Cornerstone Ministries Investments, Inc.

2450 Atlanta Highway, Suite 904

Cumming, GA  30040



August 29, 2006



Donald A. Walker

Securities and Exchange Commission

Division of Corporate Finance

Washington, D.C.  20549



RE: Cornerstone Ministries Investments, Inc. (File No. 001-32165)

Form 10-KSB/A for the year ended December 31, 2005



Dear Mr. Walker:



Below are our responses to your letter dated August 25, 2006:



Comment #1:  We have filed an amended Form 10-KSB for December 31, 2005 on EDGAR which includes the report of our former auditor for the years ended December 31, 2004 and 2003 (see page F-1(a) of the amended form).



Comment #2: In the amended Form 10-KSB we have included exhibits for both Item 601(b)(31) and (32).  Please see pages 31 and 33 of the amended filing for these exhibits.  We updated the table of contents on page 2 and Part III, Item 13 (exhibit list) so that they correspond to the corrected exhibits.  Also, we re-named the code of ethics exhibit Exhibit 14, which corresponds to the exhibit number in Item 601.



Comment #3: In the amended Form 10-KSB we have corrected the certifications (now listed as exhibit 31) so they correspond exactly to the language in Item 601(b)(31).



In connection with our responses to your comments we acknowledge that:



·

Cornerstone Ministries Investments, Inc. is responsible for the adequacy and accuracy of the disclosures in the filing;

·

Staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking action with respect to the filing; and

·

Cornerstone Ministries Investments, Inc. may not assert staff comments as a defense in any proceedings initiated by the Commission or any person under the federal securities laws of the United States.







Sincerely,

/s/ Cecil A. Brooks

Cecil A. Brooks

Chairman, President and Chief Executive Officer

Cornerstone Ministries Investments, Inc.





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Cornerstone Ministries Investments, Inc.

2450 Atlanta Highway, Suite 904

Cumming, GA  30040



FOR EDGAR FILING



August 29, 2006

Division of Corporation Finance

Securities and Exchange Commission

Washington, D.C. 20549



Re: Cornerstone Ministries Investments, Inc., File No. 333-93475

Form 10-KSB/A for year ended December 31, 2005



Dear Commission:



Attached is Form 10-KSB/A for filing by Cornerstone Ministries Investments, Inc. for its fiscal year ended December 31, 2005.  This amendment is in response to certain comments received from the Commission on August 25, 2006.



Thank you.





Sincerely,



By:  S/John T. Ottinger

John T. Ottinger

Vice President and Chief Financial Officer





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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549Form 10-KSB/Amendment No. 2[X] Annual report under section 13 or 15(d) of the Securities Exchange Act of 1934

for the fiscal year ended December 31, 2005

or

[   ] Transition report under section 13 or 15(d) of the securities exchange act of 1934

For the transition period from            to



Commissions file number 333-93475



Cornerstone Ministries Investments, Inc.

(Name of small business issuer in its charter)



|                                                                    |                                  
|------------------------------------------------------------------- | ---------------------------------
|Georgia                                                             | 58-2232313                       
|(State or other jurisdiction of incorporation or organization)      | (IRS Employer Identification No.)
|                                                                   
|2450 Atlanta Highway, Suite 904, Cumming, GA                        | 30040                            
|(Address of principal executive offices)                            | (Zip Code)                       
|                                                                   
|                                                                   
|Issuer's telephone number (678) 455-1100                           
|                                                                   
|Securities registered under Section 12(b) of the Exchange Act: None
|                                                                   
|Securities registered under Section 12(g) of the Exchange Act: None



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



Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X]



State issuer's revenues for its most recent fiscal year:  $15,703,121



State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days. As of March 27, 2006 the aggregate market value held by non-affiliates was $5,762,946 based upon current public offering price.



State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 886,607 shares of common stock as of March 27, 2006.



Documents incorporated by reference: Portions of Issuers Form SB-2 Registration Statements: No. 333-118613, filed August 27, 2004; No. 333-104810 filed April 29, 2003; No. 333-91564 filed June 28, 2002; and No. 333-93475 filed January 14, 2000.



Transitional Small Business Disclosure Format:  Yes____; NoX







1





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Cornerstone Ministries Investments, Inc.



|                                                                           |             
|-------------------------------------------------------------------------- | ------------
|Form 10-KSB Index                                                          |             
|                                                                           | Page        
|                                                                           |             
|Form 10-KSB Title Page                                                     | 1           
|Index                                                                      | 2           
|                                                                           |             
|Part I:                                                                    |             
|Item 1. Description of Business                                            | 3           
|Item 2. Description of Property                                            | 7           
|Item 3. Legal Proceedings                                                  | 8           
|Item 4. Submission of Matters to a Vote of Security Holders                | 9           
|                                                                           |             
|Part II:                                                                   |             
|Item 5. Market for Common Equity and Related Stockholder Matters           | 9           
|Item 6. Managements Discussion and Analysis or Plan of Operations         | 10          
|Item 7. Financial Statements                                               | 22          
|Independent Auditors Reports                                              | F-1 & F-1(a)
|Balance Sheets                                                             | F-2         
|Statements of Operations                                                   | F-3         
|Statements of Changes in Shareholders Equity                              | F-4         
|Statements of Cash Flows                                                   | F-5         
|Notes to Financial Statements                                              | F-6         
|                                                                           |             
|Item 8. Changes In and Disagreements with Accountants on Accounting        | 22          
|and Financial Disclosures.                                                 |             
|Item 8A. Controls and Procedures                                           | 22          
|                                                                           |             
|Part III:                                                                  |             
|Item 9. Directors, Executive Officers, Promoters and Control Persons;      | 23          
|Compliance with Section 16(a) of the Exchange Act                          |             
|Item 10. Executive Compensation                                            | 25          
|Item 11. Security Ownership of Certain Beneficial Owners and               | 25          
|and Related Stockholder Matters                                            |             
|Item 12. Certain Relationships and Related Transactions                    | 26          
|Item 13. Exhibits and Reports on Form 8-K.                                 | 27          
|Item 14. Principal Accountant Fees and Services                            | 27          
|                                                                           |             
|Signatures                                                                 | 28          
|Exhibit 14  Code of Ethics                                                | 30          
|Exhibit 31  Certifications Pursuant to Item 601(b)(31) of Regulation S-B  | 33          
|Exhibit 32  Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted | 34          
|Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                  |             
|                                                                           |             







2





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Part I



Item 1. Description of Business.



SummaryOur primary objective is to provide income for our certificate holders and shareholders, mainly by financing the acquisition and development of facilities for use by churches, their related ministries and other faith-based and non-profit organizations.  We define faith-based organizations as ones which have been formed and are operated in furtherance of their sponsors religious commitments.  During the last quarter of 2004, we began making loans to for-profit sponsors of affordable and low-income housing projects.  We will make loans to for-profit sponsors if the project provides senior living, affordable housing or age-restricted housing programs that are similar to those of our non-profit borrowers.



Presbyterian Investors Fund, Inc. was incorporated as a Georgia non-profit corporation in December 1985 and Cornerstone Ministries Investments, Inc. was formed as a Georgia for-profit corporation on March 18, 1996. Presbyterian Investors Fund, Inc. was merged into Cornerstone Ministries Investments, Inc. on December 29, 2000 and our corporate name was changed to PIF/Cornerstone Ministries Investments, Inc.  The name was changed back to Cornerstone Ministries Investments, Inc. on February 26, 2003.



We offer development, construction, bridge and interim loans, usually due within one to three years.  The typical maximum investment amount in a church loan is $1,000,000. The typical maximum investment amount in a family housing project loan or senior housing loan is from $5,000,000 to $10,000,000.  Our largest loan is approximately $38,000,000, made for the acquisition of eight senior housing facilities.  The annual interest rate on all but one loan that we made during 2003, 2004 and 2005 was from 9% to 10%. It is our policy to acquire assets primarily for income.  We do not have any limits on the percentage of our assets that may be in any one investment or in any geographic area of the United States.  We have not established any maximum ratio of our total debt to our total shareholders' equity.  These policies would be made by our board of directors and could be changed, without the vote of share or certificate owners.  A description of our loan programs follows.



Types of loans we make

We make loans to four distinct groups of borrowers.  These borrowers can be characterized as churches, senior housing facilities, family housing development projects and daycare/faith-based schools.  Inherent credit risk is reflected by the effective interest rate charged to each borrower.  In each of the above borrower groups, we normally charge 10% as an annual interest rate.  However, we do recognize the risk in each borrower by the amount of origination fees charged, renewal fees charged, the loan term and any loan participation we may have in the net profit from the borrowers sale or refinancing of the property.  For larger loans, we may elect to partner with other lenders.  Accordingly, though each loan may carry identical interest rates, the overall risk adjusted return can be managed by fees charged and loan terms and is based on underwriting credit requirements and review.  Typically, church loans will have a 5% origination fee charged, have a one year term and may have a 5% renewal fee charged.  Non-church loans are charged a 10% origination fee, may have terms beyond one year and may not have a renewal fee charged.



Our fees and interest rates are similar to the costs of specialized construction and development loans or underwritten bond issues, and less than sub-prime lenders.  Banks and insurance companies, who make loans on similar properties that are larger and more fully developed, typically charge lower interest rates.  These conventional lenders typically charge 0.5% to 2.5% origination fees.  We are paid more because of our experience, advice and willingness to finance organizations in their development stage.   Our costs of administering these loans require us to charge higher loan fees and interest rates.   The chart below outlines the relative loans outstanding as of December 31, 2005.



|                                          |  |   |              |  |              |  |         |  |      |  |             |  |        
|----------------------------------------- |  | - | ------------ |  | ------------ |  | ------- |  | ---- |  | ----------- |  | -------
|                                          |  |   | Principal    |  | %            |  |         |  |      |  |             |  |        
|Borrower                                  |  |   | Outstanding  |  | Outstanding  |  | Initial |  |      |  | Origination |  | Renewal
|Type                                      |  |   | Dec 31, 2005 |  | Dec 31, 2005 |  | Term*   |  | Rate |  | Fee*        |  | Fee*   
|Daycare/Schools                           |  | $ | 0            |  | 0%           |  | 1 year  |  | 10%  |  | 10%         |  | None   
|Churches                                  |  | $ | 8,971,537    |  | 7.3%         |  | 1 year  |  | 10%  |  | 5%          |  | 5%     
|Senior Housing                            |  |   |              |  |              |  |         |  |      |  |             |  |        
|- Loans                                   |  | $ | 38,901,607   |  | 31.7%        |  | 1 year  |  | 10%  |  | 10%         |  | 0-5%   
|- Real Estate Joint Venture
Investments   |  | $ | 14,425,955   |  | 11.8%        |  | 1 year  |  | 10%  |  | 10%         |  | 0-5%   
|Family Housing Development                |  | $ | 60,255,260   |  | 49.2%        |  | 1 year  |  | 10%  |  | 5-10%       |  | 0-5%   
|                                          |  | $ | 122,554,359  |  | 100.0%       |  |         |  |      |  |             |  |        
|* Subject to underlying credit statistics |  |   |              |  |              |  |         | 



3





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Senior housing loans classified in this table as real estate joint venture investments are loans in which we participate in the residual profits of the property and all of the following exist at the inception of the loan:

·

The borrower does not have a substantial equity investment in the property.

·

We do not have recourse to substantial tangible, saleable assets of the borrower other than the underlying collateral of the loan and there is no irrevocable letter of credit for a substantial amount of the loan.

·

There is no take-out commitment for the full amount of the loan from a creditworthy, independent third-party.

·

The facility does not have lease commitments which will provide sufficient cash flow to service normal principal and interest loan amortization payments.



We participate in residual profits through loan participation agreements, which enable us to receive income from the borrower when the property in which we provided financing is sold or refinanced to another lender.  The participation is between 25% and 33% of the borrowers gain.  We normally provide all or substantially all of the financing (directly or through loan guarantees) for the acquisition and development of these facilities, which are owed by non-profit entities.



We make three basic types of loans:  Development and acquisition loans, construction loans and semi-permanent loans.  The development and acquisition loans involve the most risk of the borrowers failure to make timely payment of interest or for us to lose principal in the event of default.  Construction loans are made when a property is ready to begin construction or renovation, so the risk is somewhat less.  Semi-permanent loans are made on completed properties that are being used for their intended purpose, so they involve the least risk to us of the three categories.  The following table shows the amount of each of these types of loans in our portfolio at December 31, 2005:



|                            |  |                      |   |                       |                   |  |                   | 
|--------------------------- |  | -------------------- | - | --------------------- | ----------------- |  | ----------------- | 
|Type of Loan                |  |                      |   | Principal Outstanding |                   |  | % of principal at | 
|                            |  | at December 31, 2005 |   |                       | December 31, 2005 | 
|Development and acquisition |  |                      | $ | 8,684,314             |                   |  | 7.1%              | 
|Construction                |  |                      | $ | 54,650,576            |                   |  | 44.6%             | 
|Semi-permanent              |  |                      | $ | 59,219,469            |                   |  | 48.3%             | 
|                            |  |                      | $ | 122,554,359           |                   |  | 100.0%            | 



The following are further descriptions of each of these three types of loans:



Development and Acquisition Loans.  We will provide financing to young growing churches, non-profit and for-profit owners of senior housing facilities, non-profit and for-profit sponsors of affordable/low-income housing projects and other ministries that we judge to possess excellent growth or income potential and which show a strong ability to repay a loan through their growth or income (as in the case of senior housing, for instance.)  These borrowers may lack the history, size, equity or income required by conventional lenders or bond underwriters. Development and acquisition loans may be used to acquire property that is either developed or to be developed (in conjunction with a construction loan provided by us or another lender).  Each loan is initially made for one to three years; however, these loans may be renewed, with or without fees, for a maximum of three years under normal circumstances.   Normally these loans are refinanced by banks or others before there is a reduction in principal. During 2005, one loan in the amount of $1,050,045 was refinanced by a commercial bank and two loans in the amount of $126,109 were partially refinanced.



Construction Loans.Construction loans are typically made to finance the construction of new facilities, renovate existing facilities, and to develop family housing projects. They normally have a maturity of one to three years.  The borrowers may lack the history, size, equity or income required by conventional lenders.  Borrowers typically pay interest only on the outstanding balance drawn for construction.  We focus primarily on loans of less than $1,000,000 for churches and day-care facilities; larger loans are required to develop senior housing, family housing projects and student housing. Our largest construction loan to date has been $13,000,000, which was for a family housing project.  For large loans we may partner with another lender.  These have included loans where we have been equal partners, where our portion was subordinated to that of our partner and where we have guaranteed payment to our partner.  We currently have five loans in which we have partnered with a commercial bank or other lenders.  The total of these loans was $59 million at December 31, 2005, of which $31.6 million was provided by the other lenders.  We require the customary documentation for construction loans, including lien subordinations and waivers, builders risk insurance, budgets and assignment of relevant contracts to us.  We make weekly disbursements on finished invoices and require interim lien waivers on all disbursements.



4





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Semi-permanent Loans.These are often called mini-perms or bridge loans.  They are issued for as long as three years and may be linked to a construction or development and acquisition loan.  Once a property is being used for its intended purpose, the loan is converted from a construction or acquisition and development loan into a semi-permanent loan.  Also, they are often used by churches and other borrowers who expect to receive pledges, grants, leases or other anticipated income but who are in need of immediate funds.  The loans are usually repaid by other forms of financing, such as church bonds or conventional loans.  We will assist the borrower in finding long term financing through some of the lenders with which we have established relationships, or we will sell the loan to one of these lenders.  During 2005, eight loans totaling almost $23 million were partially refinanced by an outside lender.



We receive monthly interest payments on all of our real estate loans and senior housing loans classified as real estate joint venture investments except when the terms of a loan allow the borrower to finance interest payments.  Interest payments are financed in the following circumstances:

Family housing development loans may finance monthly interest payments while the project is in the development and pre-sales phase.  This phase takes from 12 to 36 months, depending on the size of the project.  We receive the financed interest as the borrower sells homes in the development.

Church construction loans may finance monthly interest payments while the church building is under construction.  This takes three to nine months depending on the size of the building.  When the building is operational, the financed interest from the construction phase is included in the loans principal amount and we begin receiving monthly interest payments from the borrower.

Real estate joint venture loans may finance monthly interest payments during the construction/renovation and lease-up stages of the borrowers operations.  This takes two to six months if there is an existing building and 12 to 24 months if the financed property is raw land and a new building is being constructed.  When the construction or renovations are complete and the facility is operational, the financed interest is included in the loans principal amount and we start receiving monthly interest payments from the borrower.



Our loan policies

Loan Terms and Conditions. Each loan is secured by a first or second mortgage lien or a pledge of the borrowers LLC ownership interest if the property is owned by an LLC, a pledge of revenue and, where we determine necessary, limited personal guarantees made by members or principals of the borrowers.  We may provide a fixed or variable rate loan.  Our loans on senior housing facilities may include a participation feature where there is the possibility of additional income from the borrower upon the borrowers refinancing of a property or the sale of the property acquired by a borrower and resold during the term of our loan.  The terms and conditions offered to borrowers, including interest rates, fees, maturities and guarantees, will be based upon current market conditions and factors like our operating expenses and the loan's origination expenses.  We charge each borrower an application fee to offset the cost of loan origination and approval, legal fees and out-of-pocket expenses.  We charge a commitment and closing fee and may also charge a loan renewal fee.  These fees may be paid in cash by the borrower or added to the loan principal, at our discretion.  We generally require the normal protections afforded commercial lenders, including title insurance, real estate surveys, appropriate resolutions by the borrower, appraisals of the property, and the issuance of fire and extended insurance coverage.



Loan Guarantees.Certain real estate joint venture investments and real estate acquisition and development loans in which the borrower chooses to secure outside financing may require a guarantee from the Company as a condition of the extension of the loan by the financial institution.  The guarantee is limited to amounts under the loans and only covers outstanding principal and accrued interest and terminates upon maturity and principal repayment.  At December 31, 2005, there were three loans with a potential total of $27,697,300 for which we have a guarantee.  The total amount outstanding and therefore guaranteed at December 31, 2005 was $27,456,540.  All of the loans which have a guarantee are current based on the respective loan terms.  See Note 14 (page F-18) of the Notes to Financial Statements for additional information about these guarantees.



Loan underwriting requirements

Mortgage loan applications submitted to our underwriting staff will normally include (i) a completed application on our form, or substantially similar information on a form acceptable to us, (ii) corporate organizational documents, (iii) financial statements including pro forma financial statements, (iv) certified real estate appraisal, (v) a real estate survey certified to us, (vi) preliminary title report, (vii) market and feasibility reports, if applicable, (viii) copies of relevant insurance coverage, (ix) copies of all material contracts and leases and (x) environmental report or affidavit.

Our loan standards used in evaluating the loan requests are based upon both objective and subjective criteria and may vary depending upon the nature of the borrower.  For church loans we examine:

·

Membership trends and growth potential

·

Historical financial performance and patterns

·

Value of real estate involved and other collateral



5





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For non-church loans we will review:

·

Proposed business plan and management

·

Markets and demographics

·

Current and projected earnings and cash flow

·

Current and future value of real estate and other collateral



For our senior housing loans, we also look to the pro-forma financial condition upon stabilization of operations and require third party appraisers with specialized knowledge of these types of projects and property. We apply loan to value and coverage ratios consistent with other commercial lenders.  Additionally we will require survey, title reports and insurance, property and liability insurance and full environmental reports.  If necessary, we will also require market studies and other demographic information.



Completed applications and supporting material are submitted to the loan committee of our Board of Directors, which has authority to approve loans of $500,000 or less.  Loans or investments over this amount must be submitted to the full board for approval.  The loan committee consists of at least three directors.  The loan committee determines the creditworthiness of the borrower and oversees the rates, terms and conditions of the loan.  Upon approval of a loan application, our loan staff will work with its officers and legal counsel to supervise the loan closing.  It is our policy to require borrowers to pay all expenses of the loan including our legal expenses.  These expenses are usually deducted from the loan proceeds.



Most of the organizations that we loan to have little or no assets with which they can provide additional guarantees, collateral or equity for the project.  We will seek to obtain additional guarantees from the principals of the church or organization, or from an affiliated organization that can provide the additional security or collateral; however, the majority of our loans are made with little or no equity from the borrower.  For the return of our investment, we rely on the value of the property to be acquired/developed, the feasibility of the project and the expertise and knowledge of the developer and manager.



Loan investments we have made

This chart shows the number and amount of new real estate loans and joint venture investments that we have made in each of the last seven years:



|     |  |                      |  |                      |           
|---- |  | -------------------- |  | -------------------- | ----------
|Year |  | Number of
loans made |  | Amount of
loans made
|     | 
|1999 |  | 17                   |  | $                    | 12,953,200
|2000 |  | 10                   |  | $                    | 11,041,500
|2001 |  | 11                   |  | $                    | 14,029,191
|2002 |  | 16                   |  | $                    | 30,383,224
|2003 |  | 10                   |  | $                    | 14,622,943
|2004 |  | 8                    |  | $                    | 17,562,888
|2005 |  | 8                    |  | $                    | 16,405,561
|     |  |                      |  |                      |           



Each of our loans has a date when the full principal amount becomes due, or when we may call the loan for repayment.

These are the number and amount of our real estate loans and joint venture investments at December 31, 2005, which become due or callable in 2006 and in later years:



|                |  |                                 |  |                           |            
|--------------- |  | ------------------------------- |  | ------------------------- | -----------
|Year            |  | Number of loans
due or callable |  | Principal
due or callable
|                | 
|2006            |  | 34                              |  | $                         | 47,441,439 
|2007            |  | 7                               |  |                           | 74,523,104 
|2008            |  | -0-                             |  |                           | -0-        
|2009            |  | 2                               |  |                           | 589,816    
|2010            |  | -0-                             |  |                           | -0-        
|2011/thereafter |  | -0-                             |  | -0-                      
|Total           |  | 43                              |  | $                         | 122,554,359
|                |  |                                 |  |                           |            





6





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Loan management

We monitor each loan closely.  A loan becomes delinquent when a payment default remains uncured after 15 days.  Any delinquency is addressed immediately and involves sending a legal notice requiring strict performance under the loan documents and outlines all the remedies available to us should the default not be cured within the period required by the loan documents.  In addition to these legal steps, we work closely with each borrower.  We may make personal visits and prepare to take all legal remedies available to us through the loan documents and the laws of the appropriate state.



A loan is considered impaired if either of the following occurs:

·

We determine that it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement.

·

A loan is restructured due to the financial condition of the borrower and the interest rate is reduced below what we would normally charge for a similar loan.



