##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM
10-K/A
 (Amendment No. 2)
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES ACT OF 1934
 For the fiscal year ended December 31, 2008
 or
 o
    
    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 000-53673
 NETREIT
  California
    
    33-0841255(State of other jurisdiction of incorporation or organization)
    
    (IRS Employer Identification Number)1282 Pacific Oaks PlaceEscondido, CA
    
    92029-2900(Address of principal executive offices)
    
    (Zip code)
 (760) 471-8536
  
 o þ
 o þ
 o þ
 þ o
 o Yes o No
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
 o Yes o No




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##### 



TABLE OF CONTENTS
 PART IItem 1 Business
    
    
    1Item 1A Risk Factors
    
    
    5Item 2 Properties
    
    
    18Item 3 Legal Proceedings
    
    
    29Item 4 Submission of Matters to a Vote of Security Holders
    
    
    30PART IIItem 5 Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    31Item 6 Selected Financial Data
    
    
    33Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    34Item 7A
Quantitative and Qualitative Disclosures about Market Risk
    
    
    34Item 8 Financial Statements and Supplementary Data
    
    
    55Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    55Item 9A(T) Controls and Procedures
    
    
    55PART IIIItem 10 Directors, Executive Officers and Corporate Governance
    
    
    57Item 11 Executive Compensation
    
    
    60Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    67Item 13 Certain Relationships and Related Transactions, and Director Independence
    
    
    69Item 14
Principal Accounting Fees and Services
    
    
    71PART IVItem 15 Exhibits and Financial Statement Schedules
    
    
    71Exhibit 31.1Exhibit 31.2Exhibit 32.1




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CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS
AND INDUSTRY DATA
  
    
    specific risks that may be referred to in this Form 10-K, including those set forth in the
Risk Factors section of the Form 10-K;
 
    
    adverse economic conditions in the real estate market;
 
    
    adverse changes in the real estate financing markets;
 
    
    our inability to raise sufficient additional capital to continue to expand our real estate
investment portfolio;
 
    
    unexpected costs, lower than expected rents and revenues from our properties, and/or increases
in our operating costs;
 
    
    inability to attract or retain qualified personnel, including real estate management personnel;
 
    
    adverse results of any legal proceedings; and
 
    
    changes in laws, rules and regulations affecting our business.
  Information regarding market and industry statistics contained in this Form 10-K is included based
on information available to us that we believe is accurate. We have not reviewed or included data
from all sources, and we cannot assure you of the accuracy or completeness of the data included in
this Form 10-K . Forecasts and other forward-looking information obtained from these sources are
subject to the same qualifications and the additional uncertainties accompanying any estimates of
future market size, revenue and market acceptance of products and services. We undertake no
obligation to update forward-looking information to reflect actual results or changes in
assumptions or other factors that could affect those statements. See the Risk Factors section of
this Form 10-K for a more detailed discussion of uncertainties and risks that may have an impact on
our future results.




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ITEM 1.

    BUSINESS
 Our Company, NetREIT
    Our Management
  Our Property Manager
   Our Contacts with CHG Properties
 The Property Management Agreement.
  1




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Right to Acquire Property Managers Business.
     2




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Federal Income Tax REIT Requirements
    1940 Act Considerations
  Our Offices and Employees
   Certain Investment Limitations
  
    
    Acquire a property if its purchase price, as defined, exceeds its appraised value and the total acquisition
expenses, as defined, and real estate commissions paid do not exceed six percent (6%) of the purchase price
(or in the case of a mortgage loan, six percent (6%) of the funds advanced), unless our board (including a
majority of the independent directors) approves the transaction as being commercially competitive, fair and
reasonable to us.
 
    
    Invest in commodities, commodities futures contracts, foreign currency and bullion, with an exception for
interest rate futures.
 
    
    Invest in installment sales contracts for the sale or purchase of real estate (except in connection with
the disposition of a property and where such contract is in recordable form and is appropriately recorded
in the chain of title).
  3




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
    
    Invest in mortgage loans, unless such lien, plus the outstanding amount of the senior debt secured by the
same property, if any, does not exceed 85% of the appraised value of the property securing the loan if,
after giving effect thereto, the value of all mortgage loans secured by junior liens on real property would
not exceed 25% of our tangible assets; or if the value of all of our investments in junior mortgage loans
which do not meet the foregoing criteria would not exceed 10% of our tangible assets (which are included in
the aforesaid 25%) and the directors (including a majority of the independent directors) determine
substantial justification exists because of the presence of other underwriting criteria.
 
    
    Invest in mortgage loans unless:
 
    
    a title insurance policy
or policy commitment insures the priority of the
mortgage;
    
    the mortgage loan is not subordinate to any
mortgage loan or equity interest by a member of
our management or their affiliate; and
    
    the transaction is not with a member of our
management or their affiliate unless an appraisal
of the property securing the mortgage has been
obtained from an independent qualified appraiser
and the transaction is approved by a majority of
the independent directors.
 
    
    Invest in unimproved real property, as defined, or in mortgage loans secured by liens on unimproved real
property, if the total of such investments exceeds 10% of our invested assets, as defined.
 
    
    Trade, as compared to investment activities (other than investments made solely for hedging purposes).
 
    
    Hold property primarily for sale to customers in the ordinary course of business.
 
    
    Engage in the trading, underwriting or agency distribution of Securities issued by others.
 
    
    Invest in the equity securities of any nongovernmental issuer representing less than 100% ownership of such
issuer, including another REIT, for a period in excess of 18 months or in the equity securities of any
affiliate of a member of management, except issuers formed by us to develop, own and/or operate specific
properties.
 
    
    Engage in any short sale, or borrowing on an unsecured basis, if such borrowing will result in an asset
coverage of less than three hundred percent (300%), unless at least eighty percent (80%) of our tangible
assets consist of first mortgage loans. For the purposes hereof, asset coverage means the ratio that the
value of the aggregate book value of our assets, less all liabilities and indebtedness, except indebtedness
for unsecured borrowings, bears to the aggregate of our unsecured borrowings.
  Our Policies Regarding Operating Reserves
   4




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Restrictions on Our Transactions with Management and Their Affiliates
  
    
    Any loan of funds to or borrowing of funds from such person, unless a
majority of the directors (including a majority of the independent
directors) not otherwise interested in such transaction, approve the
transaction as being fair, competitive, commercially reasonable and no
less favorable to us than loans between unaffiliated lenders and
borrowers under the same circumstances.
 
    
    Any transaction (other than through a joint venture or partnership)
that involves the acquisition of a property from, or the sale of a
property to, such person, except our acquisition of a property where
such person has acquired the property for the sole purpose of
facilitating our acquisition thereof, the total consideration we pay
does not exceed the cost of the property to such person (including
holding costs) and no special benefit results to such person.
 
    
    Any transaction with a business organization with which such person,
in his individual capacity, is affiliated unless that transaction is
approved by the board and a majority vote of the shareholders.
 
    
    Any investment in a joint venture or partnership with such person
unless a majority of the board (including a majority of the
independent directors), excluding any director who is interested in
the transaction, approves the transaction as being fair and reasonable
to us and substantially on the same terms and conditions as those
received by other joint venturers.
 
    
    Any other transaction between us and such person, unless specifically
prohibited, shall require the approval of the board (including a
majority of the Independent Directors) excluding any director
interested in the transaction, as being fair and reasonable to us and
on terms and conditions not less favorable to us than those available
from unaffiliated third parties.
 Restrictions on Our Ability to Issue Securities
  
    
    Warrants, options or rights, except as part of a public offering or
other financing, a ratable distribution to or purchase by the
shareholder or a stock option plan for our officers, directors and/or
key employees.
 
    
    Debt securities, unless the historical debt service coverage (in the
most recently completed fiscal year), as adjusted for known changes,
is sufficient to properly service that higher level of debt.
 
    
    Assessable or non-voting equity securities.
 
 ITEM 1A.

    RISK FACTORS
 Risks Relating to an Investment in Our Securities
 If
we are unable to find suitable investments, we may not be able to achieve our investment
objectives or continue to pay dividends.
 Our continued
growth depends on external sources of capital.
  5




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We may be prevented from paying dividends by legal requirements.
 We may change one or more of our investment policies.
 Our shareholders have a very limited right to influence our business or affairs.
 We depend on key personnel.
 The availability and timing of cash dividends is uncertain.
 Our bylaws may prevent our participation in certain business combinations. 2 3 2 3 rds
 A limit on the number of Shares a person may own may discourage a takeover.
 Our common stock is subordinate to our Preferred Stock in rights to distributions.
 Possible acquisition of our affiliated property managers business.
  6




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Possible future transactions with our executive management or their affiliates.
 Our return to our shareholders could be reduced if we are required to register as an investment
company.
 Risks Relating to Private Offering Exemption and Lack of Liquidity
 Private
placement offering  compliance with exemption requirements.
  It will be difficult for our shareholders to sell their common shares because there is currently no
public market for the shares and we do not intend to list the shares on a stock exchange. If our
shareholders are able to sell their shares, they will likely have to sell them at a substantial
discount.
   7




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Risks Relating to Real Estate Investments
 Current unsettled conditions in the financial and equity markets negatively affect the U.S. and
world economies.
  Current commercial mortgage market trends may affect the terms and conditions of our mortgage
financing.
 Continued illiquidity and disruption of the mortgage market affects our ability to obtain mortgage
financing.
 Dislocations in the real estate mortgage markets have depressed real estate values.
 A decrease in real estate values will negatively affect our ability to refinance our properties and
possibly our existing mortgage obligations.
  8




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Continued deterioration of the U.S. mortgage markets would reduce our ability to acquire real
estate and diversify our portfolio.
 Increase in energy prices.
 We are not required to set aside and maintain specific levels of cash reserves.
 We may be unable to sell a property at any particular time.
 Some of our properties may depend upon a single tenant for all of their rental income.
 Some of our properties may be suitable for only one use.
 We may obtain only limited warranties when we purchase a property.
 Our ability to operate a property may be limited by contract.
  9




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Shorter lease terms tend to increase our maintenance costs.
 A property that incurs a vacancy could be difficult to sell or re-lease.
  We may have to extend credit to buyers of our properties.
 We may not have funding for future tenant improvements.
 Uninsured losses may adversely affect returns to our shareholders.
   10




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Our compliance with various legal requirements of real estate ownership may involve significant
costs.
  Our competition for properties could impact our profitability.
 The bankruptcy or insolvency of one of our major tenants would adversely impact our operations and
our ability to pay dividends.
 We could incur uninsured losses which could adversely impact the value of one or more of our
properties.
  Discovery of previously undetected environmentally hazardous conditions may adversely affect our
operating results.
  11




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Recent
increase in costs of credit and stagnation of real estate prices have lead to economic
slowdown and a recession.
 The War on Terrorism and any future terrorist attacks may negatively affect our operations and
profitability.
   Methods we use to own our properties.
  12




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If we invest in a DOWNREIT partnership as a general partner we would be responsible for all
liabilities of such partnership.
 In a sale-leaseback transaction, we are at risk that our seller/lessee will default if its tenants
default.
 Uncertain market conditions and the broad discretion of management relating to the future
disposition of properties could adversely affect the return on our Shares.
 Regulatory changes may adversely affect our specific properties and may have adverse results on our
operations and returns on our Shares.
 Changes in local conditions may affect one or more of our properties.
 Each of our properties will be subject to local supply and demand for similar or competing
properties.
 Risks Relating to Debt Financing
 The more leverage we use, the higher our operational risks will be.
 If we fail to make our debt payments, we could lose our investment in a property.
  13




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Lenders may require us to enter into restrictive covenants relating to our operations.
 If we enter into financing arrangements involving balloon payment obligations, it may adversely
affect our ability to pay dividends.
 Our risks of losing property through a mortgage loan default will be greater where the property is
cross-collateralized.
 Due-on-sale clauses in our mortgages may prevent us from taking advantage of interest rate changes.
 Risks Associated with Making or Investing in Mortgage Loans
 We
do not have experienced loan underwriting personnel.
 Mortgage loans may be impacted by unfavorable real estate market conditions, which could decrease
the value of our mortgage investments.
 Mortgage loans may be subject to interest rate fluctuations that could reduce our returns as
compared to market interest rates.
 Returns on mortgage loans may be limited by regulations.
  14




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Delays in liquidating a defaulted mortgage loan could reduce our investment returns.
 Foreclosures create additional ownership risks that could adversely impact our returns on mortgage
investments.
 Risks Relating to Our Managements Conflicts of Interest
 We face certain conflicts of interest with respect to our operations.
 There is competition for the time and services of our senior management, and our property manager
and its affiliates may not dedicate all of the time necessary to manage our business.
 The amounts of compensation to be paid to our management, our property manager and possibly their
affiliates cannot be predicted.
 Our rights, and the rights of our shareholders, to recover claims against our officers and
directors are limited.
  15




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Risks Relating to Federal Income Taxes
 Because of recently enacted tax legislation, REIT investments are comparatively less attractive
than investments in other corporations.
 Failure to qualify as a REIT could adversely affect our operations and our ability to make
distributions.
 To maintain our REIT status, we may be forced to borrow funds on a short-term basis during
unfavorable market conditions.
 Qualified plans investing in our Shares will be taxed on our distributions to the extent that they
are unrelated business taxable income.
 We still may be required to pay federal or state taxes.
  16




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Foreign shareholders selling their Securities may be subject to FIRPTA tax.
  Retirement Plan Risks
 There are special considerations that apply to qualified plans and IRAs investing in our Shares.
 
    
    their investment is consistent with their fiduciary obligations under
ERISA and the Internal Revenue Code;
 
    
    their investment is made in accordance with the documents and
instruments governing their Retirement Plan or IRA, including their
plans investment policy;
 
    
    their investment satisfies the prudence and diversification
requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA;
 
    
    their investment will not impair the liquidity of the plan;
 
    
    their investment will not produce UBTI for the plan or IRA;
 
    
    they will be able to value the assets of the plan annually in
accordance with ERISA requirements; and
 
    
    their investment will not constitute a prohibited transaction under
Section 406 of ERISA or Section 4975 of the Internal Revenue Code.
  17




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ITEM 2.

