**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 

(Mark            One)

 

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

 

For the            quarter period ended:  September 30,            2007

 

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

 

For the            transition period from _________ to _________

 

Commission file number:  000-14542

 

|   | ****SECURED INVESTMENT RESOURCES FUND, L.P.                            II****                |   |
|--------|----------------------------------------------------------------------------------------------|--------|
|   | (Exact name of small business issuer as specified in its                            charter) |   |

 

 

|   | Delaware                        |   | 48-0979566             |   |
|--------|---------------------------------|--------|------------------------|--------|
|   | (State or other jurisdiction of |   | (I.R.S. Employer       |   |
|   | incorporation or organization)  |   | Identification Number) |   |

 

|   | 199 S. Los Robles Ave., Suite 200, Pasadena,                            California 91101 |   |
|--------|------------------------------------------------------------------------------------------|--------|
|   | (Address of principal executive offices)                                                 |   |

 

 

|   | (626)585-5920                                                                     |   |
|--------|-----------------------------------------------------------------------------------|--------|
|   | (Issuer’s telephone number, including area                            code) |   |

 

 

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 |  |   | No |X| |
|--------------------------------|--------|

 

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

 

State            the number of units outstanding of the Partnership’s sole class of limited            partner units as of September 30 2007: 47,723.

 

Transitional Small Business Disclosure Format (check            one):                                                                                                                                                  Yes            |  |                  No            |X|

 

 

| INDEX           |                                                                                                       |   |
|-----------------|------------------------------------------------------------------------------------------------------------|--------|
|            |                                                                                                       |   |
|            |                                                                                                       | Page   |
| PART I –  | FINANCIAL INFORMATION                                                                                      |   |
|            |                                                                                                       |   |
| ITEM 1.         | FINANCIAL STATEMENTS:                                                                                      |   |
|            | Condensed Consolidated Balance                            Sheets                                           | 1      |
|            | Condensed Consolidated Statements of                            Operations                                 | 2      |
|            | Condensed Consolidated Statement of                            Change in Partner’s Capital (Deficit) | 3      |
|            | Condensed Consolidated Statements of                            Cash Flows                                 | 4      |
|            | Notes to Condensed Consolidated                            Financial Statements                            | 5      |
|            |                                                                                                       |   |
| ITEM 2.         | MANAGEMENT’S DISCUSSION AND                            ANALYSIS OR PLAN OF OPERATION                 | 13     |
|            |                                                                                                       |   |
| ITEM 3.         | CONTROLS AND PROCEDURES                                                                                    | 18     |
|            |                                                                                                       |   |
| PART II – | OTHER INFORMATION                                                                                          |   |
|            |                                                                                                       |   |
| ITEM 1.         | LEGAL PROCEEDINGS                                                                                          | 18     |
| ITEM 2.         | UNREGISTERED SALES OF EQUITY SECURITIES                            AND USE OF PROCEEDS                     | 20     |
| ITEM 3.         | DEFAULTS UPON SENIOR                            SECURITIES                                                 | 20     |
| ITEM 4.         | SUBMISSION OF MATTERS TO A VOTE OF                            SECURITY HOLDERS                             | 20     |
| ITEM 5.         | OTHER INFORMATION                                                                                          | 20     |
| ITEM 6.         | EXHIBITS                                                                                                   | 20     |
|            |                                                                                                       |   |
| SIGNATURES      | 21                                                                                                         |
|            |                                                                                                       |

 

 

 

 

 

**SECURED INVESTMENT RESOURCES FUND, L.P.            II**

 

**Condensed Consolidated Balance Sheets**

 

|                                                                               |   | **September 30, 2007** |        | **December 31, 2006** |   |
|------------------------------------------------------------------------------------|--------|------------------------|-------------|-----------------------|--------|
|                                                                               |   | **(unaudited)**        |        | **(audited)**         |   |
| Assets                                                                             |   |                   |        |                  |   |   |   |
| Investment property                                                                |   |                   |        |                  |   |   |   |
| Land                                                                               |   | $                      | 2,868,921   |                  | $      | 2,868,921 |   |
| Building and improvements                                                          |   |                   | 29,431,384  |                  |   | 29,078,880 |   |
|                                                                               |   |                   | 32,300,305  |                  |   | 31,947,801 |   |
| Less accumulated depreciation                                                      |   |                   | (18,168,826 | )                     |   | (17,402,885 | ) |
| Total investment property, net                                                     |   |                   | 14,131,479  |                  |   | 14,544,916 |   |
| Cash and cash equivalents                                                          |   |                   | 1,826,963   |                  |   | 1,953,608 |   |
| Restricted escrows and reserves                                                    |   |                   | 464,649     |                  |   | 784,907 |   |
| Accounts receivable, net of allowance for                            doubtful      |   |                   | 12,817      |                  |   | 11,239 |   |
| accounts of $68,650 in 2007 and $65,295 in                            2006         |   |                   |        |                  |   |   |   |
| Prepaid expenses                                                                   |   |                   | 115,287     |                  |   | 234,019 |   |
| Debt financing costs, net                                                          |   |                   | 250,098     |                  |   | 286,590 |   |
| Other assets, net                                                                  |   |                   | 101,444     |                  |   | 96,691 |   |
| Total assets                                                                       |   | $                      | 16,902,737  |                  | $      | 17,911,970 |   |
|                                                                               |   |                   |        |                  |   |   |   |
| Liabilities and Partners’                            Deficit                 |   |                   |        |                  |   |   |   |
| Liabilities                                                                        |   |                   |        |                  |   |   |   |
| Mortgage loans payable                                                             |   | $                      | 23,951,281  |                  | $      | 24,055,470 |   |
| Accounts payable                                                                   |   |                   | 76,426      |                  |   | 123,130 |   |
| Deferred revenue                                                                   |   |                   | 38,690      |                  |   | 55,238 |   |
| Accrued interest                                                                   |   |                   | 442,653     |                  |   | 296,994 |   |
| Accrued real estate taxes                                                          |   |                   | 232,304     |                  |   | 174,489 |   |
| Accrued other expense                                                              |   |                   | 295,007     |                  |   | 439,967 |   |
| Tenant security deposits                                                           |   |                   | 141,680     |                  |   | 166,578 |   |
| Total liabilities                                                                  |   |                   | 25,178,041  |                  |   | 25,311,866 |   |
|                                                                               |   |                   |        |                  |   |   |   |
| Minority Interest – Class A Limited                            Partners      |   |                   | 801,000     |                  |   | 801,000 |   |
|  

Partners’ deficit                                                    |   |                   |        |                  |   |   |   |
| General Partner                                                                    |   |                   | (74,588     | )                     |   | (71,773 | ) |
| Limited Partners                                                                   |   |                   | (9,001,716  | )                     |   | (8,129,123 | ) |
| Total partners’ deficit                                                      |   |                   | (9,076,304  | )                     |   | (8,200,896 | ) |
| Total liabilities and partners’ capital                            (deficit) |   | $                      | 16,902,737  |                  | $      | 17,911,970 |   |

 

The            accompanying notes are an integral part of these unaudited condensed consolidated            financial statements.

