**SECURITIES AND EXCHANGECOMMISSION**

##### **Washington, D.C.  20549**

**FORM 10-Q**

**x****                             ****QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES****EXCHANGEACT OF 1934.**

**For the quarterly period ended September 30, 2006.**

**OR**

**o****                                ****TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES****EXCHANGEACT OF 1934.**

**For the transition period from                                    to                                     **

**Commission file number 1-14462**

**AMERIVEST PROPERTIESINC.**

(Exact name of registrant asspecified in its charter)

 

| **Maryland**                                               | ** ** | **84-1240264**                        |
|------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of                           |       | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)                            |       |                                  |
|                                                       |       |                                  |
| **1780  South Bellaire Street**                            | ** ** | ** **                            |
| **Suite  100, Denver, Colorado**                           | ** ** | **80222**                             |
| (Address of  principal executive offices)                  |       | (Zip Code)                            |
|                                                       |       |                                  |
| **(303)  297-1800**                                        |
| (Registrant’s  telephone number, including area code) |

 

Indicate by check mark whether the registrant (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes  x  No  o

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act (check one)

Large accelerated filer o         Accelerated filer x         Non-accelerated filer o

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

The number of shares of the registrant’s common stock outstanding as ofOctober 31, 2006 was 24,114,316.

 

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**Table of Contents**
| **Part I**  | **Financial  Information**                                                                                                                                                                                          | ** ** |
|-------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **  | ** **                                                                                                                                                                                                          | ** ** |
| Item 1.     | Financial  Statements:                                                                                                                                                                                              |       |
|        | Condensed Consolidated Statement of Net Assets in  Liquidation as of September 30, 2006 (unaudited)                                                                                                                 |       |
|        | Condensed Consolidated Balance Sheet (Going Concern  Basis) as of December 31, 2005                                                                                                                                 |       |
|        | Condensed Consolidated Statement of Changes in Net  Assets in Liquidation for the three months ended September 30, 2006 and the  period June 1, 2006 to September 30, 2006 (unaudited)                              |       |
|        | Condensed Consolidated Statements of Operations (Going  Concern Basis) for the five months ended May 31, 2006, the three months ended  September 30, 2005, and the nine months ended September 30, 2005 (unaudited) |       |
|        | Condensed Consolidated Statement of Stockholders’  Equity and Comprehensive Income (Going Concern Basis) for the five months  ended May 31, 2006 (unaudited)                                                   |       |
|        | Condensed Consolidated Statements of Cash Flows (Going  Concern Basis) for the five months ended May 31, 2006 and for the nine months  ended September 30, 2005 (unaudited)                                         |       |
|        | Notes to Condensed Consolidated Financial Statements  (unaudited)                                                                                                                                                   |       |
|        |                                                                                                                                                                                                                |       |
| Item 2.     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                                                         |       |
|        |                                                                                                                                                                                                                |       |
| Item 3.     | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                                                         |       |
|        |                                                                                                                                                                                                                |       |
| Item 4.     | Controls and  Procedures                                                                                                                                                                                            |       |
|        |                                                                                                                                                                                                                |       |
| **Part II** | **Other Information**                                                                                                                                                                                               | ** ** |
| ** **  | ** **                                                                                                                                                                                                          | ** ** |
| Item 1.     | Legal Proceedings                                                                                                                                                                                                   |       |
|        |                                                                                                                                                                                                                |       |
| Item  1A.   | Risk  Factors                                                                                                                                                                                                       |       |
|        |                                                                                                                                                                                                                |       |
| Item 2.     | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                                                        |       |
|        |                                                                                                                                                                                                                |       |
| Item 3.     | Defaults  upon Senior Securities                                                                                                                                                                                    |       |
|        |                                                                                                                                                                                                                |       |
| Item 4.     | Submission  of Matters to a Vote of Security Holders                                                                                                                                                                |       |
|        |                                                                                                                                                                                                                |       |
| Item 5.     | Other Information                                                                                                                                                                                                   |       |
|        |                                                                                                                                                                                                                |       |
| Item  6.    | Exhibits                                                                                                                                                                                                            |       |

 

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**PART I –FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

**AMERIVESTPROPERTIES INC.**

**Condensed Consolidated Statement of Net Assets in Liquidation**
| ** **                                                       | ** ** | **September 30,  2006** | ** **  |
|------------------------------------------------------------------|------------|------------------------------|-------------|
| ** **                                                       | ** ** | **(unaudited)**              | ** **  |
| **ASSETS**                                                       |       |                         |        |
| Real estate assets                                               |       | $                            | 198,322,283 |   |
| Cash and cash equivalents                                        |       | 48,604,609                   |        |
| Escrow deposits and  restricted cash                             |       | 4,098,449                    |        |
| Accounts receivable                                              |       | 141,139                      |        |
| Prepaid expenses and  other assets                               |       | 419,722                      |        |
| Total assets                                                     |       | $                            | 251,586,202 |   |
| **LIABILITIES**                                                  |       |                         |        |
| Secured mortgage loans  and notes payable                        |       | $                            | 107,297,229 |   |
| Accounts payable and  accrued expenses                           |       | 1,913,849                    |        |
| Earnest money from  Koll/PER                                     |       | 2,000,000                    |        |
| Accrued real estate  taxes                                       |       | 2,562,028                    |        |
| Prepaid rents and  security deposits                             |       | 1,790,773                    |        |
| Estimated net liability  for costs during the liquidation period |       | 5,648,777                    |        |
| Total liabilities                                                |       | 121,212,656                  |        |
| Net assets in  liquidation (available to common stockholders)    |       | $                            | 130,373,546 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

1

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**AMERIVEST PROPERTIES INC.**

**Condensed Consolidated Balance Sheet(Going Concern Basis)**
| ** **                                                                                                | ** ** | **December 31,  2005** | ** **  |
|-----------------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|
| **ASSETS**                                                                                                |       |                        |        |
| Investment in real  estate:                                                                               |       |                        |        |
| Land                                                                                                      |       | $                           | 48,059,765  |   |
| Buildings and  improvements                                                                               |       | 166,431,824                 |        |
| Furniture,  fixtures and equipment                                                                        |       | 1,304,879                   |        |
| Tenant  improvements                                                                                      |       | 14,245,047                  |        |
| Tenant leasing  commissions                                                                               |       | 3,479,965                   |        |
| Intangible  assets                                                                                        |       | 13,371,477                  |        |
| Real estate  assets – held-for-sale, net                                                             |       | 46,930,658                  |        |
| Less:  accumulated depreciation and amortization                                                          |       | (24,220,447                 | )           |
| Net investment  in real estate                                                                            |       | 269,603,168                 |        |
| Cash and cash  equivalents                                                                                |       | 988,420                     |        |
| Escrow deposits                                                                                           |       | 4,920,968                   |        |
| Accounts receivable,  net                                                                                 |       | 1,310,627                   |        |
| Deferred rents  receivable                                                                                |       | 4,511,512                   |        |
| Deferred financing  costs, net                                                                            |       | 1,421,375                   |        |
| Prepaid expenses and  other assets                                                                        |       | 923,928                     |        |
| Other assets –  held-for-sale                                                                        |       | 229,792                     |        |
| Total assets                                                                                              |       | $                           | 283,909,790 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                            |       |                        |        |
| Liabilities:                                                                                              |       |                        |        |
| Secured mortgage  loans and notes payable                                                                 |       | $                           | 127,673,784 |   |
| Unsecured line  of credit                                                                                 |       | 29,897,129                  |        |
| Secured mortgage  loans – held-for-sale                                                              |       | 28,232,661                  |        |
| Accounts payable  and accrued expenses                                                                    |       | 6,917,224                   |        |
| Accrued real  estate taxes                                                                                |       | 4,195,875                   |        |
| Prepaid rents,  deferred revenue and security deposits                                                    |       | 3,273,861                   |        |
| Dividends  payable                                                                                        |       | 302,208                     |        |
| Total  liabilities                                                                                        |       | 200,492,742                 |        |
|                                                                                                      |       |                        |        |
| Stockholders’ equity:                                                                                |       |                        |        |
| Preferred stock,  $0.001 par value  Authorized: 5,000,000 shares  Issued and outstanding: none            |       | —                      |        |
| Common stock,  $0.001 par value  Authorized: 75,000,000 shares  Issued and outstanding: 24,121,306 shares |       | 24,121                      |        |
| Capital in  excess of par value                                                                           |       | 133,231,147                 |        |
| Distributions in  excess of accumulated earnings                                                          |       | (49,838,220                 | )           |
| Total  stockholders’ equity                                                                          |       | 83,417,048                  |        |
| Total liabilities and  stockholders’ equity                                                          |       | $                           | 283,909,790 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

2

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**AMERIVEST PROPERTIES INC.**

**Condensed Consolidated Statements of Changes in Net Assets inLiquidation(unaudited)**
| ** **                                                         | ** ** | **For the Three  Months Ended  September 30, 2006** | ** **  | **For the period from  June 1, 2006 to  September 30, 2006** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------------------------------|-------------|------------------------------------------------------------------------------------------------------|------------|
|                                                               | ** ** | ** **                                                                   | ** **  | ** **                                                                                           | ** ** |
| **Net  assets in liquidation, beginning of period**                |       | $                                                                            | 122,155,305 |                                                                                                 | $          | 122,579,044 |   |
|                                                               |       |                                                                         |        |                                                                                                 |       |
| **Changes  in net assets in liquidation:**                         |       |                                                                         |        |                                                                                                 |       |
| Changes to net  liability for costs during the liquidation period: |       |                                                                         |        |                                                                                                 |       |
| Excess of revenues over expenses                                   |       | 1,582,081                                                                    |        | 1,364,206                                                                                            |       |
| Change in estimated costs during the liquidation  period           |       | (1,003,184                                                                   | )           | (1,003,184                                                                                           | )          |
| Change to net  liability for costs during the liquidation period   |       | 578,897                                                                      |        | 361,022                                                                                              |       |
| Change in fair  value of real estate investments                   |       | 6,033,702                                                                    |        | 6,033,702                                                                                            |       |
| Change in assets  and liabilities                                  |       | 1,605,642                                                                    |        | 1,399,778                                                                                            |       |
| **Change  in net assets in liquidation**                           |       | 8,218,241                                                                    |        | 7,794,502                                                                                            |       |
| **Net assets in liquidation, end  of period**                      |       | $                                                                            | 130,373,546 |                                                                                                 | $          | 130,373,546 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

3

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**AMERIVEST PROPERTIES INC.**