A specific impaired loan loss allowance is recognized when an impaired loans carrying amount exceeds the present value of expected future cash flows or the collaterals net realizable value if the loan is considered collateral dependent.  We would place a loan on non-accrual status if a loan is 180 days past due under the terms of the loan agreement and we have determined that an allowance for impairment loss should be recognized on the loan.  In our history, we have had six loan delinquencies of more than six months.  At December 31, 2005, five loans are past due more than 180 days; however, we have not placed any of them on non-accrual status because the underlying collateral for each loan is greater than the outstanding loan amount and we believe that we will receive the entire outstanding amount on each loan.  No allowance for specific impaired loan loss was recognized.  During 2005 we foreclosed on a church loan and repossessed the land and building that collateralized the loan.  This was our first ever foreclosure.  We have determined that the net realizable value of the foreclosed assets is greater than the loans carrying amount; therefore, we did not recognize a loan loss.  We have never realized a loan loss write-off and would do so upon the borrower filing bankruptcy or when other collection methods have been exhausted and foreclosure is likely.  The charge-off would be equal to the amount in which the loans carrying amount exceeds the net realizable value of the collateral.



In addition to allowances for loan losses related to specific impaired loans, we review our loan portfolio for collective loan losses as prescribed by SFAS No. 5.   A collective loan loss is recognized when the characteristics of a group of loans indicate that it is probable that a loss exists even though the loss cannot be identified with a specific loan.  The collective loan loss allowance amount is based on observable data that management believes is reflective of the underlying credit losses that are inherent in the portfolio.  The components of this evaluation include trends in our historical loss experience, changes in credit risk and credit quality, credit concentrations, economic conditions, collateral values and other risks inherent in the portfolio.  We conduct this review quarterly and changes in our allowance for loan losses are made based on the results of these reviews.



Subsidiaries



We had no subsidiaries as of December 31, 2005.  See Item 12 and Note 17 of our Notes to Financial Statements for information regarding two former subsidiaries, Wellstone Communities, Inc. and Wellstone Financial Group, LLC.



Item 2. Description of Property.In February 2003, we moved our growing staff into a 4,400 square foot office building in Cumming, Georgia.  We paid $532,040 to purchase the building and as of December 31, 2005, there is a $417,294 mortgage on the building.  Effective August 1, 2004, we began leasing the office and its furnishings to Cornerstone Capital Advisors for $5,000 per month.  See Note 3 (page F-10) of the Notes to Financial Statements for additional information about this lease.  We also owned two nearby office condominiums, on which there was a mortgage loan with a $161,015 balance as of December 31, 2005.  They were leased to two tenants, for a total of $2,400 per month.  We sold these two office condominiums in February 2006 for $272,000, recognizing a $52,000 gain from the sale.  In our managements opinion, the properties are adequately insured.



Item 3. Legal Proceedings.



Laws of many states provide an exemption from registration for offerings of securities approved for listing on the Chicago Stock Exchange.  Since April 2000, we have considered our securities to have been approved for listing on the Chicago Exchange.  Prospectuses for our public offerings of bonds and common stock, as well as our publicly-filed reports, have included statements that our common stock was approved for listing on the Chicago Exchange.



7





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On December 3, 2004, a letter from the Chicago Exchange denied our application for listing and said that it had not previously approved our common stock for listing.   However, on February 4, 2005, a second letter from the Chicago Exchange said that, upon review, it had apparently approved our common stock for listing subject to the completion of an offering that would meet the Chicago Exchanges numerical standards for shareowners equity, number of public shareholders and publicly held shares.  A March 1, 2005 clarification from the Chicago Exchange said that it agreed that our status was not inconsistent with our being approved for listing upon notice of issuance, the language used in state exemption laws.  That being said, our common stock and other securities will not be listed on the Chicago Exchange in the future.

Based upon the Chicago Exchanges position in its December 3, 2004 letter, securities regulators for several states have raised the issue of whether we lawfully offered and sold securities without registration in those states and/or whether our prospectuses and publicly-filed reports were false and misleading, in their reference to Chicago Exchange approval for listing.  The following paragraphs describe the status of some of such states' regulators proceedings.  While we do not believe that we have violated any securities laws in connection with our previous reliance on the Chicago Exchange exemption, we have to date elected to settle all such related state regulatory actions where the costs of such settlements are likely to be significantly less than the costs of litigation in each state.

On February 4, 2005 the Texas State Securities Board told us that, by February 11, 2005, we must either sign an Agreed Cease and Desist Order and pay a $25,000 fine or it would obtain an emergency administrative cease and desist order, without our being represented.  We chose to sign the order on February 9, 2005 and paid the fine.  The order states that we must immediately cease and desist from engaging in conduct that is materially misleading or is otherwise likely to deceive the public in connection with the offer for sale of any security in Texas.

On March 10, 2005 we attempted to register our Series F bonds and common stock in New Jersey by filing a registration statement with the New Jerseys Bureau of Securities.  Because our initial prospectus for the Series F bonds and common stock included the statement that the our common stock was approved for listing on the Chicago Exchange upon notice of issuance, the New Jersey Bureau of Securities denied the effectiveness of our registration statement by issuing a Stop Order on October 5, 2005.  According to the Stop Order we are prohibited from selling the Series F bonds and common stock in the State of New Jersey.

On April 26, 2005 we consented to an entry of a Cease and Desist Order by the Minnesota Commissioner of Commerce that we cease and desist from offering and selling securities in Minnesota until we are in compliance with Minnesota statutes and until the Commissioners further order.  We also agreed to redeem all certificates purchased by Minnesota residents and to pay an $8,000 civil penalty.

On August 11, 2005, the Ohio Division of Securities sent us a draft of a Cease and Desist Order, the terms of which did not require us to pay fines or give rescission offers.  We to agreed to the Cease and Desist Order, and on September 12, 2005, the Ohio Division of Securities issued the Cease and Desist Order. According to the terms of the Order, we are ordered to refrain from offering to sell unregistered securities in Ohio unless a proper exemption from registration exists.

On August 25, 2005, at the informal request of Maines Office of Securities, we made rescission offers to investors in Maine.

On September 20, 2005 we entered into a Consent Agreement with the Indiana Securities Division, the terms of which required us to give rescission offers to Indiana investors, pay a $600 investigation expense cost, and refrain from violating provision of the Indiana Securities Act in the future.

On September19, 2005 we entered into a Consent Order with the Michigan Office of Financial and Insurance Services, and we agreed to make rescission offers to investors, and pay a $4,000 fine to the State of Michigan Office of Financial & Insurance Services.

At the request of the Tennessee Department of Commerce and Insurance Securities Division, and because the Tennessee Securities Division believed four Tennessee shareholders received incorrect prospectuses when buying our registered common stock, we redeemed eight shares of our common stock owned by these four Tennessee shareholders, and in October 2005, the Tennessee Department of Commerce and Insurance Securities Division approved our calculation of rescission offers made to these four Tennessee shareholders.



8





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On October 27, 2005, the Colorado Division of Securities sent us a draft of a Stipulation for Consent Cease and Desist Order, the terms of which would require us to make rescission offers to certain Colorado investors.  We agreed to the terms of this particular Order, and have subsequently made the rescission offers set forth in the Order

Since February 2005, we have been discussing our previous offers to sell securities in Kansas with the Kansas Office of the Securities Commissioner, and on August 24, 2005, the Kansas Office of the Securities Commissioner requested that we provide them with additional information relating to these offers to sell.  On September 12, 2005, we provided the Kansas Office of the Securities Commissioner with the requested additional materials, and as of the date of this prospectus, we have not received any additional requests or correspondence from the Kansas Office of the Securities Commissioner.

As a result of the aforementioned rescission offers we have made in Colorado, Indiana, Maine, Michigan, and Tennessee, combined with the redemption order issued by the state of Minnesota, we have paid approximately $1,065,500 to those investors who either elected to accept our rescission offers or received our mandatory redemption payments.

As of March 27, 2006, we are not aware that any other state has instituted any formal proceeding on this or any other issue related to any of our securities offerings, and we are not a party to any other pending legal proceeding.  We are not aware that any of the properties covered by our mortgage loans is subject to any pending legal proceeding or that any governmental authority is contemplating any legal proceeding involving us or any of those properties, other than as described above.

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



No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report, through the solicitation of proxies or otherwise.



Part II



Item 5. Market for Common Equity and Related Stockholder Matters.



a) Items required by Item 201 and Item 701 of Regulation S-B:

·

The Issuers common stock is not approved for listing on any stock exchanges.  No sales of unregistered securities occurred in 2005.

·

The Issuer has no outstanding options, warrants or securities convertible into common stock as of December 31, 2005.  There is an aggregate 24,839 shares of the Issuers common stock owned by its directors and executive officers and any shareholder it knows to beneficially own 5% or more of the outstanding shares of its common stock.  These shares could be sold under Rule 144.

·

The Issuer has filed a Form SB-2 Registration Statement in which the Issuer proposes to publicly offer 5,000,000 shares of its common stock at the same $6.50 price per share as in its previous offerings.  There is no public trading and therefore no market price of the common stock that could be affected.

·

There are 487 holders of record of the Issuers common stock.

·

For the last two fiscal years, the Issuer has paid semi-annual cash dividends on its common stock, at an annual rate of 9% on the $6.50 share price.  Earnings are the only restriction that may limit the ability to pay future dividends.



b) The Issuer is not required to furnish the information pursuant to Rule 463 of the Securities Act of 1933.



c)  The Issuer repurchased 2,341, 4 and 2,823 shares of its common stock during October, November and December 2005, respectively.  All shares were repurchased at $6.50 per share.  The repurchases were not part of a publicly declared plan to repurchase shares.





9





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Item 6. Management's Discussion and Analysis or Plan of Operation.



Selected financial data.

Please read the following selected financial data in conjunction with the rest of this Managements Discussion and Analysis or Plan of Operation and with our financial statements and related notes in this filing.



|                           |  |              |            |      |   |            |  |   |           
|-------------------------- |  | ------------ | ---------- | ---- | - | ---------- |  | - | ----------
|                           |  | Year ended  
|                           |  | December 31,
|                           |  | 2005         |            | 2004 |   | 2003      
|Revenues                   |  | $            | 15,703,121 |      | $ | 13,154,641 |  | $ | 10,923,548
|                           |  |              |            |      |   |            |  |   |           
|Investor interest expense  |  |              | 11,638,145 |      |   | 9,263,934  |  |   | 7,246,202 
|Loan loss expense          |  |              | 100,000    |      |   | 257,000    |  |   | 375,000   
|Marketing expenses         |  |              | 1,082,967  |      |   | 972,430    |  |   | 630,508   
|Management & advisory fees |  |              | 1,445,264  |      |   | 1,290,880  |  |   | 1,013,730 
|Operating expenses         |  |              | 695,756    |      |   | 722,057    |  |   | 1,091,962 
|Total expenses             |  |              | 14,962,132 |      |   | 12,506,301 |  |   | 10,357,402
|Operating income           |  |              | 740,989    |      |   | 648,340    |  |   | 566,146   
|Income tax provision       |  |              | 163,362    |      |   | 136,973    |  |   | 87,266    
|Net income                 |  | $            | 577,627    |      | $ | 511,367    |  | $ | 478,880   



Overview of operations.

We have always focused on serving non-profit organizations.  We offer specialized programs for church and other non-profit sponsors of senior housing and affordable/moderate income housing programs.  Nearly all of our earnings prior to 2001 came from financing church facilities.  During the last quarter of 2000, we began to realize revenues from investment in senior housing and affordable/moderate income and age-restricted housing project loans. During the last quarter of 2004, we began making loans to for-profit sponsors of affordable/low-income housing projects and in 2005 we began making loans to for-profit owners of senior housing facilities.



We generate revenue from:

·

interest on loans

·

origination and renewal fees on loans

·

loan participation income

·

interest on securities



We currently charge a 5% to 10% fee on new loans, based upon expected terms, and renewal fees of as much as 5% of the outstanding balance of the renewing loan.  Our interest rate on all new loans is currently from 9% to 10%.  Some loans are participating loans, which enables us to receive income from the borrower when the borrower sells or refinances (with another lender) the property in which we provided the financing.  The participation percentage varies between 25% and 33% of the borrowers gain.



Participating loans (all related to senior housing facilities) are classified as real estate joint venture investments if all of the following exist at the inception of the loan:

·

The borrower does not have a substantial equity investment in the property.

·

The Company does not have recourse to substantial tangible, saleable assets of the borrower other than the underlying collateral of the loan and there is no irrevocable letter of credit for a substantial amount of the loan.

·

There is no take-out commitment for the full amount of the loan from a creditworthy, independent third-party.

·

The facility does not have lease commitments which will provide sufficient cash flow to service normal principal and interest loan amortization.



10





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Comparison of Periods Ended December 31, 2004 and December 31, 2005

General. Assets increased from $134,407,935 at December 31, 2004 to $153,060,088 at December 31, 2005 for an increase of $18,652,153 or 14%.  This increase is a result of the sale of Investor Certificates and Mortgage Participations, net of redemptions of $12,694,967, a $5,127,274 increase in accrued Investor Certificate interest payable and new common stock issuances of $605,242.  With the additional net cash from these items we invested in real estate loans and joint venture investments, net of principal payments received, of $10,417,540.  Total revenue increased for the year ended December 31, 2005 by $2,548,480 or 19% from $13,154,641 in 2004 to $15,703,121 in 2005.  Net income for the year ended December 31, 2005 was $577,627 compared to $511,367 for the year ended December 31, 2004.



Total real estate loans and joint venture investments outstanding on December 31, 2005 was $121,104,139 compared to $110,686,599 on December 31, 2004 for an increase of $10,417,540 or 9.4%.  This increase is due to sales of Investor Certificates and Mortgage Participation Agreements and the subsequent origination or refinancing of real estate loans and joint venture investments, as follows:



|                                                           |            
|---------------------------------------------------------- | -----------
|New real estate loan originations                          | $15,741,719
|Increase in existing loans, net of principal received      | 1,992,220  
|New real estate joint venture investments made             | -0-        
|Decrease in existing real estate joint venture investments | (7,316,399)
|                                                           | $10,417,540



All other assets composed primarily of cash, bond holdings, property and equipment, and unamortized debt issue costs were $31,955,949 as of December 31, 2005.  Bond holdings increased approximately $10 million due to the purchase of $10,730,000 in tax-free bonds and $1,953,000 in church bonds net of $2,543,000 in tax-free bond redemptions.



Our cash balance decreased $2,715,466 from $15,162,659 on December 31, 2004 to $12,447,193 on December 31, 2005.  The large cash balances on hand at the end of 2005 and 2004 were due to large principal payments received during December of each year from real estate joint venture investments and senior housing real estate loans.  We anticipate using the cash on hand at the end of 2005 to make new loans during the first three to five months of 2006.



Principal and interest payable on Investor Certificates and Mortgage Participation (MP) Agreements increased $17,785,244 or 14% from $127,823,355 as of December 31, 2004 to $145,608,599 as of December 31, 2005.  In 2004, the Company filed a registration statement with the Securities and Exchange Commission to sell up to $20,000,000 in additional Investor Certificates and $9,750,000 in Common Stock.  The registration statement was approved on November 1, 2004 which allowed us to start selling new Investor Certificates in the first quarter of 2005 and continue the substantial increase in outstanding certificates and the subsequent investment in new real estate loans and joint venture investments.



Real estate loan and joint venture interest and fees earned. Interest income and fees from real estate loans and joint venture investments for the years ended December 31 is as follows:



|                                           |             |  |             |  |             |  |      
|------------------------------------------ | ----------- |  | ----------- |  | ----------- |  | -----
|                                           | 2005        |  | 2004        |  | Increase    |  | %    
|                                           | $14,093,734 |  | $12,668,299 |  | $1,425,435  |  | 11.3%
|The increase was due to the following:     |             |  |             |  |             |  |      
|Increase in average outstanding principal  |             |  |             |  | $2,832,490  |  |      
|($127,484,677  2005; $98,295,723  2004)  |             |  |             |  |             |  |      
|Decrease in weighted average interest rate |             |  |             |  | (167,103)   |  |      
|(9.72% - 2005; 9.89% - 2004)               |             |  |             |  |             |  |      
|Decrease in loan fees recognized           |             |  |             |  | (1,239,952) |  |      
|                                           |             |  |             |  | $1,425,435  |  |      



The increase in average outstanding principal is due to the addition of 8 new real estate loans with outstanding principal of $16,405,561 and an increase in the average outstanding principal on existing loans of $12,783,393.  Loan fees recognized decreased because three large loans that we originated in late 2003 and early 2004 had their loan fees fully recognized by early 2005, thus decreasing 2005s revenue as compared to 2004.  Two of our new loans that we originated in early 2005 did not have loan fees charged so we were not able to replace all of this revenue in 2005.  In the second half of 2005, we charged over $2,100,000 in new loan fees to various borrowers which should increase our recognized loan fees in 2006.



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Loan participation and other income.  For the year ended December 31, 2005, loan participation and other income increased (decreased) as follows:



|                           |  |   |           |  |   |         |  |   |          
|-------------------------- |  | - | --------- |  | - | ------- |  | - | ---------
|                           |  |   | 2005      |  |   | 2004    |  |   | Change   
|Investment income          |  | $ | 590,866   |  | $ | 433,476 |  | $ | 157,390  
|Loan participation & other |  |   | 1,018,521 |  |   | 52,866  |  |   | 965,655  
|Total                      |  | $ | 1,609,387 |  | $ | 486,342 |  | $ | 1,123,045



The Companys investment income is from the purchase of tax-free bonds used as permanent financing for projects the Company funded during their development and initial operations, local church bonds and from interest income on the Companys excess cash.  The increase in investment income is due to the purchase of church bonds in 2005 ($57,000) and from an increase in the short-term interest rates that we earned on our excess cash ($100,000).  Loan participation and other income increased due to $825,000 in loan participation/break-up fees received in 2005, $104,000 in loan guarantee revenue recognized in 2005 and an additional $35,000 in rent received from Cornerstone Capital Advisors in 2005 as compared to 2004.  We received no loan participation revenue and recognized no loan guarantee revenue in 2004.



Investor interest expense. Investor interest expense for the year ended December 31, 2005 was $11,638,145, an increase of $2,374,211 or 26% compared to 2004.  The increase is due to:



|                                                                 |           
|---------------------------------------------------------------- | ----------
|Increase in average outstanding certificate principal, including | $2,536,450
|interest payable subject to compounding                          |           
|($127,800,221  2005; $98,723,402  2004)                        |           
|Change in weighted average interest percentage                   | (29,617)  
|(8.72% - 2005; 8.75% - 2004)                                     |           
|Decrease in average outstanding Mortgage Participation principal |           
|($4,947,090  2005; $6,273,310  2004)                           | (132,622) 
|                                                                 | $2,374,211



Loan loss expense and allowance for loan losses.In the fourth quarter of 2003, as part of our regular loan grading and risk assessment process, we charged $375,000 to loan loss expense and increased our allowance for real estate loan losses to $375,000 from $0 as of December 31, 2002.  For the year ended December 31, 2004, we charged an additional $257,000 to loan loss expense.  Prior to the fourth quarter of 2003, we had never recognized an allowance for loan loss.



Even though we have not incurred a loan write-off, we increased our loan loss allowance in 2003 because of an increase in our family housing development loan portfolios relative credit risk.  The increased credit risk was caused by slower than expected new home sales in the fourth quarter of 2003, which was a result of slower than expected growth in the U.S. economy.  The increase in our loan loss allowance during 2004 was due to: 1) an increase in the family housing development loan portfolios outstanding principal, resulting in $100,000 in loan loss expense, 2) slower than expected new home sales volumes at two projects, and 3) an increase in the time that it has taken three projects to finish the development phase and start selling homes.  The slower than expected home sales and the development time increases have increased the relative credit risk of these projects which resulted in an additional $157,000 in loan loss expense in 2004.  In 2005, we increased our allowance for loan loss $100,000 due to an increase in our family housing development loan portfolios outstanding principal.  We will continue to review the credit risk of these projects each quarter and make adjustments to our allowance for loan losses based on the results of our reviews.



The allowance for loan loss increases that weve made are classified as collective loan loss allowances.  A collective loan loss allowance is recognized when the characteristics of a group of loans indicate that it is probable that a loss exists even though the loss cannot be identified with a specific loan.  The allowance for loan losses is reviewed quarterly and increases or decreases will be made based on the results of these reviews.



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As of December 31, 2005, one joint venture investment loan and four church loans were considered impaired because they were at least six months behind on their interest payments.  The joint venture investment loan had a carrying amount of $6,084,377 and the four church loans had a combined carrying amount of $3,854,226.  In total we had $9,938,603 (8% of our total loan principal outstanding) in impaired loans.  At December 31, 2004 we had one church loan with a carrying amount of $263,291 that was impaired.  This increase was due to the lack of growth in the borrowers operating results which meant that they were not able to pay all of the interest on their loans.  We have received an appraisal on the joint venture investment loan collateral and it is worth approximately $1.3 million dollars more than our loans carrying amount; therefore, we have not recognized a loss on this loan.  We continue to monitor the operating progress of this borrower and are actively involved in possible re-financing opportunities for this property.   Three of the four impaired church loans received second mortgage financing in January 2006 and have been able to pay all of their back interest with these funds.  The second mortgage holder is Church Growth Foundation, Inc. which is a former Company shareholder.



As of December 31, 2005, allowance for loan losses as a percent of outstanding loan principal by loan type:



|                                      |                     |                       |     
|------------------------------------- | ------------------- | --------------------- | ----
|                                      | Loan Loss Allowance | Outstanding Principal | %   
|Family Housing Development Loans      | $ 732,000           | $  60,255,260         | 1.2%
|Church Mortgage Loans                 | -0-                 | 8,971,537             | 0%  
|Senior Housing Mortgage Loans         | -0-                 | 38,901,607            | 0%  
|Real Estate Joint Venture Investments | -0-                 | 14,425,955            | 0%  
|Total                                 | $ 732,000           | $122,554,359          | .6% 
|                                      |                     |                       |     



Marketing expenses. Total expenses for the marketing of investor certificates for the year ended December 31, 2005 were $1,082,967 compared to $972,430 for 2004.  The increase is due to:



|                             |  |        |           |        |   |          |  |   |         
|---------------------------- |  | ------ | --------- | ------ | - | -------- |  | - | --------
|                             |  | 2005   |           | 2004   |   | Change  
|Debt issue cost amortization |  | $      | 968,955   |        | $ | 822,862  |  | $ | 146,093 
|Compliance and registration  |  |        | 51,234    |        |   | 7,891    |  |   | 43,343  
|Printing and promotions      |  |        | 19,581    |        |   | 66,619   |  |   | (47,038)
|Other marketing costs        |  | 43,197 |           | 75,058 |   | (31,861)
|Total                        |  | $      | 1,082,967 |        | $ | 972,430  |  | $ | 110,537 



Debt issue cost amortization expense increased due to Investor Certificates and Mortgage Participations sold since December 31, 2004.  This expense will continue to increase as new Investor Certificates and Mortgage Participations are sold.  Compliance and registration costs are up due to the Chicago Stock Exchange issues that we have had to deal with in 2005 (see Part I, Item 3 on page 8 for more information).  Printing and promotions costs are down because we did not use outside consultants to market our securities in 2005.  Other marketing costs decreased because we eliminated our full-time marketing manager position during 2004 because we no longer deemed this position necessary.  If we determine in the future that we need help to market our certificates or stock we will most likely hire an independent consultant and use them for a specific program or issue.



