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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)



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

For the quarterly period ended September 30, 2008

OR



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

For the transition period from  to

Commission file number 000-51860





PALADIN REALTY INCOME
PROPERTIES, INC.

(Exact Name of Registrant as Specified in Its Charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Maryland                                                       |  | 20-0378980                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|10880 Wilshire Blvd., Suite 1400 Los Angeles, California       |  | 90024                               
|(Address of Principal Executive Offices)                       |  | (Zip Code)                          

(310) 996-8704

(Registrants Telephone Number, Including Area Code)





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

Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                             |  |                               
|---------------------------- |  | ------------------------------
|Large Accelerated filer     ̈ |  | Accelerated filer     ̈        
|Non-Accelerated filer    x   |  | Smaller reporting company     ̈

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

As of October 31, 2008, there were 3,608,797 outstanding shares of common stock of Paladin Realty Income Properties, Inc.









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PALADIN REALTY INCOME PROPERTIES, INC.

INDEX



|                                |  |                                                                                                                                                                            |  |     
|------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                |  |                                                                                                                                                                            |  | Page
|PART I    FINANCIAL INFORMATION |  |                                                                                                                                                                           
|                                |  |                                                                                                                                                                           
|Item 1.                         |  | Financial Statements                                                                                                                                                       |  | 1   
|                                |  |                                                                                                                                                                           
|                                |  | Paladin Realty Income Properties, Inc. and Subsidiaries Consolidated Balance Sheets as of September 30, 2008 (unaudited)
 and December 31, 2007                            |  | 1   
|                                |  |                                                                                                                                                                           
|                                |  | Paladin Realty Income Properties, Inc. and Subsidiaries Consolidated Statements of Operations for the three and nine months
 ended September 30, 2008 and 2007 (unaudited) |  | 2   
|                                |  |                                                                                                                                                                           
|                                |  | Paladin Realty Income Properties, Inc. and Subsidiaries Consolidated Statement of Stockholders Equity for the nine
 months ended September 30, 2008 (unaudited)           |  | 3   
|                                |  |                                                                                                                                                                           
|                                |  | Paladin Realty Income Properties, Inc. and Subsidiaries Consolidated Statements of Cash Flows for the nine months ended
 September 30, 2008 and 2007 (unaudited)           |  | 4   
|                                |  |                                                                                                                                                                           
|                                |  | Notes to Consolidated Financial Statements                                                                                                                                 |  | 5   
|                                |  |                                                                                                                                                                           
|Item 2.                         |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                      |  | 22  
|                                |  |                                                                                                                                                                           
|Item 3.                         |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                                                 |  | 36  
|                                |  |                                                                                                                                                                           
|Item 4T.                        |  | Controls and Procedures                                                                                                                                                    |  | 37  
|                                | 
|PART II    OTHER INFORMATION    |  |                                                                                                                                                                           
|                                |  |                                                                                                                                                                           
|Item 1.                         |  | Legal Proceedings                                                                                                                                                          |  | 38  
|                                |  |                                                                                                                                                                           
|Item 1A.                        |  | Risk Factors                                                                                                                                                               |  | 38  
|                                |  |                                                                                                                                                                           
|Item 2.                         |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                                |  | 38  
|                                |  |                                                                                                                                                                           
|Item 3.                         |  | Defaults Upon Senior Securities                                                                                                                                            |  | 39  
|                                |  |                                                                                                                                                                           
|Item 4.                         |  | Submission of Matters to a Vote of Security Holders                                                                                                                        |  | 39  
|                                |  |                                                                                                                                                                           
|Item 5.                         |  | Other Information                                                                                                                                                          |  | 39  
|                                |  |                                                                                                                                                                           
|Item 6.                         |  | Exhibits                                                                                                                                                                   |  | 39  



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PART I  FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS.
|------- | ---------------------

PALADIN REALTY INCOME PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                                                                                          |  |                               |             |   |                   |   |            |  
|------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ----------- | - | ----------------- | - | ---------- | -
|                                                                                                                          |  | (Unaudited)September 30, 2008 |             |   | December 31, 2007 |  
|ASSETS                                                                                                                    |  |                               |             |   |                   |   |            |  
|Real Estate:                                                                                                              |  |                               |             |   |                   |   |            |  
|Building and improvements                                                                                                 |  | $                             | 88,908,471  |   |                   | $ | 49,726,454 |  
|Land                                                                                                                      |  |                               | 22,221,677  |   |                   |   | 6,131,578  |  
|Furniture, fixtures and equipment                                                                                         |  |                               | 3,381,470   |   |                   |   | 1,136,256  |  
|In-place leases                                                                                                           |  |                               | 1,099,508   |   |                   |   | 1,069,508  |  
|                                                                                                                          |  |                               |             |   |                   |   |            |  
|                                                                                                                          |  |                               | 115,611,126 |   |                   |   | 58,063,796 |  
|Less: Accumulated depreciation and amortization                                                                           |  |                               | (4,271,098  | ) |                   |   | (2,300,170 | )
|                                                                                                                          |  |                               |             |   |                   |   |            |  
|Total real estate, net                                                                                                    |  |                               | 111,340,028 |   |                   |   | 55,763,626 |  
|Investment in real estate joint venture                                                                                   |  |                               | 1,619,170   |   |                   |   | 1,666,265  |  
|Cash and cash equivalents                                                                                                 |  |                               | 3,219,133   |   |                   |   | 4,230,937  |  
|Restricted cash                                                                                                           |  |                               | 7,394,015   |   |                   |   | 1,328,202  |  
|Prepaid insurance and other assets, net                                                                                   |  |                               | 1,633,922   |   |                   |   | 947,961    |  
|Due from affiliates                                                                                                       |  |                               |            |   |                   |   | 926,416    |  
|                                                                                                                          |  |                               |             |   |                   |   |            |  
|TOTAL ASSETS                                                                                                              |  | $                             | 125,206,268 |   |                   | $ | 64,863,407 |  
|                                                                                                                          |  |                               |             |   |                   |   |            |  
|                                                                                                                          |  |                              
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                      |  |                               |             |   |                   |   |            |  
|Mortgages payable                                                                                                         |  | $                             | 90,379,276  |   |                   | $ | 43,879,125 |  
|Due to affiliates                                                                                                         |  |                               | 626,311     |   |                   |   |           |  
|Unaccepted subscriptions for common shares                                                                                |  |                               | 135,000     |   |                   |   | 210,210    |  
|Accrued expenses and other liabilities                                                                                    |  |                               | 2,905,403   |   |                   |   | 907,333    |  
|Distributions payable                                                                                                     |  |                               | 351,307     |   |                   |   | 263,426    |  
|                                                                                                                          |  |                               |             |   |                   |   |            |  
|Total Liabilities                                                                                                         |  |                               | 94,397,297  |   |                   |   | 45,260,094 |  
|                                                                                                                          |  |                               |             |   |                   |   |            |  
|Minority interest                                                                                                         |  |                               | 6,237,402   |   |                   |   | 256,902    |  
|                                                                                                                          |  |                               |             |   |                   |   |            |  
|Stockholders equity:                                                                                                     |  |                               |             |   |                   |   |            |  
|Preferred shares, $0.01 par value, 100,000,000 shares authorized; none issued or outstanding                              |  |                               |            |   |                   |   |           |  
|Common shares, $0.01 par value, 750,000,000 shares authorized; 3,547,051 shares and 2,608,023 shares issued, respectively |  |                               | 35,470      |   |                   |   | 26,080     |  
|Additional paid-in capital                                                                                                |  |                               | 31,163,059  |   |                   |   | 22,863,824 |  
|Treasury shares, at cost  16,095 shares and 2,537 shares respectively                                                    |  |                               | (149,681    | ) |                   |   | (23,593    | )
|Accumulated deficit and dividends                                                                                         |  |                               | (6,477,279  | ) |                   |   | (3,519,900 | )
|                                                                                                                          |  |                               |             |   |                   |   |            |  
|Total stockholders equity                                                                                                |  |                               | 24,571,569  |   |                   |   | 19,346,411 |  
|                                                                                                                          |  |                               |             |   |                   |   |            |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                |  | $                             | 125,206,268 |   |                   | $ | 64,863,407 |  
|                                                                                                                          |  |                               |             |   |                   |   |            |  

See notes to consolidated financial statements.



1



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PALADIN REALTY INCOME PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



|                                                                |  |                                  |           |   |                                 |   |           |      |  |   |            |   |  |   |            |  
|--------------------------------------------------------------- |  | -------------------------------- | --------- | - | ------------------------------- | - | --------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                |  | Three months ended September 30, |           |   | Nine months ended September 30, |  
|                                                                |  | 2008                             |           |   | 2007                            |   |           | 2008 |  |   | 2007       |  
|Revenues                                                        |  |                                  |           |   |                                 |   |           |      |  |   |            |   |  |   |            |  
|Rental income                                                   |  | $                                | 2,982,422 |   |                                 | $ | 1,186,260 |      |  | $ | 7,404,364  |   |  | $ | 3,404,464  |  
|Other income                                                    |  |                                  | 239,941   |   |                                 |   | 93,494    |      |  |   | 648,888    |   |  |   | 278,329    |  
|Interest income                                                 |  |                                  | 17,538    |   |                                 |   | 49,665    |      |  |   | 73,627     |   |  |   | 71,504     |  
|                                                                |  |                                  |           |   |                                 |   |           |      |  |   |            |   |  |   |            |  
|Total Revenues                                                  |  |                                  | 3,239,901 |   |                                 |   | 1,329,419 |      |  |   | 8,126,879  |   |  |   | 3,754,297  |  
|Expenses                                                        |  |                                  |           |   |                                 |   |           |      |  |   |            |   |  |   |            |  
|Property operating expenses                                     |  |                                  | 1,227,650 |   |                                 |   | 369,951   |      |  |   | 2,930,198  |   |  |   | 1,093,961  |  
|Real property taxes                                             |  |                                  | 244,179   |   |                                 |   | 99,851    |      |  |   | 599,207    |   |  |   | 297,106    |  
|General and administrative expenses                             |  |                                  | 508,720   |   |                                 |   | 237,491   |      |  |   | 1,264,626  |   |  |   | 695,340    |  
|Interest expense, including amortization of deferred loan costs |  |                                  | 1,214,230 |   |                                 |   | 554,108   |      |  |   | 2,997,899  |   |  |   | 1,662,790  |  
|Depreciation and amortization expense                           |  |                                  | 766,775   |   |                                 |   | 347,950   |      |  |   | 1,977,312  |   |  |   | 1,196,750  |  
|                                                                |  |                                  |           |   |                                 |   |           |      |  |   |            |   |  |   |            |  
|Total Expenses                                                  |  |                                  | 3,961,554 |   |                                 |   | 1,609,351 |      |  |   | 9,769,242  |   |  |   | 4,945,947  |  
|Loss before equity in earnings and minority interest            |  |                                  | (721,653  | ) |                                 |   | (279,932  | )    |  |   | (1,642,363 | ) |  |   | (1,191,650 | )
|Equity in earnings from real estate joint venture               |  |                                  | 17,594    |   |                                 |   | 20,998    |      |  |   | 60,205     |   |  |   | 63,217     |  
|Minority interest                                               |  |                                  | 37,911    |   |                                 |   | 28,707    |      |  |   | 61,524     |   |  |   | 164,395    |  
|                                                                |  |                                  |           |   |                                 |   |           |      |  |   |            |   |  |   |            |  
|Net loss                                                        |  | $                                | (666,148  | ) |                                 | $ | (230,227  | )    |  | $ | (1,520,634 | ) |  | $ | (964,038   | )
|                                                                |  |                                  |           |   |                                 |   |           |      |  |   |            |   |  |   |            |  
|Net loss per common share                                       |  |                                  |           |   |                                 |   |           |      |  |   |            |   |  |   |            |  
|Basic                                                           |  | $                                | (0.20     | ) |                                 | $ | (0.11     | )    |  | $ | (0.49      | ) |  | $ | (0.63      | )
|Diluted                                                         |  | $                                | (0.20     | ) |                                 | $ | (0.11     | )    |  | $ | (0.49      | ) |  | $ | (0.63      | )
|Weighted average number of common shares outstanding            |  |                                  |           |   |                                 |   |           |      |  |   |            |   |  |   |            |  
|Basic                                                           |  |                                  | 3,398,882 |   |                                 |   | 2,081,052 |      |  |   | 3,091,344  |   |  |   | 1,525,507  |  
|Diluted                                                         |  |                                  | 3,398,882 |   |                                 |   | 2,081,052 |      |  |   | 3,091,344  |   |  |   | 1,525,507  |  

See notes to consolidated financial statements.



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PALADIN REALTY INCOME PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

For the nine months ended September 30, 2008

(Unaudited)



|                                                         |  |               |  |                 |        |                |                          |        |   |                                 |   |  |                          |            |   |  |   |            |   |  |   |            |  
|-------------------------------------------------------- |  | ------------- |  | --------------- | ------ | -------------- | ------------------------ | ------ | - | ------------------------------- | - |  | ------------------------ | ---------- | - |  | - | ---------- | - |  | - | ---------- | -
|                                                         |  | Common Shares |  | Treasury Shares |        |                | AdditionalPaid-inCapital |        |   | AccumulatedDeficit andDividends |   |  | TotalStockholdersEquity |           
|                                                         |  | Commonshares  |  | Amount          |        | TreasuryShares |                          | Amount |   |                                 |   | 
|BALANCE, December 31, 2007                               |  | 2,608,023     |  | $               | 26,080 |                | 2,537                    |        | $ | (23,593                         | ) |  | $                        | 22,863,824 |   |  | $ | (3,519,900 | ) |  | $ | 19,346,411 |  
|                                                         |  |               |  |                 |        |                |                          |        |   |                                 |   |  |                          |            |   |  |   |            |   |  |   |            |  
|Issuance of common shares                                |  | 856,447       |  |                 | 8,564  |                |                         |        |   |                                |   |  |                          | 8,563,622  |   |  |   |           |   |  |   | 8,572,186  |  
|Treasury share purchased                                 |  |              |  |                 |       |                | 13,558                   |        |   | (126,088                        | ) |  |                          |           |   |  |   |           |   |  |   | (126,088   | )
|Selling commissions and dealer manager fees              |  |              |  |                 |       |                |                         |        |   |                                |   |  |                          | (824,820   | ) |  |   |           |   |  |   | (824,820   | )
|Offering costs                                           |  |              |  |                 |       |                |                         |        |   |                                |   |  |                          | (282,478   | ) |  |   |           |   |  |   | (282,478   | )
|Share-based compensation expense                         |  |              |  |                 |       |                |                         |        |   |                                |   |  |                          | 29,946     |   |  |   |           |   |  |   | 29,946     |  
|Distributions declared                                   |  |              |  |                 |       |                |                         |        |   |                                |   |  |                          |           |   |  |   | (1,436,745 | ) |  |   | (1,436,745 | )
|Shares issued pursuant to Distribution Reinvestment Plan |  | 82,581        |  |                 | 826    |                |                         |        |   |                                |   |  |                          | 812,965    |   |  |   |           |   |  |   | 813,791    |  
|Net Loss                                                 |  |              |  |                 |       |                |                         |        |   |                                |   |  |                          |           |   |  |   | (1,520,634 | ) |  |   | (1,520,634 | )
|                                                         |  |               |  |                 |        |                |                          |        |   |                                 |   |  |                          |            |   |  |   |            |   |  |   |            |  
|BALANCE, September 30, 2008                              |  | 3,547,051     |  | $               | 35,470 |                | 16,095                   |        | $ | (149,681                        | ) |  | $                        | 31,163,059 |   |  | $ | (6,477,279 | ) |  | $ | 24,571,569 |  
|                                                         |  |               |  |                 |        |                |                          |        |   |                                 |   |  |                          |            |   |  |   |            |   |  |   |            |  





See notes to consolidated financial statements.



