Cornerstone Ministries Investments 10QSB 2007 Q2 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 June 30, 2007

/_/ 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
of incorporation or organization)	Identification Number)


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

Not applicable

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 June 30, 2007, there were issued and outstanding 904,923shares of the common stock of the issuer.

Transitional Small Business Disclosure Format (Check one): Yes o No x

Cornerstone Ministries Investments, Inc.

Index

Page

Form 10-QSB Title Page

Index

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Report of Independent Registered Public Accounting Firm

F-1

Consolidated Balance Sheets as of June 30, 2007 and 2006

F-2

Consolidated Statements of Operations for the three and six months

ended June 30, 2007 and 2006

F-3

Consolidated Statements of Changes in Shareholders’ Equity

for the Six months ended June 30, 2007 and 2006

F-4

Consolidated Statements of Cash Flows for the six months

ended June 30, 2007 and 2006

F-5

��

Notes to Consolidated Financial Statements

F-6

Item 2. Management’s Discussion and Analysis of Financial Condition and

Results of Operation

Item 3. Controls and Procedures

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 2. Changes in Securities and Use of Proceeds

Item 3. Defaults on Senior Securities

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

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

Signatures

Certifications – Exhibits 31 and 32

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 June 30, 2007 and 2006, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for the three-month and six-month periods then ended. These 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 (United States), 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 accounting principles generally accepted in the United States of America.

/s/ Berman Hopkins Wright & LaHam, CPAs and Associates, LLP

Winter Park, Florida

August 9, 2007

F-1


CORNERSTONE MINISTRIES INVESTMENTS, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2007 and 2006

	2007	2006
ASSETS
Cash and cash equivalents	$ 6,781,797	$ 1,382,016
Guarantee receivable from related party (see note 4)	35,000	-
Loans in process	831,065	1,108,407
Real estate loans, net (including $84,643,373 and	138,219,946	125,699,215
$42,342,651 from related parties - see note 4)
Real estate joint venture investments, net	16,215,344	16,905,147
Consolidated real estate assets	14,135,417	-
Bond holdings and accrued interest	2,278,466	2,099,694
Property and equipment, net	525,024	525,517
Refundable income taxes	43,878	-
Deferred tax asset, net	809,159	250,918
Goodwill	450,997	450,997
Unamortized debt issue costs	3,108,641	2,377,513
Foreclosed real estate held for sale	-	290,679
Real estate held for investment	340,000	340,000
Other assets	42,604	39,500

TOTAL ASSETS	$183,817,338	$151,469,603

LIABILITIES
Investor certificates and accrued interest	$146,761,768	$140,406,539
Mortgage participations and accrued interest (including	7,317,684	4,113,564
$6,266,792 and $0 to related parties - see note 4)
Loans and mortgages payable and accrued interest	22,614,162	410,665
Dividends payable	231,512	230,518
Accounts and other payables (including	770,505	229,547
$60,760 and $119,190 to related parties - see note 4)
Consolidated real estate obligations	310,891	-
Guarantee obligations (including $35,000 and $0 to	574,610	239,368
related parties - see note 4)

TOTAL LIABILITIES	178,581,132	145,630,201

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; 29 million shares
authorized; 904,923 and 886,607 shares
issued and outstanding	9,049	8,866
Paid in capital	5,653,219	5,536,550
Retained earnings (deficit)	(426,062)	293,986

TOTAL SHAREHOLDERS' EQUITY	5,236,206	5,839,402

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$183,817,338	$151,469,603

SEE ACCOMPANYING NOTES

F-2


CORNERSTONE MINISTRIES INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended June 30, 2007 and 2006

		3 Mo. Ended		3 Mo. Ended		6 Mo. Ended		6 Mo. Ended
		6/30/2007		6/30/2006		6/30/2007		6/30/2006
REVENUES
Real estate loan and joint venture interest and fees	$	1,780,520	$	3,126,857	$	3,634,970	$	5,839,588
Real estate loan and joint venture interest and fees
from related parties (see note 4)		2,657,539		1,105,939		5,222,581		2,097,706
Total real estate loan and joint venture interest and fees		4,438,059		4,232,796		8,857,551		7,937,294
Loan participation and other income (including $30,000		150,213		80,907		338,855		384,663
and $30,000 from a related party - see note 4)

TOTAL REVENUES		4,588,272		4,313,703		9,196,406		8,321,957

EXPENSES
Investor and loan interest expense		3,539,520		3,026,911		7,058,835		6,017,708
Investor and loan interest expense to related parties (see note 4)		155,904		-		155,904		-
Loan loss expense		105,000		120,000		195,000		166,000
Marketing expenses		374,204		305,184		675,818		595,252
Payroll expenses		53,757		-		109,663		-
Management and advisory fees to related party (see note 4)		414,071		360,389		823,631		709,478
Operating expenses		327,110		133,093		763,893		319,299

TOTAL EXPENSES		4,969,566		3,945,577		9,782,744		7,807,737

Income (Loss) Before Provision For Income Taxes		(381,294)		368,126		(586,338)		514,220

Income Tax Provision (Benefit)		(137,504)		139,330		(220,578)		169,409

NET INCOME (LOSS)	$	(243,790)	$	228,796	$	(365,760)	$	344,811

Basic and Diluted Earnings (Loss)
per Common Share	$	(0.27)	$	0.26	$	(0.41)	$	0.39

SEE ACCOMPANYING NOTES

F-3


CORNERSTONE MINISTRIES INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the six months ended June 30, 2007 and 2006

					RETAINED
	COMMON STOCK:		PAID-IN	PREFERRED	EARNINGS	TOTAL
	SHARES	AMOUNT	CAPITAL	STOCK	(DEFICIT)	EQUITY

BALANCE, DECEMBER 31, 2005	891,914	$ 8,919	$5,570,992	$ -	$ 179,693	$5,759,604
Net income					344,811	344,811
Dividends declared					(230,518)	(230,518)
Common stock issued	-	-	-			-
Common stock redeemed	(5,307)	(53)	(34,442)			(34,495)

BALANCE, JUNE 30, 2006	886,607	$ 8,866	$5,536,550	$ -	$ 293,986	$5,839,402


BALANCE, DECEMBER 31, 2006	885,096	$ 8,851	$5,526,483	$ -	$ 171,209	$5,706,543
Net loss					(365,760)	(365,760)
Dividends declared					(231,511)	(231,511)
Common stock issued	30,648	306	198,906			199,212
Common stock issuance costs paid			(1,941)			(1,941)
Common stock redeemed	(10,821)	(108)	(70,229)			(70,337)

BALANCE, JUNE 30, 2007	904,923	$ 9,049	$5,653,219	$ -	$(426,062)	$5,236,206

SEE ACCOMPANYING NOTES

F-4


CORNERSTONE MINISTRIES INVESTMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2007 and 2006

