Presidio Property Trust (SQFT) 10-Q/A 2008 Q2 Quarterly report (amended)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Amendment No. 1)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the period from                    to                    

001-34049
(Commission file No.)

NetREIT

(Exact name of registrant as specified in its charter)

CALIFORNIA	33-0841255
(State or other jurisdiction of incorporation or	(I.R.S. employer identification no.)
organization

1282 Pacific Oaks Place, Escondido CA 92029-2900
(Address of principal executive offices)

(760) 471-8536
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):

Large accelerated filero	Accelerated filero	Non-accelerated filero	Smaller Reporting Companyþ
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ.

At April 30, 2009, registrant had issued and outstanding 7,560,569 shares of its common stock, no par value. The information contained in this Form 10-Q should be read in conjunction with the registrant’s Annual Report on Form 10, as amended.

NETREIT

- INDEX -

	Page
PART I – FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Balance Sheets as of June 30, 2008 (unaudited) and December 31, 2007		1
Condensed Statements of Operations for the Three and Six Months Ended June 30, 2008 and 2007 (unaudited)		2
Condensed Statement of Stockholders’ Equity for the Six Months Ended June 30, 2008 (unaudited)		3
Condensed Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007 (unaudited)		4
Notes to Condensed Financial Statements		5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3. Quantitative and Qualitative Disclosures About Market Risk		41
Item 4T. Controls and Procedures		41
PART II – OTHER INFORMATION:
Item 1. Legal Proceedings		42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		42
Item 3. Defaults Upon Senior Securities		42
Item 4. Submission of Matters to a Vote of Security Holders		42
Item 5. Other Information		42
Item 6. Exhibits		42
Signatures		43
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

NetREIT

Condensed Balance Sheets

	June 30, 2008			December 31, 2007
	(as restated)
	(Unaudited)			(Note 1)
ASSETS
Real estate assets, net	$	40,786,890		$	41,917,510
Lease intangibles, net		611,530			851,615
Land purchase option	��	1,370,000			1,370,000
Investment in real estate ventures		1,063,646			703,587
Mortgages receivable and interest		1,995,594			1,888,555
Cash and cash equivalents		10,203,149			4,880,659
Restricted cash		572,523			697,894
Tenant receivables, net		54,671			42,636
Due from related party		77,267			118,447
Deferred rent receivable		143,634			112,268
Deferred stock issuance costs		118,233			179,462
Deposits on potential acquisitions		781,973			—
Other assets, net		398,622			349,608
TOTAL ASSETS	$	58,177,732		$	53,112,241
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Mortgage notes payable	$	17,853,578		$	22,420,316
Accounts payable and accrued liabilities		841,923			844,549
Dividends payable		359,872			296,790
Tenant security deposits		254,473			272,681
Total liabilities		19,309,846			23,834,336
Commitments and contingencies
Stockholders’ equity:
Undesignated preferred stock, no par value, shares authorized: 8,995,000, no shares issued and outstanding at June 30, 2008 and December 31, 2007		—			—
Series A preferred stock, no par value, shares authorized: 5,000, no shares issued and outstanding at June 30, 2008 and December 31, 2007		—			—
Convertible Series AA preferred stock, no par value, $25 liquidating preference, shares authorized: 1,000,000; 50,200 shares issued and outstanding at June 30, 2008 and December 31, 2007, liquidating value of $1,255,000		1,028,916			1,028,916
Common stock Series A, no par value, shares authorized: 100,000,000; 5,147,278 and 3,835,958 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively		42,376,581			31,299,331
Common stock Series B, no par value, shares authorized: 1,000, no shares issued and outstanding at June 30, 2008 and December 31, 2007		—			—
Additional paid-in capital		433,204			433,204
Dividends paid in excess of accumulated earnings		(4,970,815	)		(3,483,546	)
Total stockholders’ equity		38,867,886			29,277,905
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	58,177,732		$	53,112,241

See notes to unaudited condensed financial statements.

1

NetREIT

Condensed Statements of Operations
(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
	(as restated)			(as restated)			(as restated)			(as restated)
Rental income	$	1,198,888		$	716,481		$	2,439,711		$	1,075,197
Costs and expenses:
Interest		274,306			226,153			569,852			314,769
Rental operating costs		584,147			338,170			1,217,550			554,487
General and administrative		325,157			141,225			581,869			315,949
Depreciation and amortization		476,596			253,235			961,550			327,742
Total costs and expenses		1,660,206			958,783			3,330,821			1,512,947
Other income (expense):
Interest income		98,030			88,524			172,492			139,733
Gain on sale of real estate		—			9,775			605,539			9,775
Other income (expense)		2,374			(8,124	)		6,479			5,306
Total other income		100,404			90,175			784,510			154,814
Loss from continuing operations		(360,914	)		(152,127	)		(106,600	)		(282,936	)
Discontinued operations:
Income from discontinued operations		—			60,809			—			131,539
Net loss		(360,914	)		(91,318	)		(106,600	)		(151,397	)
Preferred stock dividends		(21,963	)		(21,175	)		(43,925	)		(42,350	)
Net loss available to common stockholders	$	(382,877	)	$	(112,493	)	$	(150,525	)	$	(193,747	)
Loss available to common stockholders — basic and diluted:
Loss from continuing operations	$	(0.08	)	$	(0.07	)	$	(0.03	)	$	(0.16	)
Income from discontinued operations					0.02						0.06
Loss per common share	$	(0.08	)	$	(0.05	)	$	(0.03	)	$	(0.10	)
Weighted average number of common shares outstanding — basic		4,721,024			2,409,158			4,382,998			2,017,754
Weighted average number of common shares outstanding — diluted		4,721,024			2,409,158			4,382,998			2,017,754

See notes to unaudited condensed financial statements.

2

NetREIT

Condensed Statement of Stockholders’ Equity

Six months ended June 30, 2008

(Unaudited)

													Dividends Paid in Excess of
	Series AA Preferred Stock				Common Stock						Additional		Accumulated
	Shares		Amount		Shares			Amount			Paid-in Capital		Earnings			Total
Balance, December 31, 2007		50,200	$	1,028,916		3,835,958		$	31,299,331		$	433,204	$	(3,483,546	)	$	29,277,905
Sale of common stock at $10 per share						1,230,110			12,301,104								12,301,104
Stock issuance costs									(1,946,488	)							(1,946,488	)
Repurchase of common stock						(7,227	)		(61,827	)							(61,827	)
Reinvestment of cash dividends						32,159			305,476								305,476
Exercise of stock options						14,858			85,576								85,576
Exercise of warrants						485			4,530								4,530
Dividends reinvested on restricted stock						1,181			11,223								11,223
Net loss														(106,600	)		(106,600	)
Dividends paid														(643,141	)		(643,141	)
Dividends (declared)/reinvested						39,754			377,656					(737,528	)		(359,872	)
Balance, June 30, 2008, as restated		50,200	$	1,028,916		5,147,278		$	42,376,581		$	433,204	$	(4,970,815	)	$	38,867,886

See notes to unaudited condensed financial statements.

3

NetREIT

Condensed Statements of Cash Flows

(Unaudited)

	Six Months Ended			Six Months Ended
	June 30, 2008			June 30, 2007
	(as restated)			(as restated)
Cash flows from operating activities:
Net loss	$	(106,600	)	$	(151,397	)
Adjustments to reconcile net loss to net cash provided by operating activities (including discontinued operations):
Depreciation and amortization		983,118			372,560
Gain on sale of real estate		(605,539	)		(9,775	)
Bad debts		20,072
Equity in earnings of investment in real estate ventures		(16,792	)
Changes in operating assets and liabilities:
Deferred rent receivable		(31,366	)		(53,787	)
Tenant receivables		(32,107	)		(32,267	)
Other assets		(113,358	)		(261,062	)
Accounts payable and accrued liabilities		(2,626	)		54,666
Due from related party		41,180			(66,821	)
Tenant security deposits		(18,208	)		159,604
Net cash provided by operating activities		117,774			11,721
Cash flows from investing activities:
Real estate investments		(336,872	)		(15,360,920	)
Deposits on potential acquisitions		(781,973	)
Net proceeds received from sale of real estate		1,028,083
Issuance of mortgages receivable		(107,039	)		(272,448	)
Restricted cash		125,371			(447,351	)
Net proceeds received on short-term investments		22,992			39,258
Net cash used in investing activities		(49,438	)		(16,041,461	)
Cash flows from financing activities:
Proceeds from mortgage notes payable					11,000,000
Repayment of mortgage notes payable		(4,566,738	)		(58,900	)
Net proceeds from issuance of common stock		10,354,616			8,497,009
Repurchase of common stock		(61,827	)		(38,459	)
Exercise of stock options		85,576			82,558
Exercise of warrants		4,530
Deferred stock issuance costs		61,229			28,422
Dividends paid		(623,232	)		(367,405	)
Net cash provided by financing activities		5,254,154			19,143,225
Net increase in cash and cash equivalents		5,322,490			3,113,485
Cash and cash equivalents:
Beginning of period		4,880,659			5,783,283
End of period	$	10,203,149		$	8,896,768
Supplemental disclosure of cash flow information:
Interest paid	$	575,485		$	236,556
Non cash investing and financing activities:
Reclassification of real estate to investment in real estate ventures	$	473,365		$	703,587
Reinvestment of cash dividend	$	694,355		$	284,724
Accrual of dividends payable	$	359,872		$	245,664

See notes to unaudited condensed financial statements.

4

NetREIT and Subsidiary

Notes to Condensed Consolidated Financial Statements

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization.NetREIT (the “Company”) was formed and incorporated in the State of California on January 28, 1999 for the purpose of engaging in the business of investing in income-producing real estate properties. The Company, which qualifies and operates as a self-administered real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended, (the “Code”) commenced operations upon the completion of its private placement offering in 1999.

The Company invests in a diverse portfolio of real estate assets. The primary types of properties the Company invests in include office, retail, residential and self storage properties located in western United States. The Company also invests in mortgage loans.

As of June 30, 2008, the Company’s owned or had an equity interest in two office buildings (“Office Properties”) which encompassed approximately 229,000 rentable square feet, two retail shopping centers and a 7-Eleven property (“Retail Properties”) which encompassed approximately 64,000 rentable square feet, one 39 unit apartment building (“Residential Properties”), and two self storage facilities (“Self Storage Properties”) which encompassed approximately 210,000 rentable square feet.

Basis of Presentation.The accompanying interim condensed financial statements have been prepared by the Company’s management in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. In the opinion of management, the accompanying interim condensed financial statements reflect all adjustments of a normal and recurring nature that are considered necessary for a fair presentation of the results for the interim periods presented. However, the results of operation for the interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. These condensed financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s registration statement on Form 10 for the year ended December 31, 2007 filed with the SEC on May 6, 2008. The condensed balance sheet at December 31, 2007 has been derived from the audited financial statements included in the Form 10.

2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

During 2008, the Company determined that certain adjustments and reclassifications of previously issued financial statements were required to correct certain errors relating to application of Statement of Financial Accounting Standards No. 141 “Business Combinations” (“SFAS 141”). Pursuant to SFAS 141, the Company allocates the purchase price of acquired properties to land, buildings, tenant improvements and identified tangible and intangible assets and liabilities associated with in-place leases, unamortized leasing commissions, value of above or below market leases, tenant relationships and value associated with a land purchase option based upon respective market values. The Company determined that the initial process of estimating fair values for acquired in-place leases did not include all components of such valuation and it did not value the tenant relationships in connection with the Company’s acquisition of the two self-storage facilities.

5

There’s no effect to the total acquisition costs included in the balance sheet, however, the effect of the restatement was to increase the depreciation and amortization since the values have been reclassified to shorter lived assets.

In addition, the Company did not properly account for its remaining interests in its 7-11 property following the sale of an undivided 48.66% interest in the property as well as its remaining interest following the sale of an undivided 54.92% interest in Casa Grande Apartments. Due to the protective rights of the tenants in common, the ongoing accounting for the Company’s investment should have been under the equity method of accounting. In the previously issued statements, the Company had used the proportional interest consolidation method.

The corrections to the financial statements as of and for the three and six months ended June 30, 2008 are as follows:

Condensed Balance Sheets:

																				Accounts								Total
																				Payable		Minority			Dividends paid			liabilities
				Lease			Land		Investment in											and		interest in			in excess of			and
	Real estate			intangibles,			purchase		real estate		Short-term			Other			Total			accrued		limited			accumulated			stockholders’
	assets, net			net			option		ventures		investments			assets, net			assets			liabilities		partnership			earnings			equity
Balance June 30, 2008 as previously reported	$	45,020,391									$	10,137		$	520,172		$	59,497,744		$	826,696	$	664,274		$	(4,299,850	)	$	59,497,744
Reclassify investment in real estate venture		(1,698,541	)						$	1,063,646					(14,152	)	$	(649,047	)		15,227		(664,274	)				$	(649,047	)
Reclassify land purchase option		(1,370,000	)				$	1,370,000
Reclassify short-term investments												(10,137	)		10,137
Reclassify leases in place				$	138,521										(138,521	)
Reclassify lease intangibles		(799,668	)		799,668
Depreciation and amortization adjustments resulting from above		(365,292	)		(326,659	)									20,986		$	(670,965	)							(670,965	)	$	(670,965	)
Balance June 30, 2008, as restated	$	40,786,890		$	611,530		$	1,370,000	$	1,063,646	$	—		$	398,622		$	58,177,732		$	841,923	$	—		$	(4,970,815	)	$	58,177,732

Condensed Statements of Operations:

				Rental			Depreciation						Loss from
	Rental			operating			and			Other income			continuing			Net income
	income			costs			amortization			(expense)			operations			(loss)
Six months ended June 30, 2008 as previously reported	$	2,534,947		$	1,283,388		$	607,328		$	(10,313	)	$	260,228		$	260,228
Reclassify investment in real estate venture		(95,236	)		(65,838	)		(12,606	)		16,792						—
Amortize leases in place								60,343						(60,343	)		(60,343	)
Amortize tenant relationships								158,756						(158,756	)		(158,756	)
Amortize tenant improvements								175,946						(175,946	)		(175,946	)
Adjust depreciation								(28,217	)					28,217			28,217
Six months ended June 30, 2008 as restated	$	2,439,711		$	1,217,550		$	961,550		$	6,479		$	(106,600	)	$	(106,600	)

				Rental			Depreciation						Loss from
	Rental			operating			and			Other income			continuing			Net income
	income			costs			amortization			(expense)			operations			(loss)
Three months ended June 30, 2008 as previously reported	$	1,270,338		$	635,454		$	302,675		$	(8,724	)	$	(177,948)		$	(177,948	)
Reclassify investment in real estate venture		(71,450	)		(51,307	)		(9,045	)		11,098						—
Amortize leases in place								30,006						(30,006	)		(30,006	)
Amortize tenant relationships								79,378						(79,378	)		(79,378	)
Amortize tenant improvements								87,691						(87,691	)		(87,691	)
Adjust depreciation								(14,109	)					14,109			14,109
Three months ended June 30, 2008 as restated	$	1,198,888		$	584,147		$	476,596		$	2,374		$	(360,914	)	$	(360,914	)

6

	Depreciation		Loss from
	and		continuing			Net
	amortization		operations			loss
Six months ended June 30, 2007 as previously reported	$	232,637	$	(187,831	)	$	(56,292	)
Depreciation and amortization adjustments resulting from reclassification of acquisition costs		95,105		(95,105	)		(95,105	)
Six months ended June 30, 2007 as restated	$	327,742	$	(282,936	)	$	(151,397	)

	Depreciation		Loss from
	and		continuing			Net income
	amortization		operations			(loss)
Three months ended June 30, 2007 as previously reported	$	158,130	$	(57,022	)	$	3,787
Depreciation and amortization adjustments resulting from reclassification of acquisition costs		95,105		(95,105	)		(95,105	)
Three months ended June 30, 2007 as restated	$	253,235	$	(152,127	)	$	(91,318	)

Loss per share increased from $0.04 loss per share as originally reported to $0.08 loss per share, as restated for the three months ended June 30, 2008. Income per share decreased from $0.05 income per share as originally reported to $0.03 loss per share, as restated for the six months ended June 30, 2008.