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PALADIN REALTY INCOME PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                              |  |                               |             |   |      |   |             |  
|--------------------------------------------------------------------------------------------- |  | ----------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                                              |  | Nine months endedSeptember 30 |            
|                                                                                              |  | 2008                          |             |   | 2007 |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                          |  |                               |             |   |      |   |             |  
|Net loss                                                                                      |  | $                             | (1,520,634  | ) |      | $ | (964,038    | )
|Adjustments to reconcile net loss to net cash provided by/(used in) operating activities      |  |                               |             |   |      |   |             |  
|Equity in earnings from real estate joint venture                                             |  |                               | (60,205     | ) |      |   | (63,217     | )
|Distributions from real estate joint venture                                                  |  |                               | 60,205      |   |      |   | 63,217      |  
|Depreciation and amortization expense                                                         |  |                               | 1,977,312   |   |      |   | 1,196,750   |  
|Amortization of deferred loan costs                                                           |  |                               | 46,482      |   |      |   | 71,569      |  
|Amortization of deferred compensation                                                         |  |                               | 29,946      |   |      |   | 29,917      |  
|Minority interest                                                                             |  |                               | (61,524     | ) |      |   | (164,395    | )
|Changes in operating assets and liabilities:                                                  |  |                               |             |   |      |   |             |  
|Increase in restricted cash                                                                   |  |                               | (360,427    | ) |      |   | (271,175    | )
|Increase in prepaid insurance and other assets                                                |  |                               | (222,342    | ) |      |   | (135,320    | )
|Increase in due to affiliates                                                                 |  |                               | 604,290     |   |      |   | 55,139      |  
|Increase in accrued expenses and other liabilities                                            |  |                               | 865,683     |   |      |   | 73,773      |  
|                                                                                              |  |                               |             |   |      |   |             |  
|Net cash provided by/ (used in) operating activities                                          |  |                               | 1,358,786   |   |      |   | (107,780    | )
|                                                                                              |  |                               |             |   |      |   |             |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                          |  |                               |             |   |      |   |             |  
|Acquisition of / expenditures for real estate and improvements                                |  |                               | (52,159,562 | ) |      |   | (11,028,406 | )
|Increase in restricted cash                                                                   |  |                               | (5,780,596  | ) |      |   | (179,750    | )
|Decrease in due to affiliates                                                                 |  |                               |            |   |      |   | (578,498    | )
|Refundable deposits                                                                           |  |                               |            |   |      |   | (532,400    | )
|Distributions from real estate joint venture in excess of equity in earnings                  |  |                               | 47,095      |   |      |   | 14,483      |  
|                                                                                              |  |                               |             |   |      |   |             |  
|Net cash used in investing activities                                                         |  |                               | (57,893,063 | ) |      |   | (12,304,571 | )
|                                                                                              |  |                               |             |   |      |   |             |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                          |  |                               |             |   |      |   |             |  
|Borrowings from mortgages payable                                                             |  |                               | 42,300,000  |   |      |   | 6,250,000   |  
|Payments on mortgages payable                                                                 |  |                               | (49,849     | ) |      |   |            |  
|Payments on notes payable to affiliate                                                        |  |                               |            |   |      |   | (3,800,000  | )
|Deferred loan costs                                                                           |  |                               | (407,186    | ) |      |   | (372,854    | )
|Decrease in restricted cash                                                                   |  |                               | 75,210      |   |      |   | 113,403     |  
|Proceeds from issuance of common shares                                                       |  |                               | 8,572,186   |   |      |   | 14,155,572  |  
|Treasury shares purchased                                                                     |  |                               | (126,088    | ) |      |   | (23,593     | )
|Decrease in unaccepted subscriptions for common stock                                         |  |                               | (75,210     | ) |      |   | (113,403    | )
|Selling commissions and dealer manager fees                                                   |  |                               | (824,820    | ) |      |   | (1,321,546  | )
|Offering costs                                                                                |  |                               | (282,478    | ) |      |   | (439,220    | )
|Decrease (increase) in due from affiliates                                                    |  |                               | 948,437     |   |      |   | (499,829    | )
|Distributions paid                                                                            |  |                               | (535,072    | ) |      |   | (212,592    | )
|Contributions from minority interest                                                          |  |                               | 6,080,315   |   |      |   | 129,574     |  
|Distributions to minority interest                                                            |  |                               | (152,972    | ) |      |   | (7,988      | )
|                                                                                              |  |                               |             |   |      |   |             |  
|Net cash provided by financing activities                                                     |  |                               | 55,522,473  |   |      |   | 13,857,524  |  
|                                                                                              |  |                               |             |   |      |   |             |  
|Net (decrease) / increase in cash and cash equivalents                                        |  |                               | (1,011,804  | ) |      |   | 1,445,173   |  
|Cash and cash equivalentsbeginning of period                                                 |  |                               | 4,230,937   |   |      |   | 976,231     |  
|                                                                                              |  |                               |             |   |      |   |             |  
|Cash and cash equivalentsend of period                                                       |  | $                             | 3,219,133   |   |      | $ | 2,421,404   |  
|                                                                                              |  |                               |             |   |      |   |             |  
|Supplemental disclosure of non-cash investing and financing activities                        |  |                               |             |   |      |   |             |  
|Mortgage loan assumed in connection with purchase of real estate                              |  | $                             | 4,250,000   |   |      | $ | 4,795,763   |  
|Distributions payable                                                                         |  | $                             | 351,307     |   |      | $ | 225,877     |  
|Common stockholder distributions reinvested in accordance with Distribution Reinvestment Plan |  | $                             | 813,791     |   |      | $ | 406,991     |  
|Accrued expenses for real estate and improvements accrued but unpaid                          |  | $                             | 1,132,387   |   |      | $ |            |  
|Supplemental disclosure of cash flow information                                              |  |                               |             |   |      |   |             |  
|Cash paid during the year for interest                                                        |  | $                             | 2,732,622   |   |      | $ | 1,611,877   |  

See notes to consolidated financial statements.



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Paladin Realty Income Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2008 and 2007 (unaudited)



1.Organization

Paladin Realty Income Properties, Inc., a Maryland corporation (Paladin REIT), was formed on October 31, 2003 to invest in a diversified
portfolio of real estate investments, including investments in real properties and real estate related investments, focusing primarily on investments that produce current income. Paladin REIT owns interests in eight income-producing properties as of
September 30, 2008, consisting of 801 Fiber Optic Drive, a 56,336 square foot distribution facility built in 2001 that is 100% leased to FedEx Ground Package System, Inc., a subsidiary of FedEx Corporation; Champion Farms Apartments, a 264-unit
luxury multifamily rental community built in 2000; Fieldstone Apartments, a 266-unit multifamily community property built in 2001; Pinehurst Apartment Homes, a 146-unit multifamily rental community built in two phases in 1986 and 1988; Pheasant Run
Apartments, a 160-unit multifamily rental community built in 1985; Retreat Apartments, a 342-unit multifamily rental community built in 1984; Hilltop Apartments, a 124-unit multifamily rental community built in 1986; and Conifer Crossing, a 420-unit
multifamily rental community built in 1981. Paladin REIT intends to invest in a variety of real estate product types, including apartments, office buildings, industrial buildings, shopping centers and hotels. Paladin REIT may also make real estate
related investments, which include first mortgages or second mortgages, mezzanine loans or preferred equity investments relating to the same types of properties that Paladin REIT may acquire directly. Paladin REIT elected to be taxed as a REIT for
U.S. federal income tax purposes beginning with the taxable year ended December 31, 2006. Subject to certain restrictions and limitations, the business of Paladin REIT is managed by Paladin Realty Advisors, LLC (Paladin Advisors),
an affiliate of Paladin REIT, pursuant to an advisory agreement dated February 28, 2005, as amended February 28, 2008 and as amended and restated as of July 18, 2008 (the Advisory Agreement). Paladin Advisors supervises
and manages the day-to-day operations of Paladin REIT and selects the real estate and real estate related investments it acquires, subject to oversight by the board of directors of Paladin REIT. Paladin Advisors also provides marketing, sales and
client services on behalf of Paladin REIT.

On February 23, 2005, Paladin REITs initial public offering (the Initial
Public Offering) was declared effective and Paladin REIT commenced its offering efforts. The Initial Public Offering terminated on July 28, 2008 in connection with the commencement of Paladin REITs follow-on offering (the
Follow-On Offering and collectively with the Initial Public Offering, the Offerings) on July 28, 2008. As of September 30, 2008 Paladin REIT had received proceeds of $35,256,362 for 3,534,551 shares in the
Offerings.

Paladin REIT owns its assets and conducts its operations through Paladin Realty Income Properties, L.P., its operating
partnership (Paladin OP). As of September 30, 2008 and December 31, 2007, Paladin Advisors held a 0.6% and 0.8% limited partnership interest, respectively, and Paladin REIT held a 99.4% and 99.2% general partnership interest,
respectively, in Paladin OP. Management expects Paladin REITs ownership percentage in Paladin OP to continue to increase as Paladin REIT invests net proceeds from the Offerings in Paladin OP. Paladin REIT had no operations prior to
November 2, 2005.

2.Summary of Significant Accounting Policies

Basis of Presentation

The consolidated
financial statements include the accounts of Paladin REIT and its wholly-owned and controlled entities (collectively, the Company). In accordance with the Financial Accounting Standards Board (FASB) Interpretation
No. 46(R), Consolidation of Variable Interest Entities(FIN 46R), the Company also consolidates any variable interest entities (VIEs) of which it is the primary beneficiary as defined. When the Company does not
have a controlling interest in an entity but exerts a significant influence over the entity, the Company applies the equity method of accounting. All intercompany balances and transactions have been eliminated in consolidation.



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Paladin Realty Income Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)

September 30, 2008 and 2007 (unaudited)



Real Estate and Depreciation

Real estate is stated at cost, less accumulated depreciation. The Company allocates the cost of newly acquired properties between net tangible and
identifiable intangible assets. The primary intangible asset associated with an apartment property acquisition is the value of the existing lease agreements. When allocating cost to an acquired property, the Company allocates costs to the estimated
value of the land, building and fixtures assuming the property is vacant and to the estimated intangible value of the existing lease agreements. The Company estimates the intangible value of the lease agreements by determining the lost revenue
associated with a hypothetical lease-up. The Company depreciates the buildings and fixtures based on the expected useful life of the asset, which ranges from 27 to 45 years for the buildings and improvements and from five to seven years for
furniture, fixtures and equipment. The intangible value of the lease agreements is amortized over the average remaining life of the existing leases, which ranges from three to 24 months. This amortization is included in depreciation and amortization
expense on the accompanying consolidated statements of operations. Improvements and betterments are capitalized when they extend the useful life of the asset. Expenditures for repairs and maintenance are expensed as incurred.

The Company reviews long-lived assets and related identifiable intangibles for impairment whenever events or changes in circumstances indicate the
carrying amount of the assets may not be recoverable. When such events or changes in circumstances occur, recoverability of the asset to be held and used is measured by a comparison of the carrying amount of the asset to future net cash flows,
undiscounted and without interest, expected to be generated by the asset. If the sum of the expected future cash flows (undiscounted and without interest) is less than the Companys carrying amount for the asset, an impairment loss is
recognized based upon the assets fair value.

Investments

The Company follows the provisions of FIN 46R and the Company is required to evaluate whether it has a controlling financial interest in an entity through means other than voting rights. If the Company determines that
the joint venture is a variable interest entity (VIE) and that the Company is the primary beneficiary as defined in FIN 46R, it will account for such investment as if it were a consolidated subsidiary. For a joint
venture investment which is not a VIE, the Company considers other relevant accounting literature including Accounting Principles Board Opinion 18 The Equity Method of Accounting for Investments in Common Stock, Statement of
Position (SOP) 78-9 Accounting for Investments in Real Estate Ventures, and Emerging Issues Task Force Issue (EITF) 04-5 to determine the method of accounting for each of the partially-owned entities. In
accordance with the above pronouncements, the Company determines whether it should consolidate the entity or account for it on the equity method or cost method. Factors considered in determining whether or not the Company exercises control include
substantive participating rights of partners on significant business decisions, including dispositions and acquisitions of assets, financing and operating and capital budgets, board and management representatives and authority and other contractual
rights of the Companys partners. To the extent that the Company is deemed to control these entities, these entities will be consolidated.

As of September 30, 2008, Paladin OP held a 70% ownership interest in Springhurst Housing Partners, LLC (Springhurst), an 83% ownership interest in Glenwood Housing Partners I, LLC (Glenwood), a 97.5% ownership
interest in KC Pinehurst Associates, LLC (KC Pinehurst), a 97.5% ownership interest in KC Pheasant Associates, LLC (KC Pheasant), a 97.5% interest in KC Retreat Associates, LLC (KC Retreat), a 49% interest in Park
Hill Partners I, LLC (Park Hill), a 42.5% ownership interest in FPA/PRIP Conifer, LLC (FPA/PRIP) and a 74% ownership interest in PRIP 801, LLC as described in Note 3. Paladin REIT has



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##### Table of Contents

Paladin Realty Income Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)

September 30, 2008 and 2007 (unaudited)



determined that Paladin OP and the entities in which it has invested are not VIEs. Paladin REIT consolidates Paladin OP, Springhurst, Glenwood, KC Pinehurst,
KC Pheasant, and KC Retreat, as it is the majority owner and exercises control over all significant decisions. Paladin REIT also consolidates Park Hill and FPA/PRIP because it holds a significant ownership interest and exercises control over all
significant decisions. Paladin REIT accounts for its investment in PRIP 801, LLC under the equity method of accounting, as the other member has substantive participating rights as defined in EITF 04-5 and SOP 78-9. This investment is recorded
initially at cost, and subsequently adjusted for equity in earnings or losses and cash contributions and distributions.

On a periodic
basis the Company will evaluate whether there are any indicators that the value of its investments in partially-owned entities are impaired. An investment is impaired if the Companys estimate of the value of the investment is less than the
carrying amount. The ultimate realization of the Companys investment in partially-owned entities is dependent on a number of factors including the performance of that entity and market conditions. If the Company determines that a decline in
the value of a partially-owned entity is other than temporary, then the Company would record an impairment charge.

Deferred Loan Costs

Loan costs are capitalized and amortized using the effective interest method over the life of the related loan. The amortization is
recorded as a component of interest expense.

Revenue Recognition

The Company primarily leases residential apartments to tenants under non-cancellable operating leases with terms ranging from three to 24 months. Rental
income related to leases is recognized in the period earned over the lease term in accordance with Statement of Financial Accounting Standards (SFAS) No. 13, Accounting for Leases.

Other income consists of various tenant-related charges and is recognized as revenue in the period in which the applicable charge is incurred.

Accounts Receivable

Accounts
receivable is included in other assets in the consolidated balance sheets. Bad debts are recorded under the specific identification method, whereby, uncollectible receivables are directly written off when identified.

Use of Estimates

The presentation of the
consolidated financial statements requires management to make estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the carrying amount of the property, plant and equipment, and valuation allowances for receivables.
Actual results could differ from those estimates.

Cash Equivalents

Cash equivalents represent highly liquid investments with maturities at the date of purchase of three months or less.



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Paladin Realty Income Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)

September 30, 2008 and 2007 (unaudited)



Restricted Cash

Restricted cash includes subscription proceeds that are held in escrow until investors are admitted as stockholders. Upon acceptance of stockholders, shares of stock are issued, and Paladin REIT receives the
subscription proceeds. Restricted cash included $135,000 and $210,210 as of September 30, 2008 and December 31, 2007, respectively, for proceeds that were held in escrow. At September 30, 2008 and December 31, 2007, restricted
cash also included $6,709,015 and $567,992 held in restricted accounts for building and tenant improvements, repairs, property taxes and insurance as required by lenders. At September 30, 2008 and December 31, 2007, restricted cash also
included $550,000 held in a restricted account as collateral for a letter of credit as described in Note 3.

Income Taxes

The Company elected to be taxed as a REIT for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2006, under
Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. The Company believes it operates in such a manner as to qualify for treatment as a REIT for federal income tax purposes. Accordingly, the Company generally will not be
subject to federal income tax, provided that distributions to its stockholders equal at least the amount of its REIT taxable income. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes on its
taxable income at regular corporate income tax rates. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state or local taxes on its income, property or net worth and federal income and excise taxes on its
undistributed income. No provision has been made for federal income taxes for the nine months ended September 30, 2008 and 2007 in the accompanying consolidated financial statements.

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes  An Interpretation
of FASB Statement No. 109. FIN 48 increases the relevancy and comparability of financial reporting by clarifying the way companies account for uncertainty in measuring income taxes. FIN 48 prescribes a comprehensive model for how a
company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. This Interpretation only allows a favorable tax position to be included in
the calculation of tax liabilities and expenses if a company concludes that it is more likely than not that its adopted tax position will be sustained. The Company adopted FIN 48 as required effective January 1, 2007. The adoption of FIN 48 did
not have a material impact on its consolidated financial position, results of operations and cash flows. All of the Companys tax years are subject to examination by tax jurisdictions.

In accordance with FIN 48, the Company has assessed its tax positions for all open tax years as of January 1, 2007 and concluded that there were no
material FIN 48 uncertainties to be recognized. The Companys accounting policy with respect to interest and penalties related to tax uncertainties is to classify these amounts as provision for income taxes. The Company has not recognized any
interest and penalties related to tax uncertainties for the nine months ended September 30, 2008 and 2007.

Organization and Offering Costs

Organization costs are expensed as incurred and offering costs are charged to stockholders equity. These costs are subject to
a 3.0% limitation of the gross proceeds from the Offerings pursuant to the Companys Advisory Agreement with Paladin Advisors, as described in Note 6.



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Paladin Realty Income Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)

September 30, 2008 and 2007 (unaudited)



Expense Reimbursement

Pursuant to the Advisory Agreement, Paladin Advisors is entitled to reimbursement of actual expenses incurred for administrative and other services provided to the Company by Paladin Advisors and its affiliates,
including reimbursement of personnel costs and overhead for which they do not otherwise receive a fee. The Company will not reimburse Paladin Advisors for operating expenses that in the fiscal year then ended exceed the greater of (1) 2% of the
average invested assets of Paladin REIT or (2) 25% of the net income as described below of the Company (the 2%/25% Rule), and Paladin Advisors must reimburse Paladin REIT quarterly for any amounts by which the operating expenses of
Paladin REIT exceeds the 2%/25% Rule in the previous four consecutive fiscal quarters (the Expense Period).

