Cornerstone Ministries Investments 10QSB 2006 Q3 Quarterly report (small business)

U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-QSB

/X/

QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

Or

/_/

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to ____________

Commission File No. 333-93475

CORNERSTONE MINISTRIES INVESTMENTS, INC.

(Exact name of small business issuer as specified in its charter)

Georgia

58-2232313

(State or other jurisdiction

(IRS Employer Identification Number)

of incorporation or organization)

  2450 Atlanta Highway, Suite 904, Cumming, GA

   30040

(Address of principal executive office)

(Zip Code)

Issuer’s telephone number, including area code:(678)-455-1100

Former name, address and former fiscal year, if changed since last report.

Check whether the issuer (1) filed all reports required to be filed by the Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 past 90 days.

Yes   X  No__

As of September 30, 2006, there were issued and outstanding 878,907 shares of the common stock of the issuer.

Transitional Small Business Disclosure Format (Check one): Yes [  ]    No [X]

1

Cornerstone Ministries Investments, Inc.

Index

			Page
Form 10-QSB Title Page			1
Index			2
PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		Report of Independent Registered Public Accounting Firm	F-1
		Consolidated Balance Sheets as of September 30, 2006 and 2005	F-2
		Consolidated Statements of Operations for the three and nine months
		ended September 30, 2006 and 2005	F-3
		Consolidated Statements of Changes in Shareholders’ Equity
		for the nine months ended September 30, 2006 and 2005	F-4
		Consolidated Statements of Cash Flows for the nine months
		ended September 30, 2006 and 2005	F-5
		Notes to Consolidated Financial Statements	F-6
	Item 2. Management’s Discussion and Analysis of Financial Condition and             Results of Operation
			3
	Item 3. Controls and Procedures		8
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings		9
	Item 2. Changes in Securities and Use of Proceeds		10
	Item 3. Defaults on Senior Securities		10
	Item 4. Submission of Matters to a Vote of Security Holders		11
	Item 5. Other Information		11
	Item 6. Exhibits and Reports on Form 8-K		11
Signatures			11
Certifications – Exhibits 31 and 32			11

2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Board of Directors

Cornerstone Ministries Investments, Inc.

We have reviewed the accompanying consolidated balance sheets of Cornerstone Ministries Investments, Inc. as of September 30, 2006 and 2005, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for the three-month and nine-month periods then ended. These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.

Winter Park, Florida

November 10, 2006

F-1

CORNERSTONE MINISTRIES INVESTMENTS, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2006 and 2005
	2006		2005
ASSETS
Cash and cash equivalents	$	2,731,880	$	1,303,288
Loans in process	488,671		663,344
Real estate loans, net (including $36,985,260
and $1,525,027 from related parties - see Note 4)	134,567,995		76,811,109
Real estate joint venture investments, net	18,934,910		61,591,989
Bond holdings and accrued interest	2,144,387		5,187,112
Rental property assets under construction	2,824,061		-
Property and equipment, net	805,308		775,853
Refundable income taxes	-		8,228
Deferred tax asset, net	295,070		56,585
Goodwill	450,997		450,997
Unamortized debt issue costs	3,208,723		2,754,780
Real estate held for investment	340,000		340,000
Other assets	51,089		98,607
TOTAL ASSETS	$	166,843,091	$	150,041,892
LIABILITIES
Investor bonds and accrued interest	$	137,662,332	$	138,996,526
Mortgage participations and accrued interest	4,282,577		4,952,073
Loans payable and accrued interest (including $1,602,019
and $0 to related parties - see Note 4)	17,723,703		-
Accounts and other payables (including $301,387
and $11,769 to related parties - see Note 4)	441,713		137,049
Loan guarantee obligations	273,610		71,000
Building mortgages	407,957		583,477
Capital lease obligation	-		3,013
TOTAL LIABILITIES	160,791,892		144,743,138
SHAREHOLDERS' EQUITY
Series A Convertible Preferred Stock, no par
value; 235,000 shares authorized, no
shares issued and outstanding	-		-
Common Stock, $0.01 par value; 10 million shares
authorized; 878,907 and 861,940
issued and outstanding	8,789		8,619
Paid in capital	5,486,577		5,386,315
Retained earnings	555,833		(96,180)
TOTAL SHAREHOLDERS' EQUITY	6,051,199		5,298,754
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY	$	166,843,091	$	150,041,892
SEE ACCOMPANYING NOTES

F-2

CORNERSTONE MINISTRIES INVESTMENTS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended September 30, 2006 and 2005
	3 Mo. Ended			3 Mo. Ended		9 Mo. Ended		9 Mo. Ended
	9/30/2006			9/30/2005		9/30/2006		9/30/2005
REVENUES
Real estate loan and joint venture interest and fees	$	3,263,051		$	3,400,044	$	9,102,659	$	9,919,958
Real estate loan and joint venture interest and fees
from related parties (see Note 4)	1,120,985			66,753		3,218,671		138,148
Total real estate loan and joint venture interest and fees	4,384,036			3,466,797		12,321,330		10,058,106
Loan participation and other income	92,701			162,465		477,364		832,611
TOTAL REVENUES	4,476,737			3,629,262		12,798,694		10,890,717
EXPENSES
Investor interest expense	3,005,141			2,974,148		9,022,849		8,532,551
Loan loss expense	53,000			25,000		219,000		75,000
Marketing expenses	303,874			268,581		899,126		808,542
Management and advisory fees to related party (see Note 4)	375,854			332,707		1,085,332		1,034,872
Operating expenses	317,688			157,485		636,987		540,684
TOTAL EXPENSES	4,055,557			3,757,921		11,863,294		10,991,649
Income (Loss) Before Provision For Income Taxes	421,180			(128,659)		935,400		(100,932)
Income Tax Provision (Benefit)	159,333			(80,381)		328,742		(124,652)
NET INCOME (LOSS)	$		261,847	$	(48,278)	$	606,658	$	23,720
Basic and Diluted Earnings (Loss)
per Common Share	$		0.29	$	(0.06)	$	0.68	$	0.03

F-3

CORNERSTONE MINISTRIES INVESTMENTS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the nine months ended September 30, 2006 and 2005
	COMMON STOCK:			PAID-IN		PREFERRED		RETAINED		TOTAL
	SHARES	AMOUNT		CAPITAL		STOCK		EARNINGS		EQUITY
BALANCE, DECEMBER 31, 2004	819,351	$	8,194	$	5,118,568	$	-	$	91,243	$	5,218,005
Net income								23,720		23,720
Dividend declared								(211,143)		(211,143)
Common stock issued	60,812	608		394,670						395,278
Common stock issuance costs				(8,657)						(8,657)
Common stock redeemed	(18,223)	(183)		(118,266)						(118,449)
BALANCE, SEPTEMBER 30, 2005	861,940	$	8,619	$	5,386,315	$	-	$	(96,180)	$	5,298,754
BALANCE, DECEMBER 31, 2005	891,914	$	8,919	$	5,570,992	$	-	$	179,693		$5,759,604
Net income								606,658		606,658
Dividend declared								(230,518)		(230,518)
Common stock issued	-	-		-						-
Common stock redeemed	(13,007)	(130)		(84,415)						(84,545)
BALANCE, SEPTEMBER 30, 2006	878,907	$	8,789	$	5,486,577	$	-	$	555,833	$	6,051,199

F-4

CORNERSTONE MINISTRIES INVESTMENTS, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2006 and 2005
	2006	2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$         606,658	$           23,720
Adjustments to reconcile net income to cash from operations-
Depreciation and amortization	851,813	754,166
Gain from sale of property and equipment	(51,540)	-
Changes in-
Loans in process	(104,409)	(632,471)
Accrued bond holdings interest and discount amortization	196,984	15,704
Refundable income taxes	-	(8,228)
Accrued real estate loan/joint venture interest and deferred loan fees
(including ($659,457) and ($261,305) for related party loans)	(3,155,623)	(2,492,041)
Allowance for loan losses	219,000	75,000
Deferred taxes	(151,233)	(126,942)
Investor bond and mortgage participation interest payable	2,158,205	3,712,515
Loan guarantee obligation, net of related receivables	39,610	(33,000)
Accounts and other payables	(23,895)	(107,572)
Other assets	21,131	69,513
NET CASH PROVIDED BY OPERATIONS	606,701	1,250,364
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate loans made (including $12,387,727 and  $1,432,817 to related parties)	(64,709,145)	(31,435,690)
Real estate loan principal payments received (including
$14,411,398 and $0 from related parties)	38,632,408	9,829,876
Real estate joint venture investments made	(3,385,406)	(3,693,644)
Bond holdings purchased	-	(1,219,290)
Bond holdings redeemed or sold	11,974,400	30,600
Rental property assets under construction purchased	(2,824,061)	-
Property and equipment purchased	(5,485)	(10,917)
Proceeds from sale of property and equipment	272,362	-
NET CASH USED BY INVESTING ACTIVITIES	(20,044,927)	(26,499,065)
CASH FLOWS FROM FINANCING ACTIVITIES:
Investor bonds sold	1,591,589	16,416,473
Investor bonds redeemed	(9,136,761)	(1,753,744)
Mortgage participation agreements sold	1,904,940	150,000
Mortgage participation agreements redeemed	(181,663)	(2,400,000)
Debt issue costs paid	(1,279,512)	(790,321)
Loans payable proceeds (including $1,589,000 and $0  from related party)	17,589,000	-
Building mortgage principal payments	(170,352)	(18,892)
Capital lease principal payments	(1,231)	(4,928)
Common stock redeemed	(84,545)	(118,449)
Common stock issued, net of issuance costs	-	386,621
Dividends paid	(508,552)	(477,430)
NET CASH PROVIDED BY FINANCING ACTIVITIES	9,722,913	11,389,330
Net change in cash and cash equivalents	(9,715,313)	(13,859,371)
Cash and cash equivalents at beginning of period	12,447,193	15,162,659
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$       2,731,880	$       1,303,288
Supplemental Information-
Interest paid during the period	$       6,900,836	$       4,854,485
Income taxes paid during the period	$          758,000	$          105,000
Non-cash transactions-
Investor bonds matured and re-invested	$       3,243,765	$          151,412
Loan interest financed and included in loan principal (including	$       3,291,365	$          966,935
$384,125 and $47,360 on related party loans)
SEE ACCOMPANYING NOTES

F-5

CORNERSTONE MINISTRIES INVESTMENTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying Consolidated Financial Statements include the accounts of Cornerstone Ministries Investments, Inc. and its majority owned subsidiaries (collectively “the Company”).  All material intercompany transactions have been eliminated in these Consolidated Financial Statements.  The Company originates and purchases mortgage loans.  The Company offers specialized loan programs for churches, non-profit or for-profit sponsors of senior housing facilities and non-profit or for-profit sponsors of affordable/low income or age-restricted housing projects.  The Company also invests in other real estate projects for the purpose of selling at a profit or leasing.  Substantially all of the Company’s loans and investments are in projects located in the southeastern and southwestern United States.

