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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



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



For the quarterly period ended June 30, 2005



OR



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



For the transition period from
 to



Commission file number 000-51288



CNL Income Properties, Inc.

(Exact
name of registrant as specified in its charter)



|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Maryland                                                      |  | 20-0183627                         
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. employeridentification no.)
|                                                              | 
|450 South Orange Avenue Orlando, Florida                      |  | 32801                              
|(Address of principal executive offices)                      |  | (Zip code)                         



Registrants
telephone number (including area code) (407) 650-1000





---

(former name, former address and former fiscal year, if changed since last report)



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



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes ̈No x



The number of shares of common stock outstanding as of August 2, 2005 was 20,126,157.



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##### Table of Contents



TABLE OF CONTENTS



|                                                                                              |  |        
|--------------------------------------------------------------------------------------------- |  | -------
|                                                                                              |  | Page   
|PART I. FINANCIAL INFORMATION                                                                 |  |        
|                                                                                              | 
|Item 1. Financial Statements:                                                                 |  |        
|                                                                                              | 
|Condensed Consolidated Balance Sheets                                                         |  | 1      
|                                                                                              | 
|Condensed Consolidated Statements of Operations                                               |  | 2      
|                                                                                              | 
|Condensed Consolidated Statements of Stockholders Equity                                     |  | 3      
|                                                                                              | 
|Condensed Consolidated Statements of Cash Flows                                               |  | 4      
|                                                                                              | 
|Notes to Condensed Consolidated Financial Statements                                          |  | 5 11  
|                                                                                              | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 12  19
|                                                                                              | 
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |  | 19     
|                                                                                              | 
|Item 4. Controls and Procedures                                                               |  | 19  20
|                                                                                              | 
|PART II. OTHER INFORMATION                                                                    |  |        
|                                                                                              | 
|Item 1. Legal Proceedings                                                                     |  | 20     
|                                                                                              | 
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 20     
|                                                                                              | 
|Item 3. Defaults Upon Senior Securities                                                       |  | 21     
|                                                                                              | 
|Item 4. Submission of Matters to a Vote of Security Holders                                   |  | 21     
|                                                                                              | 
|Item 5. Other Information                                                                     |  | 21     
|                                                                                              | 
|Item 6. Exhibits                                                                              |  | 21  24
|                                                                                              | 
|Signatures                                                                                    |  | 25     
|                                                                                              | 
|Exhibits                                                                                      |  |        



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##### Table of Contents

PART I FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------



CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)



|                                                                                                                                                                                     |  |              |             |   |                  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ----------- | - | ---------------- | - | ---------- | -
|                                                                                                                                                                                     |  | June 30,2005 |             |   | December 31,2004 |  
|ASSETS                                                                                                                                                                               |  |              |             |   |                  |   |            |  
|Investment in unconsolidated entities                                                                                                                                                |  | $            | 124,536,507 |   |                  | $ | 41,913,212 |  
|Cash                                                                                                                                                                                 |  |              | 35,402,436  |   |                  |   | 36,710,117 |  
|Distributions receivable from unconsolidated entities                                                                                                                                |  |              | 2,459,312   |   |                  |   | 225,555    |  
|Prepaid expenses                                                                                                                                                                     |  |              | 164,113     |   |                  |   | 72,477     |  
|Deferred offering costs                                                                                                                                                              |  |              | 6,472,775   |   |                  |   | 5,381,749  |  
|Other assets                                                                                                                                                                         |  |              | 1,968,422   |   |                  |   | 1,653,317  |  
|                                                                                                                                                                                     |  |              |             |   |                  |   |            |  
|Total Assets                                                                                                                                                                         |  | $            | 171,003,565 |   |                  | $ | 85,956,427 |  
|                                                                                                                                                                                     |  |              |             |   |                  |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                 |  |              |             |   |                  |   |            |  
|Line of credit                                                                                                                                                                       |  | $            | 1,973,467   |   |                  | $ |           |  
|Accounts payable and accrued expenses                                                                                                                                                |  |              | 992,752     |   |                  |   | 589,215    |  
|Due to affiliates                                                                                                                                                                    |  |              | 8,157,393   |   |                  |   | 10,414,834 |  
|Other liabilities                                                                                                                                                                    |  |              | 135,576     |   |                  |   |           |  
|                                                                                                                                                                                     |  |              |             |   |                  |   |            |  
|Total Liabilities                                                                                                                                                                    |  |              | 11,259,188  |   |                  |   | 11,004,049 |  
|                                                                                                                                                                                     |  |              |             |   |                  |   |            |  
|Commitments and contingencies                                                                                                                                                        |  |              |             |   |                  |   |            |  
|                                                                                                                                                                                     |  |             
|Stockholders equity:                                                                                                                                                                |  |              |             |   |                  |   |            |  
|Preferred stock, $.01 par value per share 200 million shares authorized and unissued                                                                                                 |  |              |            |   |                  |   |           |  
|Excess shares, $.01 par value per share 120 million shares authorized and unissued                                                                                                   |  |              |            |   |                  |   |           |  
|Common stock, $.01 par value per share One billion shares authorized; 18,692,801 and 8,838,978 shares issued and outstanding as of June 30,
2005 and December 31, 2004, respectively |  |              | 186,928     |   |                  |   | 88,390     |  
|Capital in excess of par value                                                                                                                                                       |  |              | 161,853,025 |   |                  |   | 76,719,939 |  
|Accumulated distributions in excess of net income                                                                                                                                    |  |              | (2,295,576  | ) |                  |   | (1,855,951 | )
|                                                                                                                                                                                     |  |              |             |   |                  |   |            |  
|                                                                                                                                                                                     |  |              | 159,744,377 |   |                  |   | 74,952,378 |  
|                                                                                                                                                                                     |  |              |             |   |                  |   |            |  
|Total Liabilities and Stockholders Equity                                                                                                                                           |  | $            | 171,003,565 |   |                  | $ | 85,956,427 |  
|                                                                                                                                                                                     |  |              |             |   |                  |   |            |  



See accompanying notes
to condensed consolidated financial statements.



1



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CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



|                                                                                  |  |                        |            |   |                           |   |          |      |  |   |            |   |  |   |          |  
|--------------------------------------------------------------------------------- |  | ---------------------- | ---------- | - | ------------------------- | - | -------- | ---- |  | - | ---------- | - |  | - | -------- | -
|                                                                                  |  | Quarter Ended June 30, |            |   | Six Months Ended June 30, |  
|                                                                                  |  | 2005                   |            |   | 2004                      |   |          | 2005 |  |   | 2004       |  
|Revenue                                                                           |  | $                      |           |   |                           | $ |         |      |  | $ |           |   |  | $ |         |  
|                                                                                  |  |                        |            |   |                           |   |          |      |  |   |            |   |  |   |          |  
|Expenses:                                                                         |  |                        |            |   |                           |   |          |      |  |   |            |   |  |   |          |  
|Asset management fees to advisor                                                  |  |                        | 676,979    |   |                           |   |         |      |  |   | 990,952    |   |  |   |         |  
|General and administrative                                                        |  |                        | 420,985    |   |                           |   | 194,507  |      |  |   | 954,758    |   |  |   | 194,507  |  
|Organization costs                                                                |  |                        |           |   |                           |   | 22,357   |      |  |   |           |   |  |   | 22,357   |  
|                                                                                  |  |                        |            |   |                           |   |          |      |  |   |            |   |  |   |          |  
|Total expenses                                                                    |  |                        | 1,097,964  |   |                           |   | 216,864  |      |  |   | 1,945,710  |   |  |   | 216,864  |  
|                                                                                  |  |                        |            |   |                           |   |          |      |  |   |            |   |  |   |          |  
|Operating loss                                                                    |  |                        | (1,097,964 | ) |                           |   | (216,864 | )    |  |   | (1,945,710 | ) |  |   | (216,864 | )
|                                                                                  |  |                        |            |   |                           |   |          |      |  |   |            |   |  |   |          |  
|Other income (expense):                                                           |  |                        |            |   |                           |   |          |      |  |   |            |   |  |   |          |  
|Interest income                                                                   |  |                        | 170,152    |   |                           |   | 1,393    |      |  |   | 357,069    |   |  |   | 1,393    |  
|Interest expense and loan cost amortization                                       |  |                        | (24,516    | ) |                           |   |         |      |  |   | (24,516    | ) |  |   |         |  
|Equity in earnings of unconsolidated entities                                     |  |                        | 2,829,101  |   |                           |   |         |      |  |   | 4,482,098  |   |  |   |         |  
|                                                                                  |  |                        |            |   |                           |   |          |      |  |   |            |   |  |   |          |  
|Total other income                                                                |  |                        | 2,974,737  |   |                           |   | 1,393    |      |  |   | 4,814,651  |   |  |   | 1,393    |  
|                                                                                  |  |                        |            |   |                           |   |          |      |  |   |            |   |  |   |          |  
|Net income (loss)                                                                 |  | $                      | 1,876,773  |   |                           | $ | (215,471 | )    |  | $ | 2,868,941  |   |  | $ | (215,471 | )
|                                                                                  |  |                        |            |   |                           |   |          |      |  |   |            |   |  |   |          |  
|Earnings (loss) per share of common stock (basic and diluted)                     |  | $                      | 0.12       |   |                           | $ | (0.46    | )    |  | $ | 0.21       |   |  | $ | (0.46    | )
|                                                                                  |  |                        |            |   |                           |   |          |      |  |   |            |   |  |   |          |  
|Weighted average number of shares of common stock outstanding (basic and diluted) |  |                        | 15,913,099 |   |                           |   | 465,537  |      |  |   | 13,358,566 |   |  |   | 465,537  |  
|                                                                                  |  |                        |            |   |                           |   |          |      |  |   |            |   |  |   |          |  



See accompanying notes
to condensed consolidated financial statements.