Selling commissions paid to brokers for selling Investor Certificates and Mortgage Participations and costs incurred to register Investor Certificates are paid in cash and charged as an expense over the term of the related debt.  The unamortized balance is classified as an asset on the Balance Sheet as Unamortized debt issue costs.  The balance was $2,748,855 and $2,671,340 as of December 31, 2005 and 2004, respectively.



Operating and management/advisory expenses. Management and advisory expenses for the year ended December 31, 2005 increased $154,384 or 12% from $1,290,880 in 2004 to $1,445,264 in 2005.  The increase is due to the Companys growth in revenues.  Prior to July 1, 2003, our employees were paid directly by the Company.  On July 1, 2003, Cornerstone Capital Advisors (CCA) hired all of our employees and has billed us according to the terms of the advisory agreement, which is described below.



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Starting in July 2003, the Company contracted with CCA to provide all administrative and executive personnel services.  From July 1, 2003 until July 31, 2004, the agreement obligated us to reimburse actual expenses incurred by CCA.  Also, CCA was eligible to receive incentive compensation of up to 10% of actual expenses billed to us for the prior 12 months.  Effective August 1, 2004, the original agreement was modified so that we will pay CCA as follows:

·

A monthly management fee equal to 10% of our revenues from all sources other than loan fees, loan participation revenue, and revenue received from CCA plus 30% of loan participation revenue.

·

A loan origination fee equal to 30% of the total loan fees charged by the Company to its borrowers.  The fee is generally paid from loan proceeds and reduces deferred loan fees that we will recognize over the life of the loan.



Please see Note 3 of the Notes to Financial Statements for additional information about our agreement with CCA and for amounts that we have paid to CCA during 2005 and 2004.



For the year ended December 31, 2005, operating expenses were $695,756, which is a decrease of $26,301 from 2004s operating expenses of $722,057.  This change is due to:



|                   |          
|------------------ | ---------
|Consulting Expense | ($20,431)
|Legal Fees         | 90,019   
|Appraisal Costs    | (23,708) 
|Travel Expense     | (37,039) 
|Office Expenses    | (30,846) 
|Other              | (4,296)  
|                   | ($26,301)



Consulting expense decreased because in 2004 we used consultants to identify new markets for our loans in the African-American church community and in the low-income apartment housing market.  We have not used consultants for any material projects in 2005.  Legal fees have increased due to the legal proceedings concerning the Chicago Stock Exchange.  Appraisal costs decreased because we ordered fewer appraisals in 2005 than we did in 2004.  Travel expenses decreased because we have not had to travel as much in 2005 as compared to 2004.  We are being more effective in determining when we have to travel and when we can use technology to conduct business via the internet or other methods instead of traveling.  Office expenses decreased due to the change we made in the CCA management and advisory contract on August 1, 2004.  When the new contract was put in place, CCA became responsible for paying the normal office operating costs that we had been paying prior to August 1, 2004 which reduced our costs in 2005 as compared to 2004.



Income tax provision. The income tax provision for the year ended December 31, 2005 was $163,362 compared to $136,973 for the year ended December 31, 2004.  The increase in income taxes is due to an increase in pre-tax income.  The Companys effective tax provision rate for 2005 and 2004 was 22.1% and 21.1%, respectively.  A reconciliation of the Companys effective tax provision rate to the federal statutory rate is included in the attached Notes to Financial Statements (Note 10).



Dividends. Dividends of $489,177 and $421,353 were declared in 2005 and 2004, respectively.



Liquidity and Capital Resources

Cash flows from operations.  Net cash provided by the Companys operations for the years ended December 31, 2005 and 2004 was $5,283 522 and $2,066,663, respectively.  This increase was due to an increase in net income, depreciation and amortization expense, accrued investor certificate interest, accounts and other payables and cash received from loan fees and interest, plus a decrease in other assets.  These positive cash flow items were partially offset by an increase in loans in process, an increase in accrued bond holdings interest, an increase in deferred tax assets, and a decrease in loan loss expense.



Investor and mortgage participation interest payable increased $5,090,277 in 2005 due to an increase in outstanding debt and because approximately 33% of the Investor Certificate holders who purchased certificates in 2003 through 2005 have elected to reinvest the interest due to them each year and not receive the interest in cash until maturity.



14





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Included in the 2005 and 2004 changes in accrued real estate loan and joint venture interest and deferred loan fee amounts is $966,250 and $1,498,830 in interest, which was financed as part of loan principal.  We receive monthly interest payments on our loans except when the terms of certain loans allow borrowers to finance interest payments while the collateralized property is under development or construction.  A summary (by loan type) of the amount of net financed interest for the years ended December 31, 2005 and 2004 is as follows:



|                           |  |         |         |         |   |          
|-------------------------- |  | ------- | ------- | ------- | - | ---------
|                           |  | 2005    |         | 2004   
|Family Housing Development |  | $       | 584,877 |         | $ | 1,005,142
|Church                     |  |         | 15,775  |         |   | 33,093   
|Real Estate Joint Venture  |  | 365,598 |         | 460,595
|                           |  | $       | 966,250 |         | $ | 1,498,830



The amount for 2005 represents interest accrued and financed in 2005, net of payments received in 2005 that were financed in previous years.  2004s amount represents interest accrued and financed in 2004, net of payments received in 2004 that were financed in previous years.



The decrease in the family housing net financed interest in 2005 as compared to 2004 is due to: 1) four loans moving from their development phase into their sales phase which meant that we started to receive previously financed interest, and 2) an $850,000 principal pay down on a project in Mableton, GA which resulted in our receipt of previously financed interest.  In the second half of 2005 we originated six new family housing loans which will require us to finance the interest during the development stages of their operations.  This, along with another five to 10 proposed new family housing loans will increase our financed interest significantly in 2006.  We will still have a minimum of four loans that will be in the sale phase of their project and paying interest but the interest payments from these projects will not be enough to offset the new loans financed interest.  We anticipate that between $3.0 and $3.5 million in interest will be financed in 2006.  It is anticipated that the majority of the loans that finance their interest in 2006 will move into their sales phase of operations by early 2007 and start paying their current and previously financed interest.



The Real Estate Joint Venture financed interest for 2005 is related to loans in San Antonio, TX and McKinney, TX.  The San Antonio facility financed approximately $36,000 in interest in 2005 and is currently under renovation and will be operational by 2007.  The McKinney, TX loan was responsible for the remainder of the financed interest.  This loan is collateralized by raw land which was being developed for senior housing and just recently was changed to an age-restricted family housing development.  We have been financing the interest on this loan since June 2003.  Our other Real Estate Joint Venture Investment loans are collateralized by existing facilities that only needed to be remodeled.  Therefore, the period in which the interest is being financed on the McKinney loan is much longer than the other Real Estate Joint Venture Investment loans.  Normally, we finance two to six months of interest on senior housing loans.  We anticipate, due to the size of the McKinney project, that we will finance interest for another 12 to 16 months.



Cash flows from investing activities.    For the year ended December 31, 2005, the Company used $19,590,772 in cash from investing activities which is a decrease of $5,142,394 from $24,733,166 for the year ended December 31, 2004.  The decrease was due to the following:



|                                                                 |  |       |             
|---------------------------------------------------------------- |  | ----- | ------------
|Increase in real estate loans and joint venture investments made |  | $     | 14,225,574  
|Increase in real estate loan and joint venture investment        |  |       |             
|principal payments received                                      |  |       | (29,517,217)
|Increase in bonds purchased, net of redemptions                  |  |       | 10,140,480  
|Other items, net                                                 |  | 8,769
|                                                                 |  | $     | (5,142,394) 



The increase in real estate loans and joint venture investments made in 2005 is due to the Series F registration statement becoming effective in late 2004 and our selling of these securities in 2005 and due to the large amount of loan principal payments received which allowed us to reinvest this money into new and existing loans.



The increase in real estate loan and joint venture investment principal payments received is due to 1) four family housing projects moving into the sales phase of their operations and we have begun to receive principal payments (approximately $11.0 million), 2) large loan pay-downs on two loans and one loan pay-off ($5.1 million) and 3) senior housing loan proceeds received as a result of the sale of eight senior housing facilities to Wellstone Retirement Communities which resulted in an increase in principal payments received from senior housing facilities of $13.4 million over 2004s principal payments received.



15





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The increase in bonds purchased is from the purchase of $1,953,580 in local church bonds and $10,730,000 in tax-free senior housing bonds, net of $2,543,100 in principal received from existing tax-free bonds.



Cash flows from financing activities.  For the year ended December 31, 2005, the Companys financing activities provided $11,591,784, a decrease of $21,847,527 when compared to 2004s amount of $33,439,311.  The decrease was due to:



|                                                 |              
|------------------------------------------------ | -------------
|Decrease in investor certificates and mortgage   |              
|participations sold                              | ($15,351,971)
|Increase in redemptions of investor certificates |              
|and mortgage participations                      | (5,124,353)  
|Decrease in common stock issued                  | (1,477,288)  
|All others, net                                  | 106,085      
|Total decrease                                   | (21,847,527) 





The decrease in investor certificate and mortgage participation sales is due to a decrease in the amount of registered certificates that we had available to sell in 2005 as compared to 2004.  The increase in redemptions of investor certificates and mortgage participations is due to the pay-off of two senior housing loans in December 2005 that were used to collateralize our mortgage participations.  The decrease in the amount of common stock issued was due to the decrease in the amount of available registered securities.



In February 2006, we filed a new registration statement with the Securities and Exchange Commission which, if approved, will allow us to sell up to $60,000,000 in Series G Investor Certificates and $32,500,000 in common stock and continue our increase in outstanding certificates and common stock.



We have $23,058,930 in Investor Certificates coming due or redeemable upon demand in 2006, as follows: $10,921,029  graduated certificates; $1,406,641  access certificates; $10,921,029  five-year certificates.  Graduated certificates can be redeemed yearly on the anniversary date of the purchase and access certificates are due on demand.  Based on past experience, we expect less than 20% of the graduated and access certificates to be redeemed in 2006 and, if we have registered certificates available to sell, we expect that approximately 75% of the maturing five-year certificates will be reinvested into new Investor Certificates.  However, there is no guarantee that this will happen.  We will ensure that we have enough cash available to handle these maturities.



Among the measures we take to mitigate any demands for cash are:

·

Maintain a minimum cash balance, normally no less than $3,000,000.

·

Have readily marketable loans that can be sold for par or a premium.

·

Ask investors about their intentions at least 30 days before their bonds mature.

·

Have a bank willing to extend credit lines if needed.

·

Spread maturity dates throughout the year.

·

Limit each investor to not more than $500,000 maturing in any three-month period.



We believe that cash on hand, cash generated by operations and expected refinancing and pay-offs of existing loans, will be sufficient to meet our financing and capital needs for the coming year.  The amount and timing of our future capital requirements will depend on factors such as the origination and funding of new investments, any opportunities for acquisitions of related businesses and the overall success of our marketing efforts for certificates, shares and any other securities.



Comparison of Periods Ended December 31, 2003 and December 31, 2004

General. Assets increased from $94,728,347 at December 31, 2003 to $134,407,935 at December 31, 2004 for an increase of $39,679,588 or 42%.  This increase is a result of the sale of Investor Certificates and Mortgage Participations, net of redemptions of $33,823,692, a $3,295,070 increase in accrued Investor Certificate interest payable and new common stock issuances of $2,082,530.  With the additional net cash from these items we invested in real estate loans and joint venture investments, net of principal payments received, of $27,963,099.  Total revenue increased for the year ended December 31, 2004 by $2,231,093 or 20% from $10,923,548 in 2003 to $13,154,641 in 2004.  Net income for the year ended December 31, 2004 was $511,367 compared to $478,880 for the year ended December 31, 2003.





16





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Total real estate loans and joint venture investments outstanding on December 31, 2004 was $110,686,599 compared to $82,723,500 on December 31, 2003 for an increase of $27,963,099 or 34%.  This increase is due to sales of Investor Certificates and Mortgage Participation Agreements and the subsequent origination or refinancing of real estate loans and joint venture investments, as follows:



|                                                           |            
|---------------------------------------------------------- | -----------
|New real estate loan originations                          | $ 1,378,506
|Increase in existing loans, net of principal received      | 2,171,107  
|New real estate joint venture investments made             | 18,649,894 
|Increase in existing real estate joint venture investments | 8,359,312  
|                                                           | $27,963,099



All other assets composed primarily of cash, bond holdings, property and equipment, and unamortized debt issue costs were $23,721,336 as of December 31, 2004.



Our cash balance increased $10,772,808 from $4,389,851 on December 31, 2003 to $15,162,659 on December 31, 2004.  This increase is due to large principal payments received during December, 2004 on three real estate joint venture investments.  We anticipate using this cash to make new loans during the first three to five months of 2005.



Principal and interest payable on Investor Certificates and Mortgage Participation (MP) Agreements increased $37,127,901 or 41% from $90,695,454 as of December 31, 2003 to $127,823,355 as of December 31, 2004.  In 2003, the Company filed a registration statement with the Securities and Exchange Commission to sell up to $40,000,000 in additional Investor Certificates and $11,375,000 in Common Stock.  The registration statement was approved on March 26, 2004 which allowed us to start selling new Investor Certificates in the second quarter of 2004 and continue the substantial increase in outstanding certificates and the subsequent investment in new real estate loans and joint venture investments.



On May 31, August 15, and November 18, 2004, three loans that we guaranteed on senior housing facilities in Fort Pierce, FL and St. Petersburg, FL were modified and the maturity dates were extended.  These modifications triggered the recognition of a loan guarantee obligation on our balance sheet.  The loan guarantee obligation is carried at the guarantees combined estimated fair value of $175,000.  We billed the loan guarantee obligations to the borrowers as compensation for our risk and received $104,000 in cash during 2004.  The remaining $71,000 was received during the first quarter of 2005.  Please see Note 14 of the Notes to Financial Statements for additional information related to loan guarantees.



Real estate loan and joint venture interest and fees earned. Interest income and fees from real estate loans and joint venture investments for the years ended December 31 is as follows:



|                                           |  |             |  |            |  |            |  |    
|------------------------------------------ |  | ----------- |  | ---------- |  | ---------- |  | ---
|                                           |  | 2004        |  | 2003       |  | Increase   |  | %  
|                                           |  | $12,668,299 |  | $9,319,835 |  | $3,348,464 |  | 36%
|                                           |  |             |  |            |  |            |  |    
|The increase was due to the following:     |  |             |  |            |  |            |  |    
|Increase in average outstanding principal  |  |             |  |            |  | $2,187,165 |  |    
|($98,295,723  2004; $76,076,836  2003)   |  |             |  |            |  |            |  |    
|Increase in weighted average interest rate |  |             |  |            |  | 281,484    |  |    
|(9.89% - 2004; 9.52% - 2003)               |  |             |  |            |  |            |  |    
|Increase in loan fees recognized           |  |             |  |            |  | 879,815    |  |    
|                                           |  |             |  |            |  | $3,348,464 |  |    



The increase in average outstanding principal is due to the addition of 4 new real estate loans and 4 new joint venture investments with outstanding principal of $17,562,888 and an increase in the average outstanding principal on existing loans of $4,655,999.



Loan participation and other income.  For the year ended December 31, 2004, loan participation and other income increased (decreased) as follows:



|                           |  |        |         |           |   |             |  |   |            
|-------------------------- |  | ------ | ------- | --------- | - | ----------- |  | - | -----------
|                           |  | 2004   |         | 2003      |   | Change     
|Investment income          |  | $      | 433,476 |           | $ | 350,071     |  | $ | 83,405     
|Loan participation & other |  | 52,866 |         | 1,253,642 |   | (1,200,776)
|Total                      |  | $      | 486,342 |           | $ | 1,603,713   |  | $ | (1,117,371)



17





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The Companys investment income is from the purchase of tax-free bonds used as permanent financing for projects the Company funded during their development and initial operations and from interest income on the Companys excess cash.  The increase in investment income is due to the September, 2003 purchase of new tax-free bonds, which increased the balance in our bond holdings portfolio.  Loan participation and other income decreased due to a $1,220,277 loan participation gain recorded in September, 2003.  We received no loan participation revenue in 2004.



Investor interest expense. Investor interest expense for the year ended December 31, 2004 was $9,263,934, an increase of $2,017,732 or 28% compared to 2003.  The increase is due to:



|                                                                 |              
|---------------------------------------------------------------- | -------------
|Increase in average outstanding certificate principal, including | $   1,707,349
|interest payable subject to compounding                          |              
|($98,723,402  2004; $79,210,846  2003)                         |              
|Change in weighted average interest percentage                   | 9,044        
|(8.75% - 2004; 8.74% - 2003)                                     |              
|Increase in average outstanding Mortgage Participation principal |              
|($6,273,310  2004; $3,259,920  2003)                           | 301,339      
|                                                                 | $   2,017,732



Loan loss expense and allowance for loan losses.In the fourth quarter of 2003, as part of our regular loan grading and risk assessment process, we charged $375,000 to loan loss expense and increased our allowance for real estate loan losses to $375,000 from $0 as of December 31, 2002.  For the year ended December 31, 2004, we charged an additional $257,000 to loan loss expense.  Prior to the fourth quarter of 2003, we had never recognized an allowance for loan loss.



Even though we have not incurred a loan write-off, we increased our loan loss allowance in 2003 because of an increase in our family housing development loan portfolios relative credit risk.  The increased credit risk was caused by slower than expected new home sales in the fourth quarter of 2003, which is a result of slower than expected growth in the U.S. economy.  The increase in our loan loss allowance during 2004 was due to: 1) an increase in the family housing development loan portfolios outstanding principal, resulting in $100,000 in loan loss expense, 2) slower than expected new home sales volumes at two projects, and 3) an increase in the time that it has taken three projects to finish the development phase and start selling homes.  The slower than expected home sales and the development time increases have increased the relative credit risk of these projects which resulted in an additional $157,000 in loan loss expense in 2004.  We will continue to review the credit risk of these projects each quarter and make adjustments to our allowance for loan losses based on the results of our reviews.



The allowance for loan loss increases that we made in 2003 and 2004 are classified as collective loan loss allowances.  A collective loan loss allowance is recognized when the characteristics of a group of loans indicate that it is probable that a loss exists even though the loss cannot be identified with a specific loan.  The allowance for loan losses is reviewed quarterly and increases or decreases will be made based on the results of these reviews.



As of December 31, 2004 and 2003, one church loan with a carrying amount of $263,291 and $242,621, respectively, was considered impaired.  No specific impaired loan loss allowance was recorded because the carrying amount of the loan is less than the loans collateral or the present value of the loans expected future cash flows.



As of December 31, 2004, allowance for loan losses as a percent of outstanding loan principal by loan type:



|                                      |  |                     |         |                       |   |             |  |     
|------------------------------------- |  | ------------------- | ------- | --------------------- | - | ----------- |  | ----
|                                      |  | Loan Loss Allowance |         | Outstanding Principal |   | %          
|Family Housing Development Loans      |  | $                   | 632,000 |                       | $ | 36,007,454  |  | 1.8%
|Church Mortgage Loans                 |  |                     | -0-     |                       |   | 9,285,858   |  | 0%  
|Senior Housing Mortgage Loans         |  |                     | -0-     |                       |   | 9,286,352   |  | 0%  
|Real Estate Joint Venture Investments |  | -0-                 |         | 56,945,936            |   | 0%         
|Total                                 |  | $                   | 632,000 |                       | $ | 111,525,600 |  | .6% 





18





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Marketing expenses. Total expenses for the marketing of investor certificates for the year ended December 31, 2004 were $972,430 compared to $630,508 for 2003.  The increase is due to:



|                             |  |        |         |        |   |         |  |   |        
|---------------------------- |  | ------ | ------- | ------ | - | ------- |  | - | -------
|                             |  | 2004   |         | 2003   |   | Change 
|Debt issue cost amortization |  | $      | 822,862 |        | $ | 510,924 |  | $ | 311,938
|Management & Consulting      |  |        | 44,113  |        |   | 44,186  |  |   | (73)   
|Printing and promotions      |  |        | 66,619  |        |   | 34,870  |  |   | 31,749 
|Other marketing costs        |  | 38,836 |         | 40,528 |   | (1,692)
|Total                        |  | $      | 972,430 |        | $ | 630,508 |  | $ | 341,922



Debt issue cost amortization expense increased due to Investor Certificates and Mortgage Participations sold since December 31, 2003.  This expense will continue to increase as new Investor Certificates and Mortgage Participations are sold.  Printing and promotions costs are up due to the printing of prospectuses and marketing brochures for our new certificates, which we began to sell in the second quarter of 2004.



Selling commissions paid to brokers for selling Investor Certificates and Mortgage Participations and costs incurred to register Investor Certificates are paid in cash and charged as an expense over the term of the related debt.  The unamortized balance is classified as an asset on the Balance Sheet as Unamortized debt issue costs.  The balance was $2,671,340 and $1,772,631 as of December 31, 2004 and 2003, respectively.



Operating and payroll/management fees expenses. Payroll expenses (salaries, payroll taxes, and benefits) and management/advisory fees for the year ended December 31 increased $277,150 or 27% from $1,013,730 in 2003 to $1,290,880 in 2004.  The increase is due to additional employees hired to handle the Companys growth in operations.  Prior to July 1, 2003, the employees were paid directly by the Company.  On July 1, 2003, Cornerstone Capital Advisors (CCA) hired all of our employees and has billed us according to the terms of the management/advisory agreement, which is described below.