Loss per share from continuing operations increased from $0.03 loss per share as originally reported to $0.07 loss per share, as restated for the three months ended June 30, 2007. Loss per share from continuing operations increased from $0.11 loss per share as originally reported to $0.16 loss per share from continuing operations, as restated for the six months ended June 30, 2008. Loss per share for the three months ended June 30, 2007 increased from $0.01 per share as originally reported, to net loss per share of $0.05, as restated. Loss per share for the six months ended June 30, 2007 increased from $0.05 loss per share as originally reported, to loss per share of $0.10, as restated.

There were no changes to income taxes as a result of the restatements.

Condensed Statement of Cash Flows:

						Equity in
						earnings of						Accounts			Net cash
				Depreciation		investment						payable and			provided by
	Net income			and		in real estate						accrued			operating
	(loss)			amortization		ventures			Other assets			liabilities			activities
Six months ended June 30, 2008 as previously reported	$	260,228		$	607,328				$	(105,961	)	$	(17,853	)	$	117,774
Depreciation and amortization adjustments resulting from reclassification of acquisition costs		(366,828	)		366,828
Reclassify investments in real estate ventures					8,962	$	(16,792	)		(7,397	)		15,227
Six months ended June 30, 2008 as restated	$	(106,600	)	$	983,118	$	(16,792	)	$	(113,358	)	$	(2,626	)	$	117,774

				Depreciation
				and
	Net loss			amortization
Six months ended June 30, 2007 as previously reported	$	(56,292	)	$	277,455
Depreciation and amortization adjustments resulting from reclassification of acquisition costs		(95,105	)		95,105
Six months ended June 30, 2007 as restated	$	(151,397	)	$	372,560

7

3. SIGNIFICANT ACCOUNTING POLICIES

Property Acquisitions.The Company accounts for its acquisitions of real estate in accordance with SFAS 141 which requires the purchase price of acquired properties be allocated to the acquired tangible assets and liabilities, consisting of land, building, tenant improvements, a land purchase option, long-term debt and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, the value of in-place leases, unamortized lease origination costs and tenant relationships, based in each case on their fair values.

The Company allocates the purchase price to tangible assets of an acquired property (which includes land, building and tenant improvements) based on the estimated fair values of those tangible assets, assuming the building was vacant. Estimates of fair value for land, building and building improvements are based on many factors including, but not limited to, comparisons to other properties sold in the same geographic area and independent third party valuations. The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair values of the tangible and intangible assets and liabilities acquired.

The total value allocable to intangible assets acquired, which consists of unamortized lease origination costs, in-place leases and tenant relationships, are allocated based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant. Characteristics considered by management in allocating these values include the nature and extent of the existing business relationships with the tenant, growth prospects for developing new business with the tenant, the remaining term of the lease and the tenant’s credit quality, among other factors.

The value allocable to above or below market component of an acquired in-place lease is determined based upon the present value (using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining term, and (ii) management’s estimate of rents that would be paid using fair market rates over the remaining term of the lease. The amounts allocated to above or below market leases are included in lease intangibles, net in the accompanying condensed balance sheets and are amortized on a straight-line basis as an increase or reduction of rental income over the remaining non-cancelable term of the respective leases. At June 30, 2008 and 2007, the Company did not have any deferred rent for above or below market leases.

The land lease acquired with the World Plaza acquisition in 2007 has a fixed purchase price option cost of $181,710 at the termination of the lease in 2062. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) management valued the land option at its residual value of $1,370,000, based upon comparable land sales adjusted to present value. The difference between the strike price of the option and the recorded cost of the land purchase option is approximately $1.2 million. Accordingly, management has determined that exercise of the option is probable. The land purchase option was determined to be a contract based intangible asset associated with the land. As a result, this asset has an indefinite life and is treated as a non-amortizable asset. The amount is included as land purchase option on the accompanying condensed balance sheets.

The value of in-place leases, unamortized lease origination costs and tenant relationships are amortized to expense over the remaining term of the respective leases, which range from less than a year to ten years. The amount allocated to acquire in-place leases is determined based on management’s assessment of lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased. The amount allocated to unamortized lease origination costs is determined by what the Company would have paid to a third party to recruit a new tenant reduced by the expired term of the respective lease. The amount allocated to tenant relationships is the benefit resulting from the likelihood of a tenant renewing its lease. Amortization expense related to these assets was $119,877 and $16,771 for the three months ended June 30, 2008 and 2007, respectively. Amortization expense related to these assets was $240,085 and $16,771 for the six months ended June 30, 2008 and 2007, respectively.

8

Sales of Undivided Interests in Properties.

The Company accounts for profit recognition on sales of real estate in accordance with SFAS No. 66 “Accounting for Sales of Real Estate” (“SFAS 66”). Pursuant to SFAS 66, profits from sales will not be recognized under the full accrual method by the Company until certain criteria are met. A sale is a partial sale if the seller retains an equity interest in the property or has an equity interest in the buyer. Profit (the difference between the sales value and the proportionate cost of the partial interest sold) shall be recognized at the date of sale if a sale has been consummated and the following:

a. The buyer is independent of the seller.

b. Collection of the sales price is reasonably assured.

c. The seller will not be required to support the operations of the property or its related obligations to an extent greater than its proportionate interest.

Gains relating to transactions which do not meet the criteria for full accrual method of accounting are deferred and recognized when the full accrual method of accounting criteria are met or by using the installment or deposit methods of profit recognition, as appropriate in the circumstances.

Depreciation and Amortization of Buildings and Improvements.Land, buildings and improvements are recorded at cost. Major replacements and betterments, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives, while ordinary repairs and maintenance are expensed as incurred. The cost of buildings and improvements are depreciated using the straight-line method over estimated useful lives ranging from 30 to 55 years for buildings, improvements are amortized over the shorter of the estimated life of the asset or term of the tenant lease which range from 1 to 10 years, and 4 to 5 years for furniture, fixtures and equipment. Depreciation expense, including discontinued operations, for buildings and improvements for the three months ended June 30, 2008 and 2007, was $344,254 and $240,374, respectively. Depreciation expense, including discontinued operations, for buildings and improvements for the six months ended June 30, 2008 and 2007, was $699,945 and $331,186, respectively.

Intangible Assets— Lease intangibles represents the allocation of a portion of the purchase price of a property acquisition representing the estimated value of in-place leases, unamortized lease origination costs, tenant relationships and a land purchase option. Intangible assets are comprised of finite-lived and indefinite-lived assets. In accordance with SFAS 142, indefinite-lived assets are not amortized. Finite-lived intangibles are amortized over their expected useful lives. The Company assesses its intangibles and goodwill for impairment at least annually.

In accordance with SFAS 142, the Company is required to perform a test for impairment of goodwill and other definite and indefinite lived assets at least annually, and more frequently as circumstances warrant. The Company tests for impairment as of December 31. Based on the last review, no impairment was deemed necessary at December 31, 2007.

Investment in Real Estate Ventures.The Company analyzes its investments in joint ventures to determine whether the joint venture should be accounted for under the equity method of accounting or consolidated into the financial statements based on standards set forth under SFAS Interpretation No. 46(R), “Consolidation of Variable Interest Entities”, Statement of Position 78-9, “Accounting for Investments in Real Estate Ventures” and Emerging Issues Task Force (“EITF”) Statement No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights. Based on the guidance set forth in SFAS Interpretation No. 46(R)”. The Company has determined that the limited partners and/or tenants in common in its real estate ventures have certain protective and substantive participation rights that limit the Company’s control of the investment. Therefore, the Company’s share of its investment in real estate ventures have been accounted for under the equity method of accounting in the accompanying condensed financial statements.

9

Under the equity method, the Company’s investment in real estate ventures is stated at cost and adjusted for the Company’s share of net earnings or losses and reduced by distributions. Equity in earnings of real estate ventures is generally recognized based on the Company’s ownership interest in the earnings of each of the unconsolidated real estate ventures. For the purposes of presentation in the statement of cash flows, the Company follows the “look through” approach for classification of distributions from joint ventures. Under this approach, distributions are reported under operating cash flow unless the facts and circumstances of a specific distribution clearly indicate that it is a return of capital (e.g., a liquidating dividend or distribution of the proceeds from the joint venture’s sale of assets) in which case it is reported as an investing activity.

Management assesses whether there are any indicators that the value of the Company’s investments in unconsolidated real estate ventures may be impaired when events or circumstances indicate that there may be an impairment. An investment is impaired if management’s estimate of the fair value of the investment is less than its carrying value. To the extent impairment has occurred, and is considered to be other than temporary, the loss is measured as the excess of the carrying amount of the investment over the fair value of the investment. No impairment charges were recognized for the three and six months ended June 30, 2008 or 2007.

Provision for Loan Losses.The accounting policies require the Company to maintain an allowance for estimated credit losses with respect to mortgage loans it has made based upon its evaluation of known and inherent risks associated with its lending activities. Management reflects provisions for loan losses based upon its assessment of general market conditions, its internal risk management policies and credit risk rating system, industry loss experience, its assessment of the likelihood of delinquencies or defaults, and the value of the collateral underlying its investments. Actual losses, if any, could ultimately differ from these estimates. There have been no provisions for loan losses at June 30, 2008 and 2007.

Revenue Recognition.The Company recognizes revenue from rent, tenant reimbursements, and other revenue once all of the following criteria are met in accordance with SEC Staff Accounting Bulletin Topic 13, “Revenue Recognition”:

• persuasive evidence of an arrangement exists;

• delivery has occurred or services have been rendered;

• the amount is fixed or determinable; and

• the collectability of the amount is reasonably assured.

In accordance with SFAS No. 13, “Accounting for Leases” (“SFAS 13”), as amended and interpreted, minimum annual rental revenue is recognized in rental revenues on a straight-line basis over the term of the related lease.

Certain of the Company’s leases currently contain rental increases at specified intervals, and generally accepted accounting principles require the Company to record an asset, and include in revenues, deferred rent receivable that will be received if the tenant makes all rent payments required through the expiration of the initial term of the lease. Deferred rent receivable in the accompanying condensed balance sheets includes the cumulative difference between rental revenue recorded on a straight-line basis and rents received from the tenants in accordance with the lease terms. Accordingly, the Company determines, in its judgment, to what extent the deferred rent receivable applicable to each specific tenant is collectible. The Company reviews material deferred rent receivable, as it relates to straight-line rents, on a quarterly basis and takes into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of deferred rent with respect to any given tenant is in doubt, the Company records an increase in the allowance for uncollectible accounts or records a direct write-off of the specific rent receivable. No such reserves have been recorded as of June 30, 2008 or 2007.

10

Interest income on mortgages receivable is accrued as it is earned. The Company stops accruing interest income on a loan if it is past due for more than 90 days or there is doubt regarding collectability of the loan principal and/or accrued interest receivable.

Discontinued Operations and Properties.In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets” (“SFAS 144”), the income or loss and net gain or loss on dispositions of operating properties and the income or loss on all properties classified as held for sale are reflected in the statements of operations as discontinued operations for all periods presented. A property is classified as held for sale when certain criteria, set forth under SFAS 144, are met. At such time, the Company presents the respective assets and liabilities separately on the balance sheet and ceases to record depreciation and amortization expense. As of June 30, 2008 and December 31, 2007, the Company did not have any properties classified as held for sale.

The following is a summary of discontinued operations for the six months ended June 30, 2007:

Discontinued operations:	2007
Rental income	$	251,139
Rental operating expense		74,782
Depreciation and amortization		44,818
Income from discontinued operations	$	131,539
Earnings per share	$	0.06

Impairment.The Company accounts for the impairment of real estate in accordance with SFAS 144 which requires that the Company review the carrying value of each property to determine if circumstances that indicate impairment in the carrying value of the investment exists or that depreciation periods should be modified. If circumstances support the possibility of impairment, the Company prepares a projection of the undiscounted future cash flows, without interest charges, of the specific property and determines if the investment in such property is recoverable. If impairment is indicated, the carrying value of the property would be written down to its estimated fair value based on the Company’s best estimate of the property’s discounted future cash flows. There have been no impairments recognized on the Company’s real estate assets at June 30, 2008 and December 31, 2007.

Federal Income Taxes.The Company has elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856 through 860 of the Code, for federal income tax purposes. To qualify as a REIT, the Company must distribute annually at least 90% of adjusted taxable income, as defined in the Code, to its stockholders and satisfy certain other organizational and operating requirements. As a REIT, no provision will be made for federal income taxes on income resulting from those sales of real estate investments which have or will be distributed to stockholders within the prescribed limits. However, taxes will be provided for those gains which are not anticipated to be distributed to stockholders unless such gains are deferred pursuant to Section 1031. In addition, the Company will be subject to a federal excise tax which equals 4% of the excess, if any, of 85% of the Company’s ordinary income plus 95% of the Company’s capital gain net income over cash distributions, as defined.

Earnings and profits that determine the taxability of distributions to stockholders differ from net income reported for financial reporting purposes due to differences in estimated useful lives and methods used to compute depreciation and the carrying value (basis) on the investments in properties for tax purposes, among other things.

The Company believes that it has met all of the REIT distribution and technical requirements for the six months ended June 30, 2008 and 2007.