**Condensed Consolidated Statements of Operations(Going Concern Basis)(unaudited)**
| ** **                                               | ** ** | **Five Months  Ended  May 31, 2006** | ** ** | **Three Months  Ended  September 30, 2005** | ** ** | **Nine Months Ended  September 30, 2005** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------|------------|------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| Real Estate  Operating Revenue:                          | ** ** | ** **                                          | ** ** | ** **                                                 | ** ** | ** **                                               | ** ** |
| Rental revenues                                          |       | $                                                   | 14,548,386 |                                                       | $          | 8,609,254                                                |       | $ | 25,952,853 |   |
|                                                     |       |                                                |       |                                                       |       |                                                     |       |
| Real Estate  Operating Expenses:                         |       |                                                |       |                                                       |       |                                                     |       |
| Property operating expenses -                            |       |                                                |       |                                                       |       |                                                     |       |
| Operating expenses                                       |       | 4,254,952                                           |       | 2,307,499                                                  |       | 6,901,892                                                |       |
| Real estate taxes                                        |       | 1,812,772                                           |       | 974,461                                                    |       | 3,527,521                                                |       |
| General and administrative expenses                      |       | 2,084,652                                           |       | 1,043,395                                                  |       | 3,735,406                                                |       |
| Interest expense                                         |       | 3,533,086                                           |       | 3,111,792                                                  |       | 8,860,849                                                |       |
| Depreciation and amortization expense                    |       | 5,265,388                                           |       | 3,247,678                                                  |       | 9,691,171                                                |       |
| Strategic alternative and liquidation expenses           |       | 249,435                                             |       | 38,683                                                     |       | 145,272                                                  |       |
| Total operating expense                                  |       | 17,200,285                                          |       | 10,723,508                                                 |       | 32,862,111                                               |       |
|                                                     |       |                                                |       |                                                       |       |                                                     |       |
| Loss from  continuing operations                         |       | (2,651,899                                          | )          | (2,114,254                                                 | )          | (6,909,258                                               | )          |
|                                                     |       |                                                |       |                                                       |       |                                                     |       |
| Other Income:                                            |       |                                                |       |                                                       |       |                                                     |       |
| Interest income and other                                |       | 129,747                                             |       | 24,525                                                     |       | 42,529                                                   |       |
| Total other income                                       |       | 129,747                                             |       | 24,525                                                     |       | 42,529                                                   |       |
|                                                     |       |                                                |       |                                                       |       |                                                     |       |
| Loss before  discontinued operations                     |       | (2,522,152                                          | )          | (2,089,729                                                 | )          | (6,866,729                                               | )          |
|                                                     |       |                                                |       |                                                       |       |                                                     |       |
| Net  earnings/(loss) from discontinued operations        |       | 15,046,598                                          |       | (3,340,714                                                 | )          | (4,238,559                                               | )          |
|                                                     |       |                                                |       |                                                       |       |                                                     |       |
| Net  earnings/(loss)                                     |       | $                                                   | 12,524,446 |                                                       | $          | (5,430,443                                               | )          | $ | (11,105,288 | ) |
|                                                     |       |                                                |       |                                                       |       |                                                     |       |
| Net  Earnings/(Loss) per Share – Basic and Diluted: |       |                                                | ** ** | ** **                                                 | ** ** | ** **                                               | ** ** |
| Net earnings/(loss) before discontinued operations       |       | $                                                   | (0.10      | )                                                          | $          | (0.09                                                    | )          | $ | (0.28 | ) |
| Discontinued operations, net                             |       | 0.62                                                |       | (0.14                                                      | )          | (0.18                                                    | )          |
| Net earnings/(loss)                                      |       | $                                                   | 0.52       |                                                       | $          | (0.23                                                    | )          | $ | (0.46 | ) |
|                                                     |       |                                                |       |                                                       |       |                                                     |       |
| Weighted Average  Common Shares Outstanding:             |       |                                                |       |                                                       |       |                                                     |       |
| Basic                                                    |       | 24,124,735                                          |       | 24,074,937                                                 |       | 24,044,762                                               |       |
| Diluted                                                  |       | 24,128,907                                          |       | 24,074,937                                                 |       | 24,044,762                                               |       |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

4

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**AMERIVEST PROPERTIES INC.**

**CondensedConsolidated Statement of Stockholders’ Equityand Comprehensive Income(Going Concern Basis)**

**FiveMonths Ended May 31, 2006(unaudited)**
| ** **                    | ** ** | **Common Stock** | ** ** | **Additional  Paid in** | ** ** | **Distributions  in Excess of  Net** | ** ** | ** **   | ** ** |
|-------------------------------|------------|-----------------------|------------|------------------------------|------------|------------------------------------------------|------------|--------------|------------|
| ** **                    | ** ** | **Shares**            | ** ** | **Amount**                   | ** ** | **Capital**                                    | ** ** | **Earnings** | ** ** | **Total** | ** ** |
| Balance at  December 31, 2005 |       | 24,121,306            |       | $                            | 24,121     |                                           | $          | 133,231,147  |       | $ | (49,838,220 | ) | $ | 83,417,048 |   |
|                          |       |                  |       |                         |       |                                           |       |         |       |   |   |
| Net earnings                  |       | —                |       | —                       |       | —                                         |       | 12,524,446   |       | 12,524,446 |   |
| Equity-based compensation     |       | 6,900                 |       | 7                            |       | 30,918                                         |       | —       |       | 30,925 |   |
| Balance at May 31, 2006       |       | 24,128,206            |       | $                            | 24,128     |                                           | $          | 133,262,065  |       | $ | (37,313,774 | ) | $ | 95,972,419 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

5

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**AMERIVEST PROPERTIES INC.**

**Condensed Consolidated Statementsof Cash Flows(Going Concern Basis)(unaudited)**
| ** **                                                                                  | ** ** | **Five Months  Ended May 31,  2006** | ** ** | **Nine Months  Ended  September 30,  2005** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------------|------------|
| Cash Flows from  Operating Activities:                                                      |       |                                                |       |                                                  |       |
| Net earnings/(loss)                                                                         |       | $                                                   | 12,524,446 |                                                  | $          | (11,105,288 | ) |
| Adjustments to reconcile net earnings/(loss) to net  cash provided by operating activities- |       |                                                |       |                                                  |       |
| Depreciation and amortization expense                                                       |       | 5,314,189                                           |       | 14,378,955                                            |       |
| Loss/(gain) on sale of real estate, net                                                     |       | (15,327,481                                         | )          | 20,803                                                |       |
| Impairment of assets held-for-sale                                                          |       | —                                              |       | 2,720,826                                             |       |
| Amortization of deferred financing costs                                                    |       | 178,107                                             |       | 1,088,878                                             |       |
| Write-off of unamortized deferred financing costs                                           |       | 301,463                                             |       | 215,993                                               |       |
| Minority interest                                                                           |       | —                                              |       | (285,369                                              | )          |
| Equity-based compensation                                                                   |       | 30,925                                              |       | 534,393                                               |       |
| Changes in assets and liabilities-                                                          |       |                                                |       |                                                  |       |
| Accounts receivable                                                                         |       | 657,998                                             |       | 248,096                                               |       |
| Deferred rent receivable                                                                    |       | (153,787                                            | )          | (936,032                                              | )          |
| Prepaid expenses and other assets                                                           |       | 430,378                                             |       | (351,286                                              | )          |
| Accounts payable and accrued expenses                                                       |       | (2,150,251                                          | )          | (1,259,777                                            | )          |
| Other accrued liabilities                                                                   |       | (1,886,216                                          | )          | 282,301                                               |       |
| Net cash flows provided  by/(used in) operating activities                                  |       | (80,229                                             | )          | 5,552,493                                             |       |
|                                                                                        |       |                                                |       |                                                  |       |
| Cash Flows from  Investing Activities:                                                      |       |                                                |       |                                                  |       |
| Capital expenditures                                                                        |       | (203,614                                            | )          | (2,027,079                                            | )          |
| Tenant improvements                                                                         |       | (1,354,519                                          | )          | (4,044,453                                            | )          |
| Leasing commissions                                                                         |       | (877,590                                            | )          | (2,057,079                                            | )          |
| Proceeds from sales, net of closing costs                                                   |       | 61,704,117                                          |       | 4,432,197                                             |       |
| Cash paid to complete deed-in-lieu transaction                                              |       | —                                              |       | (114,600                                              | )          |
| Legal settlement proceeds                                                                   |       | —                                              |       | 450,000                                               |       |
| Net cash flows provided  by/(used in) investing activities                                  |       | 59,268,394                                          |       | (3,361,014                                            | )          |
|                                                                                        |       |                                                |       |                                                  |       |
| Cash Flows from  Financing Activities:                                                      |       |                                                |       |                                                  |       |
| Additions to mortgage loans and lines of credit                                             |       | —                                              |       | 7,203,233                                             |       |
| Payments of mortgage loans, lines of credit and  notes payable                              |       | (58,073,709                                         | )          | (1,000,000                                            | )          |
| Regularly scheduled principal payments                                                      |       | (1,092,898                                          | )          | (2,322,641                                            | )          |
| Payment of deferred financing costs                                                         |       | (181,387                                            | )          | (313,446                                              | )          |
| Net proceeds from exercising of options and warrants                                        |       | —                                              |       | 7,501                                                 |       |
| Net change in escrow deposits                                                               |       | 1,748,315                                           |       | (3,454,431                                            | )          |
| Dividends paid                                                                              |       | —                                              |       | (3,075,074                                            | )          |
| Net cash flows used in  financing activities                                                |       | (57,599,679                                         | )          | (2,954,858                                            | )          |
|                                                                                        |       |                                                |       |                                                  |       |
| Net change in  cash and cash equivalents                                                    |       | 1,588,486                                           |       | (763,379                                              | )          |
| Cash and cash  equivalents, beginning of period                                             |       | 988,420                                             |       | 1,859,660                                             |       |
| Cash and cash  equivalents, end of period                                                   |       | $                                                   | 2,576,906  |                                                  | $          | 1,096,281 |   |
|                                                                                        |       |                                                |       |                                                  |       |
| Supplemental  Disclosure of Cash Flow Information:                                          |       |                                                |       |                                                  |       |
| Cash paid for interest                                                                      |       | $                                                   | 3,815,831  |                                                  | $          | 10,930,480 |   |
|                                                                                        |       |                                                |       |                                                  |       |
| Supplemental  Disclosure of Non-Cash Investing and Financing Activities:                    |       |                                                |       |                                                  |       |
| Basis of real estate involved in deed-in-lieu  transaction                                  |       | $                                                   | —     |                                                  | $          | 5,160,022 |   |
| Debt extinguishment as part of deed-in-lieu  transaction                                    |       | $                                                   | —     |                                                  | $          | 5,565,859 |   |
| Note receivable  related to disposition                                                     |       | $                                                   | —     |                                                  | $          | 364,170 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

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**AMERIVESTPROPERTIES INC.**

**Notes to Condensed Consolidated Financial Statements**

**September30, 2006(unaudited)**

### 1 – Organizationand Plan of Liquidation

AmeriVest Properties Inc.(the “Company”) is a real estate investment trust (“REIT”) incorporated under thelaws of the State of Maryland.  TheCompany operates commercial office buildings in selective markets and leasesthe commercial office buildings to small and medium size tenants.  At September 30, 2006, the Company owned nineoffice properties located in metropolitan Denver, Dallas and Phoenix, all ofwhich are classified as held-for-sale and included in net assets inliquidation.