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CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

Quarter Ended June 30,
2005 and Year Ended December 31, 2004

(UNAUDITED)



|                                                                                      |  |                 |  |                               |         |  |                                                 |             |   |                          |   |            |   |  |   |             |  
|------------------------------------------------------------------------------------- |  | --------------- |  | ----------------------------- | ------- |  | ----------------------------------------------- | ----------- | - | ------------------------ | - | ---------- | - |  | - | ----------- | -
|                                                                                      |  | Common Stock    |  | Capital in Excess ofPar Value |         |  | AccumulatedDistributions inExcess of Net Income |             |   | TotalStockholdersEquity |  
|                                                                                      |  | Numberof Shares |  | ParValue                      |         |  |                                                
|Balance at December 31, 2003                                                          |  | 20,000          |  | $                             | 200     |  | $                                               | 199,800     |   |                          | $ |           |   |  | $ | 200,000     |  
|Subscriptions received for common stock through public offering and reinvestment plan |  | 8,701,270       |  |                               | 87,013  |  |                                                 | 86,591,031  |   |                          |   |           |   |  |   | 86,678,044  |  
|Issuance of restricted common stock                                                   |  | 117,708         |  |                               | 1,177   |  |                                                 | 1,175,903   |   |                          |   |           |   |  |   | 1,177,080   |  
|Stock issuance and offering costs                                                     |  |                |  |                               |        |  |                                                 | (11,246,795 | ) |                          |   |           |   |  |   | (11,246,795 | )
|Net loss                                                                              |  |                |  |                               |        |  |                                                 |            |   |                          |   | (683,263   | ) |  |   | (683,263    | )
|Distributions, declared and paid ($0.2593 per share)                                  |  |                |  |                               |        |  |                                                 |            |   |                          |   | (1,172,688 | ) |  |   | (1,172,688  | )
|                                                                                      |  |                 |  |                               |         |  |                                                 |             |   |                          |   |            |   |  |   |             |  
|Balance at December 31, 2004                                                          |  | 8,838,978       |  |                               | 88,390  |  |                                                 | 76,719,939  |   |                          |   | (1,855,951 | ) |  |   | 74,952,378  |  
|Subscriptions received for common stock through public offering and reinvestment plan |  | 9,853,823       |  |                               | 98,538  |  |                                                 | 98,232,496  |   |                          |   |           |   |  |   | 98,331,034  |  
|Stock issuance and offering costs                                                     |  |                |  |                               |        |  |                                                 | (13,099,410 | ) |                          |   |           |   |  |   | (13,099,410 | )
|Net income                                                                            |  |                |  |                               |        |  |                                                 |            |   |                          |   | 2,868,941  |   |  |   | 2,868,941   |  
|Distributions, declared and paid ($0.2606 per share)                                  |  |                |  |                               |        |  |                                                 |            |   |                          |   | (3,308,566 | ) |  |   | (3,308,566  | )
|                                                                                      |  |                 |  |                               |         |  |                                                 |             |   |                          |   |            |   |  |   |             |  
|Balance at June 30, 2005                                                              |  | 18,692,801      |  | $                             | 186,928 |  | $                                               | 161,853,025 |   |                          | $ | (2,295,576 | ) |  | $ | 159,744,377 |  
|                                                                                      |  |                 |  |                               |         |  |                                                 |             |   |                          |   |            |   |  |   |             |  



See accompanying notes
to condensed consolidated financial statements.



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CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



|                                                                         |  |                           |             |   |      |   |          
|------------------------------------------------------------------------ |  | ------------------------- | ----------- | - | ---- | - | ---------
|                                                                         |  | Six Months Ended June 30,
|                                                                         |  | 2005                      |             |   | 2004
|Increase (decrease) in cash:                                             |  |                           |             |   |      |   |          
|Operating activities:                                                    |  |                           |             |   |      |   |          
|Net cash provided by (used in) operating activities                      |  | $                         | (591,566    | ) |      | $ | 1,393    
|                                                                         |  |                           |             |   |      |   |          
|Investing activities:                                                    |  |                           |             |   |      |   |          
|Investments in unconsolidated entities                                   |  |                           | (73,845,418 | ) |      |   |         
|Deposits                                                                 |  |                           | (200,000    | ) |      |   |         
|Acquisition fees and costs                                               |  |                           | (10,739,172 | ) |      |   |         
|                                                                         |  |                           |             |   |      |   |          
|Net cash used in investing activities                                    |  |                           | (84,784,590 | ) |      |   |         
|                                                                         |  |                           |             |   |      |   |          
|Financing activities:                                                    |  |                           |             |   |      |   |          
|Subscriptions received from stockholders                                 |  |                           | 98,331,034  |   |      |   | 4,780,260
|Stock issuance costs                                                     |  |                           | (12,889,410 | ) |      |   |         
|Borrowings under line of credit, net of payments                         |  |                           | 1,973,467   |   |      |   |         
|Payment of loan costs                                                    |  |                           | (38,050     | ) |      |   |         
|Distributions to stockholders                                            |  |                           | (3,308,566  | ) |      |   |         
|                                                                         |  |                           |             |   |      |   |          
|Net cash provided by financing activities                                |  |                           | 84,068,475  |   |      |   | 4,780,260
|                                                                         |  |                           |             |   |      |   |          
|Net increase (decrease) in cash                                          |  |                           | (1,307,681  | ) |      |   | 4,781,653
|Cash at beginning of period                                              |  |                           | 36,710,117  |   |      |   | 1,000    
|                                                                         |  |                           |             |   |      |   |          
|Cash at end of period                                                    |  | $                         | 35,402,436  |   |      | $ | 4,782,653
|                                                                         |  |                           |             |   |      |   |          
|Supplemental disclosure of non-cash investing activities:                |  |                           |             |   |      |   |          
|Amounts incurred but not paid (included in due to affiliates):           |  |                           |             |   |      |   |          
|Acquisition fees and costs                                               |  | $                         |            |   |      | $ | 250,620  
|                                                                         |  |                           |             |   |      |   |          
|Allocation of acquisition fees to investments in unconsolidated entities |  | $                         | 3,583,567   |   |      | $ |         
|                                                                         |  |                           |             |   |      |   |          
|Supplemental disclosure of non-cash financing activities:                |  |                           |             |   |      |   |          
|Amounts incurred but not paid (included in due to affiliates):           |  |                           |             |   |      |   |          
|Offering and stock issuance costs                                        |  | $                         | 1,301,026   |   |      | $ | 2,534,806
|                                                                         |  |                           |             |   |      |   |          
|Distributions declared but not paid                                      |  | $                         |            |   |      | $ | 24,732   
|                                                                         |  |                           |             |   |      |   |          



See accompanying notes
to condensed consolidated financial statements.



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CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

QUARTER ENDED JUNE 30, 2005

(UNAUDITED)



|1. | Organization and Nature of Business:
|-- | ------------------------------------



CNL Income Properties, Inc. (the Company) was organized in Maryland on August 11, 2003. The Company operates and has elected to be taxed as a
real estate investment trust (a REIT) for federal income tax purposes beginning with its taxable year ended December 31, 2004. Various wholly owned subsidiaries have been and will be formed by the Company for the purpose of acquiring and
owning direct or indirect interests in real estate properties. The Company was formed primarily to acquire directly and indirectly properties in the United States that will be leased on a long-term (generally five to 20-years, plus multiple renewal
options), triple-net or gross basis to tenants or operators who are significant industry leaders. The asset classes in which the Company initially is most likely to invest or has invested include the following:



| |  |  | Property leased to dealerships
| | - |  | ------------------------------



| |  |  | Campgrounds and manufactured housing, or recreational vehicle (RV) parks
| | - |  | --------------------------------------------------------------------------



| |  |  | Health clubs
| | - |  | ------------



| |  |  | Parking lots
| | - |  | ------------



| |  |  | Merchandise marts
| | - |  | -----------------



| |  |  | Destination retail and entertainment centers
| | - |  | --------------------------------------------



| |  |  | Marinas
| | - |  | -------



| |  |  | Ski resorts, including real estate in and around ski resorts such as ski-in/ski-out alpine villages, lodging and other related properties
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Golf courses, including golf clubs and courses
| | - |  | ----------------------------------------------



| |  |  | Vacation ownership interests
| | - |  | ----------------------------



| |  |  | Other attractions, such as themed amusement parks, water parks, sports-related venues, and cultural facilities such as visual and performing arts centers or zoological parks.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company may also make or acquire loans or
other permitted investments related to interests in real estate and may purchase equity and other interests in financings. In addition, the Company may invest up to 10% of its assets in businesses that provide services to, or are otherwise ancillary
to, the types of properties in which it is permitted to invest. As of June 30, 2005, and December 31, 2004, the Company indirectly owned interests in properties at eight and seven locations, respectively, through its investments in unconsolidated
entities.



|2. | Significant Accounting Policies:
|-- | --------------------------------



Basis of PresentationThe accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles. The unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal
recurring adjustments, which are, in the opinion of management, necessary for the fair presentation of the Companys results for the interim period presented. Operating results for the quarter and six months ended June 30, 2005 may not be
indicative of the results that may be expected for the year ending December 31, 2005. Amounts as of December 31, 2004 included in the condensed consolidated financial statements have been derived from audited consolidated financial statements as of
that date. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Companys Form 10-K for the year ended December 31, 2004.



The Company commenced active operations on June 23, 2004,
when the minimum required offering proceeds were received and funds were released from escrow. Since operations had not begun, activities during the period August 11, 2003 (date of inception) through June 23, 2004 were devoted to the organization of
the Company.



Principles of ConsolidationThe
accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and entities in which the Company has a controlling interest in accordance with the provisions of Statement of
Position 78-9 Accounting for Investments in Real Estate Ventures (SOP 78-9), or is the primary beneficiary as defined in FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities
(FIN 46).



5



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##### Table of Contents

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

QUARTER ENDED JUNE 30, 2005

(UNAUDITED)



|2. | Significant Accounting Policies (Continued):
|-- | --------------------------------------------



ReclassificationsCertain prior period amounts in the condensed consolidated financial statements have been reclassified to conform with the
current period presentation.



Investment in Unconsolidated
EntitiesThe equity method of accounting is applied with respect to investments in entities in which the Company has determined that consolidation is not appropriate under FIN 46 or SOP 78-9. The difference between the Companys
carrying amount of its investments in unconsolidated entities and the underlying equity in the net assets of the entities is due to acquisition fees and expenses which have been allocated to the Companys investment. These amounts are amortized
over 39-years, which is the estimated life of the buildings when the properties were acquired. The Company records its equity in earnings of the entities under the hypothetical liquidation at book value method of accounting. Under this method, the
Company recognizes income in each period equal to the change in its share of assumed proceeds from the liquidation of the underlying unconsolidated entities at depreciated book value.



Distributions ReceivableIn accordance with the partnership agreements governing the unconsolidated entities in
which the Company has invested, at the end of each quarter the partner distributions are calculated for the period and the partnership is obligated to make those distributions within 45 days after the quarter end. As such, the Company has recorded
its share of the distribution receivable from its unconsolidated entities.



|3. | Investment in Unconsolidated Entities:
|-- | --------------------------------------



As of June 30, 2005, the Company owned investments in unconsolidated entities accounted for under the equity method of accounting with carrying values
totaling approximately $124.5 million.



In December 2004, the
Company invested approximately $41.8 million in a partnership and a trust that acquired a portfolio of commercial real estate properties located in and around various ski and golf resort villages in the United States and Canada (the Resort
Village Properties). Intrawest Corporation and its affiliates owned and operated these properties prior to the transaction and continue to own a 20% interest in, and operate, the properties under long-term management agreements. The Resort
Village Properties consist of approximately 408,000 square feet of leasable retail and commercial space.



On February 14, 2005, the Company formed a partnership (the DMC Partnership) with Dallas Market Center Company, Ltd. (DMC) that
acquired the Trade Mart, the World Trade Center, Market Hall and surface and garage parking areas at the Dallas Market Center (the DMC Property) located in Dallas, Texas for approximately $218.0 million, including the assumption of
existing mortgage loans totaling approximately $143.0 million. The Company invested approximately $60.0 million in the DMC Partnership, representing an 80% equity interest, in connection with the acquisition of the DMC Property. The DMC Property
consists of approximately 4.3 million leaseable square feet of showroom and exhibition space.



On May 25, 2005, the DMC Partnership acquired the International Floral and Gift Center (the IFGC) located at the Dallas Market Center for approximately $31.0 million, including the assumption of a $17.0
million existing mortgage loan. The Company contributed $11.2 million, excluding transaction costs, to the DMC Partnership in connection with the IFGC acquisition. The IFGC consists of approximately 440,000 square feet and houses permanent showrooms
for floral products, holiday decorative products and related accessories. As of June 30, 2005, the Company had invested approximately $71.2 million, excluding transaction costs, in the DMC Partnership for an 80% equity interest.