 

|   | - 1 - |
|--------|-------|

**SECURED INVESTMENT RESOURCES FUND, L.P.            II**

 

**Condensed Consolidated Statements of Operations**

**(Unaudited)**

 

 

|                                                                      | 3 months endedSeptember 30, | 9 months endedSeptember 30, |
|---------------------------------------------------------------------------|-----------------------------|-----------------------------|
|                                                                      |                        | 2007                        |   |   | 2006 |   |   | 2007 |   |   | 2006 |   |
| Revenue                                                                   |                        |                        |   |   |   |   |   |   |   |   |   |   |
| Rent                                                                      | $                           | 1,545,031                   |   | $ | 1,357,250 |   | $ | 4,518,016 |   | $ | 3,890,883 |   |
| Other property income                                                     |                        | 95,460                      |   |   | 117,927 |   |   | 295,778 |   |   | 336,027 |   |
| Interest                                                                  |                        | 8,475                       |   |   | 57,217 |   |   | 10,157 |   |   | 241,216 |   |
| Total revenue                                                             |                        | 1,648,966                   |   |   | 1,532,394 |   |   | 4,823,951 |   |   | 4,468,126 |   |
|                                                                      |                        |                        |   |   |   |   |   |   |   |   |   |   |
| Expenses                                                                  |                        |                        |   |   |   |   |   |   |   |   |   |   |
| Salaries                                                                  |                        | 198,027                     |   |   | 177,904 |   |   | 592,818 |   |   | 524,459 |   |
| Maintenance and repairs                                                   |                        | 44,241                      |   |   | 38,028 |   |   | 175,555 |   |   | 129,500 |   |
| Utilities                                                                 |                        | 130,998                     |   |   | 126,658 |   |   | 341,124 |   |   | 348,354 |   |
| Real estate taxes                                                         |                        | 104,427                     |   |   | 74,498 |   |   | 326,974 |   |   | 281,646 |   |
| General administrative                                                    |                        | 185,595                     |   |   | 301,229 |   |   | 587,895 |   |   | 719,055 |   |
| Contract services                                                         |                        | 187,344                     |   |   | 167,409 |   |   | 548,931 |   |   | 488,685 |   |
| Insurance                                                                 |                        | 34,445                      |   |   | 32,926 |   |   | 106,005 |   |   | 92,991 |   |
| Depreciation and amortization                                             |                        | 275,148                     |   |   | 260,227 |   |   | 823,813 |   |   | 722,449 |   |
| Property management fees                                                  |                        | 59,104                      |   |   | 49,283 |   |   | 173,251 |   |   | 123,738 |   |
| Total expenses                                                            |                        | 1,219,329                   |   |   | 1,228,162 |   |   | 3,676,366 |   |   | 3,430,877 |   |
|                                                                      |                        |                        |   |   |   |   |   |   |   |   |   |   |
| Net operating income                                                      |                        | 429,637                     |   |   | 304,232 |   |   | 1,147,585 |   |   | 1,037,249 |   |
|                                                                      |                        |                        |   |   |   |   |   |   |   |   |   |   |
| Other (income) expense                                                    |                        |                        |   |   |   |   |   |   |   |   |   |   |
| Interest expense                                                          |                        | 485,604                     |   |   | 323,742 |   |   | 1,429,193 |   |   | 1,014,431 |   |
| Total other expense                                                       |                        | 485,604                     |   |   | 323,742 |   |   | 1,429,193 |   |   | 1,014,431 |   |
|                                                                      |                        |                        |   |   |   |   |   |   |   |   |   |   |
| Net profit (loss)                                                         | $                           | (55,967                     | ) | $ | (19,510) |   | $ | (281,608 | ) | $ | 22,818 |   |
| Weighted average net profit (loss) per unit                               | $                           | (1.17                       | ) | $ | (0.36) |   | $ | (5.71 | ) | $ | 0.43 |   |
| Weighted average partnership units                            outstanding |                        | 47,723                      |   |   | 53,661 |   |   | 49,320 |   |   | 53,661 |   |
|                                                                      |                        |                        |   |   |   |   |   |   |   |   |   |   |

 

 

 

 

 

The            accompanying notes are an integral part of these unaudited condensed consolidated            financial statements.

 

|   | - 2 - |
|--------|-------|

**SECURED INVESTMENT RESOURCES FUND, L.P.            II**

 

**Condensed Consolidated Statements of Changes in Partner’s            Capital (Deficit)**

**For the Nine Months Ended September 30, 2007**

**(Unaudited)**

 

 

|                                                                      |   | **General Partner** |     | **Limited Partners** |   | **Total**   |   |
|---------------------------------------------------------------------------|--------|---------------------|----------|----------------------|--------|-------------|--------|
|                                                                      |   |                |     |                 |   |        |   |   |   |   |
|                                                                      |   |                |     |                 |   |        |   |   |   |   |
| Balance – January 1, 2007                                           |   | $                   | (71,773) |                 | $      | (8,129,123) |   | $ | (8,200,896) |   |
|                                                                      |   |                |     |                 |   |        |   |   |   |   |
| Net loss                                                                  |   |                | (2,815)  |                 |   | (278,793)   |   |   | (281,608) |   |
|                                                                      |   |                |     |                 |   |        |   |   |   |   |
| Redemption of Limited Partner’s                            interest |   |                | -        |                 |   | (593,800)   |   |   | (593,800) |   |
|                                                                      |   |                |     |                 |   |        |   |   |   |   |
| Balance – September 30, 2007                                        |   | $                   | (74,588) |                 | $      | (9,001,716) |   | $ | (9,076,304) |   |

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The            accompanying notes are an integral part of these unaudited condensed consolidated            financial statements.

 

|   | - 3 - |
|--------|-------|

**SECURED INVESTMENT RESOURCES FUND, L.P.            II**

 

**Condensed Consolidated Statements of Cash Flows**

**(Unaudited)**

 

|                                                                             |   | 9 months ended     |      |
|----------------------------------------------------------------------------------|--------|--------------------|-----------|
|                                                                             |   | September 30, 2007 |      | September 30, 2006 |   |
|                                                                             |   |               |      |   |   |   |   |
| Cash flows from operating activities                                             |   |               |      |   |   |   |   |
| Net income (loss)                                                                |   | $                  | (281,608) |   | $ | 22,818 |   |
| Adjustments to reconcile net loss to net cash                                    |   |               |      |   |   |   |   |
| Provided (used) by operating activities                                          |   |               |      |   |   |   |   |
| Depreciation and amortization                                                    |   |               | 823,813   |   |   | 722,449 |   |
| Write-off of accounts receivable                                                 |   |               | 3,3355    |   |   | 70,513 |   |
| Changes in accounts affecting operations                                         |   |               |      |   |   |   |   |
| Accounts receivable                                                              |   |               | (4,933)   |   |   | (228,426) |   |
| Prepaid expenses                                                                 |   |               | 118,732   |   |   | (70,718) |   |
| Accounts payable                                                                 |   |               | (46,704)  |   |   | 29,986 |   |
| Deferred revenue                                                                 |   |               | (16,548)  |   |   | 5,740 |   |
| Accrued interest                                                                 |   |               | 145,659   |   |   | 6,215 |   |
| Real estate taxes payable                                                        |   |               | 57,815    |   |   | 87,710 |   |
| Accrued other expense                                                            |   |               | (144,960) |   |   | 27,871 |   |
| Security deposit liability                                                       |   |               | (24,898)  |   |   | 4,199 |   |
| Net cash provided by operating activities                                        |   |               | 629,723   |   |   | 678,357 |   |
|                                                                             |   |               |      |   |   |   |   |
| Cash flows from investing activities                                             |   |               |      |   |   |   |   |
| Changes in investments and other assets                                          |   |               | (17,654)  |   |   | (4,560) |   |
| Purchases of property, plant and equipment                                       |   |               | (360,983) |   |   | (279,376) |   |
| Net cash used by investing activities                                            |   |               | (378,637) |   |   | (283,936) |   |
|                                                                             |   |               |      |   |   |   |   |
| Cash flows from financing activities                                             |   |               |      |   |   |   |   |
| Changes in restricted cash                                                       |   |               | 320,258   |   |   | (828,174) |   |
| Proceeds from long-term borrowings                                               |   |               | -         |   |   | 753,495 |   |
| Redemption of Limited Partner’s                            interest        |   |               | (593,800) |   |   | - |   |
| Principal repayments on mortgage loans                            payable        |   |               | (104,189) |   |   | (129,114) |   |
| Payments for loan costs                                                          |   |               | -         |   |   | (88,369) |   |
| Net cash used by financing activities                                            |   |               | (377,731) |   |   | (292,162) |   |
|                                                                             |   |               |      |   |   |   |   |
| Increase (decrease) in cash and cash                            equivalents      |   |               | (126,645) |   |   | 102,259 |   |
|                                                                             |   |               |      |   |   |   |   |
| Cash and cash equivalents – beginning of                            period |   |               | 1,953,608 |   |   | 423,304 |   |
|                                                                             |   |               |      |   |   |   |   |
| Cash and cash equivalents – end of                            period       |   |               | 1,826,963 |   |   | 525,563 |   |
|                                                                             |   |               |      |   |   |   |   |
|                                                                             |   |               |      |   |   |   |   |
| Supplementary disclosure of cash flow                            information     |   |               |      |   |   |   |   |
| Cash paid during the period for interest                                         |   | $                  | 1,283,534 |   | $ | 1,008,216 |   |

 

 

The            accompanying notes are an integral part of these unaudited condensed consolidated            financial statements.