On February 9, 2006, our Board ofDirectors approved a plan of liquidation (the “Plan”), which was approved byour stockholders at the Annual Meeting of Stockholders on May 24, 2006.  On July 17, 2006, the Company entered into adefinitive agreement (the “Agreement”) to sell its entire portfolio of officeproperties to Koll/PER LLC (“Koll/PER”), a limited liability company owned byThe Koll Company of Newport Beach, California and the Public EmployeeRetirement System of Idaho (“PERSI”).  The gross purchase price is $273 million (less a reserve for capitalexpenditures of approximately $850,000), which includes an assumption ofexisting property level debt of approximately $126 million.   As of October 31, 2006, we had closed on thesales of six properties.  Closings on theremaining properties will be scheduled as loan assumption approvals arereceived from the Company’s mortgage lenders and other traditional closingactivities are completed. There can be no assurance that the remainder of thesales will close, or close on the terms described.

Our net assets inliquidation aggregated approximately $130.4 million or $5.41 per share onSeptember 30, 2006.  This amountrepresents assets at estimated net realizable values on an undiscountedbasis.  The amount also includes anestimated net liability for future estimated general and administrativeexpenses and other costs incurred during the liquidation period and until suchtime that all obligations have been relieved and distributions made to theCompany’s stockholders.  As not all ofthe property sales have closed, these estimates contain potential costs thatcould change as circumstances dictate. There can be no assurance that these estimated values will be realized,nor if the reserve for future estimated general and administrative expenses isadequate.  On October 30, 2006, the Boardof Directors declared an initial liquidating cash distribution of $3.50 pershare.  The distribution will be paidNovember 16, 2006 to stockholders of record as of November 10, 2006.  The timing and amount of additional liquidatingdistributions (if any) and the final liquidating distribution will depend onthe timing and amount of proceeds the Company receives upon the sale of theseassets and the extent to which reserves are required.

The Company currently expects thatsubsequent to the disposition of our commercial office buildings andliquidating distributions that any remaining assets and liabilities will betransferred to a liquidating trust.  Theliquidating trust would continue to exist until all liabilities have beensettled and proceeds from dispositions have been distributed to stockholders.

As a result of the approval of the Plan by ourstockholders, we adopted the liquidation basis of accounting as of June 1, 2006and for all subsequent periods.  For allperiods prior to June 1, 2006, the Company’s financial statements are presentedon the going concern basis of accounting.

2 – Summary ofSignificant Accounting Policies

*Liquidation Basis of Accounting*

As a result of the approval of the Plan by ourstockholders, we adopted the liquidation basis of accounting as of June 1,2006, and for all subsequent periods. Accordingly, all assets have been adjusted to their estimated netrealizable value.  Liabilities, includingestimated costs associated with implementing the Plan, have been adjusted to

7

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their estimated settlement amounts.  The estimates of the Company’s assets andliabilities will be periodically reviewed and adjusted as appropriate.  The estimates for the valuation of realestate held-for-sale is based on the current agreement with Koll/PER, net ofestimated selling costs and other potential costs relating to theliquidation.  Actual values realized forassets and settlement of liabilities may differ materially from the amountsestimated.  Estimated future cash flowsfrom property operations were made based on the anticipated sales dates of theassets.  However, due to the uncertaintyin the timing of the anticipated sales dates and the cash flows therefrom,revenues and expenses generated by operations may differ materially fromamounts estimated.  These amounts arepresented in the accompanying statement of net assets.  The net assets represent the estimatedliquidation value of our assets available to our stockholders uponliquidation.  The actual settlement amountsrealized for assets and settlement of liabilities may differ materially, perhapsin adverse ways, from the amounts estimated. As such, it is not possible to predict the aggregate amount or timing offuture distributions to stockholders and no assurance can be given that theeventual amount of distributions to be paid will equal or exceed the estimatednet assets in liquidation included in the financial statements.

*Basis ofPresentation*

The unauditedcondensed consolidated financial statements included herein were prepared fromthe records of the Company in accordance with U.S. generally acceptedaccounting principles through May 31, 2006, and under the liquidation basis ofaccounting effective June 1, 2006, and reflect all adjustments which are, inthe opinion of management, necessary to provide a fair statement of our financialposition including net assets in liquidation, changes in net assets inliquidation, results of operations, stockholders’ equity and cash flows for theinterim periods. Such financial statements, except for liquidation basisfinancial statements, generally conform to the presentation reflected in theCompany’s Annual Report on Form 10-K filed with the Securities and ExchangeCommission for the year ended December 31, 2005.  Interim results of operations and changes innet assets in liquidation are not necessarily indicative of the results thatmay be expected for the year ending December 31, 2006.  These financial statements and notes thereinshould be read together with the financial statements and notes included in theCompany’s Form 10-K for the year ended December 31, 2005.  Certain prior period balances have beenreclassified to conform to current period presentation.

*Use ofEstimates*

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States and the liquidation basis of accounting requires management tomake significant estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosure of contingent assets and liabilities atthe date of the condensed consolidated financial statements. Actual resultscould differ from those estimates. Estimates and assumptions are reviewed periodically and the effects ofthose revisions are reflected in the period they are determined necessary.

*Investment in Real Estate*

Prior to June 1, 2006, investment in real estate wascarried at the lower of cost or fair value. Maintenance and repairs wereexpensed as incurred and improvements were capitalized. The cost of buildingand improvements were depreciated on a straight-line basis over the estimateduseful lives of the buildings and improvements, ranging primarily from 20 to40 years and the lesser of the lease term or useful life, ranging from oneto 10 years for tenant improvements. Thecost of assets sold or retired and the related accumulated depreciation and/oramortization were removed from the accounts and the resulting gain or loss wasreflected in operations in the period in which such sale or retirementoccurred.

Prior to June 1,2006, operating properties were individually evaluated for impairment whenconditions existed which may have indicated that it was probable that the sumof expected future cash flows (on an undiscounted basis) from a rental propertyover the anticipated holding period was less than its historical net costsbasis based on the

8

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probability of thepotential property dispositions.  Upon determination that a permanent impairment hadoccurred, rental properties were reduced to their fair value.   For properties to be disposed of, animpairment loss was recognized when the fair value of the property asdeterminedthrough third-partyvaluations, reduced by the estimated cost to sell, was less than the carryingamount of the property measured at the time we had a commitment to sell theproperty that was not subject to any significant contingencies.  A property to be disposed of was reported atthe lower of its carrying amount or its estimated fair value, less its cost tosell. Subsequent to the date that a property was held for disposition,depreciation expense was not recorded.  Wedid not record any impairment losses for the five months ended May 31, 2006.  For the three and nine months ended September30, 2005 we recorded impairment losses of approximately $2.7 million as part ofour incremental evaluation associated with the properties deemed asheld-for-sale.

As of June 1, 2006, the operating properties wereadjusted to estimated fair value less estimated costs to sell and otherpotential costs relating to the liquidation, through the adjustment of assetsand liabilities to fair value, to reflect the change to the liquidation basisof accounting.

*OtherIntangible Assets*

Prior to June 1, 2006, intangibleassets were amortized over the remaining life of the in-place leases thatgenerally ranged from 24 to 57 months. In accordance with theadoption of the Plan, intangible assets were adjusted to their net realizablevalue.

*Cash Equivalents*

Cash and cash equivalents consistof cash on hand and short-term, highly liquid investments. For purposes ofreporting cash flows, the Company considers as cash equivalents all highlyliquid investments with a maturity of three months or less at the time ofpurchase.

*Escrow Deposits*

In accordance with the loanagreements for a majority of the Company’s loans, the lenders require theCompany to maintain reserves for real estate taxes, property insurance, capitalimprovements and/or tenant improvements.

*Allowance for Doubtful Accounts*

Prior to June 1, 2006, tenant receivables were carriednet of the allowances for uncollectible current tenant receivables.  An allowance was maintained for estimatedlosses resulting from the inability of tenants to make required payments underthe terms of the lease agreement. Management exercised judgment in establishing the allowance andconsidered payment history, personal guarantees and credit status in developingthe estimate.  We had established anallowance for uncollectible accounts of $387,000 at December 31, 2005.  As of June 1, 2006, we have adjusted tenantreceivables and deferred rent receivable to their estimated net realizablevalue.

*DeferredLeasing and Financing Costs*

Prior to June 1, 2006, costs incurred for leasing and financing,  including commissions paid to third parties for new leases or the renewal ofleases and fees paid to third parties to obtain long-term financing, werecapitalized as deferred assets. The deferred leasing costs were recorded atcost and amortized over the terms of the respective leases. The deferredfinancing costs were amortized over the term of the respective debt instrumenton a straight-line basis, which approximated the effective yield. The deferredleasing and deferred finance costs were included as a component of totaloperating expenses and interest expense in the accompanying condensedconsolidated statements of operations.  Inaccordance with the adoption of liquidation accounting, deferred leasing costsand deferred financing costs were written off. Effective June 1, 2006, these costs will be expensed as incurred.

9

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*Revenue Recognition*

Prior to June 1, 2006, the Company recorded rental revenue for the fullterm of each lease on a straight-line basis, which included the effects of rentsteps and rent abatements. Accordingly, the Company recorded a receivable fromtenants for rents that the Company expected to collect over the remaining leaseterm as deferred rents receivable.

In accordance with the adoptionof the liquidation basis of accounting these deferred rents receivable balanceswere written off.  Effective June 1,2006, the Company will no longer record straight-line rental revenue.  Rental revenue is recorded based onthe terms of the lease agreement under the liquidation basis of accounting.

*Concentrationsof Credit Risk*

The Company leases office spaceto commercial businesses in its target markets. The terms of the leasesgenerally require basic rent payments at the beginning of each month. Creditrisk associated with the lease agreements is limited to the amount of rentsreceivable from tenants less any related security deposits.

Financial instruments, whichpotentially subject the Company to concentrations of credit risk, consistprincipally of cash and cash equivalents. The Company maintains cash accountsat three financial institutions and cash is generally invested ininvestment-grade short-term instruments and the amount of credit exposure toany one commercial issuer is limited. The Company periodically evaluates thecredit worthiness of these financial institutions, and maintains cash accountsonly in large high-quality financial institutions, thereby minimizing exposurefor deposits in excess of federally insured amounts. As of September 30, 2006we had cash accounts in excess of federally insured amounts.  We believe this risk is not significant.

*Discontinued Operations*

Priorto June 1, 2006, in accordance with SFAS No. 144, *“Accounting for Impairment or Disposal of Long-Lived Assets,”*the results of operations for properties sold during the period or classifiedas held-for-sale at the end of the current period were classified asdiscontinued operations.  The propertyspecific components included as discontinued operations include rentalrevenues, operating expenses, real estate taxes, interest expense, depreciationand amortization expense, and any related impairment and gain/loss ondisposition.