Starting in July 2003, the Company contracted with CCA to provide all administrative and executive personnel services.  From July 1, 2003 until July 31, 2004, the agreement obligated us to reimburse actual expenses incurred by CCA.  Also, CCA was eligible to receive incentive compensation of up to 10% of actual expenses billed to us for the prior 12 months.  Effective August 1, 2004, the original agreement was modified so that we will pay CCA as follows:

·

A monthly management fee equal to 10% of our revenues from all sources other than loan fees, loan participation revenue, and revenue received from CCA plus 30% of loan participation revenue.

·

A loan origination fee equal to 30% of the total loan fees charged by the Company to its borrowers.  The fee is generally paid from loan proceeds and reduces deferred loan fees that we will recognize over the life of the loan.



Please see Note 3 of the Notes to Financial Statements for additional information about our agreement with CCA and for amounts that we have paid to CCA during 2004 and 2003.



For the years ended December 31, 2004 and 2003, operating expenses were as follows:



|                                    |  |         |         |         |   |           |  |   |          
|----------------------------------- |  | ------- | ------- | ------- | - | --------- |  | - | ---------
|                                    |  | 2004    |         | 2003    |   | Change   
|a) Trust service/paying agent fees  |  | $       | 153,966 |         | $ | 162,566   |  | $ | (8,600)  
|b) Consulting fees                  |  |         | 23,130  |         |   | 142,794   |  |   | (119,664)
|c) Audit, accounting & tax services |  |         | 68,403  |         |   | 102,846   |  |   | (34,443) 
|d) Employee recruiting costs        |  |         | -0-     |         |   | 46,335    |  |   | (46,335) 
|e) Depreciation & amortization      |  |         | 66,861  |         |   | 56,695    |  |   | 10,166   
|f) Office expenses                  |  |         | 100,443 |         |   | 122,803   |  |   | (22,360) 
|g) Legal expenses                   |  |         | 73,567  |         |   | 99,186    |  |   | (25,619) 
|h) Subsidiary registration costs    |  |         | -0-     |         |   | 113,473   |  |   | (113,473)
|i) Insurance                        |  |         | 41,557  |         |   | 38,508    |  |   | 3,049    
|j) Other operating expenses         |  | 194,130 |         | 206,756 |   | (12,626) 
|Total operating expenses            |  | $       | 722,057 |         | $ | 1,091,962 |  | $ | (369,905)



19





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The changes are due to the following:

a)

Trust service/paying agent fees - decreased due to a decrease in paying agent fees for our investor certificates.

b)

Consulting fees  In 2003, we used consultants to set up the mortgage participation agreements and to identify new business markets in the African American community (churches, affordable senior housing and family housing) which increased costs over 2004.  In 2004, we have continued to use consultants to identify new business markets (affordable housing is the main area); however our overall use of outside consultants is down because CCA now has in-house people to do a lot of the work that, in past years, we would have used outside consultants to perform.

c)

Audit, accounting & tax services  Decreased due to: 1) the hiring of a full-time accountant in the middle of 2003 by CCA which has decreased our need for outside accounting services; and 2) $8,155 spent in 2003 for CPA fees to audit Wellstone Communities, Inc, a formerly wholly-owned subsidiary.

d)

Employee recruiting costs  decreased in 2004 because we are no longer using outside recruiting firms to hire employees.

e)

Depreciation & amortization  The increase is due to the purchase of additional computers, software and office furniture in 2003 and 2004.

f)

Office expenses  The decrease is due to the change in our management contract with CCA.  Prior to August, 2004, CMI was responsible for all general office costs at our corporate offices.  In August 2004, the agreement was changed and as part of the agreement, CCA is now responsible for the maintenance and ongoing operating costs of the office.  Please see Note 3 of the Notes to Financial Statements for additional information about our management agreement with CCA.

g)

Legal expenses  We have used outside attorneys less in 2004 than in 2003.

h)

Subsidiary registration costs  In the fourth quarter of 2003, we suspended Wellstone Communities, Incs (WCI) registration statement and decided to not go forward with the filing.  We spent $113,473 on this filing, which was charged to operating expense.  See Note 18 of the Notes to Financial Statements for more information about this registration statement.

i)

Insurance  increased slightly in 2004 due to our larger operations in 2004.

j)

Other operating expenses  Decreased due to economies of scale from our increased operations.



Income tax provision. The income tax provision for the year ended December 31, 2004 was $136,973 compared to $87,266 for the year ended December 31, 2003.  The net increase in income taxes is due to an increase in pre-tax income.  The Companys effective tax provision rate for 2004 and 2003 was 21.1% and 15.4%, respectively.  A reconciliation of the Companys effective tax provision rate to the federal statutory rate is included in the attached Notes to Financial Statements (Note 10).



Dividends. Dividends of $421,353 and $338,172 were declared in 2004 and 2003, respectively.



Liquidity and Capital Resources

Cash flows from operations.  Net cash provided by the Companys operations for the years ended December 31, 2004 and 2003 was $2,066,663 and $3,130,394, respectively.  This decrease was due to a decrease in net income, deferred taxes, and cash received from loan fees and loan interest, and an increase in other assets partially offset by an increase in depreciation and amortization expense, an increase in accrued investor certificate interest, and an increase in loan guarantee payments received.



Investor and mortgage participation interest payable increased $3,956,610 in 2004 due to an increase in outstanding debt and because approximately 33% of the Investor Certificate holders who purchased certificates in 2003 and 2004 have elected to reinvest the interest due to them each year and not receive the interest in cash until maturity.



Included in the 2004 and 2003 changes in accrued real estate loan and joint venture interest and deferred loan fee amounts is $1,498,830 and $797,589 in interest which was financed as part of loan principal.  We receive monthly interest payments on our loans except when the terms of certain loans allow borrowers to finance interest payments while the collateralized property is under development or construction.  A summary (by loan type) of the amount of net financed interest for the years ended December 31, 2004 and 2003 is as follows:



|                           |  |            |  |         
|-------------------------- |  | ---------- |  | --------
|                           |  | 2004       |  | 2003    
|Family Housing Development |  | $1,005,142 |  | $339,820
|Church                     |  | 33,093     |  | 8,684   
|Real Estate Joint Venture  |  | 460,595    |  | 449,085 
|                           |  | $1,498,830 |  | $797,589





20





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The amount for 2004 represents interest accrued and financed in 2004, net of payments received in 2004 that were financed in previous years.  2003s amount represents interest accrued and financed in 2003, net of payments received in 2003 that were financed in previous years.



The increase in the family housing net financed interest in 2004 as compared to 2003 is due to: 1) the Company receiving $453,938 in financed interest in 2003 that was originally financed in 2002 on a major project in Mableton, GA, 2) increased loan balances on five projects which are now in the development phase and are financing their monthly interest, 3) the addition of four new loans since September 30, 2003 which are in the development phase of construction and 4) a delay in the start of home sales at three projects financed by the Company.  Although the amount of financed interest from these projects will remain fairly high (currently $100,000 to $105,000 per month), the amount of interest financed should start to decline in the third or fourth quarter of 2005 because three to five of these projects should be going into their sales phase and we will begin to receive interest payments in cash.



The majority of the Real Estate Joint Venture financed interest for 2004 is related to a loan in McKinney, TX that is collateralized by raw land which is being developed for senior housing.  We have been financing the interest on this loan since June, 2003.  Our other Real Estate Joint Venture Investment loans are collateralized by existing facilities that only needed to be remodeled.  Therefore, the period in which the interest is being financed on the McKinney loan is much longer than the other Real Estate Joint Venture Investment loans.  Normally, we finance two to six months of interest on senior housing loans.  We anticipate, due to the size of the McKinney project, that we will finance interest for another 12 to 24 months.



Cash flows from investing activities.    For the year ended December 31, 2004, the Company used $24,733,166 in cash from investing activities which is an increase of $6,086,933 from $18,646,233 for the year ended December 31, 2003.  The increase was due to the following:



|                                                                 |  |           |            
|---------------------------------------------------------------- |  | --------- | -----------
|Increase in real estate loans and joint venture investments made |  | $         | 15,491,620 
|Increase in real estate loan and joint venture investment        |  |           |            
|principal payments received                                      |  |           | (7,605,203)
|Decrease in bonds purchased, net of redemptions                  |  |           | (1,216,250)
|Decrease in fixed asset purchases, net of fixed asset sales      |  | (583,234)
|                                                                 |  | $         | 6,086,933  



The increase in real estate loans and joint venture investments made in 2004 is due to the new registration statement becoming effective on March 26, 2004.  We did not have as much time in 2003 to originate new loans as we have had in 2004.  This trend should continue in 2005 as we invest the cash that we have received from new investor certificates, stock issuances, and loan principal payments.



The increase in real estate loan and joint venture investment principal payments received is due to three real estate joint venture investments paying down their loans in 2004 versus one large principal pay-off received in 2003 on a real estate joint venture investment in Largo, FL.



The decrease in fixed asset purchases in 2004 is due to the purchase of an office condominium in 2003 to house our corporate offices and to provide office space for future growth.



Cash flows from financing activities.  For the year ended December 31, 2004, the Company raised $37,827,217 from the sale of Investor Certificates and Mortgage Participation Agreements.  This represents an increase of $13,514,077 from new Investor Certificate and Mortgage Participation sales of $24,313,140 for the year ended December 31, 2003.  In 2003, we had no registered Investor Certificates for sale after May, 2003.  We have been able to sell new Investor Certificates since March 26, 2004 which has been the reason for the increase over last year.  Also, we issued $2,082,530 in common stock (net of issuance costs) in 2004 which was registered as part of our Series E registration statement that became effective in March 2004.



On August 27, 2004, we filed a new registration statement with the Securities and Exchange Commission which will allow us to sell up to $20,000,000 in Series F Investor Certificates and $9,750,000 in common stock.  We were notified by the Securities and Exchange Commission that they were not going to complete a full review of the registration statement.  The registration statement became effective on November 1, 2004 and we started to sell the securities registered under this statement in January 2005.



21





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Investor Certificates redeemed for cash increased from $4,208,816 for the year ended December 31, 2003 to $4,655,926 for the year ended December 31, 2004.  In both 2003 and 2004, we authorized early redemptions on certain Investor Certificates to reduce our average interest rate and to extend the length of time that our certificates will be outstanding.  In 2003, we called approximately $2,000,000 in certificates related to the church bond fund.  In August, 2004, we called all 9% five year Investor Certificates with a maturity date of March, 2005.  We gave each investor the option to receive cash or new Series E Investor Certificates (8.25% interest rate) as payment for the certificates that were being called.  The total amount called and the amounts paid in cash and reinvested in new certificates were as follows:



|                               |  |            |  |          |  |           
|------------------------------ |  | ---------- |  | -------- |  | ----------
|                               |  | Principal  |  | Interest |  | Total     
|Amounts paid in cash (28%)     |  | $1,276,823 |  | $253,918 |  | $1,530,741
|Amounts reinvested (72%)       |  | 3,258,145  |  | 647,779  |  | 3,905,924 
|Total called/early redemptions |  | $4,534,968 |  | $901,697 |  | $5,436,665



We have $11,948,840 in Investor Certificates coming due or redeemable upon demand in 2005, as follows: $9,839,496  graduated certificates; $1,781,391  access certificates; $327,953  five-year certificates.  Graduated certificates can be redeemed yearly on the anniversary date of the purchase and access certificates are due on demand.  Based on past experience, we expect less than 20% of the graduated and access certificates to be redeemed in 2005 and we expect that approximately 75% of the maturing five-year certificates will be reinvested into new Investor Certificates.  However, there is no guarantee that this will happen.  We will ensure that we have enough cash available to handle these maturities.



Among the measures we take to mitigate any demands for cash are:

·

Maintain a minimum cash balance, normally no less than $3,000,000.

·

Have readily marketable loans that can be sold for par or a premium.

·

Ask investors about their intentions at least 30 days before their bonds mature.

·

Have a bank willing to extend credit lines if needed.

·

Spread maturity dates throughout the year.

·

Limit each investor to not more than $500,000 maturing in any three-month period.



We believe that cash on hand, cash generated by operations and expected refinancing and pay-offs of existing loans, will be sufficient to meet our financing and capital needs for the coming year.  The amount and timing of our future capital requirements will depend on factors such as the origination and funding of new investments, any opportunities for acquisitions of related businesses and the overall success of our marketing efforts for certificates, shares and any other securities.



Item 7. Financial Statements.



For the information required by this item, please see Financial Statements beginning on page F-1.



Item 8. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.



On November 2, 2005 we engaged Berman Hopkins Wright & LaHam, CPAs, LLP as the principal accountants to audit our financial statements.  Our previous independent accountant, Robert N. Clemons, CPA, PA, was a sole practitioner who died suddenly and unexpectedly on September 23, 2005, which necessitated the change.  Our previous auditors report on our financial statements for either of the last two years did not contain an adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principals.  We did not have any disagreements with our former auditor on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedure during the two most recent fiscal years and the subsequent interim period until the death of our auditor on September 23, 2005.



Item 8A. Controls and Procedures.



(a) Evaluation of Disclosure Controls and Procedures. The Company maintains a system of disclosure controls and procedures (as defined in Rules 13a  15 and 15d  15 under the Securities Exchange Act of 1934) designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. The Companys Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the Companys disclosure controls within 90 days prior to the filing date of this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective in alerting them in a timely manner of material information required to be included in the Companys periodic Securities and Exchange Commission filings.



(b) Changes in Internal Controls. Since the evaluation date, no significant changes were made to the Companys internal controls or other factors that could significantly affect these controls.



22





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Part III



Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.



Our board of directors is elected by our shareholders. The board is responsible for setting policies and for hiring and retaining management. This is information about our directors and officers.



|                        |     |                               
|----------------------- | --- | ------------------------------
|Name, residence address | Age | Responsibility                
|                        |     |                               
|Cecil A Brooks          | 74  | Director, Chairman of the     
|10206 Big Canoe         |     | Board, President, CEO         
|Jasper, GA 30143        |     |                               
|                        |     |                               
|John T. Ottinger        | 51  | Director, Vice President, COO,
|6020 Providence Lane    |     | Secretary and Treasurer       
|Cumming, GA 30040       |     |                               
|                        |     |                               
|Ted Fox                 | 74  | Director                      
|10575 Big Canoe         |     |                               
|Jasper, GA  30143       |     |                               
|                        |     |                               
|Henry Darden            | 72  | Director, Member of the       
|614 Beverly Dr.         |     | Loan and Audit Committees     
|Brandon, FL  33510      |     |                               
|                        |     |                               
|Jack Wehmiller          | 58  | Director                      
|7034 George Barnes Road |     |                               
|Murrayville, GA  30564  |     |                               
|                        |     |                               
|Irving B. Wicker        | 80  | Director, Member of the       
|132 Eswick Drive        |     | Audit Committee               
|Prattville, AL 36067    |     |                               
|                        |     |                               



Directors are elected for three-year terms.  Messrs. Darden and Fox will serve until the 2006 annual meeting, Messrs. Wehmiller and Wicker will serve until 2007 and Messrs. Ottinger and Brooks will serve until the 2008 annual meeting.



Cecil A. Brooks has served in these capacities since Cornerstone Ministries Investments, Inc. was founded.  He graduated from Mercer University in 1952. After a varied career in sales and management, including real estate sales and development, he graduated from Reformed Seminary in 1975. He served as pastor of Trinity Presbyterian Church in Miami, Florida and on the staff of Mission to North America of the Presbyterian Church of America from 1983 to 1994.

He formed the Investors Fund for Building and Development (the predecessor to Presbyterian Investors Fund, Inc.) in 1985 and served as President from its inception to its merger with us.  Mr. Brooks has served on the boards of a number of non-profit organizations concerned with foreign missions and housing for the elderly.  Mr. Brooks has over 20 years experience in all areas of the church mortgage lending and development business.  Mr. Brooks has also worked closely with church bond underwriters and broker-dealers in the church lending market.  He has been a director since 1985.



John T. Ottinger, Jr. has served as Vice President and Secretary/Treasurer since Cornerstone Ministries Investments, Inc. was founded.  Mr. Ottinger is also our Chief Financial Officer and became our Chief Operating Officer in 2000.  He graduated from the University of Delaware in 1976 and spent eight years in the lodging industry.  Mr. Ottinger has served as pastor of an established church as well as organizing pastor in North Carolina.  He joined the Presbyterian Investors Fund, Inc. staff in 1985.  Mr. Ottinger has 20 years of extensive experience in church lending.  He has been a director since 1996.



23





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Ted Fox has been a director since 1996, except for a period in 2003 in which he served as director of our former subsidiary, Wellstone Communities, Inc.  Since 1999 he has been an independent investor.  Mr. Fox had a 24-year career with Law Engineering Company, retiring as Assistant Vice-President.  From 1993 to 1998, Mr. Fox was employed part-time with Cole, Henderson and Drake, Inc., an advertising agency in their finance department, maintaining their financial records.  Mr. Fox is a past Chairman of the Board of the National Association of Credit Managers.  He received a Bachelor of Business Administration degree in Management from Georgia State University.



Henry Darden has served as a director since 1992.  He received a Bachelor of Science degree in forestry management from the University of Georgia in 1955 and an AA in real estate from the City College of Chicago in 1970.  He is a Distinguished Graduate of the Industrial College of the Armed Forces.   Mr. Darden retired in 1982 as a Lieutenant Colonel with the United States Air Force.  Since then, he has been a self-employed financial and tax consultant.



Jack Wehmiller has served as a director since May 2004.  In January 2004, he joined the staff of Cornerstone Capital Advisors, Inc.  His responsibilities include broker-dealer relations along with senior and student housing development.  Mr. Wehmiller was employed in the securities industry since 1971, with 17 years in retail brokerage and the balance in sales and marketing for a major mutual fund and variable annuity distributors.  From 1998 to 2000 he was regional vice president with ING Mutual Fund Management and ING Mutual Funds.  During 2001 and early 2002, he was an independent consultant and, from April 2002 through 2003, he formed and worked for Wellstone Securities LLC.  Mr. Wehmiller is an ordained deacon at the First Baptist Church of Gainesville, GA.  He attended the University of South Florida and the Southwest School of Municipal Finance.



Irving B. Wicker has served as a director since 1990.  He graduated from the University of Maryland in 1959 and received a Masters Degree from George Washington University in 1963.  He retired in 1969 as a Lieutenant Colonel in the United States Air Force.  Mr. Wicker was self-employed as a real estate broker and financial planner from 1969 until he retired in 2000.



Independent directors

Decisions involving Cornerstone Capital Advisors, Inc. require the approval of a majority of the independent directors, as well as a majority of the full board.  We define an independent director as one who is not an officer, director or shareholder of Cornerstone Capital Advisors, Inc.  We consider Messrs. Fox, Darden and Wicker to be independent directors.  We will maintain at least two independent directors on our board.



Committees

Audit Committee. Two independent directors, Messrs. Darden and Wicker, are the audit committee.  The audit committee will make recommendations concerning the engagement of independent public accountants, review their independence, the services they provide and the results of the audit engagement.  The audit committee will also consider the range of audit and non-audit fees and review the adequacy of our internal accounting controls.  We plan to appoint, by May of 2006, a director and audit committee member who is a financial expert, as defined by regulations adopted under the Sarbanes-Oxley Act of 2002.



Loan and Investment Committee. The board has established a loan and investment committee consisting of Messrs. Brooks, Ottinger, and Darden and having a quorum of two members.  The committee will review and may approve loans and investments of up to $500,000 on behalf of the board, in accordance with the loan and investment policies as adopted and amended by the board from time to time.  Any individual loans or investments in excess of the committees authority will be subject to approval by the entire board.



Meetings and compensation of directors

The directors meet at least annually and more often as needed.  The audit committee meets at least once annually.  The loan and investment committee meets as required.  Directors receive $250 for each conference call board and committee meeting they attend and $500 for each face-to-face meeting attended.  We reimburse them for travel expenses to attend meetings.



24





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Indemnification of directors and officers and limitation of their liability

Officers or directors are not liable to Cornerstone Ministries Investments, Inc. or its shareowners, under Georgia law, if they acted in a manner they believed in good faith to be in or not opposed to Cornerstone Ministries Investments, Inc.s best interests.  They are not liable in any criminal proceeding if they had no reasonable cause to believe their conduct was unlawful.  As permitted by Georgia law, we will indemnify our officers and directors against liability and their defense costs in any proceeding in which they have been successful or where the directors who are not involved determine that the applicable standard of conduct has been met.  We will pay reasonable expenses, including attorneys' fees, incurred by directors or officers in advance of the final disposition of a proceeding, if they furnish written affirmation of good faith belief that they have met the applicable standard of conduct, together with a written promise to repay any advances if it is determined they are not entitled to indemnification.  Insofar as indemnification for liabilities arising under the federal Securities Act of 1933 (the Act) may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy expressed in the Act and is, therefore, unenforceable.  We carry insurance against the liability of our officers and directors.



Code of Ethics

The registrant has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.  A copy is attached to this report as exhibit 14.  The registrant will furnish a copy to any person, without charge, upon request made to the registrant at 2450 Atlanta Highway, Suite 904, Cumming, GA 30040.



Section 16(a) Beneficial Ownership Reporting Compliance



No directors, officers or beneficial owners of more than 10% of the registrants Common Stock was required to file reports as required by section 16(a) of the Exchange Act during the two most recent fiscal years.



Item 10. Executive Compensation.This summary compensation table shows all compensation paid to our two executive officers during 2004 and 2005:



|                                                               |                     |         
|-------------------------------------------------------------- | ------------------- | --------
|                                                               | Annual compensation
|Name and principal position                                    | Year                | Salary  
|Cecil A. Brooks, Chairman of the Board, President and CEO      | 2004                | $200,000
|                                                               | 2005                | $200,000
|John T. Ottinger, Vice president, Secretary, Treasurer and COO | 2004                | $150,000
|                                                               | 2005                | $150,000



Their services for 2004 and 2005 were included in the administrative services agreement with Cornerstone Capital Advisors, Inc. Neither we nor CCA have employment agreements with them or any other employees.

Item 11. Security Ownership of Certain Beneficial Owners and Management.



The following table shows the beneficial ownership of our common stock on December 31, 2005, for shares owned by:

(i)

each of our directors and executive officers,

(ii)

each shareowner we know to own beneficially 5% or more of the outstanding shares of our common stock and

(iii)  all directors and officers as a group.

We believe that the beneficial owners of the common stock listed below, based on information they furnished, have sole investment and voting power over their shares, subject to community property laws where applicable.