Cash and cash equivalents include bank accounts and short-term certificates with original maturities of 90 days or less.

Real estate loans and senior housing loans classified as real estate joint venture investments include unpaid principal and accrued interest balances net of deferred loan fees and unearned discounts, less an allowance for loan losses.  Interest income is recognized monthly on the accrual basis in accordance with loan terms.  Interest income is recognized on the cash basis for loans with a recorded impairment loss (other than restructured loans) and the possibility of future loss considered remote.  If the possibility of future loss is probable, then interest income is not recognized and interest payments are credited to outstanding loan principal.  Loan origination fees are deferred and amortized as a yield adjustment over the lives of the related loans using the interest method.   Amortization of deferred loan fees is discontinued when a loan is placed on non-accrual status.  Interest income and loan fees r ecognized from real estate loans and senior housing loans classified as real estate joint venture investments are reported as “Real estate loan and joint venture interest and fees” in the accompanying Consolidated Statements of Operations.

The Company receives monthly interest payments on its real estate loans and senior housing loans (classified as real estate joint venture investments) except when the terms of a loan allow a borrower to finance interest payments.  Interest is financed in the following circumstances:

•

Family housing loans may finance interest while the project is in the development and pre-sales phase, which normally lasts 12 to 36 months depending on the size of the project.  The Company receives the financed interest as the borrower sells homes in the development.

•

Church construction loans may finance interest while the church building is under construction.  This takes three to nine months, depending on the size of the building.  When the building is operational, the financed interest from the construction phase is included in the loan’s principal amount and the Company begins receiving monthly interest payments from the borrower.

•

Senior housing loans may finance interest during the construction, renovation and lease-up stages of the borrower’s operations.  This takes two to six months if there is an existing building and 12 to 24 months if the financed property is raw land and a new building is being constructed.  When the facility is operational, the financed interest is included in the loan’s principal amount and the Company begins receiving monthly interest payments from the borrower.  

Senior housing loans are classified as real estate joint venture investments if the Company participates in a property’s residual profits and all of the following exist at the inception of the loan:

•

The borrower has title but not a substantial equity investment in the property.

•

The Company does not have recourse to substantial tangible, saleable assets of the borrower other than the underlying collateral of the loan and there is no irrevocable letter of credit for a substantial amount of the loan.

•

There is no take-out commitment for the full amount of the loan from a creditworthy, independent third-party.

•

The facility does not have lease commitments which will provide sufficient cash flow to service normal principal and interest loan amortization.

F-6

The Company normally provides all or substantially all of the funding (directly or through loan guarantees) for the acquisition and development of these facilities, which are owned by non-profit entities.  The Company participates in residual profits through loan participation agreements, which enable the Company to receive income from the borrower when the property in which the Company provided financing is sold or refinanced with another lender.  The participation is between 25% and 33% of the borrower’s gain.  Loan participation income is recognized when the borrower’s sale or refinancing is completed and the Company receives cash from the borrower.

Loans in process are amounts advanced or expended on behalf of borrowers prior to completion of the loan documentation.  Interest is not accrued on these amounts until the loan documentation is complete and the borrower acknowledges the debt and associated interest.  Substantially all of these expenditures are converted to loans within one year or less.

Unamortized debt issue costs include the costs and commissions associated with issuing Investor Certificates and Mortgage Participation Agreements.  These costs are being amortized on a straight-line basis over the term of the associated debt, generally five years.

The allowance for loan losses for real estate loans and senior housing loans classified as real estate joint venture investments is maintained at a level which, in management’s judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is determined in accordance with SFAS No. 5 (collective loan losses) and SFAS No. 114 (specific impaired loan losses).  A collective loan loss is recognized when the characteristics of a group of loans indicate that it is probable that a loss exists even though the loss cannot be identified with a specific loan.  The collective loan loss allowance amount is based on observable data that management believes is reflective of the underlying credit losses inherent in the portfolio.  The components of this evaluation include trends in the Company’s historical loss experience, changes in credit risk and credit quality, credit concentrations, eco nomic conditions, collateral values, and other risks inherent in the portfolio. Specific impaired loan loss allowances are made when it is determined that a loan is impaired and the loan’s carrying amount exceeds the present value of estimated future cash flows, or, if the loan is considered collateral dependant, the loan’s collateral value. A loan is considered impaired if it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Although management uses available information to recognize losses on loans, because of uncertainties associated with local economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that a material change could occur in the allowance for loan losses in the near term. However, the amount of the change that is reasonably possible cannot be estimated. The allowance is increased by a provision for loan loss and reduced by charge-offs, net of recover ies. Changes in the allowance relating to specific impaired loans are charged or credited to loan loss expense.  Loans are charged-off to the extent the loan’s carrying amount exceeds the net realizable value of the collateral, with the charge-off occurring when it is likely that the loan is uncollectible and foreclosure will occur.  

Foreclosed real estate acquired through, or in lieu of, foreclosure are held for sale and initially recorded at the lower of the asset’s fair value or the loan’s carrying amount, which establishes a new cost basis for the asset.  Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the new cost basis or fair value less estimated costs to sell.

The Company uses FIN 46R, “Consolidation of Variable Interest Entities” to identify variable interest entities (“VIE”).  A VIE is an entity in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties.  A company that holds a variable interest in a VIE will need to consolidate the entity if the company’s interest in the VIE is such that the company will absorb a majority of the VIE’s expected losses and/or receive a majority of expected residual gains, if they occur.  Additional disclosures are also required by primary beneficiaries and other significant variable interest holders.

F-7

Bond holdings consist of tax-free local government securities and church bonds.  The Company accounts for these investments using SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, and classifies the bonds as “available for sale” securities.  The bonds are initially recorded at cost and if the bonds are purchased for a discount or premium from their par value, the discount or premium is amortized to income over the bond’s remaining life as an adjustment to the bond’s yield.  The bonds are also adjusted for unrealized holding gains and losses.  Temporary unrealized holding gains and losses are reported, net of deferred taxes, as a separate component of shareholder’s equity until realized.  If an unrealized holding loss is judged to be other than temporary, the cost basis of the security is written down to fair value and included in earnings and the amort ization of the premium or discount is suspended.

Property and equipment are valued at cost when purchased.  Depreciation is provided on the straight-line method over the estimated useful lives of the assets, which are three to five years for furnishings and equipment, and 40 years for office buildings.

Real estate held for investment includes land which the Company owns and intends to hold as an investment for more than one year.  The assets are carried at the lesser of cost or fair value.  Impairment losses are recognized when the carrying amount of a long-lived asset is determined not to be recoverable and the carrying amount exceeds fair value.  Profit from real estate sales is recognized when the collectibility of the sales price is reasonably assured and the Company is not obligated to perform significant activities after the sale to earn the profit.  If either of these conditions exists, all or part of the profit is deferred and recognized using the installment sale method or cost recovery method as prescribed by SFAS No. 66, “Accounting for Sales of Real Estate”.

Interest on Investor Bonds is accrued from the date of issuance. Bond holders choose, at the time of purchase, to have interest paid semi-annually or upon redemption.  Investors holding five year bonds in multiples of $10,000 may receive interest monthly.  Unpaid interest is compounded semi-annually.  Interest on Mortgage Participation Agreements is accrued from the date of issuance and is paid monthly.

Mortgage Participation Agreements are accounted for as secured borrowings with pledges of collateral because the agreements do not meet the definition of a sale of a financial asset under SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”.

The Company is guarantor on certain loans secured by church, senior housing, single family and affordable apartment facilities which are owned by various Company borrowers.  A loan guarantee obligation is recognized based on the loan guarantees estimated fair value.  The Company normally charges the loan guarantee’s fair value to the respective borrower as compensation for the Company’s risk and payment is expected within 30 days of the guarantee’s origination or modification date.  Unpaid amounts are classified as “Loan guarantee receivables” in the accompanying Consolidated Balance Sheets.  If the loan guarantee’s fair value is not charged to the respective borrower, deferred loan fees related to the borrower’s loan with the Company are reduced by the guarantee’s fair value.  The reduced deferred loan fees are amortized to earnings over the life of the loan.  Loan guaran tee obligations are analyzed at the end of each quarter and if the fair value of the loan guarantee has declined, the carrying amount of the obligation is reduced and credited to earnings.

Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to the difference between the methods of accounting for depreciation, amortization, start-up costs, allowance for loan losses, and installment sales for financial and tax-reporting purposes.  The deferred taxes represent the estimated future tax consequences of those differences, which will be either taxable or deductible when the assets and liabilities are recovered or settled.  Accelerated depreciation methods and shorter asset lives are used for tax reporting, and straight-line depreciation is used for financial statement reporting.  The Company calculates deferred taxes under the provisions of SFAS No. 109 which provides for deferred tax assets and liabilities to be carried on the balance sheet at current tax rates.

F-8

Management uses estimates and assumptions in preparing these Consolidated Financial Statements in accordance with generally accepted accounting principles.  The estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and reported revenues and expenses.  Actual amounts may vary from the estimates that are used.

Basic earnings per common share are calculated by dividing net income by the weighted average number of common shares outstanding during the year.  Diluted earnings per common share are calculated by adjusting weighted average outstanding shares, assuming conversion of all potentially dilutive shares of Series A Convertible Preferred Stock.

New Accounting Pronouncements:

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109” (FIN 48).  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”.  FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.  The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006.  The Company will adopt FIN 48 in the first quarter of 2007 and it is n ot expected that the adoption of FIN 48 will have a material impact on the Company’s financial statements.

Recently, the FASB has been very active, issuing a number of accounting pronouncements with various effective dates. These pronouncements, which were not discussed above, do not have a material effect on the Company’s financial statements.

NOTE 2 – PROPERTY AND EQUIPMENT        

At September 30, property and equipment is composed of:

	2006	2005
Office Condominiums	$550,116	$797,554
Church property	290,679	-0-
Office Computers, Furnishings,
Software & Equipment	147,336	127,385
Vehicles	30,351	30,351
Capital lease – phone system	-0-	17,710
Less: Accumulated depreciation	(213,174)	(197,147)
Property and equipment, net	$805,308	$775,853
Depreciation expense – three months	$10,887	$16,130
Depreciation expense – nine months	$32,170	$47,284

In 2006, the Company sold its office condominiums which were being leased to a third party.  The net proceeds received at closing were $272,362.  The carrying value of the property sold was $220,822; therefore, a $51,540 gain was recognized from this sale.  With the closing proceeds, the Company paid off the $160,332 in outstanding principal on the mortgage loan that secured the property.     