 

|   | - 4 - |
|--------|-------|

**SECURED INVESTMENT RESOURCES FUND, L.P.            II**

 

**Notes to Condensed Consolidated Financial Statements**

 

| **1.** | **Description of Business** |
|--------|-----------------------------|

             

Secured Investment Resources Fund, L.P. II (the            “Partnership” or “Registrant”) was organized on July 1, 1986 as            a limited partnership under the Delaware Uniform Limited Partnership Act. The            Partnership is governed by an Amended and Restated Agreement of Limited Partnership            dated September 25, 1986. Millenium Management, LLC (“Millenium”), a            California limited liability corporation, is the sole general partner (the            “General Partner”) of the Partnership having taken over the management of            the Partnership from a receiver, in March 2005. Any information contained in the 10QSB            for dates prior to March 2005 is based solely on records received from the prior            general partner and prior receiver and may not have been capable of independent            verification by the General Partner, although the General Partner is not aware of any            material inaccuracy in such information. Millenium’s ownership consists of two            California limited liability companies, Everest Properties II, LLC (“Everest            II”) and Everest Properties, LLC (“Everest”). Everest II owns 99.0%            of Millenium and Everest owns 1.0% of Millenium. Millenium, Everest II and Everest have            the same executive officers. Millenium and Everest II are also limited partners of the            Partnership. The Partnership Agreement provides that the Partnership is to terminate on            September 25, 2046 unless terminated prior to such date.

             

On September 26, 1986, the Partnership commenced a public offering for            the sale of units (the “Units”). The Units represent equity interests in            the Partnership and entitle the holders thereof to participate in certain allocations            and distributions of the Partnership. The sale of Units closed on September 24, 1988,            with 53,661 Units sold at $500 each, or gross proceeds of $26,830,500 to the            Partnership. Since its initial offering, the Partnership has not received, nor are            limited partners required to make, additional capital contributions.

             

In the opinion of management, all adjustments (which include only normal            recurring adjustments) necessary to present fairly the financial position, results of            operations and cash flows at September 30, 2007 and for all periods presented have been            made. The results for the nine-month period ended September 30, 2007 are not            necessarily indicative of the results which may be expected for the entire            year.

             

The form and content of the financial information disclosed in this Form            10-QSB has been presented in a condensed format in accordance with Rule            10-01(a)(2),(3), and (4) of the Exchange Act. Refer to the notes to the financial            statements of the Partnership for the year ended December 31, 2006 which are contained            in the Partnership’s Annual Report on Form 10-KSB for additional details of the            Partnership’s financial condition.

             

| **2.** | **Summary of Significant Accounting                            Policies** |
|--------|---------------------------------------------------------------------------|

             

|   | a. | **Organization**– The                            Partnership operates real estate investments renting multi-family                            residential housing and commercial shopping center space. The                            Partnership consists of the following: |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|                         |                   | State of   | Year   |        |
|------------------------------|------------------------|------------|--------|-------------|
| Partnership                  | Location               | Formation  | Formed | Property    |
|                         |                   |       |   |        |
| Sunwood                      | Las Vegas, NV          | Nevada     | 2001   | Residential |
| Hickory Glen                 | Springfield, IL        | Kansas     | 1999   | Residential |
| (formerly named Oak Terrace) |                   |       |   |
| Cascade                      | Topeka, KS             | Kansas     | 1999   | Residential |
| Bayberry                     | Lee’s Summit, MO | California | 2006   | Commercial  |

 

 

The Partnership is headquartered in Pasadena, California. Effective            March 2005, the Partnership changed general partners to Millenium Management, LLC            (“General Partner”) a California limited liability company.

             

|   | - 5 - |
|--------|-------|

|   | b. | **Reorganization**–Bayberry was formed March 21, 2006 for the                            purpose of spinning off the Bayberry real estate, and related assets                            and liabilities, which was previously held in the SIR limited                            partnership. The spin-off was made at net book value, and has no effect                            on the consolidated financial                            statements**.**After                            the spin-off, the Partnership’s relationship consisted of                            partnership management activities. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | c. | **Allocation of profits, gains and losses**– Profits, gains and losses of the Partnership are                            allocated between general and limited partners in accordance with the                            provisions of the Partnership Agreement. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | d. | **Use of estimates**–                            The preparation of consolidated financial statements in conformity with                            accounting principles generally accepted in the United States of                            America requires management to make estimates and assumptions that                            affect the reported amounts of assets and liabilities and disclosure of                            contingent assets and liabilities at the date of the consolidated                            financial statements and the reported amounts of revenue and expenses                            during the reporting year. Actual results could differ from those                            estimates. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | e. | **Cash and cash equivalents**– For purposes of the consolidated statements of                            cash flows, the Partnership considers all highly liquid cash                            investments purchased with an original maturity of three months or less                            to be cash equivalents. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | f. | **Restricted cash**–                            Restricted cash consists of escrow accounts for taxes, insurance and                            replacement costs. These costs are expected to be incurred and paid                            within 12 months. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | g. | **Accounts receivable**–                            The Partnership reviews their tenant accounts on a periodic basis and                            records a reserve for specific amounts that management feels may not be                            collected. In addition, the Partnership has established a general                            reserve for potential uncollectible accounts based on historical bad                            debts. Past due status is determined based upon contractual terms.                            Amounts are written off at the point when collection attempts on the                            accounts have been exhausted. Management uses significant judgment in                            estimating uncollectible amounts. In estimating uncollectible amounts,                            management considers factors such as current overall economic                            conditions, industry-specific economic conditions, historical customer                            performance and anticipated customer performance. While management                            believes the Partnership’s processes effectively address its                            exposure to doubtful accounts, changes in economic, industry or                            specific customer conditions may require adjustment to the allowance                            recorded by the Partnership. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | h. | **Property**– Property                            is stated at cost less accumulated depreciation. The costs of repairs                            and maintenance that do not improve or extend asset lives are expensed                            as incurred. Depreciation is provided primarily by the straight-line                            method based upon the estimated useful lives of the related assets,                            which are as follows: |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

| Buildings              | 30 years |
|------------------------|----------|
| Improvements           | 15 years |
| Furniture and fixtures | 5 years  |

             

|   | i. | **Amortization**– Loan                            costs are deferred and amortized using the straight-line method over                            the term of the loan and are stated at $250,098 and $286,590, net of                            accumulated amortization of $41,811 and $19,921, as of September 30,                            2007 and December 31, 2006, respectively. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

Aggregate amortization expense of loan costs is as follows:

             

| 2007 |   | $      | 10,084 |   |
|------|--------|--------|--------|--------|
| 2008 |   |   | 41,461 |   |
| 2009 |   |   | 41,461 |   |
| 2010 |   |   | 41,461 |   |
| 2011 |   |   | 41,461 |   |

 

|   | - 6 - |
|--------|-------|

 

| 9 months to September 2012 |   |   | 10,521  |   |
|----------------------------|--------|--------|---------|--------|
| Thereafter                 |   |   | 63,649  |   |
|                       |   | $      | 250,098 |   |

 

Prepaid commissions, included in other assets, are recorded at cost and            amortized over the life of the lease and are stated at $77,740 and $73,187, net of            accumulated amortization of $233,260 and $220,359, at September 30, 2007 and December            31 2006, respectively.

             

Aggregate amortization expense of prepaid commissions is as            follows:

             

| 2007                       |   | $      | 12,263 |   |
|----------------------------|--------|--------|--------|--------|
| 2008                       |   |   | 20,394 |   |
| 2009                       |   |   | 13,622 |   |
| 2010                       |   |   | 10,716 |   |
| 2011                       |   |   | 9,254  |   |
| 9 months to September 2012 |   |   | 5,338  |   |
| Thereafter                 |   |   | 6,153  |   |
|                       |   |   |   |   |
|                       |   | $      | 77,740 |   |

 

|   | j. | **Long-lived assets**–                            The Partnership reviews the carrying value of long-lived assets for                            impairment whenever triggering events or changes in circumstances                            indicate that the carrying amounts of any asset may not be recoverable.                            Recoverability of assets to be held and used is measured by a                            comparison of the carrying amount of an asset to future net cash flows                            expected to be generated by the asset. If such assets are considered to                            be impaired, the impairment to be recognized is measured by the excess                            of the carrying amount over the fair value of the assets. During 2006,                            Sunwood filed a petition for relief under Chapter 11 of the United                            States Bankruptcy Code. Management reviewed the assets held by Sunwood                            for impairment and determined the fair value of the assets exceed the                            claims filed with the court. Based on management’s estimates,                            these consolidated financial statements do not reflect an adjustment to                            the basis of the assets held by Sunwood at September 30, 2007. No                            additional triggering events or changes in circumstances were                            identified by management for the nine months ended September 30, 2007                            or 2006. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | k. | **Income taxes**– The                            Partnership is taxed as a partnership for federal and state income tax                            purposes. Therefore, the results of operations of the Partnership are                            included in the individual partners’ tax returns. Accordingly, no                            provision for income taxes related to operations has been made in the                            accompanying consolidated financial statements. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | l. | **Revenue recognition**–                            The Partnership recognizes revenue from real estate lease agreements as                            operating leases; and rentals from such leases are reported as revenue                            on a straight-line basis over the term of the lease. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

Other property income includes concessions, application fees, damage            charges and late fees. This revenue is recognized when it is earned.