	2007	2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$ (365,760)	$ 344,811
Adjustments to reconcile net income to cash
from operations-
Depreciation and amortization	834,757	563,575
Gain from sale of property and equipment	(9,640)	(51,540)
Loan loss expense	195,000	166,000
Changes in-
Loans in process	(377,133)	(724,145)
Accrued bond interest, net	(85,595)	245,468
Bond holdings principal discount amortization	(3,791)	(3,791)
Accrued real estate loan/joint venture interest and deferred loan fees	(676,495)	(1,601,867)
(including ($155,229) and ($159,577) from related party loans)
Deferred taxes	(327,249)	(107,081)
Refundable income taxes	17,921	-
Investor and mortgage participation interest payable	(353,377)	2,249,242
Guarantee obligations, net of related receivables	-	5,368
Accounts and other payables	(245,570)	(370,764)
Other assets	8,750	32,720

NET CASH (USED) PROVIDED BY OPERATIONS	(1,388,182)	747,996

CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate loans made (including $32,043,564 and	(41,437,316)	(40,495,922)
$8,427,918 to related parties)
Real estate loan principal payments received (including	32,396,144	22,083,970
$28,706,883 and $5,710,956 from related parties)
Real estate joint venture investments made	(2,185,278)	(1,652,404)
Real estate joint venture investment principal payments received	6,094,475	-
Consolidated real estate assets purchased	(4,850,753)	-
Bonds redeemed or sold	-	11,974,400
Property and equipment purchased	(30,080)	(5,485)
Proceeds from sale of property and equipment	9,640	272,362

NET CASH USED BY INVESTING ACTIVITIES	(10,003,168)	(7,823,079)

CASH FLOWS FROM FINANCING ACTIVITIES:
Investor certificates sold	7,314,503	-
Investor certificates redeemed	(7,996,240)	(4,894,639)
Mortgage participation agreements sold (including	7,265,000	1,556,901
$6,215,000 and $0 from related parties)
Mortgage participation agreements redeemed	(2,654,873)	-
Debt issue costs paid	(515,505)	(170,952)
Loan payable principal proceeds	2,467,162	-
Building mortgage principal payments	(405,127)	(167,644)
Capital lease principal payments	-	(1,231)
Common stock issued, net of issuance costs	197,271	-
Common stock redeemed	(70,337)	(34,495)
Dividends paid	(286,419)	(278,034)

NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES	5,315,435	(3,990,094)

Net change in cash and cash equivalents	(6,075,915)	(11,065,177)
Cash and cash equivalents at beginning of period	12,857,712	12,447,193

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$ 6,781,797	$ 1,382,016

Supplemental Information-
Interest paid during the period	$ 7,594,727	$ 3,790,368
Income taxes paid during the period	$ 90,000	$ 558,000
Non-cash transactions-
Investor certificates matured and re-invested	$ 9,558,961	$ -
Loan interest financed and included in loan principal (including	$ 1,707,822	$ 1,389,889
$964,376 and $181,392 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., its majority owned subsidiaries and variable interest entities consolidated under the provisions of FIN46R (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 investments 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 recognized from real estat e 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.

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.

F-6

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, Mortgage Participation Agreements and other loans payable. 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, economic conditions, collate ral 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 recoveries. Changes in the allow ance 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 is considered the primary beneficiary and 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.

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 amortization 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.

F-7

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 guarantee’s 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 guarantee 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.

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 prescribes a comprehensive financial statement model of how a company should recognize, measure, present, and disclose uncertain tax positions that the Company has taken or expects to take in its income tax returns. FIN 48 requires that only income tax benefits that meet the “more likely than not” recognition threshold be recognized or continue to be recognized on the effective date. Initial derecognition of amounts would be reported as a cumulative effect of a change in accounting principle. FIN 48 was effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not have a material impact on the Company’s financial statements.

F-8

In September 2006, the FASB issued FAS No. 157, “Fair Value Measurements”, which establishes a framework for reporting fair value and expands disclosure about fair value measurements. FAS 157 is effective for the Company’s 2008 fiscal year. The Company is currently evaluating the impact of this standard on its financial statements.

In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115”. FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. FAS 159 is effective for fiscal years ending after November 15, 2007. The Company is currently evaluating the impact of adopting FAS 159 on its financial statements.

NOTE 2 – PROPERTY AND EQUIPMENT & FORECLOSED REAL ESTATE HELD FOR SALE

At June 30, property and equipment is composed of:


		2007		2006
Office Condominiums	$	550,116	$	550,116
Office Computers, Furnishings,
Software & Equipment		147,917		147,336
Vehicles		29,500		30,351
Less: Accumulated depreciation		(202,509)		(202,286)
Property and equipment, net	$	525,024	$	525,517

Depreciation expense – three months	$	7,223	$	8,499
Depreciation expense – six months	$	14,423	$	21,282

In February 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 December 2005, the Company foreclosed on a church loan in Dade City, FL and repossessed the land and building. The foreclosed asset was initially recorded at the loan’s carrying value of $290,679 because the Company’s management estimated the asset’s fair value to be greater than the loan’s carrying value. In December 2006, the Company sold the land and building and financed the $275,000 purchase price. A loss of $34,442 was recognized from this sale in the fourth quarter of 2006.

NOTE 3 – COMMITMENTS AND CONTINGENCIES

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 $38,435,000 in approved, unused loan commitments for real estate loans and $4,234,000 for real estate joint venture investments as of June 30, 2007. The Company has four new approved real estate loan commitments totaling $8,600,000 as of June 30, 2007 which the Company expects to fund by year end.

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.

F-9

NOTE 4 – RELATED PARTY TRANSACTIONS

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

The Company has 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’s only employee is its president. CCA is subject to the supervision of the Company’s board of directors. One former Company executive officer and director serves on CCA’s parent company’s board of directors and the Company’s Chief Financial Officer is employed by CCA. 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 six months ended June 30, the Company paid CCA as follows:


		Three Months				Six Months
		2007		2006		2007		2006
Management Fees	$	414,071	$	360,389	$	823,631	$	709,478
Loan Origination Fees		239,854		66,450		538,553		707,325
	$	653,925	$	426,839	$	1,362,184	$	1,416,803

As of June 30, 2007 and 2006, the Company owed CCA $60,760 and $119,190, respectively under this agreement.

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 $630,000. The Company received $15,000 and $30,000 from CCA under the terms of this lease during each of the three and six month periods ending June 30, 2007 and 2006, respectively.

Loans made to subsidiaries of Cornerstone Group Holdings, Inc./Church Growth Foundation, Inc.