The average
invested assets of the Company for any period are equal to the average book value of the Companys assets invested in equity interests in, and loans secured by, real estate before reserves for depreciation or bad debts or other similar non-cash
reserves computed by taking the average of such values at the end of each month during the period. The net income of the Company for any period is equal to the Companys total revenue less total expenses other than additions to reserves for
depreciation, bad debts or other similar non-cash reserves for such period. Operating expenses include all expenses incurred by the Company under U.S. generally accepted accounting principles (including the asset management fee), but excluding
organization and offering expenses, interest payments, taxes, non-cash expenditures such as depreciation, amortization and bad debt reserves, the subordinated disposition fee, acquisition fees and expenses and distributions pursuant to Paladin
Advisors subordinated participation interest in Paladin OP.

Paladin Advisors must reimburse the excess expenses to the Company
within 60 days after the end of each fiscal quarter unless the independent directors determine that the excess expenses were justified based on unusual and nonrecurring factors which they deem sufficient. Within 60 days after the end of any Expense
Period for which total operating expenses exceed the 2%/25% Rule, Paladin REIT will send its stockholders a written disclosure, together with an explanation of the factors the independent directors considered in arriving at the conclusion that the
excess expenses were justified. However, at Paladin Advisors option, Paladin Advisors or its affiliate, as applicable may defer receipt of any portion of the asset management fee or reimbursement of expenses and elect to receive such payments,
without interest, in any subsequent fiscal year that Paladin Advisors designates.

Per Share Data

The Company presents both basic and diluted loss per share, or EPS. Basic EPS excludes potentially dilutive securities and is computed by dividing net
loss available to common stockholders by the weighted average number of common shares outstanding during the period. Dilutive EPS reflects the potential dilution that could occur if securities or other contracts to issue common shares were
exercised, where such exercise would result in a lower EPS amount. The diluted EPS would include weighted average unvested restricted shares issued to independent directors totaling 4,000 and 8,000 shares for the nine months ended September 30,
2008 and 2007, respectively, but are excluded from the calculation as their effect would be antidilutive.

Unaccepted Subscriptions for Common Shares

Unaccepted subscriptions for common shares include proceeds related to subscriptions that were held in escrow but had not been
accepted by the Company as of September 30, 2008 and December 31, 2007.

Fair Value of Financial Instruments

The fair values of the Companys cash and cash equivalents, restricted cash, other assets, distributions payable and other liabilities approximate
the carrying values due to the short-term nature of these financial



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Paladin Realty Income Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)

September 30, 2008 and 2007 (unaudited)



instruments. As of September 30, 2008, the mortgage loans payable had an estimated fair value of approximately $88.4 million compared to the carrying
value of $90.4 million. As of December 31, 2007, the mortgage loans payable had an estimated fair value of approximately $44.1 million compared to the carrying value of $43.9 million. To determine fair value, the fixed rate debt is discounted
at a rate based on an estimate of current lending rates as of September 30, 2008 and December 31, 2007.

Stock-based Compensation

Under the terms of the Independent Director Incentive Stock Plan, the Company granted 3,000 shares at fair value of $10 of restricted
common stock to each of the four independent directors on June 30, 2006. One-third of the restricted common stock will vest on each of the first three anniversaries of December 2, 2005, the date the Company reached its minimum offering.
There are 60,000 shares in total authorized under the Independent Director Incentive Stock Plan, which expires on February 28, 2015.

The Company records compensation expense for restricted common stock as required by SFAS No. 123(R), Share-Based Payment, revised 2004 (SFAS No. 123(R)). Compensation expense for common stock unvested at
March 21, 2006 was based on the grant date fair value of the common shares calculated under SFAS No. 123(R) and will be recognized using the straight-line attribution method, assuming no forfeitures. For the nine months ended
September 30, 2008 and 2007, the Company recorded $29,946 and $29,917, respectively, of related compensation expense which amounts are included in general and administrative expenses in the accompanying consolidated statements of operations.
Total unamortized compensation costs on non-vested shares at September 30, 2008 and December 31, 2007 is $6,876 and $36,822, respectively, and at September 30, 2008 the remaining weighted average period over which it is expected to be
recognized is approximately two months.

As of September 30, 2008, 8,000 shares have vested. There are 4,000 shares unvested and there
have been no forfeitures as of September 30, 2008. As of December 31, 2007, 8,000 shares have vested. There were 4,000 shares unvested and there were no forfeitures as of December 31, 2007.

Reportable Segments

FASB SFAS No. 131,
Disclosures About Segments of Enterprise and Related Information, establishes standards for reporting financial and descriptive information about an enterprises reportable segments. Management has determined that the Company has
one reportable segment, which owns interests in real estate investments.

Environmental Matters

Under various federal, state and local environmental laws, statutes, ordinances, rules and regulations, an owner of real property may be liable for the
costs of removal or remediation of certain hazardous or toxic substances at, on, in or under such property as well as certain other potential costs relating to hazardous or toxic substances. These liabilities may include government fines and
penalties and damages for injuries to persons and adjacent property. Such laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence of or disposal of such substances. As of September 30, 2008,
the Company is not aware of any environmental matter that could have a material impact on the consolidated financial statements.

Reclassifications

Certain amounts in the prior year consolidated financial statements have been reclassified in order to conform to the current year
presentation.



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Paladin Realty Income Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)

September 30, 2008 and 2007 (unaudited)



Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements which defines fair value, establishes a framework for measuring
fair value and expands the related disclosure requirements. This statement was effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. The Companys adoption of SFAS No. 157, as of
January 1, 2008, did not have a material impact on its consolidated financial position, results of operations or cash flows.

In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115. The fair value option established by SFAS No. 159
permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another
performance indicator if the business entity does not report earnings) at each subsequent reporting date. This statement was effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. The
Company has adopted SFAS No. 159 effective January 1, 2008 and has elected not to measure any of our current eligible financial assets or liabilities at fair value upon adoption. However, the Company does reserve the right to elect to
measure future eligible financial assets or liabilities at fair value.

In September 2007, the FASB ratified Emerging Issues Task Force
(EITF) Issue 07-6, Accounting for the Sale of Real Estate Subject to the Requirements of FASB Statement No. 66 When the Agreement Includes a Buy-Sell Clause, which clarifies that a buy-sell clause, in and of itself, does
not constitute a prohibited form of continuing involvement that would preclude partial sale treatment under Statement 66. EITF 07-6 applies prospectively to new arrangements entered into in fiscal years beginning after December 15, 2007. The
adoption of EITF 07-6 on January 1, 2008 did not have a material impact on the Companys consolidated financial position, results of operations and cash flows.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations which requires most identifiable assets, liabilities, noncontrolling interests and goodwill acquired in a business combination to
be recorded at full fair value. Under SFAS No. 141R, all business combinations will be accounted for by applying the acquisition method. SFAS No. 141R is effective for the periods beginning on or after December 15, 2008. Earlier
application is prohibited and will be applied to business combinations occurring after the effective date. The Company is currently evaluating the impact of adopting SFAS No. 141R on its consolidated financial position, results of operations
and cash flows.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statementsan amendment of ARB No. 51, which will require noncontrolling interests (currently referred to as minority interest) to be treated as a separate component of equity, not as a liability or other item outside of
permanent equity. The Statement applies to the accounting for noncontrolling interests and transactions with noncontrolling interest holders in consolidated financial statements. SFAS No. 160 is effective for periods beginning on or after
December 15, 2008. Earlier application is prohibited. SFAS No. 160 will be applied prospectively to all noncontrolling interests, including any that arose before the effective date except that comparative period information must be recast
to classify noncontrolling interests in equity, attributed net income and other comprehensive income to noncontrolling interests, and provide other disclosures required by SFAS No. 160. The Company is currently evaluating the impact of adopting
SFAS No. 160 on its consolidated financial position, results of operations and cash flows.



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Paladin Realty Income Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)

September 30, 2008 and 2007 (unaudited)



3.Investments

Investments in Real Estate

On January 14, 2008, a wholly-owned subsidiary of Paladin OP,
PRIP 11128, LLC purchased a 97.5% interest in KC Retreat, a joint venture between PRIP 11128, LLC, JTL Holdings, LLC and JTL Asset Management, Inc., which owns the Retreat Apartments. The Retreat Apartments is a 342-unit multifamily rental community
built in 1984. The apartment complex is located in Shawnee, Kansas. The total purchase price of Retreat Apartments was $15.9 million, plus closing costs of $200,000 and approximately $350,000 for capital expenditures. KC Retreat secured a mortgage
loan of $13.6 million to finance the acquisition. Paladin OPs investment in KC Retreat was $2,850,000. The Company also paid an acquisition fee payable to Paladin Advisors of $156,750 in connection with the acquisition of Retreat Apartments.

The operating agreement for KC Retreat provides that the Company will receive priority in distributions of operating cash flow until it
has received at least 12.0% on its invested equity, after which its co-venture partners will receive distributions until they have reached the same 12.0% on their invested equity. Thereafter, operating cash flow will be distributed 50% to the
Company and 50% to its co-venture partners. The operating agreement for KC Retreat also provides for priority distributions of sale proceeds, if any. First, the Company will receive a priority distribution equal to a return of its invested capital
plus an amount that when added to all distributions of cash flow made to the Company during the life of its investment, is sufficient to generate a 12.0% internal rate of return on its invested capital. Second, the Companys co-venture partners
will receive distributions that when added to all distributions of cash flow made to its co-venture partners during the life of their investment, is sufficient to generate a 12.0% internal rate of return on their invested capital. Third, any further
sale proceeds will be distributed 50% to the Company and 50% to its co-venture partners.

On April 7, 2008, a wholly-owned subsidiary
of Paladin OP, PRIP 6700, LLC purchased a 49% interest in Park Hill, a joint venture between PRIP 6700, LLC and JTL Properties, LLC, which owns Hilltop Apartments. Hilltop Apartments is a 124-unit multifamily rental community built in 1986. The
apartment complex is located in Kansas City, Missouri. The total acquisition cost for PRIP 6700, LLCs interest in Park Hill was $1,050,000, including approximately $50,000 for capital expenditures reserve and $50,000 for closing costs and
working capital. The property was encumbered by an existing first mortgage in the amount of $4,250,000. The Company paid an acquisition fee payable to Paladin Advisors of $57,750 in connection with the acquisition of Hilltop Apartments.

The operating agreement for Park Hill provides that the Company will receive priority in distributions of operating cash flow until it has received at
least 12.0% on its invested equity, after which its co-venture partners will receive distributions until they have reached the same 12.0% on their invested equity. Thereafter, operating cash flow will be distributed 49% to the Company and 51% to its
co-venture partners. The operating agreement for Park Hill also provides for priority distributions of sale proceeds, if any. First, the Company will receive a priority distribution equal to a return of its invested capital plus an amount that when
added to all distributions of cash flow made to the Company during the life of its investment, is sufficient to generate a 12.0% internal rate of return on its invested capital. Second, the Companys co-venture partners will receive
distributions that when added to all distributions of cash flow made to the co-venture partners during the life of their investment, is sufficient to generate a 12.0% internal rate of return on their invested capital. Third, any further sale
proceeds will be distributed 49% to the Company and 51% to its co-venture partners.

On August 4, 2008, a wholly-owned subsidiary of
Paladin OP, PRIP 3383, LLC purchased a 42.5% interest in FPA/PRIP, a joint venture between PRIP 3383, LLC and FPA Conifer Investors, LLC. On August 5, 2008, FPA/PRIP purchased Conifer Crossing. Conifer Crossing is a 420-unit multifamily rental
community developed



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Paladin Realty Income Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)

September 30, 2008 and 2007 (unaudited)



in 1981. The apartment complex is located in Norcross, Georgia. Including funds earmarked for renovation and closing costs, the total capitalization for this
investment was approximately $39,385,000. FPA/PRIP secured a mortgage loan of $28.7 million to finance the acquisition. As a condition to the loan, FPA/PRIP was required to fund an escrow account with approximately $6,613,500 for the payment for
such repairs and improvements pursuant to a Repair Escrow Agreement dated August 5, 2008. Paladin OPs investment in FPA/PRIP was $4.5 million. The Company paid an acquisition fee payable to Paladin Advisors in the amount of $251,268 in
connection with the acquisition of Conifer Crossing.

The operating agreement for FPA/PRIP provides that the Company will receive priority
in distributions of operating cash flow until the Company has received at least 8.5% on its invested equity, after which the Companys co-venture partner will receive distributions until the co-venture partner has reached the same 8.5% on its
invested equity. If the Companys pro rata distribution exceeds 9.0% in a calendar year, the Company will share 20% of its excess distributions with its co-venture partner as a cash flow bonus.

The operating agreement also provides for distributions of sale proceeds, if any, as follows. First, the Company and the co-venture partner will receive
a 100% return of our equity investments. Second, the Company and the co-venture partner will receive pro rata distributions until the Company and the co-venture partner each have received a 12.0% internal rate of return on their invested capital.
Third, the Company will share its pro rata portion of fifty percent of the remaining distributions with the co-venture partner and the co-venture partner will receive all of the other fifty percent of the remaining distributions as incentive
compensation.

In connection with Paladin OPs acquisition of its interest in Glenwood, which owns Fieldstone Apartments, Shiloh
Crossing Partners II, LLC (Shiloh II) was granted the right to require Paladin OP to purchase up to an additional 25% ownership interest in Glenwood from Shiloh II upon the occurrence of certain events and the achievement of certain
financial benchmarks at Fieldstone Apartments at a cost of $62,500 per 1% of ownership interest. On June 2, 2008, Shiloh II notified Paladin OP that it intended to sell an additional 18% ownership interest to Paladin OP. Paladin OP
reviewed the notice and confirmed that the necessary events had occurred and the required financial benchmarks had been achieved. On July 1, 2008, Paladin OP purchased the additional interest in Glenwood from Shiloh II for $1,125,000.
Paladin OP now holds an 83% ownership interest in Glenwood. Fieldstone Apartments is a 266-unit luxury multifamily rental community built in 2001. The Company also paid an acquisition fee payable to Paladin Advisors of $61,875 in connection with the
purchase of the additional ownership interest in Glenwood.

Also in connection with Paladin OPs initial acquisition of its interest
in Glenwood, a wholly owned subsidiary of Paladin OP, PRIP 10637, LLC, entered into a Phase II Option Agreement (Option Agreement) with Glenwood Housing Partners II, LLC, an Indiana limited liability company (Glenwood II).
Glenwood II owns a parcel of land adjacent to Fieldstone Apartments upon which it may construct 88 apartment units with an aggregate of 97,640 square feet of rentable space to be leased, managed and operated as Phase II of the Fieldstone Apartments.
The Option Agreement grants PRIP 10637, LLC an ongoing option to purchase at least a 70% but not more than 90% beneficial ownership interest in Glenwood II or any affiliated entity that owns the parcel and developments thereon. PRIP 10637 may
exercise the option at any time after the completion of development and stabilization of the project. If exercised, the purchase price for the option interest will be determined by a formula that utilizes market-rate variables as of that future
date.

In addition, Paladin OP holds a 70% ownership interest in Springhurst, which owns Champion Farms Apartments. Champion Farms
Apartments is a 264-unit luxury multifamily rental community built in 2000. Paladin OP also holds a 97.5% ownership interest in KC Pinehurst, which owns Pinehurst Apartment Homes a



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Paladin Realty Income Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)

September 30, 2008 and 2007 (unaudited)



146-unit multifamily rental community built in two phases in 1986 and 1988. Also, Paladin OP holds a 97.5% ownership interest in KC Pheasant, which owns
Pheasant Run Apartments, a 160-unit multifamily rental community built in 1985.

In connection with Paladin OPs acquisition of its
interest in Springhurst, Buckingham Springhurst, LLC was granted the right to require Paladin OP to purchase up to an additional 20% ownership interest in Springhurst from Buckingham Springhurst, LLC upon the occurrence of certain events and the
achievement of certain financial benchmarks at Champion Farms Apartments at a cost of $67,500 per 1% of ownership interest. As of September 30, 2008, Paladin OP has not been required to purchase additional interests in Springhurst by Buckingham
Springhurst, LLC.

The operating agreements for both Springhurst and Glenwood provide that the Company will receive priority in
distributions of operating cash flow until it has received at least 8.25% on its invested equity, after which its co-venture partners will receive distributions until they have reached the same 8.25% on their invested equity. Thereafter, operating
cash flow will be distributed 50% to the Company and 50% to its co-venture partners. The operating agreements for both Springhurst and Glenwood also provide for priority distributions of sale proceeds, if any. First, the Company will receive a
priority distribution equal to a return of its invested capital. Second, its co-venture partners will receive a distribution equal to their invested capital. Third, the Company will receive an amount that when added to all distributions of cash flow
made to the Company during the life of its investment, is sufficient to generate an 11.5% internal rate of return on its invested capital. Fourth, the Companys co-venture partners will receive an amount, that when added to all distributions of
cash flow made to its co-venture partners during the life of their investment, is sufficient to generate an 11.5% internal rate of return on their invested capital. Fifth, any further sale proceeds will be distributed 50% to the Company and 50% to
its co-venture partners.

