******Form 10-Q**



**SECURITIES EXCHANGE ACT OF 1934**

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

******OR**

**************TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**





**Commission File Number 1-12486**

**Associated Estates Realty Corporation**



|**OHIO**                                 | **34-1747603**        
|---------------------------------------- | ----------------------
|(State or other jurisdiction of          | (I.R.S. Employer      
|incorporation or organization)           | Identification Number)
|                                         |                       
|**1 AEC Parkway, Richmond Hts., Ohio**   | **44143-1467**        
|(Address of principal executive offices) | (Zip Code)            





|Indicate by check mark whether the registrant (1)  has filed all reports required to be filed by Section 13
|-----------------------------------------------------------------------------------------------------------
|or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such                
|shorter period that the registrant was required to file such reports), and (2) has been                    
|subject to such filing requirements for the past 90 days. Yes No                                           
|                                                                                                           
|Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,          
|or a non-accelerated filer.  See definition of "accelerated filer and large accelerated                    
|filer" in Rule 12b-2 of the Exchange Act.  (Check one):                                                    
|                                                                                                           
|Large accelerated filer Accelerated filerNon-accelerated filer                                             











**INDEX**

****

|**PART I  -  FINANCIAL INFORMATION**  | Page                                                        
|------------------------------------- | ------------------------------------------------------------
|                                      |                                                             
|ITEM 1                                | Consolidated Financial Statements (Unaudited)               
|                                      |                                                             
|                                      | Consolidated Balance Sheets at                              
|                                      | September 30, 2006 and December 31, 2005                    
|                                      |                                                             
|                                      | Consolidated Statements of Operations for the three and nine
|                                      | month periods ended September 30, 2006 and 2005             
|                                      |                                                             
|                                      | Consolidated Statement of Shareholders' Equity for the nine 
|                                      | month period ended September 30, 2006                       
|                                      |                                                             
|                                      | Consolidated Statements of Cash Flows for the nine          
|                                      | month periods ended September 30, 2006 and 2005             
|                                      |                                                             
|                                      | Notes to Consolidated Financial Statements                  
|                                      |                                                             
|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 6                                | Exhibits                                                    
|                                      |                                                             
|**SIGNATURES**                        | 31                                                          

*****Index*********

**PART I.  FINANCIAL INFORMATION**

**ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

******ASSOCIATED ESTATES REALTY CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

|                                                                      | September 30, | December 31,
|--------------------------------------------------------------------- | ------------- | ------------
|(In thousands, except share and per share amounts)                    | 2006          | 2005        
|**ASSETS**                                                            |               |             
|Real estate assets                                                    |               |             
|Land                                                                  | $	96,655      | $	98,070    
|Buildings and improvements                                            | 785,928       | 809,967     
|Furniture and fixtures                                                | 28,936        | 31,112      
|                                                                      | 911,519       | 939,149     
|Less:  accumulated depreciation                                       | (288,003)     | (294,505)   
|                                                                      | 623,516       | 644,644     
|Construction in progress                                              | 1,461         | 1,020       
|Real estate associated with property held for sale, net               | 277           | 273         
|Real estate, net                                                      | 625,254       | 645,937     
|Cash and cash equivalents                                             | 2,392         | 39,733      
|Restricted cash                                                       | 8,180         | 8,497       
|Accounts and notes receivable, net                                    |               |             
|Rents                                                                 | 1,590         | 1,277       
|Affiliates and joint ventures                                         | 847           | 1,909       
|Other                                                                 | 1,767         | 3,674       
|Investments in joint ventures, net                                    | 5,321         | 5,890       
|Goodwill                                                              | 1,725         | 1,725       
|Other assets, net                                                     | 11,225        | 10,584      
|Other assets associated with property held for sale, net              | 21            | 16          
|**Total assets**                                                      | $	658,322     | $	719,242   
|**LIABILITIES AND SHAREHOLDERS' EQUITY**                              |               |             
|Mortgage notes payable                                                | $	482,311     | $	547,790   
|Lines of credit borrowings                                            | 11,470        | -           
|Unsecured debt                                                        | 25,780        | 25,780      
|Total debt                                                            | 519,561       | 573,570     
|Accounts payable, accrued expenses and other liabilities              | 25,395        | 22,465      
|Dividends payable                                                     | 2,909         | 3,052       
|Resident security deposits                                            | 3,760         | 4,121       
|Funds held on behalf of managed properties                            |               |             
|Affiliates and joint ventures                                         | 506           | 959         
|Other                                                                 | 1,180         | 1,101       
|Accrued interest                                                      | 1,813         | 2,800       
|Other liabilities associated with property held for sale              | 20            | 22          
|**Total liabilities**                                                 | 555,144       | 608,090     
|                                                                      |               |             
|Operating partnership minority interest                               | 1,849         | 2,172       
|Shareholders' equity                                                  |               |             
|Preferred shares, without par value; 9,000,000 shares authorized:     |               |             
|8.70% Class B Series II cumulative redeemable, $250 per share         |               |             
|liquidation preference, 232,000 issued and outstanding                | 58,000        | 58,000      
|Common shares, without par value, $.10 stated value; 41,000,000       |               |             
|authorized; 22,995,763 issued and 17,113,292 and 17,950,326           |               |             
|outstanding at September 30, 2006 and December 31, 2005, respectively | 2,300         | 2,300       
|Paid-in capital                                                       | 280,524       | 278,885     
|Accumulated distributions in excess of accumulated net income         | (183,118)     | (184,303)   
|Accumulated other comprehensive income                                | (97)          | (25)        
|Less: Treasury shares, at cost, 5,882,471 and 5,045,437 shares        |               |             
|at September 30, 2006 and December 31, 2005, respectively             | (56,280)      | (45,877)    
|**Total shareholders' equity**                                        | 101,329       | 108,980     
|**Total liabilities and shareholders' equity**                        | $	658,322     | $	719,242   







*****Index*******ASSOCIATED ESTATES REALTY CORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

|                                                                  | For the three months | For the nine months
|----------------------------------------------------------------- | -------------------- | -------------------
|                                                                  | ended September 30,  | ended September 30,
|(In thousands, except per share amounts)                          | 2006                 | 2005               
|Revenue                                                           |                      |                    
|Property revenue                                                  | $	35,237             | $	32,813           
|Management and service company revenue:                           |                      |                    
|Fees, reimbursements and other                                    | 2,914                | 3,172              
|Painting services                                                 | 216                  | 318                
|Total revenue                                                     | 38,367               | 36,303             
|Expenses                                                          |                      |                    
|Property operating and maintenance                                | 16,674               | 15,664             
|Depreciation and amortization                                     | 8,233                | 8,208              
|Direct property management and service companies expenses         | 3,188                | 3,303              
|Painting services                                                 | 272                  | 347                
|General and administrative                                        | 2,679                | 1,994              
|Total expenses                                                    | 31,046               | 29,516             
|Operating income                                                  | 7,321                | 6,787              
|Interest income                                                   | 96                   | 56                 
|Interest expense                                                  | (17,383)             | (10,754)           
|(Loss) income before equity in net loss of joint ventures,        |                      |                    
|minority interest and income from discontinued operations         | (9,966)              | (3,911)            
|Equity in net loss of joint ventures                              | (139)                | (68)               
|Minority interest in operating partnership                        | (15)                 | (16)               
|(Loss) income from continuing operations                          | (10,120)             | (3,995)            
|Income from discontinued operations:                              |                      |                    
|Operating income                                                  | 52                   | 799                
|Gain on disposition of properties                                 | 3,397                | 17,406             
|Income from discontinued operations                               | 3,449                | 18,205             
|**Net (loss) income**                                             | (6,671)              | 14,210             
|Preferred share dividends                                         | (1,262)              | (1,261)            
|Original issuance costs related to redemption of preferred shares | -                    | -                  
|**Net (loss) income applicable to common shares**                 | $	(7,933)            | $	12,949           
|                                                                  |                      |                    
|**Earnings per common share - basic and diluted:**                |                      |                    
|(Loss) income from continuing operations applicable to            |                      |                    
|common shares                                                     | $	(.67)              | $	(.27)            
|Income from discontinued operations                               | .20                  | .94                
|Net (loss) income applicable to common shares                     | $	(.47)              | $	.67              
|                                                                  |                      |                    
|**Dividends declared per common share**                           | $	.17                | $	.17              
|                                                                  |                      |                    
|**Weighted average number of common shares outstanding -**        |                      |                    
|**basic and diluted**                                             | 16,892               | 19,257             