    PROPERTIES
 General
Information
  Renovation orDate
    
    
    Type of
    
    
    Year Property
    
    
    Purchase
    
    
    Percent
    
    
    
    
    
    
    ImprovementProperty/Location
    
    Acquired
    
    
    Property
    
    
    Constructed
    
    
    Price*
    
    
    Ownership
    
    
    Occupancy
    
    
    Cost(7)Casa Grande Apts.(1)
    
    
    4/99
    
    
    Residential
    
    
    1973
    
    
    $
    1,020,000
    
    
    
    20.0
    %
    
    
    96.1
    %
    
    
    Cheyenne, WYHavana/Parker Complex(2)
    
    
    6/06
    
    
    Office
    
    
    1975
    
    
    $
    5,828,963
    
    
    
    100
    %
    
    
    54.0
    %
    
    $
    275,000Aurora, COEscondido 7-Eleven(3)
    
    
    9/06
    
    
    Retail
    
    
    1980
    
    
    $
    1,404,864
    
    
    
    51.4
    %
    
    
    100.0
    %
    
    
    Escondido, CAGarden Gateway Plaza(4)
    
    
    3/07
    
    
    Office
    
    
    1982
    (6)
    
    $
    15,132,624
    
    
    
    94.0
    %
    
    
    88.1
    %
    
    
    Colorado Springs, COWorld Plaza(9)
    
    
    9/07
    
    
    Retail
    
    
    1974
    
    
    $
    7,650,679
    
    
    
    100
    %
    
    
    94.0
    %
    
    
    San Bernardino, CARegatta Square(5)
    
    
    10/07
    
    
    Retail
    
    
    1996
    
    
    $
    2,180,166
    
    
    
    100
    %
    
    
    100.0
    %
    
    
    Denver, COSparkys Palm Self-Storage(8)
    
    
    11/07
    
    
    Self-storage
    
    
    2003
    
    
    $
    4,848,919
    
    
    
    51.97
    %
    
    
    84.2
    %
    
    
    Highland, CASparkys Joshua Self-Storage(8)
    
    
    12/07
    
    
    Self-storage
    
    
    2003/2005
    
    
    $
    8,007,127
    
    
    
    100
    %
    
    
    67.8
    %
    
    
    Hesperia, CAExecutive Office Park(2)
    
    
    7/08
    
    
    Office
    
    
    2000/2001
    
    
    $
    10,031,316
    
    
    
    100
    %
    
    
    94.8
    %
    
    
    Colorado Springs, COWaterman Plaza(9)
    
    
    8/08
    
    
    Retail
    
    
    2008
    
    
    $
    7,382,230
    
    
    
    100
    %
    
    
    74.3
    %
    
    
    San Bernardino, CAPacific Oaks Plaza(10)
    
    
    9/08
    
    
    Office
    
    
    2005
    
    
    $
    4,859,397
    
    
    
    100
    %
    
    
    24.2
    %
    
    
    Escondido, CA
 *
    
    Purchase Price includes our acquisition related costs and expenses for the property.(1)
    
    An apartment building leased to tenants on a month-to-month basis.(2)
    
    An office building leased to tenants on a semi-gross basis.(3)
    
    Under single user lease to 7-Eleven, Inc. This property is owned by a DOWNREIT Partnership for which we
serve as general partner and in which we own a 51.4% equity interest.(4)
    
    The Complex is comprised of three buildings, each on a
separate legal parcel. Information is for all 3 buildings in Complex.(5)
    
    Strip Centers.(6)
    
    Two story built in 1982 renovated in 2002, 2 one story buildings built 1999.(7)
    
    Includes costs of or repairs to or replacement of major components, such as roofs, parking lot surfaces,
landscaping, etc. Renovation or improvement costs will be financed from reserves or other cash on hand.(8)
    
    Self-storage property.(9)
    
    A neighborhood shopping center.(10)
    
    The Company uses 12,134 square feet of the leasable 16,003 square feet as its principal business offices.  18




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Physical
Occupancy Table for Last 5 Years (1)
 Date
    
    

Percentage
Occupancy as of the Year Ended December 31,Acquired
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    

2008Casa Grande Apts. Cheyenne, WY
    
    
    4/99
    
    
    
    99.1
    %
    
    
    97.2
    %
    
    
    94.2
    %
    
    
    92.0
    %

    
    96.1
    %Havana/Parker
    
    
    6/06
    
    
    
    
    
    
    
    
    
    
    
    79.0
    %
    
    
    74.9
    %
    
    
    54.0
    %Escondido 7-Eleven
    
    
    9/06
    
    
    
    
    
    
    
    
    
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Garden
Gateway Plaza(2)
    
    
    3/07
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85.1
    %
    
    
    88.3
    %World Plaza
    
    
    9/07
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98.1
    %
    
    
    94.0
    %Regatta Square
    
    
    10/07
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100.0
    %
    
    
    100.0
    %Sparkys Palm Self-Storage
    
    
    11/07
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85.0
    %
    
    
    84.2
    %Sparkys Joshua Self-Storage
    
    
    12/07
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77.0
    %
    
    
    67.8
    %Executive
Office Park(3)
    
    
    7/08
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94.8
    %
    
    
    94.8
    %Waterman Plaza
    
    
    8/08
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4)
    
    
    74.3
    %Pacific Oaks Plaza
    
    
    9/08
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21.0
    %
    
    
    24.2
    %(5)
 
 (1)
    
    Information is provided only for the years that we owned the property.(2)
    
    Consists of 3 individual buildings situated on 3 separate
properties.(3)
    
    Consists of 4 individual buildings situated on 4 separate
properties.(4)
    
    Newly constructed property.(5)
    
    Registrant occupies the remaining approximately 12,134 square
feet, or 75.8% of this property as its
offices. Top Ten Tenants Physical Occupancy Table
  Percent of TotalAnnualized Base
    
    
    Annualized BaseRent as of
    
    
    Rent as ofTenant
    
    Number of Leases
    

December
31, 2008
    
    

December 31, 2008(1)County of San Bernardino
    
    1
    
    $
    498,056
    
    
    
    12.4
    %Keller
Williams Realty
    
    3
    
    $
    253,330
    
    
    
    6.3
    %Goodwill
Industries of Southern California
    
    1
    
    $
    330,669
    
    
    
    8.3
    %Marvell Semiconductor
    
    1
    
    $
    238,395
    
    
    
    6.0
    %Fairchild Semiconductor
    
    1
    
    $
    217,350
    
    
    
    5.4
    %St. Paul Fire & Marine Inc.
    
    1
    
    $
    161,981
    
    
    
    4.1
    %Security
Title Guaranty Corporation
    
    1
    
    $
    129,038
    
    
    
    3.2
    %Citizens Business Bank
    
    1
    
    $
    128,000
    
    
    
    3.2
    %Fed Ex Kinkos
    
    1
    
    $
    107,250
    
    
    
    2.7
    %USA Triathlon
    
    1
    
    $
    96,832
    
    
    
    2.4
    %
 
 (1)
    
    Based upon current occupancy excluding residential and self
storage properties.  19




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Occupancy and Average Effective Annual Rent Per Square Foot
  Annual RentGLA/
    
    
    Annual
    
    
    Annual Net
    
    
    Per Sq FtProperty
    
    # of Units
    
    
    Gross Rent
    
    
    Oper Inc.
    
    
    At Full OccupancyCasa Grande Apts.
    
    39 Apts
    
    
    $
    230,400
    
    
    $
    104,700
    
    
    $
    7.68Havana/Parker
    
    
    114,000
    
    
    $
    721,100
    
    
    $
    73,700
    
    
    $
    9.55Escondido 7-Eleven
    
    
    3,000
    
    
    $
    54,000
    
    
    $
    52,400
    
    
    $
    18.00Garden Gateway(2)
    
    
    115,052
    
    
    $
    1,707,800
    
    
    $
    1,041,900
    
    
    $
    10.61World Plaza
    
    
    55,098
    
    
    $
    848,600
    
    
    $
    522,200
    
    
    $
    14.65Regatta Square
    
    
    5,983
    
    
    $
    228,400
    
    
    $
    175,800
    
    
    $
    30.59Sparkys
Palm Self-Storage
    
    494 Units
    
    $
    485,800
    
    
    $
    204,900
    
    
    $
    10.13Sparkys Joshua Self-Storage
    
    789 Units
    
    $
    553,100
    
    
    $
    322,000
    
    
    $
    5.21Executive Office Park
    
    
    65,084
    
    
    $
    1,106,700
    
    
    $
    684,500
    
    
    $
    18.00
    (4)Waterman Plaza
    
    
    21,170
    
    
    $
    617,100
    
    
    $
    440,300
    
    
    $
    28.48
    (4)Pacific Oaks Plaza(3)
    
    
    3,866
    
    
    $
    99,000
    
    
    $
    63,600
    
    
    $
    15.00
    (4)
 (1)
    
    GLA means Gross Leasable Area.(2)
    
    Information is for all 3 buildings in Complex.(3)
    
    Registrant occupies approximately 12,134 square feet of this
property as its offices(4)
    
    At the date of purchase. Average Effective Annual Rent Per Square Foot for Last 5 Years
 Average Effective Annual Rent per Square FootFor the Years Ended December 31,2003
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    

2008Casa Grande Apts.
    
    $
    5.57
    
    
    $
    5.53
    
    
    $
    5.59
    
    
    $
    5.71
    
    
    $
    6.24
    
    
    $
    6.26Havana/Parker
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8.07
    
    
    $
    7.38
    
    
    $
    6.35Escondido 7-Eleven
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    18.02
    
    
    $
    18.02
    
    
    $
    18.02Garden Gateway
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    14.40
    
    
    $
    14.84World Plaza
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    15.49
    
    
    $
    15.40Regatta Square
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    38.17
    
    
    $
    38.17Sparkys Palm Self-Storage
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    9.32
    
    
    $
    9.45Sparkys Joshua Self-Storage
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6.06
    
    
    $
    4.80Executive Office Park
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    17.90
    (1)Waterman Plaza
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    23.32
    (2)Pacific Office Park
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    33.79
    (3)
 
 (1)
    
    Annualized from date of acquisition (July 9, 2008)(2)
    
    Annualized from date of acquisition (August 12, 2008)(3)
    
    Annualized from date of acquisition (September 3, 2008)  20




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##### Table of Contents



Lease
Expirations Table(1)
  Number of Leases
    
    
    
    
    
    
    Annual Rental

    
    
    PercentExpiration Year
    
    Expiring
    
    
    Square Footage
    
    

    From Lease

    
    
    of Total2009
    
    
    31
    
    
    
    42,375
    
    
    $
    396,855
    
    
    
    10.2
    %2010
    
    
    24
    
    
    
    87,121
    
    
    $
    1,026,515
    
    
    
    26.3
    %2011
    
    
    17
    
    
    
    80,090
    
    
    $
    1,078,729
    
    
    
    27.7
    %2012
    
    
    8
    
    
    
    46,384
    
    
    $
    600,803
    
    
    
    15.4
    %2013
    
    
    6
    
    
    
    28,938
    
    
    $
    356,225
    
    
    
    9.1
    %2014
    
    
    3
    
    
    
    6,513
    
    
    $
    34,943
    
    
    
    0.9
    %2015
    
    
    1
    
    
    
    1,595
    
    
    
    19,140
    
    
    
    0.5
    %2016
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2017
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2018
    
    
    2
    
    
    
    18,057
    
    
    
    384,728
    
    
    
    9.9
    %Totals
    
    
    92
    
    
    
    311,073
    
    
    $
    3,897,938
    
    
    
    100.0
    %
 (1)
    
    Table excludes residential and self storage properties. Concentration of Tenants
  Current Base
    
    
    % of TotalProperty
    
    Tenant
    
    Annual Rent
    
    
    Rental IncomeCasa Grande Apts.
    
    (1)Havana/Parker Complex
    
    NoneEscondido 7-Eleven
    
    7-Eleven, Inc.
    
    $
    54,060
    
    
    
    100.0
    %Garden Gateway Plaza
    
    Marvell Semiconductor
    
    $
    238,395
    
    
    
    20.9
    %Fairchild Semiconductor
    
    $
    217,350
    
    
    
    19.0
    %St. Paul Fire and Marine
    
    $
    161,981
    
    
    
    14.2
    %World Plaza
    
    County of San Bernardino
    
    $
    483,852
    
    
    
    61
    %Regatta Square
    
    Smiling Moose Deli
    
    $
    62,537
    
    
    
    36.7
    %Indas Express Menu
    
    $
    46,275
    
    
    
    27.1
    %5th Avenue Nails
    
    $
    33,600
    
    
    
    19.7
    %Fancy, Inc.
    