In 2006, the Company began leasing the Dade City, FL church property to a new church congregation for $2,500 per month.  The lease is a month-to-month lease.  This property was acquired by the Company in 2005 through a loan foreclosure and is valued at the carrying amount of the foreclosed loan.  The Company has received $15,000 in rental revenue in 2006 from this property.

F-9

NOTE 3 – COMMITMENTS AND CONTINGENCIES

Leases

During March 2003, the Company entered into a capital lease for a new telephone system at the Company’s headquarters.  In March 2006, the Company made its last payment and the asset is now owned by the Company.  The lease was originally recorded at the asset’s fair value and amortized over three years using the straight-line method.  Interest expense was calculated based on the implied interest rate in the lease.  The lease payment, including principal, interest and sales tax, was $672 per month.  Amortization expense was $0 and $1,476 for the three months and $984 and $4,427 for the nine months ended September 30, 2006 and 2005, respectively.  Interest expense was $0 and $172 for the three months and $25 and $721 for the nine months ended September 30, 2006 and 2005, respectively.  There are no future minimum lease payments as of September 30, 2006.

Loan Commitments

The Company makes loan commitments in connection with certain real estate loans and joint venture investments that include funding for project development, building construction, renovations, lease-up operations, financed interest and other amounts that the borrower may draw upon in accordance with the loan agreement.  For existing loans, the Company has $32,504,000 in approved, unused loan commitments for real estate loans and $402,000 for real estate joint venture investments as of September 30, 2006.  The Company also has two new approved real estate loan commitments totaling $2,810,000 as of September 30, 2006 which the Company expects to fund next quarter.

Legal Proceedings

The Company occasionally becomes involved in various claims and legal actions arising from the ordinary course of its business.  It is the opinion of the Company’s management that the ultimate disposition of these items will not have a material effect upon the Company’s financial position or results of operations.

NOTE 4 – RELATED PARTY TRANSACTIONS

Cornerstone Capital Advisors, Inc. – Management and Advisory Service Agreement

Effective July 1, 2003, the Company entered into a Management and Advisory Services Agreement with Cornerstone Capital Advisors, Inc. (“CCA”) to provide loan management, administration, and accounting; investor relations; marketing; computer and management information systems administration; record maintenance; executive management; and bookkeeping and accounting services.  The agreement is for renewable one year terms and it may be terminated by either party upon 60 days’ written notice.  The Company does not have any employees of its own and CCA is subject to the supervision of the Company’s board of directors.  Two of the Company’s directors serve on the CCA board of directors.  The agreement obligates the Company to pay CCA the following fees:

•

Management Fee – equal to 10% of the Company’s revenues from all sources other than loan fees, loan participations and revenue received from CCA plus 30% of loan participation revenue.  This fee is payable monthly.

•

Loan Origination Fee – equal to 30% of the total loan fee charged by the Company to its borrowers.  The fee is generally paid from loan proceeds and reduces deferred loan fees.

For the three and nine months ended September 30, the Company paid CCA as follows:

	Three Months		Nine Months
	2006	2005	2006	2005
Management Fees	$375,854	$332,707	$1,085,332	$1,034,872
Loan Origination Fees	512,100	268,500	1,219,425	333,954
	$887,954	$601,207	$2,304,757	$1,368,826

As of September 30, 2006 and 2005, the Company owed CCA $301,387, and $11,769, respectively under this agreement.  

F-10

Cornerstone Capital Advisors, Inc. – Office Lease

Effective August 1, 2004, the Company and CCA entered into a lease agreement whereby CCA is leasing the Company’s corporate office building and office/computer equipment in Cumming, GA.  The lease payment is $5,000 per month.  The initial lease term ended on August 31, 2005, after which time the lease converted to a month-to-month lease.  The Company’s cost basis in the office building and office/computer equipment is approximately $620,000.  The Company received $15,000 and $45,000 from CCA under the terms of this lease during the three and nine month periods ending September 30, 2006 and 2005, respectively.  

Cornerstone Direct Public Offerings, LLC

The Company has contracted with Cornerstone Direct Public Offerings, LLC (“CDPO”) to provide services for the filing of SB-2 Registration Statements with the Securities and Exchange Commission.  Two of the Company’s directors serve on the board of directors of CDPO’s majority owner, Foundation for Christian Communities Development, Inc.  Prior to 2005, the base service fee was $75,000 per filing payable in installments during the filing process.  For filings made in 2006 the Company intends to use CDPO only for the state filing portion of its registrations, which will reduce CDPO’s service fee.  The fee schedule has not been finalized as of September 30, 2006.  No amounts were owed to CDPO as of September 30, 2006 and 2005.  

Loans made to subsidiaries of Cornerstone Group Holdings, Inc.

During 2005, two loans were made to wholly owned subsidiaries of Cornerstone Group Holdings, Inc (“CGH”).  At the time that these loans were originated, two of the Company’s directors served as directors of CGH.    The two loans were made at similar terms to that of the Company’s third-party loans.  

During 2006, the Company originated six loans to entities that are majority or wholly owned subsidiaries of CGH.  All of the loans accrue interest at 10% per annum and mature at various dates during 2007.  All of the loans were made at similar terms to that of the Company’s third-party loans.  A summary of all loans to CGH subsidiaries as of September 30, 2006 is as follows:

	Principal	Purpose
Cushman Apartments, LP	$    1,939,787	Acquisition/renovation of affordable apartments/condos
Meridian Housing, LLC	627,694	Acquisition/development of affordable apartments/housing
Preston Pointe Apartments, LP	4,544,281	Construction of low income housing tax credit apartments
Preston Ridge, LLC	739,418	Acquisition/construction of affordable single family housing
Ashton Park Apartments, LP	446,554	Acquisition of land for low income tax credit apartments
River Run Apartments, LLC	1,202,785	Acquisition/construction of market rate apartments
Cambridge Place, LLC	497,196	Acquisition/construction of affordable single family housing
Madison Pointe, LLC	283,884	Acquisition/construction of affordable single family housing
Total	$ 10,281,599

During the third quarter of 2006, both of the Company directors who also served as directors of CGH resigned their positions on the CGH board.

Loan to Wellstone Retirement Communities I, LLC

In December 2005, the Company’s two largest borrowers sold eight senior housing properties to Wellstone Retirement Communities I, LLC (“WRC”) which is managed by Cornerstone Capital Advisors, Inc. (“CCA”), which also serves as the Company’s manager.  Also, two of the Company’s directors are directors for CCA.  As a result of this transaction, the Company received $60,677,668 in loan principal and $2,512,500 in bond holdings principal.  The Company immediately supplied subordinated financing of $37,901,607 at 9.5% interest and a two year maturity to WRC to purchase the property.  This loan is included in “Real estate loans, net” on the accompanying September 30, 2006 Consolidated Balance Sheet.  Approximately $10,151,000 in equity was contributed to WRC by independent accredited investors with the remaining $64,077,000 needed to purchase the properties supplied by third par ty financing as a first mortgage on the properties purchased.

F-11

On January 31, 2006, an additional senior housing property was sold by Sage Living Centers, Inc. to WRC.   The Company received $11,974,400 in bond holdings principal and immediately supplied an additional $1,548,796 in subordinated financing to WRC.  WRC also received an additional $10,922,801 in third party financing at this time.

The WRC outstanding loan principal balance on September 30, 2006 was $26,019,908.  

Loan to Castleberry Properties, LLC

In March 2006, the Company originated a loan to Castleberry Properties, LLC (“Castleberry”) for the acquisition of land that will be developed into an office park.  Cornerstone Capital Advisors, Inc., the Company’s manager, is a 50% owner of Castleberry.  As of September 30, 2006, the loan principal outstanding is $732,059 and Cornerstone Capital Advisors, Inc. has contributed $172,000 in equity into Castleberry.  The loan’s maximum commitment is $932,000.

Loan payable to Wellstone Investment Fund, LLC

In August 2006, the Company borrowed $1,589,000 from Wellstone Investment Fund, LLC (“WIF”) under a revolving line of credit agreement.  Cornerstone Capital Advisors, Inc, the Company’s manager, is also the manager for WIF.  As of September 30, 2006 the loan principal and interest due to WIF was $1,602,019.  See Note 16 for additional information on this loan payable.

NOTE 5 - REAL ESTATE LOANS

At September 30, the Company had Real Estate Loans outstanding as follows:

	2006	2005
Family housing development loans	$104,107,521	$48,281,461
Church mortgage loans	6,471,164	9,221,703
Senior housing mortgage loans	27,112,962	19,861,474
Total principal	19,861,674	77,364,638
Accrued Interest	902,249	818,374
Unearned Loan Fees	(3,074,901)	(664,903)
Allowance for loan losses	(951,000)	(707,000)
Total Real Estate Loans	$134,567,995	$76,811,109

These loans mature as follow: 2006 - $9,599,814; 2007 - $100,677,687; 2008 - $26,825,143; 2009 - $589,003; 2010 and beyond - $0.  Loan maturity may be accelerated in accordance with loan terms, generally upon certain events of default such as non-payment of scheduled payments or bankruptcy.

In 2005, the Company originated a loan with a for-profit entity that did not have enough equity to absorb all of its estimated expected losses.  The Company is not considered the primary beneficiary since the entity’s equity guarantees and subordinated debt is sufficient to absorb the majority of its estimated expected losses.  The loan’s carrying amount on September 30, 2006 was $627,694.

In September 2006, Senior Housing Services, Inc. (a non-profit entity) and its subsidiaries sold its ownership interests in seven family housing projects to Wellstone LLC, a for-profit entity formed by the project’s third-party management group.  As part of the purchase agreement, Wellstone LLC assumed all of the Company’s outstanding real estate loans on these projects.  Wellstone LLC is considered a variable interest entity because it does not have enough equity investment at risk to permit it to finance its activities without additional subordinated financial support.  The Company is not considered the primary beneficiary since Wellstone LLC’s subordinated financial instruments are sufficient to absorb the majority of its estimated expected losses.  The Company’s seven loans to Wellstone LLC had a total carrying amount of $53,497,922 as of September 30, 2006.