*****Index***ASSOCIATED ESTATES REALTY CORPORATION**

**CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY**

**(UNAUDITED)**

|                                           |            | Class B    |               | Accumulated   |               |            
|------------------------------------------ | ---------- | ---------- | ------------- | ------------- | ------------- | -----------
|                                           |            | Cumulative | Common        | Total Paid-In | Distributions | Accumulated
|                                           |            | Redeemable | Shares        | Capital       | In Excess of  | Other      
|                                           |            | Preferred  | (at $.10      | Paid-In       | Unearned      | Accumulated
|(In thousands, except share amounts)       | Total      | Shares     | stated value) | Capital       | Compensation  | Net Income 
|                                           |            |            |               |               |               |            
|Balance, December 31, 2005                 | $	108,980  | $	58,000   | $	2,300       | $	279,484     | $	(599)       | $	(184,303)
|Comprehensive income:                      |            |            |               |               |               |            
|Net income                                 | 13,668     | -          | -             | -             | -             | 13,668     
|Other comprehensive income:                |            |            |               |               |               |            
|Change in fair value of hedge instruments  | (72)       | -          | -             | -             | -             | -          
|Total comprehensive income                 | 13,596     | -          | -             | -             | -             | 13,668     
|Share-based compensation                   | 760        | -          | -             | 1,264         | 599           | 10         
|Purchase of 991,786 common shares          | (10,259)   | -          | -             | -             | -             | -          
|Issuance of 87,099 common shares for stock |            |            |               |               |               |            
|option exercises from treasury shares      | 745        | -          | -             | (224)         | -             | -          
|Common share dividends                     | (8,708)    | -          | -             | -             | -             | (8,708)    
|Preferred share dividends                  | (3,785)    | -          | -             | -             | -             | (3,785)    
|Balance, September 30, 2006                | $	 101,329 | $	58,000   | $	2,300       | $	280,524     | $	-           | $	(183,118)





*****Index*******ASSOCIATED ESTATES REALTY CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

|                                                                                      | For the nine months 
|------------------------------------------------------------------------------------- | --------------------
|                                                                                      | ended September  30,
|(In thousands)                                                                        | 2006                
|Cash flow from operating activities:                                                  |                     
|Net income                                                                            | $	13,668            
|Adjustments to reconcile net income to net cash provided by operating activities:     |                     
|Depreciation and amortization (including discontinued operations)                     | 25,225              
|Loss on fixed asset replacements write-off                                            | 143                 
|Gain on disposition of properties                                                     | (38,120)            
|Minority interest in operating partnership                                            | 47                  
|Costs (discount) related to prepayment of debt, net                                   | 668                 
|Share-based compensation                                                              | 710                 
|Equity in net loss of joint ventures                                                  | 387                 
|Distribution from joint ventures                                                      | 318                 
|Net change in assets and liabilities:                                                 |                     
|- Accounts and notes receivable                                                       | 1,593               
|- Accounts and notes receivable of affiliates and joint ventures                      | 566                 
|- Accounts payable and accrued expenses                                               | 2,787               
|- Other operating assets and liabilities                                              | (1,897)             
|- Restricted cash                                                                     | 1,617               
|- Funds held for non-owned managed properties                                         | 79                  
|- Funds held for non-owned managed properties of affiliates                           | (452)               
|Total adjustments                                                                     | (6,329)             
|Net cash flow provided by operations                                                  | 7,339               
|Cash flow from investing activities:                                                  |                     
|Recurring fixed asset additions                                                       | (8,787)             
|Revenue enhancing/non-recurring fixed asset additions                                 | (1,228)             
|Acquisition/development fixed asset additions                                         | (256)               
|Purchase of operating partnership units                                               | (184)               
|Proceeds from disposition of operating properties                                     | 44,844              
|Deposit of sale proceeds to escrow account                                            | (1,300)             
|Contributions to joint ventures                                                       | (137)               
|Net cash flow provided by (used for) investing activities                             | 32,952              
|Cash flow from financing activities:                                                  |                     
|Principal payments on mortgage notes payable                                          | (197,689)           
|Payment of debt procurement costs                                                     | (1,425)             
|Proceeds from mortgage notes obtained                                                 | 132,209             
|Proceeds from issuance of unsecured trust preferred securities                        | -                   
|Line of credit borrowings                                                             | 71,700              
|Line of credit repayments                                                             | (60,230)            
|Redemption of Class A preferred shares                                                | -                   
|Common share dividends paid                                                           | (8,851)             
|Preferred share dividends paid                                                        | (3,785)             
|Operating partnership distributions paid                                              | (50)                
|Exercise of stock options                                                             | 745                 
|Purchase of treasury shares under repurchase plan                                     | (10,185)            
|Other financing activities, net                                                       | (71)                
|Net cash flow used for financing activities                                           | (77,632)            
|Decrease in cash and cash equivalents                                                 | (37,341)            
|Cash and cash equivalents, beginning of period                                        | 39,733              
|Cash and cash equivalents, end of period                                              | $	2,392             
|Supplemental disclosure of cash flow information:                                     |                     
|Dividends declared but not paid                                                       | $	2,909             
|Cash paid for interest                                                                | 45,478              
|Fixed asset replacement and other write-offs                                          | 2,338               
|Reclassification of original issuance costs related to redemption of preferred shares | -                   
|Relinquishment of debt related to property disposition                                | -                   
|Net change in accounts payable related to recurring fixed asset additions             | 624                 
|Final adjustment to fixed assets related to 2002 non-monetary joint venture exchange  | 496                 
|Fixed asset adjustment for purchase of operating partnership unit                     | 137                 





*******Index*******ASSOCIATED ESTATES REALTY CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**



**1.**	**BASIS OF PRESENTATION AND ACCOUNTING POLICIES**



*Except as the context otherwise requires, all references to "we," "our," "us" and the "Company" in
this report collectively refer to Associated Estates Realty Corporation and its consolidated subsidiaries.*

**Business**

We are a self-administered and self-managed equity real estate investment trust ("REIT") that
specializes in multifamily property management, advisory, development, acquisition, disposition, operation
and ownership activities.  In addition to rental revenue, we receive certain property and asset management
fees, acquisition, disposition and incentive fees, consultation fees, and mortgage servicing fees.  Our MIG
subsidiary is a registered investment advisor and serves as a real estate advisor to pension funds.  We own
three taxable REIT subsidiaries (the "Service Companies") that provide management and other services to
us and to third parties.

As of September 30, 2006, we owned or property managed 103 apartment communities in ten states
consisting of 21,348 units.  We own, either directly or indirectly through subsidiaries, or hold ownership
interests in 70 of those 103 apartment communities containing 16,145 units in nine states, 12 of which are
Affordable Housing communities.  We also property manage 33 communities consisting of 5,203 units.
Additionally, we asset manage a 186-unit apartment community and a commercial property containing
approximately 145,000 square feet.

**Basis of Presentation**

The accompanying unaudited consolidated financial statements have been prepared by
management in accordance with accounting principles generally accepted in the United States of America
("GAAP") for interim financial information and applicable rules and regulations of the Securities and
Exchange Commission.  Accordingly, they do not include all of the information and footnotes required by
GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting only
of normal and recurring adjustments) considered necessary for a fair presentation have been included.  The
reported results of operations are not necessarily indicative of the results that may be expected for the full
year.  These financial statements should be read in conjunction with the audited financial statements and
accompanying notes in our Annual Report on Form 10-K for the year ended December 31, 2005.

**Share-Based Compensation**

The Amended and Restated 2001 Equity-Based Award Plan (the "Plan") was the only share-based
compensation plan in effect on September 30, 2006.  The Plan provides for equity award grants to our
officers, employees, and directors.  Equity awards available under the Plan include stock options, share
appreciation rights, restricted shares, deferred shares, and other awards based on common shares.  The
aggregate number of common shares subject to awards under the Plan is 2,250,000.  At September 30,
2006, there were 763,196 common shares available for awards under the Plan.  We also have share-based
awards outstanding that had been issued under two other plans that have since expired, and outstanding
stock option awards that had been issued to our outside directors.  For additional information regarding
these share-based compensation plans, see Note 17 of the Notes to the Consolidated Financial Statements
of our report on Form 10-K for the year ended December 31, 2005.

Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting
Standards No. 123 (revised), "Share-Based Payment" ("SFAS 123(R)") using the modified prospective
application method.  Prior to the adoption of SFAS 123(R), we accounted for share-based compensation
using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25 ("APB No.
25"), and accordingly, we recognized no compensation expense for stock option awards.