During 2005 and 2006, eight 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. These loans were made at similar terms to that of the Company’s third-party loans. All of the loans accrue interest at 10% per annum and mature at various dates in 2007 and 2008. A summary of all loans to CGH subsidiaries as of June 30, 2007 is as follows:


		Principal	Purpose
Cushman Apartments, LP	$	2,173,679	Acquisition/renovation of affordable apartments/condos
Meridian Housing, LLC		1,117,476	Acquisition/development of affordable apartments/housing
Lauren Ridge Apartments, LP		1,843,658	Acquisition/construction of market rate apartments
Preston Ridge, LLC		1,118,905	Acquisition/construction of affordable single family housing
Ashton Park Apartments, LP		523,302	Acquisition of land for low income tax credit apartments
River Run Apartments, LLC		1,748,936	Acquisition/construction of market rate apartments
Cambridge Place, LLC		563,095	Acquisition/construction of affordable single family housing
Madison Pointe, LLC		635,746	Acquisition/construction of affordable single family housing
Total	$	9,724,797

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. Also, in late 2006, CGH was dissolved by its parent company, Church Growth Foundation, Inc. (“CGF”); therefore, CGH’s ownership interest in the above entities was transferred to CGF.

F-10

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. 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. 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-party first mortgage financing.

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.

WRC received additional senior debt financing and equity contributions that allowed WRC to decrease the Company’s loan principal by approximately $25,570,000 during 2006. In January 2007, WRC refinanced its senior debt and was able to completely pay off the Company’s remaining loan amount of $12,331,338 with proceeds from the refinance and from additional equity contributions.

Loan to Castleberry Properties, LLC

In March 2006, the Company originated a loan to Castleberry Properties, LLC (“Castleberry”) for the acquisition of land that is being developed into an office park. Cornerstone Capital Advisors, Inc. (“CCA”), the Company’s manager, owns 50% of Castleberry. As of June 30, 2007, the loan principal outstanding is $893,834. The loan’s maximum commitment is $950,000. CCA has contributed $238,000 in equity to Castleberry.

Loans to Wellstone, LLC

In September 2006, two Company officers and two CCA officers each acquired an 18.75% ownership interest in Wellstone LLC, the Company’s largest borrower. All of the loans accrue interest at 10% per annum and mature at various dates during 2007 and 2008. All of the loans were originated at terms similar to that of the Company’s third-party loans. As of June 30, 2007, principal outstanding on the nine project loans to Wellstone LLC totaled $76,134,586. Seven of the nine project loans were outstanding prior to September, 2006. Two loans, with total principal outstanding of $5,904,189, were added after Wellstone LLC became a related party. Effective March 31, 2007, one of the Company officers mentioned above resigned his position and is now working for Wellstone LLC.

Mortgage Participation Agreement purchased by Wellstone Retirement Communities I, LLC

In April 2007, Wellstone Retirement Communities I, LLC (“WRC”) purchased $6,215,000 in mortgage participations which are collateralized by a real estate joint venture investment loan with property located in Chattanooga, TN. The participation pays interest monthly at 10% per annum. Please see Note 16 for additional information about the Company’s Mortgage Participation Agreements. During the first six months of 2007, the Company accrued $155,904 in interest expense related to this agreement and paid $104,112 in interest to WRC. $51,792 in accrued interest is currently owed to WRC by the Company. As of June 30, 2007, the total principal and accrued interest due to WRC under this agreement is $6,266,792 and is included in “Mortgage participations and accrued interest” on the accompanying Consolidated Balance Sheets.

Wellstone Retirement Communities I, LLC – Company Indemnity Guarantee

In April 2007, the Company provided a guarantee to Wellstone Retirement Communities I, LLC (“WRC”) as part of a WRC asset sale. In connection with the sale, WRC made customary representations and warranties and agreed to indemnify the purchaser for a breach of these representations and warranties for a period of one year following the date of sale. The Company agreed to guarantee the indemnity obligations of WRC and another obligor up to a maximum of $3,500,000. The Company is to receive a fee of $35,000 for providing the guarantee which is recorded as a “guarantee receivable” in the accompanying Consolidated Balance Sheets.

F-11

NOTE 5 - REAL ESTATE LOANS

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


		2007		2006
Family housing development loans	$	129,246,020	$	87,063,831
Church mortgage loans		11,376,096		6,824,172
Senior housing mortgage loans		1,093,054		35,443,403
Total principal		141,715,170		129,331,406
Accrued Interest		840,598		682,743
Unearned Loan Fees		(2,887,822)		(3,416,934)
Allowance for loan losses		(1,448,000)		(898,000)
Total Real Estate Loans	$	138,219,946	$	125,699,215

These loans mature as follow: 2007 - $45,035,396; 2008 - $90,238,469; 2009 - $925,325; 2010 - $0; 2011 and beyond - $5,515,980. 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.

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 six months ended June 30, the net interest payments financed were:


		2007		2006
Current year interest financed	$	2,963,012	$	2,071,970
Previous years’ financed interest received		(1,258,163)		(928,226)
Net financed interest	$	1,704,849	$	1,143,744

On June 30, 2007, the Company had significant credit risk concentrations in the following states:

Georgia - $33,353,845

Texas - $65,776,274

South Carolina - $29,216,704

Impaired loan disclosures for the six months ended June 30:


		2007		2006
Number of impaired loans		11		2
Carrying amount	$	31,217,470	$	863,455
Weighted average investment – year-to-date	$	30,265,059	$	852,434
Impaired loan interest income – three months	$	689,981	$	31,755
Impaired loan interest income – six months	$	1,372,379	$	40,321

Approximately $775,000 in allowance for specific impaired loan loss has been re-classified from the current credit risk assessment loan loss allowance because the total carrying amount of the impaired loans as of June 30, 2007 is greater than the present value of their expected future cash flows. The total expected future cash flows of the impaired loans is estimated by the Company to be approximately $30,442,000 and includes guarantees from Wellstone LLC and Cornerstone Capital Advisors, Inc. (both are related parties – see note 4) to two borrowers. These guarantees have an estimated present value to the borrowers of approximately $4,311,000. As of June 30, 2006, no specific impaired loan loss allowance had been recorded.

F-12

NOTE 6 – REAL ESTATE JOINT VENTURE INVESTMENTS

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


Location		2007		2006
St. Petersburg, FL		9,756,561		6,029,253
Lewisville, TX		-0-		545,000
Chattanooga, TN		6,232,859		5,745,991
San Antonio, TX		-0-		2,400,571
Edmond, OK		-0-		1,603,689
Total principal outstanding		15,989,420		16,324,504
Accrued interest		225,924		580,643
Unearned loan fees		-0-		-0-
Allowance for loan losses		-0-		-0-
Real estate joint venture investments, net	$	16,215,344	$	16,905,147

All of these loans mature in 2008. 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.

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 for 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.

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 either one or 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 six months ended June 30, the net interest payments financed were as follows:


		2007		2006
Current year interest financed	$	502,089	$	246,145
Previous years’ financed interest received		(499,116)		-0-
Net financed interest	$	2,973	$	246,145

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 June 30, 2007 and 2006. The impaired loan’s carrying amount as of June 30, 2007 and 2006 was $6,373,023 and $6,214,001, respectively. The loan’s average carrying amount for the first six months of 2007 and 2006 was $6,350,962 and $6,149,189, respectively. A total of $309,032 and $284,085 in interest was earned in the six months ended June 30, 2007 and 2006, respectively from this loan. The loan’s collateral is appraised at $7,400,000; therefore, no loan loss allowance has been established.