3 - Share-BasedCompensation

Priorto January 1, 2006, we accounted for our stock options using the intrinsicvalue method of accounting provided under Accounting Principles Board OpinionNo. 25, *“Accounting for Stock Issued to Employees,”*(“APB 25”) and related interpretations, as permitted by Financial AccountingStandard Board Statement of Financial Accounting Standards No. 123, *“Accounting for Stock-Based Compensation”* (“SFAS 123”).  Applying the intrinsic value method ofaccounting for our stock options, we did not record share-based compensation inour net earnings because the exercise price of our options equaled the marketprice of the underlying stock on the date of the grant.  Accordingly, share-based compensation for ouroptions was included as a proforma disclosure in the financial statementfootnotes and continues to be provided as proforma disclosure in the financialstatement footnotes for periods prior to January 1, 2006.

Effective January 1,2003, the Company adopted a long-term incentive plan as a means to compensatecertain employees and directors with equity-based compensation.  The plan provides for grants in the form ofnon-qualified and incentive stock options, stock appreciation rights, bonusstock, stock units, performance shares, performance units, restricted stock andrestricted stock units. There were no option grants under the long-termincentive plan during the nine months ended September 30, 2006 or year endedDecember 31, 2005.  During 2005, 12,000units of restricted stock were granted, all of which were vested as ofSeptember 30, 2006.  We recognized thevalue of the restricted stock as compensation expense based on the grant fairvalue of $4.00 per share over the one

10

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year vesting period.  During June 2006, an additional 12,000restricted shares were granted, of which 9,000 are unvested at September 30,2006.  Compensation expense based on thegrant fair value of $4.35 will be recognized over the one year vesting period.  We assume that all restricted shares willultimately vest.

EffectiveJanuary 1, 2006, we adopted the fair value recognition provisions of SFAS No.123R, *“Share-Based Payment”* (“SFAS 123R”),using the modified-prospective transition method.  Under this transition method, the Companyrecognized compensation expense for all unvested options as of January 1, 2006,based on the grant date fair value estimated in accordance with the originalprovisions of SFAS 123.  Compensationexpense for any share-based payments granted subsequent to January 1, 2006 willbe based on the grant date fair value estimated in accordance with theprovisions of SFAS 123R.  Results forperiods prior to January 1, 2006 have not been restated.  As a result of the adoption of SFAS 123R, werecognized approximately $1,700 of compensation expense during the nine monthsended September 30, 2006.   The estimatedcompensation on the unvested options is approximately $2,000 and will berecognized over a one year period.  TheCompany has elected to be taxed as a REIT under the Internal Revenue Code of1986, as amended; therefore, we did not recognize a tax impact related to theadoption of SFAS 123R.

Hadcompensation cost for the Company’s stock option plan been determined based onthe fair value recognition provisions of SFAS 123, the Company’s net loss andnet loss per share for the three and nine months ended September 30, 2005 wouldhave been calculated as shown in the following table:
| ** **                                                         | ** ** | **Three Months  Ended  September 30,  2005** | ** ** | **Nine Months  Ended  September 30, 2005** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------------------------|------------|
|                                                               |       |                                                   |       |                                                      |       |
| Net loss – as  reported                                       |       | $                                                      | (5,430,443 | )                                                         | $          | (11,105,288 | ) |
| Plus: Recognized  equity-based compensation                        |       | 206,893                                                |       | 534,393                                                   |       |
| Less: Total  equity-based compensation expense based on fair value |       | (210,675                                               | )          | (543,114                                                  | )          |
| Net loss – pro  forma                                         |       | $                                                      | (5,434,225 | )                                                         | $          | (11,114,009 | ) |
|                                                               |       |                                                   |       |                                                      |       |
| Loss per basic  share – as reported                           |       | $                                                      | (0.23      | )                                                         | $          | (0.46 | ) |
| Loss per diluted  share – as reported                         |       | $                                                      | (0.23      | )                                                         | $          | (0.46 | ) |
|                                                               |       |                                                   |       |                                                      |       |
| Loss per basic  share – pro forma                             |       | $                                                      | (0.23      | )                                                         | $          | (0.46 | ) |
| Loss per diluted share –  pro forma                           |       | $                                                      | (0.23      | )                                                         | $          | (0.46 | ) |

 

The fair value of eachgrant is estimated on the date of grant using the Black-Scholes option-pricingmodel with the following weighted-average assumptions (excludes 2005 and 2006since there were no option grants during either year):
|                       | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|
| Dividend yield        |       | 7.0      | %          | 7.9      | %          |
| Volatility            |       | 9.3      | %          | 27.0     | %          |
| Discount rate         |       | 2.7      | %          | 2.9      | %          |
| Expected life (years) |       | 2.2      |       | 4.6      |       |

 

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The status ofoutstanding options granted pursuant to the Company’s option plans, as ofSeptember 30, 2006, was as follows:
|                       | ** ** | **Number of  Options  Outstanding** | ** ** | **Number of  Options  Exercisable** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Fair Value** | ** ** | **Range of  Exercise  Prices** | ** ** |
|-----------------------|------------|------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|-------------------------------------|------------|
| December 31,  2005    |       | 98,000                                   |       | 86,000                                   |       | $                                       | 6.34       |                                    |       |                                | $          | 4.75 - 7.10 |   |
| Granted at fair value |       | —                                   |       |                                     |       | —                                  |       | —                                  |       | —                              |       |
| Exercised             |       | —                                   |       |                                     |       |                                    |       |                                    |       |                                |       |
| Forfeited             |       | (41,000                                  | )          |                                     |       | $                                       | 6.48       |                                    |       |                                | $          | 6.16 – 6.96 |   |
| Expired               |       | (12,000                                  | )          |                                     |       | $                                       | 4.75       |                                    |       |                                | $          | 4.75 |   |
| September 30, 2006    |       | 45,000                                   |       | 37,000                                   |       | $                                       | 6.64       |                                    |       |                                | $          | 5.70 -7.10 |   |

 

The weighted-averagecontractual life of options outstanding at September 30, 2006 was approximately1 year.

4 – Real Estate Assets

As of June 1, 2006 the operating properties wereadjusted to estimated fair value less estimated selling costs.  The following is a summary of the activityrelating to the liquidation value of real estate assets from June 30, 2006through September 30, 2006:
| ** **                                                       | ** ** | **June 30, 2006** | ** **  | **Actual Activity** | ** ** | **Revision of  Estimates** | ** ** | **September 30,  2006** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------|-------------|--------------------------|------------|---------------------------------|------------|------------------------------|------------|
| Purchase price  per Agreement                                    |       | $                           | 273,000,000 |                     | $          | (65,300,000                     | )          | $                            | —     |   | $ | 207,700,000 |   |
| Less :                                                      |       |                        |        |                     |       |                            |       |                         |       |
| Capital improvement escrow                                       |       | (850,000                    | )           | 203,750                  |       | 219,807                         |       | (426,443                     | )          |
| Estimated capital expenditures and leasing  commissions          |       | (3,438,770                  | )           | 715,079                  |       | 895,431                         |       | (1,828,260                   | )          |
| Estimated prepayment penalties if certain loans are  not assumed |       | (4,700,000                  | )           | —                   |       | 1,009,652                       |       | (3,690,348                   | )          |
| Estimated closing costs                                          |       | (3,974,346                  | )           | 732,868                  |       | 808,812                         |       | (2,432,666                   | )          |
| Estimated additional costs relating to disposals                 |       | (4,100,000                  | )           | —                   |       | 3,100,000                       |       | (1,000,000                   | )          |
| Real estate assets at  end of period                             |       | $                           | 255,936,884 |                     | $          | (63,648,303                     | )          | $                            | 6,033,702  |   | $ | 198,322,283 |   |

 

Theactual activity includes actual sales prices and related costs for the threeproperties that were sold in the three month period ending September 30,2006.  The revision of estimates forcapital improvement escrow, capital expenditures, prepayment penalties, andclosing costs includes revisions of amounts for the three properties that weresold subsequent to September 30, 2006 and a reduction of estimated additionalcosts relating to future disposals.  Theestimates for the remaining six properties to be sold include estimated capitalexpenditures, prepayment penalties and closing and additional costs and suchestimates will be adjusted to actual as information is available and uponclosing of those remaining properties.

5 – Estimated CostsDuring the Liquidation Period

Underthe liquidation basis of accounting, the Company is required to estimate andaccrue the costs associated with implementing and completing the Plan.  The estimated amounts can be significantlyimpacted due to, among other things, the costs of retaining individuals tooversee the liquidation, professional fees, insurance and other costsassociated with discharging the known and contingent liabilities of theCompany.  As a result, the Company hasrecorded an estimated liability for amounts expected to be incurred during theprojected period required to complete the liquidation of the Company’sassets.  These estimates could changematerially based on the timing of the anticipated sales, the performance of theunderlying assets or modifications to the Agreement.  Periodically, as the

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facts and circumstances associated with thedisposition of the Company’s assets change, the estimated costs during theliquidation period will be reviewed and adjusted as appropriate.

Thechanges in the estimated net liability for costs during the liquidation periodas of September 30, 2006 are as follows:

| Estimated net liability for  costs during the liquidation period at June 30, 2006      |   | $          | 6,227,674 |   |
|----------------------------------------------------------------------------------------|--------|------------|-----------|--------|
| Excess of  revenue over expenses July through September                                |   | (1,582,081 | )         |
| Change in  estimated future costs (1)                                                  |   | 1,003,184  |      |
| Estimated net liability  for costs during the liquidation period at September 30, 2006 |   | $          | 5,648,777 |   |

----

(1) Primarily due to the reduction of severance,professional fees, and additional estimated costs.

Thecomponents of the estimated net liability for costs during the liquidationperiod as of September 30, 2006 are as follows:

| Operating expenses of liquidating  trust through dissolution |   | $         | 2,500,000 |   |
|--------------------------------------------------------------|--------|-----------|-----------|--------|
| Severance costs                                              |   | 2,000,000 |      |
| Additional  estimated costs during liquidation period        |   | 1,300,000 |      |
| Excess of  projected revenues over costs                     |   | (151,223  | )         |
| Estimated costs during  the liquidation                      |   | $         | 5,648,777 |   |

 

6 – Net Assets inLiquidation

Net assets in liquidation increased $8,218,241 duringthe three months ended September 30, 2006. The primary reason for the increase was an increase of $6,033,702 in ourreal estate assets, due to a revision of the estimated selling costs andcertain provisions which we believed could impact the net realizable value ofour real estate assets.  Also, assetsincreased over liabilities $1,605,642 for the period primarily due to theexcess of revenue over expenses.  Inaddition, the estimated net liability for costs during the liquidation perioddecreased $578,897 due to excess revenue over expenses of $1,582,081 for thethree months ended September 30, 2006 offset by a change in the estimated netliability for costs during the liquidation period of $1,003,184 due to areduction of severance, professional fees, and additional estimated costs.

Basedon the shares outstanding on September 30, 2006, the net assets in liquidationat September 30, 2006 would result in liquidation distributions ofapproximately $5.41 per share.  Theseestimates for liquidation distributions per share include projections of costsand expenses expected to be incurred during the period required to complete thePlan. These projections could continue to change materially based on the timingof any sales, the performance of the underlying assets and change in theunderlying assumptions of the projected cash flows.  As such, it is not possible to predict theaggregate amount or timing of distributions to stockholders subsequent to ourannounced distribution planned to occur on November 16, 2006 and that noassurance can be given that the eventual amount of distributions to be paidwill equal or exceed the estimated net assets in liquidation included in thefinancial statements.