Under the modified prospective method of SFAS 123(R), share-based compensation cost is
recognized on (i) all awards granted on or after January 1, 2006 using the fair-value method, (ii) nonvested
stock option awards granted prior to January 1, 2006 based on their grant date fair value as previously
calculated under the pro-forma disclosure provisions of SFAS 123 over the remaining requisite service
periods, and (iii) nonvested restricted share awards based on their grant date fair value over the remaining
service periods.  Prior periods were not restated to reflect the impact of adopting this Statement.
Additionally, SFAS 123(R) requires us to estimate the amount of expected forfeitures when calculating
compensation costs, instead of accounting for forfeitures as they occur, which was our previous method.
Forfeiture rates were calculated based on our historical forfeiture activity, which was adjusted for activity that
we believe is not representative of expected future activity.  The following table reflects the effect on
operating results and per share information if we had accounted for share-based compensation in
accordance with SFAS 123(R) for the three and nine months ended September 30, 2005:

|                                                          | For the three months | For the nine months
|--------------------------------------------------------- | -------------------- | -------------------
|(In thousands, except per share data)                     | ended September 30,  | ended September 30,
|                                                          | 2005                 | 2005               
|                                                          |                      |                    
|Net income                                                | $    	14,210         | $    	11,705       
|Total share compensation cost recognized                  | 70                   | 237                
|Total share compensation cost under the fair value method | (176)                | (443)              
|Proforma net income under the fair value method           | $    	14,104         | $    	11,499       
|                                                          |                      |                    
|Net income applicable to common shares:                   |                      |                    
|Net income as reported                                    | $	 12,949            | $	    5,674        
|Total share compensation cost recognized                  | 70                   | 237                
|Total share compensation cost under the fair value method | (176)                | (443)              
|Pro forma net income under the fair value method          | $    	12,843         | $    	5,468        
|                                                          |                      |                    
|Income per common share - basic and diluted:              |                      |                    
|Net income as reported                                    | $	.67                | $	.29              
|Total share compensation cost recognized                  | -                    | .01                
|Total share compensation cost under the fair value method | -                    | (.02)              
|Pro forma net income under the fair value method          | $	.67                | $	.28              



Our share-based compensation awards consist primarily of restricted shares.  We award share-based compensation to our officers and employees as a performance incentive and to align individual goals
with those of the Company.  We grant share-based awards that vest either at the end of a specified service
period, or in equal increments during the service period on each anniversary of the grant date.  In
accordance with SFAS 123(R), we have elected to recognize compensation cost on these awards on a
straight-line basis.  In addition to awards containing only service conditions, we issue certain grants in which
the number of shares that will ultimately vest and the date at which they will vest is dependant upon the
achievement of specified performance goals.  Compensation cost for awards with performance conditions
is recognized based on our best estimate of the number of awards that will vest and the period of time in
which they will vest.

During the three and nine months ended September 30, 2006, we recognized total share-based
compensation cost of $242,000 and $692,000, respectively, in "General and administrative expense".
Additionally, we allocated an immaterial amount of equity compensation expense to individual properties
which is included in "Property operating and maintenance expense" in the Consolidated Statements of
Operations.

*Stock Options*.  We use the Black-Scholes option pricing model to estimate the fair value of share-based awards.  The weighted average Black-Scholes assumptions and fair value for the three and nine
months ended September 30, 2006 and 2005 were as follows:

|                                    | For the three months | For the nine months
|----------------------------------- | -------------------- | -------------------
|                                    | ended September 30,  | ended September 30,
|                                    | 2006                 | 2005               
|Expected volatility                 | -                    | 30.7%              
|Risk-free interest rate             | -                    | 4.2%               
|Expected life of options (in years) | -                    | 7.1                
|Dividend yield                      | -                    | 7.1%               
|Grant-date fair value               | -                    | $ 1.45             

The expected volatility was based upon the historical volatility of our weekly share closing prices
over a period equal to the expected life of the options granted.  The risk-free interest rate used was the yield
from U.S. Treasury zero-coupon bonds on the date of grant with a maturity equal to the expected life of the
options.  The expected life of the options was derived using the "simplified" method as allowed under the
provisions of the Securities and Exchange Commission's Staff Accounting Bulletin No. 107.  The dividend
yield was derived using our annual dividend rate as a percentage of the price of our shares on the date of
grant.

The following table represents stock option activity for the nine months ended September 30, 2006:



|                                   | Number of     | Weighted-Average | Weighted-Average       
|---------------------------------- | ------------- | ---------------- | -----------------------
|                                   | Stock Options | Exercise Price   | Remaining Contract Life
|Outstanding at beginning of period | 1,996,308     | $ 11.89          |                        
|Granted                            | 237,155       | $ 11.30          |                        
|Exercised                          | 87,099        | $   8.55         |                        
|Forfeited                          | 13,750        | $ 12.11          |                        
|Expired                            | 51,250        | $ 14.71          |                        
|Outstanding at end of period       | 2,081,364     | $ 11.89          | 5.0 years              
|Exercisable at end of period       | 1,486,430     | $ 12.43          | 3.9 years              

The aggregate intrinsic value of stock options outstanding and stock options exercisable at
September 30, 2006, was $10.5 million and $7.5 million, respectively.  The aggregate intrinsic value of stock
options exercised during the nine months ended September  30, 2006 and 2005 was $410,000 and $70,000,
respectively.  We generally issue shares from treasury upon the exercise of stock options.

*Restricted Shares.*Restricted shares generally have the same rights as our common shares, except
for transfer restrictions and forfeiture provisions.  Prior to January 1, 2006, restricted share awards were
recorded in shareholders' equity as deferred compensation on the grant date based upon the price of our
common shares on the grant date and amortized into expense over the requisite service period based on
the straight line method.  We generally issue restricted share awards from treasury shares.  Upon adoption
of SFAS 123(R), we returned the nonvested shares to treasury shares from unearned compensation at their
original cost, totaling $1.5 million.  We recorded an immaterial cumulative effect of a change in accounting
principle as a result of our change in policy from recognizing forfeitures as they occur to one where we
recognize cost after the application of an estimated forfeiture rate.  This amount was recorded in "General
and administrative expense" in the Consolidated Statements of Operations.  Accrued compensation cost
of $561,000 related to nonvested restricted shares at January 1, 2006 was transferred to additional paid in
capital from deferred compensation.

The following table represents restricted share activity for the nine months ended September 30,
2006:

Number of
Weighted AverageShares
Grant-Date Fair ValueNonvested at beginning of period
144,582
$   8.96Granted
75,871
$ 11.60Vested
37,802
$   8.26Forfeited
8,218
$   9.46Nonvested at end of period
174,433
$ 10.24

The weighted average grant-date fair value of restricted shares granted during the nine months
ended September 30, 2006 and 2005 was $11.60 and $9.73, respectively.  The total fair value of restricted
shares vested during the nine months ended September 30, 2006 and 2005 was $451,000 and $137,000,
respectively.  At September 30, 2006, there was $751,000 of unrecognized compensation cost related to
nonvested restricted share awards that we expect to recognize over a weighted average period of 1.9 years.

**Operating Partnership Minority Interest**

In conjunction with the 1998 acquisition of an operating partnership that owned two apartment
communities, we issued a total of 522,032 operating partnership units ("OP units").  In September 2006,
13,746 of the OP units were redeemed for cash in the amount of $184,000, which represented a value of
$13.41 per unit.  These units had a recorded amount of $321,000 when issued.  The difference of the cash
paid and the recorded amount was $137,000 which reduced the recorded amount of the underlying real
estate.  There are 79,277 OP units remaining as of September 30, 2006.

**Derivative Instruments and Hedging Activity**

During the nine months ended September 30, 2006, we utilized forward contracts with respect to
forecasted probable purchases of natural gas used in heating certain of our properties.  We utilize the gas
forwards to limit the market price risk associated with the forecasted gas purchase.  Identification of a
forward contract as a qualifying cash-flow hedge requires us to determine that the forecasted transaction(s)
is probable, and the hedging relationship between the gas contract and the expected future purchase is
expected to be highly effective at the initiation of the hedge and throughout the hedging relationship.  We
reassess this hedge on a quarterly basis to determine if it continues to be effective and the forecasted
transactions are probable.  The changes in fair value of the contracts will be recorded in other
comprehensive income ("OCI") on the Consolidated Balance Sheets.  The amount in OCI will be reclassified
into earnings when the cost of the gas affects earnings.  If any portion of the hedge is determined to be
ineffective, that amount will be recorded  into earnings.  As of September 30, 2006, this hedge was reported
at fair value on the Consolidated Balance Sheet as "Accounts payable, accrued expenses and other
liabilities" in the amount of $106,000.  The unrealized gain/loss in the fair value of this hedge is deferred in
OCI and will be recognized in earnings as the hedged transaction occurs.  The change in net unrealized
gain/loss on this hedge reflects a reclassification of net unrealized gain/loss from accumulated OCI to
earnings of $89,000 during the nine months ended September 30, 2006.  We estimate the $97,000 in OCI
will be reclassified into earnings over the next six months.

**Classification of Fixed Asset Additions**

We consider recurring fixed asset additions to a property to be capital expenditures made to replace
worn out assets to maintain the property's value.  We consider investment/revenue enhancing and/or non-recurring fixed assets to be capital expenditures if such improvements increase the value of the property
and/or enables us to increase rents.  We consider acquisition and development fixed asset additions to be
for the purchase or construction of new properties to be added to our portfolio, or fixed asset additions
identified at the time of purchase that are not made until subsequent periods.