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement of No. 109” (“FIN 48”). FIN 48 provides guidance for the financial statement recognition and measurement of a tax position taken or expected to be taken on a tax return, and provides guidance on recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition of tax positions. FIN 48 was effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 effective for the fiscal year beginning January 1, 2007, and the adoption had no impact on the Company’s results of operations.

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Stock Options.In December 2004, the FASB approved the revision of SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”), and issued the revised SFAS No. 123(R), “Share-Based Payment” (“SFAS 123(R)”). In April 2005, the effective date of adoption was changed from interim periods ending after June 15, 2005 to annual periods beginning after June 15, 2005. SFAS 123(R) effectively replaces SFAS 123, and supersedes Accounting Principle Board Opinion No. 25. SFAS 123(R) was effective for awards that are granted, modified, or settled in cash for annual periods beginning after June 15, 2005. The Company adopted SFAS 123(R) on January 1, 2006 using the modified prospective approach. Under the modified prospective approach, stock-based compensation expense is recorded for the unvested portion of previously issued awards that remained outstanding at January 1, 2006 using the same estimate of the grant date fair value and the same attribution method used to determine the pro forma disclosure under SFAS 123. SFAS 123(R) also requires that all share-based payments to employees after January 1, 2006, including employee stock options, be recognized in the financial statements as stock-based compensation expense based on the fair value on the date of grant.

Earnings (Loss) Per Common Share.Basic earnings (loss) per common share (“Basic EPS”) is computed by dividing net income (loss) available to common stockholders (the “numerator”) by the weighted average number of common shares outstanding (the “denominator”) during the period. Diluted earnings (loss) per common share (“Diluted EPS”) is similar to the computation of Basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. In addition, in computing the dilutive effect of convertible securities, the numerator is adjusted to add back the after-tax amount of interest recognized in the period associated with any convertible debt. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an anti-dilutive effect on net earnings per share.

As a result of net losses available to common stockholders for all periods presented, the number of shares used for basic earnings per share and diluted earnings per share are the same. Weighted average options, warrants and incremental shares from convertible preferred shares with respect to a total of 956,855 shares of common stock were outstanding, but not included from the computation of diluted earnings per share in the three and six months ended June 30, 2008 as their effect was anti-dilutive. Weighted average options, warrants and incremental shares from convertible preferred shares with respect to a total of 894,992 shares of common stock were outstanding, but not included from the computation of diluted earnings per share in the three and six months ended June 30, 2007 as their effect was anti-dilutive.

Fair Value of Financial Instruments.The Company calculates the fair value of financial instruments using available market information and appropriate present value or other valuation techniques such as discounted cash flow analyses. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The derived fair value estimates cannot always be substantiated by comparison to independent markets and in many cases, could not be realized in immediate settlement of the instruments. Management believes that the carrying values reflected in the accompanying balance sheets reasonably approximate the fair values for financial instruments.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include the allocation of purchase price paid for property acquisitions between land, building and intangible assets acquired including their useful lives; the allowance for doubtful accounts, which is based on an evaluation of the tenants’ ability to pay and the provision for possible loan losses with respect to mortgages receivable and interest. Actual results may differ from those estimates.

Segments.SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information” (“SFAS 131”), establishes standards for the way that public entities report information about operating segments in their financial statements. The Company acquires and operates income producing properties including office properties, residential properties, retail properties and self storage properties and invests in real estate assets, including real estate loans, and as a result, the Company operates in five business segments. See Note 10 “Segment Information”.

Recent Issued Accounting Standards.In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value and establishes a framework for measuring fair value under U. S. generally accepted accounting principles (“GAAP”). The key changes to current practice are (1) the definition of fair value, which focuses on an exit price rather than an entry price; (2) the methods used to measure fair value, such as emphasis that fair value is a market-based measurement, not an entity-specific measurement, as well as the inclusion of an adjustment for risk, restrictions, and credit standing and (3) the expanded disclosures about fair value measurements, SFAS 157 does not require any new fair value measurements. SFAS 157, as amended, was effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company adopted SFAS 157 on January 1, 2008 and, effective for the third quarter 2008, adopted FASB Staff Position SFAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP SFAS 157-3”). The adoption of SFAS 157 and FSP SFAS 157-3 did not have a significant impact on the Company’s financial position or results of operations since the Company does not record it financial assets and liabilities at fair value.

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In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurements attributes for similar types of assets and liabilities. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. In adopting SFAS 159, the Company did not elect the fair value option for any financial assets or liabilities. Therefore, the adoption of SFAS 159 did not have a significant impact on the Company’s financial position or results of operations.

In November 2007, the FASB issued Emerging Issues Task Force (“EITF”) Issue No. 07-06, “Accounting for Sale of Real Estate Subject to the Requirements of SFAS 66 When the Agreement Includes a Buy-Sell Clause” (“EITF 07-06”).A buy-sell clause is a contractual term that gives both investors of a jointly-owned entity the ability to offer to buy the other investor’s interest. EITF 07-06 applies to sales of real estate to an entity if the entity is both partially owned by the seller of the real estate and subject to an arrangement between the seller and the other investor containing a buy-sell clause. The EITF concluded the existence of a buy-sell clause does not represent a prohibited form of continuing involvement that would preclude partial sale and profit recognition pursuant to SFAS 66. The EITF cautioned the buy-sell clause could represent such a prohibition if the terms of the buy-sell clause and other facts and circumstances of the arrangement suggest:

• the buyer cannot act independently of the seller or

• the seller is economically compelled or contractually required to reacquire the other investor’s interest in the jointly owned entity.

EITF 07-06 is effective for new arrangements in fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. The adoption of EITF 07-06 did not have a significant impact on the Company’s financial position or results of operations.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”(“SFAS 141R”), which replaces SFAS 141. SFAS 141R expands the definition of a business combination and requires the fair value of the purchase price of an acquisition, including the issuance of equity securities, to be determined on the acquisition date. SFAS 141R also requires that all assets, liabilities, contingent considerations, and contingencies of an acquired business be recorded at fair value at the acquisition dater. In addition, SFAS 141R requires that acquisition costs generally be expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. SFAS 141R is effective for business combinations beginning January 1, 2009. The Company has evaluated the impact that SFAS 141R will have on its future financial statements and believes that the impact on expenses related acquisitions will not be material as it is traditional for the property seller to pay significant costs such as broker commissions.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidating Financial Statements—an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. In addition, SFAS 160 provides reporting requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company does not believe the adoption of SFAS 160 will have a significant impact on the Company’s financial position or results of operations.

In April 2008, the FASB issued FASB Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP SFAS 142-3”), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142. FSP SFAS 142-3 is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R. FSP SFAS No. 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, as well as interim periods within those fiscal years, and must be applied prospectively to intangible assets acquired after the effective date. The Company is currently evaluating the impact the adoption of the pronouncement will have on its results of operations.

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4. REAL ESTATE ASSETS AND LEASE INTANGIBLES

A summary of the six properties 100% owned by the Company as of June 30, 2008 is as follows:

						Real estate
					Property	assets, net
Property Name	Date Acquired	Location	Square Footage		Description	(in thousands)
Havana/Parker Complex	June 2006	Aurora, Colorado		114,000	Office	$	6,170.2
Garden Gateway Plaza	March 2007	Colorado Springs,
		Colorado		115,052	Office		14,053.0
World Plaza	September 2007	San Bernardino,
		California		55,096	Retail		6,108.6
Regatta Square	October 2007	Denver, Colorado		5,983	Retail		2,096.2
Sparky’s Palm Self-Storage	November 2007	San Bernardino,
		California		60,508	Self-Storage		4,622.0
Sparky’s Joshua Self-Storage	December 2007	Hesperia, California		149,650	Self -Storage		7,736.9
		Total real estate
		assets, net				$	40,786.9

The following table sets forth the components of the Company’s investments in real estate:

	June 30,			December 31,
	2008			2007
Land	$	6,844,558		$	6,940,554
Buildings and other		33,655,414			34,330,636
Tenant improvements		1,804,892			1,746,852
		42,304,864			43,018,042
Less accumulated depreciation and amortization		(1,517,974	)		(1,100,532	)
Real estate assets, net	$	40,786,890		$	41,917,510

On February 22, 2008, the Company entered into a contract to purchase Waterman Plaza in San Bernardino, California with a total of approximately 21,800 rentable square feet along with approvals for building an additional 2,500 square foot building for $7.2 million. In conjunction with the agreement, the Company paid an acquisition deposit of $400,000 which is included in deposits on potential acquisitions in the accompanying condensed balance sheet at June 30, 2008. The transaction closed in August 2008.

On May 8, 2008, the Company entered into a contract to purchase a building in Escondido, California with approximately 16,000 rentable square feet for $4.9 million. In conjunction with the agreement, the Company paid an acquisition deposit of $150,000 which is included in deposits on potential acquisitions in the accompanying condensed balance sheet at June 30, 2008. The transaction closed in September 2008.

On March 17, 2008, the Company sold a 54.92% interest in the apartment building located in Cheyenne, Wyoming. The purchasers paid $1,028,083, net of transaction costs, in cash. For financial reporting purposes the gain on sale of $605,539 is shown on the condensed statement of operations.

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Lease Intangibles

The weighted average amortization period for the intangible assets, In-place leases and leasing costs acquired as of June 30, 2008 was 2.8 years.

The following table summarizes the net value of other intangible assets and the accumulated amortization for each class of intangible asset:

	June 30, 2008							December 31, 2007
	Lease		Accumulated			Lease		Lease		Accumulated			Lease
	intangibles		Amortization			intangibles, net		intangibles		Amortization			intangibles, net
In-place leases	$	329,963	$	(94,556	)	$	235,407	$	329,963	$	(50,116	)	$	279,847
Leasing costs		273,892		(78,489	)		195,403		273,892		(41,600	)		232,292
Tenant relationships		365,817		(185,097	)		180,720		365,817		(26,341	)		339,476
	$	969,672	$	(358,142	)	$	611,530	$	969,672	$	(118,057	)	$	851,615

The estimated aggregate amortization expense for each of the five succeeding fiscal years is as follows:

	Estimated Aggregate
	Amortization Expense
Six months ending December 31, 2008	$	238,479
Year ending December 31, 2009		153,414
2010		111,684
2011		66,158
2012		28,441
2013		13,354
	$	611,530

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5. INVESTMENT IN REAL ESTATE VENTURES

The following table sets forth the components of the Company’s investment in real estate ventures:

				Investment balance at:
	Equity Percentage			June 30, 2008		December 31, 2007
Escondido 7-11		51.4	%	$	711,502	$	703,587
Casa Grande Apartments		45.8			352,144
				$	1,063,646	$	703,587

As of December 31, 2007, the investment in the Escondido, CA property was held as a tenant in common with an unrelated party. On April 21, 2008, the Company and the other tenant in common contributed their respective equity ownership to NetREIT 01 LP, a California limited partnership. At any time on or after September 30, 2008, the partner has an option to exchange its equity interest in the property into shares of NetREIT common stock at a conversion price equal to $9.30 per share up to 77,369 shares. The Company has a put option to convert the partner’s equity interests in NetREIT 01 LP to shares of Company common stock at $9.30 per share for up to 77,369 common shares upon the earlier of April 21, 2013 or the completion of an initial public offering of shares to be registered under the Securities Act of 1933.

For the three and six months ended June 30, 2008, the Company’s share of earnings for these equity investments was $10,321 and $16,792, respectively, and is included in other income in the condensed statements of operations.

Condensed balance sheets of all entities included in investment in real estate ventures as of June 30, 2008 and December 31, 2007 are as follows:

	June 30,		December 31,
	2008		2007
Real estate assets and lease intangibles	$	1,063,646	$	703,587
Total assets	$	1,063,646	$	703,587
Owner’s equity	$	1,063,646	$	703,587
Total liabilities and owners’ equity	$	1,063,646	$	703,587

The Company did not have operations from investment in real estate ventures in the three and six month periods ended June 30, 2007. Condensed statements of operations of all entities included in investment in real estate ventures for the three and six months ended June 30, 2008 are as follows:

	Three Months Ended		Six Months Ended
	June 30, 2008		June 30, 2008
Rental income	$	71,450	$	95,238
Costs and expenses:
Rental operating costs		32,432		37,921
	$	39,018	$	57,317

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6. MORTGAGES RECEIVABLE

In March 2007, the Company originated a mortgage loan in the amount of $500,000 collateralized by a second deed of trust on land under development as a retirement home in Escondido, California. This mortgage loan accrues interest at 15% per year. The mortgage loan unpaid principal and accrued interest was due and payable on March 20, 2008. At June 30, 2008 and December 31, 2007, the principal and accrued interest was $456,300 and $413,368, respectively.

In October 2007, the Company originated a mortgage loan in the amount of $935,000 collateralized by a first deed of trust on the same land under development above. This mortgage loan accrues interest at 11.5% per year. The mortgage loan unpaid principal and accrued interest was due and payable on October 1, 2008. At June 30, 2008 and December 31, 2007, the principal and accrued interest was $1,002,095 and $962,478, respectively.

In November 2007, the Company originated a mortgage loan in the amount of $500,000 collateralized by a third deed of trust on the same land above. This mortgage loan accrues interest at 15% per year. The mortgage loan unpaid principal and accrued interest was due and payable on November 19, 2008. At June 30, 2008 and December 31, 2007, the principal and accrued interest was $519,199 and $512,709, respectively.

On July 29, 2008, all three loans were modified to extend the due dates to be uniformly due and payable on December 31, 2008.

These loans, together with accrued interest, having a balance due of approximately $2.1 million went into default on January 1, 2009. The Company has commenced acquiring title to the property and will seek to sell the property in the near future. The Company does not anticipate incurring any losses with respect to these loans.

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7. MORTGAGE NOTES PAYABLE

	June 30,		December 31,
	2008		2007
Mortgage note payable in monthly installments of $24,330 through July 1, 2016, including interest at a fixed rate of 6.51%, collateralized by the Havana/Parker Complex.	$	3,490,274	$	3,520,170
Mortgage note payable in monthly installments of $71,412 through April 5, 2014, including interest at a fixed rate of 6.08%; collateralized by the Garden Gateway Plaza. Certain obligations under the note are guaranteed by the executive officers.		10,773,120		10,872,323
Mortgage note payable in monthly installments of $27,088 through February 1, 2012, including interest at a fixed rate of 5.31%; collateralized by World Plaza.		3,590,184		3,656,363
Assumed mortgage note payable in monthly installments of $39,302 through March 10, 2008, including interest at a fixed rate of 9.506%; collateralized by Sparky’s Joshua Self-Storage, paid in full in January 2008.		—		4,371,460
	$	17,853,578	$	22,420,316

8. RELATED PARTY TRANSACTIONS

Certain services and facilities are provided to the Company by C.I. Holding Group, Inc. and Subsidiaries (“CI”), a small shareholder in the Company and is approximately 35% owned by the Company’s executive management. A portion of the Company’s general and administrative costs are paid by CI and then reimbursed by the Company.