The operating agreements for both KC Pinehurst and KC Pheasant provide that the Company will receive priority in
distributions of operating cash flow until it has received at least 9.0% on its invested equity, after which its co-venture partners will receive distributions until they have reached the same 9.0% on their invested equity. Thereafter, operating
cash flow will be distributed 75% to the Company and 25% to its co-venture partners. The operating agreements for both KC Pinehurst and KC Pheasant also provide for priority distributions of sale proceeds, if any. First, the Company will receive a
priority distribution equal to a return of its invested capital plus an amount that when added to all distributions of cash flow made to the Company during the life of its investment, is sufficient to generate a 12.0% internal rate of return on its
invested capital. Second, the Companys co-venture partners will receive distributions that when added to all distributions of cash flow made to its co-venture partners during the life of their investment, is sufficient to generate a 12.0%
internal rate of return on their invested capital. Third, any further sale proceeds will be distributed 50% to the Company and 50% to its co-venture partners.

The Company consolidates FPA/PRIP, Park Hill, KC Retreat, KC Pinehurst, KC Pheasant, Springhurst and Glenwood.

Investment in Unconsolidated Joint Venture

Paladin OP also has a 74% interest in PRIP 801, LLC, a joint venture
between Paladin OP and 801 FO, LLC, which owns 801 Fiber Optic Drive. 801 Fiber Optic Drive consists of approximately 10.95 acres of real property and a 56,336 square foot building that was completed in 2001, which is 100% leased to FedEx Ground
Package System, Inc., (FedEx Ground), pursuant to a ten year net lease that commenced on August 1, 2001 and expires on July 31, 2011. FedEx Ground is a subsidiary of FedEx Corporation, a provider of transportation,



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Paladin Realty Income Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)

September 30, 2008 and 2007 (unaudited)



e-commerce and supply management services. FedEx Ground also has the option to extend the lease for two additional five year periods. The first option is
through July 31, 2016 at $405,792 per annum. The second option is through July 31, 2021 at $446,376 per annum. The current rent is $338,160 per annum.

Paladin OP accounts for its investment in PRIP 801, LLC under the equity method of accounting.

Condensed
financial information of PRIP 801, LLC is summarized as follows:

Condensed Balance Sheets

(unaudited)



|                                      |  |                   |           |                  |   |          
|------------------------------------- |  | ----------------- | --------- | ---------------- | - | ---------
|                                      |  | September 30,2008 |           | December 31,2007
|ASSETS                                |  |                   |           |                  |   |          
|Investment in real estate, net        |  | $                 | 3,874,170 |                  | $ | 3,934,812
|Other assets, net                     |  |                   | 112,750   |                  |   | 141,911  
|                                      |  |                   |           |                  |   |          
|Total Assets                          |  | $                 | 3,986,920 |                  | $ | 4,076,723
|                                      |  |                   |           |                  |   |          
|LIABILITIES AND MEMBERS EQUITY       |  |                   |           |                  |   |          
|Mortgage loan payable                 |  | $                 | 1,950,000 |                  | $ | 1,950,000
|Other liabilities                     |  |                   | 9,230     |                  |   | 38,116   
|Members equity                       |  |                   | 2,027,690 |                  |   | 2,088,607
|                                      |  |                   |           |                  |   |          
|Total Liabilities and Members Equity |  | $                 | 3,986,920 |                  | $ | 4,076,723
|                                      |  |                   |           |                  |   |          
|Companys share of Members Equity*   |  | $                 | 1,500,577 |                  | $ | 1,545,655
|                                      |  |                   |           |                  |   |          

Condensed Statements of Income

(unaudited)



|                               |  |                                |         |   |                               |   |         |      |  |   |          |   |  |   |          |  
|------------------------------ |  | ------------------------------ | ------- | - | ----------------------------- | - | ------- | ---- |  | - | -------- | - |  | - | -------- | -
|                               |  | Three months endedSeptember 30 |         |   | Nine months endedSeptember 30 |  
|                               |  | 2008                           |         |   | 2007                          |   |         | 2008 |  |   | 2007     |  
|Revenues and interest income   |  | $                              | 84,600  |   |                               | $ | 84,714  |      |  | $ | 253,986  |   |  | $ | 254,053  |  
|Expenses                       |  |                                | (59,916 | ) |                               |   | (55,430 | )    |  |   | (169,903 | ) |  |   | (165,901 | )
|                               |  |                                |         |   |                               |   |         |      |  |   |          |   |  |   |          |  
|Net income                     |  | $                              | 24,684  |   |                               | $ | 29,284  |      |  | $ | 84,083   |   |  | $ | 88,152   |  
|                               |  |                                |         |   |                               |   |         |      |  |   |          |   |  |   |          |  
|Companys share of net income* |  | $                              | 18,266  |   |                               | $ | 21,670  |      |  | $ | 62,221   |   |  | $ | 65,233   |  
|                               |  |                                |         |   |                               |   |         |      |  |   |          |   |  |   |          |  



|* | The difference in the Companys share of Members Equity and the Companys share of net income reflected above compared to the Companys balance sheets and
statements of operations is attributed to the depreciation expense of the acquisition costs incurred by the Company.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
mortgage loan requires payments of interest only at a fixed interest rate of 5.498% through November 1, 2010, the anticipated repayment date. If the mortgage loan is not repaid or refinanced as of the anticipated repayment date, interest will
accrue at a rate per annum equal to the greater of (a) 8.498% and (b) the treasury rate plus three percentage points. Pursuant to the terms of a cash management agreement, the borrower was required to post a $550,000 letter of credit by
December 1, 2007, or the lender would sweep and retain all cash flow from 801 Fiber Optic Drive. On, November 29, 2007 Paladin OP posted a $550,000 irrevocable



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Paladin Realty Income Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)

September 30, 2008 and 2007 (unaudited)



standby letter of credit with Wachovia Bank, N.A. secured by $550,000 cash deposited in a certificate of deposit with Wachovia Bank, N.A. If the borrower
does not pay off the loan on November 1, 2010, the lender can apply the letter of credit (or retained cash flow) and will continue to sweep all cash flow to repay the loan. In the event of a default under the loan documents, the cash management
agreement further provides that the lender may sweep cash from all accounts maintained by the borrower with the lender (including rent accounts from the property). The estimated principal balance to be due at the anticipated repayment date is
$1,950,000.

In general, the mortgage loan may not be prepaid until January 31, 2008 and as of September 30, 2008 it has not been
prepaid. In general, no sale, encumbrance or other transfer of an interest in the property is permitted without the lenders prior written consent. Alex Gilbert, the managing member of 801 FO, LLC has guaranteed the non-recourse standard loan
carve outs, and in exchange for his guarantee, Paladin Realty has agreed to fully indemnify Mr. Gilbert against any defaults caused by the borrower through standard default provisions such as bankruptcy, fraud, misapplication of proceeds and
certain environmental violations. The loan agreement obligation is secured by a mortgage on the property and an assignment of rents and personal property. In addition PRIP 801, LLC has entered into an environmental and hazardous substance
indemnification agreement.

The agreements contain various covenants, which among other things, limit the ability of the borrowers to incur
indebtedness, engage in certain business activities, enter into material leases on the property and transfer its interest in the property among others. The loan agreements also contain customary events of default, including, without limitation,
payment defaults, cross-defaults to certain other agreements with respect to the property and bankruptcy-related defaults. In the event of a default, the loan may be accelerated and all amounts due under the loan will become immediately due and
payable.



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Paladin Realty Income Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)

September 30, 2008 and 2007 (unaudited)



4.Mortgages Payable

Mortgages Payable

Mortgage loans
payable consisted of the following:



|                                                                                                                                                                                                                             |  |                   |            |                  |   |           
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ---------- | ---------------- | - | ----------
|                                                                                                                                                                                                                             |  | September 30,2008 |            | December 31,2007
|Mortgage loan payable  interest only at a fixed rate of 6.14% payable monthly until the loan matures on July 1, 2016, secured
by the Champion Farms Apartments property (1)                                                 |  | $                 | 16,350,000 |                  | $ | 16,350,000
|Mortgage loan payable  interest only at 6.05% payable monthly until July 1, 2011, after which principal and interest are due
until the loan matures on July 1, 2014, secured by the Fieldstone Apartments property (1)      |  |                   | 16,500,000 |                  |   | 16,500,000
|Mortgage loan payable  principal and interest at 5.58% payable monthly until the loan matures January 1, 2016, secured by
the Pinehurst Apartment Homes property (2)                                                        |  |                   | 4,729,276  |                  |   | 4,779,125 
|Mortgage loan payable  interest only at 5.95% payable monthly until the loan matures on October 1, 2017, secured by the
Pheasant Run Apartments property (3)                                                                |  |                   | 6,250,000  |                  |   | 6,250,000 
|Mortgage loan payable  interest only at 5.58% payable monthly until February 1, 2013, after which principal and interest are
due until the loan matures on February 1, 2018, secured by the Retreat Apartments property (4) |  |                   | 13,600,000 |                  |   |          
|Mortgage loan payable  interest only at 5.81% payable monthly until December 1, 2012, after which principal and interest are
due until the loan matures on December 1, 2017, secured by the Hilltop Apartments property (5) |  |                   | 4,250,000  |                  |   |          
|Mortgage loan payable  interest only at 5.96% payable monthly until September 1, 2011, after which principal and interest are
due until the loan matures on September 1, 2015, secured by the Conifer Crossing property (6) |  |                   | 28,700,000 |                  |   |          
|                                                                                                                                                                                                                             |  |                   |            |                  |   |           
|Total mortgage loans payable                                                                                                                                                                                                 |  | $                 | 90,379,276 |                  | $ | 43,879,125
|                                                                                                                                                                                                                             |  |                   |            |                  |   |           



|(1) | In general, the mortgage loan may be voluntarily or involuntarily prepaid subject to certain prepayment penalties. The loan agreement obligation is secured by a mortgage on the
property and an assignment of rents and personal property.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The loan is prepayable at any time prior to its maturity, subject to a prepayment penalty equal to the greater of (1) one percent of the outstanding balance or (2) an
amount calculated pursuant to a formula based on the remaining life of the loan and then-current interest rates. In addition the loan is guaranteed by James E. Lippert, an affiliate of JTL Holdings, LLC and JTL Asset Management, Inc., pursuant to a
guaranty dated September 13, 2007, but only upon the occurrence of certain limited events.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Assuming no event of default occurs before the initial maturity date, the loan will automatically be extended until October 1, 2018 with an adjustable interest
rate based on the Federal Home Loan Mortgage Corporation Reference Bill Index. The loan is prepayable at any time prior to its maturity, subject to a prepayment penalty equal to the greater of (1) one percent of the outstanding balance or
(2) an amount
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Paladin Realty Income Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)

September 30, 2008 and 2007 (unaudited)



| | calculated pursuant to a formula based on the remaining life of the loan and then-current interest rates. In the event of default, the entire unpaid
principal balance, any accrued interest, any prepayment penalty and all other amounts payable under the Promissory Note will be due and payable.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Assuming no event of default occurs before the initial maturity date, the loan will automatically be extended until February 1, 2019 with an adjustable interest rate based on
the Freddie Mac Reference Bill Index. The loan is prepayable at any time prior to its maturity, subject to a prepayment penalty equal to the greater of (1) one percent of the outstanding balance or (2) an amount calculated pursuant to a
formula based on the remaining life of the loan and then-current interest rates. The loan is secured by a multifamily mortgage on the property pursuant to a Multifamily Deed of Trust, Assignment of Rents and Security Agreement. In addition, the loan
is guaranteed by James E. Lippert, but only upon the occurrence of certain limited events.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Assuming no event of default occurs before the initial maturity date, the loan will automatically be extended until December 1, 2018 with an adjustable interest rate based on
the Freddie Mac Reference Bill Index. The loan is prepayable at any time prior to its maturity, subject to a prepayment penalty equal to the greater of (1) one percent of the outstanding balance or (2) an amount calculated pursuant to a
formula based on the remaining life of the loan and then-current interest rates. The loan is secured by a multifamily mortgage on the property pursuant to a Multifamily Deed of Trust, Assignment of Rents and Security Agreement. In addition, the loan
is guaranteed by James E. Lippert, but only upon the occurrence of certain limited events.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Assuming no event of default occurs before the initial maturity date, the loan will automatically be extended until September 1, 2016 with an adjustable interest rate based on
the Freddie Mac Reference Bill Index. The loan is prepayable at any time prior to its maturity, subject to a prepayment penalty equal to the greater of (1) one percent of the outstanding balance or (2) an amount calculated pursuant to a
formula based on the remaining life of the loan and then-current interest rates. The loan is secured by a multifamily mortgage on the property pursuant to a Multifamily Deed of Trust, Assignment of Rents and Security Agreement. In addition, the loan
is guaranteed by Gregory A. Fowler, a management committee representative of FPA Conifer Investors, LLC, but only upon the occurrence of certain limited events.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The loan agreements contain various covenants, which among other things, limit the ability of the borrower to incur indebtedness, engage in certain
business activities, enter into material leases on the property and transfer their interest in the property among others. The loan agreements also contain certain customary events of default, including, without limitation, payment defaults,
cross-defaults to certain other agreements with respect to the property and bankruptcy-related defaults. In the event of default, the loan may be accelerated and all amounts due under the loan will become immediately due and payable.

Paladin REITs charter provides that its independent directors must approve any borrowing in excess of 300% of the value of its net assets and the
justification for such excess borrowing must be disclosed to its stockholders in its next quarterly report. Net assets for purposes of this calculation are defined to be Paladin REITs total assets (other than intangibles), valued at cost prior
to deducting depreciation, reserves for bad debts and other non-cash reserves, less total liabilities. The preceding calculation is generally expected to approximate 75% of the aggregate cost of Paladin REITs assets before non-cash reserves
and depreciation. As of September 30, 2008, Paladin REITs borrowings did not exceed 300% of the value of its net assets.

5.
Stockholders Equity

Preferred Shares

Paladin REITs board of directors, through Paladin REITs charter, has the authority to authorize the issuance of 100,000,000 preferred shares in one or more classes or series. The rights and terms of such
preferred



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Paladin Realty Income Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)

September 30, 2008 and 2007 (unaudited)



shares will be determined by the board of directors. However, the voting rights of the preferred shares sold in a private offering shall not exceed voting
rights which bear the same relationship to the voting rights of common shares as the consideration paid for each such preferred share bears to the book value of each outstanding common share. As of September 30, 2008 and December 31, 2007,
Paladin REIT had not issued any preferred shares.

Redemptions

As of August 28, 2008, Paladin REITs Share Redemption Program was amended as follows. Paladin REIT now waives the one-year holding period in the event of the death or qualifying disability of a stockholder.
During any 12-month period, Paladin REIT will not redeem in excess of 10.0% of the number of shares of common stock that were outstanding as of the beginning of such 12-month period. Previously, Paladin REIT was limited to redemptions not in excess
of 3.0% of the number of shares of common stock outstanding at the beginning of such 12-month period. Finally, certain fees charged by Paladin REITs registrar and transfer agent, Phoenix American Financial Services, Inc., for share redemptions
are now charged to investors seeking to redeem shares of common stock pursuant to the program.

During July 2008, six stockholders redeemed
7,448 shares for $69,260. As of September 30, 2008, a total of 13 stockholders have redeemed 16,095 shares for $149,681 since the beginning of the Initial Public Offering. The redemptions have been recorded as treasury shares.

Distributions

The board of directors has declared distributions since December 2005 in the amount of $0.0016438 per share per day, representing an annualized rate of return of 6.0% on an investment of $10.00 per share if paid each
day over a 365-day period. Distributions have been declared on a monthly basis to stockholders of record as of the close of business each day during the applicable month and paid generally on the 15thday of the following month, unless the 15thday of the month is not a business
day. Distributions to stockholders are characterized for federal income tax purposes as ordinary income, capital gains, non-taxable return of capital or a combination of the three. Distributions that exceed Paladin REITs current and
accumulated earnings and profits (calculated for tax purposes) constitute a return of capital for tax purposes rather than a dividend and reduce the stockholders basis in the common shares. All of Paladin REITs distributions declared and
paid to date constitute a return of capital.

6.Related Party Transactions

Paladin Realty Securities, LLC (Paladin Securities), a wholly owned subsidiary of Paladin Advisors, began serving as the dealer manager for
the Initial Public Offering pursuant to a dealer manager agreement dated June 5, 2007, as amended by the amendment to the dealer manager agreement dated February 23, 2008 (the IPO Dealer Manager Agreement). Pursuant to the
terms of the IPO Dealer Manager Agreement, Paladin REIT paid Paladin Securities selling commissions of 7.0% of the gross offering proceeds from the sale of shares of Paladin REITs common stock in its primary offering and 4.0% of the gross
offering proceeds from the sale of shares of its common stock pursuant to its dividend reinvestment plan. Paladin REIT also paid Paladin Securities a dealer manager fee of up to 2.5% of gross offering proceeds from the sale of shares of Paladin
REITs common stock in its primary offering.

In connection with the Follow-On Offering, Paladin REIT entered into dealer manager
agreement dated February 6, 2008 (the Follow-On Dealer Manager Agreement). Pursuant to the terms of the Follow-On Dealer



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Paladin Realty Income Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)

September 30, 2008 and 2007 (unaudited)



Manager Agreement Paladin REIT pays Paladin Securities selling commissions of 6.0% of the gross offering proceeds from the sale of shares of Paladin
REITs common stock in its primary offering and Paladin REIT does not pay any commission from the sale of shares of its common stock pursuant to its distribution reinvestment plan. Paladin REIT also pays Paladin Securities a dealer manager fee
of up to 3.5% of gross offering proceeds from the sale of shares of Paladin REITs common stock in its primary offering. Paladin Securities may pay all or a portion of these selling commissions and dealer manager fees to participating
broker-dealers.