             

|   | m. | **Deferred revenue**–                            Rent received in advance is reported as a liability and recognized as                            income in the month the rent is due. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | n. | **Security deposits**–                            The Partnership requires security deposits from lessees for the                            duration of the lease. Deposits are refunded when the tenant vacates,                            provided the tenant has not damaged the space and is current on rental                            payments. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - 7 - |
|--------|-------|

             

|   | o. | **Fair value**– The                            carrying amounts of long-term debt and other receivables approximate                            fair value as current interest rates approximate those currently                            available for similar debt instruments of comparable maturities from                            the Partnership’s creditors. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

|   | p. | **Advertising**– The                            Partnership expenses advertising as incurred. Advertising expense for                            the nine months ended September 30, 2007 and 2006 was $83,361 and                            $54,048 respectively. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | q. | **New accounting pronouncements**– In May 2005, the Financial Accounting Standards                            Board (“FASB”) issued Statement of Financial Accounting                            Standards (“SFAS”) No. 154, “Accounting Changes and                            Error Corrections.” This statement replaces Accounting Principles                            Board 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. This statement                            applies to all voluntary changes in accounting principle. It also                            applies to changes required by an accounting pronouncement in the                            unusual instance that the pronouncement does not include specific                            transition provisions. When a pronouncement includes specific                            transition provisions, those provisions should be followed. The                            implementation of this pronouncement did not have a significant impact                            on the consolidated financial statements in the current                            year. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

In September 2006, the FASB issued SFAS No. 157, “Fair Value            Measurements.” This statement defines fair value, establishes a framework for            measuring fair value in generally accepted accounting principles (“GAAP”),            and expands disclosures about fair value measurements. The Partnership’s            management does not anticipate that this pronouncement will have a significant impact            on the consolidated financial statements.

             

In February 2007, the FASB issued SFAS No. 159, “The Fair Value            Option for Financial Assets and Financial Liabilities.” SFAS No. 159 permits            entities to choose to measure many financial instruments and certain other items at            fair value that are not currently required to be measured at fair value. The objective            is to improve financial reporting by providing entities with the opportunity to            mitigate volatility in reported earnings caused by measuring related assets and            liabilities differently without having to apply complex hedge accounting provisions.            SFAS No. 159 also establishes presentation and disclosure requirements designed to            facilitate comparisons between entities that choose different measurement attributes            for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years            beginning after November 15, 2007. The Partnership has not yet determined whether it            will elect the fair value option for any of its financial instruments.

             

| **3.** | **Notes Receivable** |
|--------|----------------------|

             

On March 3, 2005, the Partnership accepted a promissory note from the            former general partner initially set at $2,500,000 payable over ten years at prime plus            1%. The former general partner defaulted on the first payment and an action was filed            against the general partner and related companies. During 2005 the Partnership deemed            the note and all other receivables, including accrued interest, to be uncollectible and            the outstanding balance due the Partnership of $2,842,922 was written off. In February            2007 a settlement was reached with the former general partner whereby the Partnership            received a $100,000 payment on the note. See Note 11.

 

| **4.** | **Foreclosure** |
|--------|-----------------|

 

On August 1, 2006, a Full Recourse Promissory Note (the            “Note”) was entered into between Secured Investment Resources Fund, L.P.            (“SIR I”) and the Partnership regarding the aggregate amount of $999,656            then owed to the Partnership by SIR I.

             

The Note provided SIR I with the time and opportunity to try to sell its            property in order to repay the Note and was due and payable on September 30, 2006,            unless SIR I entered into or was negotiating a contract to sell its            property.

             

 

|   | - 8 - |
|--------|-------|

By October 1, 2006, SIR I had done neither and had not made the required            payment of principal and interest called for by the Note and had thus defaulted on the            payment of both the principal and interest due on the Note. The Partnership exercised            its remedies in respect to the collateral of the Note, acquiring SIR I’s 100%            interest in Cascade, the limited partnership that owns Cascade Apartments. SIR I            consented to this action in full satisfaction of its obligations to the            Partnership.

 

| **5.** | **Minority Interest - Class A Limited Partners                            (Sunwood)** |
|--------|---------------------------------------------------------------------------------------|

             

A dispute arose between Sunwood and the lender regarding the amount owed            on the mortgage. Sunwood and the lender entered into a settlement agreement dated June            6, 2005 whereby Sunwood agreed to pay the lender a settlement payment of $800,000. A            new class of partners “Class A Limited Partners” was created and the            Partnership received $801,000 in June 2005 of which $401,000 was received from related            parties. These funds were used as the settlement payment to the lender. The Class A            Limited Partners have no voting rights and are not allocated operating income and            losses of the Partnership, except an allocation of income equal to any distributions            received that are not a return of capital.

             

The Class A Limited Partners accrue a cumulative preferred return at a            rate of ten percent (10%) per annum compounded monthly on the outstanding balance. The            cumulative preferred return payments are allowed if there is cash available for            distributions from operations, on a quarterly basis, which is defined as net cash            realized after all operating expenses, fees to General Partner, management fees, debt            payments and reasonable cash reserves determined by the General Partner. The cumulative            preferred return on those instruments will not be recorded until such time as it is            evident Sunwood will disburse the funds.

             

Preferred return payments from cash available as a result of a sale or            refinancing the mortgage debt are available for distributions in the following            order:

             

|   | 1. | Accrued preferred return to Class A Limited                            Partners. |
|--------|----|----------------------------------------------------------------------------------|

|   | 2. | Repay the capital contributed by Class A Limited                            Partners. |
|--------|----|---------------------------------------------------------------------------------------|

|   | 3. | The greater of 50% of the capital contributed by Class A                            Limited Partners or twenty-five percent (25%) of the remaining cash                            available from the sale or refinancing. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

| **6.** | **Mortgage Loans** |
|--------|--------------------|

             

Mortgage loans consist of the following:

             

 

|                                                                                                                                                                                                                        |   | September 30                                                                              |   | December 31       |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------|--------|-------------------|--------|
|                                                                                                                                                                                                                        |   | 2007                                                                                      |   | 2006              |   |
| Mortgage payable – Sunwood, bearing interest at                            11.125%, due August 2006, secured by real estate

                                                                                    |   | $9,345,570                                                                                |   | $9,401,527        |   |
| Mortgage payable – Hickory Glen, interest only                            payable monthly at 5.94%, due January 2012, secured by real                            estate

                                        |   |  

                             

9,000,000

                              |   |  

9,000,000 |   |
| Mortgage payable – Cascade, payable $14,855                            monthly including interest, at 5.77%, due November 2016, secured by                            real estate

                              |   |  

2,514,645                                                                         |   |  

2,537,358 |   |

 

 

|   | - 9 - |
|--------|-------|

 

| Mortgage payable – Bayberry, payable $19,221                            Monthly including interest, at 6.24%, due September 2016, secured by                            real estate |   |  

3,091,066 |   |  

3,116,585 |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|--------|-------------------|--------|
|  

Total Mortgage loans                                                                                                                                                              |   | $23,951,281       |   | $24,055,470       |   |

 

Aggregate maturities of long-term debt are as follows:

 

| 2007                       |   | $      | 9,361,522  |   |
|----------------------------|--------|--------|------------|--------|
| 2008                       |   |   | 69,244     |   |
| 2009                       |   |   | 73,590     |   |
| 2010                       |   |   | 78,210     |   |
| 2011                       |   |   | 83,120     |   |
| 9 months to September 2012 |   |   | 9,060,986  |   |
| Thereafter                 |   |   | 5,224,609  |   |
|                       |   |   |       |   |
|                       |   | $      | 23,951,281 |   |

 

The mortgage payable by SIR was transferred to Bayberry during 2006, and            refinanced by Bayberry.