    $
    28,152
    
    
    
    16.5
    %Sparkys Palm Self-Storage
    
    (1)Sparkys Joshua Self-Storage
    
    (1)Executive Office Park
    
    Keller Williams Realty
    
    $
    253,330
    
    
    
    31.7
    %Security Title Guaranty Co
    
    $
    129,038
    
    
    
    16.1
    %Waterman Plaza
    
    Goodwill Industries
    
    $
    330,660
    
    
    
    89.4
    %Subway
    
    $
    39,019
    
    
    
    10.6
    %Pacific Oaks Plaza(2)
    
    Southwest Diversified Investment Co. LLC
    
    $
    57,990
    
    
    
    24.2
    %
 
 (1)
    
    This property is comprised of self storage units which are
rented on a short term basis, generally less than 12 months.(2)
    
    Registrant occupies the remaining approximately 12,134 square
feet, or 75.8% of this property as its
offices.  21




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##### Table of Contents



Percentage ofRentable
    
    
    
    
    
    
    Property
    
    
    Current Base
    
    
    RenewalProperty and Lessee
    
    Square Feet
    
    
    Lease Ends
    
    
    Leased
    
    
    Annual Rent
    
    
    OptionsEscondido 7-Eleven
7-Eleven
    
    
    3,000
    
    
    
    12/31/2018
    
    
    
    100.0
    %
    
    $
    54,060
    
    
    Two 5 yr.Havana/Parker
    
    NoneGarden Gateway Plaza
Marvell Semiconductor
    
    
    20,730
    
    
    
    1/31/2012
    
    
    
    17.6
    %
    
    $
    238,395
    
    
    One 2 yr.Fairchild Semiconductor
    
    
    18,900
    
    
    
    7/31/2013
    
    
    
    16.1
    %
    
    $
    217,350
    
    
    One 5 yr.St. Paul Fire and Marine
    
    
    15,157
    
    
    
    2/28/2010
    
    
    
    12.9
    %
    
    $
    161,981
    
    
    One 5 yr.World Plaza
County of San Bernardino
    
    
    29,942
    
    
    
    2/28/2011
    
    
    
    54.3
    %
    
    $
    496,056
    
    
    Two 1 yr.& One 5 yr.Regatta Square
Smiling Moose Deli
    
    
    2,300
    
    
    
    4/30/2010
    
    
    
    38.4
    %
    
    $
    61,617
    
    
    Two 5 yr.Indas Express Menu
    
    
    1,851
    
    
    
    12/31/2013
    
    
    
    30.9
    %
    
    $
    46,275
    
    
    None5th Avenue Nails
    
    
    1,032
    
    
    
    8/31/2012
    
    
    
    17.3
    %
    
    $
    33,600
    
    
    One 5 yr.Fancy, Inc.
    
    
    800
    
    
    
    5/31/2012
    
    
    
    13.4
    %
    
    $
    28,152
    
    
    One 5 yr.Sparkys Palm Self-Storage
    
    None
    (1)Sparkys Joshua Self-Storage
    
    None
    (1)Executive Office ParkKeller Williams Realty
    
    
    21,192
    
    
    
    8/31/2010
    
    
    
    30.5
    %
    
    $
    253,330
    
    
    One 2 yr.Security Title Guaranty Co
    
    
    9,217
    
    
    
    7/31/2012
    
    
    
    14.2
    %
    
    $
    129,038
    
    
    NoneWaterman PlazaGoodwill Industries
    
    
    21,170
    
    
    
    9/24/2018
    
    
    
    68.5
    %
    
    $
    330,660
    
    
    Two 5 yr.Pacific Oaks PlazaSouthwest
Diversified Investment Co. LLC
    
    
    3,866
    
    
    
    9/7/2011
    
    
    
    24.2
    %
    
    $
    57,990
    
    
    None
 
 (1)
    
    Self-storage units rented on a short term basis.(2)
    
    The Company uses the remaining 12,134 square feet, or 74.8%
of this property. Geographic Diversification Table
  Approximate %No. of
    
    
    Aggregate
    
    
    Approximate %
    
    
    Current Base
    
    
    of AggregateState
    
    Properties
    
    
    Square Feet
    
    
    of Square Feet
    
    
    Annual Rent
    
    
    Annual RentCalifornia
    
    
    6
    
    
    
    283,134
    
    
    
    46.2
    %
    
    $
    2,657,700
    
    
    
    40.0
    %Colorado
    
    
    4
    
    
    
    300,119
    
    
    
    49.0
    %
    
    
    3,764,000
    
    
    
    56.5
    %Wyoming
    
    
    1
    
    
    
    29,250
    
    
    
    4.8
    %
    
    
    230,400
    
    
    
    3.5
    %Total
    
    
    11
    
    
    
    612,503
    
    
    
    100.0
    %
    
    
    6,652,100
    
    
    
    100.0
    %
  Approximate %No. of
    
    
    Aggregate
    
    
    Approximate %
    
    
    Current Base
    
    
    of AggregateState
    
    Properties
    
    
    Square Feet
    
    
    of Square Feet
    
    
    Annual Rent
    
    
    Annual RentCalifornia
    
    
    7
    
    
    
    268,256
    
    
    
    50.4
    %
    
    $
    1,966,867
    
    
    
    46.8
    %Colorado
    
    
    3
    (1)
    
    
    235,035
    
    
    
    44.1
    %
    
    
    2,018,744
    
    
    
    48.1
    %Wyoming
    
    
    1
    
    
    
    29,250
    
    
    
    5.5
    %
    
    
    213,400
    
    
    
    5.1
    %Total
    
    
    11
    
    
    
    532,541
    
    
    
    100.0
    %
    
    
    4,199,011
    
    
    
    100.0
    %
 (1)
    
    Garden Gateway Plaza is comprised of 3 separate properties.  22




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##### Table of Contents



Indebtedness
 Mortgage Debt
  Principal
    
    
    Current
    
    
    
    
    
    
    Balance atProperty
    
    Amount
    
    
    Interest Rate
    
    
    Maturity Date
    
    
    MaturityHavana/Parker Complex
    
    $
    3,459,374
    
    
    
    6.51
    %
    
    July 2016
    
    
    $
    2,844,980Garden Gateway Plaza (1)
    
    $
    10,670,864
    
    
    
    6.08
    %
    
    April 2014
    
    
    $
    9,387,287World Plaza
    
    $
    3,522,227
    
    
    
    5.31
    %
    
    February 2012
    
    
    $
    3,074,416Executive Office Park (2)
    
    $
    20,000
    
    
    
    6.25
    %
    
    December 2009
    
    
    Revolving lineWaterman Plaza
    
    $
    3,834,492
    
    
    
    6.50
    %
    
    September 2015
    
    
    $
    3,304,952
 (1)
    
    Mortgage is cross-collateralized by all three buildings comprising
the Garden Gateway Plaza. Mortgage has release clause for each
building.(2)
    
    Borrowed under the Mile High Credit Facility, a $6,597,500 revolving
line of credit secured by Executive Office Park and Regatta Square. Item 2
 Description
of Properties
 Casa Grande Apartments
  th
     23




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##### Table of Contents



Escondido 7-Eleven
     Havana/Parker Complex
  Sparkys Palm Self-Storage
  Garden Gateway Plaza
   24




---



##### Table of Contents



Sparkys Joshua Self-Storage
   World Plaza
   Regatta Square
  Executive Office Park
     25




---



##### Table of Contents



Waterman Plaza
   Pacific Oaks Plaza
    Properties
Acquired After December 31, 2008
         26




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##### Table of Contents



Our Real Estate Loan Investments
       Dispositions of Properties
      27




---



##### Table of Contents



PercentProperty
    
    OwnedCasa Grande Apartments
    
    
    20.08
    %Garden Gateway
    
    
    94.01
    %Sparkys Palm Self-Storage
    
    
    51.97
    %Escondido 7-11
    
    
    51.40
    %
   28




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##### Table of Contents



ITEM 3. LEGAL PROCEEDINGS
   29




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##### Table of Contents



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   30




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##### Table of Contents



ITEM 5.
    MARKET PRICE FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
 MATTERS AND ISSUERS PURCHASES OF EQUITY SECURITIES
   Month
    
    2008
    
    
    2007Cash Dividend
    
    
    Stock Dividend
    
    
    Cash DividendJanuary
    
    $
    0.049
    
    
    
    
    
    
    $
    0.050February
    
    
    0.049
    
    
    
    
    
    
    
    0.050March
    
    
    0.047
    
    
    
    
    
    
    
    0.050April
    
    
    0.04925
    
    
    
    
    
    
    
    0.050May
    
    
    0.04925
    
    
    
    
    
    
    
    0.050June
    
    
    0.04925
    
    
    
    
    
    
    
    0.050July
    
    
    0.0495
    
    
    
    
    
    
    
    0.050August
    
    
    0.0495
    
    
    
    5
    %
    
    
    0.048September
    
    
    0.0495
    
    
    
    
    
    
    
    0.048October
    
    
    0.0864
    
    
    
    
    
    
    
    0.148November
    
    
    0.0864
    
    
    
    
    
    
    
    0.048December
    
    
    0.0864
    
    
    
    
    
    
    
    0.048Total
    
    $
    0.70045
    
    
    
    
    
    
    $
    0.690
     31




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##### Table of Contents



Market Information
  Dividend Policy
      Number of Holders of Each Class of Stock
  Securities Authorized for Issuance under Equity Compensation Plan
  Number of securitiesNumber of securities
    
    
    
    
    
    
    remaining available forto be issued upon
    
    
    Weighted-average
    
    
    future issuance underexercise of outstanding
    
    
    exercise price of
    
    
    equity compensation plansoptions, warrants
    
    
    outstanding options,
    
    
    (excluding securitiesand rights
    
    
    warrants and rights
    
    
    reflected in column (a))Plan Category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders
    
    
    19,058
    
    
    $
    8.34
    
    
    
    (1
    )Equity compensation
plans not approved
by security holders
    
    None
    
    
    
    
    
    NoneTotals
    
    
    19,058
    
    
    $
    8.34
    
    
    
    (1
    )
 (1)
    
    The stock option compensation plan was issued under the 1999 Flexible Incentive Plan that
provides that no more than 10% of the outstanding shares can be
issued under the Plan. At March 31, 2009 the maximum number of shares that could be issued under the
Plan was 732,581 shares.
Excluding the exercisable stock options and the non-vested restricted stock described in note (2),
the number of securities remaining available for future issuance under equity compensation plans is
645,702 shares at March 31, 2009.(2)
    
    In addition to the stock options awarded under the 1999 Flexible Incentive Plan, the
Compensation Committee of the Board of Directors adopted a Restricted Stock Plan under the 1999
Flexible Incentive Plan in December 2006. A table of non-vested
restricted shares granted and vested since December 31, 2006 is
as follows: Balance,
December 31, 2006
    
    
    Granted

    
    14,237Vested
    
    
    (3,907
)Balance,
December 31, 2007
    
    
    10,330Granted

    
    27,871Vested
    
    
    (12,144
)Cancelled

    
    (126
)Balance,
December 31, 2008
    
    
    25,931Granted

    
    41,890Balance, March 31, 2009
    
    
    67,821
  Options
  Issuer Purchases of Equity Securities
 (d)Maximum(c)
    
    Number (orTotal
    
    ApproximateNumber of
    
    DollarShares (or
    
    Value) ofUnits)
    
    Shares (orPurchased as
    
    Units)(a)
    
    
    
    Part of
    
    that May YetTotal
    
    (b)
    
    Publicly
    
    BeNumber of
    
    Average
    
    Announced
    
    Purchased UnderShares
    
    Price Paid
    
    Plans or
    
    the Plans orPeriod
    
    Purchased
    
    per Share
    
    Programs (1)
    
    Programs (1)February 1  February 28, 2008
    
    2,218
    
    $9.80May 1  May 31, 2008
    
    403
    
    $8.00June 1  June 30, 2008
    
    4,607
    
    $8.00November 1  November 30, 2008
    
    47
    
    $7.80Total
    
    7,275
    
    $8.55
   32




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##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA
   33




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Economic Outlook
   OVERVIEW AND BACKGROUND
   34




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##### Table of Contents



Current Developments and Trends
     Management Evaluation of Results of Operations
   35




---



##### Table of Contents



CRITICAL ACCOUNTING POLICIES
  Property Acquisitions.
     36




---



##### Table of Contents



Sales of Undivided Interests in Properties.
 
   Depreciation and Amortization of Buildings and Improvements.
 