**Recent Accounting Pronouncements**

In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes" - an interpretation of FASB Statement No. 109, "Accounting for Income
Taxes" ("FIN 48").  This Interpretation clarifies the accounting for uncertain tax positions and provides
guidance for the recognition and measurement of a tax position taken or expected to be taken in a tax
return.  This Interpretation will become effective for us on January 1, 2007.  Although we are assessing the
impact of FIN 48, we do not anticipate that it will have a material impact on our financial position, results of
operations or cash flows.  ****

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No.
108 ("SAB 108") "Considering the Effects of Prior Year Misstatements in Current Year Financial Statements."
SAB 108 provides guidance on quantifying financial statement misstatements, including the effects of prior
year errors on current year financial statements.  SAB 108 is effective for fiscal years ending after November
15, 2006.  We do not anticipate that the adoption of SAB 108 will have a material impact on our financial
position, results of operations or cash flows.

**Reclassifications**

Certain reclassifications have been made to the 2005 financial statements to conform to the 2006
presentation.

**2.	PROPERTIES ACQUIRED**

On March 9, 2005, we acquired a 316-unit multifamily community located in Florida.  The purchase
was funded primarily by mortgage financing on the acquired property and on a previously unencumbered
Same Community Market-Rate ("Market-Rate") multifamily property.  See Note 4 for further information
concerning these mortgage notes.  Additionally, this property was part of a reverse Like-Kind Exchange
under Section 1031 of the Internal Revenue Code.

**3.	PROPERTIES SOLD OR HELD FOR SALE**

We report the results of operations and gain/loss related to the sale of real estate assets as
discontinued operations in accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144").  Real estate assets that are classified as held for sale are also reported as
discontinued operations.  We generally classify properties as held for sale when all significant contingencies
surrounding the closing have been resolved.  In many transactions, these contingencies are not satisfied
until the actual closing of the transaction.  Interest expense included in discontinued operations is limited
to interest on mortgage debt specifically associated with properties sold or classified as held for sale.

We classified one property as held for sale at September 30, 2006.  The major classes of assets
and liabilities related to this property have been reclassified as such in the accompanying Consolidated
Balance Sheet at September 30, 2006.  "Income from discontinued operations" in the accompanying
Consolidated Statements of Operations for the three and nine months ended September 30, 2006 and 2005
includes the operating results for the property classified as held for sale, the operating results and gain
recognized on the property sales referenced below, and the operating results for a property sold during the
fourth quarter of 2005.

On September 28, 2006, we completed the sale of an Affordable Housing property located in
Northeast Ohio.  The sale price was a net $2.9 million and we recorded a gain of $2.5 million.  The proceeds
of this sale were used for general corporate purposes.  Subsequent to the sale, we entered into a contract
to provide property management services for this property.

On August  28, 2006, we completed the sale of a  Market-Rate congregate care property located
in Northeast Ohio.  The sale price was $2.0 million and we recorded a gain of $865,000.  Proceeds of this
sale in the amount of $1.3 million were placed in escrow and were used to repay debt in October 2006.  The
remaining proceeds were used for other corporate purposes.

On May 15, 2006, we completed the sale of a Market-Rate property located in Northeast Ohio.  The
sale price was a net $28.4 million and we recorded a gain of $23.4 million.  In connection with our IPO in
1993, we acquired a Noteholder Interest which was secured by a limited partnership interest in one-half of
this property.  We had declared the notes to be in default because of nonpayment of interest and principal.
On July 16, 2004, we accepted a 98.999% limited partnership interest in the limited partnership that owned
the property in full satisfaction of all obligations under the notes.  In addition, one of our subsidiaries acquired
the remaining 1.001% general partnership interest in that limited partnership held by our President and CEO
Jeffrey I. Friedman and a company controlled by him.  The subsidiary acquired such partnership interest in
return for a promise to pay Mr. Friedman and his controlled company 1.001% of the net sale proceeds
derived from any future sale of the property.  Pursuant to the terms of the buyout, Mr. Friedman and his
controlled company were paid a total of $127,000 from the proceeds of this sale.  The independent members
of the Board of Directors approved the terms of the buyout.  The proceeds of this sale were used primarily
to fund the defeasance of fixed rate mortgage loans.  See Note 4 for further information on the defeasance
of fixed rate mortgage loans.

On May 10, 2006, we completed the sale of a Market-Rate property located in Northeast Ohio.  The
sale price was a net $13.9 million and we recorded a gain of $11.3 million.  The proceeds of this sale were
used primarily to fund the defeasance of fixed rate mortgage loans.  See Note 4 for further information on
the defeasance of fixed rate mortgage loans.

On August 25, 2005, we completed the sale of a Market-Rate property located in Northeast Ohio.
The sale price was $28.0 million and we recorded a gain of $17.4 million.  This property was part of a
reverse Like-Kind Exchange under Section 1031 of the Internal Revenue Code.  Subsequent to the sale,
we entered into a contract to provide property management services for this property.

On June 28, 2005, we completed the sale of a Market-Rate property located in Phoenix, Arizona.
The sale price was $15.5 million and we recorded a gain of $4.0 million.  The net proceeds from this sale
of $5.1 million were deposited directly to escrow with a qualified intermediary as this sale was treated as a
Deferred Like-Kind Exchange under Section 1031 of the Internal Revenue Code.  On October 11, 2005,
these proceeds were used to partially fund the acquisition of a 168-unit Market-Rate property in Atlanta,
Georgia.

The following chart summarizes "Income from discontinued operations" for the three and nine
months ended September 30 , 2006 and 2005.

|                                                | For the three months | For the nine months
|----------------------------------------------- | -------------------- | -------------------
|                                                | ended September 30,  | ended September 30,
|                                                | 2006                 | 2005               
|(In thousands)                                  |                      |                    
|Property revenue                                | $	546                | $	4,417            
|                                                |                      |                    
|Property operating and maintenance expense      | (451)                | (2,667)            
|Real estate asset depreciation and amortization | (29)                 | (675)              
|Interest income                                 | 4                    | 2                  
|Interest expense, net (1)                       | (18)                 | (278)              
|                                                |                      |                    
|Operating income                                | 52                   | 799                
|Gain on disposition of properties               | 3,397                | 17,406             
|**Income from discontinued operations**         | $	3,449              | $	18,205           



(1)	The nine months ended September 30, 2005, includes a $330 discount received as a result of prepaying a loan (see Note 4) and a reduction to
interest expense of $144 related to an interest rate swap termination payment.

**4.	DEBT**

**Mortgage Notes Payable**

During the nine months ended September 30, 2006, we defeased (prepaid) 13 fixed rate mortgage
loans totaling $138.9 million, and incurred $14.3 million in defeasance costs, which are included in "Interest
expense" in the Consolidated Statements of Operations.

On September 14, 2006, we completed the $132.2 million mortgage refinancing of five Market-Rate
properties.  The existing mortgages on these properties were defeased with proceeds from the refinancing
and are included in the above referenced 13 defeased loans.  The new loans were structured as five
separate mortgage loans, however each mortgage loan is cross-collateralized and cross-defaulted with the
other mortgage loans involved in the refinancing.  Each loan has a term of seven years and carries a 6.09%
fixed interest rate with interest only payments during the first five years and monthly payments of principal
and interest thereafter.  These loans include a substitution feature permitting us to substitute another
multifamily residential property for the respective mortgaged property in accordance with certain terms and
conditions as well as the right to release properties subject to satisfaction of various conditions.

On September 15, 2006, we prepaid three variable rate, conventional mortgages totaling $54.6
million with proceeds from the September 14, 2006, refinancing, as discussed above, and recognized
$300,000 of expense related to the prepayments.  These loans had been secured by three Market-Rate
properties.

On August 25, 2005, as discussed in Note 3, we completed the sale of a Market-Rate property
located in Northeast Ohio.  In connection with this sale, the $16.1 million mortgage note secured by this
property was paid off.

On June 28, 2005, as discussed in Note 3, we completed the sale of a Market-Rate property located
in Phoenix, Arizona.  In connection with this sale, the $10.1 million mortgage note secured by this property
was assumed by the buyer.

On March 21, 2005, we repaid a $15.6 million variable rate mortgage note that had been secured
by a property in Florida.

On March 9, 2005, we obtained two conventional mortgage loans in connection with the purchase
of a property in Florida.  One loan, secured by a property in Northeast Ohio, was repaid in December 2005.
The other loan, which was secured by the acquired Florida property, was repaid on September 15, 2006,
as discussed above.