F-12

Based on the terms of the loans, the Company allows borrowers with loans related to certain family housing and church properties to finance interest payments while the properties are in the development and construction phase of operations.  For the nine months ended September 30, the net interest payments financed were:

	2006	2005
Current year interest financed	$3,481,243	$863,570
Previous years’ financed interest received	(1,162,841)	(270,884)
Net financed interest	$2,318,402	$592,686

On September 30, 2006, the Company had significant credit risk concentrations in the following states:

Georgia -	$29,834,390
Florida  -	$11,565,849
Texas   -	$59,574,535
South Carolina -	$28,953,890

Impaired loan disclosures for the nine months ended September 30:

	2006	2005
Number of impaired loans	1	3
Carrying amount	$288,523	$3,157,345
Weighted average investment – year-to-date	$283,950	$3,075,826
Impaired loan interest income – three months	$    6,825	$     74,254
Impaired loan interest income –nine months	$  22,463	$   220,339

No allowance for specific impaired loan loss has been recorded because the carrying amount of the impaired loans as of September 30, 2006 and 2005 was less than the present value of their expected future cash flows.   

NOTE 6 – REAL ESTATE JOINT VENTURE INVESTMENTS

As of September 30, certain of the Company’s mortgage loans on senior housing facilities are classified as real estate joint venture investments, as follows:

Location	2006		2005
McKinney, TX	$            -0-		$ 5,712,492
St. Petersburg, FL	6,891,521		5,045,334
Lewisville, TX	545,000		10,617,954
Garland, TX	-0-		6,526,957
Chattanooga, TN	6,212,187		5,700,992
San Antonio, TX	3,442,502		12,671,957
Winter Haven, FL	-0-		5,990,625
Bryan, TX	-0-		3,266,317
Edmond, OK	1,693,115		5,481,201
Total principal outstanding	18,784,325		61,013,829
Accrued interest	150,585		697,012
Unearned loan fees	-0-		(118,852)
Allowance for loan losses	-0-	-0-
Real estate joint venture investments, net	$18,934,910		$61,591,989

All of the loans mature in 2007.  Loan maturity may be accelerated in accordance with loan terms, generally upon certain events of default such as non-payment of scheduled payments or bankruptcy.

F-13

The Company participates in the residual profits of the real estate joint venture investments through loan participation agreements, which enable the Company to receive income from a borrower when a property in which the Company provided financing is sold or refinanced with another lender.  The participation percentage for each property varies between 25% and 33% of the borrower’s gain.

In March 2005, the Company received $257,000 in loan participation income from a borrower as a result of the sale of a senior housing facility in which the Company held a real estate joint venture investment.

All loans accrue interest at 10% per year and except as noted below, ‘interest-only’ payments are received monthly.  The original loan terms are for one year with two, one year extensions at the Company’s option.  The Company charges a 10% loan origination fee which is financed and included in the loan’s principal balance.  

In accordance with loan terms, the Company allows certain borrowers to finance interest payments while their facilities are in the construction or renovation phase of operations.  For the nine months ended September 30, the net interest payments financed were as follows:

	2006	2005
Current year interest financed	$996,109	$374,249
Previous years’ financed interest received	(23,146)	-0-
Net financed interest	$972,963	$374,249

The Company analyzes the underlying operations and collateral of each facility in which there is an outstanding loan by requiring independent appraisals every 12 to 24 months, reviewing loan balances and comparing them to the established loan budgets, and by analyzing income and cash flow statements that are submitted by the borrowers.  If it is determined that it is probable that the Company will be unable to collect all amounts due according to the contractual terms of a loan, the loan is considered impaired and a loan loss will be recognized to the extent the collateral’s fair value is less than the current loan carrying amount.  

One real estate joint venture investment loan was considered impaired as of September 30, 2006. The impaired loan’s carrying amount as of September 30, 2006 and its average carrying amount for the first nine months of 2006 were $6,263,207 and $6,189,189, respectively.   A total of $438,365 in interest was earned in the first nine months of 2006 from this loan.  The loan’s collateral is appraised at $7,400,000; therefore, no loan loss allowance has been established.  No real estate joint venture investment loans were considered impaired as of September 30, 2005.

NOTE 7 – ALLOWANCE FOR LOAN LOSSES

For the nine months ended September 30, 2006 and 2005, a summary of changes in the allowance for loan losses by loan type is as follows:

				Real Estate
		Family	Senior	Joint Venture
	Church	Housing	Housing	Investments	Total
Balance – 12/31/04	$      -0-	$632,000	$       -0-	$         -0-	$632,000
Loan loss expense	-0-	75,000	-0-	-0-	75,000
Charge-offs	-0-	-0-	-0-	-0-	-0-
Recoveries	-0-	-0-	-0-	-0-	-0-
Balance –9/30/05	$      -0-	$707,000	$       -0-	$          -0-	$707,000
Balance – 12/31/05	$      -0-	$732,000	$      -0-	$         -0-	$732,000
Loan loss expense	-0-	219,000	-0-	-0-	219,000
Charge-offs	-0-	-0-	-0-	-0-	-0-
Recoveries	-0-	-0-	-0-	-0-	-0-
Balance - 9/30/06	$      -0-	$915,000	$      -0-	$         -0-	$951,000

F-14

Components of allowance for loan losses at September 30:

	2006	2005
Collective loan losses-
Historical experience	$        -0-	$        -0-
Current credit risk assessment	951,000	707,000
Total collective loan losses	951,000	707,000
Specific impaired loan losses	-0-	-0-
Total allowance for loan losses	$951,000	$707,000

The Company has never incurred a loan loss charge-off; therefore, there is no collective loan loss allowance related to the Company’s historical experience.  For the three and nine months ended September 30, 2006 and 2005, the charges to loan loss expense were due to an increase in the principal outstanding on Family Housing loans.

NOTE 8 – RENTAL PROPERTY ASSETS UNDER CONSTRUCTION

In September 2006, the Company purchased an 89% ownership interest in Heron Lakes, LLC (“Heron Lakes”).  Heron Lakes is developing property in Spartanburg, SC for use as market-rate apartments.  Construction is expected to start in December 2006.  A United States Department of Housing and Urban Development (“HUD”) backed loan is expected to be used for construction and permanent financing.  As of September 30, 2006, the following costs are included in this asset:

Land                        $2,427,870

Development costs      223,761

Capitalized interest         8,035

Loan issue costs          164,395

                               $2,824,061

NOTE 9 - GOODWILL

The Company adopted SFAS 142 “Goodwill and Other Intangible Assets” effective January 1, 2002.  Goodwill associated with the Company’s acquisition of Presbyterian Investor’s Fund, Inc. is carried at $450,997 and is not subject to further amortization. Goodwill is tested for impairment at the end of each year using the present value of expected future cash flows to determine its fair value.  At December 31, 2005 and 2004, Goodwill’s fair value exceeded its carrying value; therefore, no provision for impairment loss has been recorded.  No goodwill was acquired or sold in either of the periods presented in these financial statements.

NOTE 10 - UNAMORTIZED DEBT ISSUE COSTS

Unamortized debt issue costs consist of legal, accounting, and filing costs incurred to register the Company’s debt securities, commissions paid or accrued on the sale of debt securities, and loan fees and costs associated with the Company’s loan from Bernard National.  These costs are amortized on a straight-line basis over the period the associated securities/loan are outstanding, generally five years for bonds and three years for the Bernard National loan.  At September 30, 2006, unamortized debt issue costs consist of:

Costs incurred to obtain Bernard National loan	$1,047,771
Costs incurred to register debt securities	958,323
Commissions paid on the sale of debt securities	4,898,969
Less: Accumulated Amortization	(3,696,340)
	$3,208,723

Amortization expense was $305,624 and $242,933 for the three months and $848,749 and $706,881 for the nine months ended September 30, 2006 and 2005, respectively.  Estimated amortization expense for the next five years:

10/2006 – 9/2007: $1,294,834

10/2008 – 9/2009: $769,133

10/2010 – 9/2011: $41,561

10/2007 – 9/2008: $943,101

10/2009 – 9/2010: $160,094

F-15

NOTE 11 - BOND HOLDINGS

Bond holdings at September 30 consist of-	2006	2005
St. Lucie Co., FL Subordinated Revenue Bonds:
Maturity   7/1/2036	$           -0-	$2,325,000
Maturity 10/1/2036	-0-	2,700,000
Undivided 50% interest sold to investor	-0-	(2,512,500)
Net investment in St.Lucie Co., FL bonds	-0-	2,512,500
Largo, FL Subordinated Revenue bonds:
Matures 10/1/2033	-0-	2,440,000
Undivided interest sold to investors	-0-	(1,195,600)
Net investment in Largo, FL bonds	-0-	1,244,400
Local Church Bonds, maturing 2013	1,961,507	1,219,683
Cost and fair value of bond holdings	1,961,507	4,976,583
Accrued interest receivable	182,880	210,529
	$2,144,387	$5,187,112

The bonds are not traded on an exchange; however, management estimates, based on discounted expected cash flows or the fair value of the collateral that the fair value of the individual securities is greater than or equal to their carrying amount.  Accordingly, no unrealized holding gains or losses have been recorded in 2006 or 2005.

The local church bonds are considered impaired by the Company due to non-payment of interest.  The Company is working closely with the borrowers to resolve this situation.  As stated above, no unrealized holding loss has been recorded because the Company estimates that the bond’s collateral value exceeds its current carrying amount.

The local church bonds are recorded net of $52,493 in unamortized bond discounts.  The face amount of the bonds is $2,014,000.  During the three and nine months ended September 30, 2006, $1,895 and $5,867 in bond discounts, respectively, were credited to interest income.

Proceeds from the sale or maturity of bonds were $11,974,400 and $30,600 for the nine months ended September 30, 2006 and 2005, respectively. No realized gains or losses were recognized in either period.  The Company uses the specific identification method to determine realized gains and losses.  

Tax-free interest income was $0 and $95,213 for the three months and $75,359 and $259,270 for the nine months ended September 30, 2006 and 2005, respectively.   

NOTE 12 - INCOME TAXES

The net deferred tax asset (liability) in the accompanying balance sheets includes the following components as of September 30:

	2006	2005
Deferred tax assets	$444,497	$407,188
Deferred tax liabilities	(151,427)	(350,603)
Net deferred tax asset (liability)	$295,070	$  56,585

The deferred tax liabilities result from the use of accelerated depreciation methods for property and equipment and from using the installment method for tax accounting.  The deferred tax assets result from tax versus financial reporting differences in accounting for allowance for loan losses and from differences in the amortization of debt issue and start-up costs.  The Company estimates that future taxable income will be sufficient to realize the net deferred tax assets; therefore, no valuation allowance was provided for as of September 30, 2006 and 2005.