  37




---



##### Table of Contents



Intangible Assets Goodwill and Other
Intangible Assets
    Investments in Real Estate Ventures.
   38




---



##### Table of Contents



Provision for Loan Losses.
  Cash and Cash Equivalents.
 Restricted Cash.
 Deposits held at Bankrupt institution
  Short-Term Investments.
  39




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##### Table of Contents



Deferred Common Stock Issuance Costs.
 Tenant Receivables.
 Deferred Leasing Costs.
 Deferred Financing Costs.
 Revenue Recognition.
 
    
    persuasive evidence of an arrangement exists;
    
    delivery has occurred or services have been rendered
    
    the amount is fixed or determinable; and
    
    the collectability of the amount is reasonably
assured.
   40




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##### Table of Contents



Discontinued Operations and Properties.
 Impairment.
 Federal Income Taxes.
     41




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##### Table of Contents



Stock Options
 Earnings (Loss) Per Common Share
  2008
    
    
    2007Weighted average shares used for Basic EPS
    
    
    5,083,532
    
    
    
    2,426,887Incremental shares from share-based compensation
    
    
    
    
    
    
    Incremental shares from conversion of NetREIT 01 LP Partnership
    
    
    
    
    
    
    Incremental shares from convertible preferred and warrants
    
    
    
    
    
    
    Adjusted weighted average shares used for diluted EPS
    
    
    5,083,532
    
    
    
    2,426,887
  Fair Value of Financial Instruments.
 Use of Estimates
  42




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##### Table of Contents



Segments.
 Recent Issued Accounting Standards.
   
    
    the buyer cannot act independently of the seller
 
    
    The seller is economically compelled or required to reacquire the other
investors interest in the jointly owned entity.
    43




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##### Table of Contents



.
 THE FOLLOWING IS A COMPARISON OF OUR RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2008
AND 2007
  RECENT EVENTS HAVING SIGNIFICANT EFFECT ON RESULTS OF OPERATIONS COMPARISONS
 Property Acquisitions
      44




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##### Table of Contents



Sales of Undivided Interests in Properties.
 7-11 Escondido
  Casa Grande Apartments
    Sparkys Palm Self-Storage
   45




---



##### Table of Contents



Garden Gateway Plaza
   Properties Sold
  Financing
    46




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##### Table of Contents



Mortgage Loan Receivables
    
  Revenues
   
    
    The addition of the five properties acquired in 2007, which generated an additional
$2,303,543 of rent revenue in 2008 compared to 2007.
    
    The addition of the three properties acquired in 2008 which contributed $772,468 in rent
revenue in 2008.
    
    Offset by a decrease in rent revenue for the three properties acquired prior to 2007 which
decreased by $100,663. This decrease was due to Havana/Parker Complex, which declined approximately
$148,000 in 2008. The Company has initiated an effort to increase the occupancy rate through
improving the quality of the building, an increase in marketing efforts and by hiring a new leasing
agent.
    
    Rental income was reduced by approximately $700,000 for properties that had sales of undivided
interests in 2007 and 2008 and converted to the equity method of accounting as discussed above.
  47




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##### Table of Contents



Rental Operating Expenses
  Interest Expense
   Date Acquired
    
    
    2008
    
    
    2007Havana/Parker Complex
    
    June 2006
    
    $
    230,824
    
    
    $
    237,154Garden Gateway Plaza
    
    March 2007
    
    
    518,830
    
    
    
    520,341World Plaza
    
    September 2007
    
    
    190,326
    
    
    
    54,123Sparkys Joshua Self-Storage
    
    December 2007
    
    
    9,543
    
    
    
    24,240Executive Office Park
    
    July 2008
    
    
    94,726Waterman Plaza
    
    August 2008
    
    
    97,152Amortization of deferred
financing costs
    
    
    
    
    
    
    45,080
    
    
    
    6,232$
    1,186,481
    
    
    $
    842,090
  48




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##### Table of Contents



Non-GAAP Supplemental Financial Measure: Interest Coverage Ratio
   2008
    
    
    2007Net cash provided by operating activities
    
    $
    683,526
    
    
    $
    627,190Interest and amortized financing expense
    
    
    1,186,481
    
    
    
    842,090Changes in operating assets and liabilities:Receivables and other assets
    
    
    582,817
    
    
    
    417,845Accounts payable, accrued expenses and other liabilities
    
    
    (908,481
    )
    
    
    (566,335
    )Interest coverage amount
    
    $
    1,544,343
    
    
    $
    1,320,790Divided by interest expense
    
    $
    1,141,401
    
    
    $
    835,858Interest coverage ratio
    
    
    1.35
    
    
    
    1.58
 Non-GAAP Supplemental Financial Measure: Fixed Charge Coverage Ratio
  General and Administrative Expenses
    49




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##### Table of Contents



Net Income (Loss) Available to Common Stockholders
  LIQUIDITY AND CAPITAL RESOURCES
 Cash and Cash Equivalents
  Investing Activities
  Financing Activities
   50




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##### Table of Contents



Operating Activities
  Future Capital Needs
  Contractual Obligations
    Less than a year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    More than 5 Years2009
    
    
    (2010-2011)
    
    
    (2012-2013)
    
    
    (After 2013)
    
    
    TotalPrincipal payments  secured debt
    
    $
    505,696
    
    
    $
    1,062,548
    
    
    $
    3,930,833
    
    
    $
    16,007,880
    
    
    $
    21,506,957Interest payments  fixed rate debt
    
    
    1,300,210
    
    
    
    2,508,964
    
    
    
    2,078,886
    
    
    
    1,084,260
    
    
    
    6,972,320Ground lease obligation (1)
    
    
    20,040
    
    
    
    40,080
    
    
    
    43,064
    
    
    
    1,137,204
    
    
    
    1,240,388Purchase commitments (2)
    
    
    6,575,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,575,000$
    8,400,946
    
    
    $
    3,611,592
    
    
    $
    6,052,783
    
    
    $
    18,229,344
    
    
    $
    36,294,665
 (1)
    
    Lease obligations represent the ground lease payments due on our World Plaza property.(2)
    
    Purchase commitments represent the property we purchased on January 2, 2009.  51




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##### Table of Contents



Capital Commitments
  Other Liquidity Needs
    Off-Balance Sheet Arrangements
  Capital Expenditures, Tenant Improvements and Leasing Costs
   52




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##### Table of Contents



Non-GAAP Supplemental Financial Measure: Funds From Operations (FFO)
   Year ended December 31,2008
    
    
    2007Net income (loss)
    
    $
    (2,110,519
    )
    
    $
    2,308,990Adjustments:Preferred stock dividends
    
    
    (87,850
    )
    
    
    (87,850
    )Depreciation and amortization of real estate assets
    
    
    2,038,668
    
    
    
    970,478Loss (gain) from sale of real estate
    
    
    41,024
    
    
    
    (2,890,606
    )Funds from operations
    
    $
    (118,677
    )
    
    $
    301,012
  Inflation
   53




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##### Table of Contents



Segments Disclosure
     54




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##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
  
 ITEM
9A(T). CONTROLS AND PROCEDURES
     55




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##### Table of Contents



Changes in Internal Control over Financial Reporting
  Managements Report on Internal Control over Financial Reporting
 Internal Control  Integrated Framework Internal Control  Integrated Framework
    56




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##### Table of Contents



PART
III
 
 ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  Name
    
    Age
    
    Position
    
    AddressJack K. Heilbron
    
    
    58
    
    
    Chairman of the Board
    
    1282 Pacific Oaks PlaceChief Executive Officer
    
    Escondido, CA 92029Kenneth W. Elsberry
    
    
    71
    
    
    Chief Financial Officer
    
    1282 Pacific Oaks PlaceSecretary
    
    Escondido, CA 92029David
T. Bruen
    
    
    64
    
    
    Director
    
    1282 Pacific Oaks PlaceEscondido, CA 92029Larry G. Dubose
    
    
    58
    
    
    Director
    
    1282 Pacific Oaks PlaceEscondido, CA 92029Sumner J. Rollings
    
    
    60
    
    
    Director
    
    1282 Pacific Oaks PlaceEscondido, CA 92029Thomas Schwartz
    
    
    68
    
    
    Director
    
    1282 Pacific Oaks PlaceEscondido, CA 92029Bruce A. Staller
    
    
    70
    
    
    Director
    
    1282 Pacific Oaks PlaceEscondido, CA 92029
   Jack K. Heilbron
  57




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##### Table of Contents



Kenneth W. Elsberry
 David
T. Bruen st
 Larry G. Dubose
  58




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##### Table of Contents



Sumner J. Rollings
 Thomas E. Schwartz
 Bruce A. Staller
 Committees of Directors Committees of Directors
 Audit Committee
 Nominating and Corporate Governance Committee.
 Compensation and Benefits Committee .
 Meetings and Attendance
  Compliance with Section 16(A) of the Exchange Act
 The Company became a
reporting company with the filing of a Form 10 in May 2008.  As required by Section 16(A) of the
Exchange Act, the Officers and Directors, and persons who own more than 10% of a registered class of our equity
securities were required to file the Form 3 initial report of ownership and reports of changes in ownership in the Form
4.   The Initial Form 3 was filed late for all officers and directors; Mssrs. Heilbron, Elsberry, Dubose, Staller,
Schwartz, Rollings, and Bruen.  The Form 4 referencing the restricted stock awards granted in January 2009 was filed
late for Mssrs. Heilbron, Elsberry, Dubose, Staller, Schwartz, and Rollings.  A Form 4 disclosing a private repurchase
of common stock was filed late for Mr. Heilbron. A Form 4 identifying a gift of shares by Mr. Staller was filed late,
and a Form 4 disclosing a stock option exercise and sale in connection with a cashless exercise of a stock option for
Mr. Rollings was filed late.  Upon discovery, these matters were promptly reported.  59




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##### Table of Contents



ITEM 11. EXECUTIVE COMPENSATION
 
 Name and
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    All otherPrincipal
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock
    
    
    Options
    
    
    compensationPosition
    
    Year
    
    
    Salary
    
    
    Bonus (1)
    
    
    awards (2)
    
    
    Awarded
    
    
    (3)
    
    
    TotalJack K. Heilbron
    
    
    2008
    
    
    $
    133,583
    
    
    $
    135,000
    
    
    $
    14,998
    
    
    
    
    
    
    $
    20,615
    
    
    $
    304,196President/CEO
    
    
    2007
    
    
    
    88,415
    
    
    
    50,000
    
    
    
    1,500
    
    
    
    
    
    
    
    14,503
    
    
    
    154,4182006
    
    
    
    45,067
    
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    16,425
    
    
    
    76,492Kenneth Elsberry
    
    
    2008
    
    
    
    132,583
    
    
    
    100,000
    
    
    
    14,998
    
    
    
    
    
    
    
    9,689
    
    
    
    257,270Secretary/CFO
    
    
    2007
    
    
    
    88,415
    
    
    
    50,000
    
    
    
    1,500
    
    
    
    
    
    
    
    7,460
    
    
    
    147,3752006
    
    
    
    45,067
    
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    6,214
    
    
    
    66,281
 (1)
    
    The bonuses shown for each year were paid in January of the following year.(2)
    
    For the years 2008 and 2007, the amounts shown represent the compensation
cost recognized by us related to the grants of restricted stock during the
respective year in accordance with SFAS 123R. For a discussion of
valuation assumptions used to determine the compensation cost in 2008 and
2007, see Note 3 to the Notes to the Companys Financial Statements for
the year ended December 31, 2008.(3)
    
    The following table sets forth other compensation paid by us: DistributionsPaid on
    
    
    Group Term
    
    
    
    
    
    
    
    
    
    
    Total of AllRestricted
    
    
    Life Insurance
    
    
    Auto
    
    
    Country
    
    
    OtherName
    
    Year
    
    
    Stock
    
    
    Payments
    
    
    Allowance
    
    
    Club
    
    
    CompensationJack K. Heilbron,
    
    
    2008
    
    
    $
    2,830
    
    
    $
    1,945
    
    
    $
    8,776
    
    
    $
    7,064
    
    
    $
    20,615President/CEO
    
    
    2007
    
    
    
    845
    
    
    
    1,509
    
    
    
    9,095
    
    
    
    3,054
    
    
    
    14,5032006
    
    
    
    0
    
    
    
    1,799
    
    
    
    10,033
    
    
    
    4,593
    
    
    
    16,425Kenneth W. Elsberry,
    
    
    2008
    
    
    
    2,873
    
    
    
    816
    
    
    
    6,000
    
    
    
    0
    
    
    
    9,689Secretary/CFO
    
    
    2007
    
    
    
    845
    
    
    
    615
    
    
    
    6,000
    
    
    
    0
    
    
    
    7,4602006
    
    
    
    0
    
    
    
    214
    
    
    
    6,000
    
    
    
    0
    
    
    
    6,214
  60




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##### Table of Contents



Stock Option Awards (1)
    
    
    
    
    
    
    
    
    
    

Restricted
Stock Awards (2)(3)(4)EquityIncentive
    
    
    EquityPlan
    
    
    IncentiveAwards:
    
    
    PlanNumber
    
    
    Awards:of
    
    
    MarketEquity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unearned
    
    
    or PayoutIncentive Plan
    
    
    
    
    
    
    
    
    
    
    Number
    
    
    
    
    
    
    Shares of
    
    
    Value ofAwards:
    
    
    
    
    
    
    
    
    
    
    of Shares
    
    
    Market
    
    
    Restricted
    
    
    UnearnedNumber of
    
    
    Number of
    
    
    Number of
    
    
    
    
    
    
    
    
    
    
    of
    
    
    Value of
    
    
    Stock or
    
    
    Shares ofShares
    
    
    Shares
    
    
    Shares
    
    
    
    
    
    
    
    
    
    
    Restricted
    
    
    Shares of
    
    
    Other
    
    
    RestrictedUnderlying
    
    
    Underlying
    
    
    Underlying
    
    
    
    
    
    
    
    
    