NOTE 7 – LOANS TO VARIABLE INTEREST ENTITIES (“VIE”)

Loans to VIE’s – Company not considered the primary beneficiary:

In 2005, the Company originated a loan with a for-profit entity that did not have enough equity at risk to absorb all of its estimated expected losses. The Company is not considered the primary beneficiary since the entity’s equity guarantees are estimated to be sufficient to absorb the majority of its estimated expected losses, if they occur. The loan’s carrying amount on June 30, 2007 was $1,117,782.

F-13

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 absorb all of its estimated expected losses. The Company is not considered the primary beneficiary since Wellstone LLC’s subordinated financial instruments are expected to be sufficient to absorb the majority of its estimated expected losses, if they occur. The Company’s seven original project loans to Wellstone LLC plus two new project loans originated in November 2006 and January 2007, had a total carrying amount of $74,001,890 as of June 30 , 2007.

During 2006, the Company originated six loans to borrowers who are considered variable interest entities because they do not have enough equity at risk to absorb all of their estimated expected losses. Wellstone Retirement Communities I, LLC (“WRC”) has provided guarantees to these entities which, if needed, will be adequate to absorb the majority of each borrower’s estimated expected losses, if they occur; therefore, the Company is not considered the primary beneficiary. WRC is a related party because Cornerstone Capital Advisors, Inc. manages both entities (see Note 4). As of June 30, 2007, the six loans have a total carrying amount of $6,426,851. The borrowers are developing real estate for use as market rate apartments, low-income apartments and affordable single family homes.

As of June 30, 2007, the Company has 16 loans with a total carrying amount of $81,546,523 to VIE’s in which the Company is not the primary beneficiary. These loans are classified as “Real estate loans, net” in the accompanying Consolidated Balance Sheet.

Loans to VIE’s – Company considered primary beneficiary:

The Company originated one loan in 2006 and one loan in 2007 in which the Company is considered the primary beneficiary. The borrowing entities are developing real estate for use as low-income apartment facilities. These two loans have a total carrying amount of $5,995,161 as of June 30, 2007 and they have been eliminated in consolidation. Please see Note 9 for additional information on these investments.

NOTE 8 – ALLOWANCE FOR LOAN LOSSES

For the six months ended June 30, 2007 and 2006, 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 – 12/31/05	$	-0-	$	732,000	$	-0-	$	-0-	$	732,000
Loan loss expense		-0-		166,000		-0-		-0-		166,000
Charge-offs		-0-		-0-		-0-		-0-		-0-
Recoveries		-0-		-0-		-0-		-0-		-0-
Balance –6/30/06	$	-0-	$	898,000	$	-0-	$	-0-	$	898,000

Balance – 12/31/06	$	-0-	$	1,253,000	$	-0-		-0-	$	1,253,000
Loan loss expense		-0-		195,00		-0-		-0-		195,000
Charge-offs		-0-		-0-		-0-		-0-		-0-
Recoveries		-0-		-0-		-0-		-0-		-0-
Balance –6/30/07	$	-0-	$	1,448,000	$	-0-	$	-0-	$	1,448,000

Components of allowance for loan losses at June 30:


		2007		2006
Collective loan losses-
Historical experience	$	-0-	$	-0-
Current credit risk assessment		673,000		898,000
Total collective loan losses		673,000		898,000
Specific impaired loan losses		775,000		-0-
Total allowance for loan losses	$	1,448,000	$	898,000

F-14

The Company incurred its first loss from a loan in 2006 when the Company sold a foreclosed church property at a loss of $34,000. Due to the immaterial amount of recognized losses from loans during the Company’s operating history, there is no collective loan loss allowance related to the Company’s historical experience.

NOTE 9 – CONSOLIDATED REAL ESTATE ASSETS AND OBLIGATIONS

Consolidated real estate assets and obligations include the assets and liabilities of majority-owned subsidiaries and variable interest entities (“VIE”) in which the Company is considered the primary beneficiary. As of June 30, 2007, one majority-owned subsidiary (Heron Lake, LLC) and two VIE’s in which the Company is considered the primary beneficiary (Preston Pointe Apartments, LP and Bear Place Village, LP) have been consolidated. As of June 30, 2007, the following assets and liabilities are included in the Company’s Consolidated Financial Statements:


		Subsidiary		VIE’s		Total
Assets:
Land	$	2,553,896	$	1,572,080	$	4,125,976
Buildings and improvements		-0-		4,133,629		4,133,629
Construction in Progress		4,072,465		34,112		4,106,577
Loan issue costs		802,755		32,852		835,607
Working capital escrows		918,688		-0-		918,688
Other assets		-0-		14,940		14,940
Total assets	$	8,347,804	$	5,787,613	$	14,135,417

Liabilities:
Current liabilities		-	$	108,391	$	108,391
Long-term debt		-		202,500		202,500
Total liabilities		-	$	310,891	$	310,891

The Company acquired its subsidiary in 2006 by purchasing an 89% ownership interest in an entity which is developing real estate for use as market-rate apartments. Construction began in the spring of 2007. A United States Department of Housing and Urban Development backed loan is being used for construction and permanent financing. Please see Note 17 for additional information about this loan.

The VIE investments were acquired in 2006 and 2007. Bear Place Village, LP is in the construction stage of operations. Preston Pointe Apartments, LP completed construction in December 2006 and lease-up operations are in progress. The operating results from the subsidiary and VIE investments that are included in the Company’s Consolidated Statement of Operations for the three and six months ending June 30, 2007 are as follows:


		Three Months		Six Months
Rental and related revenue	$	8,943	$	12,111	(included in other income)
Operating expenses		79,629		186,404
Net loss	$	(70,686)	$	(174,293)

NOTE 10 - GOODWILL

Goodwill associated with the Company’s fiscal year 2000 acquisition of Presbyterian Investor’s Fund, Inc. is carried at $450,997. 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, 2006 and 2005, 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.

F-15

NOTE 11 - 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 (See Note 17). At June 30, 2007, unamortized debt issue costs consist of:


Costs incurred to obtain Bernard National loan		$1,061,889
Costs incurred to register debt securities		982,677
Commissions paid on the sale of debt securities		5,864,500
Less: Accumulated Amortization		(4,800,425)
		$3,108,641

Amortization expense was $364,160 and $271,244 for the three months and $726,753 and $543,125 for the six months ended June 30, 2007 and 2006, respectively. Estimated amortization expense for the next five years:

7/2007 – 6/2008: $1,225,519

7/2009 – 6/2010: $466,343

7/2011 – 6/2012: $114,776

7/2008 – 6/2009: $1,052,972

7/2010 – 6/2011: $249,031

NOTE 12 - BOND HOLDINGS


Bond holdings at June 30 consist of-		2007		2006
Local Church Bonds, maturing 2013	$	1,967,194	$	1,959,612
Accrued interest receivable		311,272		140,082
	$	2,278,466	$	2,099,694

The bonds are not traded on an exchange; however, management estimates, based on the fair value of the bond’s 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 2007 or 2006.