The Company evaluated all of the variable interest entities that were formed
in connection with the above transactions in accordance with FIN 46 and determined that the Company is not the primary beneficiary due to the significant rights and obligations retained by other venture partners and the disproportionate economic
interests of the venture partners as compared to their respective ownership and voting percentages. Accordingly, the Company accounts for these investments under the equity method of accounting and records its share of equity in earnings from the
entities using the hypothetical liquidation at book value method. Under this method, the Companys share of the economic results of the unconsolidated entities is subject to change over time based on performance of those entities.



6



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##### Table of Contents

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

QUARTER ENDED JUNE 30, 2005

(UNAUDITED)



|3. | Investment in Unconsolidated Entities (Continued):
|-- | --------------------------------------------------



Under the hypothetical liquidation at book value method of accounting, the Company recognizes income in each period equal to the change in its share of
assumed proceeds from the liquidation of the underlying unconsolidated entities at depreciated book value. For the quarter and six months ended June 30, 2005, the Company recognized equity in earnings from the entities of approximately $2.8 million
and $4.5 million, respectively. As of June 30, 2005 and December 31, 2004, the Company had distributions receivable of approximately $2.5 million and $225,555 from its unconsolidated entities, respectively.



In connection with the investments, the Company incurred certain acquisition
and advisory fees which are paid to an affiliate. These fees are capitalized as part of the basis in the investments. Any excess carrying value of the investments over the book value of the underlying equity is amortized over the estimated useful
lives of the underlying real estate tangible assets, which represent the assets to which the excess is most clearly related.



The following presents unaudited condensed financial information for the unconsolidated entities as of and for the quarter and six months ended June 30,
2005:



|                                                  |  |                             |            |   |                                |   |            |                  |  |   |                |   |  |   |            |  
|------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------------ | - | ---------- | ---------------- |  | - | -------------- | - |  | - | ---------- | -
|                                                  |  | Quarter Ended June 30, 2005 |            |   | Six Months Ended June 30, 2005 |  
|                                                  |  | IntrawestVenture            |            |   | DMCPartnership                 |   |            | IntrawestVenture |  |   | DMCPartnership |  
|Revenue                                           |  | $                           | 3,883,901  |   |                                | $ | 5,700,253  |                  |  | $ | 7,909,088      |   |  | $ | 8,399,636  |  
|Property operating expenses                       |  |                             | (1,616,470 | ) |                                |   | (127,546   | )                |  |   | (3,159,483     | ) |  |   | (181,056   | )
|Depreciation & amortization expenses              |  |                             | (1,438,585 | ) |                                |   | (1,811,078 | )                |  |   | (2,892,561     | ) |  |   | (2,675,360 | )
|Interest expense                                  |  |                             | (983,120   | ) |                                |   | (2,279,186 | )                |  |   | (1,969,411     | ) |  |   | (3,316,991 | )
|                                                  |  |                             |            |   |                                |   |            |                  |  |   |                |   |  |   |            |  
|Net income (loss)                                 |  | $                           | (154,274   | ) |                                | $ | 1,482,443  |                  |  | $ | (112,367       | ) |  | $ | 2,226,229  |  
|                                                  |  |                             |            |   |                                |   |            |                  |  |   |                |   |  |   |            |  
|Income (loss) allocable to other venture partners |  | $                           | (1,329,649 | ) |                                | $ | (339,237   | )                |  | $ | (2,353,817     | ) |  | $ | (266,749   | )
|                                                  |  |                             |            |   |                                |   |            |                  |  |   |                |   |  |   |            |  
|Income allocable to the Company(1)                |  | $                           | 1,175,375  |   |                                | $ | 1,821,680  |                  |  | $ | 2,241,450      |   |  | $ | 2,492,978  |  
|Amortization of capitalized costs                 |  |                             | (43,373    | ) |                                |   | (124,581   | )                |  |   | (74,278        | ) |  |   | (178,052   | )
|                                                  |  |                             |            |   |                                |   |            |                  |  |   |                |   |  |   |            |  
|Equity in earnings of unconsolidated entities     |  | $                           | 1,132,002  |   |                                | $ | 1,697,099  |                  |  | $ | 2,167,172      |   |  | $ | 2,314,926  |  
|                                                  |  |                             |            |   |                                |   |            |                  |  |   |                |   |  |   |            |  

---

FOOTNOTES:



|(1) | Income is allocated to the Company on the hypothetical liquidation at book value method of accounting (see Note 2).
|--- | -------------------------------------------------------------------------------------------------------------------



|                                 |  |                     |             |                         |   |                  |  |                |             |  |   |  
|-------------------------------- |  | ------------------- | ----------- | ----------------------- | - | ---------------- |  | -------------- | ----------- |  | - | -
|                                 |  | As of June 30, 2005 |             | As of December 31, 2004
|                                 |  | IntrawestVenture    |             | DMCPartnership          |   | IntrawestVenture |  | DMCPartnership
|Total assets                     |  | $                   | 122,274,527 |                         | $ | 253,048,894      |  | $              | 121,051,018 |  | $ | 
|                                 |  |                     |             |                         |   |                  |  |                |             |  |   |  
|Total long-term debt obligations |  | $                   | 67,657,934  |                         | $ | 157,802,763      |  | $              | 67,085,980  |  | $ | 
|                                 |  |                     |             |                         |   |                  |  |                |             |  |   |  



7



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##### Table of Contents

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

QUARTER ENDED JUNE 30, 2005

(UNAUDITED)



|4. | Deferred Offering and Stock Issuance Costs:
|-- | -------------------------------------------



Beginning on April 16, 2004, the Company offered for sale up to $2 billion in shares of common stock (200 million shares of common stock at $10 per share)
(the Offering), pursuant to a registration statement on Form S-11 under the Securities Act of 1933. The Company has and will continue to incur costs in connection with the Offering and issuance of shares, including filing fees, legal,
accounting, printing, selling commissions, marketing support fees, due diligence expense reimbursements and escrow fees, which are deducted from the gross proceeds of the Offering. As of June 30, 2005, the total Offering and stock issuance costs
incurred to date was approximately $30.8 million.



Under the
terms of the Offering, certain affiliates are entitled to receive selling commissions of up to 6.5% of gross offering proceeds on all shares sold, a marketing support fee of up to 2.5% of gross offering proceeds, and reimbursement of actual expenses
incurred in connection with due diligence of the Offering (see Note 6). In accordance with the Companys amended and restated articles of incorporation, the total amount of selling commissions, marketing support fees, due diligence expense
reimbursements, and organizational and offering expenses to be paid by the Company may not exceed 13% of the aggregate offering proceeds. Therefore, offering costs of approximately $6.5 million, representing the portion of those costs exceeding 13%
of the offering proceeds, have been deferred as of June 30, 2005. Deferred offering costs as of December 31, 2004 totaled approximately $5.4 million. The deferred offering costs will be deducted from future offering proceeds and reimbursed to
affiliates to the extent the costs are within the 13% limitation. The Company is not obligated to pay the Advisor or certain of its affiliates costs that exceed the 13% limitation as of the end of the Offering. The remaining $24.3 million was
deducted from the offering proceeds and charged to capital in excess of par value.



|5. | Line of Credit:
|-- | ---------------



On May 20, 2005 the Company closed on a $5.0 million revolving line of credit with Branch Banking and Trust. The line will primarily be used for working
capital needs, distributions to stockholders and bridge financing on real estate investments. The line of credit is unsecured, bears interest at the 30-day LIBOR plus 2.25% (which was approximately 5.39% for the quarter ended June 30, 2005) and has
a term of two years. As of June 30, 2005, borrowings outstanding under the line of credit were approximately $2.0 million. The loan agreement contains certain affirmative, negative and financial covenants including quarterly and annual financial
reporting requirements, minimum net worth, and limitations on the incurrence of additional debt. The Company was in compliance with these covenants at June 30, 2005.



|6. | Related Party Arrangements:
|-- | ---------------------------



Certain directors and officers of the Company hold similar positions with CNL Income Corp., a stockholder and the advisor (the Advisor) of the
Company, and with the managing dealer of the Companys public offering, CNL Securities Corp. The Companys chairman of the board indirectly owns a controlling interest in the parent company of the Advisor. These affiliates receive fees and
compensation in connection with the Offering and the acquisition, management and sale of the Companys assets.



CNL Securities Corp., the managing dealer of the Companys public offering, receives selling commissions of up to 6.5% of gross offering proceeds on
all shares sold, a marketing support fee of up to 2.5% of gross offering proceeds, and reimbursement of actual expenses incurred up to 0.01% of proceeds in connection with due diligence of the Offering. A substantial portion of the selling
commissions and marketing support fees are reallowed to participating broker dealers. During the quarters and six months ended June 30, 2005 and 2004, the Company incurred the following fees:



|                                                             |  |                        |           |                           |   |         |  |      |           |  |   |        
|------------------------------------------------------------ |  | ---------------------- | --------- | ------------------------- | - | ------- |  | ---- | --------- |  | - | -------
|                                                             |  | Quarter Ended June 30, |           | Six Months Ended June 30,
|                                                             |  | 2005                   |           | 2004                      |   | 2005    |  | 2004
|Selling commissions                                          |  | $                      | 3,412,090 |                           | $ | 211,527 |  | $    | 6,201,252 |  | $ | 211,527
|Marketing support fee & due diligence expense reimbursements |  |                        | 1,323,109 |                           |   | 81,357  |  |      | 2,395,864 |  |   | 81,357 
|                                                             |  |                        |           |                           |   |         |  |      |           |  |   |        
|Total                                                        |  | $                      | 4,735,199 |                           | $ | 292,884 |  | $    | 8,597,116 |  | $ | 292,884
|                                                             |  |                        |           |                           |   |         |  |      |           |  |   |        



8



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##### Table of Contents

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

QUARTER ENDED JUNE 30, 2005

(UNAUDITED)



|6. | Related Party Arrangements (Continued):
|-- | ---------------------------------------



During the quarters and six months ended June 30, 2005 and 2004, the Advisor earned fees and incurred reimbursable expenses as follows:



|                                            |  |                        |           |                           |      |   |           |  |      |            |  |   |          
|------------------------------------------- |  | ---------------------- | --------- | ------------------------- | ---- | - | --------- |  | ---- | ---------- |  | - | ---------
|                                            |  | Quarter Ended June 30, |           | Six Months Ended June 30,
|                                            |  | 2005                   |           |                           | 2004 |   | 2005      |  | 2004
|Acquisition fees(1):                        |  |                        |           |                           |      |   |           |  |      |            |  |   |          
|Acquisition fees from offering proceeds     |  | $                      | 1,641,655 |                           |      | $ | 147,936   |  | $    | 2,956,146  |  | $ | 147,936  
|Acquisition fees from debt proceeds         |  |                        | 1,495,740 |                           |      |   |          |  |      | 4,908,899  |  |   |         
|                                            |  |                        |           |                           |      |   |           |  |      |            |  |   |          
|Total                                       |  |                        | 3,137,395 |                           |      |   | 147,936   |  |      | 7,865,045  |  |   | 147,936  
|                                            |  |                        |           |                           |      |   |           |  |      |            |  |   |          
|Asset management fees(2):                   |  |                        | 676,979   |                           |      |   |          |  |      | 990,952    |  |   |         
|                                            |  |                        |           |                           |      |   |           |  |      |            |  |   |          
|Reimbursable expenses(3):                   |  |                        |           |                           |      |   |           |  |      |            |  |   |          
|Offering costs                              |  |                        | 1,740,558 |                           |      |   | 2,090,298 |  |      | 3,974,756  |  |   | 2,090,298
|Organizational costs                        |  |                        |          |                           |      |   | 22,357    |  |      |           |  |   | 22,357   
|Acquisition costs                           |  |                        | 279,749   |                           |      |   | 70,302    |  |      | 579,083    |  |   | 70,302   
|Operating expenses (reimbursements)         |  |                        | (111,829  | )                         |      |   | 425,862   |  |      | 480,591    |  |   | 425,862  
|                                            |  |                        |           |                           |      |   |           |  |      |            |  |   |          
|Total                                       |  |                        | 1,908,478 |                           |      |   | 2,608,819 |  |      | 5,034,430  |  |   | 2,608,819
|                                            |  |                        |           |                           |      |   |           |  |      |            |  |   |          
|Total fees earned and reimbursable expenses |  | $                      | 5,722,852 |                           |      | $ | 2,756,755 |  | $    | 13,890,427 |  | $ | 2,756,755
|                                            |  |                        |           |                           |      |   |           |  |      |            |  |   |          