    
    Stock
    
    
    Restricted
    
    
    Rights
    
    
    StockUnexercised
    
    
    Unexercisable
    
    
    Unexercised
    
    
    Option
    
    
    Option
    
    
    That
    
    
    Stock That
    
    
    That Have
    
    
    ThatOptions (#)
    
    
    Options (#)
    
    
    Unearned
    
    
    Exercise
    
    
    Expiration
    
    
    Have Not
    
    
    Have Not
    
    
    Not
    
    
    Have NotName
    
    Exercisable
    
    
    Unexercisable
    
    
    Options (#)
    
    
    Price ($)
    
    
    Date
    
    
    Vested (3)
    
    
    Vested (4)
    
    
    Vested
    
    
    VestedJack K. Heilbron
    
    
    5,321
    
    
    
    0
    
    
    
    0
    
    
    $
    8.14
    
    
    6/30/2009 and 2010
    
    
    
    2,525
    
    
    $
    25,250
    
    
    
    0
    
    
    $
    0Kenneth W. Elsberry
    
    
    1,737
    
    
    
    0
    
    
    
    0
    
    
    $
    8.64
    
    
    
    6/30/2010
    
    
    
    2,525
    
    
    $
    25,250
    
    
    
    0
    
    
    $
    0
 (1)
    
    Options were granted in 2004 and 2005. The option price represents the
weighted average price of the outstanding options. The options for
each named executive officer expire as follows: Jack K. Heilbron -
1,848 on June 30, 2009 and 3,473 on June 30, 2010; Kenneth W. Elsberry
- 1,737 on June 30, 2010. No options have been granted since 2005.(2)
    
    The amounts in these columns represent the stock awards held at
December 31, 2008 that were granted on January 1, 2007 and 2008.(3)
    
    The restricted stock awards vest according to the following schedule:
1,525 shares vest on December 31, 2009 and 1,000 vest on December 31,
2010.(4)
    
    Market value has been calculated by multiplying the offering price of
$10 in our ongoing private placement offering by the outstanding
restricted stock awards for each named executive officer. Stock Vested Table
  Option Awards
    
    
    Stock AwardsNumber of
    
    
    
    
    
    
    Number ofShares
    
    
    Value Realized
    
    
    Shares
    
    
    Value RealizedAcquired on
    
    
    on
    
    
    Acquired on
    
    
    onName
    
    Exercise
    
    
    Exercise (1)
    
    
    Vesting
    
    
    Vesting (2)Jack K. Heilbron
    
    
    4,325
    
    
    $
    17,758
    
    
    
    1,525
    
    
    $
    15,250Kenneth W. Elsberry
    
    
    8,127
    
    
    $
    26,267
    
    
    
    1,525
    
    
    $
    15,250
 (1)
    
    This column represents the difference between the exercise price and
the market value of the common stock based on the offering price of
$10 in our ongoing private placement offering.(2)
    
    This column represents the value realized on vesting as calculated by
multiplying the offering price of our common stock on December 31,
2008 of $10 by the number of shares vested. Employment Agreements.
  61




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##### Table of Contents



2008 Executive Compensation Plan
  Compensation of the Companys Directors
  Change inpension valueFees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    andearned or
    
    
    
    
    
    
    
    
    
    
    Non-equity
    
    
    nonqualifiedpaid in
    
    
    Stock
    
    
    
    
    
    
    incentive
    
    
    deferred
    
    
    All othercash
    
    
    Awards
    
    
    Option
    
    
    plan
    
    
    compensation
    
    
    compensationName
    
    
    
    
    
    (1)
    
    
    (2)(3)
    
    
    Awards
    
    
    compensation
    
    
    earnings
    
    
    (4)
    
    
    TotalBruce Staller
    
    
    2008
    
    
    
    
    
    
    $
    28,582
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,225
    
    
    $
    31,8072007
    
    
    
    
    
    
    
    5,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    845
    
    
    
    6,095Sumner Rollings
    
    
    2008
    
    
    
    
    
    
    
    26,583
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,873
    
    
    
    29,4562007
    
    
    
    
    
    
    
    5,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    845
    
    
    
    6,095Thomas Schwartz
    
    
    2008
    
    
    
    
    
    
    
    25,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,873
    
    
    
    28,1232007
    
    
    
    
    
    
    
    5,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    845
    
    
    
    6,095Larry Dubose
    
    
    2008
    
    
    
    
    
    
    
    25,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,014
    
    
    
    28,2642007
    
    
    
    
    
    
    
    5,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    845
    
    
    
    6,095
 (1)
    
    The Company pays no cash fees to any of its nonaffiliated directors to
attend directors meetings but does reimburse such directors for their
travel expenses.(2)
    
    The amounts shown represent the compensation cost recognized by us
related to the grants of restricted stock during 2008 and 2007 in
accordance with Statement of Financial Accounting Standard No. 123R,
Share Based Payments(SFAS 123R). For a discussion of the valuation
assumptions used to determine the compensation cost in 2008 and 2007,
see Note 2 to the Financial Statements included in our annual report
on Form 10 for the year ended December 31, 2008.(3)
    
    On January 1,2008, each non-employee director was awarded 3,000 shares
of restricted stock. In addition the lead director, Mr. Staller, and
the Chairman of the Audit Committee, Mr. Dubose, were awarded an
additional 500 and 200 shares, respectively. On January 1, 2007,
each non-employee director was awarded 1,500 shares of restricted
stock. The fair value on date of grant was calculated by multiplying
the number of shares by the price of our private placement offering of
common stock of $10. All of these restricted stock awarded vest on the
anniversary of the grant date over three years and all shares,
including shares of restricted stock, are eligible to receive
distributions from the date of grant. During 2008 and 2007, 1/3 of the
shares granted vested and was recorded as director compensation.(4)
    
    For all directors the amount represents distributions paid on shares
of nonvested restricted stock during the year ended December 31, 2008 and 2007.  62




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##### Table of Contents



Compensation Decision-Making
 Our Compensation Committee.
 Role of Contracts Establishing Compensation.
 Role of Executives in Establishing Compensation.
 Other Compensation Policies.
     63




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##### Table of Contents



Compensation Program
 Compensation Program Objectives and Philosophy.
  Compensation Program Design.
 Elements of Compensation
  COMPENSATION DISCUSSION AND ANALYSIS
  Overview
  Base Salary
   64




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##### Table of Contents



Employment and Severance Agreements
   Annual Cash Bonus
  Long-Term Incentive Compensation Awards
    65




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##### Table of Contents



1999 Flexible Income Plan.
 Compensation of Directors.
  66




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##### Table of Contents



ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
 Principal Shareholders
  PercentageOwnedMaximum
    
    
    AtBeneficial
    
    
    March 31,Name
    
    Ownership
    
    
    2009(1)Jack K. Heilbron
    
    
    37,668
    (2)
    
    
    0.51
    %1282 Pacific Oaks PlaceEscondido, CA 92029Kenneth W. Elsberry
    
    
    32,974
    (3)
    
    
    0.45
    %1282 Pacific Oaks PlaceEscondido, CA 92029David Bruen
    
    
    5,250
    (4)
    
    
    0.07
    %1282 Pacific Oaks PlaceEscondido, CA 92029Larry G. Dubose
    
    
    12,619
    (5)
    
    
    0.17
    %1282 Pacific Oaks PlaceEscondido, CA 92029Sumner Rollings
    
    
    22,891
    (6)
    
    
    0.31
    %1282 Pacific Oaks PlaceEscondido, CA 92029Thomas Schwartz
    
    
    18,566
    (7)
    
    
    0.25
    %1282 Pacific Oaks PlaceEscondido, CA 92029Bruce A. Staller
    
    
    17,411
    (8)
    
    
    0.24
    %1282 Pacific Oaks PlaceEscondido, CA 92029All Officers and directors as a Group (seven)
    
    
    147,379
    (9)
    
    
    1.99
    %Other five percent beneficial ownersNo shareholder beneficially owns 5% or more
    
    None
    
    
    
    
  (1)
    
    Based on 7,325,813 common Shares outstanding as of March 31, 2009.(2)
    
    Includes 830 Shares held of record by CI Holding Group, Inc. (CI
Holding), 22,120 Shares and 6,250 non-vested shares owned by Mr.
Heilbron, 3,739 Shares owned by Ms. Limoges, wife of Mr.
Heilbron, and stock options expiring on June 30, 2009 and June
30, 2010 held by Mr. Heilbron to purchase 4,704 Shares at prices
ranging from $7.20 to $8.638 per Share.  67




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##### Table of Contents



(3)
    
    Includes 25,542 Shares held of record and 6,250 non-vested shares and stock options which expire on June 30, 2010
held by Mr. Elsberry for the purchase of 1,736 Shares at price of $8.638 per Share.(4)
    
    Includes 5,250 non-vested shares that will vest in 2009, 2010 and 2001.(5)
    
    Includes 6,210 Shares owned of record by Mr. Dubose and 6,250 non-vested shares that will vest in 2009, 2010 and 2011.(6)
    
    Includes 13,143 Shares held and 6,275 non-vested restricted shares that will vest in 2009, 2010 and 2011 and stock
options which expire on June 30, 2010 to purchase 3,473 Shares at price of $8.638 per Share.(7)
    
    Includes 6,040 Shares held and 6,275 non-vested restricted shares that will vest in 2009, 2010 and 2011 and stock
options for 6,251 Shares which expire on June 30, 2009 and June 30, 2010 at prices ranging from $7.20 to $8.638.(8)
    
    Includes 7,330 Shares beneficially owned and 6,608 non-vested restricted shares that will vest in 2009, 2010 and 2011
and stock options which expire on June 30, 2010 for the purchase of 3,473 Shares at price of $8.638 per Share.(9)
    
    Includes 84,952 Shares beneficially held of record by the directors and officers and 43,367 non-vested restricted
shares and stock options which expire on June 30, 2009 and June 30, 2010 for the purchase of 19,060 Shares at prices
ranging from $7.20 to $9.069 per Share.  68




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##### Table of Contents



ITEM 13.

    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
      Director
Independence
  
    
    The director is, or has been within the last three years, our employee or an employee of any of our subsidiaries;
    
    An immediate family member of the director is, or has been within the last three years, our executive officer or
an executive officer of any of our subsidiaries;
    
    The director (or an immediate family member of the director) received during any twelve-month period within the
last three years, more than $60,000 in direct compensation from us and/or any of our subsidiaries, other than
director and committee fees and pension or other forms of deferred compensation for prior service (provided such
compensation is not contingent in any way on continued service;
    
    The director was affiliated with or employed within the last three years by our present or former (internal or
external) auditor or an immediate family member of the director was affiliated with or employed in a
professional capacity by our present or former (internal or external) auditor;
    
    The director (or an immediate family member of the director) is, or has been within the last three years,
employed as an executive officer of another company where any of our executives served on that companys
compensation committee;
    
    The director is a current employee, or an immediate family member of the director is a current executive officer
of another company that made payments to, or received payments from us or any of our subsidiaries for property
or services in an amount which, in any of the last three fiscal years, exceeds the greater of $200,000, or two
percent (2%) of such other companys consolidated gross revenue;
    
    The director (or an immediate family member of the director) was, within the last three years, an affiliate or
executive officer of another company which was indebted to us, or to which we were indebted, where the total
amount of either companys indebtedness to the other was five percent (5%) or more of our total consolidated
assets or the total consolidated assets of the company for which he or she served as an affiliate or execute
officer;
  69




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##### Table of Contents




    
    The director (or an immediate family member of the director) was, within the last three years, an officer,
director or trustee of a charitable organization where our (or an affiliated charitable foundations) annual
discretionary charitable contributions to the charitable organization exceeded the greater of $1 million or five
percent (5%) of that organizations revenues;
    
    Within the last three (3) fiscal years been an officer, director or trustee of a charitable organization where
NetREITs contributions (or an affiliated charitable foundations annual discretionary charitable contributions
to the charitable organization) exceeded the greater of One Hundred Thousand Dollars ($100,000) or five percent
(5%) of that organizations consolidated gross revenue.
   70




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##### Table of Contents



ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
   2008
    
    
    2007Audit Fees
    
    $
    143,500
    
    
    $
    167,197Audit-Related Fees
    
    
    
    
    
    
    Tax Fees
    
    
    
    
    
    
    All Other Fees
    
    
    
    
    
    
    Total
    
    $
    143,500
    
    
    $
    167,197
 
 PART IV
 
 ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
   
    
    Report of J.H. Cohn LLP, Independent Registered Public Accounting Firm
 
    
    Balance Sheets as of December 31, 2008 and 2007
 
    
    Statements of Operations for the years ended December 31, 2008 and 2007
 
    
    Statements of Stockholders Equity for the years ended December 31, 2008 and
2007
 
    
    Statements of Cash Flows for the years ended December 31, 2008 and 2007
 
    
    Notes to Financial Statements
      ExhibitNumber
    
    Description3.1
    
    
    Articles of Incorporation filed January 28, 1999 (1)3.2
    
    
    Certificate of Determination of Series AA Preferred Stock filed
April 4, 2005 (1)3.3
    