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 $46,806 and $54,388 in unamortized bond discounts as of June 30, 2007 and 2006, respectively. The face amount of the bonds is $2,014,000. During the three and six months ended June 30, 2007 and 2006, $1,896 and $3,792 in bond discounts, respectively, were credited to interest income.

Proceeds from the sale or maturity of bonds were $0 and $11,974,400 for the six months ended June 30, 2007 and 2006, 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 $75,359 for the six month periods ending June 30, 2007 and 2006, respectively.

NOTE 13 - INCOME TAXES

The net deferred tax asset in the accompanying Consolidated Balance Sheets includes the following components as of June 30:


		2007		2006
Deferred tax assets	$	946,784	$	418,637
Deferred tax liabilities		(137,625)		(167,719)
Net deferred tax asset	$	809,159	$	250,918

F-16

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, amortization of debt issue and start-up costs, and variable interest entities. 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 June 30, 2007 and 2006.

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


		Three Months				Six Months
		2007		2006		2007		2006
Current: Federal	$	43,524	$	188,469	$	94,716	$	246,581
State		6,330		20,709		11,955		29,909
Deferred: Federal		(168,810)		(62,986)		(294,852)		(96,533)
State		(18,548)		(6,862)		(32,397)		(3,308)
	$	(137,504)	$	139,330	$	(220,578)	$	169,409

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


	Three Months		Six Months
	2007	2006	2007	2006
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	-	-	-	(5.0%)
Other, net	1.6%	.1%	.1%	.2%
Effective tax provision (benefit) rate	(36.1%)	37.8%	(37.6%)	32.9%

Current income taxes payable were $0 and $86,778 as of June 30, 2007 and 2006, respectively, and are included in “accounts and other payables” in the accompanying Consolidated Balance Sheets.

NOTE 14 - 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 June 30, 2007, the Company had cash in excess of insured limits totaling $6,442,591. 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 15 - 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 June 30:

Years to Maturity

On demand & 1 year

Total Principal

2007

$ 45,599,944

16,511,355

28,968,629

7,681,131

32,127,343

$130,888,402

2006

$ 32,994,100

37,921,187

16,621,986

29,171,435

7,703,763

$ 124,412,471

At June 30, 2007 and 2006, accrued interest payable was $15,873,366 and $15,994,068, respectively. Interest rates for bonds outstanding at June 30, 2007 are:

5.00% - $592,473

7.25% - $1,306,896

8.25% - $85,288,458

6.75% - $956,130

7.75% - $1,733,731

9.00% - $41,010,714

The Company filed a Form SB-2 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. After a full review by the Securities and Exchange Commission, the registration statement became effective on September 11, 2006 and the Company began to sell securities on September 25, 2006. For the six months ended June 30, 2007, the Company sold $7,314,503 in bonds and $199,212 in Common Stock (30,648 shares at $6.50 per share). Also, $9,558,961 in maturing bonds was reinvested into Series G bonds during the six months ended June 30, 2007.

NOTE 16 – MORTGAGE PARTICIPATION AGREEMENTS

Mortgage Participation (“MP”) Agreements are debt instruments that are collateralized by specific loans owned by the Company and they entitle the investor to a proportionate share of the interest earned on the collateral. The MP Agreements have not been registered and therefore, are only available to accredited investors. Interest is paid monthly to the MP investor after the Company receives interest payments on the related 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 interest in the underlying collateral. Interest expense related to MP Agreements was $169,296 and $93,760 for the three months and $217,542 and $170,677 for the six months ended June 30, 2007 and 2006, respectively. MP Agreement principal and interest outstanding and related collateral as of June 30, 2007:


		MP Amount		Total Collateral
		Outstanding		Carrying Amount
Bluffton, SC family housing loan; matures 9/01/08
with one available extensions	$	1,050,000	$	5,288,340
Chattanooga, TN senior housing loan; matures 6/30/08
with no available extensions		6,215,000	$	6,373,023
Accrued interest payable		52,684
	$	7,317,684

The Bluffton loan which collateralizes the MP Agreements is classified as a real estate loan and the Chattanooga loan is classified as a real estate joint venture investment in the accompanying Consolidated Balance Sheets. The total carrying amounts are equal to the loan’s principal plus accrued interest less deferred loan fees.

F-18

NOTE 17 – LOANS & MORTGAGES PAYABLE

Outstanding at June 30:


		2007		2006
Bernard National Senior Funding, Ltd
Interest rate equal to the greater of 8.5%
or LIBOR + 3.5% – currently 8.82%
Matures August 2009	$	20,000,000	$	-0-
Prudential Huntoon Paige
Interest rate – 5.75%
Matures June 2048		2,467,162		-0-
Fidelity Bank
Interest rate – 9.75%
Matures September 2009		-0-		410,665
Principal outstanding		22,467,162		410,665
Interest payable		147,000		-0-
Total principal & interest outstanding	$	22,614,162	$	410,665

Interest expense – three months	$	482,278	$	9,832
Interest expense – six months	$	908,208	$	21,047

For the three and six months ended June 30, 2007, $25,428 in interest expense was capitalized because the Prudential Huntoon Paige loan principal proceeds are being used to fund a facility that is under construction.

Loan maturity amounts by year: 2007 - $0; 2008 - $0; 2009 - $20,113,945; 2010 - $120,672; 2011 and thereafter - $2,232,545.

The Bernard National Senior Funding, Ltd. (“Bernard National”) loan is a $40,000,000 revolving credit facility. The loan is secured by 19 of the Company’s first mortgage real estate loans which had a carrying value of $43,508,645 at June 30, 2007. 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 June 30, 2007 the loan to value ratio minimums have been met.

As part of the Bernard National 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 National as security for the revolving credit facility. The assets, liabilities and results of operations for CAP are included in these Consolidated Financial Statements.

The Prudential Huntoon Paige (“Prudential”) loan is a $17,214,400 construction loan which will convert into a permanent loan once construction is complete. The loan is being used by the Company’s Heron Lake, LLC subsidiary to construct market-rate apartments in Spartanburg, SC. During the construction period, monthly interest-only payments are being financed by Prudential and added to the loan’s principal. After construction is completed, a principal and interest payment of $91,733 will be due monthly. The underlying land and improvements collateralize the loan.

The Fidelity Bank loan was originally used to finance the Company’s office building. In June 2007, the loan was paid in full.

F-19

NOTE 18 – GUARANTEE OBLIGATIONS

The Company is guarantor on 10 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 facilities. As of June 30, 2007, all loans which had a guarantee were current based on their loan terms.