On February 1, 2005, we repaid $10.7 million in variable rate debt and prepaid $5.3 million in zero
percent UDAG financing, both of which had been secured by a Market-Rate property.  Of the $16.0 million
that was repaid, $10.7 million matured on February 1, 2005, $3.1 million would have matured on April 1,
2005 and $2.2 million would have matured on June 1, 2006.  The $2.2 million that would have matured on
June 1, 2006, was paid off at a discount of $330,000, which was recorded as a reduction to interest
expense.  We funded the repayment by obtaining a new mortgage loan on the same property in the amount
of $16.1 million.  This note was repaid in full in connection with the sale of this property on August 25, 2005.

**Lines of Credit**

Our $17.0 million secured line of credit was unavailable at December 31, 2005, because the
property securing that credit line had been sold.  In February 2006, we identified a replacement property to
serve as security for this credit line and amended the loan terms by increasing the credit line to $17.0 million
from $15.0 million with interest calculated at LIBOR plus 1.5%.  This line matures March 1, 2008.
Borrowings under the line may be restricted based upon the operating performance of the property.  There
were borrowings of $11.5 million outstanding on this line of credit at September 30, 2006.

We also have a $14.0 million secured line of credit which matures in December 2007.  There were
no regular borrowings outstanding under this line at September 30, 2006 or December 31, 2005.  The
interest rate on this line is 1.8% in excess of LIBOR or the one month reference rate.  Letters of credit of $2.7
million were outstanding on this line at September 30, 2006.  On October 6, 2006, letters of credit totaling
approximately $2.6 million were canceled, leaving one letter of credit in the amount of $63,000 outstanding.
There were no borrowings outstanding on this line at December 31, 2005.

**Unsecured Debt**

On March 15, 2005, AERC Delaware Trust (the "Trust"), a newly formed wholly owned subsidiary,
sold trust preferred securities for an aggregate amount of $25.8 million.  Associated Estates Realty
Corporation ("AERC") owns all of the common securities of the Trust.  The Trust used the proceeds to
purchase AERC's junior subordinated note due March 30, 2035, which represents all of the Trust's assets.
The terms of the trust preferred securities are substantially the same as the terms of the junior subordinated
note.  Interest on the junior subordinate note is payable at a fixed rate equal to 7.9% per annum through the
interest rate payment date in March 2015 and thereafter at a variable rate equal to LIBOR plus 3.25% per
annum.  AERC may redeem the junior subordinated note at par at any time on and after March 30, 2010.
To the extent that AERC redeems the junior subordinated note, the Trust is required to redeem a
corresponding amount of trust preferred securities.

**5.**	**GOODWILL AND OTHER INTANGIBLE ASSETS**

**Goodwill**



*MIG Realty Advisors, Inc.*  In June 1998, we recorded goodwill in connection with the MIG Realty
Advisors, Inc. merger.  The goodwill was allocated fully to the Management and Service Operations
Segment.

We completed our annual review of goodwill during the three months ended March 31, 2006.  In
performing this analysis, we use a multiple of revenues to the range of potential alternatives and assign a
probability of the various alternatives under consideration by management.  Based on this analysis, we have
determined that goodwill was not impaired as of March 31, 2006.  As such, there were no changes to the
carrying amount of goodwill during the nine months ended September 30, 2006.  Should the estimates used
to determine alternatives or the probabilities of the occurrence thereof change, an impairment may result
which could materially impact our results of operations for the period in which it is recorded.

**Intangible Assets**

*Property Acquisitions*.  In accordance with SFAS 141, "Business Combinations", we allocate a
portion of the total purchase price of a property acquisition to any intangible assets identified, such as
existing leases and tenant relationships.  The intangible assets are amortized over the remaining lease
terms or estimated life of the tenant relationship, which is approximately twelve to sixteen months.  Due to
the short term nature of residential leases, we believe that existing lease rates approximate market rates,
and therefore, no allocation is made for above/below market leases.

**6.**	**TRANSACTIONS WITH AFFILIATES AND JOINT VENTURES**

We provide management and other services to (and are reimbursed for certain expenses incurred
on behalf of) certain non-owned properties in which our Chief Executive Officer ("CEO") and/or other related
parties have varying ownership interests.  The entities which own these properties, as well as other related
parties, are referred to as "affiliates."  We also provide similar services to joint venture properties.

In the normal course of business, we have advanced funds on behalf of affiliates and joint ventures
and held funds for the benefit of affiliates and joint ventures.

We held two notes of equal amounts payable by our CEO aggregating $3.4 million, both of which
were paid in full on April 25, 2005.  The average interest rate payable on these notes during 2005 was
approximately 4.5%.

Merit Painting Services ("Merit"), a subsidiary of ours, has provided services to JAS Construction,
Inc. ("JAS") related to property rehabilitation and other work from time to time.  JAS is owned by a son of
our CEO.  Reported revenue related to work performed by Merit for JAS is included in the table below.

Summarized affiliate and joint venture transaction activity was as follows:

|                                                           | For the three months | For the nine months
|---------------------------------------------------------- | -------------------- | -------------------
|                                                           | ended September 30,  | ended September 30,
|(In thousands)                                             | 2006                 | 2005               
|                                                           |                      |                    
|Property management fee and other                          |                      |                    
|miscellaneous service revenue                              | $	128                | $	 235             
|                                                           |                      |                    
|Painting service revenue related to JAS Construction       | 2                    | 87                 
|Other affiliate and joint venture painting service revenue | 2                    | 47                 
|                                                           |                      |                    
|Expenses incurred on behalf of and reimbursed by(1)        | 268                  | 340                
|                                                           |                      |                    
|Interest income on notes due from CEO                      | -                    | -                  

(1)*Primarily payroll and employee benefits, reimbursed at cost.*

|                                                                  | September 30,      | December 31,
|----------------------------------------------------------------- | ------------------ | ------------
|(In thousands)                                                    | 2006               | 2005        
|                                                                  |                    |             
|Accounts and notes receivable from affiliates and joint ventures: |                    |             
|Funds advanced                                                    | $	 528             | $	633       
|JAS Construction, Inc.                                            | 26                 | 392         
|Property management fees, insurance and                           |                    |             
|miscellaneous receivables                                         | 293                | 884         
|Total due from affiliates and joint ventures                      | $	847              | $	1,909     
|                                                                  |                    |             
|Funds held on behalf of affiliates and joint ventures             | $	             506 | $	959       

**7.	SHARES**

On July 27, 2005, our Board of Directors authorized the repurchase of up to $50.0 million of our
common shares.  On October 20, 2006, our Board of Directors expanded their authorization to include the
repurchase of our Class B Series II Preferred Shares.  As of September 30, 2006, we had repurchased
2,803,925 common shares under this plan at a cost of $27.6 million.

During the nine months ended September 30, 2006, a total of 37,802 restricted shares had vested
and were issued from treasury shares.  Effective January 1, 2006, we adopted SFAS 123(R).  This
Statement requires that restricted shares are recognized as issued shares when they become vested.  In
accordance with previous generally accepted accounting principles, we had recognized restricted shares
as issued shares when they were initially granted.  As a result of the adoption of this Statement, we returned
to treasury 144,582 restricted shares which were nonvested at January 1, 2006.  See Note 1 for additional
information related to the adoption of SFAS 123(R).

**8.	EARNINGS PER SHARE**

Earnings per share ("EPS") has been computed pursuant to the provisions of SFAS 128, "Earnings
per Share."  There were 2.1 million options to purchase common shares outstanding at September 30, 2006
and 2005.  None of the options were included in the calculation of diluted earnings per share for the periods
presented as their inclusion would be antidilutive to the net loss applicable to common shares from
continuing operations.

The exchange of operating partnership minority interests into common shares was also not included
in the computation of diluted EPS because we plan to settle these OP units in cash.

**9.	INTERIM SEGMENT REPORTING**

We have four reportable segments: (1) Acquisition/Disposition Multifamily Properties; (2) Same
Community Market-Rate ("Market-Rate") Multifamily Properties; (3) Affordable Housing Multifamily
Properties; and (4) Management and Service Operations.  We have identified these segments based upon
how management makes decisions regarding resource allocation and performance assessment. The
Acquisition/Disposition properties represent acquired or developed properties which have not yet reached
stabilization (we consider a property stabilized when its occupancy rate reaches 93.0% and we have owned
the property for one year), and properties that have been sold or are classified as held for sale in accordance
with SFAS 144.  The Market-Rate properties are same community (owned during the entirety of the
comparison periods) conventional multifamily residential apartments.  The Affordable Housing properties
are multifamily properties for which the rents are subsidized and certain aspects of the operations are
regulated by HUD pursuant to Section 8 of the National Housing Act of 1937.  The Management and Service
Operations provide management and advisory services to the Acquisition/Disposition, Market-Rate and
Affordable Housing properties that we own, as well as to third party clients and properties.  All of our
segments are located in the United States.