    
    Bylaws of NetREIT (1)3.4
    
    
    Audit Committee Charter (1)
  71




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##### Table of Contents



ExhibitNumber
    
    Description3.5
    
    
    Compensation and Benefits Committee Charter (1)3.6
    
    
    Nominating and Corporate Governance Committee Charter (1)3.7
    
    
    Principles of Corporate Governance of NetREIT (1)4.1
    
    
    Form of Common Stock Certificate (1)4.2
    
    
    Form of Series AA Preferred Stock Certificate (1)4.3
    
    
    Registration Rights Agreement 2005 (1)4.4
    
    
    Registration Rights Agreement 2007 (1)10.1
    
    
    1999 Flexible Incentive Plan (1)10.2
    
    
    NetREIT Dividend Reinvestment Plan (1)10.3
    
    
    Form of Property Management Agreement (1)10.4
    
    
    Option Agreement to acquire CHG Properties (1)10.5
    
    
    Employment
Agreement as of April 20, 1999 by and between the Company and
Jack K. Heilbron (2)10.6
    
    

Employment
Agreement as of April 20, 1999 by and between the Company and
Kenneth W. Elsberry (2)31.1
    
    
    Certificate of the Companys Chief Executive Officer (Principal
Executive Officer) pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, with respect to the registrants Annual Report on Form 10-K
for the year ended December 31, 2008.31.2
    
    
    Certification of the Companys Chief Financial Officer (Principal
Financial and Accounting Officer) pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, with respect to the registrants Annual
Report on Form 10-K for the year ended December 31, 2008.32.1
    
    
    Certification of principal executive officer and principal financial
officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
 (1)
    
    Previously filed as an exhibit to the Form 10 for the year ended December 31, 2007.(2)
    
    Previously filed as an exhibit to the amended Form 10
for the year ended December 31, 2007 filed June 26, 2009.  72




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##### Table of Contents



SIGNATURES
  NETREIT.By:
    /s/ Jack K. HeilbronJack K. HeilbronDate: July 29, 2009
    
    Chief Executive Officer   Signature
    
    Title
    
    Date/s/ Jack K. Heilbron

Jack K. Heilbron
    
    Director, Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
    
    May 29, 2009/s/ Kenneth W. Elsberry

Kenneth W. Elsberry
    
    Director, Chief Financial Officer and Secretary (Principal
Financial and Accounting Officer)
    
    May 29, 2009/s/ David T. Bruen

David T. Bruen
    
    Director
    
    May 20, 2009/s/ Larry G. Dubose

Larry G. Dubose
    
    Director
    
    May 18, 2009/s/ Sumner J. Rollins

Sumner J. Rollins
    
    Director
    
    May 19, 2009/s/ Thomas Schwartz
    
    Director
    
    May 29, 2009Thomas Schwartz/s/
Bruce A. Staller
    
    Director
    
    May 29, 2009Bruce A. Staller
  73




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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS
 PageREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    F-2FINANCIAL STATEMENTS:Balance Sheets
    
    F-3Statements of Operations
    
    F-4Statements of Stockholders Equity
    
    F-5Statements of Cash Flows
    
    F-6Notes to Financial Statements
    
    F-7
  F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
     
  F-2




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##### Table of Contents



NetREIT
 
 Balance Sheets
 December 31, 2008 and 2007
 December 31,
    
    
    December 31,2008
    
    
    2007(as restated)ASSETSReal estate assets, net
    
    $
    43,375,860
    
    
    $
    41,917,510Lease intangibles, net
    
    
    699,749
    
    
    
    851,615Land purchase option
    
    
    1,370,000
    
    
    
    1,370,000Investment in real estate ventures
    
    
    16,455,043
    
    
    
    703,587Mortgages receivable and interest
    
    
    3,052,845
    
    
    
    1,888,555Cash and cash equivalents
    
    
    4,778,761
    
    
    
    4,880,659Restricted cash
    
    
    673,507
    
    
    
    697,894Deposits held at bankrupt institution, net
    
    
    520,000Tenant receivables, net
    
    
    99,180
    
    
    
    42,636Due from related party
    
    
    39,432
    
    
    
    118,447Deferred rent receivable
    
    
    200,846
    
    
    
    112,268Deferred stock issuance costs
    
    
    69,478
    
    
    
    179,462Deposits on potential acquisitions
    
    
    367,498Other assets, net
    
    
    728,681
    
    
    
    349,608TOTAL ASSETS
    
    $
    72,430,880
    
    
    $
    53,112,241LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Mortgage notes payable
    
    $
    21,506,957
    
    
    $
    22,420,316Accounts payable and accrued liabilities
    
    
    1,729,675
    
    
    
    844,549Dividends payable
    
    
    754,576
    
    
    
    296,790Tenant security deposits
    
    
    217,021
    
    
    
    272,681Total liabilities
    
    
    24,208,229
    
    
    
    23,834,336Commitments and contingenciesStockholders equity:Undesignated preferred stock, no par value, shares
authorized: 8,995,000, no shares issued and outstanding
at December 31, 2008 and 2007
    
    
    
    
    
    
    Series A preferred stock, no par value, shares
authorized: 5,000, no shares issued and outstanding at
December 31, 2008 and 2007
    
    
    
    
    
    
    Convertible Series AA preferred stock, no par value, $25
liquidating preference, shares authorized: 1,000,000; 50,200
shares issued and outstanding at
December 31, 2008 and 2007, liquidating value of $1,255,000
    
    
    1,028,916
    
    
    
    1,028,916Common stock Series A, no par value,
shares authorized: 100,000,000; 6,766,472 and
3,835,958 shares issued and outstanding at December 31,
2008 and 2007, respectively
    
    
    56,222,663
    
    
    
    31,299,331Common stock Series B, no par value, shares authorized: 1,000, no
shares issued and outstanding at December 31,
2008 and 2007
    
    
    
    
    
    
    Additional paid-in capital
    
    
    433,204
    
    
    
    433,204Dividends paid in excess of accumulated earnings
    
    
    (9,462,132
    )
    
    
    (3,483,546
    )Total stockholders equity
    
    
    48,222,651
    
    
    
    29,277,905TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    72,430,880
    
    
    $
    53,112,241
 See notes to financial statements.
  F-3




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##### Table of Contents



NetREIT
 
 Statements of Operations
 Years ended December 31, 2008 and 2007
 Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,2008
    
    
    2007(as restated)Rental income
    
    $
    5,107,410
    
    
    $
    2,836,506Costs and expenses:Interest
    
    
    1,186,481
    
    
    
    842,090Rental operating costs
    
    
    2,507,664
    
    
    
    1,471,667General and administrative
    
    
    1,678,576
    
    
    
    794,659Depreciation and amortization
    
    
    2,087,877
    
    
    
    942,072Total costs and expenses
    
    
    7,460,598
    
    
    
    4,050,488Other income (expense):Interest income
    
    
    336,600
    
    
    
    434,310Gain (loss) on sale of real estate
    
    
    (41,024
    )
    
    
    4,475Equity in earnings (losses) of real estate ventures
    
    
    (40,723
    )
    
    
    2,583Other expense
    
    
    (12,184
    )
    
    
    (2,751
    )Total other income
    
    
    242,669
    
    
    
    438,617Loss from continuing operations
    
    
    (2,110,519
    )
    
    
    (775,365
    )Discontinued operations:Income from discontinued operations
    
    
    
    
    
    
    198,224Gain from sale of real estate
    
    
    
    
    
    
    2,886,131Total discontinued operations
    
    
    
    
    
    
    3,084,355Net income (loss)
    
    
    (2,110,519
    )
    
    
    2,308,990Preferred stock dividends
    
    
    (87,850
    )
    
    
    (87,850
    )Net income (loss) available to common stockholders
    
    $
    (2,198,369
    )
    
    $
    2,221,140Loss per common share  basic and diluted:Loss from continuing operations
    
    $
    (0.43
    )
    
    $
    (0.36
    )Income from discontinued operations
    
    
    
    
    
    
    1.27Income (loss) per common share
    
    $
    (0.43
    )
    
    $
    0.91Weighted average number of common shares outstanding  basic
and diluted
    
    
    5,083,532
    
    
    
    2,426,887
 See notes to financial statements.
  F-4




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##### Table of Contents



NetREIT
 
 Statements of Stockholders Equity
 Years ended December 31, 2008 and 2007
 DividendsPaidSeries AA
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    in Excess ofPreferred Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    TotalBalance December 31, 2006
    
    
    50,200
    
    
    $
    1,028,916
    
    
    
    1,738,315
    
    
    $
    13,227,294
    
    
    $
    433,204
    
    
    $
    (2,131,185
    )
    
    $
    12,558,229Sale of common stock and
warrants at $10 per
share
    
    
    
    
    
    
    
    
    
    
    1,837,710
    
    
    
    18,381,685
    
    
    
    
    
    
    
    
    
    
    
    18,381,685Stock issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,828,611
    )
    
    
    
    
    
    
    
    
    
    
    (2,828,611
    )Repurchase of common
stock
    
    
    
    
    
    
    
    
    
    
    (6,309
    )
    
    
    (51,724
    )
    
    
    
    
    
    
    
    
    
    
    (51,724
    )Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    12,565
    
    
    
    83,757
    
    
    
    
    
    
    
    
    
    
    
    83,757Vesting of restricted
stock previously issued
    
    
    
    
    
    
    
    
    
    
    3,907
    
    
    
    37,214
    
    
    
    
    
    
    
    
    
    
    
    37,214Stock dividend at $10
per share
    
    
    
    
    
    
    
    
    
    
    152,821
    
    
    
    1,528,210
    
    
    
    
    
    
    
    (1,528,210
    )
    
    
    Reinvestment of cash
dividends
    
    
    
    
    
    
    
    
    
    
    70,510
    
    
    
    670,068
    
    
    
    
    
    
    
    
    
    
    
    670,068Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,613,127
    
    
    
    2,613,127Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,584,913
    )
    
    
    (1,584,913
    )Dividends declared
    
    
    
    
    
    
    
    
    
    
    26,439
    
    
    
    251,438
    
    
    
    
    
    
    
    (548,228
    )
    
    
    (296,790
    )Balance, December 31,
2007 (as previously
reported)
    
    
    50,200
    
    
    
    1,028,916
    
    
    
    3,835,958
    
    
    
    31,299,331
    
    
    
    433,204
    
    
    
    (3,179,409
    )
    
    
    29,582,042Prior period adjustments:Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (304,137
    )
    
    
    (304,137
    )Balance, December 31,
2007 (as restated)
    
    
    50,200
    
    
    
    1,028,916
    
    
    
    3,835,958
    
    
    
    31,299,331
    
    
    
    433,204
    
    
    
    (3,483,546
    )
    
    
    29,277,905Sale of common stock and
warrants at $10 per share
    
    
    
    
    
    
    
    
    
    
    2,691,255
    
    
    
    26,912,553
    
    
    
    
    
    
    
    
    
    
    
    26,912,553Stock issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,202,029
    )
    
    
    
    
    
    
    
    
    
    
    (4,202,029
    )Repurchase of common
stock
    
    
    
    
    
    
    
    
    
    
    (9,275
    )
    
    
    (82,190
    )
    
    
    
    
    
    
    
    
    
    
    (82,190
    )Reinvestment of cash
dividends
    
    
    
    
    
    
    
    
    
    
    118,911
    
    
    
    1,129,572
    
    
    
    
    
    
    
    
    
    
    
    1,129,572Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    22,248
    
    
    
    141,274
    
    
    
    
    
    
    
    
    
    
    
    141,274Exercise of warrants
    
    
    
    
    
    
    
    
    
    
    485
    
    
    
    4,530
    
    
    
    
    
    
    
    
    
    
    
    4,530Dividends reinvested on
restricted stock
    
    
    
    
    
    
    
    
    
    
    2,823
    
    
    
    26,852
    
    
    
    
    
    
    
    
    
    
    
    26,852Vesting of restricted
stock previously issued
    
    
    
    
    
    
    
    
    
    
    12,144
    
    
    
    119,575
    
    
    
    
    
    
    
    
    
    
    
    119,575Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,110,519
    )
    
    
    (2,110,519
    )Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,240,296
    )
    
    
    (2,240,296
    )Dividends (declared)/
reinvested
    
    
    
    
    
    
    
    
    
    
    91,923
    
    
    
    873,195
    
    
    
    
    
    
    
    (1,627,771
    )
    
    
    (754,576
    )Balance, December 31,
2008
    
    
    50,200
    
    
    $
    1,028,916
    
    
    
    6,766,472
    
    
    $
    56,222,663
    
    
    $
    433,204
    
    
    $
    (9,462,132
    )
    
    $
    48,222,651
 See notes to financial statements.
  F-5




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##### Table of Contents



NetREIT
 
 Statements of Cash Flows
 Years ended December 31, 2008 and 2007
 Year Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,2008
    
    
    2007(as restated)Cash flows from operating activities:Net income (loss)
    
    $
    (2,110,519
    )
    
    $
    2,308,990Adjustments to reconcile net income (loss) to net
cash provided by operating activities (including discontinued operations):Depreciation and amortization
    
    
    2,087,877
    
    
    
    1,021,210Stock compensation
    
    
    119,575
    
    
    
    37,214Loss (gain) on sale of real estate
    
    
    41,024
    
    
    
    (2,886,131
    )Bad debt expense
    
    
    60,717Distributions from real estate ventures
    
    
    118,465Equity in (earnings) losses of real estate ventures
    
    
    40,723
    
    
    
    (2,583
    )Changes in operating assets and liabilities:Deferred rent receivable
    
    
    (88,578
    )
    