             

The mortgage payable by Sunwood matured in 2006, but the Partnership            filed for bankruptcy protection, as described in Note 10. The mortgage was purchased by            an affiliate of the General Partner, Everest Properties II, LLC, on April 25,            2007.

             

| **7.** | **Related Party Transactions** |
|--------|--------------------------------|

 

The General Partner performs various professional services for the            Partnership, primarily tax accounting, audit preparation, Securities and Exchange            Commission (“SEC”) report preparation, and investor services.

             

In 2005, the General Partner and certain employees of the General            Partner subscribed for $401,000 of the Class A Limited Partnership interests issued by            Sunwood. See Note 5.

             

Transactions with related parties consist of the following for the three            months ended September 30:

             

|                   | 2007     | 2006    |
|------------------------|----------|---------|
|                   |     |    |
| Interest payments      | $265,709 | -       |
| Investor services fees | 8,886    | -       |
| Management fees        | 27,000   | 5,483   |
|                   | $301,595 | $ 5,483 |

             

The Partnership has no employees and depends on the General Partner and            its affiliates for the management and administration of all Partnership activities. The            Partnership Agreement provides for (i) certain payments to affiliates for services and            (ii) reimbursement of certain expenses incurred by affiliates on behalf of the            Partnership.

             

No affiliate of the General Partner receives any compensation from the            Partnership for providing management services.

             

|   | - 10 - |
|--------|--------|

The Partnership carries insurance (where applicable) for property/excess            property risks, boiler and machinery risks, earthquake, and general/access liability            through insurance policies obtained by Everest II, an affiliate of the General Partner,            from insurers unaffiliated with the General Partner.

             

| **8.** | **Concentrations of Credit Risk** |
|--------|-----------------------------------|

             

At September 30, 2007 and 2006 and at various times throughout these            years, the Partnership maintained cash balances with certain financial institutions in            excess of the federal deposit insurance limit. This risk is managed by maintaining all            deposits in sound financial institutions.

             

| **9.** | **Cash Distributions** |
|--------|------------------------|

 

No cash distributions have been made since October 1998. Future            distributions will only be made from excess cash flow exceeding working capital            reserves.

             

| **10.** | **Bankruptcy Protection** |
|---------|---------------------------|

 

On September 12, 2006, Sunwood filed a petition for relief under Chapter            11 of the United States Bankruptcy Code. The filing was made as Sunwood’s            mortgage matured in August 2006 with a lis pendens filed upon the property to prevent a            sale or refinancing. Under Chapter 11, Sunwood will act as debtor-in-possession under            court protection from their creditors and claimants, while using the Chapter 11 process            to allow Sunwood to sell or refinance the real estate. Claims filed with the court are            as follows:

             

 

| Schedule D secured claims   |   | $      | 9,736,225 |   |
|-----------------------------|--------|--------|-----------|--------|
| Schedule F unsecured claims |   |   | 137,929   |   |
| Total claims                |   | $      | 9,874,154 |   |

             

Management’s estimate of the fair value in the amount of            $15,400,000 exceeds the total claims of $9,874,154 filed with the court. All the            foregoing claims have been accrued in the consolidated financial statements.

             

| **11.** | **Contingencies** |
|---------|-------------------|

 

*Environmental*

             

Various federal, state and local laws subject property owners or            operators to liability for management, and the costs of removal and remediation, of            certain hazardous substances present on a property. Such laws often impose liability            without regard to whether the owner or operator knew of, or was responsible for, the            release or presence of the hazardous substances. The presence of, or the failure to            manage or remedy properly, hazardous substances may adversely affect occupancy at            affected apartment communities and the ability to sell or finance affected properties.            In addition to the costs associated with investigation and remediation actions brought            by government agencies, and potential fines or penalties imposed by such agencies in            connection therewith, the presence of hazardous substances on a property could result            in claims by private plaintiffs for personal injury, disease, disability or other            infirmities. Various laws also impose liability for the cost of removal, remediation or            disposal of hazardous substances through a licensed disposal or treatment facility.            Anyone who arranges for the disposal or treatment of hazardous substances is            potentially liable under such laws. These laws often impose liability whether or not            the person arranging for the disposal ever owned or operated the disposal facility. In            connection with the ownership, operation and management of properties, the Partnership            could potentially be liable for environmental liabilities or costs associated with            their properties or properties the Partnership acquires or manages in the            future.

             

Management is not aware of any environmental liabilities.

 

 

|   | - 11 - |
|--------|--------|

*Mold*

 

The Partnership has not been named as a defendant in any lawsuits that            have alleged personal injury and property damage as a result of the presence of mold.            However, we are aware of lawsuits against owners and managers of other multi-family            properties asserting claims of personal injury and property damage caused by the            presence of mold, some of which have resulted in substantial monetary judgments or            settlements. We do not have insurance coverage for property damage loss claims            specifically arising from the presence of mold or for personal injury claims related to            mold exposure. We believe our current policies and procedures will prevent or eliminate            mold exposure from our properties and will minimize the effects that mold may have on            our residents. To date, we have not incurred any material costs or liabilities relating            to claims of mold exposure or to abate mold conditions.

             

*Litigation*

             

Sunwood Village Litigation

             

On March 8, 2005, Mega Ventures, LLC filed Case No. A500656 in the            District Court of Clark County, Nevada to enforce an alleged agreement to sell the            Sunwood Village Apartments. The Partnership believed that the agreement was terminated            or was otherwise not enforceable and that it was in the best interest of the            Partnership not to allow a sale of Sunwood Village for the price in the disputed            agreement. This litigation was moved to the United States Bankruptcy Court, District of            Nevada, Case No. BK-S-06-12463-BAM; Adv. No. 06-1194-BAM. After the first phase of the            trial, the Court ruled on October 15, 2007, that Sunwood Village breached the agreement            with Mega Ventures by failing to sell the Sunwood Village Apartments to Mega Ventures,            and the Court scheduled the remedies phase of the trial for March 2008, in order for            the Court to determine Mega’s damages or to award Mega the remedy of specific            performance of the agreement. The outcome of this litigation cannot be predicted. If            Mega prevails in specifically enforcing the alleged agreement or receives a substantial            award of damages, then the Partnership may not be able to realize any significant net            proceeds from a sale of the Sunwood Village Apartments after repayment of outstanding            obligations.

             

Litigation Against Former General Partner

             

On November 9, 2005, the Partnership filed Case No. 05CV08810 in the            District Court of Johnson County, Kansas, alleging that the Partnership’s former            general partner, James R. Hoyt, failed to make the first required payment on a            promissory note Mr. Hoyt signed in order to repay $2,500,000 that he owes to the            Partnership. This litigation was settled in January 2007. Pursuant to the settlement,            Mr. Hoyt agreed to have judgment entered in the Partnership’s favor in the            amount of $2,750,000, and to pay $100,000 to the Partnership in cash immediately. As            part of the settlement, Mr. Hoyt has provided information regarding his assets and            income that, if true, indicates that the Partnership is unlikely to be able to collect            any significant portion of the balance of the judgment. The settlement requires            Mr. Hoyt to provide documents and to testify under oath regarding his financial            situation, and provides the Partnership with a year to investigate further in order to            attempt to verify such information. If Mr. Hoyt misrepresented his financial            condition, the Partnership will be entitled to attempt to collect the balance of the            judgment. Otherwise, the judgment will be discharged at the end of such time. The            general partner believes the settlement is more favorable to the Partnership than what            the Partnership would likely have been able to achieve through contested litigation.            The entire receivable was previously written off.

             

There are no other pending or outstanding litigation matters involving            the Partnership or its properties, other than matters of a routine nature arising in            the ordinary course of business.

             

Sunwood Bankruptcy

             

On September 12, 2006, Sunwood filed for protection under Chapter 11 of            the United States Bankruptcy Code, as more fully described in Note 10.