The accounting policies of the reportable segments are the same as those described in the "Basis
of Presentation and Significant Accounting Policies" in our Annual Report on Form 10-K for the year ended
December 31, 2005.  We evaluate the performance of our reportable segments based on Net Operating
Income ("NOI").  NOI is determined by deducting property operating and maintenance expenses from
property revenue for the Acquisition/Disposition (excluding amounts classified as discontinued operations),
Market-Rate and Affordable Housing segments and deducting direct property management and service
companies expenses and painting services expenses from Management and Service Company revenue
for the Management and Service Operations segment.  We consider NOI to be an appropriate supplemental
measure of our performance because it reflects the operating performance of our real estate portfolio and
management and service companies at the property and management and service company level and is
used to assess regional property level performance.  NOI should not be considered (i) as an alternative to
net income (determined in accordance with GAAP), (ii) as an indicator of financial performance, (iii) as cash
flow from operating activities (determined in accordance with GAAP) or (iv) as a measure of liquidity; nor
is it necessarily indicative of sufficient cash flow to fund all of our needs.  Certain other real estate
companies may define NOI in a different manner.

Segment information for the three and nine months ended September 30, 2006 and 2005 is as
follows:

|                                              | For the three months ended September 30, 2006
|--------------------------------------------- | ---------------------------------------------
|                                              |                                              
|                                              | Acquisition/                                 
|(In thousands)                                | Disposition                                  
|                                              |                                              
|Total segment revenue                         | $	530                                        
|Elimination of intersegment revenue           | -                                            
|Consolidated revenue                          | 530                                          
|                                              |                                              
|Equity in net loss of joint ventures          | -                                            
|                                              |                                              
|Operating income from discontinued operations | 52                                           
|                                              |                                              
|*NOI                                          | 239                                          
|                                              |                                              
|Total assets                                  | $	63,385                                     

*Intersegment revenue and expenses have been eliminated in the computation of NOI for each of the segments.

|                                              | For the nine months ended September 30, 2006
|--------------------------------------------- | --------------------------------------------
|                                              |                                             
|                                              | Acquisition/                                
|(In thousands)                                | Disposition                                 
|                                              |                                             
|Total segment revenue                         | $	5,016                                     
|Elimination of intersegment revenue           | -                                           
|Consolidated revenue                          | 5,016                                       
|                                              |                                             
|Equity in net loss of joint ventures          | -                                           
|                                              |                                             
|Operating income from discontinued operations | 208                                         
|                                              |                                             
|*NOI                                          | 2,846                                       
|                                              |                                             
|Total assets                                  | $	63,385                                    

*Intersegment revenue and expenses have been eliminated in the computation of NOI for each of the segments.

|                                              | For the three months ended September 30, 2005
|--------------------------------------------- | ---------------------------------------------
|                                              |                                              
|                                              | Acquisition/                                 
|(In thousands)                                | Disposition                                  
|                                              |                                              
|Total segment revenue                         | $	 -                                         
|Elimination of intersegment revenue           | -                                            
|Consolidated revenue                          | -                                            
|                                              |                                              
|Equity in net loss of joint ventures          | -                                            
|                                              |                                              
|Operating income from discontinued operations | 799                                          
|                                              |                                              
|*NOI                                          | -                                            
|                                              |                                              
|Total assets                                  | $	86,415                                     

*Intersegment revenue and expenses have been eliminated in the computation of NOI for each of the segments.

|                                              | For the nine months ended September 30, 2005
|--------------------------------------------- | --------------------------------------------
|                                              |                                             
|                                              | Acquisition/                                
|(In thousands)                                | Disposition                                 
|                                              |                                             
|Total segment revenue                         | $	2,398                                     
|Elimination of intersegment revenue           | -                                           
|Consolidated revenue                          | 2,398                                       
|                                              |                                             
|Equity in net loss of joint ventures          | -                                           
|                                              |                                             
|Operating income from discontinued operations | 2,544                                       
|                                              |                                             
|*NOI                                          | 1,467                                       
|                                              |                                             
|Total assets                                  | $	86,415                                    

*Intersegment revenue and expenses have been eliminated in the computation of NOI for each of the segments.

A reconciliation of total NOI to total consolidated net (loss) income for the three and nine months
ended September 30, 2006 and 2005 is as follows:

|                                           | For the three months | For the nine months
|------------------------------------------ | -------------------- | -------------------
|                                           | ended September 30,  | ended September 30,
|(In thousands)                             | 2006                 | 2005               
|                                           |                      |                    
|Total NOI for reportable segments          | $	18,233             | $	 16,989          
|Depreciation and amortization              | (8,233)              | (8,208)            
|General and administrative expense         | (2,679)              | (1,994)            
|Interest income                            | 96                   | 56                 
|Interest expense                           | (17,383)             | (10,754)           
|Equity in net loss of joint ventures       | (139)                | (68)               
|Minority interest in operating partnership | (15)                 | (16)               
|Income from discontinued operations:       |                      |                    
|Operating income                           | 52                   | 799                
|Gain on disposition of properties          | 3,397                | 17,406             
|Income from discontinued operations        | 3,449                | 18,205             
|Consolidated net (loss) income             | $	(6,671)            | $	14,210           

******10.	CONTINGENCIES**

***Legal Proceedings*****

We are subject to legal proceedings, lawsuits and other claims, including proceedings by
government authorities (collectively "Litigation").  Litigation is subject to uncertainties and outcomes are
difficult to predict.  Consequently, we are unable to estimate ultimate aggregate monetary liability or financial
impact with respect to the Litigation matters described in the following paragraphs as of September 30,
2006, and no accruals have been made for these matters other than those identified in the following
paragraphs.  We believe that other Litigation will not have a material adverse impact on us after final
disposition.  However, because of the uncertainties of litigation, one or more lawsuits could ultimately result
in a material obligation.

***Pending Lawsuits*****

On or about April 14, 2002, Melanie and Kyle Kopp commenced an action against us in the Franklin
County, Ohio Court of Common Pleas seeking undetermined damages, injunctive relief and class action
certification.  This case arose out of our Suredeposit program.  This program allows cash short prospective
residents to purchase a bond in lieu of paying a security deposit.  The bond serves as a fund to pay those
resident obligations that would otherwise have been funded by the security deposit.  Plaintiffs allege that the
non-refundable premium paid for the bond is a disguised form of security deposit, which is otherwise
required to be refundable in accordance with Ohio's Landlord-Tenant Act.  Plaintiffs further allege that
certain pet deposits and other nonrefundable deposits required by us are similarly security deposits that
must be refundable in accordance with Ohio's Landlord-Tenant Act.  On or about January 15, 2004, the
plaintiffs filed a motion for class certification.  We subsequently filed a motion for summary judgment.  Both
motions are pending before the Court.  We intend to vigorously defend ourselves against these claims.

***Government Investigations***

On or about August 7, 2002, the Maryland Attorney General served us with a subpoena seeking
information concerning certain of our leasing practices in connection with our Maryland properties.  The
subpoena sought extensive information going back a number of years, including information about our
Suredeposit programs and certain non-refundable deposits.  We understand that other landlords operating
in Maryland have been served with similar subpoenas.  The Maryland Attorney General has now completed
its review of the information we furnished and based upon that information contends that certain of our
leasing practices are in violation of Maryland's landlord tenant laws.  Any issues with the Attorney General
regarding the SureDeposit program have already been resolved without any material impact on our financial
results.  We are attempting to reach an out of court settlement with the Maryland Attorney General for the
purpose of resolving this matter and we have recorded an estimated loss contingency for that purpose,
which is included in "Accounts payable, accrued expenses and other liabilities" in the Consolidated Balance
Sheets and "General and administrative expense" in the Consolidated Statements of Operations.  We are
subject to additional exposure if we are unable to resolve this matter for the amount we recorded as a loss
contingency.  We are unable at this time to reasonably estimate the amount of additional loss.

On or about December  22, 2003, the Montgomery County, Maryland Office of Landlord Tenant
Affairs commenced an investigation into possible violations of state and county Landlord-Tenant laws
involving two properties operated by us located in Montgomery County, Maryland.  The matters being
investigated are for the most part the same leasing practices being investigated by the Maryland Attorney
General.  We are attempting to resolve those matters with Montgomery County simultaneously with settling
matters with the Maryland Attorney General.  Montgomery County recently commenced additional
investigations concerning other leasing practices in Montgomery County and we have recorded an estimated
loss contingency for that purpose which is included in "Accounts payable, accrued expenses and other
liabilities" in the Consolidated Balance Sheets and "General and administrative expense" in the Consolidated
Statements of Operations.  We are subject to additional exposure if we are unable to resolve this matter for
the amount we recorded as a loss contingency.  We are unable at this time to reasonably estimate the
amount of additional loss.