In April 2007, the Company provided an indemnification guarantee to Wellstone Retirement Communities I, LLC (“WRC”). In connection with a major asset sale, WRC made customary representations and warranties and agreed to indemnify the purchaser for a breach of these representations and warranties for one year from the date of sale. The Company guaranteed the indemnity obligations of WRC and another obligor up to a maximum of $3,500,000. The agreed upon fee for this obligation is $35,000, which is outstanding at June 30, 2007 and included in “guarantee receivables” on the accompanying Consolidated Balance Sheets

Guarantee obligations as of June 30, 2007:


	Renewal/					Current		Loan
	Origination	Maturity		Maximum		Principal		Guarantee
Location/Type	Date	Date		Guarantee		Outstanding		Obligation
Charleston, SC	12/30/05	4/1/08	$	$11,500,000	$	$11,500,000	$	100,000
Beaufort, SC	12/30/05	4/1/08		8,850,000		8,850,000		150,000
Blythewood, SC	8/25/06	8/25/08		250,000		250,000		3,750
Seneca, SC	9/08/06	9/08/08		860,000		860,000		12,900
Spartanburg, SC	9/26/06	9/26/08		17,660,000		4,421,454		101,875
Lexington, SC	12/29/06	12/29/08		18,250,000		4,785,960		91,000
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	8/24/09		371,700		371,700		3,717
St. Petersburg, FL	12/18/04	8/15/08		7,331,300		6,753,240		71,000
Indemnification	4/13/07	4/13/08		3,500,000		n/a		35,000
			$	69,123,661	$	38,343,015	$	$574,610

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 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 June 30, 2007 and 2006.

F-20

NOTE 20 - EARNINGS PER SHARE

Basic earnings (loss) per share for the three and six months ended June 30, 2007 and 2006 have been calculated as follows:


			Three Months		Six Months
2006	Net Income	$	228,796	$	344,811
	Average Common Shares Outstanding		886,607		887,464
	Earnings per Common Share	$	0.26	$	0.39
2007	Net Loss	$	(243,790)	$	(365,760)
	Average Common Shares Outstanding		900,931		895,923
	Loss per Common Share	$	(0.27)	$	(0.41)

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 six months ended June 30, 2007 from the following customers:


		Amount	%	Description of Revenue Received
Wellstone, LLC	$	4,473,256	48.6%	Interest and fees from a real estate loans

Senior Housing Services, Inc
and subsidiaries	$	1,737,359	18.9%	Interest and fees from real estate joint
				venture investments and real estate loans
	$	6,210,615	67.5%

Wellstone, LLC is considered a related party of the Company – please refer to Note 4 for additional information about the relationship.

Senior Housing Services, Inc. and 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.

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.

Loans and mortgages payable – 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.

F-21

The estimated fair values of the Company’s financial instruments at June 30, 2007 are:


		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	6,781,797	$	6,781,797
Bond holdings	$	2,278,466	$	2,278,466
Financial liabilities:
Investor bonds	$	130,888,402	$	130,888,402
Mortgage participations	$	7,265,000	$	7,265,000
Loans and mortgages payable	$	22,467,162	$	22,467,162
Loan guarantee obligations	$	574,610	$	574,610

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.


		Six months ended
		June 30,
		2007		2006
Revenues	$	9,196,406	$	8,321,957
Investor/loan interest expense		7,214,739		6,017,708
Loan loss expense		195,000		166,000
Marketing expenses		675,818		595,252
Management/advisory fees		823,631		709,478
Payroll and related costs		109,663		-0-
Operating expenses		763,893		319,299
Total expenses		9,782,744		7,807,737
Operating income (loss)		(586,338)		514,220
Income tax provision (benefit)		(220,578)		169,409
Net income (loss)	$	(365,760)	$	344,811

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 10.5%. 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.

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 June 30, 2006 and June 30, 2007

General. Assets increased from $151,469,603 at June 30, 2006 to $183,817,338 at June 30, 2007 for an increase of $32,347,735 or 21%. The increase is due to our new $20,000,000 revolving credit agreement loan with Bernard National Senior Funding, Ltd and an increase in outstanding Investor Bonds and Mortgage Participation Agreements. With the cash generated from these increases and with cash already on hand, we invested in real estate loans and joint venture investments, net of principal payments received, of $11,830,928. We also invested in one subsidiary and two consolidated variable interest entities totaling $14,135,417. Total revenue increased for the six months ended June 30, 2007 by $874,449 (11%) to $9,196,406. Net income (loss) for the six months ended June 30, 2007 was ($365,760) compared to $344,811 for the same period ended June 30, 2006.

Total real estate loans and joint venture investments outstanding on June 30, 2007 was $154,435,290 compared to $142,604,362 on June 30, 2006 for an increase of $11,830,928 or 8.3%. This increase is due to the cash received from the Bernard National loan and an increase in Investor Bonds and Mortgage Participation Agreements and the subsequent origination or refinancing of real estate loans and joint venture investments, as follows:


New real estate loan originations	$	31,395,892
Decrease in existing loans, net of principal received		(18,875,161)
New real estate joint venture investments made		-0-
Increase in existing real estate joint venture investments		(689,803)
	$	11,830,928

Consolidated real estate assets increased due to our investment in one subsidiary (Heron Lakes, LLC) and two variable interest entities in which we are the primary beneficiary. Heron Lakes, LLC is constructing a market rate apartment facility in South Carolina. We currently own 89% of this entity. The two variable interest entities are building low income apartments in South Carolina. Please refer to Note 9 of the “Notes to Consolidated Financial Statements” for additional information about these investments. We are actively pursuing the sale of our ownership in Heron Lakes, LLC and the investment of additional capital into the two variable interest entities so that we will not have to continue to consolidate these entities into our financial statements.

All other assets composed primarily of cash, bond holdings, property and equipment, and unamortized debt issue costs were $15,246,631 as of June 30, 2007.

During the second quarter of 2006, we determined that our church bond holdings, with a carrying value of $2,278,466 are impaired due to the non-payment of interest by the borrower. Our initial and on-going evaluations 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. In August 2007, we received approximately $256,000 in past due interest on these bonds.

Our cash balance increased $5,399,781 from $1,382,016 on June 30, 2006 to $6,781,797 on June 30, 2007. This increase is due to the fact that we are selling new bonds and Mortgage Participations in 2007; whereas in the first six months of 2006 we had no new bonds registered and for sale.

Principal and interest payable on Investor Bonds and Mortgage Participation (“MP”) Agreements increased $9,559,349 or 7% from $144,520,103 as of June 30, 2006 to $154,079,452 as of June 30, 2007. We have sold approximately $19.2 million in new Series G bonds since September 2006; however, this increase has been offset by approximately $12.8 million in bond redemptions from maturing bonds. Our MP Agreement principal has also increased approximately $3.2 million in the last year. The large number of bond redemptions is due to not being registered in a number of states that were affected by the Chicago Stock Exchange issue (see page 8 for more on this item) which means that we could not reinvest maturing bonds from investors living in these states.