The Company has entered into a property management agreement with CHG Properties, Inc. (“CHG”), a wholly owned subsidiary of CI, to manage all of its properties at rates up to 5% of gross income. During the three months ended June 30, 2008 and 2007, the Company paid CHG total management fees of $54,326 and $25,469, respectively, and $110,676 and $39,040 during the six months ended June 30, 2008 and 2007, respectively.

During the term of the property management agreement, the Company has an option to acquire the business conducted by CHG. The option is exercisable, without any consent of the property manager, its board or its shareholders, with the approval of a majority of the Company’s directors not otherwise interested in the transaction. The option price is shares of the Company to be determined by a predefined formula based on the net income of CHG during the 6-month period immediately preceding the month in which the acquisition notice is delivered. The Company has no intention to exercise the option to acquire CHG.

Prior to the sale of the Rancho Santa Fe Professional Building in October 2007, the Company leased office space in this property to CI under a lease that provided for future monthly lease payments of $8,787 per month. The Company received cash for rental income from CI totaling $27,149 and $8,787 during the three months ended June 30, 2008 and 2007, respectively, and received $54,291 and $36,436 during the six months ended June 30, 2008 and 2007, respectively. At June 30, 2008 and December 31, 2007, CI owed the Company $52,273 and $118,447, respectively, relating to the above lease.

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9. STOCKHOLDERS’ EQUITY

Employee Retirement and Share-Based Incentive Plans

Stock Options.

Each of these options was awarded pursuant to the Company’s 1999 Flexible Incentive Plan (the “Plan”). The following table summarizes the stock option activity. The exercise price and number of shares under option have been adjusted to give effect to stock dividends declared by the Company.

				Weighted Average
	Shares			Exercise Price
Balance, December 31, 2006		55,683		$	7.06
Options exercised		(13,182	)	$	6.36
Balance, December 31, 2007		42,501		$	7.28
Options exercised		(14,858	)	$	5.76
Options outstanding and exercisable, June 30, 2008		27,643		$	8.10

At June 30, 2008, the options outstanding and exercisable had exercise prices ranging from $7.20 to $8.64, with a weighted average price of $8.10, and expiration dates ranging from June 2009 to June 2010 with a weighted average remaining term of 1.63 years.

The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. The aggregate intrinsic value of options outstanding, all of which are exercisable, was $51,531 at June 30, 2008.

Share-Based Incentive Plan.The Compensation Committee of the Board of Directors adopted a restricted stock award program under the Plan in December 2006 for the purpose of attracting and retaining officers, key employees and non-employee board members. The Board has granted nonvested shares of restricted common stock on January 1, 2007 and 2008. The nonvested shares have voting rights and are eligible for dividends paid to common shares. The share awards vest in equal annual installments over the three or five year period from date of issuance. The Company recognized compensation cost for these fixed awards over the service vesting period, which represents the requisite service period, using the straight-line attribution expense method.

The value of the nonvested shares was calculated based on the offering price of the shares in the most recent private placement offering of $10 adjusted for a 5% stock dividend since granted. The value of granted nonvested restricted stock issued during the six months ended June 30, 2008 and 2007 totaled $278,710 and $126,070, respectively. During the six months ended June 30, 2008 none of the shares vested. During the three months ended June 30, 2008 and the six months ended June 30, 2008 dividends of $5,597 and $11,223 were declared on the nonvested shares, respectively. The nonvested restricted shares will vest in equal installments over the next two to five years.

Cash Dividends.Cash dividends declared per common share for the six months ended June 30, 2008 and 2007 were $0.295 and $0.30, respectively. The dividend paid to stockholders of the Series AA Preferred for the three months ended June 30, 2008 was $21,963, and for the six months ended June 30, 2008 was $43,926 or an annualized portion of the 7% of the liquidation preference of $25 per share.

Sale of Common Stock.During the six months ended June 30, 2008 the net proceeds for the sale of 1,230,110 shares of common stock was $10,354,616.

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10. SEGMENTS

The Company’s five reportable segments consists of mortgage loan activities and the four types of commercial real estate properties for which the Company’s decision-makers internally evaluate operating performance and financial results: Residential Properties, Office Properties, Retail Properties and Self Storage Properties and Real Estate Loans. The Company also has certain corporate level activities including accounting, finance, legal administration and management information systems which are not considered separate operating segments.

The Company’s chief operating decision maker evaluates the performance of its segments based upon net operating income. Net operating income is defined as operating revenues (rental income, tenant reimbursements and other property income) less property and related expenses (property expenses, real estate taxes, ground leases and provisions for bad debts) and excludes other non-property income and expenses, interest expense, depreciation and amortization, and general and administrative expenses. The accounting policies of the reportable segments are the same as those described in the Company’s Organization and Basis of Presentation footnote (see Note 1). There is no intersegment activity.

The following tables reconcile the Company’s segment activity to its combined results of operations and financial position for the three and six months ended June 30, 2008 and 2007 and as of June 30, 2008 and December 31, 2007.

	Three months ended June 30,						Six months ended June 30,
	2008			2007			2008			2007
	(as restated)			(as restated)			(as restated)			(as restated)
Office Properties:
Rental income	$	612,169		$	649,069		$	1,224,844		$	940,810
Property and related expenses		300,256			308,433			656,104			494,334
Net operating income, as defined		311,913			340,636			568,740			446,476
Residential Properties:
Rental income		—			53,897			49,517			107,357
Property and related expenses		—			28,784			25,456			59,200
Net operating income, as defined		—			25,113			24,061			48,157
Retail Properties:
Rental income		270,685			13,515			551,336			27,030
Property and related expenses		103,299			953			194,291			953
Net operating income, as defined		167,386			12,562			357,045			26,077
Self Storage Properties:
Rental income		316,034			—			614,014			—
Property and related expenses		180,592			—			341,699			—
Net operating income, as defined		135,442			—			272,315			—
Mortgage loan activity:
Interest income		64,842			7,292			124,145			7,292
Reconciliation to Net Income Available to Common Stockholders:
Total net operating income, as defined, for reportable segments		679,583			385,603			1,346,306			528,002
Unallocated other income:
Gain on sale of real estate					9,775			605,539			9,775
Total other income		35,562			73,108			54,826			137,747
Unallocated other expenses:
General and administrative expenses		325,157			141,225			581,869			315,949
Interest expense		274,306			226,153			569,852			314,769
Depreciation and amortization		476,596			253,235			961,550			327,742
Loss from continuing operations		(360,914	)		(152,127	)		(106,600	)		(282,936	)
Income from discontinued operations		—			60,809			—			131,539
Net loss		(360,914	)		(91,318	)		(106,600	)		(151,397	)
Preferred dividends		(21,963	)		(21,175	)		(43,925	)		(42,350	)
Net loss available for common stockholders	$	(382,877	)		(112,493	)	$	(150,525	)	$	(193,747	)

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	June 30,		December 31,
	2008		2007
	(as restated)
Assets:
Office Properties:
Land, buildings and improvements, net(1)	$	20,492,793	$	20,787,078
Total assets(2)		21,549,689		21,899,523
Residential Property:
Land, buildings and improvements, net(1)		—		777,569
Total assets(2)		—		777,773
Investment in real estate ventures		352,144		—
Retail Properties:
Land, buildings and improvements, net(1)		9,735,911		9,760,526
Total assets(2)		9,844,005		9,825,269
Investment in real estate ventures		711,502		703,587
Self Storage Properties:
Land, buildings and improvements, net(1)		539,716		12,813,952
Total assets(2)		12,584,100		12,829,217
Mortgage loan activity:
Mortgage receivable and accrued interest		1,995,594		1,888,555
Total assets		1,995,594		1,888,555
Reconciliation to Total Assets:
Total assets for reportable segments		47,037,034		47,923,924
Other unallocated assets:
Cash and cash equivalents		10,203,149		4,880,659
Prepaid expenses and other assets, net		937,549		307,658
Total Assets	$	58,177,732	$	53,112,241

(1)	Includes lease intangibles and the land purchase option related to property acquisitions.
(2)	Includes land, buildings and improvements, current receivables, deferred rent receivables and deferred leasing costs and other related intangible assets, all shown on a net basis.

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	June 30,
	2008		2007
	(as restated)
Capital Expenditures:(1)
Office Properties:
Acquisition of operating properties		—	$	15,002,561
Capital expenditures and tenant improvements	$	162,540		337,642
Residential Property:
Capital expenditures and tenant improvements		—		18,581
Retail Properties:
Acquisition of operating properties		—		—
Capital expenditures and tenant improvements		153,769		2,136
Self Storage Properties:
Acquisition of operating properties		—		—
Capital expenditures and tenant improvements		20,563		—
Mortgage loan activity:
Loans originated		107,039		272,448
Total Reportable Segments:
Acquisition of operating properties		—		15,002,561
Capital expenditures and tenant improvements		336,872		358,359
Total real estate expenditures		336,872		15,360,920
Loan origination		107,039		272,448

(1) Total consolidated capital expenditures are equal to the same amounts disclosed for total reportable segments.

11. SUBSEQUENT EVENTS

Property Acquisitions

On July 9, 2008, the Company purchased the Executive Office Park located in Colorado Springs, Colorado. The purchase price for the property was $10.1 million, including transaction costs. The Company purchased the property for $3.5 million cash and with $6.6 million borrowed under a new line of credit established with a financial institution (the “line of credit”). This credit line is a revolving line with an original maturity date of May 9, 2011. The maturity date was subsequently amended to December 10, 2009. The loan has a fixed interest rate of 6.5% and is secured by first mortgage liens on Executive Office Park and Regatta Square. This property is comprised of a condominium development consisting of four separate buildings situated on four legal parcels. The property is developed as an office condominium complex. The property consists of a total of 65,084 square feet situated on a total of 4.65 acres.

On August 12, 2008, the Company purchased the Waterman Plaza located in San Bernardino, California. The purchase price for the property was $7.2 million, including transaction costs. The Company purchased the property with $3.3 million cash and a new fixed rate note in the amount of $3.9 million secured by this property. This property is a newly constructed retail/office building consisting of approximately 21,200 square feet situated on a total of 2.7 acres and approvals to construct an additional 2,300 square foot building.

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On September 3, 2008, the Company acquired the Pacific Oaks Plaza, an office building located in Escondido, California. The purchase price for the property was $4.9 million, including transaction costs, all paid in cash. This property consists of approximately 16,000 square feet and is being utilized as the Company’s headquarters. Approximately 3,900 square feet of the building is leased to an unrelated entity for $4,832 per month and the Company occupies the remaining space as its principal offices.

On January 2, 2009, the Company acquired the Morena Office Center, an office building located in San Diego, California. The purchase price for the property was $6.6 million, including transaction costs. The Company purchased the property with $3.4 million cash and a $3.2 million draw on the line of credit. This property consists of approximately 26,784 square foot building on approximately 0.62 acres.

On February 5, 2009, Dubose Model Homes USA, L.P., a Texas limited partnership and the Company entered into an agreement (“Agreement”) to form Dubose Acquisition Partners II, Ltd, a limited partnership (the “Partnership”) pursuant to the provisions of the Texas Business Organizations Code. The purpose of the Partnership is to acquire up to twenty eight model homes from homebuilder subsidiaries of Weyerhaeuser Real Estate Company or its affiliates with a potential for capital appreciation, to rent said model homes, to sell such model homes, and to conduct such other businesses which are incidental or necessary to the foregoing.

Dubose Model Homes USA, L.P. is the original general partner and the Company is a limited partner. The Partnership will admit limited partners accepted by the general partner who purchase “Units”, defined as a limited partnership interest in the partnership resulting from a capital contribution of $19,250. Initially there will be 100 Units sold to the limited partners for aggregate initial capital contributions of $1,925,000. The Company has elected to purchase 51 of the initial 100 Units at the price of $19,250 per Unit, for a total capital contribution of $981,750, and has deposited such funds with the general partner. The 51 Units are currently a majority ownership, and it is the intention of the Company to maintain a majority ownership of the Units at all times during the Agreement.

Larry G. Dubose, a Director at NetREIT since June 2005, currently serves as President of the General Partner, Dubose Model Homes USA, L.P., a company he founded in 1985. Mr. Dubose sold Dubose Model Homes USA, L.P., in 2004 and does not currently maintain any ownership interest.

On February 5, 2009, the Company and Fontana Dialysis Building, LLC formed Fontana Medical Plaza, LLC (“FMP”) which the Company is Managing Member and 51% owner. On February 19, 2009, FMP assumed an agreement to purchase the Fontana Medical Plaza located in Fontana, California. The purchase price for the property is $1,900,000, before transaction costs, all paid in cash. The Company purchased the property with $800,000 cash and a $1,100,000 draw on the line of credit. The property consists of approximately 10,500 square feet and is currently unoccupied. The FMP has also assumed a lease agreement for a tenant to occupy 100% of the building for ten years with three five year renewal options. The new tenant is expected to move in upon the completion of the tenant improvements expected to be complete no later than July 2009. The lease agreement requires annual rent payments during the first five years of $259,973 increasing by 12.5% on the fifth year anniversary and each five year anniversary thereafter.

On March 23, 2009, the Company acquired The Rangewood Medical Office Building (“Rangewood) located in Colorado Springs, Colorado. The purchase price for the property was $2.7 million, including transaction costs. The Company purchased the property with $230,000 cash and a $2,430,000 draw on the line of credit. Rangewood is a 3-story, Class A medical office building of approximately 18,222 rentable square feet. The building was constructed in 1998 and, as of the date of the acquisition, was 92% occupied.

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Property sales

In October 2008, the Company sold an undivided 25.3% of its interests in Sparky’s Palm Self Storage. The purchaser paid $1.4 million, net of transaction costs, in cash. For financial reporting purposes, the gain of $0.1 million will be included in the statement of operations in the line item gain on sale of real estate for the year ended December 31, 2008. The Company’s remaining investment in this property will be included on the balance sheet in investment in real estate ventures and accounted for under the equity method.