             

             

             

|   | - 12 - |
|--------|--------|

| **12.** | **Capital Resources** |
|---------|-----------------------|

             

The accompanying condensed consolidated financial statements have been            prepared in conformity with generally accepted accounting principles which contemplate            continuation of the Partnership as a going concern. However, the Partnership has            incurred losses in recent years and has negative capital.

             

In view of these matters, realization of a major portion of the assets            in the accompanying condensed consolidated balance sheets is dependent upon continued            operations of the Partnership, which in turn is dependent upon the Partnership’s            ability to meet its financing requirements, and the success of its future operations.            Management believes that actions to cut costs and increase occupancy will continue to            reduce operating losses. Additionally, positive operating cash flows for the nine            months ended September 30, 2007 and a cash balance of $1.8 million at September 30,            2007 provide the Partnership the opportunity to continue as a going concern.

             

ITEM 2:  MANAGEMENT’S DISCUSSION AND            ANALYSIS OR PLAN OF OPERATION

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Section includes “forward-looking statements” within            the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the            Securities Exchange Act of 1934. All statements, other than statements of historical            facts, included in this section and located elsewhere in this Form 10-QSB regarding the            prospects of our industry and our prospects, plans, financial position and business            strategy may constitute forward-looking statements. Forward-looking statements            generally can be identified by the use of forward-looking terminology such as            “may,” “will,” “expect,” “intend,”            “estimate,” “anticipate,” “plan,”            “foresee,” “believe” or “continue” or the negatives            of these terms or variations of them or similar terminology. Although we believe that            the expectations reflected in these forward-looking statements are reasonable, we can            give no assurance that these expectations will prove to have been correct. All such            forward-looking statements are subject to certain risks and uncertainties that could            cause actual results to differ materially from those contemplated by the relevant            forward-looking statement. Important factors that could cause actual results to differ            materially from our expectations include, among others: (i) the ability to retain            tenants, (ii) general economic, business, market and social conditions, (iii) trends in            the real estate investment market, (iv) projected leasing and sales, (v) competition,            (vi) inflation and (vii) future prospects for the Partnership. Readers are urged to            consider these factors carefully in evaluating the forward-looking statements. All            subsequent written and oral forward-looking statements attributable to us or persons            acting on our behalf are expressly qualified in their entirety by these cautionary            statements. The forward-looking statements included herein are made only as of the date            of this Form 10-QSB, and we do not undertake any obligation to release publicly any            revisions to such forward-looking statements to reflect events or circumstances after            the date hereof or to reflect the occurrence of unanticipated events.

 

CRITICAL ACCOUNTING POLICIES

 

Revenue            Recognition

 

Lease agreements are accounted for as operating leases, and rentals from            such leases are reported as revenues ratably over the terms of the leases.

 

Investment Property Useful Lives

 

The Partnership is required to make subjective assessments as to the            useful lives of its properties for the purpose of determining the amount of            depreciation to reflect on an annual basis with respect to those properties. These            assessments have a direct impact on the Partnership’s net income.

             

Buildings and improvements are depreciated over their estimated useful            lives of 30 to 40 years on a straight-line basis. Land improvements are depreciated            over their useful lives of 15 to 20 years on a straight-line basis. Personal property            is depreciated over its estimated useful life of 5 to 15 years using the straight-line            method.

 

|   | - 13 - |
|--------|--------|

Capital            Expenditures

 

For reporting purposes, the Partnership capitalizes all carpet,            flooring, blinds, appliance and HVAC replacements. The Partnership expenses all other            expenditures that total less than $10,000. Expenditures and costs related to contracts            that are equal to or greater than $10,000 are evaluated individually for            capitalization. Repairs and maintenance are charged to expense as incurred. Additions            and betterments are capitalized.

             

Classification of Properties

 

The Partnership is required to make subjective assessments as to whether            a property should be classified as “Held for Sale” under the provisions of            SFAS 144. SFAS 144 contains certain criteria that must be met in order for a property            to be classified as held for sale, including: management commits to a plan to sell the            asset; the asset is available for immediate sale in its present condition; an active            program to locate a buyer has been initiated; the sale of the asset is probable and            transfer of the asset is expected to qualify for recognition as a sale within one year;            the asset is being actively marketed for sale at a price that is reasonable in relation            to its current fair value; and actions required to complete the plan indicate that it            is unlikely that significant changes to the plan will be made or that the plan will be            withdrawn.

 

Impairment of Investment Property Values

 

The Partnership is required to make subjective assessments as to whether            there are impairments in the value of its investment properties. Management’s            estimates of impairment in the value of investment properties have            a direct impact on the Partnership’s net income.

             

The Partnership follows the provisions of SFAS No. 144. The Partnership            assesses the carrying value of its long-lived asset whenever events or changes in            circumstances indicate that the carrying amount of the underlying asset may not be            recoverable. Certain factors that may occur and indicate that impairment may exist            include, but are not limited to: significant underperformance relative to projected            future operating results; significant changes in the manner of the use of the asset;            and significant adverse industry or market economic trends. If an indicator of possible            impairment exists, a property is evaluated for impairment by a comparison of the            carrying amount of a property to the estimated undiscounted future cash flows expected            to be generated by the property. If the carrying amount of a property exceeds its            estimated future cash flows on an undiscounted basis, an impairment charge is            recognized by the amount by which the carrying amount of the property exceeds the fair            value of the property. Management estimates fair value of its properties based on            projected undiscounted cash flows using a discount rate determined by management to be            commensurate with the risk inherent in the Partnership.

 

Real            Estate Acquisitions

 

Upon acquisitions of real estate properties, management makes subjective            estimates of the fair value of acquired tangible assets (consisting of land, land            improvements, building, improvements, and furniture, fixtures and equipment) and            identified intangible assets and liabilities (consisting of above and below market            leases, in-place leases, tenant relationships and assumed financing that is determined            to be above or below market terms) in accordance with Statement of Financial Accounting            Standards (SFAS) No. 141,*Business            Combinations*. Management utilizes methods similar to those            used by independent appraisers in making these estimates. Based on these estimates,            management allocates purchase price to the applicable assets and liabilities. These            estimates have a direct impact on our net income.

 

Use of            Estimates

 

The preparation of financial statements in conformity with accounting            principles generally accepted in the United States requires management to make            estimates and assumptions that affect amounts reported in the accompanying Condensed            Consolidated Financial Statements. The most significant assumptions and estimates            relate to revenue recognition, depreciable lives of investment property, capital            expenditures, properties held for sale, and the valuation of investment property.            Application of these assumptions requires the exercise of judgment as to future            uncertainties and, as a result, actual results could differ from these            estimates.

 

|   | - 14 - |
|--------|--------|

Impact            of Recently Issued Accounting Standards

 

In September 2006, the Financial Accounting Standards Board (FASB)            issued FASB Statement No. 157,*Fair Value            Measurements*(“FAS 157”). FAS 157 establishes a            single authoritative definition of fair value, sets out a framework for measuring fair            value, and expands on required disclosures about fair value measurement. FAS 157 is            effective for us on January 1, 2008 and will be applied prospectively. The provisions            of FAS 157 are not expected to have a material impact on our consolidated financial            statements.

 

In February 2007, the FASB issued SFAS No. 159,*Establishing the Fair Value Option for Financial Assets and            Liabilities*, to permit all entities to choose to elect to            measure eligible financial instruments at fair value. SFAS No. 159 applies to fiscal            years beginning after November 15, 2007, with early adoption permitted for an entity            that has also elected to apply the provisions of SFAS No. 159, unless it chooses early            adoption. Management is currently evaluating the impact of SFAS No. 159 on its            consolidated financial statements.

 

DESCRIPTION OF BUSINESS

 

OVERVIEW

 

The Partnership currently operates three apartment communities and one            commercial property. Cash is primarily generated by renting units to tenants, or            securing loans with the Partnership’s assets. Cash is used primarily to pay            operating expenses (repairs and maintenance, payroll, utilities, taxes, and insurance),            make capital expenditures for property improvements, repay principal and interest on            outstanding loans or to pay cash distributions to shareholders. The key performance            indicators for revenues are occupancy rates and rental rates. Revenues are also            impacted by concessions (discounts) offered as rental incentives. The key performance            indicator for operating expenses is total operating expense per apartment unit. A            significant change in the turnover rate of rental units can also cause a significant            change in operating expenses. Management also evaluates total taxes, utilities and            insurance rates for each property.