F-16

Components of the Company’s income tax provision (benefit) for the three and nine months ended September 30:

	Three Months		Nine Months
	2006	2005	2006	2005
Current:    Federal	$183,340	-0-	$429,921	$         -0-
State	20,145	(4,450)	50,054	2,290
Deferred:  Federal	(39,781)	(74,113)	(136,314)	(121,816)
State	(4,371)	(1,818)	(14,919)	(5,126)
	$159,333	($80,381)	$328,742	($124,652)

Reconciliation of the Company’s income tax provision (benefit) rate to the statutory federal rate for the three and nine months ended September 30:  

	Three Months		Nine Months
	2006	2005	2006	2005
Statutory federal rate	35.0%	(35.0%)	35.0%	(35.0%)
Effect of graduated federal rates	(1.0%)	1.0%	(1.0%)	1.0%
State taxes, net of federal benefit	3.7%	(3.7%)	3.7%	(3.7%)
Effect of tax-free bond interest income	-	(25.9%)	(2.7%)	(87.3%)
Other, net	(.1%)	1.1%	.1%	1.5%
Effective tax provision (benefit) rate	37.8%	(62.5%)	35.1%	(123.5%)

Current income taxes payable were $90,263 and $0 as of September 30, 2006 and 2005, respectively, and are included in “accounts and other payables” in the accompanying Consolidated Balance Sheets.  

NOTE 13 - CASH CONCENTRATION RISK

A cash concentration risk arises when the Company has more cash in a financial institution than is covered by federal deposit insurance. At September 30, 2006, the Company had cash in excess of insured limits totaling $2,523,740.  The Company’s policy is to place its cash investments with high quality financial institutions and has never experienced any loss on holdings in excess of insured limits.

NOTE 14 - INVESTOR BONDS

The Company has three types of bonds outstanding:

Access bonds have no stated maturity and are due on demand.  The minimum investment amount is $100.  The interest rate is determined by the Board of Directors each quarter.  The directors may change the rate between quarters if market conditions warrant such a change.  The current interest rate is 5%.

Graduated rate bonds can be redeemed yearly and have a five year maximum maturity.  The minimum investment amount is $500.  The interest rate increases based on the length of time that the bond is outstanding.  For bonds sold prior to 2004 the rate starts at 7% and increases .5% for each year the bond is outstanding with a 9% maximum rate.  Bonds (Series E & F) sold in 2004 and 2005 have an initial interest rate of 6.25% and increase .5% for each year the bond is outstanding with an 8.25% maximum rate.  Series G bonds do not include graduated rate bonds.

Five year bonds have a five year maturity and a $500 minimum investment.  The interest rate is 9% for bonds sold prior to 2004 and 8.25% for bonds (Series E, F & G) sold in 2004 and thereafter.

F-17

The bonds are not collateralized and no sinking fund is required to fund redemptions at maturity.  All of the bonds have been registered with the Securities and Exchange Commission under the Securities Act of 1933.

Five year schedule of principal maturities for bonds outstanding at September 30:

Years to Maturity On demand & 1 year 2 3 4 5+ Total Principal 2006 $  45,458,555 18,005,845 35,528,488 17,933,696 4,835,354                         $121,761,938  2005 $ 22,656,748 26,447,434 26,364,802 30,532,001 20,636,387 $ 126,637,372 

At September 30, 2006 and 2005, accrued interest payable was $15,900,394 and $12,359,154, respectively.  Interest rates for bonds outstanding at September 30, 2006 are:

5.00% - $988,621

7.25% - $2,305,985

  9.00% - $55,592,667             

6.25% - $592,682              8.25% - $58,282,538     

6.75% - $1,309,547

8.50% - $2,689,898      

On August 27, 2004, the Company filed a Form SB-2 Registration Statement under the Securities Act of 1933 with the Securities and Exchange Commission to sell up to $20,000,000 of its Series F Investor Bonds along with $9,750,000 of its Common Stock.  The Securities and Exchange Commission notified the Company that it would not complete a full review of the registration statement.  The registration statement became effective on November 1, 2004 and the Company started to sell securities registered in this statement in January 2005.  For the nine months ended September 30, 2005, the Company sold $16,416,473 in bonds and $395,278 in Common Stock (60,812 shares at $6.50 per share).

The Company filed a new registration statement with the Securities and Exchange Commission in February 2006 with $60,000,000 in Series G Investor Bonds and $32,500,000 in Common Stock available for issuance.  The terms of the Series G Investor Bonds are similar to the Series E and F bonds.  The registration statement became effective on September 11, 2006 and the Company began to sell securities on September 25, 2006.  For the nine months ended September 30, 2006, the Company sold $1,591,589 in bonds and $84,545 in Common Stock (13,007 shares at $6.50 per share).

NOTE 15 – MORTGAGE PARTICIPATION AGREEMENTS

In 2003, the Company began selling Mortgage Participation (“MP”) Agreements.  The MP Agreements have not been registered and therefore, are only available to accredited investors.  The agreements are collateralized by specific loans owned by the Company and entitle the investor to a proportionate share of the interest earned on the collateral.  Interest is paid monthly to the MP investor after the Company receives interest payments on related the collateralized loans.  The agreements have no stated maturity date.  Principal payments are made when the Company receives principal payments on the collateralized loans.  Losses that the Company may incur on the collateralized loans are shared pro-rata with the MP Agreement holders.  The Company has the right but not the obligation to redeem the MP Agreements at any time.  The MP Agreement investors do not have the right to sell or repledge their in terest in the underlying collateral.  Interest expense related to MP Agreements was $106,859 and $122,812 for the three months and $277,536 and $380,246 for the nine months ended September 30, 2006 and 2005, respectively.  MP Agreement principal and interest outstanding and related collateral as of September 30, 2006:

	MP Amount	Total Collateral
	Outstanding	Carrying Amount
Bluffton, SC family housing loan; matures 4/15/07
with no available extensions	$4,248,277	$4,901,830
Accrued interest payable	34,300
	$4,282,577

F-18

The loan which collateralizes the MP Agreements is classified as a real estate loan in the accompanying Consolidated Balance Sheets.  The total carrying amount is equal to the loan’s principal plus accrued interest.

NOTE 16 – LOANS PAYABLE

Outstanding at September 31, 2006:
Wellstone Investment Fund, LLC	$ 1,589,000
Interest rate – 10%; matures 12/31/06
Bernard National Senior Funding, Ltd	16,000,000
Interest rate equal to the greater of 8.5%
or LIBOR + 3.5% – currently 8.82%;
matures August 31, 2009
Principal outstanding	17,589,000
Interest payable	134,703
Total principal & interest outstanding	$17,723,703

Interest expense for the three and nine months ended September 30, 2006 was $138,103.

The Wellstone Investment Fund, LLC loan is a short-term uncollateralized revolving line of credit loan.  Interest-only payments are due monthly and the principal is due on the maturity date (December 31, 2006).

The Bernard National Senior Funding, Ltd. (“Bernard”) loan is a $40,000,000 revolving credit facility.  The loan is secured by 19 of the Company’s first mortgage real estate loans.  Interest-only payments are due monthly.  No principal payments are due until the maturity date unless certain loan to value ratio minimums (as defined in the agreement) are not met.  If these ratio minimums are not met, the Company is required to make a payment which would decrease the loan amount outstanding to an amount which would then allow the Company to meet the loan to value ratio minimums.  As of September 30, 2006 the loan to value ratio minimums have been met.

As part of the Bernard transaction, the Company formed a wholly-owned subsidiary, CMI Asset Pool I, LLC (“CAP”), and contributed the 19 first mortgage loans to CAP.  These loans were then pledged as collateral to Bernard as security for the revolving credit facility.  The assets, liabilities and results of operations for CAP are included in these Consolidated Financial Statements.

NOTE 17 - GUARANTEES

The Company is guarantor on nine loans secured by senior housing, low income housing, affordable family housing and church facilities.  Certain real estate joint venture investments and real estate acquisition and development loans in which the borrower chooses to secure outside financing may require the Company to guarantee the loan as a condition of the extension of the loan by the financial institution.  The loan guarantees are solely limited to amounts drawn under credit facilities and cover outstanding principal and accrued interest and terminates upon maturity and principal repayment or at project stabilization (as defined by the agreement).  Only upon an uncured payment default and upon demand by the financial institution would the Company be required to perform under its guarantee obligations.  The Company’s recourse would be limited to repossession of the underlying collateral and subsequent resale of the fa cilities.  As of September 30, 2006, all loans which had a guarantee were current based on their loan terms.  Loan guarantees as of September 30, 2006:

F-19

	Renewal/			Current	Loan
	Origination	Maturity	Maximum	Principal	Guarantee
Location	Date	Date	Guarantee	Outstanding	Obligation
Charleston, SC	12/30/05	4/1/08	$11,500,000	$11,500,000	$92,000
Beaufort, SC	12/30/05	4/1/08	8,850,000	8,850,000	71,000
Blythewood, SC	8/25/06	8/25/08	250,000	250,000	3,750
Seneca, SC	9/08/06	9/08/06	860,000	860,000	12,900
Spartanburg, SC	9/26/06	9/26/06	925,000	925,000	13,875
Dallas, TX (church)	5/16/06	5/16/09	219,000	219,000	2,153
Dallas, TX (church)	6/09/06	6/9/2009	331,661	331,661	3,215
Dallas, TX (church)	8/24/06	8/24/06	371,700	371,700	3,717
St. Petersburg, FL	12/18/04	8/15/06	7,347,300	6,881,840	71,000
			$30,654,661	$30,189,201	$273,610

The guarantees related to the Charleston, SC and Beaufort, SC low income housing facilities also include a construction cost guarantee and various operational performance guarantees as defined by the agreements.  The non-profit owner of these facilities is a co-guarantor with the Company.  Also, the developer of these projects has agreed to defer the collection of approximately $2,950,000 in developer fees and costs from the project’s construction budgets until after the Company’s guarantee obligations have been released.  Any operating or construction cost shortfalls will reduce the deferred developer fees paid by the borrower and will be used to reimburse the Company and the non-profit owner for any amounts paid under the guarantee agreements.

NOTE 18 - BUILDING MORTGAGES

	2006	2005
Outstanding at September 30 :	$       -0-	$163,073
Fidelity Bank – collateralized by rental office building
Interest rate varies with a 7.5% maximum,
loan was paid off in February, 2006.
Fidelity Bank – collateralized by corporate office building	407,957	420,404
Interest rate equal to “prime + 1.5%”, currently 9.75%; monthly
principal & interest payment of $4,322; matures Sept. 1, 2009,
at which time a balloon payment of $351,211 is due.
Total principal outstanding	$407,957	$583,477
Interest expense - three months	$  10,475	$  11,441
Interest expense - nine months	$  31,522	$  32,482

Estimated annual principal payments: 2006 - $6,645; 2007 - $17,437; 2008 - $19,026; 2009 - $364,849.