In October 2008, the Company sold an undivided 5.99% of its interests in Garden Gateway. The purchaser paid $1.0 million, of which $0.4 million was paid in cash and $0.6 million paid in the form of a promissory note secured by the interest in the property. For financial reporting purposes, the gain of $0.1 million will be included in the statement of operations in the line item gain on sale of real estate for the year ended December 31, 2008. The Company’s remaining investment in this property will be included on the balance sheet in investment in real estate ventures and accounted for under the equity method. The deed of trust for the loan secured by Garden Gateway Plaza contains the Company’s covenant not to transfer an interest in the property. The Company advised the real estate broker of its intent to transfer an interest in the property at the time it negotiated this sale. The Company contracted to transfer the undivided interest in the property based on its belief that the lender had agreed to its transfer. The Company has not yet received the lender’s written waiver of this restriction and has contacted the lender to resolve this issue. If it does not give its waiver, the lender could claim the Company breached this covenant and pursue one or more remedies, including immediately payment of the entire loan balance. The Company believes it to be in the lender’s best interest not to do so and believes it will resolve this issue in a satisfactory manner.

In December 2008, the Company sold an undivided 9.33% of its interests in its Sparky’s Palm Self Storage. The purchaser paid $0.5 million, net of transactions costs, in cash and $0.6 million paid in the form of a promissory note secured by the interest in the property. For financial reporting purposes, the gain of $0.04 million will be included in the statement of operations in the line item gain on sale of real estate for the year ended December 31, 2008. The Company’s remaining investment in this property will be included on the balance sheet in investment in real estate ventures and accounted for under the equity method.

In December 2008, the Company sold an undivided 25.0% of its interests in its Casa Grande Apartments. The purchaser paid $0.5 million, net of transaction costs, in cash. For financial reporting purposes, the gain of $0.3 million will be included in the statement of operations in the line item gain on sale of real estate for the year ended December 31, 2008. The Company’s remaining investment in this property will be included on the balance sheet in investment in real estate ventures and accounted for under the equity method.

In December 2008, the Company sold an undivided 13.4% of its interests in its Sparky’s Palm Self Storage. The purchaser paid $0.7 million, of which $0.4 million was paid in cash and $0.3 million paid in the form of a promissory note secured by the interest in the property. For financial reporting purposes, the gain of $0.1 million will be included in the statement of operations in the line item gain on sale of real estate for the year ended December 31, 2008. The Company’s remaining investment in this property will be included on the balance sheet in investment in real estate ventures and accounted for under the equity method.

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Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations.

The following discussion relates to our condensed financial statements and should be read in conjunction with the condensed financial statements and notes thereto appearing elsewhere in this report. Statements contained in this “Management’s Discussion and Analysis and Results of Operations” that are not historical facts may be forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to materially differ from those projected. Some of the information presented is forward-looking in nature, including information concerning projected future occupancy rates, rental rate increases, project development timing and investment amounts. Although the information is based our current expectations, actual results could vary from expectations stated in this report. Numerous factors will affect our actual results, some of which are beyond our control. These include the timing and strength of national and regional economic growth, the strength of commercial and residential markets, competitive market conditions, and fluctuations in availability and cost of construction materials and labor resulting from the effects of worldwide demand, future interest rate levels and capital market conditions. You are cautioned not to place undue reliance on this information, which speaks only as of the date of this report. We assume no obligation to update publicly any forward-looking information, whether as a result of new information, future events or otherwise, except to the extent we are required to do so in connection with our ongoing requirements under federal securities laws to disclose material information. For a discussion of important risks related to our business, and an investment in our securities, including risks that could cause actual results and events to differ materially from results and events referred to in the forward-looking information.

Economic Outlook

Beginning in the Fall of 2007 and throughout 2008, the U.S. and global economy entered a serious recession. The current economic environment is characterized by a severe residential housing slump, depressed commercial real estate valuations, weak consumer confidence, rising unemployment and concerns regarding stagflation, deflation and inflation. Numerous financial systems around the world have become illiquid and banks have become less willing to lend to other banks and borrowers. Uncertainty remains in terms of the depth and duration of these adverse economic conditions.

The conditions described above have created an environment of limited financing alternatives for acquiring properties as lending institutions have cut back on making loans and tightened credit standards. Continued market volatility could impact our ability to finance future property acquisitions. In addition, this difficult economic environment may make it difficult for our tenants to continue to meet their obligations to the Company.

OVERVIEW AND BACKGROUND

NetREIT (which we sometimes refer to as “we,” “us” or the “Company”) operates as a self-administered real estate investment trust (“REIT”) headquartered in San Diego County, California. We have been in a growth stage having increased capital by approximately 87.9% to $38.9 million at June 30, 2008 from $20.7 million at June 30, 2007. Our investment portfolio increased by approximately 82.5% to $45.8 million at June 30, 2008 from $25.1 million at June 30, 2007. During the six months ended June 30, 2008 rental income increased by approximately 118.2% from $1.1 million to $2.4 million due to the increase in the number of properties owned during those periods.

Our properties are located primarily in Southern California and Colorado. These areas have above average population growth. The clustering of our assets enables us to reduce our operating costs through economies of scale by servicing a number of properties with less staff. We do not develop properties but acquire properties that are stabilized or anticipate they will be in the first year of operations. A property is considered to be stabilized once it has achieved an 80% occupancy rate for a full year as of January 1, or has been open for three years. We are actively communicating with real estate brokers and other third parties to locate properties for potential acquisitions in an effort to build our portfolio.

Most of our office and retail properties we currently own are leased to a variety of tenants ranging from small businesses to large public companies, many of which do not have publicly rated debt. We have in the past entered into, and intend in the future to enter into, purchase agreements for real estate having net leases that require the tenant to pay all of the operating expense (Triple Net Leases) or pay increases in operating expenses over specific base years. Most of our leases are for terms of 3 to 5 years with annual rental increases built into the leases. Our residential and self storage properties that we currently own are rented pursuant to rental agreements that are for no longer than 6 months. Our self storage properties are located in markets that have multiple self storage properties from which to choose. Competition will impact our property results. Our operating results of these properties depend materially on our ability to lease available self storage units, to actively manage unit rental rates, and on the ability of our tenants to make required rental payments. We believe that we will be able to respond quickly and effectively to changes in local and regional economic conditions by adjusting rental rates by concentration of these properties in one region of Southern California and under the regional management of one regional property manager. We depend on advertisements, flyers, web sites, etc. to secure new tenants to fill any vacancies.

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Current Developments and Trends

As discussed above, credit and real estate financing markets have experienced significant deterioration beginning in the fall of 2007. We expect this trend may continue throughout 2008 and market turbulence could increase in the commercial real estate arena.

As a result of this deterioration, we believe mortgage financing will continue to be more difficult to obtain, which may affect our ability to finance future acquisitions. We have obtained financing on satisfactory terms for the potential acquisitions we have under contract. However, we have experienced challenges in obtaining financing in the amounts related to purchase price or the rates that were available 2 or 3 years ago. We believe this may reduce the competition for properties that we bid on reducing the price of those properties.

Although long-term interest rates remain relatively low by historical standards, there has been a significant increase in the credit spreads across the credit spectrum. Increases in credit spreads or deterioration in individual tenant credit may lower the appraised values of properties. We generally enter into three to five year leases with our tenants to mitigate the impact of fluctuations in interest rates on the values of our portfolio.

Despite slow economic growth rates in recent periods, inflation rates in the United States have continued to rise. Increases in inflation are sometimes associated with rising long-term interest rates, which may have a negative impact on the value of the portfolio we own. To mitigate this risk, our leases generally have fixed rent increases or increases based on formulas indexed to increases in the Consumer Price Index (“CPI”) or other indices for the jurisdiction in which the property is located. To the extent that the CPI increases, additional rental income streams may be generated from these leases and thereby mitigate the impact of inflation.

Management Evaluation of Results of Operations

Management evaluates our results of operations with a primary focus on increasing and enhancing the value, quality and amount of our properties and seeking to increase the value of our real estate. Management focuses on improving underperforming assets through re-leasing efforts, including negotiation of lease renewals, or selectively replacing assets in order to increase the overall value in our real estate portfolio. Management’s ability to increase assets depends on our ability to raise capital and our ability to identify appropriate investments.

Management’s evaluation of operating results includes evaluating our ability to generate necessary cash flow in order to fund distributions to our shareholders. Management’s assessment of operating results therefore gives less emphasis to the effects of unrealized gains and losses, which may cause fluctuations in net income for comparable periods but have no impact on cash flows, and to other non-cash charges such as depreciation and impairment charges. Management’s evaluation of cash flow includes and assessment of the long-term sustainability of our real estate portfolio. In the past the funding of distributions exceeded operating results, however, we believe that with the anticipated increase in the investment assets the cash flow from operations will fund the distribution to our shareholders because there will not be a corresponding increase in general and administrative expenses compared to the increased net operating income from the new properties.

Management focuses on measures of cash flows from investing activities and cash flows from financing activities in its evaluation of our capital resources. Investing activities typically consist of the acquisition or disposition of investments in real property or mortgage receivables and the funding of capital expenditures with respect to real properties. Financing activities primarily consist of the proceeds from sale of stock, borrowings and repayments of mortgage debt and the payment of distributions to our stockholders.

CRITICAL ACCOUNTING POLICIES

The presentation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Certain accounting policies are considered to be critical accounting policies, as they require management to make assumptions about matters that are highly uncertain at the time the estimate is made, and changes in the accounting estimate are reasonably likely to occur from period to period. Management believes the following critical accounting policies reflect our more significant judgments and estimates used in the preparation of our financial statements. For a summary of all of our significant accounting policies, see note 3 to our condensed financial statements included elsewhere in this Form 10-Q/A.

26

Property Acquisitions.The Company accounts for its acquisitions of real estate in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” which requires the purchase price of acquired properties be allocated between the acquired tangible assets and liabilities, consisting of land, building, tenant improvements, long-term debt and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, the value of in-place leases, the value of unamortized lease origination costs and the value of tenant relationships, based in each case on their fair values.

The Company allocates the purchase price to tangible assets of an acquired property (which includes land, building and tenant improvements) based on the estimated fair values of those tangible assets, assuming the building was vacant. Estimates of fair value for land, building and building improvements are based on many factors including, but not limited to, comparisons to other properties sold in the same geographic area and independent third party valuations. The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair values of the tangible and intangible assets and liabilities acquired.

The total value allocable to intangible assets acquired, which consists of unamortized lease origination costs, in-place leases and tenant relationships, are allocated based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant. Characteristics considered by management in allocating these values include the nature and extent of the existing business relationships with the tenant, growth prospects for developing new business with the tenant, the remaining term of the lease and the tenant’s credit quality, among other factors.

The value allocable to above or below market component of an acquired in-place lease is determined based upon the present value (using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining term, and (ii) management’s estimate of rents that would be paid using fair market rates over the remaining term of the lease. The amounts allocated to above or below market leases are included in lease intangibles, net in the accompanying balance sheets and are amortized on a straight-line basis as an increase or reduction of rental income over the remaining non-cancelable term of the respective leases

The land lease acquired with the World Plaza acquisition has a fixed purchase price option cost of $181,710 at the termination of the lease in 2062. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) management valued the land option at its residual value of $1,370,000, based upon comparable land sales adjusted to present value. The difference between the strike price of the option and the recorded cost of the land purchase option is approximately $1.2 million. Accordingly, management has determined that exercise of the option is probable. The land purchase option was determined to be a contract based intangible asset associated with land. As a result, this asset has an indefinite life and is treated as a non-amortizable asset. The amount is included as land purchase option on the accompanying condensed balance sheets.

The value of in-place leases, unamortized lease origination costs and tenant relationships are amortized to expense over the remaining term of the respective leases, which range from less than a year to ten years. The amount allocated to acquire in-place leases is determined based on management’s assessment of lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased. The amount allocated to unamortized lease origination costs is determined by what the Company would have paid to a third party to recruit a new tenant reduced by the expired term of the respective lease. The amount allocated to tenant relationships is the benefit resulting from the likelihood of a tenant renewing its lease.

Sales of Undivided Interests in Properties.The Company accounts for profit recognition on sales of real estate in accordance with SFAS No. 66 “Accounting for Sales of Real Estate” (“SFAS 66”). Pursuant to SFAS 66, profits from sales will not be recognized under the full accrual method by the Company until certain criteria are met. Profit (the difference between the sales value and the proportionate cost of the partial interest sold) shall be recognized at the date of sale if a sale has been consummated and the following:

a. The buyer is independent of the seller.

b. Collection of the sales price is reasonably assured.

c. The seller will not be required to support the operations of the property or its related obligations to an extent greater than its proportionate interest.

Gains relating to transactions which do not meet the criteria for full accrual method of accounting are deferred and recognized when the full accrual method of accounting criteria are met or by using the installment or deposit methods of profit recognition, as appropriate in the circumstances.

Depreciation and Amortization of Buildings and Improvements. Land, buildings and improvements are recorded at cost. Major replacements and betterments, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives, while ordinary repairs and maintenance are expensed as incurred. The cost of buildings and improvements are depreciated using the straight-line method over estimated useful lives ranging from 30 to 55 years for buildings, improvements are amortized over the shorter of the estimated life of the asset or term of the tenant lease which range from 1 to 10 years, and 4 to 5 years for furniture, fixtures and equipment.

27

Intangible Assets— Lease intangibles represents the allocation of a portion of the purchase price of a property acquisition representing the estimated value of in-place leases, unamortized lease origination costs, tenant relationships and a land purchase option. Intangible assets are comprised of finite-lived and indefinite-lived assets. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, indefinite-lived assets are not amortized. Finite-lived intangibles are amortized over their expected useful lives. The Company assesses its intangibles and goodwill for impairment at least annually.

In accordance with SFAS 142, the Company is required to perform a test for impairment of goodwill and other definite and indefinite lived assets at least annually, and more frequently as circumstances warrant.

Investments in Real Estate Ventures.The Company analyzes its investments in joint ventures to determine whether the joint venture should be accounted for under the equity method of accounting or consolidated into the financial statements based on standards set forth under SFAS Interpretation No. 46(R), “Consolidation of Variable Interest Entities”, Statement of Position 78-9, “Accounting for Investments in Real Estate Ventures” and Emerging Issues Task Force (“EITF”) Statement No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights”. Based on the guidance set forth in SFAS Interpretation No. 46(R), the Company has determined that the limited partners and/or tenants in common in its real estate ventures have certain protective and substantive participation rights that limit the Company’s control of the investment. Therefore, the Company’s share of its investment in real estate ventures have been accounted for under the equity method of accounting in the accompanying condensed financial statements.

Under the equity method, the Company’s investment in real estate ventures is stated at cost and adjusted for the Company’s share of net earnings or losses and reduced by distributions. Equity in earnings of real estate ventures is generally recognized based on the Company’s ownership interest in the earnings of each of the unconsolidated real estate ventures. For the purposes of presentation in the statement of cash flows, the Company follows the “look through” approach for classification of distributions from joint ventures. Under this approach, distributions are reported under operating cash flow unless the facts and circumstances of a specific distribution clearly indicate that it is a return of capital (e.g., a liquidating dividend or distribution of the proceeds from the joint venture’s sale of assets) in which case it is reported as an investing activity.