    
    (89,668
    )Tenant receivables
    
    
    (117,261
    )
    
    
    (38,236
    )Other assets
    
    
    (376,978
    )
    
    
    (289,941
    )Accounts payable and accrued liabilities
    
    
    885,126
    
    
    
    404,098Due from related parties
    
    
    79,015
    
    
    
    25,416Tenant security deposits
    
    
    (55,660
    )
    
    
    136,821Net cash provided by operating activities
    
    
    683,526
    
    
    
    627,190Cash flows from investing activities:Real estate investments
    
    
    (22,997,254
    )
    
    
    (38,369,822
    )Proceeds received from sale of real estate
    
    
    3,929,243
    
    
    
    6,012,759Deposits on potential acquisitions
    
    
    (367,498
    )Issuance of mortgages receivable
    
    
    (244,074
    )
    
    
    (1,888,555
    )Restricted cash
    
    
    24,387
    
    
    
    (589,406
    )Proceeds from short-term investments
    
    
    20,457
    
    
    
    49,733Deposit held at bankrupt institution
    
    
    (1,740,358
    )Net cash used in investing activities
    
    
    (21,375,097
    )
    
    
    (34,785,291
    )Cash flows from financing activities:Proceeds from mortgage notes payable
    
    
    10,447,500
    
    
    
    19,064,976Repayment of mortgage notes payable
    
    
    (11,360,859
    )
    
    
    (218,103
    )Net proceeds from issuance of common stock
    
    
    22,710,524
    
    
    
    15,553,074Repurchase of common stock
    
    
    (82,190
    )
    
    
    (51,724
    )Exercise of stock options
    
    
    141,274
    
    
    
    83,757Exercise of warrants
    
    
    4,530Deferred stock issuance costs
    
    
    109,984
    
    
    
    (98,440
    )Dividends paid
    
    
    (1,381,090
    )
    
    
    (1,078,063
    )Net cash provided by financing activities
    
    
    20,589,673
    
    
    
    33,255,477Net decrease in cash and cash equivalents
    
    
    (101,898
    )
    
    
    (902,624
    )Cash and
cash equivalents:Beginning of year
    
    
    4,880,659
    
    
    
    5,783,283End of year
    
    $
    4,778,761
    
    
    $
    4,880,659Supplemental disclosure of cash flow information:Interest paid
    
    $
    1,278,650
    
    
    $
    748,397Non-cash investing activities:Reclassification of real estate to investment in real estate ventures
    
    $
    15,910,644
    
    
    $
    703,507Non-cash financing activities:Issuance of mortgage notes receivable on sale of real estate
    
    $
    920,216
    
    
    $
    Reinvestment of cash dividend
    
    $
    2,029,619
    
    
    $
    921,506Issuance of stock dividend
    
    $
    
    
    
    $
    1,528,210Accrual of dividends payable
    
    $
    754,576
    
    
    $
    296,790
 See notes to financial statements.
  F-6




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##### Table of Contents



NetREIT
 
 Notes to Financial Statements
 1. ORGANIZATION
    2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
     F-7




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##### Table of Contents



Balance Sheet:
 Dividends paid in
    
    
    Total liabilitiesInvestments in
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    excess of
    
    
    andReal estate
    
    
    Lease intangibles,
    
    
    Land purchase
    
    
    real estate
    
    
    Short-term
    
    
    
    
    
    
    
    
    
    
    accumulated
    
    
    stockholdersassets, net
    
    
    net
    
    
    option
    
    
    ventures
    
    
    investments
    
    
    Other assets, net
    
    
    Total Assets
    
    
    earnings
    
    
    equityBalance, December 31, 2007 as previously reported
    
    $
    45,008,328
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    33,129
    
    
    $
    455,000
    
    
    $
    53,416,378
    
    
    $
    (3,179,409
    )
    
    $
    53,416,378Reclassify investment in real estate venture
    
    
    (703,587
    )
    
    
    
    
    
    
    
    
    
    $
    703,587
    
    
    
    
    
    
    
    
    
    
    
    Reclassify leases in place
    
    
    
    
    
    $
    138,521
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (138,521
    )
    
    
    Reclassify lease intangibles
    
    
    (799,672
    )
    
    
    799,672Reclassify land purchase option
    
    
    (1,370,000
    )
    
    
    
    
    
    $
    1,370,000Reclassify short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33,129
    )
    
    
    33,129Depreciation and amortization adjustments resulting from above
    
    
    (217,559
    )
    
    
    (86,578
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (304,137
    )
    
    
    (304,137
    )
    
    
    (304,137
    )Balance, December 31, 2007 as restated
    
    $
    41,917,510
    
    
    $
    851,615
    
    
    $
    1,370,000
    
    
    $
    703,587
    
    
    $
    
    
    
    $
    349,608
    
    
    $
    53,112,241
    
    
    $
    (3,483,546
    )
    
    $
    53,112,241
 Statement of Operations:
 Equity inearnings
    
    
    
    
    
    
    Loss fromRental operating
    
    
    Depreciation and
    
    
    Gain on sale of
    
    
    (losses) of real
    
    
    
    
    
    
    continuingRental income
    
    
    costs
    
    
    amortization
    
    
    real estate
    
    
    estate ventures
    
    
    Other expense
    
    
    operations
    
    
    Net incomeYear ended December 31, 2007 as
previously reported
    
    $
    2,863,836
    
    
    $
    1,485,490
    
    
    $
    648,859
    
    
    
    
    
    
    
    
    
    
    $
    1,724
    
    
    $
    (471,228
    )
    
    $
    2,613,127Reclassify investment in real
estate venture
    
    
    (27,330
    )
    
    
    (13,823
    )
    
    
    (10,924
    )
    
    
    
    
    
    $
    2,583
    
    
    
    
    
    
    
    
    
    
    
    Reclassify gain on sale of real
estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,475
    
    
    
    
    
    
    
    (4,475
    )Amortize leases in place (1)
    
    
    
    
    
    
    
    
    
    
    60,237
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60,237
    )
    
    
    (60,237
    )Amortize tenant relationships (1)
    
    
    
    
    
    
    
    
    
    
    26,341
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,341
    )
    
    
    (26,341
    )Amortize tenant improvements (1)
    
    
    
    
    
    
    
    
    
    
    248,598
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (248,598
    )
    
    
    (248,598
    )Adjust depreciation (1)
    
    
    
    
    
    
    
    
    
    
    (31,039
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,039
    
    
    
    31,039Year ended December 31, 2007 as
restated
    
    $
    2,836,506
    
    
    $
    1,471,667
    
    
    $
    942,072
    
    
    $
    4,475
    
    
    $
    2,583
    
    
    $
    (2,751
    )
    
    $
    (775,365
    )
    
    $
    2,308,990
 (1)
    
    The depreciation and amortization adjustments result from reclassification of acquisition
costs from buildings with a useful life of 39 years to lease lives which range from less than a
year to seven years.   Statement of Cash Flows:
 Net cashEquity in losses of
    
    
    
    
    
    
    provided by
    
    
    
    
    
    
    Net cash used inDepreciation and
    
    
    real estate
    
    
    
    
    
    
    operating
    
    
    Real estate
    
    
    investingNet income
    
    
    amortization
    
    
    ventures
    
    
    Other assets
    
    
    activities
    
    
    investments
    
    
    activitiesYear ended December 31,
2007 as previously reported
    
    $
    2,613,127
    
    
    $
    717,073
    
    
    
    
    
    
    $
    (462,524
    )
    
    $
    457,190
    
    
    $
    (38,199,822
    )
    
    $
    (34,615,291
    )Depreciation and
amortization (1)
    
    
    (304,137
    )
    
    
    304,137Reclassify leases in place
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    170,000
    
    
    
    170,000
    
    
    
    (170,000
    )
    
    
    (170,000
    )Reclassify equity in
earnings of real estate
ventures
    
    
    
    
    
    
    
    
    
    $
    (2,583
    )
    
    
    2,583Year ended December 31,
2007 as restated
    
    $
    2,308,990
    
    
    $
    1,021,210
    
    
    $
    (2,583
    )
    
    $
    (289,941
    )
    
    $
    627,190
    
    
    $
    (38,369,822
    )
    
    $
    (34,785,291
    )
  F-8




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##### Table of Contents



3. SIGNIFICANT ACCOUNTING POLICIES
 Property Acquisitions.
       F-9




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##### Table of Contents



Sales of Undivided Interests in Properties.
      Depreciation and Amortization of Buildings and Improvements.
 Intangible Assets
   Investments in Real Estate Ventures. 78-9,
  F-10




---



##### Table of Contents



Provision for Loan Losses.
 Cash and Cash Equivalents.
 Restricted Cash.
 Deposits held at Bankrupt institution
  F-11




---



##### Table of Contents



Short-Term Investments.
   Deferred Common Stock Issuance Costs.
 Tenant Receivables.
 Deferred Leasing Costs.
 Deferred Financing Costs.
  F-12




---



##### Table of Contents



Revenue Recognition.
 
    
    persuasive evidence of an arrangement exists;
    
    delivery has occurred or services have been rendered;
    
    the amount is fixed or determinable; and
    
    the collectability of the amount is reasonably assured.
    Discontinued Operations and Properties.
  RentableProperty
    
    
    Month of
    
    
    Square
    
    
    Sales PriceLocation
    
    Type
    
    
    Disposition
    
    
    Feet
    
    
    (in millions)365 S. Rancho Santa Fe Rd
San Marcos, CA
    
    Office
    
    October
    
    
    27,127
    
    
    $
    5.65
  Discontinued operations:
    
    2007Gain on sale of real estate
    
    $
    2,886,131Rental income
    
    
    394,721Rental operating expense
    
    
    127,669Depreciation and amortization
    
    
    68,828Income from discontinued operations
    
    
    198,224Total income from discontinued operations
    
    $
    3,084,355Earnings per share
    
    $
    1.27
  F-13




---



##### Table of Contents



Impairment.
 Federal Income Taxes.
    Stock Options.
  F-14




---



##### Table of Contents



Earnings (Loss) Per Common Share.
  2008
    
    
    2007Weighted average shares used for Basic EPS
    
    
    5,083,532
    
    
    
    2,426,887Effect of dilutive securities:Incremental shares from share-based compensation
    
    
    
    
    
    
    Incremental shares from conversion of NetREIT 01 LP Partnership
    
    
    
    
    
    
    Incremental shares from convertible preferred and warrants
    
    
    
    
    
    
    Adjusted weighted average shares used for diluted EPS
    
    
    5,083,532
    
    
    
    2,426,887
  Fair Value of Financial Instruments.
 Use of Estimates
  F-15




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##### Table of Contents



Segments.
 Recent Issued Accounting Standards.
  .
 
    
    the buyer cannot act independently of the seller or
    
    the seller is economically compelled or
contractually required to reacquire the other
investors interest in the jointly owned entity.
  F-16




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##### Table of Contents



(
    F-17




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##### Table of Contents



4. REAL ESTATE ASSETS AND LEASE INTANGIBLES
  Real estateSquare
    
    
    Property
    
    assets, netProperty Name
    
    Date Acquired
    
    Location
    
    Footage
    
    
    Description
    
    (in thousands)Havana/Parker Complex
    
    June 2006
    
    Aurora, Colorado
    
    
    114,000
    
    
    Office
    
    $
    6,414.0World Plaza
    
    September 2007
    
    San Bernardino, California
    
    
    55,096
    
    
    Retail
    
    
    6,006.8Regatta Square
    
    October 2007
    
    Denver, Colorado
    
    
    5,983
    
    
    Retail
    
    
    2,074.2Sparkys Joshua Self-Storage
    
    December 2007
    
    Hesperia, California
    
    
    149,650
    
    
    Self Storage
    
    
    7,651.9Executive Office Park
    
    July 2008
    
    Colorado Springs, Colorado
    
    
    65,084
    
    
    Office
    
    
    9,601.3Waterman Plaza
    
    August 2008
    
    San Bernardino, California
    
    
    21,285
    
    
    Retail
    
    
    6,806.0Pacific Oaks Plaza
    
    September 2008
    
    Escondido, California
    
    
    16,037
    
    
    Office
    
    
    4,821.7Total real estate assets, net
    
    
    
    
    
    
    
    $
    43,375.9
 
 December 31,
    
    
    December 31,2008
    
    
    2007Land
    
    $
    7,710,502
    
    
    $
    6,940,554Buildings and other
    
    
    35,497,050
    
    
    
    34,330,636Tenant improvements
    
    
    1,530,927
    
    
    
    1,746,85244,738,479
    
    
    
    43,018,042Less accumulated depreciation and amortization
    
    
    (1,362,619
    )
    
    
    (1,100,532
    )Real estate assets, net
    
    $
    43,375,860
    
    
    $
    41,917,510
     F-18




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##### Table of Contents



LandPurchase
    
    
    Buildings
    
    
    Tenant
    
    
    In-place
    
    
    Leasing
    
    
    Tenant
    
    
    Total PurchaseLand
    
    
    Option
    
    
    and other
    
    
    Improvements
    
    
    Leases
    
    
    Costs
    
    
    Relationships
    
    
    PriceWorld Plaza
    
    
    
    
    
    $
    1,370,000
    
    
    $
    6,006,891
    
    
    $
    118,803
    
    
    $
    65,211
    
    
    $
    89,774
    
    
    
    
    