For the nine months ended September 30, 2008, Paladin REIT incurred $824,820 in selling commissions and dealer
manager fees to Paladin Securities. For the year ended December 31, 2007, Paladin REIT incurred $667,153 in selling commissions and dealer manager fees to Paladin Securities.

The Advisory Agreement entitles Paladin Advisors to specified fees upon the provision of certain services with regard to the Offerings and investment of
funds in real properties and real estate related investments, among other services, as well as reimbursement for organization and offering costs incurred by Paladin Advisors on behalf of the Company and certain costs incurred by Paladin Advisors and
its affiliates in providing services to the Company.

Amounts due (from) to Affiliates



|                                                                   |  |                   |           |   |                  |   |            |  
|------------------------------------------------------------------ |  | ----------------- | --------- | - | ---------------- | - | ---------- | -
|                                                                   |  | September 30,2008 |           |   | December 31,2007 |  
|General and administrative expenses due to affiliates (1)          |  | $                 | 746,021   |   |                  | $ | 141,731    |  
|Organization and offering costs due (from) to affiliates (2)       |  |                   | (119,710  | ) |                  |   | (1,068,147 | )
|Acquisition fees due to affiliates (3)                             |  |                   |          |   |                  |   |           |  
|                                                                   |  |                   |           |   |                  |   |            |  
|Total due (from) to affiliates                                     |  | $                 | 626,311   |   |                  | $ | (926,416   | )
|Deferred general and administrative expenses due to affiliates (4) |  | $                 | 1,881,361 |   |                  | $ | 1,499,043  |  
|Deferred organization and offering costs due to affiliates (4)     |  | $                 | 6,131,528 |   |                  | $ | 4,354,293  |  



|(1) | During the three months ended September 30, 2008, the Company incurred $489,555 of general and administrative expenses. Due to the application of the 2%/25% Rule (as discussed
in Note 2), the Company was able to recognize a total of $508,720 of general and administrative expenses in its consolidated statement of operations with the additional amount of $19,166 recorded as due to affiliate. During the three months ended
September 30, 2008, the Company paid Paladin Advisors $70,164 for asset management fees for its eight properties. During the nine months ended September 30, 2008, the Company incurred $660,338 of general and administrative expenses. Due to
the application of the 2%/25% Rule (as discussed in Note 2), the Company was able to recognize a total of $1,264,626 of general and administrative expenses in its consolidated statement of operations with the additional amount of $604,290 recorded
as due to affiliate. During the nine months ended September 30, 2008 the Company paid Paladin Advisors $180,990 for asset management fees for its eight properties. Paladin Advisors has elected to defer (without interest) the net balance of
$746,021 in general and administrative expenses due to affiliate.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Organization and offering costs of the Company are paid by Paladin Advisors or its affiliates, including Paladin Realty, on behalf of the Company and directly by
the Company. Organization and offering costs consist of actual marketing, legal, accounting, printing and other offering expenses, including amounts to reimburse Paladin Advisors, its affiliates or its dealer manager, for all marketing related costs
and expenses, including, but not limited to, expenses relating to registering and marketing the shares and other marketing and organization costs, technology costs and expenses attributable to the Offerings, and payment or reimbursement of bona fide
due diligence expenses of the dealer manager and broker-dealers participating
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Paladin Realty Income Properties, Inc. and Subsidiaries

Notes to Consolidated Financial Statements(Continued)

September 30, 2008 and 2007 (unaudited)



| | in the Offerings. Pursuant to the Advisory Agreement, the Company is obligated to reimburse Paladin Advisors or its affiliates for amounts advanced for
organization and offering costs, provided that Paladin Advisors and its affiliates are responsible for the payment of organization and offering costs to the extent they exceed 3.0% of gross proceeds from the Offerings and will be required to return
to the Company any amount the Company reimburses them in excess of 3.0% of the gross proceeds from the Offerings. Such costs only become a liability of the Company to the extent they do not exceed 3.0% of the gross proceeds of the Offerings. For the
nine months ended September 30, 2008, the Company paid $560,227 of offering costs. Due to the application of the 3.0% limitation, the Company was only able to recognize $282,478, which was charged to stockholders equity with the additional
amount of $277,749 recorded as due from affiliate. On March 28, 2008 Paladin Advisors reimbursed the Company $1,226,186. Paladin Advisors is required to reimburse the balance of $119,710 within 60 days after the end of the Offerings.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Paladin Advisors was entitled to acquisition fees related to all acquisitions. During the nine months ended September 30, 2008, the Company paid $527,643 of acquisition fees to
Paladin Advisors for these acquisitions.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Not reflected in the consolidated financial statements at September 30, 2008 and December 31, 2007 as these amounts have exceeded the Companys limitations described
above in footnotes 1 and 2.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7.Subsequent Events

Redemptions

In October 2008,
eight stockholders redeemed 10,531 shares for $97,940.



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|------- | --------------------------------------------------------------------------------------

The following Managements Discussion and Analysis of Financial Condition and Results of Operations (the MD&A) is intended to help
the reader understand our operations and our present business environment. The MD&A is provided as a supplement toand should be read in conjunction withour consolidated financial statements and the accompanying notes thereto
contained in Item 1 of Part I of this report. As used herein, the terms we, our and us refer to Paladin Realty Income Properties Inc., a Maryland corporation, and its consolidated subsidiaries.

Forward-Looking Statements

Certain information
included in this Quarterly Report on Form 10-Q contains, and other materials filed or to be filed by us with the Securities and Exchange Commission, or the SEC, contain or will contain, forward-looking statements. All statements, other
than statements of historical facts, including, among others, statements regarding our possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives, are forward-looking statements.
Those statements include statements regarding the intent, belief or current expectations of Paladin Realty Income Properties, Inc., which we refer to as Paladin REIT or the Company, and members of our management team, as well
as the assumptions on which such statements are based, and generally are identified by the use of words such as may, will, seeks, anticipates, believes, estimates,
expects, plans, intends, should or similar expressions. You should not place undue reliance on these forward-looking statements. Statements regarding the following subjects are forward-looking by their
nature:



| |  |  | our business strategy;
| | - |  | ----------------------



| |  |  | our projected operating results;
| | - |  | --------------------------------



| |  |  | our ability to obtain future financing arrangements;
| | - |  | ----------------------------------------------------



| |  |  | estimates relating to our future distributions;
| | - |  | -----------------------------------------------



| |  |  | our understanding of our competition;
| | - |  | -------------------------------------



| |  |  | market trends;
| | - |  | --------------



| |  |  | projected capital expenditures; and
| | - |  | -----------------------------------



| |  |  | use of proceeds of our Offerings.
| | - |  | ---------------------------------

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a
result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You
should carefully consider these risks before you make an investment decision with respect to our common stock, along with the following factors that could cause actual results to vary from our forward-looking statements:



| |  |  | the factors referenced in Item 1A herein as well as Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2007;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in our business strategy;
| | - |  | ---------------------------------



| |  |  | availability, terms and deployment of capital;
| | - |  | ----------------------------------------------



| |  |  | availability of qualified personnel;
| | - |  | ------------------------------------



| |  |  | changes in our industry, interest rates or the general economy; and
| | - |  | -------------------------------------------------------------------



| |  |  | the degree and nature of our competition.
| | - |  | -----------------------------------------



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We believe these forward-looking statements are reasonable; however, undue reliance should not be placed
on any forward-looking statements, which are based on current expectations. All written and oral forward-looking statements attributable to us or persons acting on our behalf are qualified in their entirety by these cautionary statements. Further,
forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating
results over time unless required by law.

Overview

We are a Maryland corporation formed on October 31, 2003 to invest in a diversified portfolio of real estate investments, including investments in real properties and real estate related investments, focusing
primarily on properties that produce current income. As of September 30, 2008, we owned interests in eight income-producing properties:



| |  |  | 801 Fiber Optic Drive, a 56,336 square foot distribution facility built in 2001 that is leased to FedEx Ground Package System, Inc., a subsidiary of FedEx
Corporation;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Champion Farms Apartments, a 264-unit luxury multifamily rental community built in 2000;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | Fieldstone Apartments, a 266-unit multifamily community property built in 2001;
| | - |  | -------------------------------------------------------------------------------



| |  |  | Pinehurst Apartment Homes, a 146-unit renovated multifamily community built in two phases in 1986 and 1988 and renovated in 2006;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | Pheasant Run Apartments, a 160-unit multifamily community built in 1985 and renovated in 2003 and 2004;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | The Retreat Apartments, a 342-unit multifamily community built in 1984 and renovated in 2004 and 2005;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | Hilltop Apartments, a 124-unit multifamily community built in 1986; and
| | - |  | -----------------------------------------------------------------------



| |  |  | Conifer Crossing, a 420-unit multifamily community built in 1981.
| | - |  | -----------------------------------------------------------------

We intend to invest in a variety of real estate product types, including apartments, office buildings, industrial buildings, shopping centers and hotels. In addition, we may make or acquire mortgage loans secured by,
or preferred equity investments in entities that own, the same types of properties that we may acquire directly, which we refer to collectively as real estate related investments. We own our assets and conduct our operations through Paladin Realty
Income Properties, L.P., our operating partnership, which we refer to as Paladin OP.

Our Initial Public Offering terminated on
July 28, 2008 in connection with the commencement of our Follow-On Offering on July 28, 2008.

We elected to be taxed as a REIT
for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2006, under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. We believe we operate in such a manner as to qualify for treatment as
a REIT for federal income tax purposes. Accordingly, we generally will not be subject to federal income tax, provided that distributions to our stockholders equal at least the amount of our REIT taxable income. If we fail to qualify as a REIT in any
taxable year, we will be subject to federal income taxes on our taxable income at regular corporate income tax rates. Even if we qualify for taxation as a REIT, we may be subject to certain state or local taxes on our income, property, or net worth
and federal income and excise taxes on our undistributed income.

Recent Acquisitions

Fieldstone Apartments

On July 1,
2008, we purchased an additional 18% membership interest in Glenwood, which owns Fieldstone Apartments located at 10637 Springfield Pike in Woodlawn, Ohio. We purchased the additional 18%



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membership interest from Shiloh II for approximately $1.1 million pursuant to the right of Shiloh II to require us to purchase up to an additional 25% of the
membership interests in Glenwood owned by Shiloh II. We paid Paladin Advisors an acquisition fee of $61,875 in connection with this additional investment. After the additional acquisition on July 1, 2008, we own an 83% interest in Glenwood.

Conifer Crossing

On
August 5, 2008, FPA/PRIP, a joint venture in which we own a 42.5% interest purchased Conifer Crossing located at 3383 Holcomb Bridge Road NW in Norcross, Georgia from Simpson Financing Limited Partnership, an unaffiliated third party. FPA
Conifer Investors, LLC, an affiliate of Fowler Property Acquisitions, a San Francisco based real estate investment firm, owns the remaining 57.5% interest in FPA/PRIP. Fowler Property Acquisitions is not affiliated with us.

Including funds held in escrow for renovation and closing costs, the total capitalization for this investment was approximately $39,385,000. We paid an
acquisition fee payable to Paladin Advisors pursuant to the terms of the Advisory Agreement of $251,268 in connection with our investment in Conifer Crossing. We will also pay Paladin Advisors an annual asset management fee of $50,254 pursuant to
the terms of the Advisory Agreement.

In connection with the closing of the Conifer Crossing acquisition, FPA/PRIP obtained a loan from
Freddie Mac in the amount of $28,700,000 as evidenced by a Multifamily Note dated August 5, 2008. The loan bears interest at a fixed rate of 5.96% and matures on September 1, 2015. The first three years are interest only with the remaining
four years amortizing on a 30 year schedule. Assuming no event of default occurs before the initial maturity date, the loan will automatically be extended until September 1, 2016 with an adjustable interest rate based on the Freddie Mac
Reference Bill Index. The loan is prepayable at any time prior to its maturity, subject to a prepayment penalty equal to the greater of (1) 1.0% of the principal being repaid or (2) an amount calculated pursuant to a standard formula based
on the remaining life of the loan and then-current interest rates. The loan is secured by a multifamily mortgage on the property pursuant to a Multifamily Deed to Secure Debt, Assignment of Rents and Security Agreement. In addition, the loan is
guaranteed by Gregory A. Fowler, a management committee representative of our co-venture partner, but only upon the occurrence of certain limited events. As a condition to the loan, FPA/PRIP was required to fund an escrow account with approximately
$6,613,500 for the payment for such repairs and improvements pursuant to a Repair Escrow Agreement dated August 5, 2008, or the Repair Escrow Agreement.

The operating agreement provides that we will receive priority in distributions of operating cash flow until we have received at least 8.5% on our invested equity, after which our co-venture partner will receive
distributions until the co-venture partner has reached the same 8.5% on its invested equity. If our pro rata distribution exceeds 9.0% in a calendar year, we will share 20% of our excess distributions with our co-venture partner as a cash flow
bonus.

The operating agreement also provides for distributions of sale proceeds, if any, as follows. First, we and our co-venture partner
will receive a 100% return of our equity investments. Second, we and our co-venture partner will receive pro rata distributions until we each have received a 12.0% internal rate of return on our invested capital. Third, we will share our pro rata
portion of fifty percent of the remaining distributions with our co-venture partner and our co-venture partner will receive all of the other fifty percent of the remaining distributions as incentive compensation.

Critical Accounting Policies

We believe our most
critical accounting policies are the accounting for lease revenues (including straight-line rent), the regular evaluation of whether the value of a real estate asset has been impaired, real estate purchase price allocations and accounting for joint
ventures. Each of these items involves estimates that require management to make judgments that are subjective in nature. We rely on our experience, we collect historical



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data and current market data, and we analyze these assumptions in order to arrive at what we believe to be reasonable estimates. Under different conditions
or assumptions, materially different amounts could be reported related to the accounting policies described below. In addition, application of these accounting policies involves the exercise of judgments on the use of assumptions as to future
uncertainties and, as a result, actual results could materially differ from these estimates.

Real Estate and Depreciation

Real estate is stated at cost, less accumulated depreciation. We allocate the cost of newly acquired properties between net tangible
and identifiable intangible assets. The primary intangible asset associated with an apartment property acquisition is the value of the existing lease agreements. When allocating cost to an acquired property, we allocate costs to the estimated value
of the land, building and fixtures assuming the property is vacant and to the estimated intangible value of the existing lease agreements. We estimate the intangible value of the lease agreements by determining the lost revenue associated with a
hypothetical lease-up. We depreciate the building and fixtures based on the expected useful life of the asset, which ranges from 27 to 45 years for the building and improvements and from five to seven years for furniture, fixtures and equipment. The
intangible value of the lease agreements is amortized over the average remaining life of the existing leases, which ranges from three to 24 months. This amortization is included in depreciation and amortization expense on the accompanying
consolidated statements of operations. Expenditures for repairs and maintenance are expensed as incurred.

We review long-lived assets and
related identifiable intangibles for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. When such events or changes in circumstances occur, recoverability of the asset to be held
and used is measured by a comparison of the carrying amount of the asset to future net cash flows, undiscounted and without interest, expected to be generated by the asset. If the sum of the expected future cash flows (undiscounted and without
interest) is less than our carrying amount for the asset, an impairment loss is recognized based upon the assets fair value.

Investments

The Company follows the provisions of Financial Accounting Standards Board Interpretation No. 46 (revised
December 2004), Consolidation of Variable Interest Entities, or FIN 46R, and the Company is required to evaluate whether it has a controlling financial interest in an entity through means other than voting rights. If we determine that
the joint venture is a variable interest entity (VIE) and that we are the primary beneficiary as defined in FIN 46R, we will account for such investment as if it were a consolidated subsidiary. For a joint venture
investment which is not a VIE we consider other relevant accounting literature including Accounting Principles Board Opinion 18The Equity Method of Accounting for Investments in Common Stock, Statement of Position (SOP)
78-9Accounting for Investments in Real Estate Ventures, and Emerging Issues Task Force Issue (EITF) 04-5 to determine the method of accounting for each of the partially-owned entities. In accordance with the above
pronouncements, we determine whether we should consolidate the entity or account for it on the equity method or cost method. Factors considered in determining whether or not we exercise control include substantive participating rights of partners on
significant business decisions, including dispositions and acquisitions of assets, financing and operating and capital budgets, board and management representatives and authority and other contractual rights of our partners. To the extent that we
are deemed to control these entities, these entities will be consolidated.

As of September 30, 2008, we held a 99.4% ownership
interest in Paladin OP and Paladin OP held a 70% ownership interest in Springhurst, an 83% ownership interest in Glenwood, a 97.5% ownership interest in KC Pinehurst, a 97.5% ownership interest in KC Pheasant, a 97.5% interest in KC Retreat, a 49%
interest in Park Hill, a 42.5% ownership interest in FPA/PRIP and a 74% ownership interest in PRIP 801, LLC, as described in Note 3 to the consolidated financial statements. We have determined that Paladin OP and the entities in which it has
invested are not VIEs. We consolidate Paladin OP, Springhurst, Glenwood, KC Pinehurst, KC Pheasant, and KC Retreat, as we are the majority owner and exercise control over all significant decisions. We also consolidate



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each of Park Hill and FPA/PRIP because we hold a significant ownership interest and exercise control over all significant decisions. We account for our
investment in PRIP 801, LLC under the equity method of accounting, as the other member has substantive participating rights as defined in EITF 04-5 and SOP 78-9. This investment is recorded initially at cost, and subsequently adjusted for equity in
earnings or losses and cash contributions and distributions.