Management assesses whether there are any indicators that the value of the Company’s investments in unconsolidated real estate ventures may be impaired when events or circumstances indicate that there may be an impairment. An investment is impaired if management’s estimate of the fair value of the investment is less than its carrying value. To the extent impairment has occurred, and is considered to be other than temporary, the loss is measured as the excess of the carrying amount of the investment over the fair value of the investment.

Revenue Recognition.The Company recognizes revenue from rent, tenant reimbursements, and other revenue once all of the following criteria are met in accordance with SEC Staff Accounting Bulletin Topic 13, “Revenue Recognition”:

• persuasive evidence of an arrangement exists;

• delivery has occurred or services have been rendered;

• the amount is fixed or determinable; and

• the collectability of the amount is reasonably assured.

In accordance with SFAS No. 13, “Accounting for Leases” (“SFAS 13”), as amended and interpreted, minimum annual rental revenue is recognized in rental revenues on a straight-line basis over the term of the related lease.

Certain of the Company’s leases currently contain rental increases at specified intervals, and generally accepted accounting principles require the Company to record an asset, and include in revenues, deferred rent receivable that will be received if the tenant makes all rent payments required through the expiration of the initial term of the lease. Deferred rent receivable in the accompanying condensed balance sheets includes the cumulative difference between rental revenue recorded on a straight-line basis and rents received from the tenants in accordance with the lease terms. Accordingly, the Company determines, in its judgment, to what extent the deferred rent receivable applicable to each specific tenant is collectible. The Company reviews material deferred rent receivable, as it relates to straight-line rents, on a quarterly basis and takes into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of deferred rent with respect to any given tenant is in doubt, the Company records an increase in the allowance for uncollectible accounts or records a direct write-off of the specific rent receivable.

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THE FOLLOWING IS A COMPARISON OF OUR RESULTS OF OPERATIONS

Our results of operations for the three or six months ended June 30, 2008 are not indicative of those expected in future periods as we expect that rental income, interest income from real estate loans receivable, interest expense, rental operating expense, general and administrative expense and depreciation and amortization will significantly increase in future periods as a result of operations from assets acquired during 2007 and 2008 for an entire period and as a result of anticipated future acquisitions of real estate investments.

RECENT EVENTS HAVING SIGNIFICANT EFFECT ON RESULTS OF OPERATIONS COMPARISONS

Property Acquisitions

In March 2007, the Company acquired Garden Gateway Plaza, a 115,052 square foot office complex consisting of three buildings in Colorado Springs, Colorado for $15.1 million, including transaction costs. The purchase was funded by borrowings of $11.0 million and the remainder was funded with the Company’s funds on hand. There are approximately three months of operations included in the three and six months ended June 30, 2007 compared to the full three and six months for the periods ended June 30, 2008.

In September 2007, the Company acquired World Plaza, a 55,096 square foot retail center in San Bernardino, California for $7.7 million, including transaction costs. The purchase was funded by assumption of an existing borrowing of $3.7 million and the remainder was funded with the Company’s funds on hand. The acquisition included a land lease with a fixed purchase price option cost of $181,710 at termination of the lease in 2062. There were no operations included in the three or six month periods ended June 30, 2007, compared to the full three and six months for the periods ended June 30, 2008.

In October 2007, the Company acquired Regatta Square, a 5,983 square foot retail center in Denver, Colorado for $2.2 million, including transaction costs. The purchase was funded with the Company funds on hand. There were no operations included in the three and six month periods ended June 30, 2007, compared to the full three and six months for the periods ended June 30, 2008.

In November 2007, the Company acquired Sparky’s Palm Self-Storage, a 495 unit/60,508 square foot self storage property in San Bernardino, California for $4.8 million, including transaction costs. The purchase was funded with the Company’s funds on hand. There were no operations included in the three and six month periods ended June 30, 2007, compared to the full three and six months for the periods ended June 30, 2008.

In December 2007, the Company acquired Sparky’s Joshua Self-Storage, a 789 unit/149,650 square foot self storage property in Hesperia, California for $8.0 million, including transaction costs. The purchase was funded by assumption of an existing borrowing of $4.4 million and the remainder was funded with the Company’s funds on hand. There were no operations included in the three and six month periods ended June 30, 2007, compared to the full three and six months for the periods ended June 30, 2008.

Property Sales

In March 2008, the Company sold an undivided 54.92% of its interest in Casa Grande Apartments. The buyers paid $1.0 million, net of transaction costs, in cash. For financial reporting purposes, the gain of $0.6 million is included in the condensed statement of operations in the line item gain on sale of real estate for the three and six months ended June 30, 2008. The Company’s remaining investment in this property is included on the condensed balance sheet in investment in real estate ventures and accounted for under the equity method.

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On May 1, 2008, NetREIT and the co-owner to the 7-Eleven property, a non-related person, formed NetREIT 01 LP, a California limited partnership with NetREIT as a general partner, to manage the operation of the Escondido 7-Eleven property. NetREIT contributed its 51.4% interest in the property to the partnership for its general partner interest, and the co-owner contributed its 48.6% interest for the limited partner interest. The limited partner, in its discretion, may convert its limited partner interest into $719,533 of NetREIT common stock at $9.30 per share at anytime after September 30, 2008. After December 31, 2012, NetREIT may, but is not obligated to, exchange its common stock for the limited partner interest on the same terms. The portion of the results of operations of NetREIT 01 LP for the period from May 1, 2008 to June 30, 2008 attributable to the minority owner were not significant and is included in rental operating costs in the accompanying condensed statements of operations for the three and six months ended June 30, 2008.

Sale of real estate

There were no dispositions of real estate during the three months ended June 30, 2008. On March 17, 2008, the Company sold a 54.92% interest in Casa Grande Apartments. The two purchasers paid $1,028,083, net of transaction costs, in cash. For financial reporting purposes, during the six months ended June 30, 2008 the gain on sale of $605,539 is shown on the condensed statement of operations. We anticipate selling interests in other properties to buyers who need a Code Section 1031 tax deferred exchange during in the future.

Financing

In October 2006, we commenced a new private placement offering of $200 million of our common stock at $10.00 per share. Net proceeds from the offering, after commissions, due diligence fees, and syndication expenses, were approximately $10.4 million during the six months ended June 30, 2008. In addition, we received approximately $1.0 million from proceeds of sale of real estate. The net proceeds were primarily used as follows: $4.4 million to pay off the mortgage on the Hesperia property; $0.3 million to improve properties and $0.62 million to pay dividends.

Comparison of the Three Months Ended June 30, 2008 to the Three Months Ended June 30, 2007

	Three Months Ended June 30,						Dollar			Percentage
	2008			2007			Change			Change
Net operating income, as defined
Office Properties	$	311,913		$	340,636		$	(28,723	)		(8.4	%)
Retail Properties		167,386			12,562			154,824			1,232.5	%
Residential Property		—			25,113			(25,113	)		(100.0	%)
Self Storage Properties		135,442			—			135,442			100.0	%
Mortgage Receivable		64,842			7,292			57,550			789.2	%
Total Portfolio	$	679,583		$	385,603		$	293,980			76.2	%
Reconciliation of Net Loss Available for Common Stockholders:
Net operating income, as defined for reportable segments	$	679,583		$	385,603		$	293,980			76.2	%
Other expenses:
General and administrative expenses		(325,157	)		(141,225	)		183,932			130.2	%
Interest expenses		(274,306	)		(226,153	)		48,153			21.3	%
Depreciation and amortization		(476,596	)		(253,235	)		223,361			88.2	%
Gain on sale of real estate		—			9,775			(9,775	)		(100.	%)
Total other income		35,562			73,108			(37,546	)		(51.4	%)
Loss from continuing operations before minority interests		(360,914	)		(152,127	)		(208,787	)		(137.2	%)
Income from discontinued operations		—			60,809			(60,809	)		(100.0	%)
Net loss		(360,914	)		(91,318	)		(269,596	)		(295.2	%)
Preferred dividends		(21,963	)		(21,175	)		788			(3.7	%)
Net loss available for common stockholders	$	(382,877	)	$	(112,493	)	$	(270,384	)		(240.4	%)

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Revenues

Rental revenue from continuing operations for the three months ended June 30, 2008 was $1,198,888 versus $716,481 for same period in 2007, an increase of $482,407, or 67.3%. The increase in rental revenue in 2008 compared to 2007 is primarily attributable to:

• The four properties acquired by NetREIT in 2007, which generated $586,716 of rent revenue during the three months ended June 30, 2008.

• Same property rents generated on three properties during the three months of 2008 and 2007 decreased by $33,479 or 4.9% primarily due to a decrease in occupancy in our office building in Aurora, Colorado. The decrease resulted basically from one large tenant that ceased business.

• A reduction of rental income of $71,450 for two properties (7-11 Escondido and Casa Grande Apartments) that are accounted for under the equity method from the date of partial sales of undivided interests in the properties. The Company reports only its share of net earnings from these properties.

Rental revenue is expected to continue to increase in future periods, as compared to historical periods, as a result of owning the assets acquired during late 2007 for an entire year and future acquisitions of real estate assets. Four of the properties acquired in 2007 were purchased in the third and fourth quarters of 2007. On annualized basis the rental revenue of these four properties will increase revenues by approximately $1,100,000 during the third and fourth quarters of 2008.

Interest income from mortgage loans was a new activity in the latter part of the 2^nd quarter of 2007 and accounted for approximately $64,842 of interest income during the three months ended June 30, 2008 compared to $360 during the same period ended June 30, 2007. We do not anticipate making any more mortgage loans.

The remainder of the interest in 2008 is from cash equivalents which decreased to $33,000 in 2008 from $88,000 in 2007. The average balance of cash equivalents held during the three months of 2008 was approximately $3,300,000 compared to $5,900,000 during the same period in 2007 and the rates earned on short term investments of cash decreased from a range of 3-4% in 2007 to 1-2% in 2008. The cash equivalent balance fluctuates depending on the closing dates of acquisitions that are hard to anticipate. Due to the low rates on short term investments we have arranged a line of credit in connection with the acquisition of the office building complex in Colorado Springs, Colorado of $6,597,500 at a fixed rate of 6.25%. We expect to reduce this loan with excess cash and increase the loan as we close additional acquisitions thereby increasing the yield on excess cash in the future.

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Rental Operating Expenses

Rental operating expense from continuing operations was $584,147 for the three months ended June 30, 2008 versus $338,170 for same period in 2007, an increase of $245,977, or 72.7%. The increase in operating expense in 2008 compared to 2007 is attributable primarily to the same reasons that rental revenue increased. However, the operating expense as a percentage rental income was 48.7% for 2008 versus 47.2% in 2007. The increase in number of properties and diversification of type of properties has resulted in the higher operating expense percentage. In particular the operating expenses of the self storage properties added in 2008 averaged approximately 56% due to the increased administrative demands of such properties compared to office or retail properties. Rental operating expenses are expected to continue to increase in future periods, as compared to historical periods, as a result of owning the assets acquired during 2007 for an entire period and future acquisitions or real estate assets.

Interest Expense

Interest expense increased by $48,153 or 21% during the three months ended June 30, 2008 compared to the same period in 2007 due to the higher average outstanding borrowings. During the three months ended June 30, 2008, the average mortgage loans on three of the properties was $17.9 million compare to $14.5 million on the two properties during the three months ended June 30, 2007. We anticipate interest expense to increase as a result of the increase in loan balance during 2007 for an entire year 2008 and the interest expense on future acquisitions. In addition, we will borrow funds to acquire both of the properties we currently have under contract.

The following is a summary of our interest expense on loans, including the interest and amortization of deferred financing costs reported in the discontinued operations on the statement of operations for the three months ended June 30,:

	2008		2007
Interest on the Garden Gateway property	$	57,517	$	58,479
Interest on the Executive Office Plaza property		164,005		166,961
Interest on the Palm Self-Storage property		47,807		—
Amortization of deferred financing costs		4,977		713
Interest Expense	$	274,306	$	226,153

At June 30, 2008, the weighted average interest rate on our mortgage loans of $17,853,578 was 6.01%

General and Administrative Expenses

General and administrative expenses increased by approximately $183,932 to $325,157 during the three months ended June 30, 2008 compared to $141,225 during the same period in 2007. In 2008, general and administrative expenses as a percentage of total revenue were 27.1% as compared to 19.7% in 2007. In comparing our general and administrative expenses with other REITs one should take into consideration that we are a self administered REIT and, therefore, these expenses are usually higher. Accordingly, all of our expenses related to acquisitions, due diligence performed by our officers and employees is charged as general and administrative expense as incurred rather than being capitalized as part of the cost of real property acquired. The increase in general and administrative expenses during 2008 and 2007 was primarily due to the increase in our capital, the size of our real estate portfolio and the requirement that the Company register with the Securities and Exchange Commission (“SEC”). The primary increase was in employee costs and professional fees related to the registration. During the three months in 2008 employee and director compensation was approximately $163,000 compared to $73,000 during the same period in 2007. The number of full-time administrative employees at June 30, 2008 and 2007 was 8 and 6, respectively. We anticipate an increase in staff and compensation costs as our capital and portfolio continue to increase; however, we anticipate that these costs as a percentage of total revenue will decline. Approximately $89,000 of the increase was due to the cost of the 2007 audit and the need to re-audit 2006 to meet the filing requirements of the SEC and the cost of engaging a Sarbanes-Oxley consulting firm to perform a risk assessment and analysis of the Company’s internal control in order to meet the requirements of a company registered under the Securities and Exchange Act of 1934 (the “1934 Act”). Approximately $20,000 of the increase was due to legal expenses in connection with the filing or the registration statement and other reports with the SEC. We expect these expenses to increase due to the one time charge for re-audit of 2006 and 2007 resulting in restating and filing amended reports for the year ended 2007 and the quarters ended March 31, 2008 and June 30, 2008. Additionally, we anticipate additional audit and accounting costs related to property acquisitions due to filing requirements of the SEC.

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Net Loss Available to Common Stockholders

Net loss available to common stockholders was $382,877 during the three months ended June 30, 2008, as compared to a loss of $112,493 during the same period in 2007. The increase in the loss is primarily related to the increase in general and administrative expenses. The general and administrative expenses will not increase to the same degree and we estimate that the addition of the property acquired subsequent to June 30, 2008 will eventually make up the deficit.