7 – Dispositions

On January 23, 2006, theCompany sold Financial Plaza, a 310,838 square foot office property located inPhoenix, for $55.0 million to a publicly traded REIT, recording a net gain onthe sale of approximately $15.3 million in the first quarter of 2006.  The net cash proceeds of approximately $53million were used to repay an outstanding first

13

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mortgage balance ofapproximately $23 million and approximately $30 million of indebtedness underthe Company’s Unsecured Credit Facility.

On January 24, 2006, theCompany sold Keystone Office Park, a 114,980 square foot office propertylocated in Indianapolis, for approximately $9.4 million to a foreigninstitutional investor.  Subsequent torecording an impairment of $1.6 million on the property in the fourth quarterof 2005, the Company recognized a net gain of approximately $65,000.  Of the $8.6 million in net proceeds receivedfrom the sale, the Company used approximately $4.6 million to pay theoutstanding mortgage balances and approximately $300,000 to repay the remainingbalance due on Unsecured Credit Facility leaving the Company with approximately$3.7 million in cash.

*Dispositionsunder the Agreement with Koll/PER:*

On August 17,2006, Greenhill Park, a 248,249 square-foot Class A office property, was soldfor $29.8 million.  The Company receivedcash proceeds of  approximately $28.4 million, after closing costs andadjustments.

On September 21,2006, Scottsdale Norte, a 79,689 square-foot Class A office property, was soldfor $18.0 million.  The Company receivedcash proceeds of approximately $11.0million, after payoff of the first mortgage, closing costs and adjustments.

On September 28,2006, Hackberry View, a 114,598 square-foot office property, was sold for $17.5million.  The Company received cashproceeds of approximately $5.5million, after assignment of the first and second mortgages, closing costs andadjustments.

The net cashproceeds of approximately $44.9 million from these dispositions under theAgreement with Koll/PER have been accumulated with other proceeds and madeavailable, subject to the expenses and other costs of the Company, fordistribution to stockholders under the Plan.

8 – Discontinued Operations

Prior to June 1,2006, in accordance with SFAS No. 144, *“Accounting for Impairmentor Disposal of Long-Lived Assets”*, the operating results ofproperties sold during the period or designated as held-for-sale and anyrelated impairment and gain/loss on the disposition were included indiscontinued operations for the five months ended May 31, 2006 and the threeand nine months ended September 30, 2005.

During the fivemonths ended May 31, 2006, the Company completed the disposition of FinancialPlaza and Keystone Office Park.  TheCompany wrote-off unamortized deferred financing costs in connection with thedispositions of $301,463 and incurred prepayment penalties of $203,540.   The Company recognized net gains ofapproximately $15.3 million.

During 2005, theCompany completed the disposition of Panorama Falls, AmeriVest Plaza atInverness and Chateau Plaza and completed a Deed-In-Lieu Agreement to return 13non-core Texas State Buildings to the lender. During the nine months ended September 30, 2005, the Company wrote-offunamortized deferred financing costs of approximately $215,993, and recognizeda loss of $20,803 in connection with the Texas State Buildings dispositions,both of which are reflected in discontinued operations during the nine monthsended September 30, 2005.

14

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The following is a summary of the operating results ofthese properties included in discontinued operations:

|                                                                                                    | ** ** | **Three Months  Ended  September 30,  2005** | ** ** | **Five Months  Ended  May 31, 2006** | ** ** | **Nine Months  Ended  September 30,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------------|------------|
| Rental revenue                                                                                     |       | $                                                      | 3,385,491  |                                                | $          | 540,283                                               |       | $ | 11,186,449 |   |
|                                                                                               |       |                                                   |       |                                                |       |                                                  |       |
| Property  operating expenses -                                                                     |       |                                                   |       |                                                |       |                                                  |       |
| Operating expenses                                                                                 |       | (1,077,694                                             | )          | (133,276                                            | )          | (3,429,444                                            | )          |
| Real estate taxes                                                                                  |       | (473,712                                               | )          | (59,275                                             | )          | (1,625,767                                            | )          |
| Interest expense                                                                                   |       | (1,034,796                                             | )          | (123,612                                            | )          | (3,097,888                                            | )          |
| Deferred  financing costs and prepayment penalties associated with the disposition of  real estate |       | —                                                 |       | (505,003                                            | )          | (215,993                                              | )          |
| Depreciation and  amortization expense                                                             |       | (1,504,598                                             | )          | —                                              |       | (4,599,656                                            | )          |
| Impairment of  real estate                                                                         |       | (2,720,826                                             | )          | —                                              |       | (2,720,826                                            | )          |
| Total expense                                                                                      |       | (6,811,626                                             | )          | (821,166                                            | )          | (15,689,574                                           | )          |
|                                                                                               |       |                                                   |       |                                                |       |                                                  |       |
| Minority  interest                                                                                 |       | 84,420                                                 |       | —                                              |       | 285,369                                               |       |
|                                                                                               |       |                                                   |       |                                                |       |                                                  |       |
| Gain/(loss) on  sale                                                                               |       | 1,001                                                  |       | 15,327,481                                          |       | (20,803                                               | )          |
| Net earnings/(loss)  from discontinued operations                                                  |       | $                                                      | (3,340,714 | )                                                   | $          | 15,046,598                                            |       | $ | (4,238,559 | ) |

 

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9 – MortgageLoans, Notes Payable, and Lines of Credit

The Company finances its properties with mortgage loansand other debt instruments, such as lines of credit.  The following is a summary of the Company’soutstanding mortgage loans, notes payable and lines of credit, classified byinterest type (fixed or variable) and in order of maturity at September 30,2006 and December 31, 2005:
| ** **                                                              | ** ** | ** **                                             | ** ** | ** **            | ** ** | **September 30, 2006** | ** **  | **December 31, 2005** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|-----------------------|------------|----------------------------------|-------------|---------------------------------|------------|
| **Lender**                                                              | ** ** | **Mortgaged Property**                            | ** ** | **Maturity  Date(1)** | ** ** | **Principal  Balance**           | ** **  | **Interest  Rate(2)**           | ** ** | **Principal  Balance** | ** ** | **Interest  Rate(2)** | ** ** |
| ***Fixed Rate***                                                        |       |                                                   |       |                  |       |                             |        |                            |       |   |   |   |   |
| GEMSA                                                                   |       | Hampton Court (7)                                      |       | 11/1/2007             |       | $                                | 7,900,000   |                            | 5.48       | % | $ | 7,900,000 |   | 5.48 | % |
|                                                                    |       |                                                   |       |                  |       |                             |        |                            |       |   |   |   |   |
| Greenwich Capital Financial Products                                    |       | Parkway Centre II  Centerra Southwest  Gas Building    |       | 10/1/2008             |       | 36,673,883                       |        | 5.13                            | %          | 37,306,859 |   | 5.13 | % |
|                                                                    |       |                                                   |       |                  |       |                             |        |                            |       |   |   |   |   |
| Metropolitan Life Insurance Company                                     |       | Parkway Centre III (7)                                 |       | 9/10/2009             |       | 14,547,968                       |        | 4.47                            | %          | 14,813,833 |   | 4.47 | % |
|                                                                    |       |                                                   |       |                  |       |                             |        |                            |       |   |   |   |   |
| Morgan Stanley Mortgage Capital Inc. (3)                           |       | Sheridan Center  Arrowhead Fountains  Kellogg Building |       | 1/1/2013              |       | 27,966,251                       |        | 7.40                            | %          | 28,360,682 |   | 7.40 | % |
|                                                                    |       |                                                   |       |                  |       |                             |        |                            |       |   |   |   |   |
| Allstate Life Insurance Company                                         |       | Camelback – 1st(7)                                |       | 9/5/2014              |       | 15,397,430                       |        | 5.82                            | %          | 15,631,631 |   | 5.82 | % |
|                                                                    |       |                                                   |       |                  |       |                             |        |                            |       |   |   |   |   |
| Allstate Life Insurance Company                                         |       | Camelback – 2nd(7)                                |       | 9/5/2014              |       | 4,811,697                        |        | 5.82                            | %          | 4,884,884 |   | 5.82 | % |
| Subtotal                                                                |       |                                                   |       |                  |       | 107,297,229                      |        | 5.79                            | %          | 108,897,889 |   | 5.78 | % |
|                                                                    |       |                                                   |       |                  |       |                             |        |                            |       |   |   |   |   |
| ***Other Notes Payable***                                               |       |                                                   |       |                  |       |                             |        |                            |       |   |   |   |   |
| Lease Capital Corporation                                               |       | Phone system                                           |       | n/a                   |       | —                           |        | —                          |       | 43,747 |   | 11.11 | % |
| Subtotal, excluding held-for-sale properties                            |       |                                                   |       |                  |       | 107,297,229                      |        | 5.79                            | %          | 108,941,636 |   | 5.79 | % |
|                                                                    |       |                                                   |       |                  |       |                             |        |                            |       |   |   |   |   |
| ***Sold Properties***                                                   |       |                                                   |       |                  |       |                             |        |                            |       |   |   |   |   |
|                                                                    |       |                                                   |       |                  |       |                             |        |                            |       |   |   |   |   |
| Allstate Life Insurance Company                                         |       | Financial Plaza                                        |       | (4)                   |       | —                           |        | —                          |       | 23,650,188 |   | 5.25 | % |
|                                                                    |       |                                                   |       |                  |       |                             |        |                            |       |   |   |   |   |
| Security Life of Denver Insurance Company                               |       | Keystone Office Park – 1st                        |       | (4)                   |       | —                           |        | —                          |       | 4,119,506 |   | 8.00 | % |
|                                                                    |       |                                                   |       |                  |       |                             |        |                            |       |   |   |   |   |
| Security Life of Denver Insurance Company                               |       | Keystone Office Park – 2nd                        |       | (4)                   |       | —                           |        | —                          |       | 462,967 |   | 8.63 | % |
|                                                                    |       |                                                   |       |                  |       |                             |        |                            |       |   |   |   |   |
| KeyBank National Association – $10 million Secured Credit Facility |       | Greenhill Park                                         |       | (5)                   |       | —                           |        | —                          |       | — |   | — |   |
|                                                                    |       |                                                   |       |                  |       |                             |        |                            |       |   |   |   |   |
| KeyBank National Association – Unsecured Credit Facility           |       | Unsecured                                              |       |                  |       | —                           |        | —                          |       | 29,897,129 |   | 6.91 | % |
|                                                                    |       |                                                   |       |                  |       |                             |        |                            |       |   |   |   |   |
| Southern Farm Bureau Life Insurance Company                             |       | Scottsdale Norte                                       |       | (6)                   |       | —                           |        | —                          |       | 6,507,070 |   | 7.90 | % |
|                                                                    |       |                                                   |       |                  |       |                             |        |                            |       |   |   |   |   |
| J.P. Morgan Chase                                                       |       | Hackberry View – 1st                              |       | (6)                   |       | —                           |        | —                          |       | 11,287,282 |   | 6.57 | % |
|                                                                    |       |                                                   |       |                  |       |                             |        |                            |       |   |   |   |   |
| J.P. Morgan Chase                                                       |       | Hackberry View – 2nd                              |       | (6)                   |       | —                           |        | —                          |       | 937,796 |   | 8.00 | % |
| Subtotal, sold properties                                               |       |                                                   |       |                  |       | —                           |        | —                          |       | 76,861,938 |   | 6.46 | % |
|                                                                    |       |                                                   |       |                  |       |                             |        |                            |       |   |   |   |   |
| Total                                                                   |       |                                                   |       |                  |       | $                                | 107,297,229 |                            | 5.79       | % | $ | 185,803,574 |   | 6.09 | % |

 

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(1)          The Agreement specifies thatthe buyer will assume all mortgages, subject to lender approval.