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 June 30, 2007 we had drawn $20,000,000, 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 six months ended June 30 is as follows:


	2007		2006		Increase		%
Three Months	$	4,438,059	$	4,232,796	$	205,263	4.8%
Six Months	$	8,857,551	$	7,937,294	$	920,257	11.6%


		Three Months		Six Months
The increases were due to the following:
Increase in average outstanding principal	$	289,902	$	784,699
(Three months: $157,199,563 – 2007; $144,730,241 – 2006)
(Six Months: $155,234,612 – 2007; $138,837,216 – 2006)
Change in weighted average interest rate		(21,961)		20,654
(Three months: 9.75% - 2007; 9.81% - 2006)
(Six months: 9.82% - 2007; 9.79% - 2006)

Change in loan fees recognized		(62,678)		114,904
	$	205,263	$	920,257

The increase in average outstanding principal is due to the addition of 22 new real estate loans in the last 12 months.

Loan participation and other income. For the three and six months ended June 30, 2007 loan participation and other income increased (decreased) $69,306 and ($45,808), respectively as compared to the same periods ended June 30, 2006. These changes are due to the following:


		Three Months		Six Months
Investment interest	$	58,222	$	1,967
Office rental income		-0-		(12,100)
Gains – fixed asset sales		9,640		(41,900)
Other		1,444		6,225
	$	69,306	$	(45,808)

Investment income increased this quarter due to an increase in excess cash available for short-term investment. Office rental income decreased because we sold our office condo rental property near the end of the first quarter in 2006. Gains from fixed asset sales increased in the three month period due to two small asset sales in June 2007. These assets were almost fully depreciated when they were sold which then caused the small gain. Gains from fixed asset sales decreased for the six month period ended June 30, 2007 due to the sale of our rental condo office in the first quarter of 2006, which resulted in a $51,540 gain.

Investor interest expense. Investor interest expense for the three and six months ended June 30, 2007 was $3,695,424 and $7,214,739, respectively which is an increase of $668,513 (22%) and $1,197,031 (20%), respectively compared to the same periods in 2006. The increase is due to:


		Three Months		Six Months
Increase in average outstanding certificate principal, including	$	189,944	$	342,790
interest payable subject to compounding
(Three Months: $140,591,895 – 2007; $133,603,067 – 2006)
(Six Months: $142,010,266 – 2007; $135,214,685 – 2006)
Change in weighted average interest percentage		(20,121)		(33,803)
(Three Months: 8.65% - 2007; 8.71% - 2006)
(Six Months: 8.67% - 2007; 8.72% - 2006)
Increase in average outstanding Mortgage Participation principal		75,536		46,865
(Three Months: $6,771,840 – 2007; $3,750,400 – 2006)
(Six Months: $4,350,840 – 2007; $3,413,540 – 2006)
Bernard National loan		445,900		886,996
Construction period interest capitalization – rental properties		(22,746)		(45,817)
	$	668,513	$	1,197,031

The construction period interest capitalization relates to the consolidated real estate assets that we obtained when we acquired our 89% ownership interest in Heron Lakes, LLC and from our investment in one consolidated variable interest entity which had property under construction during the first six months of 2007. During the construction of an asset, accrued interest 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 $105,000 and $120,000 for the three months and $195,000 and $166,000 for the six months ended June 30, 2007 and 2006, respectively to loan loss expense. These charges were due to increases in the family housing development loan portfolio’s outstanding principal. Our allowance for loan losses is reviewed quarterly and increases or decreases are made based on the results of these reviews.

In the second quarter of 2007, we re-classified $775,000 of our loan loss allowance to impaired loan loss with the remaining $673,000 classified as a collective loan loss allowance. 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. An impaired loan loss allowance is recognized when a loan is considered impaired and the present value of expected future cash flows from the loan is less than the current carrying value of the loan.

As of June 30, 2007, two church loans and nine family housing loans were considered impaired because they are at least six months behind on their interest payments or because we do not believe it is likely that we will receive all of our interest and principal according to the loan’s original terms. Our management team has evaluated the underlying assets and related guarantees that collateralize the impaired loans and they have determined that the estimated net present value of expected future cash flows from these loans is, in aggregate, approximately $775,000 less than the $31,217,470 in total carrying amounts of the impaired loans. Therefore, as stated above, we are transferring $775,000 from our general collective loan loss allowance to our impaired loan loss allowance. Going forward, we will be tracking these two components of our loan loss allowance separately and we will re-evaluate them at the end of each quarter. Included in the expected future cash flows of seven of the family housing loans, are guarantees from Wellstone LLC and Cornerstone Capital Advisors, Inc. (“CCA”), both of whom are considered related parties to us. These guarantees have an expected present value of $4,311,000 and, if needed, will be used by the borrowers to pay loan principal and interest to us. Wellstone LLC and CCA entered into these guarantee agreements with the borrowers because their management teams were previously involved in managing and/or advising the borrowers on these projects and the respective boards of Wellstone LLC and CCA believe it is their responsibility to be involved in the eventual financial disposition of the projects.

One real estate joint venture investment loan, with a carrying amount of $6,373,023 and $6,214,001 on June 30, 2007 and 2006, respectively was considered impaired. We have received an appraisal on the real estate joint venture investment loan’s collateral and it is estimated to be worth approximately $1,000,000 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 for the property.

As of June 30, 2007, allowance for loan losses as a percent of outstanding loan principal by loan type:


		Loan Loss Allowance		Outstanding Principal	%
Family Housing Development Loans	$	1,448,000	$	129,246,020	1.1%
Church Mortgage Loans		-0-		11,376,096	0%
Senior Housing Mortgage Loans		-0-		1,093,054	0%
Real Estate Joint Venture Investments		-0-		15,989,420	0%
Total	$	1,448,000	$	157,704,590	.9%

Marketing expenses. Total expenses for the marketing of Investor Bonds for the three and six months ended June 30, 2007 were $374,204 and $675,818, respectively, compared to $305,184 and $595,252 for the same periods in 2006. The increase for the three months ended June 30, 2007 is due to a settlement with Virginia in regard to the Chicago Stock Exchange issue. The increase for the six months ended June 30, 2007 is due to the Virginia settlement ($70,000) mentioned in the previous sentence and an increase in sales commission amortization expense.

Selling commissions paid to brokers for selling Investor Bonds and Mortgage Participations, costs incurred to register Investor Bonds and loan fees related to the Bernard National loan are initially charged to “Unamortized debt issue costs”, which is classified as an asset on our balance sheet. These costs are then amortized to expense over the term of the related debt. The Unamortized debt issue cost balance was $3,108,641 and $2,377,513 as of June 30, 2007 and 2006, respectively.

Operating, management and payroll expenses. Management and advisory expenses for the three and six months ended June 30, 2007 increased $53,682 (15.0%) and $114,153 (16%), respectively from $360,389 and $709,478 in 2006 to $414,071 and $823,631 in 2007. These increases are due to an increase in revenues.

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 six months ended June 30, 2007 and 2006.