---

FOOTNOTES:



|(1) | Acquisition fees for services in the selection, purchase, development or construction of real property, generally equal to 3.0% of gross offering proceeds, and 3.0%
of loan proceeds for services in connection with the incurrence of debt. The debt acquisition fees for the quarter and six months ended June 30, 2005 were incurred in connection with the Companys investment in the DMC Partnership with DMC and
the partnerships assumption of mortgage loans upon acquisition of the DMC Property and IFGC.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Asset management fees of 0.08334% per month of the Companys real estate asset value, as defined in the Companys prospectus dated April 18,
2005, and the outstanding principal amount of any mortgage loan as of the end of the preceding month.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | The Advisor and its affiliates are entitled to reimbursement of certain expenses incurred on behalf of the Company in connection with the Companys
organization, offering, acquisitions, and operating activities.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Pursuant to the advisory agreement, the Company will not reimburse the Advisor any amount by which total operating expenses paid or incurred by the Company exceed the greater of 2% of average invested assets or 25% of
net income (the Expense Cap) in any expense year, as defined in the advisory agreement. The first applicable expense year and measurement period was the twelve months ended June 30, 2005, for which the Companys operating expenses
exceeded the Expense Cap by $398,071. In accordance with the advisory agreement, such amount will not be reimbursed to the Advisor and has been recorded as a reduction in general and administrative expenses and the amounts due to affiliates.



9



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##### Table of Contents

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

QUARTER ENDED JUNE 30, 2005

(UNAUDITED)



|6. | Related Party Arrangements (Continued):
|-- | ---------------------------------------



Amounts due to affiliates for fees and expenses described above are as follows:



|                                                                |  |              |           |   |                  |   |            |  
|--------------------------------------------------------------- |  | ------------ | --------- | - | ---------------- | - | ---------- | -
|                                                                |  | June 30,2005 |           |   | December 31,2004 |  
|Due to the Advisor and its affiliates:                          |  |              |           |   |                  |   |            |  
|Offering expenses                                               |  | $            | 7,311,182 |   |                  | $ | 6,960,292  |  
|Asset management fees                                           |  |              | 236,302   |   |                  |   |           |  
|Operating expenses (reimbursements)                             |  |              | (111,829  | ) |                  |   | 1,207,252  |  
|Acquisition fees and expenses                                   |  |              | 414,081   |   |                  |   | 1,893,200  |  
|                                                                |  |              |           |   |                  |   |            |  
|Total                                                           |  | $            | 7,849,736 |   |                  | $ | 10,060,744 |  
|                                                                |  |              |           |   |                  |   |            |  
|Due to CNL Securities Corp:                                     |  |              |           |   |                  |   |            |  
|Selling commissions                                             |  | $            | 222,197   |   |                  | $ | 320,767    |  
|Marketing support fees and due diligence expense reimbursements |  |              | 85,460    |   |                  |   | 123,373    |  
|Offering costs                                                  |  |              |          |   |                  |   | (90,050    | )
|                                                                |  |              |           |   |                  |   |            |  
|Total                                                           |  | $            | 307,657   |   |                  | $ | 354,090    |  
|                                                                |  |              |           |   |                  |   |            |  
|Total due to affiliates                                         |  | $            | 8,157,393 |   |                  | $ | 10,414,834 |  
|                                                                |  |              |           |   |                  |   |            |  



|7. | Distributions:
|-- | --------------



On January 1, 2005 and February 1, 2005, the board of directors declared a distribution of $0.0417 per share for stockholders of record on January 1, 2005
and February 1, 2005, respectively, which were paid on March 31, 2005. On February 15, 2005, the board of directors declared a distribution of $0.0438 per share for stockholders of record at the close of business on March 1, 2005, which was paid on
March 31, 2005. The January, February and March distributions were primarily funded with a temporary advance of approximately $1.3 million from an affiliate of the Advisor. The advance was repaid in the second quarter of 2005 upon receipt of the
Companys first quarter earnings distributions from its unconsolidated entities.



The Companys board of directors declared distributions of $0.0438 per share to stockholders of record at the close of business on April 1, 2005 and May 1, 2005. The board of directors also declared a
distribution of $0.0458 per share for stockholders of record at the close of business on June 1, 2005. These distributions were paid by June 30, 2005.



Approximately 60% of the distributions for the six months ended June 30, 2005 constitute a return of capital for federal income tax purposes. No amounts
distributed to stockholders are required to be or have been treated as a return of capital for purposes of calculating the stockholders return on their invested capital. The characterization of distributions declared for the quarter and six
months ended June 30, 2005 may not be indicative of the characterization of distributions that may be expected for the year ending December 31, 2005.



10



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##### Table of Contents

CNL INCOME PROPERTIES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

QUARTER ENDED JUNE 30, 2005

(UNAUDITED)



|8. | Commitments & Contingencies:
|-- | ----------------------------



In connection with the purchase of the resort village property located at Copper Mountain, Colorado, the Intrawest Partnership agreed to pay additional
future purchase consideration contingent upon the Copper Mountain property achieving certain levels of financial performance, as specified in the purchase and sale agreement. The amount of the contingent purchase price will be determined as of
December 31, 2008, and in no event, will the amount exceed $3.75 million. The Company has guaranteed the payment of the contingent purchase price to Intrawest on behalf of the Intrawest Partnership.



|9. | Subsequent Events:
|-- | ------------------



The Companys board of directors declared distributions of $0.0458 per share to stockholders of record at the close of business on July 1, 2005 and
August 1, 2005, to be paid by September 30, 2005.



11



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##### Table of Contents

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------



INTRODUCTION



The following discussion is based on the condensed consolidated financial statements as of June 30, 2005 and
December 31, 2004 and for the quarter and six months ended June 30, 2005. Amounts as of December 31, 2004 included in the unaudited condensed consolidated financial statements have been derived from audited consolidated financial
statements as of that date. This information should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto, as well as the consolidated financial statements and notes thereto included
in our annual report on Form 10-K for the year ended December 31, 2004.



STATEMENT REGARDING FORWARD LOOKING INFORMATION



The following information contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These statements generally are characterized by the use of terms such as may, will, should, plan, anticipate, estimate, intend, predict,
believe and expect or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, our actual
results could differ materially from those set forth in the forward-looking statements. Some factors that might cause such a difference include the following: conditions affecting the CNL brand name, increased direct competition, changes in general
economic conditions, changes in government regulations, changes in local and national real estate conditions, terrorism, extended U.S. military combat operations, our ability to obtain additional lines of credit or permanent financing on
satisfactory terms, availability of proceeds from our offering of shares, our ability to identify suitable investments, our ability to close on identified investments, inaccuracies of our accounting estimates, our ability to locate suitable tenants
and operators for our properties and borrowers for mortgage loans, and the ability of such tenants and borrowers to make payments under their respective leases or mortgage loans. Given these uncertainties, we caution you not to place undue reliance
on such statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances or to reflect the occurrence of unanticipated events.



OVERVIEW



CNL Income Properties, Inc. was organized pursuant to the laws of the State
of Maryland on August 11, 2003. We were formed primarily to acquire properties in the United States that will be leased on a long-term (generally five to 20 years, plus multiple renewal options), triple-net or gross basis to tenants or
operators who are significant industry leaders. We currently operate and have elected to be taxed as a real estate investment trust (a REIT) for federal income tax purposes beginning with the taxable year ended December 31, 2004. We
have retained CNL Income Corp. (the Advisor) as our advisor to provide management, acquisition, advisory and administrative services.



Beginning on April 16, 2004, we offered for sale up to $2 billion in shares of common stock (200 million shares of common stock at $10 per share)
pursuant to a registration statement on Form S-11 under the Securities Act of 1933, as amended (the Offering). We commenced active operations on June 23, 2004, when the minimum required offering proceeds were received and funds were
released to us from escrow. The activities from August 11, 2003 (our inception) through June 23, 2004 were devoted to the organization of the company. As of June 30, 2005 we had received aggregate offering proceeds totaling $185.0
million (18,555,093 shares), including $2.3 million (215,638 shares) purchased through our distribution reinvestment plan. The shares sold and the gross offering proceeds received from such sales do not include the 20,000 shares purchased by the
Advisor for $200,000 preceding the commencement of the initial offering or the $1.2 million (117,708 restricted common shares) issued in December 2004 to CNL Financial Group, Inc., a company affiliated with our Advisor and wholly owned indirectly by
our chairman of the board and his wife. We have and will continue to use proceeds from the Offering to invest in properties and other permitted investments.



We intend to focus our investment activities on and use the proceeds of our Offering primarily for the acquisition, development and ownership of
properties that we believe (i) are part of an asset class wherein the supply of developed, specific-use real estate is greater than the demand for the intended use of such real estate; (ii) are part of an industry that is experiencing
constraints on the availability of new capital, which we believe typically has the effect of lowering the purchase price of such properties from that which would typically be available; and/or (iii) have the potential for long-term revenue
generation based upon certain demographic data including an aging baby boomer population and associated concentrations of wealth. We have initially begun to invest in, and will most likely continue to invest in, properties in the following asset
classes (in no order of priority):



| |  |  | Property leased to dealerships including, for example, automobile, motorcycle, recreational vehicle and boat dealerships;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



12



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##### Table of Contents

| |  |  | Campgrounds, and manufactured housing, or recreational vehicle (RV) parks, whose operators rent lots and offer other services;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | Health clubs, wellness centers and spa facilities;
| | - |  | --------------------------------------------------



| |  |  | Parking lots, whose operators offer monthly and daily parking space rentals in urban areas;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | Merchandise marts, whose operators lease showrooms to, and host tradeshows for, merchandise manufacturers and wholesalers in major metropolitan areas;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Destination retail and entertainment centers, whose operators develop and lease properties featuring entertainment-oriented stores, restaurants and/or attractions;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Marinas, whose operators offer recreational boat slip rentals and other services such as boat and boat trailer storage, gasoline sales, boat rentals and sales, restaurants, lodging
and related properties offering other nautical related goods and services;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Ski resorts, including real estate in and around ski resorts such as ski-in/ski-out alpine villages, townhouses, lodging and other related properties;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Golf courses, including golf clubs and courses that may offer other amenities;
| | - |  | ------------------------------------------------------------------------------



| |  |  | Vacation ownership interests, which entitle a purchaser of the interests to exclusive use of resort accommodations at a resort property or properties for a particular period of time
each year; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other attractions, such as themed amusement parks, water parks, sports-related venues, and cultural facilities such as visual and performing arts centers or zoological parks.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Although these are initially the most likely
asset classes in which we have invested and will invest, we may acquire or invest in other types of properties which are not listed above that we believe have the potential for long-term revenue generation based upon underwriting criteria and models
that we have developed and/or certain demographic criteria as described above.