25





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|                                                            |                                     |                                                     
|----------------------------------------------------------- | ----------------------------------- | ----------------------------------------------------
|Name and address of
Beneficial Owner                        | Number of Shares Beneficially Owned | Percentage of  Total Common
Stock Beneficially Owned
|                                                            |                                     |                                                     
|Cecil A. Brooks
10206 Big Canoe
Jasper, GA 30143            | 2,722                               | *                                                   
|                                                            |                                     |                                                     
|John T. Ottinger
6020 Providence Lane
Cumming, GA 30040     | 3,072                               | *                                                   
|                                                            |                                     |                                                     
|Ted Fox
10575 Big Canoe
Jasper, GA 30143                    | 6,083                               | *                                                   
|                                                            |                                     |                                                     
|Irving B. Wicker
132 Eswick Drive
Prattville, AL 36067      | 6,962                               | *                                                   
|                                                            |                                     |                                                     
|Henry Darden
614 Beverly Dr
Brandon, FL 33510               | 6,000                               | *                                                   
|                                                            |                                     |                                                     
|All directors and executive officers as a group (5 Persons) | 24,839                              | 2.8%                                                

* less than one percent.



Item 12. Certain Relationships and Related Transactions.



We caused Wellstone Communities Inc. (WCI) to be incorporated on November 20, 2002, for the purpose of its initially being a wholly-owned subsidiary and then for it to raise capital from the sale of preferred stock and to invest that capital in ways not feasible for us and in owning a bank.  In December 2002, January 2003 and October 2003, we purchased a total of 136,250 shares of WCI common stock for $1,362,500.  WCI used our investment to purchase three loans from us in 2003 for a total of $971,003, which was the principal balance on those loans at the purchase date.  WCI decided not to go forward with its plans and on June 30, 2004, it was dissolved.  Its assets were distributed to us and its common stock cancelled.



During 2001, we formed Wellstone Financial Group, LLC (WFG).  At formation we issued 500 shares of our Series A Convertible Preferred Stock (valued at $500,000) to WFG in exchange for a 100% ownership interest.  WFG assisted non-profit entities to secure financing from banks, bond underwriters, and other sources for retirement, childcare, churches, and church-related facilities.  It received consulting fees for completed financings.  WFG had no revenues in 2003 or 2004.  It was not able to retain the type of specialized employees necessary to develop its operations into a long-term profitable venture.  Therefore, it was dissolved on June 30, 2004 and the preferred stock it owned was cancelled.



On July 1, 2003, we entered into a management and administrative services agreement with Cornerstone Capital Advisors, Inc. (CCA) for it to provide our administrative, management and executive services.  The agreement is for renewable one-year terms and may be terminated by either party upon 60 days written notice.  We do not have any employees of our own and CCA is subject to the supervision of our board of directors.  Our two officers, Cecil A. Brooks and John T. Ottinger, are also officers and directors of Cornerstone Capital Advisors, Inc.  We paid CCA $1,865,605 under this agreement in 2004 and $2,596,428 in 2005.  See Note 3 of the Notes to Financial Statements for additional disclosures about our agreement with CCA.



In June 2004, we engaged Cornerstone Direct Public Offerings, LLC (CDPO) to provide legal and administrative services for our Series F SB-2 Registration Statement filing with the Securities and Exchange Commission.  The service fee was $75,000.  In January 2005, we amended the agreement and paid an additional $20,000 to CDPO due to an increase in the amount of time needed to register the securities with the various state securities regulators.  Also, in January 2004, we amended our previous service agreement that we signed in 2003 relating to our Series E SB-2 Registration Statement and paid an additional $25,000 to CDPO for cost over-runs related to the length of time needed for our registration statement to become effective.  Two of our directors serve on the Board of Directors of Cornerstone Direct Public Offerings majority owner, Foundation for Christian Communities Development, Inc.



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In December 2005, our two largest borrowers sold eight senior housing properties to Wellstone Retirement Communities I, LLC (WRC) which is managed by CCA, which also serves as our manager.  Two of our directors are also directors for CCA.  As a result of this transaction, we received $63,190,168 in loan and bond holdings principal and we immediately supplied subordinated financing of $37,901,607 at 9.5% interest and a two year maturity to WRC to purchase the property.  Approximately $10,151,000 in equity was contributed by unrelated accredited investors with the remaining $64,077,000 needed to purchase the properties supplied by third-party first mortgage financing.



During 2005, two loans were made to wholly-owned subsidiaries of Cornerstone Group Holdings, Inc (CGH).  At the time that these loans were originated, two of our directors were also directors of CGH.  Subsequent to the loan originations, both of our directors resigned from the board of CGH.  These two loans were made at similar terms to that of our loans with independent third parties and were approved by all of our independent directors.  As of December 31, 2005, the principal outstanding on these two loans was $1,384,404.  Both loans accrue interest at 10% per annum and mature in 2006.



All material affiliated transactions and loans are made or entered into on terms that are no less favorable to us than those that can be obtained from unaffiliated third parties and must be approved by a majority of our independent directors who do not have an interest in the transactions and who were offered access, at our expense, to our lawyer or independent legal counsel. We do not make loans to our officers or directors.



Item 13. Exhibits and Reports on Form 8-K.



(a)

(Item 601 of Regulation S-B)



Exhibit

Number                                    Description



| |     |  |  |                                                                                                                                                                             
| | --- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |  |  |                                                                                                                                                                             
| | 1.1 |  |  | Sales Agency Agreement with Wellstone Securities, LLC.                                                                                                                      
| |     |  |  | (Incorporated by reference from Exhibit 1.1 of the Issuers Registration Statement on Form SB-2, No. 333-118613, filed August 27, 2004.)                                    
| | 1.3 |  |  | Bond Purchase Agreement (Incorporated by reference from Exhibit 1.2 of the Issuers Registration Statement on Form SB-2, No. 333-118613, filed August 27, 2004.)            
| | 1.4 |  |  | Common Stock Purchase Agreement (Incorporated by reference from Exhibit 1.3 of the Issuers Registration Statement on Form SB-2, No. 333-118613, filed August 27, 2004.)    
| | 3.1 |  |  | Amended and Restated Articles of Incorporation (Incorporated by reference from Exhibit 3.1 of the                                                                           
| |     |  |  | Issuers Registration Statement on Form SB-2, No. 333-118613,filed August 27, 2004.)                                                                                        
| | 3.2 |  |  | Amended and Restated By-laws of the issuer (Incorporated by reference from Exhibit 3.2 of                                                                                   
| |     |  |  | Issuers Registration Statement on Form SB-2, No. 333-118613,filed August 27, 2004.)                                                                                        
| | 4.1 |  |  | Article III.A., page 1 of the Amended and Restated Articles of Incorporation and Article III of the                                                                         
| |     |  |  | Amended and Restated By-laws (Reference is made to Exhibits 3.1 and 3.2.)                                                                                                   
| | 4.2 |  |  | Form of Graduated Rate Bonds (Incorporated by reference from Exhibit 4.3 of the Issuers                                                                                    
| |     |  |  | Registration Statement on Form SB-2, No. 333-118613, filed August 27, 2004.)                                                                                                
| | 4.3 |  |  | Form of five-year term Bonds (Incorporated by reference from Exhibit 4.3 of the                                                                                             
| |     |  |  | Issuers Registration Statement on Form SB-2, No. 333-118613,filed August 27, 2004.)                                                                                        
| | 4.4 |  |  | Trust Indenture for Series B and C Certificates of Indebtedness (Incorporated by reference from                                                                             
| |     |  |  | Exhibit 4.4 of Issuers Registration Statement on Form SB-2, No. 333-93475,filed January 14, 2000.)                                                                         
| | 4.5 |  |  | Trust Indenture dated June 14, 2002 (Incorporated by reference from Exhibit 4.8 of the Issuers Registration Statement on Form SB-2, No. 333-91564, filed June 28, 2002.)   
| | 4.6 |  |  | Trust Indenture dated April 29, 2003 (Incorporated by reference from Exhibit 4.6 of the Issuers Registration Statement on Form SB-2, No. 333-104810, filed April 29, 2003.)
| | 14  |  |  | Code of Ethics                                                                                                                                                              
| | 21  |  |  | Subsidiaries of the Issuer  the Issuer has no subsidiaries; therefore, no exhibit is attached.                                                                             
| | 24  |  |  | Power of Attorney (included in the Signatures section of this report)                                                                                                       
| | 31  |  |  | Certifications pursuant to Item 601(b) (31) of Regulation S-B                                                                                                               
| | 32  |  |  | Certifications pursuant to 18 U.S.C.  Section 1350                                                                                                                          



(b)  On November 15, 2005 the registrant filed Form 8-K, No. 001-32165, to report a change in the registrants certifying accountant.



27





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Item 14.  Principal Accountant Fees and Services.



On November 2, 2005 the Board of Directors engaged Berman Hopkins Wright & LaHam, CPAs, LLP as the auditors of the financial statements for the year ended December 31, 2005.  Our previous independent auditor, Robert N. Clemons CPA, PA was a sole practitioner who died suddenly and unexpectedly on September 23, 2005, which necessitated the change.



No member of either firm mentioned above has a financial interest in Cornerstone Ministries Investments, Inc.  All of the services described below were approved by our audit committee and the Board of Directors.



Audit Fees -fees for services rendered in connection with the audit of our annual financial statements, the review of financial statements included in our Form 10-QSBs and for services that are normally provided by the   accountant in connection with statutory and regulatory filings were $52,571 and $66,648 for the years ended   December 31, 2005 and 2004, respectively.

Tax Fees -fees for tax services, including preparation of our tax returns and tax-related matters were $3,440 and $3,126 for the years ended December 31, 2005 and 2004, respectively.

All Other Fees - fees for the preparation and review of the financial sections of our Form SB-2 Registration Statements were $0 and $5,969 for the years ended December 31, 2005 and 2004, respectively.



All hours expended on the accountants engagement to audit our financial statements were attributed to work performed by Berman Hopkins Wright & LaHam, CPAs, LLP and Robert N. Clemons CPA, PAs full-time, permanent employees.



SIGNATURES



In accordance with Section 15(d) of the Exchange Act, the Issuer caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CORNERSTONE MINISTRIES INVESTMENTS, INC.(Issuer)



By   S/Cecil A. Brooks__________________________     March 27, 2006

Cecil A. Brooks, Chief Executive Officer



Each person whose signature appears below appoints Cecil A. Brooks, John T. Ottinger, or either of them, his or her attorney-in-fact, with full power of substitution and resubstitution, to sign any and all amendments to this report on Form 10-KSB of Cornerstone Ministries Investments, Inc., and to file them, with all their exhibits and other related documents, with the Securities and Exchange Commission, ratifying and confirming all that their attorney-in-fact and agent or his or her substitute or substitutes may lawfully do or cause to be done by virtue of this appointment. In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Issuer and in the capacities and on the dates indicated.



Signature

Title

Date



S/Cecil A. Brooks Chief Executive Officer, President and

March 27, 2006

Cecil A. Brooks

Chairman of the Board of Directors



S/John T. Ottinger Vice President, Chief Operating Officer,

March 27, 2006

John T. Ottinger

Chief Financial Officer, Secretary, Treasurer

and Director (principal accounting officer)



*S/Ted Fox Director

March 27, 2006

Ted Fox



*S/Henry Darden Director

March 27, 2006

Henry Darden



28





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*S/Jack Wehmiller Director

March 27, 2006

Jack Wehmiller



*S/Irving B. Wicker Director

March 27, 2006

Irving B. Wicker



By: *S/Cecil A. Brooks, attorney-in-fact

March 27, 2006

Cecil A. Brooks



Supplemental Information to be Furnished With Reports Filed

Pursuant to Section 15(d) of the Act by Registrants Which Have Not

Registered Securities Pursuant to Section 12 of the Act



The report on Form 10-K is the only annual report sent or to be sent to security holders covering the registrants last fiscal year.  No proxy soliciting material has been sent or is to be furnished to security holders with respect to any annual or other meeting of security holders.





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To The Board of Directors and Shareholders

Cornerstone Ministries Investments, Inc.



Report of Independent Registered Public Accounting Firm



We have audited the accompanying balance sheet of Cornerstone Ministries Investments, Inc., as of December 31, 2005 and the related statements of operations, changes in shareholders equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Cornerstone Ministries Investments, Inc. as of December 31, 2004 and 2003 were audited by another auditor whose report dated March 17, 2005, expressed an unqualified opinion on those statements.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cornerstone Ministries Investments, Inc. as of December 31, 2005 and the results of its operations, changes in shareholders equity and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.









S/ Berman Hopkins Wright & Laham, CPAs, LLP

Winter Park, Florida

March 10, 2006



F-1





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ROBERT N. CLEMONS, CPA, PA

PO BOX 1670

DELAND, FLORIDA 32721-1670



To The Board of Directors and Shareholders of

Cornerstone Ministries Investments, Inc.



Report of Independent Registered Public Accounting Firm



We have audited the accompanying balance sheets of Cornerstone Ministries Investments, Inc. as of December 31, 2004, 2003 & 2002 and the related statements of operations, changes in shareholders equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cornerstone Ministries Investments, Inc. as of December 31, 2004, 2003 & 2002 and the results of their operations, changes in shareholders equity and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.



S/ Robert N. Clemons, CPA, PA

DeLand, Florida

March 17, 2005



F-1(a)





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|                                                         |  |  |              |               |              |               |              |               |              |                 |  |  |  |  |  |  | 
|-------------------------------------------------------- |  |  | ------------ | ------------- | ------------ | ------------- | ------------ | ------------- | ------------ | --------------- |  |  |  |  |  |  | 
|CORNERSTONE MINISTRIES INVESTMENTS, INC.                 |  |  |              |               |              |              
|BALANCE SHEETS                                           |  |  |              |               |              |               |              |               |             
|December 31, 2005, 2004 and 2003                         |  |  |              |               |              |               |             
|                                                         |  |  |              |               |              |               |              |               |              | (Consolidated -
|                                                         |  |  |              |               |              |               |              |               |              | See Note 17)   
|                                                         |  |  |              |               |              | 2005          |              | 2004          |              | 2003           
|ASSETS                                                   |  |  |              |               |              |               |              |               |              |                
|Cash and cash equivalents                                |  |  |              | $  12,447,193 |              | $  15,162,659 |              | $   4,389,851
|Loan guarantee receivable                                |  |  |              | -             |              | 71,000        |              | -            
|Loans in process                                         |  |  |              |               | 384,262      |               | 30,873       |               | 118,504     
|Real estate loans, net (including $39,466,114            |  |  | 106,238,279  |               | 54,278,585   |               | 47,877,277  
|in 2005 from related parties - see Note 3)               |  |  |              |               |              |               |             
|Real estate joint venture investments, net               |  |  | 14,865,860   |               | 56,408,014   |               | 34,846,223  
|Bond holdings and accrued interest                       |  |  | 14,315,771   |               | 4,013,733    |               | 4,001,333   
|Property and equipment, net                              |  |  |              | 762,135       |              | 812,221       |              | 873,101      
|Refundable income taxes                                  |  |  |              | -             |              | -             |              | 42,617       
|Deferred tax asset, net                                  |  |  |              | 143,837       |              | -             |              | -            
|Goodwill                                                 |  |  |              |               |              | 450,997       |              | 450,997       |              | 450,997        
|Unamortized debt issue costs                             |  |  |              | 2,748,855     |              | 2,671,340     |              | 1,772,631    
|Foreclosed real estate held for sale                     |  |  | 290,679      |               | -            |               | -           
|Real estate held for investment                          |  |  |              | 340,000       |              | 340,000       |              | 340,000      
|Other assets                                             |  |  |              |               | 72,220       |               | 168,513      |               | 15,813      
|                                                         |  |  |              |               |              |               |              |               |              |                
|TOTAL ASSETS                                             |  |  |              |               | $153,060,088 |               | $134,407,935 |               | $ 94,728,347
|                                                         |  |  |              |               |              |               |              |               |              |                
|LIABILITIES                                              |  |  |              |               |              |               |              |               |             
|Investor certificates and accrued interest               |  |  | $143,062,898 |               | $120,603,157 |               | $ 84,562,645
|Mortgage participations and accrued interest             |  |  | 2,545,701    |               | 7,220,198    |               | 6,132,809   
|Accounts and other payables (including                   |  |  | 600,311      |               | 244,621      |               | 267,806     
|$73,365, $7,464 and $93 to related parties - see Note 3) |  |  |              |               |              |              
|Common dividends payable                                 |  |  |              | 278,034       |              | 266,287       |              | 169,087      
|Loan guarantee obligations                               |  |  |              | 234,000       |              | 175,000       |              | -            
|Building mortgages                                       |  |  |              |               | 578,309      |               | 602,369      |               | 180,194     
|Capital lease obligation                                 |  |  |              | 1,231         |              | 7,941         |              | 13,632       
|Deferred taxes payable                                   |  |  |              | -             |              | 70,357        |              | 171,443      
|                                                         |  |  |              |               |              |               |              |               |             
|TOTAL LIABILITIES                                        |  |  |              |               | 147,300,484  |               | 129,189,930  |               | 91,497,616  
|                                                         |  |  |              |               |              |               |              |              
|SHAREHOLDERS' EQUITY                                     |  |  |              |               |              |               |              |              
|Series A Convertible Preferred Stock, no par             |  |  |              |               |              |               |             
|value; 235,000 shares authorized, no                     |  |  |              |               |              |               |             
|shares issued and outstanding                            |  |  |              | -             |              | -             |              | -            
|Common Stock, $0.01 par value; 10 million shares         |  |  |              |               |              |               |             
|authorized; 891,914, 819,351 and 531,532 shares          |  |  |              |               |              |              
|issued and outstanding                                   |  |  |              | 8,919         |              | 8,194         |              | 5,315        
|Paid in capital                                          |  |  |              |               | 5,570,992    |               | 5,118,568    |               | 3,297,435   
|Retained earnings                                        |  |  |              |               | 179,693      |               | 91,243       |               | 1,229       
|Treasury stock                                           |  |  |              |               | -            |               | -            |               | (73,248)    
|                                                         |  |  |              |               |              |               |             
|TOTAL SHAREHOLDERS' EQUITY                               |  |  | 5,759,604    |               | 5,218,005    |               | 3,230,731   
|TOTAL LIABILITIES AND                                    |  |  |              |               |              |               |              |              
|SHAREHOLDERS' EQUITY                                     |  |  |              | $153,060,088  |              | $134,407,935  |              | $ 94,728,347 
|                                                         |  |  |              |               |              |               |              |              
|                                                         |  |  |              |               |              |               |              |              
|SEE ACCOMPANYING NOTES                                   |  |  |              |               |              |               |              |              





F-2





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|                                                                |              |                  |              |                  |               |                  |           |               |               
|--------------------------------------------------------------- | ------------ | ---------------- | ------------ | ---------------- | ------------- | ---------------- | --------- | ------------- | --------------
|CORNERSTONE MINISTRIES INVESTMENTS, INC.                        |              |                  |              |                  |              
|STATEMENTS OF OPERATIONS                                        |              |                  |              |                  |               |                 
|For the years ended December 31, 2005, 2004 and 2003            |              |                  |              |                  |              
|                                                                |              |                  |              |                  |               |                  |           |               | (Consolidated-
|                                                                |              |                  |              |                  |               |                  |           |               | See Note 17)  
|                                                                |              |                  |              |                  | 2005          |                  | 2004      |               | 2003          
|REVENUES                                                        |              |                  |              |                  |               |                  |           |              
|Real estate loan and joint venture interest and fees (including | $ 14,093,734 |                  | $ 12,668,299 |                  | $   9,319,835
|$439,208 from related parties in 2005 - see Note 3)             |              |                  |              |                  |              
|Loan participation and other income (including $60,000 in       | 1,609,387    |                  | 486,342      |                  | 1,603,713    
|2005 and $25,000 in 2004 from a related party - see Note 3)     |              |                  |              |                  |              
|                                                                |              |                  |              |                  |               |                  |           |               |               
|TOTAL REVENUES                                                  |              |                  |              | 15,703,121       |               | 13,154,641       |           | 10,923,548   
|                                                                |              |                  |              |                  |               |                  |           |               |               
|EXPENSES                                                        |              |                  |              |                  |               |                  |           |              
|Investor interest expense                                       |              |                  | 11,638,145   |                  | 9,263,934     |                  | 7,246,202
|Loan loss expense                                               |              |                  |              | 100,000          |               | 257,000          |           | 375,000      
|Marketing expenses                                              |              |                  |              | 1,082,967        |               | 972,430          |           | 630,508      
|Payroll expenses                                                |              |                  |              | -                |               | -                |           | 695,111      
|Management and advisory fees to related party (see Note 3)      | 1,445,264    |                  | 1,290,880    |                  | 318,619      
|Operating expenses                                              |              |                  |              | 695,756          |               | 722,057          |           | 1,091,962    
|                                                                |              |                  |              |                  |               |                  |           |               |               
|TOTAL EXPENSES                                                  |              |                  |              | 14,962,132       |               | 12,506,301       |           | 10,357,402   
|                                                                |              |                  |              |                  |               |                  |           |               |               
|Income Before Provision For Income Taxes                        | 740,989      |                  | 648,340      |                  | 566,146      
|                                                                |              |                  |              |                  |               |                  |           |               |               
|Income Tax Provision                                            |              |                  | 163,362      |                  | 136,973       |                  | 87,266   
|                                                                |              |                  |              |                  |               |                  |           |               |               
|NET INCOME                                                      |              |                  |              | $     577,627    |               | $     511,367    |           | $     478,880
|                                                                |              |                  |              |                  |               |                  |           |               |               
|Basic and Diluted Earnings per Common Share                     |              | $           0.69 |              | $           0.72 |               | $           0.92
|                                                                |              |                  |              |                  |               |                  |           |               |               
|                                                                |              |                  |              |                  |               |                  |           |               |               
|                                                                |              |                  |              |                  |               |                  |           |               |               
|                                                                |              |                  |              |                  |               |                  |           |               |               
|                                                                |              |                  |              |                  |               |                  |           |               |               
|                                                                |              |                  |              |                  |               |                  |           |               |               
|SEE ACCOMPANYING NOTES                                          |              |                  |              |                  |               |                  |          