    
    $
    7,650,679Regatta Square
    
    $
    811,022
    
    
    
    
    
    
    
    1,267,469
    
    
    
    47,050
    
    
    
    40,510
    
    
    
    14,115
    
    
    
    
    
    
    
    2,180,166Sparkys Joshua Self-Storage
    
    
    1,281,140
    
    
    
    
    
    
    
    6,533,175
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    192,812
    
    
    
    8,007,127Executive Office Park
    
    
    1,265,735
    
    
    
    
    
    
    
    7,747,826
    
    
    
    797,219
    
    
    
    195,518
    
    
    
    119,583
    
    
    
    
    
    
    
    10,125,881Waterman Plaza
    
    
    2,350,000
    
    
    
    
    
    
    
    4,319,736
    
    
    
    177,030
    
    
    
    135,162
    
    
    
    182,101
    
    
    
    
    
    
    
    7,164,029Pacific Oaks Plaza
    
    
    980,000
    
    
    
    
    
    
    
    3,862,791
    
    
    
    
    
    
    
    23,254
    
    
    
    10,438
    
    
    
    
    
    
    
    4,876,483
  F-19




---



##### Table of Contents



Property sales
            F-20




---



##### Table of Contents



Lease Intangibles
   December 31, 2008
    
    
    December 31, 2007Lease intangibles
    
    
    Accumulated Amortization
    
    
    Lease intangibles, net
    
    
    Lease intangibles
    
    
    Accumulated Amortization
    
    
    Lease intangibles, netIn-place leases
    
    $
    459,657
    
    
    $
    (83,231
    )
    
    $
    376,426
    
    
    $
    329,963
    
    
    $
    (50,116
    )
    
    $
    279,847Leasing costs
    
    
    416,011
    
    
    
    (69,088
    )
    
    
    346,923
    
    
    
    273,892
    
    
    
    (41,600
    )
    
    
    232,292Tenant relationships
    
    
    192,812
    
    
    
    (180,617
    )
    
    
    12,195
    
    
    
    365,817
    
    
    
    (26,341
    )
    
    
    339,476Below-market leases
    
    
    (40,160
    )
    
    
    4,365
    
    
    
    (35,795
    )$
    1,028,320
    
    
    $
    (328,571
    )
    
    $
    699,749
    
    
    $
    969,672
    
    
    $
    (118,057
    )
    
    $
    851,615
  EstimatedAggregateAmortizationExpenseYear ending December 31, 2009
    
    $
    209,4402010
    
    
    159,3592011
    
    
    92,9012012
    
    
    67,1462013
    
    
    42,404Thereafter
    
    
    128,499$
    699,749
 5. INVESTMENT IN REAL ESTATE VENTURES
  Equity
    
    
    Investment balance at:Percentage
    
    
    December 31, 2008
    
    
    December 31, 2007Garden Gateway Plaza
    
    
    94.0
    %
    
    $
    13,232,571
    
    
    
    Sparkys Palm Self-Storage
    
    
    52.0
    
    
    
    2,380,484
    
    
    
    Escondido 7-11
    
    
    51.4
    
    
    
    694,458
    
    
    $
    703,587Casa Grande Apartments
    
    
    20.1
    
    
    
    147,530
    
    
    
    $
    16,455,043
    
    
    $
    703,587
   F-21




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##### Table of Contents



December 31,2008
    
    
    2007Real estate assets and lease intangibles
    
    $
    17,107,835
    
    
    $
    703,587Total assets
    
    $
    17,107,835
    
    
    $
    703,587Liabilities
    
    $
    662,792
    
    
    $
    Owners equity
    
    
    16,445,043
    
    
    
    703,587Total liabilities and owners equity
    
    $
    17,107,835
    
    
    $
    703,587
  December 31,2008
    
    
    2007Rental income
    
    $
    704,443
    
    
    $
    27,330Costs and expenses:Rental operating costs
    
    
    311,130
    
    
    
    939$
    393,313
    
    
    $
    26,391
  F-22




---



##### Table of Contents



6. MORTGAGES RECEIVABLE
        F-23




---



##### Table of Contents



7. MORTGAGE NOTES PAYABLE
  December 31,
    
    
    December 31,2008
    
    
    2007Mortgage note payable in monthly
installments of $24,330 through July 1,
2016, including interest at a fixed rate of
6.51%, collateralized by the Havana/Parker
Complex property.
    
    $
    3,459,374
    
    
    $
    3,520,170Mortgage note payable in monthly
installments of $71,412 through April 5,
2014, including interest at a fixed rate of
6.08%; collateralized by the leases and
office buildings of the Garden Gateway
Plaza property. Certain obligations under
the note are guaranteed by the executive
officers.
    
    
    10,670,864
    
    
    
    10,872,323Mortgage note payable in monthly
installments of $27,088 through February 1,
2012, including interest at a fixed rate of
5.31%; collateralized by the World Plaza
property.
    
    
    3,522,227
    
    
    
    3,656,363Revolving line of credit facility to borrow
up to $6,597,500, interest only payments at
a fixed rate of 6.25%; principal payable
December 10, 2009; collateralized by the
Executive Office Park and Regatta Square
properties.
    
    
    20,000Mortgage note payable in monthly
installments of $25,995 through September
1, 2015, including interest at a fixed rate
of 6.5%; collateralized by the Waterman
Plaza property.
    
    
    3,834,492Assumed mortgage note payable in monthly
installments of $39,302 through March 10,
2008, including interest at a fixed rate of
9.506%; collateralized by the Sparkys
Joshua Self-Storage property. The Company
paid the loan off in its entirety in
January 2008.
    
    
    
    
    
    
    4,371,460$
    21,506,957
    
    
    $
    22,420,316
    F-24




---



##### Table of Contents



ScheduledPrincipalYears Ending:
    
    Payments2009
    
    $
    505,6962010
    
    
    515,5652011
    
    
    547,2832012
    
    
    3,488,9642013
    
    
    441,869Thereafter
    
    
    16,007,580Total
    
    $
    21,506,957
 8. RELATED PARTY TRANSACTIONS
       F-25




---



##### Table of Contents



9. STOCKHOLDERS EQUITY
  Common Stock.
 Undesignated Preferred Stock.
 Series A Preferred Stock.
 Series AA Preferred Stock.
 Common Stock Units.
  F-26




---



##### Table of Contents



Shareholder Warrants.
 Broker Dealer Warrants.
  F-27




---



##### Table of Contents



Employee Retirement and Share-Based Incentive Plans
 Stock Options.
  WeightedAverageExerciseShares
    
    
    PriceBalance, December 31, 2006
    
    
    55,683
    
    
    $
    7.06Options exercised
    
    
    (13,182
    )
    
    $
    6.36Options outstanding and
exercisable, December 31,
2007
    
    
    42,501
    
    
    $
    7.28Options exercised
    
    
    (22,248
    )
    
    $
    6.35Options outstanding and
exercisable, December 31,
2008
    
    
    20,253
    
    
    $
    8.31
   Share-Based Incentive Plan .
   F-28




---



##### Table of Contents



Stock Dividends.
 Stock
    
    
    Common StockDate of Declaration
    
    Record Date
    
    
    Dividend Rate
    
    
    Value
    
    
    Shares
    
    
    AmountMay 18, 2007
    
    August 1, 2007
    
    
    5
    %
    
    $
    10
    
    
    
    152,821
    
    
    $
    1,528,210
 Cash Dividends.
 10. COMMITMENTS AND CONTINGENCIES
 Operating Leases
 
 ScheduleYears Ending:
    
    Payments2009
    
    $
    20,0402010
    
    
    20,0402011
    
    
    20,0402012
    
    
    21,1542013
    
    
    21,910Thereafter
    
    
    1,137,204Total
    
    $
    1,240,388
 Litigation.
 Environmental Matters.
  F-29




---



##### Table of Contents



11. CONCENTRATION OF CREDIT RISKS
 
 12. SEGMENTS
    F-30




---



##### Table of Contents



Year Ended December 31,2008
    
    
    2007Office Properties:Rental income
    
    $
    2,680,847
    
    
    $
    2,192,448Property and related expenses
    
    
    1,426,849
    
    
    
    1,193,767Net operating income, as defined
    
    
    1,253,998
    
    
    
    998,681Equity in (losses) from real estate ventures
    
    
    (66,279
    )Residential Properties:Rental income
    
    
    49,517
    
    
    
    218,544Property and related expenses
    
    
    25,554
    
    
    
    117,832Net operating income, as defined
    
    
    23,963
    
    
    
    100,712Equity in earnings from real estate ventures
    
    
    21,883Retail Properties:Rental income
    
    
    1,272,686
    
    
    
    321,771Property and related expenses
    
    
    442,551
    
    
    
    101,731Net operating income, as defined
    
    
    830,135
    
    
    
    220,040Equity in earnings from real estate ventures
    
    
    15,839
    
    
    
    2,583Self Storage Properties:Rental income
    
    
    1,104,360
    
    
    
    103,743Property and related expenses
    
    
    612,710
    
    
    
    58,337Net operating income, as defined
    
    
    491,650
    
    
    
    45,406Equity in (losses) from real estate ventures
    
    
    (12,166
    )Mortgage loan activity:Interest income
    
    
    270,088
    
    
    
    74,838Reconciliation to Net Income Available to Common Stockholders:Total net operating income, as defined, for reportable segments
    
    
    2,829,111
    
    
    
    1,442,260Unallocated other income:Total other income
    
    
    54,328
    
    
    
    356,721Gain (loss) on sale of real estate
    
    
    (41,024
    )
    
    
    4,475Unallocated other expenses:General and administrative expenses
    
    
    1,678,576
    
    
    
    794,659Interest expense
    
    
    1,186,481
    
    
    
    842,090Depreciation and amortization
    
    
    2,087,877
    
    
    
    942,072Loss from continuing operations
    
    
    (2,110,519
    )
    
    
    (775,365
    )Income from discontinued operations
    
    
    
    
    
    
    3,084,355Net income (loss)
    
    
    (2,110,519
    )
    
    
    2,308,990Preferred dividends
    
    
    (87,850
    )
    
    
    (87,850
    )Net income (loss) available for common stockholders
    
    $
    (2,198,369
    )
    
    $
    2,221,140
  F-31




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##### Table of Contents



December 31,2008
    
    
    2007(as restated)Assets:Office Properties:Land, buildings and improvements, net (1)
    
    $
    21,088,756
    
    
    $
    20,787,078Total assets (2)
    
    
    22,397,320
    
    
    
    21,899,523Investment in real estate ventures
    
    
    13,232,571Residential Property:Land, buildings and improvements, net
    
    
    
    
    
    
    777,569Total assets
    
    
    
    
    
    
    777,773Investment in real estate ventures
    
    
    147,530Retail Properties:Land, buildings and improvements, net (1)
    
    
    16,692,805
    
    
    
    9,760,526Total assets (2)
    
    
    17,104,905
    
    
    
    9,825,269Investments in real estate ventures
    
    
    694,458
    
    
    
    703,587Self Storage Properties:Land, buildings and improvements, net (1)
    
    
    7,664,048
    
    
    
    12,813,952Total assets (2)
    
    
    7,875,137
    
    
    
    12,829,217Investment in real estate ventures
    
    
    2,380,484Mortgage loan activity:Mortgage receivable and accrued interest
    
    
    3,052,845
    
    
    
    1,888,555Total assets
    
    
    3,052,845
    
    
    
    1,888,555Reconciliation to Total Assets:Total assets for reportable segments
    
    
    66,885,250
    
    
    
    47,923,924Other unallocated assets:Cash and cash equivalents
    
    
    4,778,761
    
    
    
    4,880,659Prepaid expenses and other assets, net
    
    
    766,869
    
    
    
    307,658Total Assets
    
    $
    72,430,880
    
    
    $
    53,112,241
 (1)
    
    Includes lease intangibles and the land purchase option related to property
acquisitions.(2)
    
    Includes land, buildings and improvements, current receivables, deferred rent receivables
and deferred leasing costs and other related intangible assets, all shown on a net basis.  F-32




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Years ended December 31,2008
    
    
    2007Capital Expenditures:(1)Office Properties:Acquisition of operating properties
    
    $
    15,002,361
    
    
    $
    15,132,621Capital expenditures and tenant improvements
    
    
    650,466
    
    
    
    486,571Residential Property:Capital expenditures and tenant improvements
    
    
    
    
    
    
    32,209Retail Properties:Acquisition of operating properties
    
    
    7,164,030
    
    
    
    9,830,847Capital expenditures and tenant improvements
    
    
    158,377
    
    
    
    31,528Self Storage Properties:Acquisition of operating properties
    
    
    
    
    
    
    12,856,046Capital expenditures and tenant improvements
    
    
    22,020
    
    
    
    Mortgage loan activity:Loans originated
    
    
    920,716
    
    
    
    1,888,555Total Reportable Segments:Acquisition of operating properties
    
    
    22,166,391
    
    
    
    37,819,514Capital expenditures and tenant improvements
    
    
    830,863
    
    
    
    550,308Total real estate investments
    
    $
    22,997,254
    
    
    $
    38,369,822Total loan originations
    
    $
    920,716
    
    
    $
    1,888,555
 (1)
    
    Total consolidated capital expenditures are equal to the same amounts disclosed for total
reportable segments. 13. SUBSEQUENT EVENTS
    F-33




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F-34