Various wholly-owned subsidiaries and unconsolidated entities have been and will be formed in the future by us for the purpose of acquiring and owning real estate properties. As of June 30, 2005, we have invested
in retail and commercial properties at seven resort villages and one merchandise mart property. Management expects to continue to acquire properties with a view to diversify among the types of tenants, operators and the geographic location of the
properties. The following is a summary of our investments in properties as of June 30, 2005:



In December 2004 we invested in a partnership that acquired retail and commercial properties at seven resort villages in the U.S. and Canada (the
Resort Village Properties). All of the Resort Village Properties were acquired from Intrawest Corporation (Intrawest). Due to certain legal, tax and lender requirements, the Canadian Resort Village Properties were acquired by
us through a trust. Intrawest retained a 20% ownership interest in the partnership which owns the U.S. Resort Village Properties (the Intrawest Partnership). Intrawest continues to operate the Resort Village Properties pursuant to
management agreements. Although we own an 80% interest in the Intrawest Partnership, our ownership percentage exceeds our economic interest and our voting rights, and Intrawest may receive a greater return than us when the Resort Village Properties
perform at certain levels. The Resort Village Properties consist of approximately 408,000 square feet of leasable space that was 100% economically leased and 96% physically leased as of June 30, 2005.



On February 14, 2005, we formed a partnership (the DMC
Partnership) to acquire the Dallas Market Center (the DMC Property) located in Dallas, Texas. The acquisition of the first tranche was completed on February 14, 2005 and included the World Trade Center, Dallas Trade Mart and
Market Hall buildings as well as leases for the underlying land; limited use rights to the Apparel Mart (which resides on the Dallas Market Center campus); and related parking facilities on the property. Additional funding for the first tranche
occurred on March 11, 2005. The DMC Partnership acquired the DMC Property for $218.0 million, including the assumption of existing mortgage loans totaling approximately $143.0 million. We invested approximately $60.0 million in the DMC
Partnership, representing an 80% equity interest, in connection with the acquisition of the DMC Property. The DMC Property consists of approximately 4.3 million leaseable square feet of showroom and exhibition space. The DMC Property is leased
to Dallas Market Center Operating, L.P., a subsidiary of the existing management company, Market Center Management Company, Ltd. (MCMC), which continues to manage the DMC Property. MCMC or related predecessor entities have managed the
DMC Property since its inception.



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##### Table of Contents

On May 25, 2005, the DMC Partnership acquired the International Floral and Gift Center (the
IFGC) located at the DMC Property for approximately $31.0 million, including the assumption of a $17.0 million existing mortgage loan. We contributed $11.2 million, excluding transaction costs, to the DMC Partnership in connection with
the IFGC acquisition. The IFGC consists of approximately 440,000 square feet and houses permanent showrooms for floral products, holiday decorative products and related accessories. The IFGC is leased to IFDC Operating, L.P., a wholly-owned
subsidiary of the existing management company, MCMC, under a long-term master lease agreement. MCMC or related predecessor entities have managed the IFGC since its inception.



As of June 30, 2005, we had invested approximately $71.2 million, excluding transaction costs and held an 80% interest
in the DMC Partnership. Although we own an 80% interest in the DMC Property and IFGC and receive a certain return prior to any payments to DMC, DMC has equal voting rights on the management board of the DMC Property and shares control over certain
key decisions with us.



CRITICAL ACCOUNTING
POLICIES



Consolidation. The consolidated financial
statements include our accounts and the accounts of our wholly owned subsidiaries and entities in which we have a controlling interest in accordance with the provisions of Statement of Position 78-9 Accounting for Investments in Real Estate
Ventures (SOP 78-9) or are the primary beneficiary as defined in FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, (FIN 46). The application of FIN 46 and SOP
78-9 requires management to make significant estimates and judgments about our, and our venture partners, rights, obligations and economic interests in the related venture entities. The equity method of accounting is applied in the
consolidated financial statements with respect to those investments in entities in which we are not the primary beneficiary under FIN 46 or have less than a controlling interest due to the significance of rights and obligations held by other parties
under SOP 78-9.



Investments in Unconsolidated Entities.
The equity method of accounting is applied with respect to investments in entities for which we have determined that consolidation is not appropriate under FIN 46 or SOP 78-9. We recognize equity in earnings from our unconsolidated entities
under the hypothetical liquidation at book value (HLBV) method of accounting due to the capital structure of those entities and the rights and priorities of the partners. The HLBV method differs from other generally
accepted accounting methods in which an investing partner recognizes the percentage of a ventures net income or loss based upon the partners percentage of ownership. Under the HLBV method, we must estimate at
the balance sheet date what we would receive or be obligated to pay in accordance with the governing agreements if our unconsolidated entities were to liquidate all of their assets, pay their debts and distribute the
remaining equity. As a result, we recognize income (equity in earnings) in each reporting period equal to the change in our share of assumed proceeds from the liquidation of the underlying unconsolidated entities at
depreciated book value. Under this method, in any given period we could be recording more or less income than actual cash distributions received and more or less than we may receive in the event of an actual
liquidation.



LIQUIDITY
AND CAPITAL RESOURCES



General



Our principal demand for funds will be for property
acquisitions, loans and other permitted investments and the payment of operating expenses and distributions to stockholders. Generally, our cash needs for items other than property acquisitions will be generated from operations, our investments or
advances from affiliates, although our affiliates are not obligated to advance such funds. We have also entered into a revolving line of credit with a capacity of $5.0 million, which will be used to bridge short term liquidity needs that arise due
to timing of cash receipts and payments.



We intend to continue
to acquire properties and consider making loans and other permitted investments with proceeds from our public offering and permanent debt financing to be obtained. If sufficient capital is not raised, it would limit our ability to acquire additional
properties, make loans or permitted investments. This could impact our ability to pay distributions or raise the distribution rate due to our limited income from operations, unless we choose to borrow to do so.



We intend to continue to pay distributions to our stockholders on a quarterly
basis. Operating cash flows are expected to be generated from properties, loans and other permitted investments to cover such distributions. In the event we are unable to acquire properties at the pace expected, we may not be able to continue to pay
distributions to stockholders or may need to reduce the distribution rate or borrow to continue paying distributions, all of which may negatively impact a stockholders investment in the long term.



We believe that our current and anticipated capital resources, including cash
on hand and the availability of funds from our line of credit are sufficient to meet our liquidity needs for the coming year.



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##### Table of Contents

Common Stock Offering



As of June 30, 2005, we had received subscription proceeds in connection with the Offering of $185.0 million (18,555,093 shares) excluding the 20,000
shares purchased by the Advisor for $200,000 preceding the commencement of the initial offering and the $1.2 million (117,708 restricted common shares) issued in December 2004 to CNL Financial Group, Inc., a company affiliated with our Advisor and
wholly owned indirectly by our chairman of the board and his wife. We raised on average approximately $18.2 million per month during the second quarter of 2005. During the period July 1, 2005 through August 2, 2005, we received additional
subscription proceeds of approximately $15.7 million (1,571,064 shares). We primarily use the capital we raise to acquire properties and make other permitted investments and to pay fees and expenses in connection with the Offering and acquisitions.



Investments in and Earnings from Unconsolidated Entities



As of June 30, 2005, we had invested in properties at eight locations
through our unconsolidated entities. We are entitled to receive quarterly cash distributions from the unconsolidated entities. Distributions receivable from our unconsolidated entities as of June 30, 2005 and December 31, 2004 were
approximately $2.5 million and $225,555, respectively. These distributions are generally received within 45 days after quarter end and, when received, are expected to contribute to our cash from operating activities.



Borrowings



We intend to borrow money to acquire assets and to pay certain related fees. We have, and may continue to borrow money to
pay distributions to stockholders. We also intend to encumber assets in connection with such borrowings. In general, the aggregate amount of permanent financing is not expected to exceed 50% of our total assets on an annual basis, however, it may
likely exceed 50% for a limited period in our early acquisition stage. The maximum amount we may borrow is 300% of our net assets in the absence of a satisfactory showing that a higher level of borrowing is appropriate. In order to borrow an amount
in excess of 300% of our net assets, a majority of the independent members of our board of directors must approve the borrowing, and the borrowing must be disclosed and explained to stockholders in our first quarterly report after such approval
occurs.



We plan to obtain lines of credit, in an amount up to
$100 million. The lines of credit may be increased at the discretion of our board of directors and may be repaid with offering proceeds, proceeds from the sale of assets, working capital or permanent financing. On May 20, 2005, we closed
on a $5.0 million revolving line of credit with Branch Banking and Trust. The line will primarily be used for working capital needs, distributions to stockholders and bridge financing on real estate investments. The line of
credit is unsecured, bears interest at the 30-day LIBOR plus 2.25% (approximately 5.39% for the quarter ended June 30, 2005) and has a term of two years. As of June 30, 2005, we had outstanding borrowings under the line of credit
of approximately $2.0 million. The loan agreement contains certain affirmative, negative and financial covenants including quarterly and annual financial reporting requirements, minimum net worth, and limitations on the incurrence of additional
debt. We were in compliance with these covenants at June 30, 2005.



See the section below titled Off Balance Sheet and Other Arrangements  Borrowings of our Unconsolidated Entities for a description of the borrowings of our unconsolidated entities.



Related Party Arrangements



As of June 30, 2005, we owed our Advisor and certain of its affiliates
approximately $8.2 million for certain organizational and offering expenses, acquisition fees, asset management fees, selling commissions, marketing support fees, due diligence expense reimbursements and operating expenses incurred on our behalf. In
accordance with our amended and restated articles of incorporation, the total amount of certain offering, organization and stock issuance costs we pay may not exceed 13% of the aggregate offering proceeds. Accordingly, approximately $6.5 million of
these costs have been capitalized and deferred as of June 30, 2005, with a corresponding amount due to our Advisor and certain of its affiliates. The deferred offering costs will be deducted from future offering proceeds and reimbursed to
affiliates to the extent the costs are within the 13% limitation. We are not obligated to pay our Advisor or certain of its affiliates costs that exceed the 13% limitation as of the end of the Offering.



In addition, to the extent that operating expenses payable or reimbursable to
affiliates, in any four consecutive fiscal quarters (the Expense Year), exceed the greater of 2% of average invested assets or 25% of net income, the Advisor shall reimburse us the amount by which the total operating expenses paid or
incurred exceed the greater of the 2% or 25% threshold (the Expense Cap). The first Expense Year was the twelve months ended June 30, 2005, for which our operating expenses exceeded the Expense Cap by $398,071. Therefore, such
amount has been recorded as a reduction in operating expenses and amounts due to affiliates.