**11.	GUARANTEES**

We are a 49.0% partner in the joint venture partnership that owns Idlewylde Apartments, an 843-unit
multifamily community, located in Atlanta, Georgia. In connection with the $42.0 million mortgage loan
encumbering this property, we have guaranteed certain obligations of the partnership including
environmental indemnification obligations and typical non-recourse carveouts.  Although we have not
recorded a liability for a potential loss, we are required by GAAP to estimate the fair value of this guaranty.
We have estimated the fair value of the guaranty to be $290,000, and this amount is included as an asset
in "Investments in joint ventures, net" and as a liability in "Accounts payable, accrued expenses and other
liabilities" in the accompanying Consolidated Balance Sheet.  In addition, we routinely guaranty mortgage
debt of our wholly owned subsidiaries.

******12.	SUBSEQUENT EVENTS**

***Mortgage Notes Payable***

During October 2006, we prepaid debt totaling $1.2 million with funds that had been placed in
escrow in connection with the August 28, 2006 sale of a Market-Rate congregate care property.

***Share Repurchase Program***

On October 20, 2006, our Board of Directors expanded their July 27, 2005 authorization to
repurchase up to $50.0 million of our common shares to include the repurchase of our Class B Series II
Preferred Shares.  As of September 30, 2006, there was $22.4 million still available for purchase under this
authorization.

*****Index*****

**ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.**

The following discussion should be read in conjunction with the consolidated financial statements
and notes thereto included in Part I, Item 1 of this report on Form 10-Q.  This discussion may contain
forward-looking statements based on current judgments and current knowledge of management, which are
subject to certain risks, trends and uncertainties that could cause actual results to vary from those projected,
including but not limited to, expectations regarding our 2006 performance, which are based on certain
assumptions.  Accordingly, readers are cautioned not to place undue reliance on forward-looking statements
which speak only as of the dates of the document.  These forward-looking statements are intended to be
covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  The words
"expects", "projects", "believes", "plans", "anticipates", and similar expressions are intended to identify
forward-looking statements.  Investors are cautioned that these forward-looking statements involve risks and
uncertainty, that could cause actual results to differ from estimates or projections contained in these forward-looking statements, including without limitation the following:

- changes in the economic climate in the markets in which we own and manage properties,
including interest rates, our ability to consummate the sale of properties pursuant to our current
plan, the overall level of economic activity, the availability of consumer credit and mortgage
financing, unemployment rates and other factors;

risks of a lessening of demand for the multifamily units that we own or manage;

competition from other available multifamily units and change in market rental rates;

increases in property and liability insurance costs;

changes in real estate taxes and other operating expenses (e.g., cleaning, utilities, repairs and
maintenance costs, insurance and administrative costs, security, landscaping, staffing and other
general costs);

expenditures that cannot be anticipated such as utility rate and usage increases, unanticipated
repairs, and real estate tax valuation reassessments or millage rate increases;

inability to control operating expenses or achieve increases in revenue;

the results of litigation filed or to be filed against us;

changes in tax legislation;

risks of personal injury claims and property damage related to mold claims because of
diminished insurance coverage;

catastrophic property damage losses that are not covered by our insurance;

risks associated with property acquisitions such as environmental liabilities, among others;

changes in government regulations affecting our properties, the rent of which are subsidized
and certain aspects of which are regulated by the United States Department of Housing and
Urban Development ("HUD") and other properties that we manage;

inability to renew current contracts with HUD for rent subsidized properties at existing rents;

changes in or termination of contracts relating to third party management and advisory
business;

risks related to our joint ventures; and

risks related to the perception of residents and prospective residents as to the attractiveness,
convenience and safety of our properties or the neighborhoods in which they are located.

**Overview**.  We are engaged primarily in the ownership and operation of multifamily residential units.
We also provide asset and property management services to third party owners of multifamily residential
units for which we are paid fees.  Our primary source of cash and revenue from operations is rents from the
leasing of owned apartment units.  Approximately 91.2% of our consolidated revenue was generated from
the leasing of these owned units for the nine months ended September 30, 2006, and approximately 88.4%
of the rental revenue generated by these owned properties during the nine months ended September 30,
2006 was related to the Market-Rate properties.  The operating performance of the properties, particularly
the Market-Rate properties, is affected by factors such as interest rates, unemployment rates, and the supply
and demand of rental housing in particular markets.  Rental revenue collections are a combination of rental
rates and occupancy levels which have increased in 2006, and rent concessions which have decreased in
2006.  We attempt to adjust these factors from time to time, based on market conditions, in order to
maximize rental revenue.  Indicators that we use in measuring these factors include physical occupancy and
net collected rent.  These indicators are more fully described in the Results of Operations comparison.
Additionally, we consider property net operating income to be an important indicator of our overall
performance.  Property net operating income (property operating revenue less property operating and
maintenance expenses) is a measure of the profitability of our properties, which has the largest impact of
all of our sources of income and expense on our financial condition and operating results.  See Note 9 of
the Notes to Consolidated Financial Statements presented in Part I, Item 1 of this report on Form 10-Q for
additional information regarding property net operating income and total net operating income, in addition
to  a reconciliation of total net operating income to consolidated net (loss) income in accordance with GAAP.

**2006 Expectations.**

***Portfolio performance***** - We expect to increase our Market-Rate property NOI by approximately
4.75% to 5.25% in 2006.  For the nine months ended September 30, 2006, our Market-Rate
property NOI increased 4.8% while our Market-Rate operating margins declined 0.5%.  For the
year, we expect operating margins to remain relatively flat compared to 2005.

***Interest expense and general and administrative expense***- We expect total interest expense
before defeasance costs and other prepayment costs to decrease approximately $2.8 million
by utilizing sale proceeds to pay down debt or by refinancing at lower interest rates.  Total
defeasance costs and other prepayment costs for 2006 are expected to be approximately $19.3
million.  During the nine months ended September  30, 2006, we defeased or prepaid  sixteen
loans aggregating $193.5 million and recognized related costs of approximately $14.6 million.
Additionally, general and administrative expenses are expected to increase approximately
20.0% primarily as a result of NOI based performance bonuses, severance, legal accruals and
the impact on deferred directors shares resulting from our share price appreciation.  As a result
of these costs, for the nine months ended September 30, 2006, general and administrative
expenses were approximately 25.0% higher than the general and administrative expenses for
the nine months ended September 30, 2005.

***Property sales***** - We plan to sell between $75 and $100 million of properties in 2006.  For the
nine months ended September 30, 2006, we sold $47.2 million of properties.

**LIQUIDITY AND CAPITAL RESOURCES**

**Cash Flows and Liquidity**.   Significant sources and uses of cash in the nine months ended
September 30, 2006 and 2005, are summarized as follows:

Cash Sources (Uses):

|                                                            | For the nine months
|----------------------------------------------------------- | -------------------
|                                                            | ended September 30,
|(In thousands)                                              | 2006               
|                                                            |                    
|Net cash provided by operating activities                   | $	7,339            
|Property acquisition and/or development expenditures        | (256)              
|Property disposition proceeds, net                          | 43,544             
|Recurring and non-recurring capital expenditures            | (10,015)           
|(Decrease) increase in mortgage notes                       | (65,480)           
|Increase in unsecured debt                                  | -                  
|Increase (decrease) in lines of credit borrowing            | 11,470             
|Cash dividends and operating partnership distributions paid | (12,686)           
|Purchase of treasury shares                                 | (10,185)           

Our primary sources of liquidity are cash flow provided by operations, short term borrowings on our
lines of credit and proceeds from property sales.  Cash provided by operations in 2006 decreased compared
to 2005 primarily due to the payment of $14.3 million of defeasance costs, which were funded by secured
borrowings and property sales.  Excluding these costs, cash flow from operations would have increased
slightly in 2006 primarily due to changes in accounts payable and accounts receivable resulting from the
timing of cash payments.

We obtained cash from the following additional sources during 2006:

- $43.5 million in proceeds from the disposition of four operating properties, net;

$11.5 million in line of credit borrowings; and

We utilized cash for the following additional purposes during 2006:

- $10.3 million in capital additions;
- $65.5 million reduction in mortgage notes primarily due to the defeasance or prepayment of 16
mortgage loans;
- $12.7 million in dividends and distributions paid; and
- $10.2 million to repurchase our common shares.

At September 30, 2006, there were total borrowings of $11.5 million and letters of credit of $2.7
million outstanding on our two secured lines of credit leaving $16.8 million available for additional
borrowings.  On October 6, 2006, letters of credit totaling $2.6 million were canceled, leaving one letter of
credit in the amount of $63,000 outstanding.

In February 2006, we completed an agreement that increased our $15.0 million line of credit to a
$17.0 million line and identified a replacement property to serve as security for this line.  In October 2005,
the property that previously secured this line was sold.  As a result of that sale, the line was not available
to us until the replacement security was identified in February 2006.

During the nine months ended September 30, 2006, we defeased (prepaid) 13 fixed rate mortgage
loans totaling $138.9 million and prepaid three variable rate conventional mortgages totaling $54.6 million.
We recorded $14.6 million in defeasance and other prepayment costs related to these transactions, which
are included in "Interest expense" in the Consolidated Statements of Operations.