(2)          Interestonly, does not include amortization of deferred financing costs or any fees.

(3)          MorganStanley Mortgage Capital, Inc. purchased this loan from Teachers Insurance andAnnuity Association of America on August 31, 2006.

(4)          Propertywas sold in January 2006.

(5)          Propertywas sold in August 2006.

(6)          Propertywas sold in September 2006.

(7)          Properties were sold in October 2006. See subsequent event footnote 12.

16

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The following table details the scheduled maturities of debt outstandingat September 30, 2006 (based on debt outstanding without taking intoconsideration the disposition of properties and assumption of debt):

| 2006       |   | $          | 521,964     |   |
|------------|--------|------------|-------------|--------|
| 2007       |   | 10,148,514 |        |
| 2008       |   | 36,996,073 |        |
| 2009       |   | 14,853,686 |        |
| 2010       |   | 1,210,165  |        |
| Thereafter |   | 43,566,827 |        |
| Total      |   | $          | 107,297,229 |   |

 

Thechange in debt during the nine months ended September 30, 2006 consisted of thefollowing:

 

|                                                 | ** ** | **2006**    | ** **  |
|-------------------------------------------------|------------|-------------|-------------|
| Balance at  January 1                           |       | $           | 185,803,574 |   |
| Additions                                       |       | —      |        |
| Repayments, including repayments at disposition |       | (76,644,300 | )           |
| Scheduled principal payments                    |       | (1,862,045  | )           |
| Balance at September 30                         |       | $           | 107,297,229 |   |

 

*Secured Line of Credit*

TheCompany extinguished its line of credit upon the sale of the Greenhill Parkproperty on August 17, 2006.  There wereno borrowings on this facility during the nine months ended September 30, 2006.

*Other*

Our debt instrumentsgenerally contain certain covenants common to the type of facility orborrowing, including financial covenants establishing minimum debt servicecoverage ratios and maximum leverage ratios. We were in compliance with allfinancial covenants pertaining to our debt instruments at and during the ninemonths ended September 30, 2006.

10 –401(k) Plan

TheAmeriVest 401(k) Plan (“401(k) Plan”) was terminated on July 31, 2006. As aresult of the 401(k) Plan’s final termination, all participants were fullyvested in their account balances on the termination date, including anaggregate of 22,040 shares of the Company.

Inconnection with the termination of the 401(k) Plan, the Company purchased those22,040 shares on August 16, 2006 at the closing share price on that day of$4.93 per share.  The shares weresubsequently cancelled by the Company and are no longer considered issued oroutstanding.

11 –Per Share Information

For the fivemonths ended May 31, 2006, the only adjustment necessary to the basic weightedaverage common shares outstanding to arrive at the diluted average commonshares was the weighted-average effect of the 3,000 unvested restrictedshares.  The outstanding options wereexcluded from the diluted weighted-average shares due to their anti-dilutiveeffect, as the option exercise price exceeds the stock fair value and wouldresult in a reduction to the number of shares outstanding utilizing thetreasury stock method.  There are noadjustments necessary for the three or nine months ended September 30, 2005 asthe Company recognized a net loss and the impact would be anti-dilutive.

17

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During the threemonths ended September 30, 2006, 22,040 shares were surrendered as part of thetermination of the 401(k) plan, and 5,150 shares were vested in the long-termincentive plan.  At September 30, 2006,there were 24,114,316 common shares outstanding.

12 – Subsequent Events

Subsequent to September30, 2006, the Company has completed the following sales under the Agreementwith Koll/PER:

On October 11, 2006,Parkway Centre III, a 152,396 square-foot office property, was sold for $25.6million.  The Company received cashproceeds of approximately $10.0million, after assignment of the first mortgage, closing costs and adjustments.

On October 20, 2006,Hampton Court, a 108,588 square-foot office property, was sold for $17.0million.  The Company received cashproceeds of approximately $9.0 million,after assignment of the first mortgage, closing costs and adjustments.

On October 25, 2006,Camelback Lakes, a 203,794 square-foot office property, was sold for $50.4million.  The Company received cash proceedsof approximately $28.0 million,after assignment of the first mortgage, closing costs and adjustments.

The net cash proceeds ofapproximately $47.0 million fromthese sales to Koll/PER have been accumulated with other proceeds and madeavailable, subject to the expenses, liabilities and other costs of the Company,for distribution to stockholders under the plan of liquidation approved by itsstockholders.

On October 30, 2006, theBoard voted to terminate AmeriVest’s Deferred Compensation Plan for Directorsand Executives, effective as of October 30, 2006. Shares equivalent to the deferred share unitbalance in the plan, net of shares withheld for taxes, will be distributed toparticipants.

On October 30, 2006, theBoard declared an initial liquidating cash distribution of $3.50 per share orapproximately $84.4 million.  Thedistribution will be paid November 16, 2006 to stockholders of record as ofNovember 10, 2006.

On November 3, 2006, theBoard voted to terminate AmeriVest’s Dividend Reinvestment Plan, effective asof  November 3, 2006.  Whole shares will be issued directly toparticipants and fractional shares will be converted to cash.

Also on November 3, 2006,the Board of Directors replaced its existing compensation program for outsidedirectors with the following program. The Board implemented a per-meeting fee of $2,500 for all meetingscommencing with the fourth quarter of 2006 until the company has been dissolvedand a liquidating trust formed.  Inaddition, the Board approved a special performance-based aggregate fee of $10,000for each independent director, payable $5,000 immediately, and $5,000 uponclosing of all of the remaining six properties. The Board also approved payment of an additional $15,000 retainer fee toeach independent director upon formation of the liquidating trust, if any, inexchange for such director’s willingness to make themselves available to theliquidating trustee or trustees during the term of the liquidating trust.

18

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**Item 2.****           Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

The discussion and analysis ofthe Company’s financial condition and results of operations are based upon itscondensed consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesas to the liquidation basis for the period June 1, 2006 to September 30, 2006and on the going concern basis for all prior periods. The preparation of thesefinancial statements requires management to make significant estimates andjudgments that affect the reported amounts of assets and liabilities, revenuesand expenses, and related disclosure of contingent assets and liabilities atthe date of the financial statements. Actual results may differ from theseestimates under different assumptions or conditions.

The followingdiscussion and analysis of the condensed consolidated net assets inliquidation, changes in net assets in liquidation, financial condition andresults of operations should be read in conjunction with the condensedconsolidated financial statements and notes thereto included in this Form 10-Qand elsewhere.

Forward-LookingStatements

Certainstatements in this Form 10-Q that are not historical facts are “forward-lookingstatements” as that term is defined under the Private Securities LitigationReform Act of 1995.  Theseforward-looking statements are based on the Company’s current expectations,beliefs, assumptions, estimates and projections about the industry and marketsin which the Company operates.  Wordssuch as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates”and variations of such words and similar expressions are intended to identifysuch forward-looking statements. Information concerning anticipated asset sales, expected investmentbalances, expected funding sources, planned investments, forecasted dates andrevenue and expense growth assumptions are examples of forward-lookingstatements.  These statements are notguarantees of future performance and involve certain risks, uncertainties andassumptions, which are difficult to predict and many of which are beyond theCompany’s control.  Therefore, actualoutcomes and results may differ materially from what is expressed, forecastedor implied in such forward-looking statements. The Company undertakes no obligation to update publicly anyforward-looking statements, whether as a result of new information, futureevents or otherwise, except as required by applicable law.

TheCompany’s operating results depend primarily on income from its properties,which are substantially influenced by supply and demand for such properties,operating expense levels, property level operations and the pace and price atwhich the Company can develop or dispose of such properties.  Capital and credit market conditions, whichaffect the Company’s cost of capital, also influence operating results.  See “Item 1. Description of Business” in theCompany’s Annual Report on Form 10-K for the period ending December 31, 2005and Item 1A. of the reports on Form 10-Q for the periods ending September 30,2006 and June 30, 2006 for a more complete discussion of risk factors thatcould impact the Company’s future financial performance.

Organization,Business, and Plan of Liquidation

As used herein, “we”, “us”, “our”and “the Company” refer to AmeriVest Properties Inc., a Marylandcorporation. We were incorporated in the State of Maryland in 1999. We are aREIT investing in, operating and leasing commercial office buildings primarilyto small and medium size tenants. At September 30, 2006, we owned nineproperties, which included an aggregate of approximately 1,297,000 rentablesquare feet located in metropolitan Denver, Dallas and Phoenix. Subsequent toSeptember 30, 2006, we sold three properties with 464,778 square feet locatedin Dallas and Phoenix.  At September 30,2005, we owned 16 properties, which included an aggregate of approximately2,451,000 rentable square feet.

On February 9, 2006 our Board ofDirectors approved a plan of liquidation (the “Plan”), which was approved byour stockholders at the Annual Meeting of Stockholders on May 24, 2006.  On July 17, 2006, the Company entered into adefinitive agreement (the “Agreement”) to sell its entire portfolio of officeproperties to Koll/PER LLC (“Koll/PER”), a limited liability company owned byThe Koll Company of Newport Beach, California and the Public EmployeeRetirement System of Idaho (“PERSI”).  The gross purchase price is $273 million (less a reserve for capitalexpenditures of approximately $850,000), which includes an assumption ofexisting property level debt of approximately $126 million.   Through October 31, 2006, we have closed onthe sales of six properties.  Closings onthe remaining properties will be scheduled as loan assumption approvals arereceived from the Company’s mortgage lenders and other traditional closingactivities are completed. There can be no assurance

19

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that the remainder of the transaction will close, or close onthe terms described.

Our net assets in liquidationaggregated approximately $130.4 million or $5.41 per share on September 30,2006.  This amount represents assets atestimated net realizable values on an undiscounted basis.  The amount also includes an estimated netliability for future estimated general and administrative expenses and othercosts during the liquidation.  As not allof the property sales have closed, these estimates contain potential costs thatcould change as circumstances dictate. There can be no assurance that these estimated values will be realized,nor if the reserve for future estimated general and administrative expenses isadequate.  This amount should not betaken as an indication of the timing or amount of future distributions to be madeby the Company.  On October 30, 2006 theBoard of Directors declared an initial liquidating cash distribution of $3.50per share.  The distribution will be paidNovember 16, 2006 to stockholders of record as of November 10, 2006.  Given the progress of asset sales to date,and to insure that a liquidating distribution is paid in 2006 to preserve theCompany’s REIT status for the year, the Board of Directors has elected to makethis initial distribution at this time. The timing and amount of additional liquidating distributions (if any),and the final liquidating distribution will depend on the timing and amount ofproceeds the Company receives upon the sale of these assets and the extent towhich reserves are required.