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##### Table of Contents

Distributions



We intend to pay distributions to our stockholders on a quarterly basis. The amount of distributions declared to our stockholders will be determined by
our board of directors and is dependent upon a number of factors, including expected and actual net cash from operations for the year, our financial condition, a balanced analysis of value creation reflective of both current and long-term stabilized
cash flows from our properties, our objective of continuing to qualify as a REIT for federal income tax purposes, the actual operating results of each quarter, economic conditions, other operating trends, capital requirements and avoidance of
volatility of distributions. Operating cash flows are expected to be generated from properties, loans and other permitted investments acquired or made by us.



On January 1, 2005 and February 1, 2005, our board of directors declared a distribution of $0.0417 per share for stockholders of record on
January 1, 2005 and February 1, 2005, respectively, which were paid on March 31, 2005. On February 15, 2005, our board of directors declared a distribution of $0.0438 per share for stockholders of record at the close of business
on March 1, 2005, and paid on March 31, 2005. This represented an increased per share distribution.



Due to the difference in the timing of our receipt of distributions from our unconsolidated entities and our payment of distributions to our stockholders,
a portion of the January, February and March distributions were funded with a temporary advance from an affiliate of our Advisor in the approximate amount of $1.3 million. In May 2005, we received distribution payments of approximately $2.0 million
from our unconsolidated entities, a portion of which was used to repay amounts temporarily advanced by an affiliate of the Advisor to fund first quarter distributions.



Our board of directors declared distributions of $0.0438 per share to stockholders of record at the close of business on
April 1, 2005 and May 1, 2005, both of which were paid on June 30, 2005. Our board of directors also declared a distribution of $0.0458 per share for stockholders of record at the close of business on June 1, 2005, paid on
June 30, 2005. This represents an increased per share distribution. The distributions were temporarily funded, in part, by borrowings under our line of credit due to the timing differences between our payment of distributions to stockholders
and receipt of the distributions from our unconsolidated entities. During the third quarter of 2005, we expect to receive distributions from our unconsolidated entities which will be used to repay this amount.



Our board of directors declared distributions of $0.0458 per share to
stockholders of record at the close of business on July 1, and August 1, 2005 to be paid by September 30, 2005.



The distributions declared and paid during the six months ended June 30, 2005 were $3.3 million and exceeded net income for the six months ended
June 30, 2005 by approximately $440,000. Distributions to stockholders may be considered a return of capital to the extent the amount of such distributions exceed net income calculated in accordance with generally accepted accounting principles
(GAAP). Accordingly, for the six months ended June 30, 2005, approximately 13% of the distributions represented a return of capital, if calculated using GAAP net income as the basis. Approximately 60% of the distributions for the
six months ended June 30, 2005 constitute a return of capital for federal income tax purposes. No amounts distributed to stockholders are required to be or have been treated as a return of capital for purposes of calculating the
stockholders return on their invested capital. The characterization of distributions declared for the quarter and six months ended June 30, 2005 may not be indicative of the characterization of distributions that may be expected for the
year ending December 31, 2005.



Cash Flow Analysis



Our net cash flow used in operating activities was $591,566 for the six
months ended June 30, 2005 and was comprised of interest earned on invested cash, the receipt of distributions from our unconsolidated entities and payments made for operating expenses, as compared to the net cash flow from operating activities
of $1,393 for the six months ended June 30, 2004, which consisted solely of interest income earned and received during the period in which we were operational.



Cash flows used in investing activities were approximately $84.8 million for the six months ended June 30, 2005 and
consisted primarily of contributions made to acquire our interests in the DMC Partnership and the payment of acquisition fees and costs. We had no investing activities during the six months ended June 30, 2004.



For the six months ended June 30, 2005, the net cash flows provided by
financing activities, were approximately $84.1 million and were primarily attributable to: the receipt of $98.3 million of subscription proceeds, the payment of $12.9 million in stock issuance costs in connection with the offering, distributions
paid to stockholders of $3.3 million, and net borrowings under our line of credit of $2.0 million. The net cash flows provided by financing activities for the six months ended June 30, 2004 was $4.8 million and consisted solely of subscriptions
proceeds received in connection with our offering.



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##### Table of Contents

RESULTS OF OPERATIONS



From the time of our formation on August 11, 2003 through June 23,
2004, we had not commenced active operations because we were in our organizational stage and had not received the minimum required offering amount of $2.5 million (250,000 shares). Operations commenced on June 23, 2004 when we received
aggregate subscription proceeds in excess of the minimum offering amount. Our net loss of $215,471 for the quarter and six months ended June 30, 2004 included $194,507 in general operating and administrative expenses, $22,357 in organization
costs and interest income of $1,393.



For the quarter and six
months ended June 30, 2005, our net income of approximately $1.9 million and $2.9 million included $420,985 and $954,758 in general operating and administrative expenses and $676,979 and $990,952 in asset management fees, respectively. The net
operating expenses included a reimbursement from our Advisor for amounts exceeding the Expense Cap, as described in the section above titled Related Party Arrangements. The overall increase in our operating expenses is directly related
to the overall increase in our operating activities as compared to the same period in the prior year when we were in our organizational stage and the addition of assets under management. Currently, our primary source of income is the equity in
earnings generated from our investments in unconsolidated entities. The structure and agreements governing those entities provides us a stated return on our investment in priority to any returns to our partners. We recognized equity in earnings of
approximately $2.8 million and $4.5 million generated from our investments in unconsolidated entities for the quarter and six months ended June 30, 2005, respectively. See also the description of income recognition for our investments in
unconsolidated entities in the section titled Critical Accounting Policies above.



Our results of operations for the quarter and six months ended June 30, 2005 are not necessarily indicative of what the results of operations will be for the year ending December 31, 2005.



OTHER



Funds from Operations



We consider funds from operations (FFO) to be an indicative measure of operating performance due to the
significant effect of depreciation of real estate assets on net income. FFO, based on the revised definition adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (NAREIT) and as used herein,
means net income determined in accordance with GAAP, excluding gains or losses from sales of property, plus depreciation and amortization of real estate assets and after adjustments for unconsolidated partnerships and joint ventures. We believe that
by excluding the effect of depreciation and amortization, FFO can facilitate comparisons of operating performance between periods and between other equity REITs. FFO was developed by NAREIT as a relative measure of performance of an equity REIT in
order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. However, FFO (i) does not represent cash generated from operating activities determined in accordance with GAAP (which,
unlike FFO, generally reflects all cash effects of transactions and other events that enter into the determination of net income), (ii) is not necessarily indicative of cash flow available to fund cash needs and (iii) should not be
considered as an alternative to net income determined in accordance with GAAP as an indication of our operating performance, or to cash flow from operating activities determined in accordance with GAAP as a measure of either liquidity or our ability
to make distributions. FFO as presented may not be comparable to amounts calculated by other companies. Accordingly, we believe that in order to facilitate a clear understanding of the consolidated historical operating results, FFO should be
considered in conjunction with our net income and cash flows as reported in the accompanying consolidated financial statements and notes thereto.



Reconciliation of net income to FFO for the quarter and six months ended June 30, 2005 and 2004:



|                                                                                  |  |                        |            |   |                           |   |          |      |  |   |            |   |  |   |          |  
|--------------------------------------------------------------------------------- |  | ---------------------- | ---------- | - | ------------------------- | - | -------- | ---- |  | - | ---------- | - |  | - | -------- | -
|                                                                                  |  | Quarter Ended June 30, |            |   | Six Months Ended June 30, |  
|                                                                                  |  | 2005                   |            |   | 2004                      |   |          | 2005 |  |   | 2004       |  
|Net income (loss)                                                                 |  | $                      | 1,876,773  |   |                           | $ | (215,471 | )    |  | $ | 2,868,941  |   |  | $ | (215,471 | )
|Adjustments:                                                                      |  |                        |            |   |                           |   |          |      |  |   |            |   |  |   |          |  
|Equity in earnings of unconsolidated entities                                     |  |                        | (2,829,101 | ) |                           |   |         |      |  |   | (4,482,098 | ) |  |   |         |  
|Pro-rata share of FFO from unconsolidated entities                                |  |                        | 4,600,665  |   |                           |   |         |      |  |   | 7,005,423  |   |  |   |         |  
|                                                                                  |  |                        |            |   |                           |   |          |      |  |   |            |   |  |   |          |  
|Total funds from operations                                                       |  | $                      | 3,648,337  |   |                           | $ | (215,471 | )    |  | $ | 5,392,266  |   |  | $ | (215,471 | )
|                                                                                  |  |                        |            |   |                           |   |          |      |  |   |            |   |  |   |          |  
|Weighted average number of shares of common stock outstanding (basic and diluted) |  |                        | 15,913,099 |   |                           |   | 465,537  |      |  |   | 13,358,566 |   |  |   | 465,537  |  
|                                                                                  |  |                        |            |   |                           |   |          |      |  |   |            |   |  |   |          |  
|FFO per share (basic and diluted)                                                 |  | $                      | 0.23       |   |                           | $ | (0.46    | )    |  | $ | 0.40       |   |  | $ | (0.46    | )
|                                                                                  |  |                        |            |   |                           |   |          |      |  |   |            |   |  |   |          |  



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OFF BALANCE SHEET AND
OTHER ARRANGEMENTS



We hold
interests in unconsolidated entities that may affect our results of operations, financial liquidity, and capital expenditures. Our equity in earnings from unconsolidated entities for the quarter and six months ended June 30, 2005 contributed
approximately $2.8 million and $4.5 million to our results of operations. The partnership agreements governing the allocation of cash flows from the entities provide for the payment of a preferred return on our invested capital and thereafter in
accordance with specified residual sharing percentages. With respect to our investment in the Intrawest Partnership, Intrawest may receive a greater return than us when the Resort Village Properties perform at certain levels.



Intrawest executed leases as a tenant for all unleased space at the time that
we acquired the Resort Village Properties and guaranteed the leases for all space then leased to Intrawest or its affiliates. The failure of Intrawest to meet this commitment would put us at risk in the event of a default or vacancy, thereby
potentially reducing our expected return.



In connection with
the two loans encumbering the Resort Village Properties (described below), if we engage in certain prohibited activities, we could become liable for the obligations of the unconsolidated entities which own the Resort Village Properties for certain
enumerated recourse liabilities related to those entities and the Resort Village Properties. In the case of the borrowing for the Resort Village Properties located in Canada, our obligations are such that we could become liable for the entire loan
if we triggered a default due to bankruptcy or other similar events.



We may also be responsible for a portion of capital expenditures for the Resort Village Properties. We do not expect to make any significant capital expenditures or contributions for these properties in the near term.



Borrowings of Our Unconsolidated Entities



Upon closing the first tranche of the acquisition of the Dallas Market
Center on February 14, 2005, the DMC Partnership became obligated for approximately $143 million in existing debt on the DMC Property. The securitized loan bears interest at a blended rate of 6.04% and requires aggregate monthly principal and
interest payments of $889,145. The loan matures in September 2014 and allows prepayment after October 2006 under certain terms and conditions.



On May 25, 2005, upon closing of the second tranche of the acquisition of International Floral Gift Center (the IFGC), the DMC
Partnership became obligated for approximately $17.0 million in existing debt. The IFGC loan bears interest at a fixed rate of 5.45% and requires aggregate monthly principal and interest payments of $110,663. The loan is amortized over 22-years,
matures in September 2012 and allows prepayment after August 2006 under certain terms and conditions.