NOTE 19 - SERIES A CONVERTIBLE PREFERRED STOCK

In 2001, the Company amended its Articles of Incorporation to provide for the issuance of up to 235,000 shares of Series A Convertible Preferred Stock.  The shares do not accrue dividends unless such dividends are declared by the Board of Directors.  The shares entitle the preferred shareholder to have one vote per share, presently equal to the voting rights of Common shareholders.  Each share is convertible, after 3 years, into shares of Common Stock based on a formula.  No Series A Convertible Preferred Stock was outstanding on September 30, 2006 and 2005.

F-20

NOTE 20 - EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share for the three and nine months ended September 30, 2006 and 2005 have been calculated as follows:

		Three Months	Nine Months
2005	Net Income (Loss)	($48,278)	$  23,720
	Average Common Shares Outstanding	844,269	826,794
	Earnings (Loss) per Common Share	($    0.06)	$      0.03
2006	Net Income	$261,847	$606,658
	Average Common Shares Outstanding	884,682	886,437
	Earnings per Common Share	$      0.29	$      0.68

Diluted earnings (loss) per share are the same as basic earnings (loss) per share because there are no shares of Series A Convertible Preferred Stock outstanding.  Other than the Series A Convertible Preferred Stock, there are no other potentially dilutive securities, stock options or warrants outstanding.

NOTE 21 – MAJOR CUSTOMERS

The Company received more than 10% of its total revenue for the nine months ended September 30, 2006 from the following customers:

	Amount	%	Description of Revenue Received
Senior Housing Services, Inc
and its subsidiaries	$6,826,830	53.3%	Interest and fees from real estate joint
			venture investments and real estate loans
Wellstone Retirement
Communities I, LLC	2,392,283	18.7%	Interest and fees from a real estate loan
	$9,219,113	72.0%

Senior Housing Services, Inc. and its subsidiaries (“SHS”) is not a related party.  SHS neither directly or indirectly controls, is controlled by, nor is under common control of the Company.  There is not common ownership interest, officers, or directors and the Company does not have the power to direct or significantly influence the management or operating policies of SHS.  

In September 2006, SHS sold its 100% ownership interests in seven family housing projects to Wellstone LLC, a company formed by the project’s third-party management group.  As part of the purchase agreement, SHS received a preferred minority equity interest in Wellstone LLC.  Wellstone LLC assumed all of the Company’s outstanding loans related to the seven projects that they purchased from SHS.

Wellstone Retirement Communities I, LLC is managed by the Company’s manager, Cornerstone Capital Advisors, Inc.  

NOTE 22 – FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Cash and cash equivalents – Fair value approximates their carrying amount due to the initial maturities of the instruments being three months or less.

Bond holdings – These bonds are not traded on an exchange; therefore, fair value is estimated based on the present value of expected future cash flows, which approximates their carrying amount.

Investor bonds and mortgage participations – Fair value is estimated based on the present value of expected future cash flows, which approximates their carrying amount.

F-21

Building mortgage and capital lease obligation – Fair value approximates carrying value since stated rates are similar to rates currently available to the Company for debt with similar terms and remaining maturities.

Loan guarantee obligations – Fair value approximates the risk-factored net present value of possible future cash flows related to the specific loan guarantee obligation.

The estimated fair values of the Company’s financial instruments at September 30, 2006 are:

	Carrying Amount	Fair Value
Financial assets:
Cash and cash equivalents	$    2,731,880	$    2,731,880
Bond holdings	$    1,961,507	$    1,961,507
Financial liabilities:
Investor bonds	$121,761,938	$121,761,938
Mortgage participations	$    4,248,277	$    4,248,277
Building mortgages	$       407,957	$       407,957
Loan guarantee obligations	$       273,610	$       273,610

F-22

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation.

Selected financial data.  

Please read the following selected financial data in conjunction with the rest of this “Management’s Discussion and Analysis or Plan of Operation” and with our financial statements and related notes in this filing.  

	Nine months ended September 30,
	2006		2005
Revenues	$	12,798,694	$	10,890,717
Investor interest expense	9,022,849		8,532,551
Loan loss expense	219,000		75,000
Marketing expenses	899,126		808,542
Management/advisory fees	1,085,332		1,034,872
Operating expenses	636,987		540,684
Total expenses	11,863,294		10,991,649
Operating income (loss)	935,400		(100,932)
Income tax provision (benefit)	328,742		(124,652)
Net income	$	606,658	$	23,720

Overview of operations.  

We have always focused on serving non-profit organizations.  We offer specialized programs for church and other non-profit sponsors of senior housing and affordable/moderate income and age-restricted housing programs.  Nearly all of our earnings prior to 2001 came from financing church facilities.  During the last quarter of 2000, we began to realize revenues from investment in senior and affordable/moderate income housing projects. During the last quarter of 2004, we began to make loans to for-profit sponsors of affordable and low-income housing projects and in 2005 we began making loans to for-profit owners of senior housing facilities and age restricted for-sale housing projects.  We generate revenue from:

•

interest on loans

•

origination and renewal fees on loans

•

loan participation income

•

interest on securities

We currently charge a 5% to 10% fee on new loans, based upon expected terms, and renewal fees of as much as 5% of the outstanding balance of the renewing loan.  Our interest rate on all new loans is currently from 9% to 10%. Our interest rate and fees are higher than a standard bank would charge because we are willing to lend money to borrowers who lack the capital or operating histories necessary to use traditional bank loans.  Some loans are participating loans, which enable us to receive income from the borrower when the borrower sells or refinances (with a third-party lender) the property for which we provided the financing.  The participation percentage varies between 25% and 33% of the borrower’s gain.

Participating loans are classified as real estate joint venture investments if all of the following exist at the loan’s inception:

•

The borrower does not have a substantial equity investment in the property.

•

The Company does not have recourse to substantial tangible, saleable assets of the borrower other than the underlying collateral of the loan and there is no irrevocable letter of credit for a substantial amount of the loan.

•

There is no take-out commitment for the full amount of the loan from a creditworthy, independent third-party.

•

The facility does not have lease commitments which will provide sufficient cash flow to service normal principal and interest loan amortization.

Comparison of Periods Ended September 30, 2005 and September 30, 2006

General. Assets increased from $150,041,892 at September 30, 2005 to $166,843,091 at September 30, 2006 for an increase of $16,801,199 or 11%.  The increase is due to our new revolving credit agreement loan with Bernard National Senior Funding, Ltd.  We received $16,000,000 from this loan transaction.  With this cash and with cash already on hand, we invested in real estate loans and joint venture investments, net of principal payments received, of $15,099,807.  We also invested in an 89% ownership interest in Heron Lakes, LLC, which has a current carrying value of $2,824,061.  Total revenue increased for the three and nine months ended September 30, 2006 by $847,475 (23%) and $1,907,977 (17%) to $4,476,737 and $12,798,694, respectively.  Net income (loss) for the three and nine months ended September 30, 2006 was $261,847 and $606,658 compared to ($48,278) and $23,720 for the same periods en ded September 30, 2005.

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Total real estate loans and joint venture investments outstanding on September 30, 2006 was $153,502,905 compared to $138,403,098 on September 30, 2005 for an increase of $15,099,807 or 11%.  This increase is due to the cash received from the Bernard National loan and the subsequent origination or refinancing of real estate loans and joint venture investments, as follows:       

New real estate loan originations	$  35,515,623
Decrease in existing loans, net of principal received	(3,778,645)
New real estate joint venture investments made	-0-
Decrease in existing real estate joint venture investments	(16,637,171)
	$  15,099,807

In September 2006, we purchased an 89% ownership interest in Heron Lakes, LLC.  Heron Lakes, LLC is developing land in South Carolina for use as a market-rate apartment complex.  Pre-construction work is on-going and construction is expected to start this winter.  The carrying amount of this project on our balance sheet is $2,824,061.  We are actively pursuing the sale of our ownership interest in this project and the conversion of any remaining investment into a real estate mortgage loan.

All other assets composed primarily of cash, bond holdings, property and equipment, and unamortized debt issue costs were $10,516,125 as of September 30, 2006.  

During the second quarter of 2006, we determined that our church bond holdings, with a carrying value of $2,144,387, are impaired due to the non-payment of interest by the borrower.  Our initial evaluation of the underlying collateral shows that the collateral is worth more than the current carrying value of the bonds; therefore, we have not charged earnings with an unrealized loss and we are continuing to recognize interest from this investment on the accrual basis.  We are working diligently with the borrower and the other bond holders to ensure that this situation is resolved and that our financial investment is preserved.

Our cash balance increased $1,428,592 from $1,303,288 on September 30, 2005 to $2,731,880 on September 30, 2006.  In September 2005 we originated a large family housing real estate mortgage loan which brought our cash down to a lower than normal balance at September 30, 2005.  Our current cash balance is still lower than our historical averages due to a high number of new loans originated this year and a high amount of investor bond redemptions (no new bonds were available for reinvestment until September).  We were able to fund the new loans and bond redemptions with cash from operations and the proceeds from the Bernard National loan (discussed below).  

Principal and interest payable on Investor Bonds and Mortgage Participation (“MP”) Agreements decreased $2,003,690 or 1.4% from $143,948,599 as of September 30, 2005 to $141,944,909 as of September 30, 2006.  Our Series F bonds sold out in late 2005 and until our Series G bonds were approved for sale in September 2006 we had no new bonds to offer to our investors.  Therefore, all maturities prior to September had to be paid in cash which caused the decrease in outstanding bonds and MP agreements.

In August 2006 we entered into a revolving credit agreement with Bernard National Funding, Ltd.  This agreement provides up to $40,000,000 in financing to us and it is secured by 19 of our first mortgage real estate loans.  As of September 30, 2006 we had drawn $16,000,000, which was used to fund new real estate mortgage loan commitments.  We pursued this financing because management believes that we need alternative financing programs available to us outside of our traditional Investor Bond program.  By adding to our financing options we can continue to grow our loan portfolio as we find suitable projects even if the timing of a new Investor Bond series is delayed.

Real estate loan and joint venture interest and fees earned. Interest income and fees from real estate loans and joint venture investments for the three and nine months ended September 30 is as follows:

	2006			2005		Increase			%
Three Months		$	4,384,036	$	3,466,797		$	917,239		26.40%
Nine Months		$	12,321,330	$	10,058,106		$	2,263,224		22.50%

4

The increases were due to the following:	Three Months			Nine Months
Increase in average outstanding principal		$	405,458	$	1,290,199
(Three months: $148,401,531 – 2006; $131,322,111 – 2005)
(Nine months: $142,025,320 – 2006; $124,158,063 – 2005)
Change in weighted average interest rate		86,032		74,073
(Three months: 9.84% - 2006; 9.61% - 2005)
(Nine months: 9.81% - 2006; 9.74% - 2005)
Change in loan fees recognized		425,749		898,952
		$	917,239	$	2,263,224

The increases in average outstanding principal and the increases in loan fees recognized are due to the addition of 16 new real estate loans.