 

General economic trends that management evaluates include construction            of apartment units (supply), unemployment rates, job growth, and interest rates            (demand). The apartment industry is sensitive to extremely low interest rates, which            tend to increase home ownership and decrease apartment occupancy rates. The apartment            industry is also sensitive to increased unemployment rates, which tend to cause            possible renters to double up in a unit or share a non-rental dwelling with relatives            or acquaintances. New construction in an area with low occupancy rates can cause a            further decline in occupancy or rental rates.

 

Economic trends appear to indicate that interest rates are increasing            and credit is tightening. It also appears that unemployment rates are declining, with            job growth rising. If these trends are correct and if the trends continue, the            Partnership believes it should be able to begin reducing concessions, raising rental            rates and increasing occupancy, which should improve revenues. In such case, the            Partnership also believes variable operating expenses will also tend to increase, but            fixed expense coverage would improve.

 

The Partnership primarily invests in income-producing real properties            (apartments). As of September 30, 2007 the Partnership’s portfolio is comprised            of:

             

| Property                     | Type of Ownership         | Use       |
|------------------------------|---------------------------|-----------|
|                         |                      |      |
| Bayberry (1)                 | Fee ownership, subject to | Shopping  |
| Lee’s Summit, Missouri | a first mortgage          | Center    |
| Cascade Apts. (1)            | Fee ownership, subject to | Apartment |
| Topeka, Kansas               | a first mortgage          | 86 units  |
| Hickory Glen (1)             | Fee ownership, subject to | Apartment |
| Springfield, Illinois        | a first mortgage          | 129 units |
| Sunwood Village Apts. (2)(3) | Fee ownership, subject to | Apartment |
| Las Vegas, Nevada            | a first mortgage          | 252 units |

             

(1) Property is held by a limited partnership in which the Partnership            owns 100%of the limited partner interest.

|   | - 15 - |
|--------|--------|

(2) Property is held by a limited partnership in which the Partnership            owns 100% of the original limited partner interest, but which also has Class A limited            partners that are entitled to a preferred return.

(3) Property is held by a limited partnership that is the subject of a            bankruptcy reorganization under Chapter 11.

             

LIQUIDITY AND CAPITAL RESOURCES

 

At September 30, 2007, the Partnership and it subsidiaries had cash and            cash equivalents of approximately $1,827,000 compared to approximately $1,954,000 at            December 31, 2006. Cash and cash equivalents decreased approximately $127,000 since            December 31, 2006. Redemption of limited partner units of $594,000, purchase of plant            property and equipment of $361,000 and principal repayment of mortgage loans was            partially offset by funds generated from operating activity of approximately            $630,000.

             

The sufficiency of existing liquid assets to meet future liquidity and            capital expenditure requirements is directly related to the level of capital            expenditures required at the various properties to adequately maintain the physical            assets and other operating needs of the Partnership and to comply with Federal, state,            and local legal and regulatory requirements. The General Partner monitors developments            in the area of legal and regulatory compliance. For example, the Sarbanes-Oxley Act of            2002 mandates or suggests additional compliance measures with regard to governance,            disclosure, audit and other areas. In light of these changes, the Partnership expects            that it will incur higher expenses related to compliance. The Partnership regularly            evaluates the capital improvement needs of the properties. The Partnership has no other            material commitments for property improvements and replacements however certain routine            capital expenditures are anticipated during 2007. Such capital expenditures will depend            on the physical condition of the properties as well as replacement reserves and cash            flow generated by the properties. Capital expenditures will be incurred only if cash is            available from operations, Partnership reserves or refinancing proceeds. To the extent            that capital improvements are completed, the Partnership’s distributable cash            flow, if any, may be adversely affected at least in the short term.

             

The Partnership’s assets are thought to be generally sufficient            for any near-term needs (exclusive of capital improvements) of the Partnership. The            mortgage indebtedness encumbering the Partnership’s investment properties is            approximately $23,951,000. Of such amounts, $9,345,000 matured in 2007 and balloon            payments of approximately $9,000,000 and $4,841,000 are due in 2012, and 2016,            respectively. The General Partner will attempt to refinance such indebtedness and/or            sell the properties prior to such maturity dates. If a property cannot be refinanced or            sold for a sufficient amount, the Partnership will risk losing such property through            foreclosure. As has been previously described, Sunwood Village has filed for bankruptcy            reorganization, occasioned by the maturity of the mortgage loan on the Sunwood property            at the same time Sunwood is effectively prevented from selling or refinancing the            property because of the lis pendens recorded by Mega Ventures against the property            relating to the litigation over their attempt to purchase the property. See Note 11 to            the Financial Statements. The Partnership believes that when such litigation and the            resultant bankruptcy are concluded, Sunwood will have sufficient assets to either            refinance its mortgage encumbrances or to sell the property and pay off such mortgage            encumbrances.

 

No dividends or distributions were declared or paid in the quarter ended            September 30, 2007. Commencing on February 23, 2007, the Partnership conducted an odd            lot tender offer to purchase units from all holders of fewer than 30 units, at $100 per            unit. As a result, 5,938 units were redeemed and retired as of September 30, 2007 for            $593,800.

 

Contractual Obligations and Commercial Commitments

Aggregate maturities of long-term debt are as follows:

 

| 2007 |   | $      | 9,361,522 |   |
|------|--------|--------|-----------|--------|
| 2008 |   |   | 69,244    |   |
| 2009 |   |   | 73,590    |   |
| 2010 |   |   | 78,210    |   |
| 2011 |   |   | 83,120    |   |

 

|   | - 16 - |
|--------|--------|

 

| 9 months to September 2012 |   |   | 9,060,986  |   |
|----------------------------|--------|--------|------------|--------|
| Thereafter                 |   |   | 5,224,609  |   |
|                       |   |   |       |   |
|                       |   | $      | 23,951,281 |   |

             

             

The            mortgage payable by SIR was transferred to Bayberry during 2006, and refinanced by            Bayberry.

 

The mortgage payable by Sunwood matured in 2006, but the Partnership            filed for bankruptcy protection, as described in Note 10 to the Financial Statements.            The mortgage was purchased by an affiliate of the General Partner, Everest II, on April            25, 2007.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

The            Partnership does not have any “off-balance sheet arrangements” as defined            in Item 303 (c) of Regulations S-B promulgated under the Securities Exchange Act of            1934, as amended.

 

RESULTS            OF OPERATIONS

 

This item should be read in conjunction with the condensed consolidated            financial statements and other items contained elsewhere in this report.

             

The Partnership’s financial results depend upon a number of            factors including the ability to attract and maintain tenants at the investment            properties, interest rates on mortgage loans, costs incurred to operate the investment            properties, general economic conditions and weather. As part of the ongoing business            plan of the Partnership, the General Partner monitors the rental market environment of            its investment properties to assess the feasibility of increasing rents, maintaining or            increasing occupancy levels and protecting the Partnership from increases in expenses.            As part of this plan, the General Partner attempts to protect the Partnership from the            burden of inflation-related increases in expenses by increasing rents and maintaining a            high overall occupancy level. However, the General Partner may use rental concessions            and rental rate reductions to offset softening market conditions, accordingly, there is            no guarantee that the General Partner will be able to sustain such a plan. Further, a            number of factors that are outside the control of the Partnership such as the local            economic climate and weather can adversely or positively affect the Partnership’s            financial results.

             

The Partnership’s net loss was approximately $56,000 for the three            months ended September 30, 2007 compared to a loss of $20,000 for the three months            ended September 30, 2006. The acquisition of Cascade caused total revenue to rise            $173,000 and increase expenses $195,000.

             

Total expenses decreased excluding the rise from the acquisition of            Cascade for the three months ended September 30, 2007 by $42,000. Sunwood had decreases            in legal fees of $150,000 in the three months ended September 30, 2007. These decreases            were partially offset by an increase in interest expense of $153,000 due to the loan            being in default and subject to default interest at a rate of 4% per annum. Hickory            Glen had a decrease in interest expense of $22,000. Property revenues increased at            Hickory Glen by $21,000 and at Sunwood by $20,000. However these were offset by a            decrease in CAM billings at Bayberry of $27,000. Interest income declined $49,000 in            the Company due to the accrual of interest that was made in 2006 for amounts due on the            note. Hickory Glen saw its interest income fall by $11,000. In 2006 it had escrow            balances of $1.4 million that earned interest compared to $76,000 in 2007.