We have elected to be taxed as aREIT for federal income tax purposes and generally will not be subject tofederal income tax if we distribute at least 90% of our taxable income andcomply with a number of organizational and operational requirements.  Although we expect to continue to qualify asa REIT until our dissolution, no assurance can be given that we will not loseor terminate our status as a REIT.

*FactorsWhich May Influence Future Changes in Net Assets in Liquidation*

*RentalIncome*

The amount of rental income generated by ourproperties depends principally on our ability to maintain the occupancy ratesof currently leased space, to lease currently available space and spaceavailable from unscheduled lease terminations at the existing rental rates andthe timing of the disposition of the properties. Negative trends in one or moreof these factors could adversely affect our rental income in future periods.

*Uses ofEstimates*

Management has estimated the net realizable value of the propertiesbased on the current Agreement with Koll/PER. These estimates include closing costs, prepayment penalties if our loansare not assumed by Koll/PER, and expenditures for leasing commissions, tenantimprovements, and capital expenditures until we sell the properties. As not allof the properties have closed, our estimates for potential disbursements couldcontinue to change as circumstances dictate. Management has also estimated and reserved for estimated future generaland administrative expenses and other costs to be incurred during theliquidation period.  There can be noassurance that the estimated net realizable values for our properties will berealized, nor that the reserve for future estimated general and administrativeexpense is adequate.

Changesin Net Assets in Liquidation 

*Threemonths ended September 30, 2006*

Net assets in liquidation increased $8,218,241 duringthe three months ended September 30, 2006. The primary reason for the increase was an increase of $6,033,702 in ourreal estate assets, due to a revision of the estimated selling costs andcertain provisions which we believed could impact the net realizable value ofour real estate assets.  Also, assetsincreased over liabilities $1,605,642 for the period primarily due to theexcess of revenue over expenses.  Inaddition, the estimated net liability for costs during the liquidation perioddecreased $578,897 due to excess revenue over expenses of $1,582,081 for thethree months ended September 30, 2006 offset by a change in the estimated netliability for costs during the liquidation period of $1,003,184 due to areduction of certain previously estimated costs.

*Fourmonths ended September 30, 2006*

Net assets in liquidation increased $7,794,502 duringthe four months ended September 30, 2006. The primary reason for the increase was an increase of $6,033,702 in ourreal estate assets, due to a revision of the estimated selling costs andcertain provisions which we believed could impact the net realizable value ofour real

20

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estateassets.  Also, assets increased overliabilities $1,399,778 for the period primarily due to the excess of revenueover expenses.  In addition, theestimated net liability for costs during the liquidation period decreased$361,022 due to excess revenue over expenses of $1,364,206 for the three monthsended September 30, 2006 offset by a change in the estimated net liability forcosts during the liquidation period of $1,003,184 due to a reduction of certainpreviously estimated costs.

Liquidity andCapital Resources

At September 30, 2006, our total assets and net assetsin liquidation were approximately $251.6 million and $130.4 million,respectively. Our ability to meet our obligations is contingent upon thedisposition of our remaining assets in accordance with the Plan. Managementestimates that the net proceeds from the sale of assets pursuant to the Planwill be adequate to pay our obligations; however, we cannot provide anyassurance that the remaining properties under the agreement with Koll/PER willclose on the terms previously described or on any terms.  As such, it is not possible to predict theaggregate amount or timing of future distributions subsequent to our announcedNovember 16, 2006 initial liquidating distribution to stockholders and noassurance can be given that the eventual amount of distributions to be paidwill equal or exceed the estimated net assets in liquidation included in thefinancial statements.

*CurrentSources of Capital and Liquidity*

We anticipate, but can not assure, that our cash flowfrom operations and sales of property will be sufficient during the liquidationperiod to fund our cash needs for payment of expenses, capital expenditures,recurring debt service payments and repayment of debt maturities.

The Plan gives our Board of Directorsthe power to sell any and all of our assets without further approval by ourstockholders and provides that liquidating distributions be made to ourstockholders as determined at the discretion of our Board of Directors.  On October 30, 2006 the Board of Directorsdeclared an initial liquidating cash distribution of $3.50 per share.  The distribution will be paid November 16,2006 to stockholders of record as of November 10, 2006.  The timing and amount of any subsequentliquidating distributions and the final liquidating distribution will depend onthe timing and amount of proceeds the Company will receive upon the sale ofthese assets and the extent to which reserves for current or future liabilitiesare required.

*OtherLiquidity Needs*

We are required to distribute 90% of our REIT taxableincome (excluding capital gains) on an annual basis in order to qualify as aREIT for federal income tax purposes. Effective March 9, 2005, we suspendedregular quarterly distributions. On October 30, 2006 our Board of Directorsdeclared a liquidating cash distribution of $3.50 per share.  Future liquidating distributions fromproceeds received from the sales of assets will be determined at the discretionof our Board of Directors. We have historically distributed amounts in excessof our taxable income resulting in a return of capital to our stockholders. Weanticipate that we will meet our REIT requirements for 2006.

We believe that we will have sufficient capitalresources to satisfy our liquidity needs during the liquidationperiod.   As of September 30, 2006 we estimate that we will have$5.65 million of commitments and expenditures during the liquidation periodcomprised of the following: $2.5 million of estimated costs to operate theliquidating trust until dissolution, $2.0 million for estimated severancecosts, $1.3 million for estimated additional costs, offset by estimated excessrevenue over operating costs of $150,000. However, there can be no assurancethat we will not exceed the amounts of these estimated expenditures.  A material adverse change in the net cashprovided by operating activities or net proceeds expected from the liquidationof real estate assets may affect our ability to fund these items.

Liquidating distributionswill be determined by our Board of Directors in their sole discretion and aredependent on a number of factors, including the amount of funds available fordistribution, our financial condition, our capital expenditures, the annualdistribution required to maintain REIT status under the Internal Revenue Codeof 1986, as amended, and other factors the Board of Directors may deemrelevant. Distributions in the liquidation should first reduce the basis of aU.S. stockholder’s shares of common stock, with any excess constituting acapital

21

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gain if such U.S. stockholder holds his shares ofcommon stock as a capital asset. If the sum of all liquidating distributions isless than a U.S. stockholder’s basis in his shares of common stock, thedifference will constitute a capital loss that is recognized at the time suchU.S. stockholder receives his final liquidating distribution, which includesthe transfer of assets to a liquidating trust.

The stated range of stockholder distributions areestimates only and actual results may be higher or lower than estimated. Thepotential for variance on either end of the range could occur for reasonsincluding, but not limited to: (i) unanticipated costs which could reducenet asset values actually realized; (ii) if we wind up our businesssignificantly faster than anticipated, some of the anticipated costs may not benecessary and net liquidation proceeds could be higher; (iii) if wecomplete all loan assumptions as planned and incur no prepayment penalties orother costs, net liquidation proceeds could be higher; (iv) a delay in ourliquidation could result in higher than anticipated costs and net liquidationproceeds could be lower; and (v) circumstances may change and the actualnet proceeds realized from the sale of some of the assets might be less, orsignificantly less, than currently estimated.

*FutureSources of Capital*

The Company believes proceeds from the sale of the sixproperties under contract will be adequate to fund anticipated capital needsthrough the anticipated distribution dates. As of October 31, 2006 we had approximately $96.0 million cash on hand,which includes $2.0 million of earnest money from Koll/PER, prior to thedistribution to be paid on November 16, 2006 of approximately $84.4 million.

CriticalAccounting Policies

Critical accounting policies aredefined as those that are reflective of significant judgments and uncertainties,which would potentially result in materially different results under differentassumptions and conditions. Set forth below is a summary of the accountingpolicies management believes are critical to the preparation of the condensedconsolidated financial statements. The summary should be read in conjunctionwith the more complete discussion of the Company’s accounting policies includedin Note 2 to the consolidated financial statements in the Company’s 2005Annual Report on Form 10-K.

*Liquidation Basis of Accounting*

As a result of the approval of the Plan by our stockholders, we adoptedthe liquidation basis of accounting as of June 1, 2006 and for all subsequentperiods.  Accordingly, all assetshave been adjusted to their estimated fair value on an undiscounted basis.  Liabilities, including estimated costsassociated with implementing the Plan, have been adjusted to their estimatedsettlement amounts.  The estimate of thevaluation of real estate held for sale is based on current contracts, estimatesand other indications of sales value net of estimated selling costs.  Actual values realized for assets andsettlement of liabilities may differ materially from the amounts estimated.  Estimated future cash flows from propertyoperations were made based on the anticipated sales dates of the assets.  Due to the uncertainty in the timing of theanticipated sales dates and the cash flows there from, results of operationsmay differ materially from amounts estimated. These amounts are presented in the accompanying statement of net assetsin liquidation.  The net assets representthe estimated liquidation value of our assets available to our stockholdersupon liquidation.  The actual settlementamounts realized for assets and settlement of liabilities may differmaterially, perhaps in adverse ways, from the amounts estimated.

*Investment inReal Estate*

Prior to June 1, 2006, uponacquisition, the purchase price of a property is allocated to land, buildingand improvements and other intangible assets and associated liabilities asrequired by SFAS No. 141 *“Business**Combinations.”* (SFAS 141) The allocation to land was basedon an estimate of its fair value based on all available information includingappraisals. The allocation to other intangible assets represented the valueassociated with the in-place leases, including leasing commission, legal andother related costs. Also required by SFAS 141, is the creation of anintangible asset or liability resulting from in-place leases being above orbelow the market rental rates on the date of acquisition. This asset orliability was amortized over the life of the related in-place leases as anadjustment to revenue.

22

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Investment in real estate isstated at cost, unless adjusted for impairment. Depreciation and amortizationare computed on a straight-line basis over the estimated useful lives asfollows:
| Description                                                                       | ** ** | **Estimated Useful Lives**                     | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| Land                                                                              |       | Not  depreciated                                         |       |
| Buildings and  improvements                                                       |       | 20  to 40 years                                          |       |
| Furniture,  fixtures and equipment                                                |       | 5  to 7 years                                            |       |
| Tenant improvements,  tenant leasing commissions and other intangible assets |       | Lesser of term of  related lease or useful life of asset |       |

 

Maintenance and repairs areexpensed as incurred and improvements are capitalized. The cost of assets soldor retired and the related accumulated depreciation and/or amortization areremoved from the accounts and the resulting gain or loss is reflected inoperations in the period in which such sale or retirement occurs. Allocatingthe purchase price of a property to the different components of investment inreal estate, determining whether expenditures meet the criteria forcapitalization and assigning depreciable lives is considered to be criticalbecause it requires management to exercise significant judgment.