Loan participation and other income.  For the three and nine months ended September 30, 2006, loan participation and other income changed as follows:

	Three Months			Nine Months
	2006	2005	Change	2006	2005	Change
Investment income	$70,122	$140,025	$    (69,903)	$ 355,259	$404,234	$      (48,975)
Loan participation & other	22,579	22,440	139	122,105	428,377	(306,272)
Total	$92,701	$162,465	$    (69,764)	$ 477,364	$832,611	$    (355,247)

The Company’s investment income is from the purchase of tax-free bonds used as permanent financing for projects the Company funded during their development and initial operations, church bonds and from interest income on the Company’s excess cash.  

The decreases in investment income for the three and nine months ended September 30, 2006 are due to the sale of tax-free bonds in 2006 which resulted in less investment dollars outstanding in 2006 as compared to 2005.  

The increase (decrease) in loan participation and other income was due to:

	Three Months		Nine Months
Loan participation revenue	$	-0-	$	(257,000)
Loan guarantee revenue		-0-	(104,000)
Gain on sale of fixed asset		-0-	51,540
Other		139	3,188
	$	139	$	(306,272)

We received $257,000 in loan participation revenue during the first quarter of 2005 from the sale of a senior housing facility by one of our borrowers.  In each of the first and second quarters of 2005 a loan that we guaranteed was paid off; therefore, we recognized loan guarantee fees in 2005.  We did not receive any loan participation or loan guarantee revenue in the first nine months of 2006.  The gain on sale of fixed asset is due to the February 2006 sale of our rental office condos in Cumming, GA.  Please see Note 2 of the “Notes to Consolidated Financial Statements” for additional information on this transaction.

Investor interest expense. Investor interest expense for the three and nine months ended September 30, 2006 was $3,005,141 and $9,022,849 which is an increase of $30,993 (1.0%) and $490,298 (5.7%), respectively compared to 2005.  The increases are due to:

	Three Months		Nine Months
Increase in average outstanding certificate principal, including	$	38,222	$	601,043
interest payable subject to compounding
(Three months: $132,078,105 – 2006; $130,298,477 – 2005)
(Nine months: $134,169,158 – 2006; $124,900,475 – 2005)
Change in weighted average interest percentage	16,760		-0-
(Three months: 8.80% - 2006; 8.75% - 2005)
(Nine months: 8.70% - 2006; 8.70% - 2004
Decrease in average outstanding Mortgage Participation principal
(Three months: $4,274,360 – 2006; $4,912,500 – 2005)

5

(Nine months: $3,700,480 – 2006; $5,069,947 – 2005)	(15,954)		(102,710)
Construction period interest capitalization – rental property	(8,035)		(8,035)
	$	30,993	$	490,298

The construction period interest capitalization relates to the rental property construction assets that we acquired when we purchased an 89% ownership interest in Heron Lakes, LLC.  During the construction of an asset, interest that is paid which relates to the assets under construction can be capitalized and included in the cost of the asset.

Loan loss expense and allowance for loan losses.    We charged $53,000 and $25,000 for the three months and $219,000 and $75,000 for the nine months ended September 30, 2006 and 2005, respectively to loan loss expense.  These charges were due to increases in the family housing development loan portfolio’s outstanding principal.  

The allowance for loan loss increases that we made in 2006 and 2005 are classified as collective loan loss allowances.  A collective loan loss allowance is recognized when the characteristics of a group of loans indicate that it is probable that a loss exists even though the loss cannot be identified with a specific loan.  The allowance for loan losses is reviewed quarterly and increases or decreases are made based on the results of these reviews.  

As of September 30, 2006, one church loan and one real estate joint venture investment loan were considered impaired because they are at least six months behind on their interest payments.  The real estate joint venture investment loan had a carrying amount of $6,263,207 and the church loan had a carrying amount of $288,523 on September 30, 2006.  In total we had $6,551,730 in impaired loans.  At September 30, 2005 we had three church loans with a total carrying amount of $3,157,345 that were considered impaired.  We have received an appraisal on the real estate joint venture investment loan’s collateral and it is worth approximately $1.15mm more than the loan’s carrying amount; therefore, we have not recognized an impairment loss on this loan.  We will continue to monitor the operating progress of this borrower, and we are actively involved in possible re-financing opportunities with this property.

As of September 30, 2006, allowance for loan losses as a percent of outstanding loan principal by loan type:

	Loan Loss Allowance	Outstanding Principal	%
Family Housing Development Loans	$ 951,000	$104,107,521	.9%
Church Mortgage Loans	-0-	6,471,164	0%
Senior Housing Mortgage Loans	-0-	27,112,962	0%
Real Estate Joint Venture Investments	-0-	18,784,324	0%
Total	$ 951,000	$156,475,971	.6%

Marketing expenses. Total expenses for the marketing of Investor Bonds for the three and nine months ended September 30, 2006 were $303,874 and $899,126, respectively compared to $268,581 and $808,542 for the same periods in 2005.  The changes are due to:  

	Three Months				Nine Months
		2006	2005	Change	2006	2005	Change
Debt issue cost amortization		$277,349	$    242,517	$   34,832	$ 819,643	$   705,634	$     114,009
Other marketing costs		26,525	26,064	461	79,483	102,908	(23,425)
		$303,874	$    268,581	$   35,293	$ 899,126	$   808,542	$       90,584

Selling commissions paid to brokers for selling Investor Bonds and Mortgage Participations and costs incurred to register Investor Bonds are paid in cash and charged as an expense over the term of the related debt.  The unamortized balance is included in “Unamortized debt issue costs” and is classified as an asset on our balance sheet.  The balance was $2,190,057 and $2,754,780 as of September 30, 2006 and 2005, respectively.   

The increases in debt issue cost amortization for the three and nine months ended September 30, 2006 are due to sales of new Investor Bonds and Mortgage Participation Agreements since September 30, 2005.  Other marketing costs decreased for the nine months ended September 30, 2006 because of fines and compliance issue costs spent in the first three months of 2005 on the Chicago Stock Exchange matter (see page 8 for more information on this item).  We have not had to spend additional money on this issue in 2006.

Operating and management expenses. Management and advisory expenses for the three months ended September 30, 2006 increased $43,147 (13.0%) from $332,707 in 2005 to $375,854 in 2006.  This increase is due to an increase in revenues.  For the nine months ended September 30, 2006 management and advisory expenses increased $50,460 (4.9%) from $1,034,872 to

6

$1,085,332.  This increase in is due an increase in revenues offset by a $77,000 loan participation revenue fee paid to Cornerstone Capital Advisors, Inc. (“CCA”) in the first quarter of 2005.  No loan participation fees have been paid in 2006.  

Our management and advisory agreement with CCA obligates us to pay CCA the following fees:

•

A monthly management fee equal to 10% of our revenues from all sources other than loan fees, loan participation revenue, and revenue received from CCA plus 30% of loan participation revenue.

•

A loan origination fee equal to 30% of the total loan fees charged by the Company to its borrowers.  The fee is generally paid from loan proceeds and reduces deferred loan fees that we will recognize over the life of the loan.  

Please see Note 4 of the “Notes to Consolidated Financial Statements” for additional information about our agreement with CCA and for amounts that we have paid to CCA during the three and nine months ended September 30, 2006 and 2005.

For the three and nine months ended September 30, 2006 and 2005, operating expenses were as follows:

	2006		2005		Change
Three Months	$	317,688	$	157,485	$		160,203
Nine Months	$	636,987	$	540,684	$	96,303

The increases in 2006 are due to:           

	Three Months		Nine Months
Interest Expense – Loans Payable	$	138,103	$	138,103
Loan Issue Cost Amortization	29,104		29,104
Legal Fees & Other	(7,004)		(70,904)
	$	160,203	$	96,303

Interest Expense and loan issue cost amortization increased due to the Bernard National loan (discussed in previous paragraphs) and a revolving line of credit loan with Wellstone Investment Fund, both of which were added in the third quarter of 2006.  Please see Notes 4 and 16 of the Notes to Consolidated Financial Statements for additional information on the Wellstone Investment Fund loan.

Legal fees and other expenses decreased in both periods because in 2005 we spent higher than normal amounts on legal fees due to the Chicago Stock Exchange issue (see page 8 for additional information).  In 2006, our legal costs have gone down to their normal levels since we have not had to spend any additional money on the Chicago Stock Exchange issue.

Income tax provision (benefit). The income tax provision (benefit) for the three and nine months ended September 30, 2006 was $159,333 and $328,742, respectively compared to ($80,381) and ($124,652) for the same periods ended September 30, 2005.  The increases in income taxes are due to an increase in pre-tax income.  The Company’s effective tax provision (benefit) rate was 37.8% and (62.5%) for the three months and 35.1% and (123.5%) for the nine months ended September 30, 2006 and 2005, respectively.  A reconciliation of the Company’s effective tax provision rate to the federal statutory rate is included in the attached “Notes to Consolidated Financial Statements” (Note 12).     

Dividends.  Dividends of $230,518 and $211,514 were declared on June 30, 2006 and 2005, respectively and paid in full in the following month.

Liquidity and Capital Resources

Cash flows from operations.  Net cash provided by the Company’s operations for the nine months ended September 30, 2006 and 2005 was $606,701 and $1,250,364, respectively.  The decrease in 2006 was due to an increase in real estate loan interest financed and an increase in investor interest payments partially offset by increases in net income, depreciation and amortization expense, allowance for loan losses, and bond holdings interest received and a decrease in loans in process.

Investor bond and mortgage participation interest payable increased $2,158,205 in the first nine months of 2006 because approximately 30% to 40% of the investors who purchased bonds in the last four years have elected to reinvest the interest due to them and not receive the interest in cash until maturity.

7

Included in the 2006 and 2005 changes in accrued real estate loan and joint venture interest and deferred loan fee amounts is $3,291,365 and $966,935 in interest which was financed as part of loan principal.  We receive monthly interest payments on our loans except when the terms of certain loans allow borrowers to finance interest payments while the collateralized property is under development or construction.  A summary (by loan type) of the amount of net financed interest for the nine months ended September 30, 2006 and 2005 is as follows:

	2006		2005
Family Housing Development	$	2,645,299	$	571,721
Church Construction	(103,210)		20,965
Senior Housing	749,276		374,249
	$	3,291,365	$	966,935

The amount for 2006 represents interest accrued and financed in 2006, net of payments received in 2006 that were financed in previous years.  2005’s amount represents interest accrued and financed in 2005, net of payments received in 2005 that were financed in previous years.