             

The Partnership’s net loss was approximately $281,000 for the nine            months ended September 30, 2007 compared to a profit of $23,000 for the nine months            ended September 30, 2006. The acquisition of Cascade caused total revenue to rise            $477,000 and increase expenses $546,000.

             

Total expense increase excluding the rise from the acquisition of            Cascade for the nine months ended September 30, 2007 was $115,000. Sunwood had an            increase in interest expense of $308,000 due to

 

|   | - 17 - |
|--------|--------|

the            loan being in default and subject to default interest at a rate of 4% per annum, for            the nine months ended September 30, 2007. These increases were partially offset by a            decrease in utility cost of $40,000 and legal fees of $117,000. Hickory Glen had            increases in contract service expense of $60,000 marketing costs of $47,000 and            maintenance expense of $14,000. Property revenues increased at Hickory Glen by $141,000            and at Sunwood by $51,000. However these were offset by a decrease in CAM billings at            Bayberry of $122,000. Interest income declined $192,000 in the Company due to the            accrual of interest that was made in 2006 for amounts due on the SIR 1 note. Hickory            Glen saw its interest fall by $39,000. In 2006 it had escrow balances of $1.4 million            that earned interest compared to $76,000 in 2007.

             

MARKET            RISK

 

The debt on Sunwood is currently in default with a fixed stated rate of            7.15% and a default rate of 11.15%. Bayberry’s debt is at a fixed rate of 6.24%            and Cascade’s is at a fixed rate of 5.77%. Both loans mature in 2016. Hickory            Glen has debt with a fixed rate of 5.94% and a maturity in 2012. Bayberry and Hickory            Glen debt allows for prepayment after the lockout period which is September 2010 and            January 2011 respectfully by means of defeasance. Cascade’s loan can be prepaid            by paying the prepayment premium which is the greater of 1% of the principal            outstanding or the yield maintenance calculation as contained in the note.

 

INFLATION

 

The effects of inflation did not have a material impact upon the            Partnership’s operations during the current period.

             

| ITEM 3:   | CONTROLS AND PROCEDURES |
|---------------------|-------------------------|

 

| (a)   | Evaluation of disclosure controls and                            procedures. |
|-----------------|------------------------------------------------------------------------------|

 

The Partnership’s management, with the participation of the            principal executive officer and principal financial officer of the General Partner, who            are the equivalent of the Partnership’s principal executive officer and principal            financial officer, respectively, has evaluated the effectiveness of the            Partnership’s disclosure controls and procedures (as such term is defined in            Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended            (the “Exchange Act”)) as of the end of the period covered by this report.            Based on such evaluation, the principal executive officer and principal financial            officer of the General Partner, who are the equivalent of the Partnership’s            principal executive officer and principal financial officer, respectively, have            concluded that, as of the end of such period, the Partnership’s disclosure            controls and procedures were adequately designed and operating effectively to ensure            that material information relating to the Registrant would be made known to them by            others within the Registrant, particularly during the period in which this Form 10-QSB            Quarterly Report was being prepared.

             

| (b) | Internal Control Over Financial Reporting. |
|-----|--------------------------------------------|

 

There have not been any changes in the Partnership’s internal            control over financial reporting (as such term is defined in Rules 13a-15(f) and            15d-15(f) under the Exchange Act) during the period of this report from December 31,            2006 that have materially affected, or are reasonably likely to materially affect, the            Partnership’s internal control over financial reporting.

 

| PART II   | OTHER INFORMATION |
|---------------------|-------------------|

 

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

 

Sunwood Village Litigation

 

On March 8, 2005, Mega Ventures, LLC filed Case No. A500656 in the            District Court of Clark County, Nevada to enforce an alleged agreement to sell the            Sunwood Village Apartments. The Partnership believed that the agreement was terminated            or was otherwise not enforceable and that it was in the best interest of the            Partnership not to allow a sale of Sunwood Village for the price in the disputed            agreement. This litigation was removed to the United States Bankruptcy Court, District            of Nevada, Case No. BK-S-06-

|   | - 18 - |
|--------|--------|

12463-BAM; Adv. No. 06-1194-BAM. After the first phase of the trial, the            Court ruled on October 15, 2007, that Sunwood Village breached the agreement with Mega            Ventures by failing to sell the Sunwood Village Apartments to Mega Ventures, and the            Court scheduled the remedies phase of the trial for March 2008, in order for the Court            to determine Mega’s damages or to award Mega the remedy of specific performance            of the agreement. The outcome of this litigation cannot be predicted. If Mega prevails            in specifically enforcing the alleged agreement or receives a substantial award of            damages, then the Partnership may not be able to realize any significant net proceeds            from a sale of the Sunwood Village Apartments after repayment of outstanding            obligations.

Litigation Against Former General Partner

 

On November 9, 2005, the Partnership filed Case No. 05CV08810 in the            District Court of Johnson County, Kansas, alleging that the Partnership’s former            general partner, James R. Hoyt, failed to make the first required payment on a            promissory note Mr. Hoyt signed in order to repay $2,500,000 that he owes to the            Partnership. This litigation was settled in January 2007. Pursuant to the settlement,            Mr. Hoyt agreed to have judgment entered in the Partnership’s favor in the            amount of $2,750,000, and to pay $100,000 to the Partnership in cash immediately. As            part of the settlement, Mr. Hoyt has provided information regarding his assets and            income that, if true, indicates that the Partnership is unlikely to be able to collect            any significant portion of the balance of the judgment. The settlement requires            Mr. Hoyt to provide documents and to testify under oath regarding his financial            situation, and provides the Partnership with a year to investigate further in order to            attempt to verify such information. If Mr. Hoyt misrepresented his financial            condition, the Partnership will be entitled to attempt to collect the balance of the            judgment. Otherwise, the judgment will be discharged at the end of such time. The            general partner believes the settlement is more favorable to the Partnership than what            the Partnership would likely have been able to achieve through contested litigation.            The entire receivable was previously written off.

Sunwood Bankruptcy

             

On September 12, 2006, Sunwood filed for protection under Chapter 11 of            the United States Bankruptcy Code, as more fully described in Note 10 to the Financial            Statements.

 

There            are no other pending or outstanding litigation matters involving the Partnership or its            properties, other than matters of a routine nature arising in the ordinary course of            business.

 

|   | - 19 - |
|--------|--------|

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

 

None

 

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

 

See Note 6 and Note 10 of the Notes to Unaudited consolidated Financial            Statements incorporated herein   by this reference.

 

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

 

None.

 

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

 

None.

 

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

 

|   | 31.1 | Certification of equivalent of Chief                            Executive Officer pursuant to Securities Exchange Act Rules                            13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the                            Sarbanes-Oxley Act of 2002. |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 31.2 | Certification of equivalent of Chief                            Financial Officer pursuant to Securities Exchange Act Rules                            13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the                            Sarbanes-Oxley Act of 2002. |
|--------|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 32.1 | Certification of Chief Executive                            Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to                            Section 906 Of The Sarbanes-Oxley Act Of 2002. |
|--------|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

|   | 32.2 | Certification of Chief Financial                            Officer pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To                            Section 906 Of The Sarbanes-Oxley Act Of 2002. |
|--------|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

             

[SIGNATURES ON THE FOLLOWING PAGE]

 

 

 

 

|   | - 20 - |
|--------|--------|

SIGNATURES

 

In            accordance with the requirements of the Securities Exchange Act of 1934, the Registrant            caused this report to be signed on its behalf by the undersigned, there unto duly            authorized.

             

             

|   |             |   | SECURED INVESTMENT RESOURCES FUND, L.P. II |
|--------|------------------|--------|--------------------------------------------|
|   |             |   |                                       |
| Date:  | November 6, 2007 | By:    | Millenium Management, LLC                  |
|   |             |   | General Partner                            |
|   |             |   |                                       |
|   |             | By:    | /s/ W. Robert Kohorst                      |
|   |             |   | W. Robert Kohorst                          |
|   |             |   | President and Chief Executive Officer      |
|   |             |   |                                       |
| Date:  | November 6, 2007 | By:    | /s/ Peter Wilkinson                        |
|   |             |   | Peter Wilkinson                            |
|   |             |   | Vice President and                         |
|   |             |   | Principal Financial Officer                |

             

 

|   | - 21 - |
|--------|--------|