For the three and six months ended June 30, 2007 operating expenses were $327,110 and $763,893, respectively which is a $194,017 and $444,594 increase over 2006’s operating expenses for the same time periods. The increases are due to the following:


		Three Months			Six Months
Loan issue cost amortization	$	89,241	$	178,482
Consolidated real estate asset operating costs		79,629		186,404
Legal fees		18,384		49,891
Other		6,763		29,817
	$	194,017	$	444,594

Loan issue cost amortization increased due to the Bernard National loan (discussed in previous paragraphs) which was added in the third quarter of last year.

The increase in consolidated real estate asset operating costs resulted from the purchase of Heron Lakes, LLC and our investment in two variable interest entities in which are considered the primary beneficiary. One of the variable interest entities is an operating apartment facility and its year-to-date operating expenses of $159,842 have been included in our financial statements. Start-up and administrative costs from the two “under construction” properties, which totaled $26,562, also contributed to this expense.

Legal fees increased due to additional legal costs related to the Chicago Stock Exchange issue (see the “Legal Proceedings” section for more information on this issue).

Effective October 2006, our president is now employed directly by us instead of by Cornerstone Capital Advisors. Therefore, payroll costs increased for the three and six months ended June 30, 2007 by $53,757 and $109,663, respectively. These amounts include wages and related taxes, benefits and administrative costs.

Income tax provision (benefit). The income tax provision (benefit) for the three and six months ended June 30, 2007 was ($137,504) and ($220,578), respectively compared to $139,330 and $169,409 for the same periods ended June 30, 2006. The decrease in income taxes is due to a decrease in pre-tax income. The Company’s effective tax provision (benefit) rate was (36.1%) and 37.8% for the three months and (37.6%) and 32.9% for the six months ended June 30, 2007 and 2006, 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 13).

Dividends. Dividends of $231,511 and $230,518 were declared on June 30, 2007 and 2006, respectively.

Liquidity and Capital Resources

Cash flows from operations. Net cash provided (used) by the Company’s operations for the six months ended June 30, 2007 and 2006 was ($1,388,182) and $747,996, respectively. The increase in cash used by operations in 2007 of $2,136,178 was due to a decrease in net income, and a $2,602,619 decrease in investor interest payable partially offset by an increase in depreciation/amortization, loan fees received and other accounts payable.

The decrease in investor interest payable is due to interest payments which were made as a result of a large bond maturity on March 15, 2007. Some of our investors had previously elected to reinvest the interest due to them until maturity. At maturity we then paid five years of interest to these investors which increased our cash used by operations.

Included in the 2007 and 2006 changes in accrued real estate loan and joint venture interest and deferred loan fee amounts is $1,707,822 and $1,389,889 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 six months ended June 30, 2007 and 2006 is as follows:


		2007		2006
Family Housing Development	$	1,553,948	$	1,459,874
Church Construction		150,901		(92,443)
Senior Housing		2,973		22,458
	$	1,707,822	$	1,389,889

The amount for 2007 represents interest accrued and financed in 2007, net of payments received in 2007 that were financed in previous years. 2006’s amount represents interest accrued and financed in 2006, net of payments received in 2006 that were financed in previous years.

The increase in the family housing net financed interest in 2007 compared to 2006 is due to the addition of 9 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 2 large projects which have gone into their sales phase and are now paying interest to us as they sell homes.

In the first six months of 2006, we received $92,443 in previously financed church loan interest due to significant pay downs on three church loans. In late 2006 and early 2007 we originated 10 new church construction loans which financed $150,901 in interest in the first six months of 2007.

Senior housing financed interest decreased because in the second quarter of 2007 we received loan pay-offs from two projects in which we had financed interest in previous years.

Cash flows from investing activities. For the six months ended June 30, 2007, the Company used $10,003,168 in cash from investing activities which is an increase of $2,180,089 from $7,823,079 for the six months ended June 30, 2006. In 2006 we received $11,974,400 from the sale of bond holdings and $272,362 from the sale of fixed assets. These two items reduced our cash flows used in investing activities in 2006. We did not have any similar material transactions in 2007 so cash used by financing activities increased compared to last year.

Cash flows from financing activities. During the six month period ended June 30, 2007, cash flows provided by financing activities was $5,315,435 compared to cash used of $3,990,094 in 2006. Normally financing activities provide cash for us to grow our lending business. However, in the first six months of 2006 this did not happen because we had no registered bonds for sale; therefore, all maturing bonds were redeemed for cash. In the first six months of 2007 our cash provided by financing activities was less than normal because we redeemed $7,996,240 in maturing bonds for cash. We had a large bond maturity in March 2007 and because we have fewer states in which we are able to sell our bonds (due to our decision not to renew our registration in some states and the Chicago Stock Exchange issue – see the “Legal Proceedings” section for more information), some of our investors could not reinvest their maturing bonds into new bonds. We expect this trend to continue in the foreseeable future but at a reduced rate given our increased sales focus in states where we are registered.

Dividends of $286,420 and $278,034 were paid in the first six months of 2007 and 2006, respectively.

We have $45,599,944 in Investor Bonds coming due or redeemable upon demand in the next 12 months. $7,327,010 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 past experience, we expect that less than 25% of the graduated certificates will be redeemed for cash during the next 12 months.

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, with fewer states available for selling our bonds we estimate that this percentage will drop to around 60%. 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 June 30, 2007, 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

We have become subject to administrative proceedings with various state securities regulators that stem from statements we made in our filings with the Securities and Exchange Commission. These proceedings relate to allegedly false statements we made in prospectuses and Exchange Act reports that our securities were approved for listing on the Chicago Stock Exchange. The states allege that we failed to register securities that we offered and sold in these jurisdictions and that we misrepresented the fact that these securities were approved for listing on the Chicago Stock Exchange. Our defense to these allegations is that we qualified for an exemption from registration in these states because the securities were in fact approved for listing on the Chicago Stock Exchange. In addition to the existing administrative proceedings, we may become subject to similar administrative proceedings in states that have not yet contacted us.

As of the date of this filing, several states have prohibited us from selling securities in their jurisdictions. Specifically, New Jersey has prohibited us from selling our Series F bonds to its residents. Minnesota has ordered us to cease and desist from offering and selling securities to its residents until we are compliant with its laws and until its further order. Ohio has ordered us to refrain from offering unregistered securities to its residents unless a proper exemption from registration is available. We have also paid civil fines and made rescission offers. We may also become subject to similar administrative proceedings with states that have not yet contacted us.

As of August 10, 2007, we are not a party to any other pending legal proceeding. We are not aware that any of the properties covered by our mortgage loans is subject to any pending legal proceeding or that any governmental authority is contemplating any legal proceeding involving us or any of those properties, other than as described above.

Item 2. Changes in Securities

Not Applicable

Item 3. Defaults upon Senior Securities

Not Applicable

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) No Form 8-K was filed in the first six months of 2007.

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: August 10, 2007

Cornerstone Ministries Investments, Inc. (Registrant)

By: S/Jack Wehmiller

Jack Wehmiller

President and acting Chief Financial Officer

Cornerstone Ministries Investments Inactive 10QSB2007 Q2 Quarterly report (small business)