The increase in the family housing net financed interest in 2006 as compared to 2005 is due to the addition of 16 new projects which are in their development phase of operation and are financing their interest.  This increase in projects in their development phase is partially offset by three projects which have gone into their sales phase and are paying interest to us as they sell homes.  We expect the net financed interest amount to remain at its current level until late 2007 when we expect the majority of these new projects to go into their sales phase and begin making interest and principal payments to us.

In 2006 we received $103,210 in previously financed church interest due to significant pay downs on three church loans.

The increase in senior housing financed interest in 2006 is due to a restructure and renewal on the Chattanooga, TN real estate joint venture investment loan.  Past due interest of $468,011 was financed and included in the principal balance of the loan.  This was a one-time concession to the borrower.  Since this renewal/restructure, the borrower has been able to stay current on their loan interest.  The Chattanooga, TN loan is classified as an impaired loan in our financial statements (see Note 6 of the “Notes to Consolidated Financial Statements” for more information).  We will monitor the borrowers operations and if they can show a one year trend of staying current on their interest payment we will take them off of the impaired loan list.  We are actively working with the borrowers to refinance all or part of this loan with an outside lender.

Cash flows from investing activities.    For the nine months ended September 30, 2006, the Company used $20,044,927 in cash from investing activities which is a decrease of $6,454,138 from $26,499,065 for the nine months ended September 30, 2005.  The decrease was due to the cash sale of $11,974,400 in bond holdings and the receipt of $252,262 from the sale of our rental office building.  These receipts were offset by an increase (net of payments received) in net real estate and joint venture investment loans made of $4,162,685 and the purchase of rental property assets under construction of $2,824,061.

Cash flows from financing activities.  During the nine month period ended September 30, 2006, the Company did not have any registered bonds or stock for sale until late September; therefore, only $1,591,589 in new bonds were sold in 2006 compared to $16,416,473 in 2005.  

Investor Bonds redeemed for cash increased from $1,753,744 for the nine months ended September 30, 2005 to $9,136,761 for the nine months ended September 30, 2006.  This increase is due to a larger amount of maturities in the first nine months of 2006 versus 2005.  Until September 2006 we had no bonds available for the owners of the maturing bonds to reinvest in so the majority of the maturities were paid in cash.  Since we now have new registered bonds for sale we anticipate that the amount of maturing bonds redeemed for cash will decrease significantly in the next 12 months.

As discussed above, we added two loans payable in the third quarter of 2006, totaling principal outstanding of $17,589,000.  We added this debt to supplement our Investor Bond program so that we will have alternative financing available in case we cannot coordinate the issuance of new registered bonds with new loan investment opportunities.  Please see Note 16 of the “Notes to Consolidated Financial Statements” for additional information about these loans.

Dividends of $508,552 and $447,430 were paid in the first nine months of 2006 and 2005, respectively.

We have $45,458,555 in Investor Bonds coming due or redeemable upon demand in the next 12 months.  $9,984,548 of this amount is for graduated certificates, which allow an investor to redeem their certificate each year on the anniversary date of the purchase.  Based on our historical experience, we expect that less than 20% of the graduated certificates will be redeemed for cash during the next 12 months.  

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The Securities and Exchange Commission approved our Series G registration statement in September 2006 with approximately $60,000,000 in Series G Investor Bonds available for issuance with terms similar to our Series E and F bonds.    Our historical experience indicates that more than 75% of the maturities will be reinvested into new Investor Bonds; however, we cannot guarantee that this will happen in the future.  We will ensure that we have enough cash available to handle these maturities.

Among the measures we take to mitigate any demands for cash are:

● Maintain a minimum cash balance, normally no less than $3,000,000.

● Have readily marketable loans that can be sold for par or a premium.

● Ask investors their intentions at least 30 days before their bonds mature.

● Have a bank willing to extend credit lines if needed.

● Spread maturity dates throughout the year.

● Limit each investor to not more than $500,000 maturing in any three-month period.

We believe that cash on hand, cash generated by operations and expected refinancing and pay-offs of existing loans, will be sufficient to meet our financing and capital needs for the coming year.  The amount and timing of our future capital requirements will depend on factors such as the origination and funding of new investments, any opportunities for acquisitions of related businesses and the overall success of our marketing efforts for certificates, shares and any other securities.

Item 3. Controls and Procedures

The principal executive officer and the principal financial officer of the small business issuer, Cornerstone Ministries Investments, Inc., have, as of September 30, 2006, evaluated the small business issuer’s disclosure controls and procedures, as defined by Sections 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934. Based on their evaluation, they have concluded that those disclosure controls and procedures are designed and implemented effectively to ensure that information required to be disclosed by the small business issuer in the reports that it files or submits under that Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.  

Part II. Other Information

Item 1. Legal Proceedings

The laws of many states provide an exemption from registration for offerings of securities approved for listing on the Chicago Stock Exchange.  Since April 2000, we have considered our securities to have been approved for listing on the Chicago Exchange.  Prospectuses for our public offerings of bonds and common stock, and our publicly-filed reports, have included statements that our common stock was approved for listing on the Chicago Exchange.

On December 3, 2004, a letter from the Chicago Exchange denied our application for listing and said that it had not previously approved our common stock for listing.  However, on February 4, 2005, a second letter from the Chicago Exchange said that, upon review, it had apparently approved our common stock for listing subject to the completion of an offering that would meet the Chicago Exchange’s numerical standards for shareowners’ equity, number of public shareholders and publicly held shares.  A March 1, 2005 clarification from the Chicago Exchange said that it agrees that our status was not inconsistent with our being “approved for listing upon notice of issuance,” the language used in state exemption laws.  That being said, our common stock and other securities will not be listed on the Chicago Exchange in the future.

Based upon the Chicago Exchange’s position in its December 3, 2004 letter, securities regulators for several states have raised the issue of whether we lawfully offered and sold securities without registration in those states and/or whether our prospectuses and publicly-filed reports were false and misleading, in their reference to Chicago Exchange approval for listing.  The following paragraphs describe the status of some of such states’ regulators proceedings.  While we do not believe that we have violated any securities laws in connection with our previous reliance on the Chicago Exchange exemption, we have to date elected to settle all such related state regulatory actions where the cost of such settlements are likely to be significantly less than the cost of litigation in each state.  

On February 4, 2005 the Texas State Securities Board told us that, by February 11, 2205 we must either sign an Agreed Cease and Desist Order and pay a $25,000 fine or it would obtain an emergency administrative cease and desist order, without our being represented.  We chose to sign the order on February 9, 2005 and paid the fine.  The order states that we must “immediately cease and desist from engaging in conduct that is materially misleading or is otherwise likely to deceive the public in connection with the offer for sale of any security in Texas.”

On March 10, 2005 we attempted to register our Series F bonds and common stock in New Jersey by filing a registration statement with the New Jersey Bureau of Securities.  Because our initial prospectus for the Series F bonds and common stock included the statement that our common stock was approved for listing on the Chicago Exchange upon notice of issuance, the New Jersey Bureau of Securities

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denied the effectiveness of our registration statement by issuing a Stop Order on October 5, 2005.  According to the Stop Order, we are prohibited from selling the Series F bonds and common stock in New Jersey.

On April 26, 2005 we consented to an entry of a Cease and Desist Order by the Minnesota Commissioner of Commerce that we cease and desist from offering and selling securities in Minnesota until we are in compliance with Minnesota statues and until the Commissioner’s further order.  We also agreed to redeem all bonds purchased by Minnesota residents and to pay an $8,000 civil penalty.

On August 25, 2005, at the informal request of Maine’s Office of Securities, we made rescission offers to investors in Maine.

On August 11, 2005, the Ohio Division of Securities sent us a draft of a Cease and Desist Order, the terms of which did not require us to pay fines or give rescission offers.  We agreed to the Cease and Desist Order, and on September 12, 2005, the Ohio Division of Securities issued the Cease and Desist Order.  According to the terms of the Order, we are ordered to refrain from offering to sell unregistered securities in Ohio unless a proper exemption from registration exists.

On September 20, 2005 we entered into a Consent Agreement with the Indiana Securities Division, the terms of which required us to give rescission offers to Indiana investors, pay a $600 investigation expense cost, and refrain from violating provisions of the Indiana Securities Act in the future.

On September 19, 2005 we entered into a Consent Order with the Michigan Office of Financial and Insurance Services, and we agreed to make rescission offers to investors and pay a $4,000 fine.

At the request of the Tennessee Department of Commerce and Insurance Securities Division, and because the Tennessee Securities Division believed four Tennessee shareholders received incorrect prospectuses when buying our registered common stock, we redeemed eight shares of our common stock owned by these four Tennessee shareholders, and in October 2005, the Tennessee Department of Commerce and Insurance Securities Division approved  our calculation of rescission offers made to these four Tennessee shareholders.

On October 27, 2005, the Colorado Division of Securities sent us a draft of a Stipulation for Consent and Desist Order, the terms of which would require us to make rescission offers to certain Colorado investors.  We agreed to the terms of this particular Stipulation for Consent and Desist Order and have subsequently made the rescission offers set forth in the Order.

Since February 2005, we have been discussing our previous offers to sell securities in Kansas with the Kansas Office of the Securities Commissioner, and on August 24, 2005, the Kansas Office of the Securities Commissioner requested that we provide them with additional information relating to these offers to sell.  On September 12, 2005, we provided the Kansas Office of the Securities Commissioner with the requested additional materials and as of the date of this filing, we have not received any additional requests or correspondence from them.

As a result of the aforementioned rescission offers we have made in Colorado, Indiana, Maine, Michigan and Tennessee, combined with the redemption order issued by the state of Minnesota, we have paid approximately $1,065,500 to those investors who either elected to accept our rescission offers or received mandatory redemption payments.

As of November 10, 2006, we are not aware that any other state has instituted any formal proceedings on this or any other issue related to any of our securities offerings, and we are not a party to any other pending legal proceedings.  We are not aware that any of the properties covered by our mortgage loans is subject to any pending legal proceedings or that any governmental authority is contemplating any legal proceedings involving us or any of those properties, other than described above.

Item 2. Changes in Securities

Not Applicable

Item 3. Defaults upon Senior Securities

Not Applicable

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Item4. Submission of Matters to a Vote of Securities Holders

Not Applicable

Item 5. Other Information

Not Applicable

Item 6. Exhibits and Reports on Form 8-K

(a)

(1)  Exhibits 31 and 32, Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) On September 7, 2006 the Company filed Form 8-K (No. 001-32165) to report that the Company had created a new direct                 financial obligation with Bernard National Senior Funding, Ltd.

Signatures

In accordance with the requirements of the Securities and Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: November 10, 2006

Cornerstone Ministries Investments, Inc. (Registrant)

By:S/John T. Ottinger

       John T. Ottinger

       Vice President and Chief Financial Officer

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