Comparison of six months ended June 30, 2008 to six months ended June 30, 2007

	Six Months Ended
	June 30,						Dollar			Percentage
	2008			2007			Change			Change
Net operating income, as defined
Office Properties	$	568,740		$	446,476		$	122,264			27.4	%
Retail Properties		357,045			26,077			330,968			1,269.2	%
Residential Property		24,061			48,157			(24,096	)		(50.0	%)
Self Storage Properties		272,315			—			272,315			100.0	%
Mortgage Receivable		124,145			7,292			116,853			1602.5	%
Total Portfolio	$	1,346,306		$	528,002		$	818,304			155.0	%
Reconciliation of Net Loss Available for Common Stockholders:
Net operating income, as defined for reportable segments	$	1,346,306		$	528,002		$	818,304			155.0	%
Other expenses:
General and administrative expenses		(581,869	)		(315,949	)		(265,920	)		84.2	%
Interest expenses		(569,852	)		(314,769	)		(255,083	)		81.0	%
Depreciation and amortization		(961,550	)		(327,742	)		(633,808	)		193.4	%
Gain on sale of real estate		605,539			9,775			595,764			6094.8	%
Total other income		54,826			137,747			(82,921	)		(60.2	%)
Loss from continuing operations before minority interests		(106,600	)		(282,936	)		176,336			62.3	%
Income from discontinued operations		—			131,539			(131,359	)		(100.0	%)
Net loss		(106,600	)		(151,397	)		44,797			29.6	%
Preferred dividends		(43,925	)		(42,350	)		1,575			(3.7	%)
Net loss available for common stockholders	$	(150,525	)	$	(193,747	)	$	43,222			22.3	%

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Revenues

Rental revenue from continuing operations for the six months ended June 30, 2008 was $2,439,711 versus $1,075,197 for same period in 2007, an increase of $1,364,514, or 126.9%. The increase in rental revenue in 2008 compared to 2007 is primarily attributable to:

• The five properties acquired by NetREIT in 2007, which generated $1,510,288 of rent revenue during the six months ended June 30, 2008.

• The Havana/Parker Complex acquired in June 2006 which decreased approximately $62,000 in the six months ended June 30, 2008 compared to the same period in 2007.

• A reduction of rental revenues of $95,236 for two properties (7-11 Escondido and Casa Grande Apartments) that are being accounted for using the equity method of accounting.

Rental revenues are expected to continue to increase in future periods, as compared to historical periods, as a result of owning the assets acquired during late 2007 for an entire year and subsequent acquisitions in the second half of 2008 and early 2009. Four of the properties acquired in 2007 were purchased in the third and fourth quarters of 2007. On an annualized basis, the rental revenues of these four properties should increase revenues by approximately $1,100,000 during the third and fourth quarters of 2008.

Interest income from mortgage loans was a new activity during the six months in 2007 and accounted for approximately $124,145 of interest income during the six months ended June 30, 2008 compared to $2,116 during the same period ended June 30, 2007. We do not anticipate making any more mortgage loans.

The remainder of the interest income in 2008 is from cash equivalents which decreased to $48,348 in 2008 compared to $137,617 in 2007. The average balance of cash equivalents held during the six months of 2008 was approximately $5.4 million compared to $6.7 million during the same period in 2007 and the rates earned on short term investments of cash decreased from approximately 4% in 2007 to 2% in 2008. The cash equivalent balance fluctuates depending on the closing dates of acquisitions that are hard to anticipate. Due to the low rates on short term investments we have arranged a line of credit in connection with the acquisition of the Executive Office Plaza of $6,597,500 at a fixed rate of 6.25%. We expect to reduce this loan with excess cash and increase the loan as we close additional acquisitions thereby increasing the yield on excess cash in the future.

Rental Operating Expenses

Rental operating expense from continuing operations was $1,217,550 for the six months ended June 30, 2008 compared to $554,487 for same period in 2007, an increase of $663,063, or 119.6%. The increase in operating expense in 2008 compared to 2007 is primarily attributable to the same reasons that rental revenue increased. However, the operating expense as a percentage rental income was 49.9% for 2008 versus 51.6% in 2007. The increase in number of properties and diversification of type of properties has resulted in a lower operating expense percentage. Rental operating expenses are expected to continue to increase in future periods, as compared to historical periods, as a result of owning the assets acquired during 2007 for an entire period and future acquisitions or real estate assets.

Interest Expense

Interest and financing expense increased by $255,083 or 81% during the six months ended June 30, 2008 compared to the same period in 2007 due to the higher average outstanding borrowings and an increase in the effective rate including amortization of financing costs by .5%. During the six months ended June 30, 2008, the average mortgage loans on three of the properties was approximately $17.9 million while during the six months ended June 30, 2007, the average mortgage loans on two properties was $10.9, an increase of 64%. We anticipate interest expense to increase as a result of the increase in loan balance during 2007 for an entire year 2008 and the interest expense on future acquisitions.

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The following is a summary of our interest expense on loans, including the interest and amortization of deferred financing costs reported in the discontinued operations on the condensed statement of operations for the six months ended June 30, 2008 and 2007.

	2008		2007
Interest on the Garden Gateway Plaza	$	115,285	$	118,516
Interest on the Havana/Parker Complex		328,767		194,828
Interest on the Palm Self-Storage		96,055		—
Interest on the Joshua’s Self-Storage		9,543		—
Amortization of deferred financing costs		20,202		1,425
Interest Expense	$	569,852	$	314,769

At June 30, 2008, the weighted average interest rate on our mortgage loans of $17,853,578 was 6.01%

General and Administrative Expenses

General and administrative expenses increased by approximately $265,920 to $581,869 during the six months ended June 30, 2008 compared to $315,949 during the same period in 2007. In 2008, general and administrative expenses as a percentage of total revenue were 23.8% as compared to 29.4% in 2007. In comparing our general and administrative expenses with other REITs one should take into consideration that we are a self administered REIT and, therefore, these expenses are usually higher. Accordingly, all of our expenses related to acquisitions, due diligence performed by our officers and employees is charged as general and administrative expense as incurred rather than being capitalized as part of the cost of the real estate acquired. The increase in general and administrative expenses during 2008 and 2007 was primarily due to the increase in our capital, the size of our real estate portfolio and the requirement to become registered under the 1934 Act. The primary increase was in employee costs and professional fees. During the six months in 2008, employee and director compensation was approximately $317,000 compared to $201,000 during the same period in 2007. The number of full-time employees at June 30, 2008 and 2007 was 8 and 6, respectively. We anticipate an increase in staff and compensation costs as our capital and portfolio continue to increase, however, we anticipate that these costs as a percentage of total revenue will continue to decline. Approximately $130,000 of the increase was due to SEC filing expenses, the audit expense for the 2007 audit and the need to re-audit 2006 to meet the SEC requirements and the expense of hiring a Sarbanes-Oxley consulting firm to advise us on risk assessment and analysis of the company’s internal control in order to meet the requirements of a 1934 Act registered company. Approximately $28,000 of the increase was due to legal expense in connection with filing the registration and other reports with the SEC. We expect these expenses to decrease due to the one time charge for re-audit of 2006 and the original risk assessment and the first time filing expense portion of the SEC filings, however the audit fee will increase as we add more properties.

Net Loss Available to Common Stockholders

Net loss available to common stockholders was ($150,525) for the six months ended June 30, 2008, as compared to a loss of ($193,747) in the same period in 2007. The net loss in 2008 included a gain on sale of real estate that if excluded there would have been a loss of $756,064. The net loss in 2007 includes income from discontinued operation that if excluded there would have been a loss of $62,208. The increase in the loss during a time that revenue from properties increased is due to the increase in general and administrative expenses. We do not expect the general and administrative expenses to increase to the same degree and we estimate that the addition of the properties acquired subsequent to June 30 will continue to make up the deficit.

Non-GAAP Supplemental Financial Measure: Interest Coverage Ratio

Our interest coverage ratio for 2008 was 1.61 times and for 2007 was 2.62 times. Interest coverage ratio is calculated as: the interest coverage amount (as calculated in the following table) divided by interest expense, including interest recorded to discontinued operations. We consider interest coverage ratio to be an appropriate supplemental measure of a company’s ability to meet its interest expense obligations. Our calculations of interest coverage ratio may be different from the calculation used by other companies and, therefore, comparability may be limited. This information should not be considered as an alternative to any GAAP liquidity measures.

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The following is a reconciliation of net cash provided by operating activities on our condensed statements of cash flows to our interest coverage amount for the six months ended June 30, 2008 and 2007.

	2008		2007
Net cash provided by operating activities	$	117,774	$	11,721
Interest and amortized financing expense		569,852		314,769
Changes in operating assets and liabilities:
Receivables and other assets		176,831		347,116
Accounts payable, accrued expenses and other liabilities		20,346		147,449
Interest coverage amount	$	884,803		821,055
Divided by interest expense	$	549,650	$	313,344
Interest coverage ratio		1.61		2.62

Interest expense includes interest expense recorded to “income from discontinued operations” in our condensed statements of operations.

Non-GAAP Supplemental Financial Measure: Fixed Charge Coverage Ratio

Our fixed charge coverage ratio for 2008 was 1.49 times and for 2007 was 2.31 times. Fixed charge coverage ratio is calculated in exactly the same manner as interest coverage ratio, except that preferred stock dividends are also added to the denominator. We consider fixed charge coverage ratio to be an appropriate supplemental measure of a company’s ability to make its interest and preferred stock dividend payments.

LIQUIDITY AND CAPITAL RESOURCES

Cash and Cash Equivalents

At June 30, 2008, we had approximately $10.2 million in cash and cash equivalents compared to $4.9 million at December 31, 2007. We used approximately $3.3 million on July 9, 2008 to close the purchase of the office complex in Colorado Springs, Colorado and will need approximately $3 million to close the Waterman Plaza and Escondido Office Building properties. We expect to obtain additional mortgages collateralized by some or all of our real property in the future. We expect the funds from operations; additional mortgages and securities offerings will provide us with sufficient capital to make additional investments and to fund our continuing operations for the foreseeable future. We also anticipate issuing additional equity securities in order to obtain additional capital.

Investing Activities

Net cash used in investing activities during the six months ended June 30, 2008 was approximately $49,000, which consisted of net proceeds of approximately $1.0 million from the sale of a 54.9% undivided interest in the Casa Grande Apartments offset primarily by $0.3 million of funds spent on capital improvements to newly acquired properties and $0.8 million for deposits on potential acquisitions as compared to net cash used in investing activities during the six months ended June 30, 2007 of approximately $16 million which consisted primarily of the purchase of the Garden Gateway Plaza of $15 million.

Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2008 was approximately $5.3 million, which primarily consisted of $10.4 million net proceeds from issuance of common stock offset by $4.6 million of principal repayments of the mortgage on the Sparky’s Joshua Self-Storage loan and other mortgage payments and dividend payments of approximately $0.6 million. Net cash provided by financing activities for the six months ended June 30, 2007 was approximately $19.1 million, which consisted of the proceeds received from the long-term financing of the Garden Gateway Plaza totaling $11 million, the net proceeds from the offering of common stock and preferred stock of approximately $8.5 million partially offset by dividend payments of approximately $.4 million.

Operating Activities

Net cash provided by operating activities in 2008 was approximately $118,000 primarily as a result of net income before depreciation expense of approximately $877,000, less the gain on sale of a 54.92% undivided interest in the Casa Grande Apartments for approximately $606,000.

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Future Capital Needs

During 2008 and beyond, we expect to complete additional acquisitions of real estate. We intend to fund our contractual obligations and acquire additional properties in 2008 by borrowing a portion of purchase price and collateralizing the mortgages with the acquired properties or from the net proceeds of issuing additional equity securities. We may also use these funds for general corporate needs. If we are unable to make any required debt payments on any borrowings we make in the future, our lenders could foreclose on the properties collateralizing their loans, which could cause us to lose part or all of our investments in such properties. In addition, we need sufficient capital to fund our dividends in order to meet these obligations.

Contractual Obligations

The following table provides information with respect to the maturities and scheduled principal repayments of our secured debt and interest payments on our fixed-rate debt at June 30, 2008 and provides information about the minimum commitments due in connection with our ground lease obligation and purchase commitment at June 30, 2008. Our secured debt agreements contain covenants and restrictions requiring us to meet certain financial ratios and reporting requirements. Non-compliance with one or more of the covenants or restrictions could result in the full or partial principle balance of such debt becoming immediately due and payable. We were in compliance with all our debt covenants and restrictions at June 30, 2008.

	Payment Due by Period
	Less than						More than
	1 Year		1 – 3 years		3 – 5 Years		5 Years
	(2008)		(2009-2010)		(2011-2012)		(After 2011)		Total
Principal payments—secured debt	$	201,113	$	867,723	$	3,884,223	$	12,900,519	$	17,853,578
Interest payments—fixed-rate debt		535,867		2,080,199		1,826,661		1,489,367		5,932,094
Ground lease obligation (1)		10,020		40,080		41,194		1,159,114		1,250,408
Purchase commitments (2)		22,350,000		—		—		—		22,350,000
Total	$	23,097,000	$	2,988,002	$	5,752,078	$	15,549,000	$	47,386,080

(1)	Lease obligations represent the ground lease payments due on our World Plaza Center property. The lease expires in 2062.
(2)	Purchase commitments represent three properties that we have contracts to purchase as of June 30, 2008.

Capital Commitments

We currently project that we could spend an additional $500,000 to $800,000 in capital improvements, tenant improvements, and leasing costs for properties within our stabilized portfolio during the next twelve months, depending on leasing activity. Capital expenditures may fluctuate in any given period subject to the nature, extent and timing of improvements required to maintain our properties, the term of the leases, the type of leases, the involvement of external leasing agents and overall market conditions. We have impounds with lending institutions of $500,000, included in Restricted Cash in the accompanying condensed balance sheet, reserved for these tenant improvement, capital expenditures and leasing costs.

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Other Liquidity Needs

We are required to distribute 90% of our REIT taxable income (excluding capital gains) on an annual basis in order to qualify as a REIT for federal income tax purposes. Accordingly, we intend to continue to make, but have not contractually bound ourselves to make, regular quarterly distributions to common stockholders and preferred stockholders from cash flow from operating activities. All such distributions are at the discretion of our Board. We may be required to use borrowings, if necessary, to meet REIT distribution requirements and maintain our REIT status. We have historically distributed amounts in excess of the taxable income resulting in a return of capital to our stockholders, and currently have the ability to not increase our distributions to meet our REIT requirement for 2008. We consider market factors and our historical and anticipated performance in addition to REIT requirements in determining our distribution levels. On April 30 and July 31, 2008, we paid a regular quarterly cash dividends to stockholders of $0.147 and $0.14775 per common share, a total of $1,325,521 of which $683,132 was reinvested in shares of company common stock. This dividend is equivalent to an annual rate of $0.588 per share. In addition, on April 10 and July 10, 2008 we paid the quarterly distributions to our Series AA Preferred stockholders of $43,926 of which $6,400 was reinvested in shares of company common stock.