F-3





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|                                                                                                                |         |          |          |               |            |           |                           |           |                      |          |                         |           |                            |           |           |        |  |  |  |  | 
|--------------------------------------------------------------------------------------------------------------- | ------- | -------- | -------- | ------------- | ---------- | --------- | ------------------------- | --------- | -------------------- | -------- | ----------------------- | --------- | -------------------------- | --------- | --------- | ------ |  |  |  |  | 
|CORNERSTONE MINISTRIES INVESTMENTS, INC.                                                                        |         |          |          |               |            |           |                           |           |                      |          |                        
|STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY                                                                   |         |          |          |               |            |           |                           |           |                      |         
|For the years ended December 31, 2005, 2004 and 2003                                                            |         |          |          |               |            |           |                           |           |                      |         
|                                                                                                                |         |          |          |               |            |           |                           |           |                      |          |                         |           |                            |           |           |       
|The statement for the year ended December 31, 2003 was part of a consolidated financial statement - see Note 17 |         |          |         
|                                                                                                                |         |          |          |               |            |           |                           |           |                      |          |                         | RETAINED  |                            |           |           |       
|                                                                                                                |         |          |          | COMMON STOCK: |            | PAID-IN   |                           | PREFERRED |                      | EARNINGS |                         | TREASURY  |                            | TOTAL    
|                                                                                                                |         |          |          | SHARES        |            | AMOUNT    |                           | CAPITAL   |                      | STOCK    |                         | (DEFICIT) |                            | STOCK     |           | EQUITY
|                                                                                                                |         |          |          |               |            |           |                           |           |                      |          |                         |           |                            |           |           |       
|BALANCE, DECEMBER 31, 2002                                                                                      | 530,947 |          | $  5,309 |               | $3,293,641 |           | $                       - |           | $        (139,479)   |          | $                     - |           | $                3,159,471
|Net income                                                                                                      |         |          |          |               |            |           |                           |           |                      |          | 478,880                 |           |                            |           | 478,880  
|Common stock issued                                                                                             |         | 585      |          | 6             |            | 3,794     |                           |           |                      |          |                         |           |                            | 3,800    
|Dividends declared                                                                                              |         |          |          |               |            |           |                           |           |                      |          | (338,172)               |           |                            |           | (338,172)
|Treasury stock acquired (11,269 shares)                                                                         |         |          |          |               |            |           |                           |           |                      |          | (73,248)                |           | (73,248)                  
|                                                                                                                |         |          |          |               |            |           |                           |           |                      |          |                         |           |                            |           |           |       
|BALANCE, DECEMBER 31, 2003                                                                                      | 531,532 |          | $  5,315 |               | $3,297,435 |           | $                       - |           | $              1,229 |          | $          (73,248)     |           | $                3,230,731
|Net income                                                                                                      |         |          |          |               |            |           |                           |           |                      |          | 511,367                 |           |                            |           | 511,367  
|Common stock issued                                                                                             |         | 327,591  |          | 3,276         |            | 2,126,065 |                           |           |                      |          |                         |           |                            | 2,129,341
|Common stock issuance costs paid                                                                                |         |          |          |               | (46,811)   |           |                           |           |                      |          |                         |           | (46,811)                  
|Common stock redeemed                                                                                           |         | (39,772) |          | (397)         |            | (258,121) |                           |           |                      |          |                         |           |                            | (258,518)
|Dividends declared                                                                                              |         |          |          |               |            |           |                           |           |                      |          | (421,353)               |           |                            |           | (421,353)
|Treasury stock sold (11,269 shares)                                                                             |         |          |          |               |            |           |                           |           |                      |          | 73,248                  |           | 73,248                    
|                                                                                                                |         |          |          |               |            |           |                           |           |                      |          |                         |           |                            |           |           |       
|BALANCE, DECEMBER 31, 2004                                                                                      | 819,351 |          | $  8,194 |               | $5,118,568 |           | $                       - |           | $            91,243  |          | $                     - |           | $                5,218,005
|Net income                                                                                                      |         |          |          |               |            |           |                           |           |                      |          | 577,627                 |           |                            |           | 577,627  
|Common stock issued                                                                                             |         | 95,962   |          | 959           |            | 622,797   |                           |           |                      |          |                         |           |                            | 623,756  
|Common stock issuance costs paid                                                                                |         |          |          |               | (18,514)   |           |                           |           |                      |          |                         |           | (18,514)                  
|Common stock redeemed                                                                                           |         | (23,399) |          | (234)         |            | (151,859) |                           |           |                      |          |                         |           |                            | (152,093)
|Dividends declared                                                                                              |         |          |          |               |            |           |                           |           |                      |          | (489,177)               |           |                            |           | (489,177)
|BALANCE, DECEMBER 31, 2005                                                                                      | 891,914 |          | $  8,919 |               | $5,570,992 |           | $                       - |           | $          179,693   |          | $                    -  |           | $                5,759,604
|                                                                                                                |         |          |          |               |            |           |                           |           |                      |          |                         |           |                            |           |           |       
|                                                                                                                |         |          |          |               |            |           |                           |           |                      |          |                         |           |                            |           |           |       
|                                                                                                                |         |          |          |               |            |           |                           |           |                      |          |                         |           |                            |           |           |       
|                                                                                                                |         |          |          |               |            |           |                           |           |                      |          |                         |           |                            |           |           |       
|SEE ACCOMPANYING NOTES                                                                                          |         |          |          |               |            |           |                           |           |                      |          |                         |           |                            |          





F-4





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|                                                                         |              |                  |                  |                  |                        |                  |                      |                      |                 |               |             
|------------------------------------------------------------------------ | ------------ | ---------------- | ---------------- | ---------------- | ---------------------- | ---------------- | -------------------- | -------------------- | --------------- | ------------- | ------------
|CORNERSTONE MINISTRIES INVESTMENTS, INC.                                 |              |                  |                  |                  |                        |                  |                     
|STATEMENTS OF CASH FLOWS                                                 |              |                  |                  |                  |                        |                  |                      |                     
|For the years ended December 31, 2005, 2004 and 2003                     |              |                  |                  |                  |                        | (Consolidated - 
|                                                                         |              |                  |                  |                  |                        |                  |                      |                      |                 |               | See Note 17)
|                                                                         |              |                  |                  |                  |                        |                  | 2005                 |                      | 2004            |               | 2003        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                    |              |                  |                  |                  |                        |                  |                     
|Net income                                                               |              |                  |                  |                  |                        | $        577,627 |                      | $     511,367        |                 | $     478,880
|Adjustments to reconcile net income to cash                              |              |                  |                  |                  |                        |                  |                     
|from operations-                                                         |              |                  |                  |                  |                        |                  |                      |                      |                 |              
|Depreciation and amortization                                            |              |                  |                  |                  | 1,033,860              |                  | 889,723              |                      | 567,619        
|Loss from sale of property and equipment                                 |              |                  |                  | -                |                        | 2,534            |                      | -                   
|Changes in-                                                              |              |                  |                  |                  |                        |                  |                      |                      |                 |              
|Loans in process                                                         |              |                  |                  |                  |                        | (353,389)        |                      | 87,631               |                 | 240,516      
|Accrued bond interest, net                                               |              |                  |                  |                  | (159,317)              |                  | (12,400)             |                      | (50,921)       
|Bond holdings principal discount amortization                            |              |                  | (2,241)          |                  | -                      |                  | -                   
|Accrued real estate loan/joint venture interest and deferred loan fees   | (1,371,084)  |                  | (3,495,448)      |                  | (1,505,568)           
|(including ($348,407) in 2005 from related party loans)                  |              |                  |                  |                  |                        |                 
|Allowance for loan losses                                                |              |                  |                  |                  | 100,000                |                  | 257,000              |                      | 375,000        
|Deferred taxes                                                           |              |                  |                  |                  |                        | (214,194)        |                      | (101,086)            |                 | 445,676      
|Refundable income taxes                                                  |              |                  |                  |                  | -                      |                  | 42,617               |                      | (42,617)       
|Investor and mortgage participation interest payable                     |              |                  | 5,090,277        |                  | 3,956,610              |                  | 2,613,748           
|Loan guarantee obligation, net of related receivables                    |              |                  | 130,000          |                  | 104,000                |                  | -                   
|Accounts and other payables                                              |              |                  |                  |                  | 355,690                |                  | (23,185)             |                      | (14,314)       
|Other assets                                                             |              |                  |                  |                  |                        | 96,293           |                      | (152,700)            |                 | 22,375       
|                                                                         |              |                  |                  |                  |                        |                  |                      |                      |                 |               |             
|NET CASH PROVIDED BY OPERATIONS                                          |              |                  | 5,283,522        |                  | 2,066,663              |                  | 3,130,394           
|                                                                         |              |                  |                  |                  |                        |                  |                      |                      |                 |               |             
|CASH FLOWS FROM INVESTING ACTIVITIES:                                    |              |                  |                  |                  |                        |                  |                     
|Real estate loans made (including $2,115,438 in 2005 to related parties) | (53,699,489) |                  | (14,682,118)     |                  | (16,377,539)          
|Real estate loan principal payments received (including                  |              | 36,950,082       |                  | 9,201,063        |                        | 8,166,950       
|$899,338 in 2005 from related parties)                                   |              |                  |                  |                  |                        |                  |                      |                     
|Real estate joint venture investments made                               |              |                  |                  | (6,575,910)      |                        | (31,367,707)     |                      | (14,180,666)        
|Real estate joint venture investment principal payments received         |              | 13,892,309       |                  | 12,124,111       |                        | 5,553,021       
|Bonds purchased                                                          |              |                  |                  |                  |                        | (12,683,580)     |                      | -                    |                 | (2,500,000)  
|Bonds redeemed or sold                                                   |              |                  |                  |                  | 2,543,100              |                  | -                    |                      | 1,283,750      
|Property and equipment purchased                                         |              |                  |                  | (13,157)         |                        | (9,915)          |                      | (591,749)           
|Proceeds from sale of property and equipment                             |              |                  | -                |                  | 1,400                  |                  | -                   
|Foreclosed real estate additions                                         |              |                  |                  |                  | (4,127)                |                  | -                    |                      | -              
|                                                                         |              |                  |                  |                  |                        |                  |                      |                      |                 |               |             
|NET CASH USED BY INVESTING ACTIVITIES                                    |              |                  | (19,590,772)     |                  | (24,733,166)           |                  | (18,646,233)        
|                                                                         |              |                  |                  |                  |                        |                  |                      |                      |                 |               |             
|CASH FLOWS FROM FINANCING ACTIVITIES:                                    |              |                  |                  |                  |                        |                  |                     
|Investor certificates sold                                               |              |                  |                  |                  | 20,100,246             |                  | 36,748,967           |                      | 18,444,677     
|Investor certificates redeemed                                           |              |                  |                  |                  | (2,767,779)            |                  | (4,655,926)          |                      | (4,208,816)    
|Mortgage participation agreements sold                                   |              |                  |                  | 2,375,000        |                        | 1,078,250        |                      | 5,868,463           
|Mortgage participation agreements redeemed                               |              |                  | (7,012,500)      |                  | -                      |                  | -                   
|Debt issue costs paid (including $20,000, $100,000 and                   |              | (1,048,132)      |                  | (1,721,571)      |                        | (1,278,850)     
|$75,000 to a related party)                                              |              |                  |                  |                  |                        |                  |                      |                      |                
|Building mortgage proceeds                                               |              |                  |                  |                  | -                      |                  | 440,000              |                      | -              
|Building mortgage principal payments                                     |              |                  |                  | (24,060)         |                        | (17,825)         |                      | (9,032)             
|Capital lease principal payments                                         |              |                  |                  | (6,710)          |                        | (5,691)          |                      | (4,078)             
|Common stock issued, net of issuance costs                               |              |                  | 605,242          |                  | 2,082,530              |                  | 3,800               
|Common stock redeemed                                                    |              |                  |                  |                  | (152,093)              |                  | (258,518)            |                      | -              
|Dividends paid                                                           |              |                  |                  |                  |                        | (477,430)        |                      | (324,153)            |                 | (337,725)    
|Treasury stock sold (acquired)                                           |              |                  |                  |                  | -                      |                  | 73,248               |                      | (73,248)       
|                                                                         |              |                  |                  |                  |                        |                  |                      |                      |                 |               |             
|NET CASH PROVIDED BY FINANCING ACTIVITIES                                |              |                  | 11,591,784       |                  | 33,439,311             |                  | 18,405,191          
|                                                                         |              |                  |                  |                  |                        |                  |                      |                      |                 |               |             
|Net change in cash and cash equivalents                                  |              |                  |                  | (2,715,466)      |                        | 10,772,808       |                      | 2,889,352           
|Cash and cash equivalents at beginning of period                         |              |                  | 15,162,659       |                  | 4,389,851              |                  | 1,500,499           
|                                                                         |              |                  |                  |                  |                        |                  |                      |                      |                 |               |             
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                               |              | $   12,447,193   |                  | $ 15,162,659     |                        | $   4,389,851   
|                                                                         |              |                  |                  |                  |                        |                  |                      |                      |                 |               |             
|Supplemental Information-                                                |              |                  |                  |                  |                        |                  |                      |                      |                
|Interest paid during the period                                          |              |                  |                  |                  | $     6,595,549        |                  | $   5,333,638        |                      | $   4,643,972  
|Income taxes paid during the period                                      |              |                  |                  | $        105,000 |                        | $      182,500   |                      | $                  -
|Non-cash transactions-                                                   |              |                  |                  |                  |                        |                  |                      |                      |                
|Fixed asset lease financing                                              |              |                  |                  |                  | $                    - |                  | $                  - |                      | $        17,710
|Investor certificates matured and re-invested                            |              |                  | $        151,412 |                  | $   3,309,314          |                  | $   3,800,364       
|Loan interest financed and included in loan principal (including         |              | $        966,250 |                  | $   1,498,830    |                        | $      797,589  
|$63,187 in 2005 on related party loans)                                  |              |                  |                  |                  |                        |                  |                      |                     
|                                                                         |              |                  |                  |                  |                        |                  |                      |                      |                 |               |             
|SEE ACCOMPANYING NOTES                                                   |              |                  |                  |                  |                        |                  |                      |                      |                
|                                                                         |              |                  |                  |                  |                        |                  |                      |                      |                 |               |             



F-5





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| |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  | 



CORNERSTONE MINISTRIES INVESTMENTS, INC.

NOTES TO FINANCIAL STATEMENTS



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying financial statements include the accounts of Cornerstone Ministries Investments, Inc. (the Company).  Previously, the Companys financial statements included the accounts of two wholly-owned subsidiaries, Wellstone Communities, Inc. and Wellstone Financial Group, LLC.  In June 2004, the Company dissolved both subsidiaries.  See Note 17 for additional disclosures.



The Company originates and purchases mortgage loans, substantially all of which are made to non-profit organizations.  The Company offers specialized loan programs for churches, non-profit sponsors of senior housing facilities and either non-profit or for-profit sponsors of affordable/low income or age-restricted housing projects.  The Company also invests in other real estate projects for the purpose of selling at a profit, or leasing.  Substantially all of the Companys loans and investments are in projects located in the Southeastern United States.



Cash and cash equivalents include bank accounts and short-term certificates with original maturities of 90 days or less.



Real estate loans and senior housing loans classified as real estate joint venture investments include unpaid principal and accrued interest balances net of deferred loan fees and unearned discounts, less an allowance for loan losses.  Interest income is recognized monthly on the accrual basis in accordance with loan terms.  Interest income is recognized on the cash basis for loans with a recorded impairment loss (other than restructured loans) and the possibility of future loss considered remote.  If the possibility of future loss is probable, then interest income is not recognized and interest payments are credited to outstanding loan principal.  Loan origination fees are deferred and amortized as a yield adjustment over the lives of the related loans using the interest method.   Amortization of deferred loan fees is discontinued when a loan is placed on non-accrual status.  Interest income and loan fees recognized from real estate loans and senior housing loans classified as real estate joint venture investments are reported as Real estate loan and joint venture interest and fees in the accompanying Statements of Operations.



The Company receives monthly interest payments on its real estate loans and senior housing loans (classified as real estate joint venture investments) except when the terms of a loan allow a borrower to finance interest payments.  Interest is financed in the following circumstances:

·

Family housing loans may finance interest while the project is in the development and pre-sales phase, which normally lasts 12 to 36 months depending on the size of the project.  The Company receives the financed interest as the borrower sells homes in the development.

·

Church construction loans may finance interest while the church building is under construction.  This takes three to nine months, depending on the size of the building.  When the building is operational, the financed interest from the construction phase is included in the loans principal amount and the Company begins receiving monthly interest payments from the borrower.

·

Senior housing loans may finance interest during the construction, renovation and lease-up stages of the borrowers operations.  This takes two to six months if there is an existing building and 12 to 24 months if the financed property is raw land and a new building is being constructed.  When the facility is operational, the financed interest is included in the loans principal amount and the Company begins receiving monthly interest payments from the borrower.



Senior housing loans are classified as real estate joint venture investments if the Company participates in a propertys residual profits and all of the following exist at the inception of the loan:

·

The borrower has title but not a substantial equity investment in the property.

·

The Company does not have recourse to substantial tangible, saleable assets of the borrower other than the underlying collateral of the loan and there is no irrevocable letter of credit for a substantial amount of the loan.

·

There is no take-out commitment for the full amount of the loan from a creditworthy, independent third-party.

·

The facility does not have lease commitments which will provide sufficient cash flow to service normal principal and interest loan amortization.



F-6





---



The Company normally provides all or substantially all of the funding (directly or through loan guarantees) for the acquisition and development of these facilities, which are owned by non-profit entities.  The Company participates in residual profits through loan participation agreements, which enable the Company to receive income from the borrower when the property in which the Company provided financing is sold or refinanced with another lender.  The participation is between 25% and 33% of the borrowers gain.  Loan participation income is recognized when the borrowers sale or refinancing is completed and the Company receives cash from the borrower.



Loans in process are amounts advanced or expended on behalf of borrowers prior to completion of the loan documentation.  Interest is not accrued on these amounts until the loan documentation is complete and the borrower acknowledges the debt and associated interest.  Substantially all of these expenditures are converted to loans within one year or less.



Unamortized debt issue costs include the costs and commissions associated with issuing Investor Certificates and Mortgage Participation Agreements.  These costs are being amortized on a straight-line basis over the term of the associated debt, generally five years.



The allowance for loan losses for real estate loans and senior housing loans classified as real estate joint venture investments is maintained at a level which, in managements judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is determined in accordance with SFAS No. 5 (collective loan losses) and SFAS No. 114 (specific impaired loan losses).  A collective loan loss is recognized when the characteristics of a group of loans indicate that it is probable that a loss exists even though the loss cannot be identified with a specific loan.  The collective loan loss allowance amount is based on observable data that management believes is reflective of the underlying credit losses inherent in the portfolio.  The components of this evaluation include trends in the Companys historical loss experience, changes in credit risk and credit quality, credit concentrations, economic conditions, collateral values, and other risks inherent in the portfolio. Specific impaired loan loss allowances are made when it is determined that a loan is impaired and the loans carrying amount exceeds the present value of estimated future cash flows, or, if the loan is considered collateral dependant, the loans collateral value. A loan is considered impaired if it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Although management uses available information to recognize losses on loans, because of uncertainties associated with local economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that a material change could occur in the allowance for loan losses in the near term. However, the amount of the change that is reasonably possible cannot be estimated. The allowance is increased by a provision for loan loss and reduced by charge-offs, net of recoveries. Changes in the allowance relating to specific impaired loans are charged or credited to loan loss expense.  Loans are charged-off to the extent the loans carrying amount exceeds the net realizable value of the collateral, with the charge-off occurring when it is likely that the loan is uncollectible and foreclosure will occur.



Foreclosed real estate acquired through, or in lieu of, foreclosure are held for sale and initially recorded at the lower of the assets fair value or the loans carrying amount, which establishes a new cost basis for the asset.  Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the new cost basis or fair value less estimated costs to sell.



The Company uses FIN 46R, Consolidation of Variable Interest Entities to identify variable interest entities (VIE).  A VIE is an entity in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk to finance its activities without additional subordinated financial support from other parties.  A company that holds a variable interest in a VIE will need to consolidate the entity if the companys interest in the VIE is such that the company will absorb a majority of the VIEs expected losses and/or receive a majority of expected residual gains, if they occur.  Additional disclosures are also required by primary beneficiaries and other significant variable interest holders.



F-7





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Bond holdings consist of tax-free local government securities and church bonds.  The Company accounts for these investments using SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and classifies the bonds as available for sale securities.  The bonds are initially recorded at cost and if the bonds are purchased for a discount or premium from their par value, the discount or premium is amortized to income over the bonds remaining life as an adjustment to the bonds yield.  The bonds are also adjusted for unrealized holding gains and losses.  Temporary unrealized holding gains and losses are reported, net of deferred taxes, as a separate component of shareholders equity until realized.  If an unrealized holding loss is judged to be other than temporary, the cost basis of the security is written down to fair value and included in earnings and the amortization of the premium or discount is suspended.



Property and equipment are valued at cost when purchased.  Depreciation is provided on the straight-line method over the estimated useful lives of the assets, which are three to five years for furnishings and equipment, and 40 years for office buildings.



Real estate held for investment includes land which the Company owns and intends to hold as an investment for more than one year.  The assets are carried at the lesser of cost or fair value.  Impairment losses are recognized when the carrying amount of a long-lived asset is determined not to be recoverable and the carrying amount exceeds fair value.  Profit from real estate sales is recognized when the collectibility of the sales price is reasonably assured and the Company is not obligated to perform significant activities after the sale to earn the profit.  If either of these conditions exists, all or part of the profit is deferred and recognized using the installment sale method or cost recovery method as prescribed by SFAS No. 66, Accounting for Sales of Real Estate.



Interest on Investor Certificates is accrued from the date of issuance. Certificate holders choose, at the time of purchase, to have interest paid semi-annually or upon redemption.  Investors holding five year certificates in multiples of $10,000 may receive interest monthly.  Unpaid interest is compounded semi-annually.  Interest on Mortgage Participation Agreements is accrued from the date of issuance and is paid monthly.



Mortgage Participation Agreements are accounted for as secured borrowings with pledges of collateral because the agreements do not meet the definition of a sale of a financial asset under SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.



The Company is guarantor on certain loans secured by senior housing and affordable apartment facilities which are owned by non-profit entities.  A loan guarantee obligation is recognized based on the loan guarantees estimated fair value.  The Company normally charges the loan guarantees fair value to the respective borrower as compensation for the Companys risk and payment is expected within 30 days of the guarantees origination or modification date.  Unpaid amounts are classified as Loan guarantee receivables in the accompanying balance sheets.  If the loan guarantees fair value is not charged to the respective borrower, deferred loan fees related to the borrowers loan with the Company are reduced by the guarantees fair value.  The reduced deferred loan fees are amortized to earnings over the life of the loan.  Loan guarantee obligations are analyzed at the end of each fiscal year and if the fair value of the loan guarantee has declined, the carrying amount of the obligation is reduced and credited to earnings.



Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to the difference between the methods of accounting for depreciation, amortization, start-up costs, allowance for loan losses, and installment sales for financial and tax-reporting purposes.  The deferred taxes represent the estimated future tax consequences of those differences, which will be either taxable or deductible when the assets and liabilities are recovered or settled.  Accelerated depreciation methods and shorter asset lives are used for tax reporting, and straight-line depreciation is used for financial statement reporting.  The Company calculates deferred taxes under the provisions of SFAS No. 109 which provides for deferred tax assets and liabilities to be carried on the balance sheet at current tax rates.



F-8





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Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles.  The estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and reported revenues and expenses.  Actual amounts may vary from the estimates that are used.



Basic earnings per common share are calculated by dividing net income by the weighted average number of common shares outstanding during the year.  Diluted earnings per common share are calculated by adjusting weighted average outstanding shares, assuming conversion of all potentially dilutive shares of Series A Convertible Preferred Stock.

New Accounting Pronouncements:

In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment (SFAS 123R). This standard amends SFAS No. 123, Accounting for Stock-Based Compensation, and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS 123R establishes the accounting for grants of stock options and other transactions in which an entity exchanges its equity instruments for goods or services. SFAS 123R requires that companies use a fair value method to value stock options and recognize the related compensation expense in net earnings. The provisions of SFAS 123R are effective for the first reporting period beginning after December 15, 2005, although earlier application is encouraged. The Company does not have any share-based payment obligations and does not expect this pronouncement to have a material effect on our financial position or results of operations.



In May 2005, the FASB issued SFAS No. 154, Accounting for Changes and Error Corrections (SFAS 154), which replaces APB Opinion No. 20 Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle.  Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized  by including in net income of the period of the change the cumulative effect of changing to the new accounting principle.  SFAS 154 requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings for that period rather than being reported in the income statement.  SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.  The adoption of SFAS 154 is not expected to have a material impact on the Companys financial position or results of operations.



Recently, the FASB has been very active, issuing a number of accounting pronouncements with various effective dates. These pronouncements, which were not discussed above, do not have a material effect on our financial statements.



NOTE 2  PROPERTY AND EQUIPMENT

At December 31, property and equipment is composed of:



|                               |           |           |           |           |           |         
|------------------------------ | --------- | --------- | --------- | --------- | --------- | --------
|                               |           | 2005      |           | 2004      |           | 2003    
|                               |           |           |           |           |           |         
|Office Condominiums            |           | $797,554  |           | $795,034  |           | $792,659
|Office Computers, Furnishings, |           |           |           |           |           |         
|Software & Equipment           |           | 129,625   |           | 111,215   |           | 120,477 
|Vehicles                       |           | 30,351    |           | 30,351    |           | 37,730  
|Capital lease  phone system   | 17,710    |           | 17,710    |           | 17,710   
|Less: Accumulated Depreciation |           | (213,105) |           | (142,089) |           | (95,475)
|Property and equipment, net    | $762,135  |           | $812,221  |           | $873,101 
|                               |           |           |           |           |           |         
|Depreciation expense           | $  63,242 |           | $  66,861 |           | $  56,695



F-9





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NOTE 3  COMMITMENTS AND RELATED PARTY TRANSACTIONS

Leases:

During 2003, the Company entered into a capital lease for a new telephone system at the Companys headquarters.  The lease was recorded at the assets fair value and is being amortized over three years using the straight-line method.  Interest expense is calculated based on the implied interest rate in the lease.  The lease payment, including principal, interest and sales tax, is $672 per month.  Amortization expense was $5,903, $5,903 and $4,919 and interest expense was $821, $1,839 and $2,198 for the years ended December 31, 2005, 2004 and 2003, respectively.  Future yearly minimum lease payments as of December 31, 2005:



|                         |        |       
|------------------------ | ------ | ------
|Year                     |        | Amount
|2006                     |        | $1,256
|Less interest portion    |        | (25)  
|Capital lease obligation | $1,231





Loan Commitments:

The Company makes loan commitments in connection with certain real estate loans and joint venture investments that include funding for project development, building construction, renovations, lease-up operations, financed interest and other amounts that the borrower may draw upon in accordance with the loan agreement.  For existing loans, the Company has $39,858,000 in approved, unused loan commitments for real estate loans and $1,613,000 for real estate joint venture investments as of December 31, 2005.  The Company also has two new approved real estate loan commitments totaling $5,150,000 as of December 31, 2005 which the Company expects to fund in the first quarter of 2006.



Related Party Transactions:

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

Effective July 1, 2003, the Company entered into a Management and Advisory Services Agreement with Cornerstone Capital Advisors, Inc. (CCA) to provide loan management, administration, and accounting; investor relations; marketing; computer and management information systems administration; record maintenance; executive management; and bookkeeping and accounting after June 30, 2003.  The agreement is for renewable one year terms and it may be terminated by either party upon 60 days written notice.  The Company does not have any employees of its own and CCA is subject to the supervision of the Companys board of directors.  Two of the Companys directors serve on the CCA board of directors.



From July 1, 2003 until July 31, 2004, the agreement obligated the Company to reimburse actual expenses incurred by CCA.  Also, CCA was eligible to earn incentive compensation of up to 10% of the actual expenses billed to the Company for the prior 12 months.  The base for the incentive compensation included being current on all bond interest and other obligations, and that the common stock shareholders have received dividends equal to an annual rate of at least 10% on the price paid in a public offering for all the time the shares were outstanding.  Factors above the base and the exact amount of incentive compensation were determined by the board of directors judgment on the extent to which CCAs services contributed to the results.



Effective August 1, 2004, the original agreement was modified so that the Company will pay CCA as follows:

·

Management Fee  equal to 10% of the Companys revenues from all sources other than loan fees, loan participations and revenue received from CCA plus 30% of loan participation revenue.  This fee is payable monthly.

·

Loan Origination Fee  equal to 30% of the total loan fee charged by the Company to its borrowers.  The fee is generally paid from loan proceeds and reduces deferred loan fees.



F-10





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For the years ended December 31, the Company paid CCA as follows:



|                            |     |            |     |            |        |         
|--------------------------- | --- | ---------- | --- | ---------- | ------ | --------
|                            |     | 2005       |     | 2004       |        | 2003    
|                            |     |            |     |            |        |         
|Management Fees             |     | $1,445,264 |     | $1,290,880 |        | $318,619
|Loan Origination Fees       |     | 1,152,164  |     | 574,725    |        | -0-     
|Incentive Compensation Fees | -0- |            | -0- |            | 23,440
|                            |     | $2,596,428 |     | $1,865,605 |        | $342,059



As of December 31, 2005, 2004 and 2003, the Company owed CCA $73,365, $7,464, and $93, respectively under the terms of this agreement.



Cornerstone Capital Advisors, Inc.  Office Lease

Effective August 1, 2004, the Company and CCA entered into a lease agreement whereby CCA is leasing the Companys corporate office building and office/computer equipment in Cumming, GA.  The lease payment is $5,000 per month.  The initial lease term ended on August 31, 2005, after which time the lease converted to a month-to-month lease.  The Companys cost basis in the office building and office/computer equipment is approximately $616,000.  For the years ended December 31, 2005 and 2004, the Company received $60,000 and $25,000, respectively from CCA under the lease agreement.





Cornerstone Direct Public Offerings, LLC

The Company has contracted with Cornerstone Direct Public Offerings, LLC (CDPO) to provide legal and other services for the filing of SB-2 Registration Statements with the Securities and Exchange Commission.  Two of the Companys directors serve on the board of directors of CDPOs majority owner, Foundation for Christian Communities Development, Inc.  The base service fee is $75,000 per filing payable in installments during the filing process.  For future filings the Company intends to use CDPO only for the state filing portion of its registrations, which will reduce CDPOs service fee.  The fee schedule has not been finalized as of December 31, 2005.  During 2003, the Company and Wellstone Communities, Inc. (a formerly 100%-owned subsidiary) each entered into a service agreement with CDPO for the filing of SB-2 Registration Statements.  The $150,000 fee for these two agreements was paid in 2003.  In January, 2004, the Company amended its service agreement and paid an additional $25,000 to CDPO for cost over-runs related to the length of time needed for the Companys registration statement to become effective.



In 2004, the Company entered into a service agreement with CDPO for the filing of a new SB-2 Registration Statement.  $75,000 was paid to CDPO in 2004 under this service agreement.  In January 2005, the Company amended the agreement and paid $20,000 to CDPO due to an increase in the amount of time needed to register the securities with various state securities regulators.  No amounts were owed to CDPO as of December 31, 2005, 2004 and 2003.  See Note 12 for additional disclosures on the Companys registration statements and Note 17 for additional disclosures on Wellstone Communities, Inc.s registration statement.



Loans made to subsidiaries of Cornerstone Group Holdings, Inc.

During 2005, two loans were made to wholly owned subsidiaries of Cornerstone Group Holdings, Inc (CGH).  At the time that these loans were originated, two of the Companys directors served as directors of CGH.  Subsequent to the time of the loan originations, both of the Companys directors resigned from the board of CGH.  The two loans were made at similar terms to that of the Companys third-party loans.  As of December 31, 2005, the principal outstanding on these two loans was $1,384,404.



F-11





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Wellstone Retirement Communities I, LLC

In December 2005, the Companys two largest borrowers sold eight senior housing properties to Wellstone Retirement Communities I, LLC (WRC) which is managed by Cornerstone Capital Advisors, Inc. (CCA), which also serves as the Companys manager.  Also, two of the Companys directors are directors for CCA.  As a result of this transaction, the Company received $60,677,668 in loan principal and $2,512,500 in bond holdings principal.  The Company immediately supplied subordinated financing of $37,901,607 at 9.5% interest and a two year maturity to WRC to purchase the property.  This loan is included in Real estate loans, net on the accompanying December 31, 2005 Balance Sheet.  Approximately $10,151,000 in equity has also been contributed to WRC by independent accredited investors with the remaining $64,077,000 needed to purchase the properties supplied by third party financing as a first mortgage on the properties purchased.



On January 31, 2006, an additional senior housing property was sold by Sage Living Centers, Inc. to WRC.   The Company received $11,974,400 in bond holdings principal and immediately supplied an additional $1,548,796 in subordinated financing to WRC.  WRC also received an additional $10,922,801 in third party financing at this time.



NOTE 4 - REAL ESTATE LOANS

At December 31, the Company had Real Estate Loans outstanding as follows:

|                                 |  |               |  |             |  |            
|-------------------------------- |  | ------------- |  | ----------- |  | -----------
|                                 |  | 2005          |  | 2004        |  | 2003       
|                                 |  |               |  |             |  |            
|Family housing development loans |  | $  60,255,260 |  | $36,007,454 |  | $25,013,068
|Church mortgage loans            |  | 8,971,537     |  | 9,285,858   |  | 13,526,028 
|Senior housing mortgage loans    |  | 38,901,607    |  | 9,286,352   |  | 9,794,001  
|Total principal                  |  | 108,128,404   |  | 54,579,664  |  | 48,333,097 
|Accrued Interest                 |  | 856,363       |  | 479,961     |  | 255,994    
|Unearned Loan Fees               |  | (2,014,488)   |  | (149,040)   |  | (336,814)  
|Allowance for loan losses        |  | (732,000)     |  | (632,000)   |  | (375,000)  
|Total Real Estate Loans          |  | $106,238,279  |  | $54,278,585 |  | $47,877,277
|                                 |  |               |  |             |  |            



These loans mature as follow: 2006 - $33,015,484; 2007 - $74,523,104; 2008 - $0; 2009 - $589,816; 2010 and beyond - $0.  Loan maturity may be accelerated in accordance with loan terms, generally upon certain events of default such as non-payment of scheduled payments or bankruptcy.



In 2005, the Company originated a loan with a for-profit entity that did not have enough equity or subordinated debt to absorb all of its estimated expected losses.  The Company is not considered the primary beneficiary since the entitys equity and subordinated debt is sufficient to absorb the majority of its estimated expected losses.  The loans carrying amount on December 31, 2005 was $178,367.



Based on the terms of the loans, the Company allows borrowers with loans related to certain family housing and church properties to finance interest payments while the properties are in the development and construction phase of operations.  For the years ended December 31, the net interest payments financed were:



|                                           |  |             |  |            |  |          
|------------------------------------------ |  | ----------- |  | ---------- |  | ---------
|                                           |  | 2005        |  | 2004       |  | 2003     
|Current year interest financed             |  | $1,398,731  |  | $1,158,109 |  | $805,525 
|Previous years financed interest received |  | (798,079)   |  | (119,874)  |  | (457,021)
|Net financed interest                      |  | $   600,652 |  | $1,038,235 |  | $348,504 
|                                           |  |             |  |            |  |          



On December 31, 2005, the Company had significant credit risk concentrations in the following states:

Georgia - $ 27,516,418

Florida  - $ 15,213,215

Texas   -  $ 42,396,129

South Carolina - $15,602,977



F-12





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Impaired loan disclosures for the years ended December 31:



|                                           |  |             |  |           |  |          
|------------------------------------------ |  | ----------- |  | --------- |  | ---------
|                                           |  | 2005        |  | 2004      |  | 2003     
|Number of impaired loans                   |  | 4           |  | 1         |  | 1        
|Carrying amount at year end                |  | $3,854,226  |  | $263,291  |  | $242,621 
|Weighted average investment  year-to-date |  | $3,746,612  |  | $252,956  |  | $237,130 
|Impaired loan interest income              |  | $   357,959 |  | $  24,312 |  | $  19,166



No allowance for specific impaired loan loss has been recorded because the carrying amount of the individual impaired loans as of December 31, 2005, 2004 and 2003 was less than the present value of their expected future cash flows.



In December 2005, the Company foreclosed on a church loan and repossessed the land and building that collateralized the loan.  The foreclosed asset was recorded at the loans carrying amount of $290,679 because the estimated fair value of the foreclosed asset is greater than the loans carrying amount.  Therefore, no loan loss expense was recorded as a result of this transaction.  The foreclosed asset is being held for sale by the Company.



NOTE 5  REAL ESTATE JOINT VENTURE INVESTMENTS

As of December 31, certain of the Companys mortgage loans on senior housing facilities are classified as real estate joint venture investments, as follows:



|                                           |  |                    |  |             |  |            
|------------------------------------------ |  | ------------------ |  | ----------- |  | -----------
|Location                                   |  | 2005               |  | 2004        |  | 2003       
|McKinney, TX                               |  | $              -0- |  | $ 4,050,291 |  | $ 3,109,337
|St. Petersburg, FL                         |  | 5,085,334          |  | 4,582,344   |  | 3,684,620  
|Lewisville, TX                             |  | 545,000            |  | 10,617,954  |  | 10,286,004 
|Garland, TX                                |  | -0-                |  | 6,421,006   |  | 5,905,556  
|Chattanooga, TN                            |  | 5,715,991          |  | 5,438,254   |  | 3,637,623  
|San Antonio, TX                            |  | 2,197,781          |  | 11,931,167  |  | 9,109,573  
|                                           |  |                    |  |             |  |            
|Winter Haven, FL                           |  | -0-                |  | 5,942,402   |  | -0-        
|Bryan, TX                                  |  | -0-                |  | 2,616,317   |  | -0-        
|Edmond, OK                                 |  | 881,849            |  | 5,346,201   |  | -0-        
|Total principal outstanding                |  | 14,425,955         |  | 56,945,936  |  | 35,732,713 
|Accrued interest                           |  | 446,971            |  | 329,195     |  | 301,565    
|Unearned loan fees                         |  | (7,066)            |  | (867,117 )  |  | (1,188,055)
|Allowance for loan losses                  |  | -0-                |  | -0-         |  | -0-        
|Real estate joint venture investments, net |  | $14,865,860        |  | $56,408,014 |  | $34,846,223



All of the loans mature in 2006.  Loan maturity may be accelerated in accordance with loan terms, generally upon certain events of default such as non-payment of scheduled payments or bankruptcy.



The Company participates in the residual profits of the real estate joint venture investments through loan participation agreements, which enable the Company to receive income from a borrower when a property in which the Company provided financing is sold or refinanced with another lender.  The participation percentage for each property varies between 25% and 33% of the borrowers gain.



In 2005, the Company received $257,000 in loan participation income and $567,970 in loan break-up fees from two borrowers as a result of the sale of senior housing facilities in which the Company held real estate joint venture investments.



All loans accrue interest at 10% per year and except as noted below, interest-only payments are received monthly.  The original loan terms are for one year with two, one year extensions at the Companys option.  The Company charges a 10% loan origination fee which is financed and included in the loans principal balance.



F-13





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In accordance with loan terms, the Company allows certain borrowers to finance interest payments while their facilities are in the construction or renovation phase of operations.  For the years ended December 31, the net interest payments financed were as follows:

|                                           |  |           |  |          |  |         
|------------------------------------------ |  | --------- |  | -------- |  | --------
|                                           |  | 2005      |  | 2004     |  | 2003    
|Current year interest financed             |  | $500,584  |  | $520,335 |  | $449,085
|Previous years financed interest received |  | (134,986) |  | (59,740) |  | -0-     
|Net financed interest                      |  | $365,598  |  | $460,595 |  | $449,085



The Company analyzes the underlying operations and collateral of each facility in which there is an outstanding loan by requiring independent appraisals every 12 to 24 months, reviewing loan balances and comparing them to the established loan budgets, and by analyzing income and cash flow statements that are submitted by the borrowers.  If it is determined that it is probable that the Company will be unable to collect all amounts due according to the contractual terms of a loan, the loan is considered impaired and a loan loss will be recognized to the extent the collaterals fair value is less than the current loan carrying amount.



One real estate joint venture investment loan was considered impaired as of December 31 2005. The impaired loans carrying amount as of December 31, 2005 and its average carrying amount for 2005 was $6,084,377 and $5,784,147, respectively.   A total of $565,438 in interest was earned in 2005 from this loan.  The loans collateral is appraised at $7,400,000; therefore, no loan loss allowance has been established.  No loans were considered impaired as of December 31, 2004 and 2003.



NOTE 6  ALLOWANCE FOR LOAN LOSSES

For the years ended December 31, 2005, 2004 and 2003, a summary of changes in the allowance for loan losses by loan type is as follows:



|                     |  |            |  |              |  |                |  |               |  |             
|-------------------- |  | ---------- |  | ------------ |  | -------------- |  | ------------- |  | ------------
|                     |  |            |  |              |  |                |  | Real Estate   |  |             
|                     |  |            |  | Family       |  | Senior         |  | Joint Venture |  |             
|                     |  | Church     |  | Housing      |  | Housing        |  | Investments   |  | Total       
|                     |  |            |  |              |  |                |  |               |  |             
|Balance  12/31/02   |  | $      -0- |  | $        -0- |  | $          -0- |  | $         -0- |  | $        -0-
|Loan loss expense    |  | -0-        |  | 375,000      |  | -0-            |  | -0-           |  | 375,000     
|Charge-offs          |  | -0-        |  | -0-          |  | -0-            |  | -0-           |  | -0-         
|Recoveries           |  | -0-        |  | -0-          |  | -0-            |  | -0-           |  | -0-         
|Balance  12/31/03   |  | $      -0- |  | $375,000     |  | $          -0- |  | $         -0- |  | $375,000    
|Loan loss expense    |  | -0-        |  | 257,000      |  | -0-            |  | -0-           |  | 257,000     
|Charge-offs          |  | -0-        |  | -0-          |  | -0-            |  | -0-           |  | -0-         
|Recoveries           |  | -0-        |  | -0-          |  | -0-            |  | -0-           |  | -0-         
|Balance  12/31/04   |  | $      -0- |  | $632,000     |  | $          -0- |  | $         -0- |  | $632,000    
|Loan loss expense    |  | -0-        |  | 100,000      |  | -0-            |  | -0-           |  | 100,000     
|Charge-offs          |  | -0-        |  | -0-          |  | -0-            |  | -0-           |  | -0-         
|Recoveries           |  | -0-        |  | -0-          |  | -0-            |  | -0-           |  | -0-         
|Balance  12/31/2005 |  | $      -0- |  | $732,000     |  | $         -0-  |  | $         -0- |  | $732,000    



Components of allowance for loan losses at December 31:



|                                |  |              |  |              |  |             
|------------------------------- |  | ------------ |  | ------------ |  | ------------
|                                |  | 2005         |  | 2004         |  | 2003        
|Collective loan losses-         |  |              |  |              |  |             
|Historical experience           |  | $        -0- |  | $        -0- |  | $        -0-
|Current credit risk assessment  |  | 732,000      |  | 632,000      |  | 375,000     
|Total collective loan losses    |  | 732,000      |  | 632,000      |  | 375,000     
|Specific impaired loan losses   |  | -0-          |  | -0-          |  | -0-         
|Total allowance for loan losses |  | $732,000     |  | $632,000     |  | $375,000    



F-14





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Prior to 2003, the Company had no allowance for loan loss activity.  In the fourth quarter of 2003, as part of the Companys regular loan grading and risk assessment process, it was determined that the family housing loan portfolios credit risk had increased over historical levels.  This increase was caused by slower than expected new home sales.  The slow down in new home sales was due to slower-than-expected growth in the U.S. economy.  This increase in credit risk resulted in a $375,000 charge to loan loss expense in 2003.  For the year ended December 31, 2004, the Company charged an additional $257,000 to loan loss expense.  This charge is due to an increase in the family housing loan portfolios outstanding loan principal, slower than expected new home sales volumes at two projects, and an increase in the time that it has taken three projects to finish the development phase and start selling homes.  For the year ended December 31, 2005, $100,000 was charged to loan loss expense.  This charge was due to an increase in the principal outstanding on Family Housing loans.



The Company has never incurred a loan loss charge-off; therefore, there is no collective loan loss allowance related to the Companys historical experience.



NOTE 7 - GOODWILL

The Company adopted SFAS 142 Goodwill and Other Intangible Assets effective January 1, 2002.  Goodwill associated with the Companys acquisition of Presbyterian Investors Fund, Inc. is carried at $450,997 and is not subject to further amortization. Goodwill is tested for impairment at the end of each year using the present value of expected future cash flows to determine its fair value.  At December 31, 2005, 2004 and 2003, Goodwills fair value exceeded its carrying value; therefore, no provision for impairment loss has been recorded.  No goodwill was acquired or sold in any of the years presented in these financial statements.