*Valuation ofReal Estate Assets*

Under going concernaccounting, long-lived assets to be held and used are carried at cost, unlessadjusted for impairment, and evaluated for impairment when events or changes incircumstances indicate such an evaluation is warranted.  We also evaluate assets for potentialimpairment when we deem them to be held-for-sale.  Valuation of real estate is considered a “criticalaccounting estimate” because the evaluation of impairment and the determinationof fair values involve a number of management assumptions relating to futureeconomic events that could materially affect the determination of the ultimatevalue, and therefore, the carrying amounts of our real estate. Furthermore,decisions regarding when a property should be classified as held-for-sale underSFAS No. 144, *“Accounting for Impairment orDisposal of Long-Lived Assets,”*requires significant managementjudgment. There are many phases to the disposition process ranging from theinitial market research to being under contract with non-refundable earnestmoney. Deciding when management is committed to selling an asset is thereforehighly subjective.

When determining if thereis an indication of impairment, we estimate the asset’s rental revenues lessoperating expenses over the anticipated holding period on an undiscounted cashflow basis and compare this amount to its carrying value. Estimating theexpected rental revenues less operating expenses and holding period requiressignificant management judgment. If it is determined that there is anindication of impairment for assets to be held and used, or if an asset isdeemed to be held-for-sale, we then determine the fair value of the asset.

The real estate industryuses capitalization rates as the primary measure of fair value. Specifically,annual rental revenues less operating expenses for a property is divided by anestimated capitalization rate to determine the fair value of the property.Determining the appropriate capitalization rate requires significant judgmentand is typically based on many factors including the prevailing rate for themarket or submarket, as well as the quality and location of the properties.Further, capitalization rates can fluctuate up or down due to a variety offactors in the overall economy or within local markets. If the actualcapitalization rate for a property is significantly different from ourestimated rate, the impairment evaluation for an individual asset could bematerially affected.

*RevenueRecognition*

Certainleases provide for tenant occupancy during periods for which no rent is due orwhere minimum rent payments increase during the term of the lease.  Prior to June 1, 2006, rental revenue wasrecorded for the full term of each lease on a straight-line basis.  Accordingly, the Company recorded areceivable from tenants for rents that it expected to collect over theremaining lease term as deferred rents receivable.  When the Company acquired a property, theterm of the existing leases was considered to commence as of the acquisition datefor the purposes of this calculation. Upon the adoption of the liquidation basis of accounting, all deferredrental revenue was written off.

*Income Taxes*

The Company operates in a manner intended to enable it tocontinue to qualify as a REIT under Sections 856-860 of the Code.  Withrespect to a REIT that is liquidating within 24 months of adopting a plan ofliquidation a dividend paid deduction is allowed to the extent thedistribution is attributable to accumulated earnings and profits or,

23

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to the extent anydistribution within such period does not exceed earnings and profits (computedwithout regard to capital losses) for the year of distribution.  The Company intends to distribute its earnings andprofit.  Therefore, no provision for Federal income taxes is required. If the Company fails to distribute the required amount of income to ourstockholders, or fails to meet other REIT requirements, we may fail to qualifyas a REIT and substantial adverse tax consequences may result.

Uses of Capital, Contractual Commitments and Off-Balance SheetArrangements

The following table details the contractualobligations at September 30, 2006 (based on debt outstanding without takinginto consideration the disposition of properties and assumption of debt):
| **For the years  ended December 31,** | ** ** | **Scheduled Debt  Maturities (1)** | ** **  | **Interest Payments  on Secured  Mortgage Loans(1)** | ** ** | **Tenant  Improvements,  Capital  Expenditures and  Leasing  Commissions** | ** ** | **Total**  | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------|-------------|---------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|------------|------------|
| 2006                                                      |       | $                                            | 521,964     |                                                                | $          | 1,573,142                                                                       |       | $          | 1,828,300  |   | $ | 3,923,406 |   |
| 2007                                                      |       | 10,148,514                                   |        | 6,710,792                                                           |       | —                                                                          |       | 16,859,306 |       |
| 2008                                                      |       | 36,996,073                                   |        | 5,770,238                                                           |       | —                                                                          |       | 42,766,311 |       |
| 2009                                                      |       | 14,853,686                                   |        | 4,350,939                                                           |       | —                                                                          |       | 19,204,625 |       |
| 2010                                                      |       | 1,210,165                                    |        | 4,303,994                                                           |       | —                                                                          |       | 5,514,159  |       |
| Thereafter                                                |       | 43,566,827                                   |        | 23,151,159                                                          |       | —                                                                          |       | 66,717,986 |       |
| Total                                                     |       | $                                            | 107,297,229 |                                                                | $          | 45,860,264                                                                      |       | $          | 1,828,300  |   | $ | 154,985,793 |   |

 

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(1)          Includes payments forParkway Centre III, Hampton Court, and Camelback Lakes which were soldsubsequent to September 30, 2006.

*InterestRate Information*

Asof September 30, 2006, all of our outstanding mortgage debt are fixed rateloans with a weighted-average interest rate of 5.79%.

*DebtCovenants*

Certain of the Company’s debt instruments containcovenants common to that type of facility or borrowing, including financialcovenants establishing minimum debt service coverage and maximum leverageratios.  The Company was in compliancewith all financial covenants pertaining to its debt instruments at and duringthe three and nine months ended September 30, 2006.

**Item 3.****        Quantitative andQualitative Disclosures About Market Risk**

Our future earnings, cash flows and fair values relevantto financial instruments depend upon prevalent market rates for those financialinstruments.  Market risk is the risk ofloss from adverse changes in market prices and interest rates.  We manage our market risk by matchingprojected cash inflows from operating, investing and financing activities withprojected cash outflows to fund debt service, capital expenditures, dividendsand other cash requirements.  At September30, 2006, all of our outstanding debt obligations have fixed interest ratesthat limit the risk of fluctuating interest rates.   See “Item 7a.  Quantitative and Qualitative Disclosure aboutMarket Risk” in our 2005 Annual Report on Form 10-K for detailed informationabout the qualitative and quantitative disclosures about our market risk.

**Item 4.****           Controls andProcedures**

The Companycarried out an evaluation as of September 30, 2006, under the supervision andwith participation of the Company’s management, including our Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of the Company’sdisclosure controls and procedures pursuant to Rule 13a-15 under the SecuritiesExchange Act of 1934.  Based on theirevaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that disclosure controls and procedures were effective as of the endof the period covered by this report to ensure that information required to bedisclosed by the Company in its reports that it files or submits under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in the Securities and Exchange Commissionsrules and forms.  Subsequent to September30, 2006, there have been

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no significantchanges in the Company’s internal controls over financial reporting thatoccurred during the period covered by this report that has materially affected,or is reasonably likely to materially affect, the Company’s internal controlover financial reporting.

**PartII.   Other Information**

Item 1.   Legal Proceedings

No changes.

Item 1A. RiskFactors

As of October 31,2006 the Company had approximately $96.0 million of cash on hand.  The Company maintains cash accounts at threefinancial institutions and cash is generally invested in investment-gradeshort-term instruments and the amount of credit exposure to any one commercialissuer is limited.  The Company periodically evaluates the creditworthiness of these financial institutions, and maintains cash accounts only inlarge, high-quality financial institutions, thereby minimizing exposure fordeposits in excess of federally insured amounts. As of September 30, 2006 wehad cash accounts in excess of federally insured amounts.  We believe this risk is not significant.

Item 2.   Unregistered Sales of Equity Securities andUse of Proceeds

| Period               | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased as  part of publicly  announced plans or  programs** | ** ** | **Maximum number  of shares that may  yet be purchased  under the plans or  programs** | ** ** |
|----------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|
| August 16, 2006  (1) |       | 22,040                                           |       | $                                                | 4.93       |                                                                                                                             | None       |                                                                                                                                | N/A        |   |
|                      |            |                                                  |            |                                                  |            |                                                                                                                                  |            |                                                                                                                                     |            |  |

 

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(1) Due to the July 31, 2006 termination of the 401(k)Plan, on August 16, 2006, the Company purchased the 22,040 shares of theCompany’s common stock that were held in the 401(k) Plan at the closing priceon that day of $4.93 per share.  Theseshares were subsequently cancelled and are no longer considered issued oroutstanding.

Item 3.  Defaults upon Senior Securities

None

Item4.  Submission of Matters to a Vote ofSecurity Holders

None.

Item 5.  Other Information

Since November 21, 2004,when the Board approved the engagement of a national investment banking firm toexplore strategic alternatives, the Board and the five committees of the Boardhave met a total of 73 times, including 34 full Board meetings.  Since the Company’s shareholders approved theCompany’s Plan of Liquidation on May 24, 2006, at which time each of theCompany’s three current directors became a member of each standing Boardcommittee, the Board and committees have met a total of 14 times, including9 full Board meetings.  In addition,during that period, each director has spent considerable time with managementreviewing various issues related to the liquidation and winding up of theCompany.  In prior years, barringextraordinary events, the Board generally met once a quarter and the committeesgenerally met no more frequently than quarterly.

 

Based on the timeexpended to date and the anticipated time commitment anticipated through thecompletion of the liquidation, together with the fact that the Board’scompensation plan had not been adjusted since January 2005, on November 3,2006, the Board of Directors replaced its existing compensation program foroutside directors with the following program. The Board implemented a per-meeting fee of $2,500 for all meetingscommencing with the fourth quarter of 2006 until the Company has been dissolvedand a liquidating trust formed.  Inaddition, the Board approved a special performance-based aggregate fee of $10,000for each independent director, payable $5,000 immediately, and $5,000 uponclosing of all of the remaining six properties. The Board also approved payment of an additional $15,000 retainer fee toeach independent director upon formation of the liquidating trust, if any, inexchange for such director’s willingness to make themselves available to theliquidating trustee or trustees during the term of the liquidating trust.  There can be no assurance that the sales ofthe remaining properties will close under AmeriVest’s purchase and saleagreement with Koll/PER, LLC, or on any terms, that a second liquidatingdistribution will be made or that AmeriVest will transfer its assets to aliquidating trust. 

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Item 6.  Exhibits
| 31.1 |   | Certification of Chief Executive Officer pursuant to  section 302 of the Sarbanes-Oxley Act of 2002. |
|------|--------|------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification of Chief Financial Officer pursuant to  section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 |   | Certification of Chief Executive Officer pursuant to  section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2 |   | Certification of Chief Financial Officer pursuant to  section 906 of the Sarbanes-Oxley Act of 2002. |

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###### SIGNATURES

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                  | AMERIVEST PROPERTIES INC. |
|------------------|---------------------------|
|             |                      |   |
|             |                      |   |
| November 7, 2006 |                      |   |
|             | By:                       | /s/ Charles K. Knight |   |
|             |                      | Charles K.  Knight |
|             |                      | Chief Executive  Officer |
|             |                      |   |
|             |                      |   |
|             | By:                       | /s/ Sheri D. Henry |   |
|             |                      | Sheri D. Henry |
|             |                      | Chief Financial  Officer |
|             |                      | (Principal Financial Officer and |
|             |                      | Principal Accounting Officer) |

 

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