We believe that we will have sufficient capital resources to satisfy our liquidity needs over the next twelve-month period. We expect to meet our short-term liquidity needs, which may include principal repayments of our debt obligations, capital expenditures, distributions to common and preferred stockholders, and short-term acquisitions through retained cash flow from operations, proceeds from the proceeds from disposition of non-strategic assets.

We expect to meet our long-term liquidity requirements, which will include additional properties through additional issuance of common stock, long-term secured borrowings. We do not intend to reserve funds to retire existing debt upon maturity. We presently expect to refinance such debt at maturity or retire such debt through the issuance of common stock as market conditions permit.

Off-Balance Sheet Arrangements

As of June 30, 2008, we do not have any off-balance sheet arrangements or obligations, including contingent obligations.

Capital Expenditures, Tenant Improvements and Leasing Costs

Capital expenditures may fluctuate in any given period subject to the nature, extent, and timing of improvements required to be made to the properties. We anticipate spending more on gross capital expenditures during 2008 compared to 2007 due to rising construction costs and the anticipated increase in asset purchases in 2008, however, we do not anticipate any significant capital expenditures.

Tenant improvements and leasing costs may also fluctuate in any given year depending upon factors such as the property, the term of the lease, the type of lease, the involvement of external leasing agents and overall market conditions.

Non-GAAP Supplemental Financial Measure: Funds From Operations (“FFO”)

Management believes that FFO is a useful supplemental measure of our operating performance. We compute FFO under the definition outlined by the National Association of Real Estate Investment Trust (“NAREIT”). NAREIT defines FFO as net income (loss) computed in accordance with accounting principles generally accepted in the United States (“GAAP”), plus depreciation and amortization of real estate assets (excluding amortization of deferred financing costs and depreciation of non-real estate assets) reduced by gains and losses from sales of depreciable operating property and extraordinary items, as defined by GAAP. Other REITs may use different methodologies for calculating FFO, and accordingly, our FFO may not be comparable to other REITs.

Because FFO excludes depreciation and amortization, gains and losses from property dispositions and extraordinary items, it provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses and interest costs, providing a perspective not immediately apparent from net income. In addition, management believes that FFO provides useful information to the investment community about our financial performance when compared to other REITs since FFO is generally recognized as the industry standard for reporting the operations of REITs.

However, FFO should not be viewed as an alternative measure of our operating performance since it does not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties which are significant economic costs and could materially impact our results from operations.

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The following table presents our FFO for the three and six months ended June 30, 2008 and 2007:

	Three months ended						Six months ended
	June 30						June 30,
	2008			2007			2008			2007
Net loss	$	(360,914	)	$	(91,318	)	$	(106,600	)	$	(151,397	)
Adjustments:
Preferred stock dividends		(21,963	)		(21,175	)		(43,925	)		(42,350	)
Gain on sale of real estate		—			(9,775	)		(605,539	)		(9,775	)
Depreciation and amortization of real estate		476,596			275,687			961,550			372,560
Amortization of finance charges		4,976			713			20,202			1,425
Funds From Operations	$	98,695		$	154,132		$	225,688		$	170,463

Inflation

Since the majority of our leases require tenants to pay most operating expenses, including real estate taxes, utilities, insurance, and increases in common area maintenance expenses, we do not believe our exposure to increases in costs and operating expenses resulting from inflation would be material.

Recent Issued Accounting Standards.In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value and establishes a framework for measuring fair value under U. S. generally accepted accounting principles (“GAAP”). The key changes to current practice are (1) the definition of fair value, which focuses on an exit price rather than an entry price; (2) the methods used to measure fair value, such as emphasis that fair value is a market-based measurement, not an entity-specific measurement, as well as the inclusion of an adjustment for risk, restrictions, and credit standing and (3) the expanded disclosures about fair value measurements, SFAS 157 does not require any new fair value measurements. SFAS 157, as amended, was effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company adopted SFAS 157 on January 1, 2008 and, effective for the third quarter 2008, adopted FASB Staff Position SFAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP SFAS 157-3”). The adoption of SFAS 157 and FSP SFAS 157-3 did not have a significant impact on the Company’s financial position or results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurements attributes for similar types of assets and liabilities. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The adoption of SFAS 159 has not had a significant impact on the Company’s financial position as a result of operations. The Company did not elect to apply the fair value option to any specific assets or liabilities.

In November 2007, the FASB issued Emerging Issues Task Force (“EITF”) Issue No. 07-06, “Accounting for Sale of Real Estate Subject to the Requirements of SFAS 66 When the Agreement Includes a Buy-Sell Clause” (“EITF 07-06”).A buy-sell clause is a contractual term that gives both investors of a jointly-owned entity the ability to offer to buy the other investor’s interest. EITF 07-06 applies to sales of real estate to an entity if the entity is both partially owned by the seller of the real estate and subject to an arrangement between the seller and the other investor containing a buy-sell clause. The EITF concluded the existence of a buy-sell clause does not represent a prohibited form of continuing involvement that would preclude partial sale and profit recognition pursuant to SFAS 66. The EITF cautioned the buy-sell clause could represent such a prohibition if the terms of the buy-sell clause and other facts and circumstances of the arrangement suggest:

• the buyer cannot act independently of the seller or

• the seller is economically compelled or contractually required to reacquire the other investor’s interest in the jointly owned entity.

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The adoption of EITF 07-06 did not have a significant impact on the Company’s financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”(“SFAS 141R”), which replaces FASB Statement No. 141, “Business Combinations” (“SFAS 141”). SFAS 141R expands the definition of a business combination and requires the fair value of the purchase price of an acquisition, including the issuance of equity securities, to be determined on the acquisition date. SFAS 141R also requires that all assets, liabilities, contingent considerations, and contingencies of an acquired business be recorded at fair value at the acquisition dater. In addition, SFAS 141R requires that acquisition costs generally be expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. SFAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is prohibited. The Company is currently evaluating the impact that SFAS 141R will have on its future financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidating Financial Statements—an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. In addition, SFAS 160 provides reporting requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is prohibited. The Company does not believe the adoption of SFAS 160 will have a significant impact on the Company’s financial position or results of operations.

In April 2008, the FASB issued FASB Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP SFAS 142-3”), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142. FSP SFAS 142-3 is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141R. FSP SFAS No. 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, as well as interim periods within those fiscal years, and must be applied prospectively to intangible assets acquired after the effective date. The Company is currently evaluating the impact the adoption of the pronouncement will have on its results of operations.

SEGMENTS DISCLOSURE.

The Company’s reportable segments consist of the four types of commercial real estate properties for which the Company’s decision-makers internally evaluate operating performance and financial results: Residential Properties, Office Properties, Retail Properties and Self Storage Properties. The Company also has certain corporate level activities including accounting, finance, legal administration and management information systems which are not considered separate operating segments.

The Company evaluates the performance of its segments based upon net operating income. Net operating income is defined as operating revenues (rental income, tenant reimbursements and other property income) less property and related expenses (property expenses, real estate taxes, ground leases and provisions for bad debts) and excludes other non-property income and expenses, interest expense, depreciation and amortization, and general and administrative expenses. There is no intersegment activity.

See notes to the accompanying Condensed Financial Statements for a Schedule of the Segment Reconciliation to Net Loss Available to Common Stockholders.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4T. Controls and Procedures

As discussed in Note 2, “Restatement of previously issued financial statements” in the Notes to Financial Statements contained in our filings on Form 10-Q for the quarters ended March 31 and June 30, 2008, we have restated our financial statements for the year ended December 31, 2007 and for the quarters ended March 31 and June 30, 2008 to correct certain errors relating to the application of Statement of Financial Accounting Standards No. 141“Business Combinations” (“SFAS 141”). Pursuant to SFAS 141, the Company allocates the purchase price of acquired properties to land, buildings, tenant improvements and identified tangible and intangible assets and liabilities associated with in-place leases, unamortized leasing commissions, value of above or below market leases, tenant relationships and value associated with a land purchase option based upon respective market values. The Company determined that the initial process of estimating fair values for acquired in-place leases did not include all components of such valuation and it did not value the tenant relationships.

In addition, the Company did not properly account for its remaining interests in its 7-11 property following the sale of an undivided 48.66% interest in the property. This accounting treatment is based on standards set forth under SFAS Interpretation No. 46(R), “Consolidation of Variable Interest Entities”, Statement of Position 78-9, “Accounting for Investments in Real Estate Ventures” and Emerging Issues Task Force (“EITF”) Statement No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights. Based on the guidance set forth in SFAS Interpretation No. 46(R)”. Due to the protective and substantive participation rights of the tenant in common, the ongoing accounting for the Company’s investment should have been under the equity method of accounting. In the previously issued financial statements, the Company had used the proportional interest consolidation method.

Following such reconsideration, we have concluded that we did not correctly apply generally accepted accounting principles as they related to accounting for acquisitions under SFAS 141 and our investment in real estate ventures because our accounting staff did not have adequate training or expertise on the proper application of the specific accounting principles at the time the financial statements contained in the 2007 Form 10 were originally prepared and filed. As a result of this inadequacy, we have further concluded that there was a material weakness in our internal control over financial reporting with respect to the application of generally accepted accounting principles as they related to accounting for acquisitions and, as a result, our disclosure controls and procedures and our internal control over financial reporting were not effective as of December 31, 2007. However, we have concluded that the lack of adequate training or expertise of our accounting staff was limited to the application of SFAS 141 and accounting for investments in real estate ventures and the material weakness in our internal control over financial reporting and related inadequacy of our disclosure controls and procedures did not otherwise affect the preparation of our financial statements in accordance with generally accepted accounting principles. In addition, because we did not identify the above-described material weakness until the third quarter of 2008, we have concluded that our disclosure controls and procedures were not effective in the periods covered by, and as asserted in, our quarterly reports on Form 10-Q for the periods ended March 31 and June 30, 2008.

During 2008, we made a number of improvements to our internal accounting resources through the addition of a Vice President Finance with over 30 years experience in finance and accounting including the application of SFAS 141 and accounting for investments in real estate ventures in an effort to minimize financial reporting deficiencies in the future. The Company delayed filing the Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 until this material weakness was remediated. Therefore, our management, including our principal executive officer and principal financial officer, have determined that the material weakness in our internal control over financial reporting and the related inadequacy in our disclosure controls and procedures that existed as of June 30, 2008 have since been remedied.

The misapplication of SFAS 141 and accounting for investments in real estate ventures had no effect to the total acquisition costs of the properties involved and there was no effect to cash. However, the effect of the restatement for the property acquisitions was to increase depreciation and amortization expense since the values have been reclassified to shorter lived assets. The effect of the accounting for investments in real estate ventures was a reclassification of assets and liabilities to the line item investment in real estate ventures on the condensed balance sheet and to reclassify rental income and rental operating costs to equity in earnings of real estate ventures.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, other than the changes described above under “Disclosure Controls and Procedures.”

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings.-None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the three months ended June 30, 2008, the Company sold 721,654 shares of its common stock for an aggregate of $7,216,540. These shares were sold at a price of $10.00 per share in a private placement offering to a total of 183 accredited investors. Each issuee purchased their shares for investment and the shares are subject to appropriate transfer restrictions. The offering was made by the Company through selected FINRA member broker-dealer firms. The sales were made in reliance on the exemptions from registration under the Securities Act of 1933 and applicable state securities laws contained in Section 4(2) of the Act and Rule 506 promulgated thereunder.

During the three months ended June 30, 2008, the Company also sold 40,346 shares of its common stock to certain of its existing shareholders under its dividend reinvestment plan. The shares were sold directly by the Company without underwriters to a total of 137 persons participating in the plan. The Company sold these shares in reliance on the exemptions from registration under the Securities Act of 1933 and applicable state securities laws set forth in Section 4(2) of the Act and Rule 506 promulgated thereunder. Each issuee purchased the shares for investment and the shares are subject to appropriate transfer restrictions.

During the three months ended June 30, 2008, the Company issued 834 shares at an average exercise price of $7.20 upon the exercise of options by one employee.

During the three months ended June 30, 2008, the Company issued 485 shares at an average exercise price of $9.34 upon the exercise of its broker warrants to three persons.

All shares issued in these offerings were sold for cash consideration. The Company used the net proceeds it received for the sale of these shares to acquire and/or maintain its real estate investments.

Item 3. Defaults Upon Senior Securities. — None

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

At the annual meeting of our stockholders on July 25, 2008, our stockholders elected Messrs. Jack K. Heilbron, Bruce Staller, Sumner J. Rollings, Thomas E. Schwartz, Larry G. Dubose, David Bruen and Kenneth W. Elsberry as the directors of the Registrant for a term from the date of the meeting until the next regular or annual meeting of the shareholders at which election of directors is an agenda item and until his successor is duly elected and shall qualify(2,495,889 votes for and 48,095 votes withheld). The stockholders also voted to ratify the selection of JH Cohn LLP, as the Company’s independent registered public accounting firm for the year ending December 31, 2008 (2,428,596 voted for; 11,223 voted against; and 101,994 abstained from voting).

Item 5. Other Information. – None

Item 6. Exhibits.

Exhibit
Number		Description
	3.1	Articles of Incorporation filed January 28, 1999 (1)
	3.2	Certificate of Determination of Series AA Preferred Stock filed April 4, 2005 (1)
	3.3	Bylaws of NetREIT (1)
	3.4	Audit Committee Charter (1)
	3.5	Compensation and Benefits Committee Charter (1)
	3.6	Nominating and Corporate Governance Committee Charter (1)
	3.7	Principles of Corporate Governance of NetREIT (1)
	4.1	Form of Common Stock Certificate (1)

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Exhibit
Number		Description
	4.2	Form of Series AA Preferred Stock Certificate (1)
	10.1	1999 Flexible Incentive Plan (1)
	10.2	NetREIT Dividend Reinvestment Plan (1)
	10.3	Form of Property Management Agreement (1)
	10.4	Option Agreement to acquire CHG Properties (1)

(1) Previously filed as an exhibit to the Form 10 for the year ended December 31, 2007.

31.1*	Certificate of the Company’s Chief Executive Officer (Principal Executive Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrant’s Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2008.
31.2*	Certification of the Company’s Chief Financial Officer (Principal Financial and Accounting Officer) pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrant’s Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2008.
32.1*	Certification of the Company’s Chief Executive Officer (Principal Executive Officer) and Principal Financial and Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.

* Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: May 13, 2009	NetREIT
	By:	/s/ Jack K. Heilbron
		Name:	Jack K. Heilbron
		Title:	Chief Executive Officer
	By:	/s/ Kenneth W. Elsberry
		Name:	Kenneth W. Elsberry
		Title:	Chief Financial Officer

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