On a periodic basis we will evaluate whether there are any indicators that
the value of our investments in partially-owned entities are impaired. An investment is impaired if our estimate of the value of the investment is less than the carrying amount. The ultimate realization of our investment in partially-owned entities
is dependent on a number of factors including the performance of that entity and market conditions. If we determine that a decline in the value of a partially-owned entity is other than temporary, then we would record an impairment charge.

Revenue Recognition

We primarily lease residential apartments to tenants under non-cancellable operating leases with terms ranging from three to 24 months. Rental income related to leases is recognized in the period earned over the lease term in accordance
with Statement of Financial Accounting Standards (SFAS) No. 13, Accounting for Leases. Other income consists of various tenant-related charges and is recognized as revenue in the period in which the applicable charge is
incurred.

Accounts Receivable

Accounts receivable is included in other assets in our consolidated balance sheets. Bad debts are recorded under the specific identification method, whereby, uncollectible receivables are directly written off when identified.

Use of Estimates

The presentation of
the consolidated financial statements requires management to make estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.

Income Taxes

The Company elected to be taxed as a REIT for U.S. federal income tax purposes beginning with the taxable year
ended December 31, 2006, under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. The Company believes it operates in such a manner as to qualify for treatment as a REIT for federal income tax purposes. Accordingly, the
Company generally will not be subject to federal income tax, provided that distributions to its stockholders equal at least the amount of its REIT taxable income. If the Company fails to qualify as a REIT in any taxable year, it will be subject to
federal income taxes on its taxable income at regular corporate income tax rates. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state or local taxes on its income, property or net worth and federal
income and excise taxes on its undistributed income. No provision has been made for federal income taxes for the nine months ended September 30, 2008 and 2007 in the accompanying consolidated financial statements.

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income TaxesAn Interpretation of
FASB Statement No. 109. FIN 48 increases the relevancy and comparability of financial reporting by clarifying the way companies account for uncertainty in measuring income taxes. FIN 48 prescribes a comprehensive model for how a company
should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. This



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Interpretation only allows a favorable tax position to be included in the calculation of tax liabilities and expenses if a company concludes that it is more
likely than not that its adopted tax position will be sustained. The Company adopted FIN 48 as required effective January 1, 2007. The adoption of FIN 48 did not have a material impact on its consolidated financial position, results of
operations or cash flows. All of the Companys tax years are subject to examination by tax jurisdictions.

In accordance with FIN 48,
the Company has assessed its tax positions for all open tax years as of January 1, 2007 and concluded that there were no material FIN 48 uncertainties to be recognized. The Companys accounting policy with respect to interest and penalties
related to tax uncertainties is to classify these amounts as provision for income taxes. The Company has not recognized any interest and penalties related to tax uncertainties for the nine months ended September 30, 2008 and 2007.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements which defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. This statement was
effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. The Companys adoption of SFAS No. 157 as of January 1, 2008 did not have a material impact on its consolidated financial
position, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115. The fair value option established by SFAS No. 159 permits all entities to choose to measure eligible items at fair value at specified
election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent
reporting date. This statement was effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. The Company has adopted SFAS No. 159 effective January 1, 2008 and has elected not to measure
any of our current eligible financial assets or liabilities at fair value upon adoption. However, the Company does reserve the right to elect to measure future eligible financial assets of liabilities at fair value.

In September 2007, the FASB ratified Emerging Issues Task Force (EITF) Issue 07-6, Accounting for the Sale of Real Estate Subject to
the Requirements of FASB Statement No. 66 When the Agreement Includes a Buy-Sell Clause, which clarifies that a buy-sell clause, in and of itself, does not constitute a prohibited form of continuing involvement that would preclude partial
sale treatment under Statement 66. EITF 07-6 applies prospectively to new arrangements entered into in fiscal years beginning after December 15, 2007. The adoption of EITF 07-6 as of January 1, 2008 did not have a material impact on the
Companys consolidated financial position, results of operations and cash flows.

In December 2007, the FASB issued SFAS
No. 141R, Business Combinations which requires most identifiable assets, liabilities, noncontrolling interests and goodwill acquired in a business combination to be recorded at full fair value. Under SFAS No. 141R, all business
combinations will be accounted for by applying the acquisition method. SFAS No. 141R is effective for periods beginning on or after December 15, 2008. Earlier application is prohibited and will be applied to business combinations occurring
after the effective date. The Company is currently evaluating the impact of adopting SFAS No. 141R on its consolidated financial position, results of operations and cash flows.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB
No. 51, which will require noncontrolling interests (currently referred to as minority interest) to be treated as a separate component of equity, not as a liability or other item outside of permanent equity. The Statement applies to
the accounting for noncontrolling interests and transactions with noncontrolling interest holders in consolidated financial statements. SFAS No. 160 is effective for periods beginning on or after December 15, 2008. Earlier application is
prohibited. SFAS No. 160 will be applied



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prospectively to all noncontrolling interests, including any that arose before the effective date except that comparative period information must be recast
to classify noncontrolling interests in equity, attributed net income and other comprehensive income to noncontrolling interests, and provide other disclosures required by SFAS No. 160. The Company is currently evaluating the impact of adopting
SFAS No. 160 on its consolidated financial position, results of operations and cash flows.

Results of Operations

Three Months Ended September 30, 2008 Compared to the Three Months Ended September 30, 2007

Rental income for the quarter ended September 30, 2008 was $2,982,422 compared to rental income of $1,186,260 for the quarter ended
September 30, 2007. Our rental income has increased due to our acquisitions of Pinehurst Apartment Homes and Pheasant Run Apartments in September 2007, Retreat Apartments in January 2008, Hilltop Apartments in April 2008 and Conifer Crossing in
August 2008. We expect rental income to continue to increase in future periods, as compared to historical periods, as a result of our investments in real estate acquired in 2007 and 2008 and future acquisitions of real estate investments.

Other income for the quarter ended September 30, 2008 was $239,941 compared to $93,494 for the quarter ended September 30, 2007.
Other income consists of various tenant related charges and are recognized as revenue in the period in which the applicable charge is incurred. The increase in other income for the quarter ended September 30, 2008 is attributable to our
acquisitions in 2007 and 2008.

Property operating expenses for the quarter ended September 30, 2008 were $1,227,650 compared to
$369,951 for the quarter ended September 30, 2007. The increase in property operating expenses for the quarter ended September 30, 2008 is attributable to our acquisitions in 2007 and 2008. We expect property operating expenses to continue
to increase in future periods, as compared to historical periods as a result of our investments in real estate acquired in 2007 and 2008 and future acquisitions of real estate investments.

Real estate taxes were $244,179 for the quarter ended September 30, 2008 compared to $99,851 for the quarter ended September 30, 2007. The
increase in real estate taxes in 2008 is a result of our acquisitions in 2007 and 2008.

General and administrative expenses were $508,720
for the quarter ended September 30, 2008 compared to $237,491 for the quarter ended September 30, 2007. The amount of general and administrative expenses we were permitted to accrue and pay under the 2%/25% Rule, discussed below under
Related Party Transactions and Agreements, increased during the quarter ended September 30, 2008 due to the fact that our average invested assets increased as a result of our acquisitions in 2007 and 2008. We expect this trend
to continue as we acquire additional real estate investments.

Interest expense, including amortization of deferred financing costs, was
$1,214,230 for the quarter ended September 30, 2008 compared to $554,108 for the quarter ended September 30, 2007. The increase in interest expense was primarily related to the increase in mortgage notes payable from $43,895,763 as of
September 30, 2007 to $90,379,276 as of September 30, 2008 as a result of our acquisitions in 2007 and 2008 and certain financing costs that we incurred in connection with such indebtedness.

Depreciation and amortization expense was $766,775 for the quarter ended September 30, 2008 compared to $347,950 for the quarter ended
September 30, 2007. The increase in depreciation and amortization expense is a result of our acquisitions in 2007 and 2008.

Loss
allocated to minority interest increased from $28,707 for the quarter ended September 30, 2007 to $37,911 for the quarter ended September 30, 2008 and the increase was due mainly to the allocation of losses to the provisions of each
projects operating agreement.



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Net loss increased from $230,227 for the quarter ended September 30, 2007 to $666,148 for the
quarter ended September 30, 2008 primarily due to the net impact of items discussed above.

Nine Months Ended September 30, 2008 Compared to
the Nine Months Ended September 30, 2007

Rental income for the nine months ended September 30, 2008 was $7,404,364 compared
to rental income of $3,404,464 for the nine months ended September 30, 2007. Our rental income has increased due to our acquisitions of Pinehurst Apartment Homes and Pheasant Run Apartments in September 2007, Retreat Apartments in January 2008,
Hilltop Apartments in April 2008 and Conifer Crossing in August 2008.

Other income for the nine months ended September 30, 2008 was
$648,888 compared to $278,329 for the nine months ended September 30, 2007. Other income consists of various tenant related charges and is recognized as revenue in the period in which the applicable charge is incurred. The increase in other
income for the nine months ended September 30, 2008 is attributable to our acquisitions in 2007 and 2008.

Property operating expenses
for the nine months ended September 30, 2008 were $2,930,198 compared to $1,093,961 for the nine months ended September 30, 2007. The increase in property operating expenses for the nine months ended September 30, 2008 is attributable
to our acquisitions in 2007 and 2008.

Real estate taxes were $599,207 for the nine months ended September 30, 2008 compared to
$297,106 for the nine months ended September 30, 2007. The increase in real estate taxes in 2008 is a result of our acquisitions in 2007 and 2008.

General and administrative expenses were $1,264,626 for the nine months ended September 30, 2008 compared to $695,340 for the nine months ended September 30, 2007. The amount of general and administrative
expenses we were permitted to accrue and pay under the 2%/25% Rule, discussed below under Related Party Transactions and Agreements, increased during the nine months ended September 30, 2008 due to the fact that our average invested
assets increased as a result of our acquisitions in 2007 and 2008.

Interest expense, including amortization of deferred financing costs,
was $2,997,899 for the nine months ended September 30, 2008 and $1,662,790 for the nine months ended September 30, 2007. The increase in interest expense was primarily related to the increase in mortgage notes payable from $43,895,763 as
of September 30, 2007 to $90,379,276 as of September 30, 2008 as a result of our acquisitions in 2007 and 2008 and certain financing costs that we incurred in connection with such indebtedness.

Depreciation and amortization expense was $1,977,312 for the nine months ended September 30, 2008 compared to $1,196,750 for the nine months ended
September 30, 2007. The increase in depreciation and amortization expense is a result of our acquisitions in 2007 and 2008.

Loss
allocated to minority interest decreased from $164,395 for the nine months ended September 30, 2007 to $61,524 for the nine months ended September 30, 2008 due mainly to the allocation of losses to the provisions of each projects
operating agreement.

Net loss increased from $964,038 for the nine months ended September 30, 2007 to $1,520,634 for the nine months
ended September 30, 2008 primarily due to the net impact of items discussed above.

Related Party Transactions and Agreements

Selling Commissions and Dealer Manager Fees.Pursuant to the terms of the IPO Dealer Manager Agreement, we paid Paladin Securities
selling commissions of 7.0% of the gross offering proceeds from the sale of shares of our common stock in our primary offering and 4.0% of the gross offering proceeds from the sale of shares of our common stock pursuant to our dividend reinvestment
plan. We also paid Paladin Securities a dealer manager fee of up to 2.5% of gross offering proceeds from the sale of shares of our common stock in our primary



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offering. Pursuant to the terms of the Follow-On Dealer Manager Agreement, we pay Paladin Securities selling commissions of 6.0% of the gross offering
proceeds from the sale of shares of our common stock in our primary offering and we do not pay any commission from the sale of shares of our common stock pursuant to our distribution reinvestment plan. We also pay Paladin Securities a dealer manager
fee of up to 3.5% of gross offering proceeds from the sale of shares of our common stock in our primary offering. Paladin Securities may pay all or a portion of these selling commissions and dealer manager fees to participating broker-dealers. For
the nine months ended September 30, 2008, we incurred $824,820 in selling commissions and dealer manager fees to Paladin Securities.

Organization and Offering Costs.Our organization and offering costs are paid by Paladin Advisors or its affiliates, including Paladin Realty, on behalf of us and directly by us. Organization and offering costs consist of actual
legal, accounting, printing and other offering expenses, including amounts to reimburse Paladin Advisors, its affiliates or our dealer manager, for all marketing related costs and expenses, including, but not limited to, expenses relating to
registering and marketing the shares and other marketing and organization costs, technology costs and expenses attributable to the Offerings, and payment or reimbursement of bona fide due diligence expenses of the dealer manager and broker-dealers
participating in the Offerings. Pursuant to the Advisory Agreement, we are obligated to reimburse Paladin Advisors or its affiliates for amounts advanced for organization and offering costs, provided that Paladin Advisors and its affiliates are
responsible for the payment of organization and offering costs to the extent they exceed 3.0% of gross proceeds from the Offerings and will be required to return to us any amount we reimburse them in excess of 3.0% of the gross proceeds from the
Offerings.

We had incurred organization and offering costs of $7,312,136 as of September 30, 2008, which includes $6,131,528 of
deferred organization and offering costs paid by Paladin Advisors as described in Note 6 of the notes to our consolidated financial statements included herewith. Such costs only become a liability to us to the extent they do not exceed 3.0% of the
gross proceeds of the Offerings. When recorded by us, organization costs are expensed as incurred and offering costs are charged to stockholders equity. For the nine months ended September 30, 2008, we recognized $282,478 of offering
costs.

As of September 30, 2008, $1,010,101 in offering costs have been charged to stockholders equity and $51,134 of
organization costs were expensed in 2005.

Subject to the 3.0% limitation, the remaining $6,250,901 in organization and offering costs as
of September 30, 2008 may be recognized in future periods as we receive additional proceeds of the Offerings.

Expense
Reimbursement.Pursuant to the Advisory Agreement, Paladin Advisors is entitled to reimbursement of actual expenses incurred for administrative and other services provided to us by Paladin Advisors and its affiliates for which they do not
otherwise receive a fee. We will not reimburse Paladin Advisors for operating expenses that in the fiscal year then ended exceeded the greater of (1) 2% of our average invested assets or (2) 25% of our net income (the 2%/25%
Rule), and Paladin Advisors must reimburse us quarterly for any amounts by which our operating expenses exceed the 2%/25% Rule in the previous four consecutive fiscal quarters (the Expense Period). Our average invested assets for
any period are equal to the average book value of our assets invested in equity interests in, and loans secured by, real estate before reserves for depreciation or bad debts or other similar non-cash reserves computed by taking the average of such
values at the end of each month during the period. Our net income for any period is equal to our total revenue less total expenses other than additions to reserves for depreciation, bad debts or other similar non-cash reserves for such period.
Operating expenses include all expenses incurred by us under U.S. generally accepted accounting principles (GAAP) (including the asset management fee), but excluding organization and offering expenses, selling commissions and dealer
manager fees, interest payments, taxes, non-cash expenditures such as depreciation, amortization and bad debt reserves, the subordinated disposition fee, acquisition fees and expenses and distributions pursuant to Paladin Advisors subordinated
participation interest in Paladin OP.

Paladin Advisors must reimburse the excess expenses to us within 60 days after the end of each
fiscal quarter unless a majority of the independent directors determine that the excess expenses were justified based on



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unusual and nonrecurring factors which they deem sufficient. Within 60 days after the end of any Expense Period for which total operating expenses exceed the
2%/25% Rule, we will send our stockholders written disclosure, together with an explanation of the factors the independent directors considered in arriving at the conclusion that the excess expenses were justified. However, at Paladin Advisors
option, Paladin Advisors or its affiliate, as applicable may defer receipt of any portion of the asset management fee or reimbursement of expenses and elect to receive such payments, without interest, in any subsequent fiscal year that Paladin
Advisors designates.

During the Expense Period ended September 30, 2008, our operating expenses, including expenses incurred on our
behalf by Paladin Advisors and its affiliates, did not exceed the 2%/25% Rule. During the Expense Period ended September 30, 2008, $491,501 was paid by Paladin Advisors.

For the three months ended September 30, 2008, we incurred $489,555 in general and administrative expenses. In accordance with the Advisory
Agreement, we recognize on a quarterly basis amounts not exceeding the 2%/25% Rule. Due to the application of the 2%/25% Rule, we were able to recognize $508,720 of general and administrative expenses in our consolidated statements of operations for
the three months ended September 30, 2008 with the additional amount of $19,166 recorded as due to affiliate.

For the nine months
ended September 30, 2008, we incurred $660,338 in general and administrative expenses. Due to the application of the 2%/25% Rule, we were able to recognize $1,264,626 of general and administrative expenses in our consolidated statements of
operations for the nine months ended September 30, 2008 with the additional amount of $604,290 recorded as due to affiliate.