On December 16, 2004, we completed our acquisition of a portfolio of resort village properties through our unconsolidated partnership with Intrawest
Corporation. In connection with that acquisition, Intrawest Resort Finance, Inc. provided bridge financing in the principal amount of $45.0 million. On May 20, 2005, the $45.0 million bridge loan was refinanced with loans from Sun Life
Assurance Company of Canada made to the subsidiary owners of the partnership in the aggregate principal amount of $46.0 million. The loans bear interest at a fixed rate of 5.75%, requires, the subsidiary owners of our unconsolidated partnership
with Intrawest Corporation to make monthly principal and interest payments in the aggregate amount of $289,389 (based on a 25-year amortization), matures on May 20, 2015, and may not be prepaid except with payment of a premium.



The acquisition of the Canadian Resort Village Properties on
December 3, 2004 was funded, in part, with approximately $22.3 million ($26.6 million Canadian dollars) of permanent debt financing secured by a mortgage on the Canadian Resort Village Properties, which was obtained on December 3, 2004.
The loan bears interest at a fixed rate of 5.83%, requires payments of interest-only for the first two years, and thereafter requires monthly payments of principal and interest based upon a 30-year amortization period and a maturity date on the
tenth anniversary of the loan.



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##### Table of Contents

COMMITMENTS, CONTINGENCIES AND
CONTRACTUAL OBLIGATIONS



The
following table presents our contingent commitments and contractual obligations and the related payment periods as of June 30, 2005:



|                                     |  |                 |   |           |   |           |  |                  |           |       |   |   |  |   |          
|------------------------------------ |  | --------------- | - | --------- | - | --------- |  | ---------------- | --------- | ----- | - | - |  | - | ---------
|                                     |  | Payments due in
|                                     |  | Less than1 year |   | Years 1-3 |   | Years 3-5 |  | More than5 years |           | Total
|Line of credit                       |  | $               |  |           | $ | 1,973,467 |  | $                |          |       | $ |  |  | $ | 1,973,467
|Contingent purchase consideration(1) |  |                 |  |           |   |          |  |                  | 3,750,000 |       |   |  |  |   | 3,750,000
|                                     |  |                 |   |           |   |           |  |                  |           |       |   |   |  |   |          
|Total contractual obligations        |  | $               |  |           | $ | 1,973,467 |  | $                | 3,750,000 |       | $ |  |  | $ | 5,723,467
|                                     |  |                 |   |           |   |           |  |                  |           |       |   |   |  |   |          

---

FOOTNOTES:



|(1) | In connection with the purchase of the resort village property located at Copper Mountain,
Colorado, the Intrawest Partnership agreed to pay additional future purchase consideration contingent upon the Copper Mountain property achieving certain levels of financial performance, as specified in the purchase and sale
agreement. The amount of the contingent purchase price will be determined as of December 31, 2008, and in no event, will the amount exceed $3.75 million. We have guaranteed the payment of the contingent purchase price to
Intrawest on behalf of the Intrawest Partnership.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------



We may be exposed to interest rate changes primarily as a result of long-term debt used to acquire properties and to make loans and other permitted
investments. Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve our objectives, we expect to borrow primarily at fixed
rates or variable rates with the lowest margins available, and in some cases, with the ability to convert variable rates to fixed rates. With regard to variable rate financing, we will assess interest rate cash flow risk by continually identifying
and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.



As of June 30, 2005, we had not made any loans and did not have any direct borrowings under long-term debt. However, on May 25, 2005 we closed on a $5.0
million revolving line of credit, on which we had drawn approximately $2.0 million as of June 30, 2005. The line will primarily be used for working capital needs, distributions to stockholders and bridge financing on real estate investments. The
line of credit is unsecured, bears interest at the 30-day LIBOR plus 2.25% and has a term of two years.



We are indirectly exposed to foreign currency risk related to our investment in unconsolidated Canadian entities. We are also indirectly exposed to credit
risk and interest rate risk due to the properties, mortgages and leasing activities in our unconsolidated entities. However, we believe our risk of foreign exchange loss and exposure to credit and interest rate risks are adequately mitigated as a
result of our right to receive a preferred return on our investment from the unconsolidated entities.



|Item 4. | Controls and Procedures
|------- | -----------------------



Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the Exchange Act), our management, with the participation of
our Chief Executive Officer and Chief Financial Officer, has carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by
this quarterly report. Based upon that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures are effective, as of the end of the period covered by
this report, in alerting our management in a timely manner to information required to be disclosed in our periodic SEC filings.



Included as Exhibits 31.1 and 31.2 to this quarterly report on Form 10-Q are Certifications of the Companys Chief Executive Officer and Chief
Financial Officer. The certifications are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. This section of the quarterly report on Form 10-Q contains the information concerning the evaluation





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##### Table of Contents

referred to in the Section 302 certifications. This information should be read in conjunction with the Section 302 certifications for a more complete
understanding of the topics presented.



Disclosure controls and
procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed
under the Exchange Act is accumulated and communicated to management, including the Companys Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.



PART II OTHER INFORMATION



|Item 1. | Legal Proceedings  None
|------- | ------------------------



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



Use of Proceeds from Registered Securities



We registered, pursuant to a registration statement under the Securities Act of 1933 (SEC File Number 333-108355) the offering and sale of up to $2
billion in shares of common stock (200 million shares of common stock at $10 per share subject to discounts in certain cases). The Offering became effective on April 16, 2004. Of the 200 million shares of common stock that we registered, we
initially designated five million shares at $9.50 per share for participants in our reinvestment plan.



As of June 30, 2005 and August 2, 2005, we have sold $185.0 million (18,555,093 shares), and $200.7 million (20,126,157 shares) respectively, in
connection with the Offering. The shares sold and the gross offering proceeds received from such sales do not include the 20,000 shares purchased by the Advisor for $200,000 preceding the commencement of the initial offering or the $1.2 million
(117,708 restricted common shares) issued in December 2004 to CNL Financial Group, Inc., a company affiliated with our Advisor and wholly owned indirectly by our chairman of the board and his wife. As of June 30, 2005, we have sold $2.3 million
(215,638 shares) in connection with our distribution reinvestment plan and we have incurred the following expenses in connection with the issuance of our registered securities:



|                                                 |  |   |           
|------------------------------------------------ |  | - | ----------
|Selling commissions                              |  | $ | 11,597,768
|Marketing support fee and due diligence expenses |  |   | 4,471,836 
|Offering costs and expenses                      |  |   | 8,276,601 
|                                                 |  |   |           
|Offering and stock issuance costs(1)             |  | $ | 24,346,205
|                                                 |  |   |           

---

FOOTNOTES:



|(1) | The total amount of selling commissions, marketing support fees, due diligence expense reimbursements and other organizational and offering expenses are subject to
an expense cap and may not exceed 13% of the gross offering proceeds. An additional $6.5 million of costs incurred in connection with the Offering (exceeding the 13% expense cap) has been deferred as of June 30, 2005. The deferred offering costs
will be deducted from future offering proceeds and reimbursed to affiliates to the extent that the costs are within the 13% limitation.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The selling commissions, marketing support fee and due diligence expenses are paid to CNL Securities Corp., an affiliate of the Advisor which acts as our
managing dealer, and a substantial portion of the selling commissions, marketing support fee and due diligence expenses are reallowed to third party participating broker-dealers. Other offering costs and expenses have been incurred by, and are
payable to an affiliate of our Advisor.



The net offering
proceeds from the Offering, after deducting the total expenses described above, was $160.7 million at June 30, 2005. As of June 30, 2005 we had used approximately $124.5 million to acquire properties owned through our unconsolidated entities, of
which approximately $10.9 million in acquisition fees were allocated to those investments.



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##### Table of Contents

|Item 3. | Defaults Upon Senior SecuritiesNone
|------- | ------------------------------------



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



| | (a) | Our annual meeting of stockholders was held in Orlando, Florida on June 14, 2005.
| | --- | ---------------------------------------------------------------------------------



| | (b) | Each of our five directors was re-elected. Those directors are: Bruce Douglas, Dennis N. Folken, Robert J. Woody, Robert A. Bourne and James M. Seneff, Jr.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | The meeting was held for the purpose of (i) electing the board of directors and (ii) to transact such other business as may properly have come before the meeting or any adjournment
or postponement thereof.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The two proposals were
submitted to a vote of stockholders and received votes as follows:



| | 1. | The stockholders approved the election of the following persons as directors of the Company:
| | -- | --------------------------------------------------------------------------------------------



|                     |  |           |  |         
|-------------------- |  | --------- |  | --------
|Name                 |  | For       |  | Withheld
|Bruce Douglas        |  | 6,667,260 |  | 42,440  
|Dennis N. Folken     |  | 6,667,260 |  | 42,440  
|Robert J. Woody      |  | 6,667,260 |  | 42,440  
|Robert A. Bourne     |  | 6,666,510 |  | 43,190  
|James M. Seneff, Jr. |  | 6,667,260 |  | 42,440  



| | 2. | To transact such other business as may properly have come before the meeting or any adjournment or postponement thereof:
| | -- | ------------------------------------------------------------------------------------------------------------------------



|          |  |         |  |            
|--------- |  | ------- |  | -----------
|For       |  | Against |  | Abstentions
|6,349,371 |  | 98,023  |  | 262,306    



|Item 5. | Other InformationNone
|------- | ----------------------



|Item 6. | Exhibits
|------- | --------



The following documents are filed as part of this report.



|    |  |                                                                                                                                                                                                                                                                                                                                                                        
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | 
|2.1 |  | Purchase and Sale Agreement between Whistler Mountain Resort Limited Partnership and Intrawest Corporation as Sellers and US Canadian Trust Alpha as Purchaser dated as of December 3, 2004
(Previously filed as Exhibit 2.1 to the Report on Form 8-K filed December 9, 2004, and incorporated herein by reference.)                                                  
|    | 
|2.2 |  | Purchase and Sale Agreement (Copper Mountain Commercial Properties) between the Sellers and CNL Village Retail Partnership, LP as Purchaser dated as of December 3, 2004 (Previously filed
as Exhibit 2.2 to the Report on Form 8-K filed December 9, 2004, and incorporated herein by reference.)                                                                     
|    | 
|2.3 |  | Schedule of Omitted Purchase and Sale Agreements (Previously filed as Exhibit 2.3 to the Report on Form 8-K filed December 17, 2004, and incorporated herein by
reference.)                                                                                                                                                                                            
|    | 
|2.4 |  | Amended and Restated Partnership Interest Purchase Agreement by and between CNL Income Properties, Inc. and Dallas Market Center Company, Ltd. as of January 14, 2005 (Previously filed as
Exhibit 2.4 to Post-Effective Amendment No. One to the Registration Statement on Form S-11 (File No. 333-108355) filed March 3, 2005, and incorporated herein by reference.)
|    | 
|3.1 |  | CNL Income Properties, Inc. Amended and Restated Articles of Incorporation (Previously filed as Exhibit 3.3 to the Registration Statement on Form S-11 (File No. 333-108355) filed March 16,
2004, and incorporated herein by reference.)                                                                                                                              