NOTE 8 - UNAMORTIZED DEBT ISSUE COSTS

Unamortized debt issue costs consist of legal, accounting, and filing costs incurred to register the Companys debt securities and commissions paid or accrued on the sale of debt securities.  These costs are amortized on a straight-line basis over the period the associated securities are outstanding, generally five years.  At December 31, 2005, unamortized debt issue costs consist of:



|                                                |  |              
|----------------------------------------------- |  | -------------
|Costs incurred to register debt securities      |  | $     843,075
|Commissions paid on the sale of debt securities |  | 4,752,125    
|Less: Accumulated Amortization                  |  | (2,846,345)  
|                                                |  | $  2,748,855 
|                                                |  |              

Amortization expense was $970,617, $822,862, and $510,924 for the years ended December 31, 2005, 2004 and 2003, respectively, and is included in marketing expenses in the accompanying Statements of Operations.

Estimated amortization expense for the next five years:



|                |  |                 
|--------------- |  | ----------------
|2006 - $994,535 |  | 2009 - $344,275 
|2007 - $807,366 |  | 2010 - $  81,756
|2008 - $520,923 |  |                 



NOTE 9 - BOND HOLDINGS



|                                              |  |                   |  |             |  |            
|--------------------------------------------- |  | ----------------- |  | ----------- |  | -----------
|Bond holdings at year-end consist of-         |  | 2005              |  | 2004        |  | 2003       
|St. Lucie Co., FL Subordinated Revenue Bonds: |  |                   |  |             |  |            
|Maturity   7/1/2036                           |  | $             -0- |  | $2,325,000  |  | $2,325,000 
|Maturity 10/1/2036                            |  | -0-               |  | 2,700,000   |  | 2,700,000  
|Undivided 50% interest sold to investor       |  | -0-               |  | (2,512,500) |  | (2,512,500)
|Net investment in St.Lucie Co., FL bonds      |  | -0-               |  | 2,512,500   |  | 2,512,500  
|Largo, FL Subordinated Revenue bonds:         |  |                   |  |             |  |            
|Matures 10/1/2033                             |  | 13,170,000        |  | 2,500,000   |  | 2,500,000  
|Undivided interest sold to investors          |  | (1,195,600)       |  | (1,225,000) |  | (1,225,000)
|Net investment in Largo, FL bonds             |  | 11,974,400        |  | 1,275,000   |  | 1,275,000  
|Local Church Bonds, maturing 2013             |  | 1,955,821         |  | -0-         |  | -0-        
|Cost and fair value of bond holdings          |  | 13,930,221        |  | 3,787,500   |  | 3,787,500  
|Accrued interest receivable                   |  | 385,550           |  | 226,233     |  | 213,833    
|                                              |  | $14,315,771       |  | $4,013,733  |  | $4,001,333 



F-15





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The bonds are not traded on an exchange; however, management estimates, based on discounted expected cash flows, that the fair value of the individual securities approximates their original cost.  Accordingly, no unrealized holding gains or losses have been recorded in 2005, 2004, or 2003.



The local church bonds are recorded net of $58,179 in unamortized bond discounts.  The face amount of the bonds is $2,014,000.  During 2005, $2,241 in bond discounts was credited to interest income.



Proceeds from the sale and maturity of bonds were $2,543,100, $0, and $1,283,750 for the years ending December 31, 2005, 2004 and 2003, respectively. No realized gains or losses were recognized in any year.  The Company uses the specific identification method to determine realized gains and losses.



Tax-free interest income was $347,583, $329,622, and $274,095 for the years ended December 31, 2005, 2004 and 2003, respectively.



NOTE 10 - INCOME TAXES

The net deferred tax asset (liability) in the accompanying balance sheets includes the following components as of December 31:



|                                   |          |           |           |           |            |          
|---------------------------------- | -------- | --------- | --------- | --------- | ---------- | ---------
|                                   |          | 2005      |           | 2004      |            | 2003     
|Deferred tax assets                |          | $345,658  |           | $296,110  |            | $196,917 
|Deferred tax liabilities           |          | (201,821) |           | (366,467) |            | (368,360)
|Net deferred tax asset (liability) | $143,837 |           | ($70,357) |           | ($171,443)
|                                   |          |           |           |           |           

The deferred tax liabilities result from the use of accelerated depreciation methods for property and equipment and from using the installment method for tax accounting.  The deferred tax assets result from tax versus financial reporting differences in accounting for allowance for loan losses and from differences in the amortization of debt issue and start-up costs.  The Company estimates that future taxable income will be sufficient to realize the deferred tax assets; therefore, no valuation allowance was provided for as of December 31, 2005, 2004, and 2003.



During 2003, the Companys request with the Department of the Treasury to change its tax accounting method for loan fees to approximate its book treatment under SFAS Nos. 65 and 91 was approved.  As a result of this change, the Company was able to amend and request refunds from its 2000 and 2001 federal and state tax returns totaling $286,953.  $244,336 of the requested refunds was received in 2003 and the remaining $42,617 was received in 2004.  In addition, the amended tax returns created a $481,154 federal net operating loss carryforward and an $82,025 state net operating loss carryforward that the Company used to reduce its 2003 income tax liability.

Components of the Companys income tax provision (benefit) for the years ended December 31:



|                    |  |           |  |          |  |           
|------------------- |  | --------- |  | -------- |  | ----------
|                    |  | 2005      |  | 2004     |  | 2003      
|Current:    Federal |  | $328,478  |  | $203,501 |  | ($332,464)
|State               |  | 49,078    |  | 34,558   |  | (25,946)  
|Deferred:   Federal |  | (192,989) |  | (91,183) |  | 404,711   
|State               |  | (21,205)  |  | (9,903)  |  | 40,965    
|                    |  | $163,362  |  | $136,973 |  | $87,266   



Reconciliation of the Companys income tax provision (benefit) rate to statutory federal rates for the years ended December 31:



|                                        |  |         |  |         |  |        
|--------------------------------------- |  | ------- |  | ------- |  | -------
|                                        |  | 2005    |  | 2004    |  | 2003   
|Statutory federal rate                  |  | 35.0%   |  | 35.0%   |  | 35.0%  
|Effect of graduated federal rates       |  | (1.0%)  |  | (1.0%)  |  | (3.1%) 
|State taxes, net of federal benefit     |  | 3.7%    |  | 3.7%    |  | 3.7%   
|Effect of tax-free bond interest income |  | (15.9%) |  | (17.3%) |  | (16.5%)
|Other, net                              |  | .3%     |  | .7%     |  | (3.7%) 
|Effective tax provision rate            |  | 21.1%   |  | 21.1%   |  | 15.4%  



Current income taxes payable were $367,038, $93,232 and $36,673 as of December 31, 2005, 2004 and 2003, respectively, and are included in accounts and other payables in the accompanying balance sheets.



F-16





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NOTE 11 - CASH CONCENTRATION RISK & RESTRICTED CASH

A cash concentration risk arises when the Company has more cash in a financial institution than is covered by federal deposit insurance. At December 31, 2005, the Company had cash in excess of insured limits totaling $12,228,304.  The Companys policy is to place its cash investments with high quality financial institutions and has never experienced any loss on holdings in excess of insured limits.



NOTE 12 - INVESTOR CERTIFICATES

The Company has three types of certificates outstanding:



Access certificates have no stated maturity and are due on demand.  The minimum investment amount is $100.  The interest rate is determined by the Board of Directors each quarter.  The directors may change the rate between quarters if market conditions warrant such a change.  The current interest rate is 4%.

Graduated certificates can be redeemed yearly and have a five year maximum maturity.  The minimum investment amount is $500.  The interest rate increases based on the length of time that the certificate is outstanding.  For certificates sold prior to 2004 the rate starts at 7% and increases .5% for each year the certificate is outstanding with a 9% maximum rate.  Certificates (Series E & F) sold in 2004 and thereafter have an initial interest rate of 6.25% and increase .5% for each year the certificate is outstanding with an 8.25% maximum rate.

Five year certificates have a five year maturity and a $500 minimum investment.  The interest rate is 9% for certificates sold prior to 2004 and 8.25% for certificates (Series E & F) sold in 2004 and thereafter.



The certificates are not collateralized and no sinking fund is required to fund redemptions at maturity.  All of the certificates have been registered with the Securities and Exchange Commission under the Securities Act of 1933.

Five year schedule of principal maturities for certificates outstanding at December 31:



|                                                              |  |                                                                              |  |                                                                               |  |                                                                            
|------------------------------------------------------------- |  | ---------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------
|Years to Maturity
On demand & 1 year
2
3
4
5+
Total Principal |  | 2005
$   23,058,930
34,507,886
18,019,184
35,638,069
18,083,041
$129,307,110 |  | 2004
$   11,948,840
10,803,667
34,885,514
18,092,276
36,244,346
$ 111,974,643 |  | 2003
$    9,672,380
4,862,922
10,803,667
35,717,731
18,172,501
$ 79,229,201



At December 31, 2005, 2004 and 2003, accrued interest payable was $13,755,788, $8,628,514, and $5,333,444, respectively.  Interest rates for certificates outstanding at December 31, 2005 are:



|                   |  |                     |  |                    
|------------------ |  | ------------------- |  | -------------------
|4.00% - $1,406,641 |  | 8.00% - $ 1,836,787 |  | 9.00% - $63,638,664
|6.25% - $1,840,266 |  | 8.25% - $53,901,487 |  |                    
|6.75% - $2,919,161 |  | 8.50% - $3,764,104  |  |                    



On April 29, 2003, the Company filed a Form SB-2 Registration Statement under the Securities Act of 1933 with the Securities and Exchange Commission to sell up to $40,000,000 of its Series E Investor Certificates along with $11,375,000 of its Common Stock.  The Registration Statement was approved by the Securities and Exchange Commission on March 26, 2004.  The Company issued $39,931,209 in new Investor Certificates and $2,129,341 in Common Stock (327,591 shares at $6.50 per share) from this registration.



On August 27, 2004, the Company filed a Form SB-2 Registration Statement under the Securities Act of 1933 with the Securities and Exchange Commission to sell up to $20,000,000 of its Series F Investor Certificates along with $9,750,000 of its Common Stock.  The Securities and Exchange Commission notified the Company that it would not complete a full review of the registration statement.  The registration statement became effective on November 1, 2004 and the Company started to sell securities registered in this statement in January 2005.  For the year ended December 31, 2005, the Company sold $19,993,924 in certificates and $623,756 in Common Stock (95,962 shares at $6.50 per share).



The Company filed a new registration statement with the Securities and Exchange Commission during February 2006 with $60,000,000 in Series G Investor Certificates and $32,500,000 in Common Stock available for issuance.  The terms of the Series G Investor Certificates will be similar to the Series E and F certificates.



F-17





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NOTE 13  MORTGAGE PARTICIPATION AGREEMENTS

In 2003, the Company began selling Mortgage Participation (MP) Agreements.  The MP Agreements have not been registered and therefore, are only available to accredited investors.  The agreements are collateralized by specific loans owned by the Company and entitle the investor to a proportionate share of the interest earned on the collateral.  Interest is paid monthly to the MP investor after the Company receives interest payments on related the collateralized loans.  The agreements have no stated maturity date.  Principal payments are made when the Company receives principal payments on the collateralized loans.  Losses that the Company may incur on the collateralized loans are shared pro-rata with the MP Agreement holders.  The Company has the right but not the obligation to redeem the MP Agreements at any time.  The MP Agreement investors do not have the right to sell or repledge their interest in the underlying collateral.  Interest expense related to MP Agreements was $494,709, $627,331 and $325,992 for the years ended December 31, 2005, 2004 and 2003, respectively.  MP Agreement principal and interest outstanding and related collateral as of December 31, 2005:



|                                                  |  |             |  |                 
|------------------------------------------------- |  | ----------- |  | ----------------
|                                                  |  | MP Amount   |  | Total Collateral
|                                                  |  | Outstanding |  | Carrying Amount 
|Bluffton, SC family housing loan; matures 4/15/07 |  |             | 
|with no available extensions                      |  | $2,525,000  |  | $7,870,077      
|Accrued interest payable                          |  | 20,701      |  |                 
|                                                  |  | $2,545,701  |  |                 



The loan which collateralizes the MP Agreements is classified as a real estate loan in the accompanying balance sheets.  The total carrying amount is equal to the loans outstanding principal plus accrued interest.



In 2005, the Company redeemed $7,012,500 in MP Agreement principal collateralized by the Winter Haven, FL and Garland, TX senior housing loans because the loans on these facilities were paid off.  In addition, $300,000 in MP Agreement principal on the Winter Haven and Garland facilities was transferred to Bluffton, SC MP Agreement principal at the request of the investors.  The remaining $2,225,000 in Bluffton, SC MP Agreement principal was received from new accredited investors during the fourth quarter of 2005.



NOTE 14 - GUARANTEES

The Company is guarantor on three loans secured by senior housing and low income housing facilities owned by non-profit entities.  Certain real estate joint venture investments and real estate acquisition and development loans in which the borrower chooses to secure outside financing may require the Company to guarantee the loan as a condition of the extension of the loan by the financial institution.  The loan guarantees are solely limited to amounts drawn under credit facilities and cover outstanding principal and accrued interest and terminates upon maturity and principal repayment or at project stabilization (as defined by the agreement).  Only upon an uncured payment default and upon demand by the financial institution would the Company be required to perform under its guarantee obligations.  The Companys recourse would be limited to repossession of the underlying collateral and subsequent resale of the facilities.  As of December 31, 2005, all loans which had a guarantee were current based on their loan terms.  Loan guarantees as of December 31, 2005:



|                   |  |             |  |          |  |             |  |             |  |           
|------------------ |  | ----------- |  | -------- |  | ----------- |  | ----------- |  | ----------
|                   |  | Renewal/    |  |          |  |             |  | Current     |  | Loan      
|                   |  | Origination |  | Maturity |  | Maximum     |  | Principal   |  | Guarantee 
|Location           |  | Date        |  | Date     |  | Guarantee   |  | Outstanding |  | Obligation
|Charleston, SC     |  | 12/30/05    |  | 4/1/08   |  | 11,500,000  |  | 11,500,000  |  | 92,000    
|Beaufort, SC       |  | 12/30/05    |  | 4/1/08   |  | 8,850,000   |  | 8,850,000   |  | 71,000    
|St. Petersburg, FL |  | 12/18/04    |  | 4/15/06  |  | 7,347,300   |  | 7,106,540   |  | 71,000    
|                   |  |             |  |          |  | $27,697,300 |  | $27,456,540 |  | $234,000  



The guarantees related to the Charleston, SC and Beaufort, SC low income housing facilities also include a construction cost guarantee and various operational performance guarantees as defined by the agreements.  The non-profit owner of these facilities is a co-guarantor with the Company.  Also, the developer of these projects has agreed to defer the collection of approximately $2,950,000 in developer fees and costs from the projects construction budgets until after the Companys guarantee obligations have been released.  Any operating or construction cost shortfalls will reduce the deferred developer fees paid by the borrower and will be used to reimburse the Company and the non-profit owner for any amounts paid under the guarantee agreements.



F-18





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NOTE 15 - BUILDING MORTGAGE



|                                                                                                       |  |              |  |             |  |                
|------------------------------------------------------------------------------------------------------ |  | ------------ |  | ----------- |  | ---------------
|                                                                                                       |  | 2005         |  | 2004        |  | 2003           
|Fidelity Bank  collateralized by rental office building                                               |  | $   161,015  |  | $  170,655  |  | $      180,194 
|Interest rate varies with a 7.5% maximum, currently 7.5%; monthly                                      |  |              |  |             |  |                
|principal & interest payment of $1,723; matures March 1, 2006,                                         |  |              |  |             |  |                
|at which time a balloon payment of $159,376 is due.                                                    |  |              |  |             |  |                
|Fidelity Bank  collateralized by corporate office building                                            |  | 417,294      |  | 431,714     |  | -0-            
|Interest rate equal to prime + 1.5%, currently 8.75%; monthly                                        |  |              |  |             |  |                
|principal & interest payment of $4,322; matures Sept. 1, 2009,                                         |  |              |  |             |  |                
|at which time a balloon payment of $351,211 is due.                                                    |  |              |  |             |  |                
|Total principal outstanding at December 31                                                             |  | $   578,309  |  | $  602,369  |  | $      180,194 
|                                                                                                       |  |              |  |             |  |                
|Interest expense for the years ended December 31                                                       |  | $     45,197 |  | $    23,898 |  | $        15,784
|                                                                                                       |  |              |  |             |  |                
|Estimated annual principal payments: 2006 - $176,997; 2007 - $17,437; 2008 - $19,026; 2009 - $364,849. | 



NOTE 16 - SERIES A CONVERTIBLE PREFERRED STOCK

In 2001, the Company amended its Articles of Incorporation to provide for the issuance of up to 235,000 shares of Series A Convertible Preferred Stock.  The shares do not accrue dividends unless such dividends are declared by the Board of Directors.  The shares entitle the preferred shareholder to have one vote per share, presently equal to the voting rights of Common shareholders.  Each share is convertible, after 3 years, into shares of Common Stock based on an adjustable formula.



During 2001, as part of the Companys formation and initial capitalization of Wellstone Financial Group, LLC (WFG), 500 preferred shares with a value of $500,000 were issued to WFG in return for a 100% ownership interest in WFG.  In June 2004, WFG was dissolved and all of the outstanding Series A Convertible Preferred Stock was redeemed from WFG in exchange for the Companys ownership interest in WFG.  See Note 17 for additional disclosures on this transaction.



NOTE 17  DISSOLUTION OF SUBSIDIARIES

In June 2004, the Companys Board of Directors approved an agreement to dissolve Wellstone Financial Group, LLC (WFG), a 100%-owned subsidiary.  In exchange for the Companys ownership interest in WFG, the Company redeemed all of the Companys Series A Preferred Stock owned by WFG.  The fair value of the Preferred Stock and the Companys ownership interest in WFG were both estimated at $500,000; therefore, no cash was exchanged.  As of June 30, 2004, WFG is no longer included in the Companys financial statements.  The transaction had no effect on the Companys assets, liabilities, net income and earning per share of common stock.  WFG was dissolved because the Company has been unable to retain the type of specialized employees necessary to develop WFGs operations into a long-term profitable venture.



In June 2004, the Companys Board of Directors approved an agreement to dissolve Wellstone Communities, Inc. (WCI), a 100%-owned subsidiary. The Company received all of WCIs assets in exchange for its 136,250 shares of WCI Common Stock.  The fair value of this transaction was $1,265,268.  WCIs assets included $1,046,340 in cash and a real estate mortgage loan with a carrying amount of $218,928.  The transaction had no effect on the Companys assets, liabilities, net income, and earnings per common share.  WCI filed a Form SB-2 Registration Statement in 2003 and planned to issue preferred stock to expand its specialized loan operations and possibly purchase a bank.  The Company determined that it was not feasible to go forward with the registration statement given the proposed financial structure; therefore, $113,473 in registration costs were charged to earnings in the fourth quarter of 2003 and in 2004 WCI was dissolved.



F-19





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NOTE 18 - EARNINGS PER SHARE

Basic earnings per share have been calculated as follows:



2003

Net Income

$478,880

Average Common Shares Outstanding

521,782

Earnings per Common Share

$      0.92

2004

Net Income

$511,367

Average Common Shares Outstanding

713,567

Earnings per Common Share

$      0.72

2005

Net Income

$577,627

Average Common Shares Outstanding

840,376

Earnings per Common Share

$      0.69



Diluted earnings per share are the same as basic earnings per share because there are no shares of Series A Convertible Preferred Stock outstanding.  Other than the Series A Convertible Preferred Stock, there are no other potentially dilutive securities, stock options or warrants outstanding.



NOTE 19  MAJOR CUSTOMERS

The Company received more than 10% of its total revenue for the year ended December 31, 2005 from the following customers:



|                              |  |               |  |       |  |                                          
|----------------------------- |  | ------------- |  | ----- |  | -----------------------------------------
|                              |  | Amount        |  | %     |  | Description of Revenue Received          
|                              |  |               |  |       |  |                                          
|Senior Housing Services, Inc. |  | $   6,838,279 |  | 43.5% |  | Interest and fees from real estate joint 
|                              |  |               |  |       |  | venture investments                      
|Wellstone Housing, LLC        |  | 3,127,450     |  | 19.9% |  | Interest and fees from family housing    
|                              |  |               |  |       |  | development loans                        
|Sage Living Centers, Inc.     |  | 2,326,118     |  | 14.8% |  | Interest and fees from real estate joint 
|                              |  |               |  |       |  | venture investments and real estate loans
|                              |  | $12,291,847   |  | 78.2% |  |                                          



The major customers are not related parties.  Neither organization directly or indirectly controls, is controlled by, or is under common control of the Company.  There is not common ownership interest, officers, or directors and the Company does not have the power to direct or significantly influence the management or operating policies of these customers.



On December 31, 2004, Senior Housing Services, Inc formed a single member Limited Liability Company (Wellstone Housing, LLC) and purchased the assets and assumed all of Wellstone Housing Corporations liabilities, which included the Companys real estate loans.  The total combined revenue received from Senior Housing Services, Inc. and Wellstone Housing, LLC for the year ended December 31, 2005 was $9,965,729 or 63.4% of the Companys total revenue.



NOTE 20  FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:



Cash and cash equivalents  Fair value approximates their carrying amount due to the initial maturities of the instruments being three months or less.



Bond holdings  These bonds are not traded on an exchange; therefore, fair value is estimated based on the present value of expected future cash flows, which approximates their carrying amount.



Investor certificates and mortgage participations  Fair value is estimated based on the present value of expected future cash flows, which approximates their carrying amount.



Building mortgage and capital lease obligation  Fair value approximates carrying value since stated rates are similar to rates currently available to the Company for debt with similar terms and remaining maturities.



Loan guarantee obligations  Fair value approximates the risk-factored net present value of possible future cash flows related to the specific loan guarantee obligation.



F-20





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The estimated fair values of the Companys financial instruments at December 31, 2005 are:



|                           |  |                 |             |            |   |            
|-------------------------- |  | --------------- | ----------- | ---------- | - | -----------
|                           |  | Carrying Amount |             | Fair Value
|Financial assets:          |  |                 |             |            |   |            
|Cash and cash equivalents  |  | $               | 12,447,193  |            | $ | 12,447,193 
|Bond holdings              |  | $               | 13,930,221  |            | $ | 13,930,221 
|Financial liabilities:     |  |                 |             |            |   |            
|Investor certificates      |  | $               | 129,307,110 |            | $ | 129,307,110
|Mortgage participations    |  | $               | 2,525,000   |            | $ | 2,525,000  
|Building mortgages         |  | $               | 578,309     |            | $ | 578,309    
|Capital lease obligation   |  | $               | 1,231       |            | $ | 1,231      
|Loan guarantee obligations |  | $               | 234,000     |            | $ | 234,000    







F-21