Acquisition Fees.Pursuant to the terms of the Advisory Agreement prior to its amendment and restatement effective July 18, 2008, we paid Paladin Advisors acquisition fees consisting of 2.75% of (1) the contract purchase
price for a property acquired directly or through a joint venture or (2) with respect to real estate related investments, the appraised value of the underlying property, not to exceed 5.5% of the funds we advance with respect to the investment.
As amended, our Advisory Agreement provides for an acquisition fee in an amount equal to 1.5% of (1) the purchase price of a real property investment acquired directly; (2) our allocable cost of a property acquired in a joint venture or
(3) with respect to real estate related investments, the funds advanced for such investment. Our allocable cost of a joint venture investment is equal the product of (i) the amount actually paid or allocated to the purchase, development,
construction or improvement of properties by the joint venture, inclusive of expenses related thereto, and the amount of outstanding debt associated with such properties and the joint venture, and (ii) the Funds percentage economic
interest in the joint venture.

Paladin Advisors was entitled to acquisition fees of $527,643 relating to the acquisition of Retreat
Apartments, Hilltop Apartments, Conifer Crossing and the additional 18% membership interest in Glenwood, which were paid during the nine months ended September 30, 2008. The acquisition fees were capitalized as part of our investment in 801
Fiber Optic Drive, Champion Farms Apartments, Fieldstone Apartments, Pinehurst Apartment Homes, Pheasant Run Apartments, Retreat Apartments, Hilltop Apartments and Conifer Crossing.

Asset Management Fees.Pursuant to the terms of the Advisory Agreement prior to its amendment and restatement effective July 18, 2008, an
annual asset management fee was payable to Paladin Advisors monthly in an amount equal to one-twelfth of 0.6% of (1) the contract purchase price of a property acquired directly or through a joint venture or (2) with respect to real estate
related investments, the appraised value of the underlying property, not to exceed 1.2% of the funds we advanced with respect to the investment. Paladin Advisors received this fee for supervising the management, leasing, development and construction
services provided for our properties by third parties and management of real estate related investments. As amended, the Advisory Agreement provides that we will pay Paladin Advisors on a monthly basis an asset management fee in an amount equal to
one-twelfth of 0.6% of (1) the purchase price of a real property investment acquired directly; (2) our allocable cost of a property acquired in a joint venture or (3) with respect to real estate related investments, the funds advanced
for such investment. Our allocable cost of a joint venture investment is calculated as set forth



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above under Acquisition Fees. Paladin Advisors may elect, in its sole discretion, to defer (without interest) payment of the asset management fee
in any month by providing us written notice of such deferral.

During the three months ended September 30, 2008, we paid Paladin
Advisors $70,164 for asset management fees earned for the three months ended September 30, 2008. During the nine months ended September 30, 2008, the Company paid Paladin Advisors $180,990 for asset management fees earned for the nine
months ended September 30, 2008.

Trends or Uncertainties

The commercial real estate debt markets have recently been experiencing volatility as a result of certain factors including the failure of large lending
institutions, the placement of Fannie Mae and Freddie Mac into the conservatorship of the U.S. government, the tightening of underwriting standards by lenders and credit rating agencies and the significant inventory of unsold collateralized mortgage
backed securities in the market. This has resulted in lenders decreasing the availability of debt financing as well as increasing the cost of debt financing. As our existing debt is fixed rate debt, our current portfolio will not be materially
impacted by the current debt market environment. However, should the reduced availability of debt and/or the increased cost of borrowings continue, either by increases in the index rates or by increases in lender spreads, we will need to consider
such factors in the evaluation of future acquisitions. This may result in future acquisitions generating lower overall economic returns and potentially reducing future cash flow available for distribution.

In addition, the state of the debt markets could have an impact on the overall amount of capital investing in real estate which may result in price or
value decreases of real estate assets. Although this may benefit us for future acquisitions, it could negatively impact the current value of our existing assets.

Our management is not aware of any other material trends or uncertainties that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the acquisition, management and
operation of real estate and real estate related investments.

Liquidity and Capital Resources

During the nine months ended September 30, 2008, our sources of funds were:



| |  |  | proceeds, net of selling commissions and dealer manager fees, of $7,747,366 from the sale of 856,447 common shares in our Offerings; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | net operating income of $4,523,847 from our investments in real estate.
| | - |  | -----------------------------------------------------------------------



32



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We consider net operating income to be an appropriate supplemental performance measure because net
operating income reflects the operating performance of our properties and excludes certain items that are not considered to be controllable in connection with the management of the property, such as depreciation, interest expense, interest income
and general and administrative expenses. Additionally, we believe that net operating income is a widely accepted measure of comparative operating performance in the real estate investment community. However, our use of the term net operating income
may not be comparable to that of other real estate companies as they may have different methodologies for computing this amount. We believe that the line on our consolidated statement of operations entitled net loss is the most directly
comparable GAAP measure to net operating income. The following table is a reconciliation of net operating income to our reported net loss from continuing operations for the nine months ended September 30, 2008:



|                                                                |  |   |            |  
|--------------------------------------------------------------- |  | - | ---------- | -
|Net Operating Income                                            |  | $ | 4,523,847  |  
|Equity in earnings from real estate joint venture               |  |   | 60,205     |  
|Interest income                                                 |  |   | 73,627     |  
|Depreciation and amortization expense                           |  |   | (1,977,312 | )
|Interest expense, including amortization of deferred loan costs |  |   | (2,997,899 | )
|General and administrative expenses                             |  |   | (1,264,626 | )
|Minority Interest                                               |  |   | 61,524     |  
|                                                                |  |   |            |  
|Net Loss                                                        |  | $ | (1,520,634 | )
|                                                                |  |   |            |  

We are dependent upon the net proceeds to be received from our Offerings to conduct our proposed
activities. The capital required to make additional real property investments and real estate related investments will be obtained from the Offerings and from any indebtedness that we may incur in connection with the acquisition of any real
properties and real estate related investments thereafter. We anticipate our sources of funds will continue to consist of the net proceeds from the Offerings and indebtedness. We believe that these cash resources will be sufficient to satisfy our
cash requirements for the foreseeable future, and we do not anticipate a need to raise funds from other than these sources within the next twelve months.

Net cash provided by operating activities for the nine months ended September 30, 2008 was $1,358,786 compared to net cash used in operating activities of $107,780 for the nine months ended September 30,
2007 due to our acquisitions of Pinehurst Apartment Homes and Pheasant Run Apartments in September 2007, Retreat Apartments in January 2008, Hilltop Apartments in April 2008 and Conifer Crossing in August 2008.

Net cash used in investing activities for the nine months ended September 30, 2008 was $57,893,063, which included $52,159,562 relating to the
purchase of real estate and improvements and an increase in restricted cash of $5,780,596, less distributions from real estate joint venture in excess of equity in earnings of $47,095. Net cash used in investing activities for the nine months ended
September 30, 2007 was $12,304,571, which included $11,028,406 relating to the purchase of real estate and improvements, an increase in restricted cash of $179,750, a decrease of $578,498 in due to affiliates and $532,400 in payment of
refundable deposits, less distributions from real estate joint venture in excess of equity in earnings of $14,483.

Net cash provided by
financing activities was $55,522,473 for the nine months ended September 30, 2008 related to $8,572,186 in proceeds from the issuance of common shares in our Offerings, $42,300,000 of borrowings from mortgages payable, $6,080,315 of
contributions from minority interest and $948,437 decrease in due from affiliates offset primarily by $49,849 of payments on mortgages payable, $407,186 in deferred loan costs, $126,088 of treasury shares purchased, $824,820 of selling commissions
and dealer manager fees, $282,478 of offering costs, $535,072 of distributions paid and $152,972 of distributions to minority interest. Net cash provided by financing activities for the nine months ended September 30, 2007 was $13,857,524
primarily related to $14,155,572 in proceeds from the issuance of common shares in our Offerings, $6,250,000 of borrowings from in mortgages payable and $129,574 of contributions from minority interest offset primarily by $3,800,000 of payments on
note payable to affiliate, $372,854 in deferred loan costs, $23,593 in treasury shares



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purchased, $1,321,546 of selling commissions and dealer manager fees, $439,220 of offering costs, $499,829 increase in due to affiliate, $212,592 of
distributions paid and $7,988 distributions to minority interests.

Mortgages Payable

We have mortgage loans in an aggregate amount of $90,379,276 outstanding, consisting of (1) $16,350,000 incurred in connection with the acquisition
of our interest in Champion Farms Apartments, (2) $16,500,000 incurred in connection with the acquisition of our interest in Fieldstone Apartments, (3) $4,729,276 incurred in connection with the acquisition of our interest in Pinehurst
Apartment Homes, (4) $6,250,000 incurred in connection with the acquisition of our interest in Pheasant Run Apartments, (5) $13,600,000 incurred in connection with the acquisition of our interest in Retreat Apartments, (6) $4,250,000
incurred in connection with the acquisition of our interest in Hilltop apartments and (7) $28,700,000 incurred in connection with the acquisition of our interest in Conifer Crossing. These mortgage notes payable are described in detail in Note
4 to our consolidated financial statements included herein.

Leverage Policy

Our charter provides that our independent directors must approve any borrowing in excess of 300% of the value of our net assets and the justification for
such excess borrowing must be disclosed to our stockholders in our next quarterly report. Net assets for purposes of this calculation are defined to be our total assets (other than intangibles), valued at cost prior to deducting depreciation,
reserves for bad debts and other non-cash reserves, less total liabilities. The preceding calculation is generally expected to approximate 75% of the aggregate cost of our assets before non-cash reserves and depreciation. As of September 30,
2008, our leverage did not exceed 300.0% of the value of our net assets.

Distributions

We paid $1,348,863 in distributions during the nine months ended September 30, 2008. Our board of directors has declared distributions for the
periods listed below to stockholders of record as the close of business each day during the applicable period and paid on the dates listed below.



|                                      |  |                             |   |  |                    |  |                    |        
|------------------------------------- |  | --------------------------- | - |  | ------------------ |  | ------------------ | -------
|Month                                 |  | Annualized RateDeclared (1) |   |  | Date Paid          |  | TotalDistributions
|December 1, 2007 to December 31, 2007 |  | 6.0                         | % |  | January 15, 2008   |  | $                  | 130,354
|January 1, 2008 to January 31, 2008   |  | 6.0                         | % |  | February 15, 2008  |  | $                  | 134,933
|February 1, 2008 to February 29, 2008 |  | 6.0                         | % |  | March 17, 2008     |  | $                  | 131,386
|March 1, 2008 to March 31, 2008       |  | 6.0                         | % |  | April 15, 2008     |  | $                  | 145,938
|April 1, 2008 to April 30, 2008       |  | 6.0                         | % |  | May 15, 2008       |  | $                  | 148,235
|May 1, 2008 to May 31, 2008           |  | 6.0                         | % |  | June 16, 2008      |  | $                  | 158,010
|June 1, 2008 to June 30, 2008         |  | 6.0                         | % |  | July 15, 2008      |  | $                  | 158,645
|July 1, 2008 to July 31, 2008         |  | 6.0                         | % |  | August 15, 2008    |  | $                  | 168,738
|August 1, 2008 to August 31, 2008 (2) |  | 6.0                         | % |  | September 15, 2008 |  | $                  | 172,624



|(1) | Distributions were declared in the amount of $0.0016438 per share per day, representing an annualized rate of return of 6.0% on an investment of $10.00 per share if paid each day
over a 365-day period.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | On August 25, 2008, our board of directors declared dividends for the month of September that totaled approximately $172,000 when paid on October 15, 2008. On
September 29, 2008, our board of directors declared dividends for the month of October that will total approximately $180,000 when paid on November 17, 2008. On October 28, 2008, our board of directors declared dividends for the month
of November that will total approximately $178,000 when paid on December 15, 2008.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Each of our eight real estate
investments is structured as a joint venture with an unaffiliated third-party. As required under GAAP, our financial statements present the operations of 801 Fiber Optic Drive on an



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unconsolidated basis, and the operations of Champion Farms Apartments, Fieldstone Apartments, Pinehurst Apartment Homes, Pheasant Run Apartments, the Retreat
Apartments, the Hilltop Apartments and Conifer Crossing on a consolidated basis. Consolidation requires us to reflect 100% of the income and expenses of property operations with a partial offset to account for the minority interest held by our joint
venture partner. As structured as of September 30, 2008, our investment in Champion Farms Apartments represented a 70% ownership interest, our investment in Fieldstone Apartments an 83% ownership interest, our investment in Pinehurst Apartment
Homes a 97.5% ownership interest, our investment in Pheasant Run Apartment a 97.5% ownership interest, a 97.5% ownership interest in the Retreat Apartments, a 49.0% ownership interest in Hilltop Apartments and a 42.5% ownership interest in Conifer
Crossing. However, by the terms of the joint ventures for Champion Farms and Fieldstone Apartments we are entitled to 100% of available cash flow from each property as a priority distribution until we receive at least an 8.25% return on our invested
capital. By the terms of the joint ventures for Pinehurst Apartment Homes and Pheasant Run Apartments, we are entitled to 100% of available cash flow from each property as a priority distribution until we receive at least a 9.0% return on our
invested capital. By the terms of the joint ventures for the Retreat Apartment and Hilltop Apartments, we are entitled to 100% of available cash flow from each property as a priority distribution until we receive at least a 12.0% return on our
invested capital. By the terms of the joint venture for Conifer Crossing, we are entitled to 100% of available cash flow from each property as a priority distribution until we receive at least an 8.5% return on our invested capital. The following
chart compares cash distributions received from the Companys investments in 801 Fiber Optic Drive, Champion Farms Apartments, Fieldstone Apartments, Pinehurst Apartment Homes, Pheasant Run Apartments, the Retreat Apartments, Hilltop Apartments
and Conifer Crossing during the year ended December 31, 2007 and the nine months ended September 30, 2008 with distributions paid during the same period.

Summary of Cash Distributions from the Companys Investments



|                                                |  |                |         |                         |   |                      |  |                         |         |                       |   |                      |  |                      |         |                    |   |         |  |   |        |  |   |        |  |   |          
|----------------------------------------------- |  | -------------- | ------- | ----------------------- | - | -------------------- |  | ----------------------- | ------- | --------------------- | - | -------------------- |  | -------------------- | ------- | ------------------ | - | ------- |  | - | ------ |  | - | ------ |  | - | ---------
|                                                |  | 801 FiberOptic |         | ChampionFarmsApartments |   | FieldstoneApartments |  | PinehurstApartmentHomes |         | PheasantRunApartments |   | RetreatApartments(1) |  | HilltopApartments(2) |         | ConiferCrossing(3) |   | Total  
|Summary of Cash Distributions from Investments: |  |                |         |                         |   |                      |  |                         |         |                       |   |                      |  |                      |         |                    |   |         |  |   |        |  |   |        |  |   |          
|Year ended December 31, 2007                    |  | $              | 166,500 |                         | $ | 378,129              |  | $                       | 303,932 |                       | $ | 63,768               |  | $                    | 62,054  |                    |   |        |  |   |       |  |   |       |  | $ | 974,383  
|Nine months ended September 30, 2008            |  |                | 107,300 |                         |   | 329,330              |  |                         | 291,771 |                       |   | 162,765              |  |                      | 178,344 |                    | $ | 237,741 |  | $ | 60,550 |  | $ | 42,500 |  |   | 1,410,301
|                                                |  |                |         |                         |   |                      |  |                         |        
|Summary of Distributions Paid                   |  |                |         |                         |   |                      |  |                         |         |                       |   |                      |  |                      |         |                    |   |         |  |   |        |  |   |        |  |   |          
|Year ended December 31, 2007                    |  |                |         |                         |   |                      |  |                         |         |                       |   |                      |  |                      |         |                    |   |         |  |   |        |  |   |        |  | $ | 969,937  
|Nine months ended September 30, 2008            |  |                |         |                         |   |                      |  |                         |         |                       |   |                      |  |                      |         |                    |   |         |  |   |        |  |   |        |  |   | 1,348,863



|(1) | We acquired our interest in the Retreat Apartments on January 14, 2008.
|--- | -----------------------------------------------------------------------

|(2) | We acquired our interest in Hilltop Apartments on April 7, 2008.
|--- | ----------------------------------------------------------------

|(3) | We acquired our interest in Conifer Crossing on August 5, 2008.
|--- | ---------------------------------------------------------------

Of the $1,348,863 distributions noted above, $535,072 was paid in cash and $813,791 was paid through the distribution reinvestment plan in the form of additional shares issued.

As shown in the charts, cash distributions from our investments have exceeded the distributions paid for the year ended December 31, 2007 and the
nine months ended September 30, 2008. In addition, for the nine months ended September 30, 2008, cash flow from operations was $1,358,786, which exceeds the amount of distributions paid in cash. Paladin Advisors has paid expenses on our
behalf and Paladin Advisors has deferred the reimbursement of a portion of these expense payments and from time to time has deferred certain other fees owed to it. We are dependent on Paladin Advisors to support our financial position currently
because of our small



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size. As we continue to grow by selling shares in our Follow-On Offering and by making additional investments, we expect to be able to finance our
operations without advances from and deferrals of fees otherwise payable to Paladin Advisors.