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|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|3.2  |  | CNL Income Properties, Inc. Bylaws (Previously filed as Exhibit 3.4 to the Registration Statement on Form S-11 (File No. 333-108355) filed March 16, 2004, and incorporated herein by
reference.)                                                                                                                                                                                                                                                                                                                                                                                        
|     | 
|3.3  |  | Articles of Amendment to the Amended and Restated Articles of Incorporation of CNL Income Properties, Inc. (Previously filed as Exhibit 3.5 to the Registration Statement on Form S-11 (File
No. 333-108355) filed April 9, 2004, and incorporated herein by reference.)                                                                                                                                                                                                                                                                                                                 
|     | 
|3.4  |  | Amendment No. One to the Bylaws of CNL Income Properties, Inc. (Previously filed as Exhibit 3.1 to the Report on Form 8-K filed on May 9, 2005 (File No. 000-51288) and incorporated herein
by reference.)                                                                                                                                                                                                                                                                                                                                                                               
|     | 
|4.1  |  | CNL Income Properties, Inc. Amended and Restated Articles of Incorporation (Previously filed as Exhibit 3.3 to the Registration Statement on Form S-11 (File No. 333-108355) filed March 16,
2004, and incorporated herein by reference.)                                                                                                                                                                                                                                                                                                                                                
|     | 
|4.2  |  | CNL Income Properties, Inc. Bylaws (Previously filed as Exhibit 3.4 to the Registration Statement on Form S-11 (File No. 333-108355) filed March 16, 2004, and incorporated herein by
reference.)                                                                                                                                                                                                                                                                                                                                                                                        
|     | 
|4.3  |  | Articles of Amendment to the Amended and Restated Articles of Incorporation of CNL Income Properties, Inc. (Previously filed as Exhibit 3.5 to the Registration Statement on Form S-11 (File
No. 333-108355) filed April 9, 2004, and incorporated herein by reference.)                                                                                                                                                                                                                                                                                                                 
|     | 
|4.4  |  | Amendment No. One to the Bylaws of CNL Income Properties, Inc. (Previously filed as Exhibit 3.1 to the Report on Form 8-K filed on May 9, 2005 (File No. 000-51288) and incorporated herein
by reference.)                                                                                                                                                                                                                                                                                                                                                                               
|     | 
|4.5  |  | Form of Reinvestment Plan (Included in the Prospectus as Appendix A and incorporated herein by reference.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     | 
|10.1 |  | Form of Escrow Agreement between CNL Income Properties and SouthTrust Bank (Previously filed as Exhibit 10.1 to the Registration Statement on Form S-11 (File No. 333-108355) filed March
16, 2004, and incorporated herein by reference.)                                                                                                                                                                                                                                                                                                                                               
|     | 
|10.2 |  | Advisory Agreement dated April 20, 2005 (Previously filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q for the period ended March 31, 2005, filed May 11, 2005 and incorporated
herein by reference.)                                                                                                                                                                                                                                                                                                                                                                            
|     | 
|10.3 |  | Form of Reinvestment Plan (Included in the Prospectus as Appendix A and incorporated herein by reference.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|     | 
|10.4 |  | Indemnification Agreement between CNL Income Properties, Inc. and James M. Seneff, Jr. dated March 2, 2004. Each of the following directors and/or officers has signed a substantially similar
agreement: Robert A. Bourne, Bruce Douglas, Dennis N. Folken, Robert J. Woody dated March 2, 2004 and Thomas J. Hutchison III, R. Byron Carlock, Jr., Tammie A. Quinlan and Charles A. Muller dated April 19, 2004. (Previously filed as Exhibit 10.4
to the Quarterly Report on Form 10-Q for the period ended June 30, 2004, filed August 4, 2004 and incorporated herein by reference.)
|     | 
|10.5 |  | Credit Agreement dated December 3, 2004 between R&H US Canadian Property Limited, Borrower and CNL Income Partners, LP, Lender (Previously filed as Exhibit 10.5 to Post-Effective
Amendment No. One to the Registration Statement on Form S-11 (File No. 333-108355) filed March 3, 2005, and incorporated herein by reference.)                                                                                                                                                                                                                                                        
|     | 
|10.6 |  | Credit Agreement dated December 3, 2004 between R&H US Canadian Property Limited, Borrower and Intrawest Resorts, Inc., Lender (Previously filed as Exhibit 10.6 to Post-Effective
Amendment No. One to the Registration Statement on Form S-11 (File No. 333-108355) filed March 3, 2005, and incorporated herein by reference.)                                                                                                                                                                                                                                                        
|     | 
|10.7 |  | Master Lease Agreement dated December 3, 2004 by and between Whistler Mountain Resort Limited Partnership, as Landlord and CNL Income Canada Lessee Corp., as Tenant (Previously filed as
Exhibit 10.7 to Post-Effective Amendment No. One to the Registration Statement on Form S-11 (File No. 333-108355) filed March 3, 2005, and incorporated herein by reference.)                                                                                                                                                                                                                  
|     | 
|10.8 |  | Schedule of Omitted Lease Agreements (Previously filed as Exhibit 10.8 to Post-Effective Amendment No. One to the Registration Statement on Form S-11 (File No. 333-108355) filed March 3,
2005, and incorporated herein by reference.)                                                                                                                                                                                                                                                                                                                                                  



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|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                  
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.9  |  | Property Management Agreement dated December 3, 2004 between Playground Real Estate Ltd. (Manager) and CNL Income Canada Lessee Corp. (Head Lessee)(Previously filed as Exhibit 10.9 to
Post-Effective Amendment No. One to the Registration Statement on Form S-11 (File No. 333-108355) filed March 3, 2005, and incorporated herein by reference.)                                                                            
|      | 
|10.10 |  | Property Management Agreement dated as of December 3, 2004 between Intrawest U.S. Commercial Property Management, Inc. (Manager) and CNL Income Mammoth, LP (Owner) (Previously filed as
Exhibit 10.10 to Post-Effective Amendment No. One to the Registration Statement on Form S-11 (File No. 333-108355) filed March 3, 2005, and incorporated herein by reference.)                                                          
|      | 
|10.11 |  | Schedule of Omitted Management Agreements (Previously filed as Exhibit 10.11 to Post-Effective Amendment No. One to the Registration Statement on Form S-11 (File No. 333-108355) filed
March 3, 2005, and incorporated herein by reference.)                                                                                                                                                                                    
|      | 
|10.12 |  | Loan Agreement dated December 16, 2004 between CNL Village Retail Partnership, LP, Borrower and Intrawest Resort Finance, Inc., Lender (Previously filed as Exhibit 10.12 to Post-Effective
Amendment No. One to the Registration Statement on Form S-11 (File No. 333-108355) filed March 3, 2005, and incorporated herein by reference.)                                                                                       
|      | 
|10.13 |  | R&H US Canadian Property Limited, US Canadian Property Alpha Blue Mountain Nominee Corp., and US Canadian Property Alpha Whistler Nominee Corp, Borrowers and Congress Financial
Corporation (Canada), Lender, Loan Agreement (Previously filed as Exhibit 10.13 to Post-Effective Amendment No. One to the Registration Statement on Form S-11 (File No. 333-108355) filed March 3, 2005, and incorporated herein by
reference.)
|      | 
|10.14 |  | Amended and Restated Limited Partnership Agreement of CNL Village Retail Partnership, LP dated December 3, 2004 (Previously filed as Exhibit 10.5 to the Report on Form 8-K filed December
9, 2004, and incorporated herein by reference.)                                                                                                                                                                                       
|      | 
|10.15 |  | Master Lease dated as of February 14, 2005 by and between WTC-Trade Mart, L.P., Landlord and Dallas Market Center Operating, L.P., Tenant (Previously filed as Exhibit 10.15 to
Post-Effective Amendment No. One to the Registration Statement on Form S-11(File No. 333-108355) filed March 3, 2005, and incorporated herein by reference.)                                                                                     
|      | 
|10.16 |  | Loan Agreement dated as of August 2, 2004 between WTC-Trade Mart, L.P., as Borrower and Bank of America, N.A., as Lender (Previously filed as Exhibit 10.16 to Post-Effective Amendment No.
Three to the Registration Statement on Form S-11(File No. 333-108355) filed on June 15, 2005 and incorporated herein by reference.)                                                                                                  
|      | 
|10.17 |  | Contribution of Partnership Interests and Membership Interests Agreement dated as of February 14, 2005 by and between Dallas Market Center Company, Ltd. and CNL Dallas Market Center, L.P.
(Previously filed as Exhibit 10.17 to Post-Effective Amendment No. Three to the Registration Statement on Form S-11(File No. 333-108355) filed on June 15, 2005 and incorporated herein by reference.)                               
|      | 
|10.18 |  | Master Lease dated as of May 20, 2005 by and between IFDC Property Company, Ltd., Landlord and IFDC Operating, L.P., Tenant (Previously filed as Exhibit 10.18 to Post-Effective Amendment
No. Three to the Registration Statement on Form S-11(File No. 333-108355) filed on June 15, 2005 and incorporated herein by reference.)                                                                                               
|      | 
|10.19 |  | Loan Agreement dated as of August 8, 2003 by and between IFDC Property Company, Ltd., as Borrower and Bank of America, N.A., as Lender (Previously filed as Exhibit 10.19 to Post-Effective
Amendment No. Three to the Registration Statement on Form S-11(File No. 333-108355) filed on June 15, 2005 and incorporated herein by reference.)                                                                                    
|      | 
|10.20 |  | Contribution of Partnership Interests and Membership Interests Agreement dated as of May 20, 2005 by and between Dallas Market Center Company, Ltd. and CNL Dallas Market Center, L.P.
(Previously filed as Exhibit 10.20 to Post-Effective Amendment No. Three to the Registration Statement on Form S-11(File No. 333-108355) filed on June 15, 2005 and incorporated herein by reference.)                                    



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|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.21 |  | Loan Agreement dated as of May 20, 2005 by and between Branch Banking and Trust Company, Lender and CNL Income Properties, Inc., Borrower (Previously filed as Exhibit 10.21 to
Post-Effective Amendment No. Three to the Registration Statement on Form S-11(File No. 333-108355) filed on June 15, 2005 and incorporated herein by reference.)                                                                                                       
|      | 
|10.22 |  | Loan Agreement dated as of May 20, 2005, by and between CNL Income Copper, LP, CNL Income Sandestin, LP, CNL Income Mammoth, LP, CNL Income Snowshoe, LP, and CNL Income Stratton, LP,
Borrowers and Sunlife Assurance Company of Canada, Lender (Previously filed as Exhibit 10.22 to Post-Effective Amendment No. Three to the Registration Statement on Form S-11(File No. 333-108355) filed on June 15, 2005 and incorporated herein by
reference.)
|      | 
|31.1  |  | Certification of the Chief Executive Officer, Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)                                                                                                                                                                                                                                                                                      
|      | 
|31.2  |  | Certification of the Chief Financial Officer, Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)                                                                                                                                                                                                                                                                                      
|      | 
|32.1  |  | Certification of the Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed
herewith.)                                                                                                                                                                                                                                                                              
|      | 
|32.2  |  | Certification of the Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed
herewith.)                                                                                                                                                                                                                                                                              



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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, on the 10th day of August, 2005.



CNL INCOME PROPERTIES, INC.By:

/s/ Thomas J. Hutchison IIITHOMAS J. HUTCHISON IIIChief Executive Officer(Principal Executive Officer)By:

/s/ Tammie A. QuinlanTAMMIE A. QUINLANSenior Vice President and Chief Financial Officer(Principal Financial and Accounting Officer)




25