For the nine months ended September 30,
2008, Paladin Advisors and its affiliates had incurred on our behalf $382,318 in general and administrative expenses. Pursuant to the terms of the Advisory Agreement, Paladin Advisors has deferred (without interest) repayment of these expenses. The
payment of these obligations in future periods may impact our ability to pay future distributions. Paladin Advisors is not obligated to either pay expenses on our behalf or defer reimbursements of such expense payments or fees in future periods. If
Paladin Advisors were to cease paying expenses on our behalf or deferring reimbursement of expenses or fees, our ability to pay distributions to our stockholders could be adversely affected, and we may be unable to pay distributions to our
stockholders, or such distributions could decrease significantly. Additionally, if Paladin Advisors continues to pay expenses on our behalf and/or defer reimbursement of expense payments or fees, the ultimate repayment of these obligations could
adversely impact on our ability to pay distributions in future periods as well as potentially adversely impact the value of your investment.

The amount of distributions to be distributed to our stockholders in the future will be determined by our board of directors and are dependent on a number of factors, including funds available for payment of distributions (including whether
Paladin Advisors continues to pay expenses and/or defer reimbursement of expense payments or fees), our financial condition, capital expenditure requirements, annual distribution requirements needed to maintain our status as a REIT under the
Internal Revenue Code, any limitations imposed by the terms of indebtedness we may incur and other factors.

Off-Balance Sheet Arrangements

As of September 30, 2008 and December 31, 2007, we had no off-balance sheet arrangements that have or are reasonably likely
to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|------- | -----------------------------------------------------------

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, we
expect that the primary market risk to which we will be exposed is interest rate risk.

We may be exposed to the effects of interest rate
changes primarily as a result of borrowings used to maintain liquidity and fund expansion and refinancing of our real estate investment portfolio and operations. Our interest rate risk management objectives will be to limit the impact of interest
rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs while taking into account variable interest rate risk. To achieve our objectives, we may borrow at fixed rates or variable rates. We may also enter
into derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on a related financial instrument. We will not enter into derivative or interest rate transactions for speculative purposes.

In addition to changes in interest rates, the value of our real estate and real estate related investments is subject to fluctuations
based on changes in local and regional economic conditions and changes in the creditworthiness of lessees, and which may affect our ability to refinance our debt if necessary.

As of September 30, 2008, we had outstanding fixed-rate debt of approximately $90.4 million.

As of September 30, 2008, the fair value of our fixed-rate debt is estimated to be $88.4 million, compared to its carrying value of $90.4 million.
To determine fair value, the fixed-rate debt is discounted at a rate based on an estimate of current lending rates as of September 30, 2008.



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A 50 basis point increase in interest rates on our fixed-rate debt would decrease the fair value of our
$90.4 million fixed-rate debt by approximately $2.1 million. A 50 basis point decrease in interest rates on our fixed-rate debt would increase the fair value of our $90.4 million fixed-rate debt by approximately $3.3 million.

These amounts were determined by considering the impact of hypothetical interest rates on our financial instruments. These analyses do not consider the
effect of any changes in overall economic activity that could occur in that environment. Further, in the event of a change of the magnitude discussed above, we may take actions to further mitigate our exposure to the change. However, due to the
uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.



|ITEM 4T. | CONTROLS AND PROCEDURES.
|-------- | ------------------------

As of the end of the
period covered by this report, management, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon and as of the date of the evaluation, our chief executive officer and chief financial officer concluded that the disclosure controls and procedures were effective.

There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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##### Table of Contents

PART IIOTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS.
|------- | ------------------

None.



|ITEM 1A. | RISK FACTORS.
|-------- | -------------

The following risk factor should be
read together with the risk factors disclosed under Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2007.

Recent events in U.S. and global financial markets have had, and may continue to have, a negative impact on the terms and availability of credit in the United States and the state of the national economy
generally which could have an adverse effect on our business and our results of operations.

The recent failure of large U.S.
financial institutions and the resulting turmoil in the United States and global financial sector has had, and will likely continue to have, a negative impact on the terms and availability of credit and the state of the economy generally within the
United States. The tightening of the U.S. credit markets has resulted in increasing interest rates leading to fears of a lack of adequate credit and a further economic downturn. Some lenders are imposing more stringent restrictions on the terms of
credit and there may be a general reduction in the amount of credit available in the markets in which we conduct business. The negative impact of the tightening of the credit markets may result in an inability to finance the acquisition of real
properties and other real estate related investments on favorable terms, if at all, increased financing costs or financing with increasingly restrictive covenants.

Additionally, decreasing home prices and increasing mortgage defaults have resulted in uncertainty in the real estate and real estate securities and debt markets. As a result, the valuation of real estate-related
investments has been volatile and is likely to continue to be volatile in the future. The volatility in markets may make it more difficult for us to obtain adequate financing or realize gains on our investments which could have an adverse effect on
our business and our results of operations.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
|------- | ------------------------------------------------------------

On February 23, 2005, our Initial Public Offering (SEC File No. 333-113863) was declared effective and we commenced our efforts to raise up to 35,000,000 shares of our common stock in the primary offering
for $10.00 per share and up to 3,500,000 shares of our common stock pursuant to our dividend reinvestment plan for $10.00 per share, aggregating up to $385,000,000. On July 28, 2008, we commenced our Follow-On Offering of up to 85,526,316
shares of common stock pursuant to a Registration Statement on Form S-11 (SEC File Nos. 333-146867 and 333-113863) which was declared effective by the SEC on July 28, 2008. The Follow-on Offering includes up to 75,000,000 shares to be
offered for sale at $10.00 per share in the primary offering and up to 10,526,316 shares to be offered for sale pursuant to our distribution reinvestment plan for $9.50 per share, aggregating up to $850,000,000. As of September 30, 2008, we had
sold 3,534,551 shares of common stock in the Offerings, raising gross proceeds of $35,256,362. From this amount, we have incurred $3,165,856 in selling commissions and dealer manager fees to our dealer managers, $7,312,136 in organization and
offering costs (of which $1,010,101 has been recorded in our financial statements), $1,384,076 in acquisition or origination fees and $372,089 in asset management fees.

As of September 30, 2008, we had net offering proceeds from the Offerings of $31,028,021. We used a combination of net offering proceeds and debt to purchase our interests in eight properties and to pay other
operating expenses and fees. For more information regarding how we used our net offering proceeds through September 30, 2008, see our financial statements included in this report.



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During the quarter ended September 30, 2008, we repurchased shares of our common stock as follows:



|                                        |  |                                    |  |                                 |      |                                                                               |       |                                                                                                |    |  
|--------------------------------------- |  | ---------------------------------- |  | ------------------------------- | ---- | ----------------------------------------------------------------------------- | ----- | ---------------------------------------------------------------------------------------------- | -- | -
|Period                                  |  | (a) Total Numberof SharesPurchased |  | (b) Average PricePaid Per Share |      | (c) Total Numberof SharesPurchased asPart of PubliclyAnnounced Planor Program |       | (d) MaximumApproximateDollar Value ofShares that MayYet Be PurchasedUnder the Plansor Programs |   
|July 1, 2008 to July 31, 2008           |  | 7,448                              |  | $                               | 9.30 |                                                                               | 7,448 |                                                                                                | (1 | )
|August 1, 2008 to August 31, 2008       |  |                                   |  |                                 |     |                                                                               |      |                                                                                                | (1 | )
|September 1, 2008 to September 30, 2008 |  |                                   |  |                                 |     |                                                                               |      |                                                                                                | (1 | )



|(1) | Subject to funds being available, we will limit the number of shares redeemed pursuant to our share redemption program as follows: (a) during any 12-month period, we will not
redeem in excess of 10.0% of the number of shares outstanding as of the beginning of such 12-month period; and (b) funding for the redemption of shares will come exclusively from the proceeds we receive from the sale of shares under our
distribution reinvestment plan.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES.
|------- | --------------------------------

None.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|------- | ----------------------------------------------------

None.



|ITEM 5. | OTHER INFORMATION.
|------- | ------------------

None.



|ITEM 6. | EXHIBITS.
|------- | ---------



|     |  |                                                                                                                                                                                                                                                                                                      
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  | Second Articles of Amendment and Restatement of the Registrant (filed as Exhibit 3.1 to the Registrants Current Report on Form 8-K filed on July 28, 2008 and incorporated herein by
reference).                                                                                                    
|     | 
|3.2  |  | Amended and Restated Bylaws of the Registrant (filed as Exhibit 3.2 to Post-Effective Amendment No. 5 on April 6, 2007 and incorporated herein by reference).                                                                                                                                        
|     | 
|3.3  |  | Amendment No. 1 to Amended and Restated Bylaws (filed as Exhibit 3.1 to the Registrants Current Report on Form 8-K on March 28, 2008 and incorporated herein by reference).                                                                                                                         
|     | 
|4.1  |  | Form of Subscription Agreement (filed as Appendix B to the Prospectus filed on July 28, 2008 and incorporated herein by reference).                                                                                                                                                                  
|     | 
|4.2  |  | Paladin Realty Income Properties, Inc. Distribution Reinvestment Plan (filed as Appendix C to the Prospectus filed on July 28, 2008 and incorporated herein by reference).                                                                                                                           
|     | 
|10.1 |  | Third Amended and Restated Advisory Agreement (filed as Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on July 23, 2008 and incorporated herein by
reference)                                                                                                                     
|     | 
|10.2 |  | Purchase and Sale Agreement, dated as of April 2, 2008, by and between Simpson Financing Limited Partnership and Fowler Property Acquisitions, LLC (filed as Exhibit 10.1 to the
Registrants Current Report on Form 8-K on August 8, 2008 and incorporated herein by reference)                     
|     | 
|10.3 |  | Assignment and Assumption of Agreement of Purchase and Sale, dated as of May 22, 2008, by and between Fowler Property Acquisitions, LLC and FPA Conifer Associates, LLC (filed as Exhibit 10.2 to
the Registrants Current Report on Form 8-K on August 8, 2008 and incorporated herein by reference)



39



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##### Table of Contents

|     |  |                                                                                                                                                                                                                                                                                                               
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|10.4 |  | Amendment to Assignment and Assumption of Agreement of Purchase and Sale, dated as of July 27, 2008, by and between Fowler Property Acquisitions, LLC and FPA/PRIP Conifer, LLC (filed as Exhibit
10.3 to the Registrants Current Report on Form 8-K on August 8, 2008 and incorporated herein by reference) 
|     | 
|10.5 |  | Operating Agreement of FPA/PRIP Conifer, LLC, dated as of August 4, 2008, by and between PRIP 3383, LLC and FPA Conifer Investors, LLC (filed as Exhibit 10.4 to the Registrants Current
Report on Form 8-K on August 8, 2008 and incorporated herein by reference)                                          
|     | 
|10.6 |  | Multifamily Note effective as of August 5, 2008 made by FPA/PRIP Conifer, LLC in favor of Holliday Fenoglio Fowler, L.P. (filed as Exhibit 10.5 to the Registrants Current Report on
Form 8-K on August 8, 2008 and incorporated herein by reference)                                                        
|     | 
|10.7 |  | Multifamily Deed to Secure Debt, Assignment of Rents and Security Agreement, effective as of August 5, 2008, by FPA/PRIP Conifer, LLC in favor of Holliday Fenoglio Fowler, L.P. (filed as Exhibit
10.6 to the Registrants Current Report on Form 8-K on August 8, 2008 and incorporated herein by reference)
|     | 
|10.8 |  | Guaranty, dated August 5, 2008, by Gregory A. Fowler in favor Holliday Fenoglio Fowler, L.P. (filed as Exhibit 10.7 to the Registrants Current Report on Form 8-K on August 8, 2008 and
incorporated herein by reference)                                                                                    
|     | 
|10.9 |  | Repair Escrow Agreement, dated as of August 5, 2008, by and between FPA/PRIP Conifer, LLC and the Federal Home Loan Mortgage Corporation (filed as Exhibit 10.8 to the Registrants Current
Report on Form 8-K on August 8, 2008 and incorporated herein by reference)                                        
|     | 
|31.1 |  | Section 302 Certification of Principal Executive Officer.                                                                                                                                                                                                                                                     
|     | 
|31.2 |  | Section 302 Certification of Principal Financial Officer.                                                                                                                                                                                                                                                     
|     | 
|32.1 |  | Section 906 Certification of Principal Executive Officer.                                                                                                                                                                                                                                                     
|     | 
|32.2 |  | Section 906 Certification of Principal Financial Officer.                                                                                                                                                                                                                                                     



40



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##### Table of Contents

SIGNATURES

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



|                         |  |  |  |                                        |  |                                                                                                                           
|------------------------ |  |  |  | -------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------
|                         |  |  |  | PALADIN REALTY INCOME PROPERTIES, INC.
|                         |  |  | 
|Date:  November 10, 2008 |  |  |  | By:                                    |  | /s/    WHITNEY A.
GREAVES                                                                                                 
|                         |  |  |  |                                        |  | Whitney A. Greaves President and Chief Executive Officer (Principal Executive Officer)                                    
|                         |  |  | 
|Date:  November 10, 2008 |  |  |  | By:                                    |  | /s/    JOHN A GERSON                                                                                                      
|                         |  |  |  |                                        |  | John A. Gerson Executive Vice President, Chief Financial Officer and Director (Principal Financial and Accounting Officer)





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##### Table of Contents

EXHIBIT INDEX



|     |  |                                                                                                                                                                                                                                                                                                               
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  | Second Articles of Amendment and Restatement of the Registrant (filed as Exhibit 3.1 to the Registrants Current Report on Form 8-K filed on July 28, 2008 and incorporated herein by
reference).                                                                                                             
|     | 
|3.2  |  | Amended and Restated Bylaws of the Registrant (filed as Exhibit 3.2 to Post-Effective Amendment No. 5 on April 6, 2007 and incorporated herein by reference).                                                                                                                                                 
|     | 
|3.3  |  | Amendment No. 1 to Amended and Restated Bylaws (filed as Exhibit 3.1 to the Registrants Current Report on Form 8-K on March 28, 2008 and incorporated herein by reference).                                                                                                                                  
|     | 
|4.1  |  | Form of Subscription Agreement (filed as Appendix B to the Prospectus filed on July 28, 2008 and incorporated herein by reference).                                                                                                                                                                           
|     | 
|4.2  |  | Paladin Realty Income Properties, Inc. Distribution Reinvestment Plan (filed as Appendix C to the Prospectus filed on July 28, 2008 and incorporated herein by reference).                                                                                                                                    
|     | 
|10.1 |  | Third Amended and Restated Advisory Agreement (filed as Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on July 23, 2008 and incorporated herein by
reference)                                                                                                                              
|     | 
|10.2 |  | Purchase and Sale Agreement, dated as of April 2, 2008, by and between Simpson Financing Limited Partnership and Fowler Property Acquisitions, LLC (filed as Exhibit 10.1 to the Registrants
Current Report on Form 8-K on August 8, 2008 and incorporated herein by reference)                              
|     | 
|10.3 |  | Assignment and Assumption of Agreement of Purchase and Sale, dated as of May 22, 2008, by and between Fowler Property Acquisitions, LLC and FPA Conifer Associates, LLC (filed as Exhibit 10.2 to
the Registrants Current Report on Form 8-K on August 8, 2008 and incorporated herein by reference)         
|     | 
|10.4 |  | Amendment to Assignment and Assumption of Agreement of Purchase and Sale, dated as of July 27, 2008, by and between Fowler Property Acquisitions, LLC and FPA/PRIP Conifer, LLC (filed as Exhibit
10.3 to the Registrants Current Report on Form 8-K on August 8, 2008 and incorporated herein by reference) 
|     | 
|10.5 |  | Operating Agreement of FPA/PRIP Conifer, LLC, dated as of August 4, 2008, by and between PRIP 3383, LLC and FPA Conifer Investors, LLC (filed as Exhibit 10.4 to the Registrants Current
Report on Form 8-K on August 8, 2008 and incorporated herein by reference)                                          
|     | 
|10.6 |  | Multifamily Note effective as of August 5, 2008 made by FPA/PRIP Conifer, LLC in favor of Holliday Fenoglio Fowler, L.P. (filed as Exhibit 10.5 to the Registrants Current Report on Form
8-K on August 8, 2008 and incorporated herein by reference)                                                        
|     | 
|10.7 |  | Multifamily Deed to Secure Debt, Assignment of Rents and Security Agreement, effective as of August 5, 2008, by FPA/PRIP Conifer, LLC in favor of Holliday Fenoglio Fowler, L.P. (filed as Exhibit
10.6 to the Registrants Current Report on Form 8-K on August 8, 2008 and incorporated herein by reference)
|     | 
|10.8 |  | Guaranty, dated August 5, 2008, by Gregory A. Fowler in favor Holliday Fenoglio Fowler, L.P. (filed as Exhibit 10.7 to the Registrants Current Report on Form 8-K on August 8, 2008 and
incorporated herein by reference)                                                                                    
|     | 
|10.9 |  | Repair Escrow Agreement, dated as of August 5, 2008, by and between FPA/PRIP Conifer, LLC and the Federal Home Loan Mortgage Corporation (filed as Exhibit 10.8 to the Registrants Current
Report on Form 8-K on August 8, 2008 and incorporated herein by reference)                                        
|     | 
|31.1 |  | Section 302 Certification of Principal Executive Officer.                                                                                                                                                                                                                                                     
|     | 
|31.2 |  | Section 302 Certification of Principal Financial Officer.                                                                                                                                                                                                                                                     
|     | 
|32.1 |  | Section 906 Certification of Principal Executive Officer.                                                                                                                                                                                                                                                     
|     | 
|32.2 |  | Section 906 Certification of Principal Financial Officer.