During October 2006, we prepaid debt totaling $1.2 million employing funds that had been placed
in escrow in connection with the August 28, 2006 sale of a Market-Rate congregate care property.

We anticipate funding approximately $3.2 million for recurring, investment/revenue enhancing and
non-recurring capital expenditures for the remainder of 2006.  These expenditures are expected to be
funded from cash flow provided by operating activities and the sale of properties.

Any future multifamily property acquisitions or developments would be financed with the most
appropriate sources of capital, which may include the assumption of mortgage indebtedness, bank and other
institutional borrowings, the exchange of properties, undistributed earnings, secured or unsecured debt
financings, or the issuance of shares or units exchangeable into common shares.

We anticipate that we will meet our liquidity requirements for the remainder of 2006 generally
through net cash provided by operations and property sales' proceeds.  We believe that these and other
sources, such as secured borrowings (primarily the lines of credit) should be sufficient to meet operating
requirements, capital additions, mortgage amortization payments and the payment of dividends in
accordance with REIT requirements.  We anticipate that we will continue paying quarterly dividends and that
we will sustain our current dividend rate.

**Guarantees.**   We routinely guaranty mortgage debt of our wholly owned subsidiaries.  Additionally,
we had one guaranty at September 30, 2006, related to a mortgage loan secured by one of our joint venture
properties.  See Note 11 of the Notes to Consolidated Financial Statements presented in Part I, Item 1 of
this report on Form 10-Q for information related to this guaranty.

**Off-Balance Sheet Investments and Financing Commitments.**   At September 30, 2006, we had
investments in two joint ventures that each own a multifamily apartment community.  The operations of these
properties are similar to the operations of our wholly owned portfolio.  These investments enable us to
exercise influence over the operations of the properties and share in their profits, while earning additional
fee income.  We account for our investments in unconsolidated joint ventures under the equity method of
accounting as we exercise significant influence, but do not control these entities.  These investments are
initially recorded at cost as investments in joint ventures and subsequently adjusted for equity in earnings
and cash contributions and distributions.

We have one guaranty obligation related to our joint ventures, which was previously discussed
under Guarantees.  Both of the joint venture properties were encumbered by debt at September 30, 2006.

**Dispositions.** 	On September 28, 2006, we completed the sale of an Affordable Housing property
located in Northeast Ohio.  The sale price was a net $2.9 million and we recorded a gain of $2.5 million.
The proceeds of this sale were used for general corporate purposes.  Subsequent to the sale, we entered
into a contract to provide property management services for this property.

On August  28, 2006, we completed the sale of a Market-Rate congregate care property located in
Northeast Ohio.  The sale price was $2.0 million and we recorded a gain of $865,000.  The proceeds of this
sale were used for general corporate purposes and to repay the debt on the property.

On May 15, 2006, we completed the sale of a Market-Rate property located in Northeast Ohio.  The
sale price was a net $28.4 million and we recorded a gain of $23.4 million.  The proceeds of this sale were
used primarily to fund the defeasance of fixed rate mortgage loans.

On May 10, 2006, we completed the sale of a Market-Rate property located in Northeast Ohio.  The
sale price was a net $13.9 million and we recorded a gain of $11.3 million.  The proceeds of this sale were
used primarily to fund the defeasance of fixed rate mortgage loans.

We classified one property as held for sale at September 30, 2006.  We tested this property in
accordance with SFAS 144 and determined that it was not impaired.  The results of operations for this
property are included in "Income from discontinued operations" in the Consolidated Statements of
Operations for all periods presented.

**Management and Service Operations.**  During the nine months ended September 30, 2006,
management contracts on two third-party owned properties were canceled.  Also, three properties owned
by third parties were sold and, as a result of the sales, the management contracts were canceled.  Total
annualized revenue related to these management contracts was approximately $726,000.  We recorded a
disposition fee of $198,000 during the third quarter of 2006 as a result of the sale of one of the properties.
Additionally, subsequent to the sale of an Affordable Housing property in September 2006, we entered into
a management contract with the buyer of the property to provide property management services.  We
anticipate a total of $30,000 in annual fee revenue related to this property.

***RESULTS OF OPERATIONS***

***Comparison of the three and nine months ended September 30, 2006 to the three and nine months
ended September 30, 2005*****

In the following discussion, Market-Rate properties represents wholly owned Same Community
Market-Rate properties that we have owned during the entirety of the comparison periods.  For the three and
nine month comparison periods, there were 55 and 54 Market-Rate properties, respectively.  Affordable
Housing properties represents 11 properties subject to HUD regulations.  Acquired/Disposed properties
represents recently acquired properties, properties classified as held for sale, and all sold properties.  For
the three and nine month comparison periods, there were one and two acquired properties, respectively,
and one held for sale property.

Overall, the net loss from continuing operations for 2006 increased in both comparison periods
primarily due to increases in interest expense (primarily due to defeasance costs) and property operating
and maintenance expenses during 2006.  These increases were partially offset by an increase in property
revenue during 2006.

The following chart reflects the amount and percentage change in line items that are relevant to the
changes in overall operating performance when comparing the three and nine months ended September
30, 2006 to the three and nine months ended September 30, 2005:

|                                             | Increase (decrease) in | Increase (decrease) in
|-------------------------------------------- | ---------------------- | ----------------------
|                                             | three month comparison | nine month comparison 
|                                             | period ended           | period ended          
|                                             | September 30, 2006     | September 30, 2006    
|                                             | to September 30, 2005  | to September 30, 2005 
|(Amounts in thousands)                       |                        |                       
|Property revenue                             | $	 2,424               | 7.4%                  
|Property operating and maintenance expenses: |                        |                       
|Real estate taxes and insurance              | 518                    | 11.5%                 
|Repairs and maintenance                      | 187                    | 5.9%                  
|Personnel                                    | 167                    | 4.1%                  
|Utilities                                    | 127                    | 6.0%                  
|Property operating and maintenance expenses  | 1,010                  | 6.5%                  
|General and administrative expense           | 685                    | 34.4%                 
|Interest expense (1)                         | 6,629                  | 61.6%                 
|Income from discontinued operations          | (14,756)               | (81.1)%               

(1)Changes in interest expense were impacted by $7.5 million and $14.6 million of defeasance and other prepayment costs for the
three and nine months ended September 30, 2006, respectively.

*****Index*****

*Property Revenue*.  Property revenue is impacted by a combination of rental rates, rent concessions
and occupancy levels.  We measure these factors using indicators such as  physical occupancy (number
of units occupied divided by total number of units at the end of the period) and average monthly net collected
rent per unit (gross potential rents less vacancies and concessions divided by total number of units).  This
information is presented in the following table for the three and nine months ended September 30, 2006 and
2005 (information for the three and nine months ended September 30, 2005 reflect results based upon the
operating properties and their respective segments as of September 30, 2006):

|                       | For the three months ended
|---------------------- | --------------------------
|                       | September 30, 2006        
|                       |                           
|                       | Physical                  
|                       | Occupancy                 
|                       |                           
|Acquisition Properties | 97.6%                     
|Market-Rate            | 95.3%                     
|Affordable Housing     | 99.5%                     

|                       | For the nine months ended
|---------------------- | -------------------------
|                       | September 30, 2006       
|                       |                          
|                       | Physical                 
|                       | Occupancy                
|                       |                          
|Acquisition Properties | 92.8%                    
|Market-Rate            | 95.4%                    
|Affordable Housing     | 99.5%                    

Property revenue increased in 2006 during both comparison periods primarily as a result of
increased occupancy and a combination of rental rate increases and an overall reduction in concessions
being offered in the Market-Rate segment and increases of $532,000 and $2.6 million for the three and nine
month comparison periods, respectively, related to the properties acquired in 2005.  Additionally, we initiated
several new cost reimbursement programs in 2004 and 2005 which were phased-in throughout 2005.  The
programs were fully implemented by late 2005.  The results from these reimbursement programs also
contributed to the increase in property revenue.



*Property Operating and Maintenance Expenses.*  Property operating and maintenance expenses
increased primarily as a result of increases in real estate tax expense, repair and maintenance expense,
personnel expense, and utilities expense in both comparison periods.  Real estate taxes increased in both
comparison periods primarily due to estimated increases in assessed property values and millage rates in
2006 and a decrease in refunds received related to prior year taxes of approximately $278,000 in 2006
compared to 2005.  Insurance increased primarily as a result of property coverage principally in the
Southeast.  Repairs and maintenance expenses increased in both comparison periods primarily due to
increases in maintenance project costs, unit preparation costs, landscaping costs, and trash removal costs.
The increase in personnel expense was primarily due to salary increases and benefit costs in both
comparison periods.  Utilities increased during both comparison periods primarily due to increases in the
cost per unit of natural gas in the first half of 2006 compared to the same period in 2005 which was partially
offset by reduced consumption.

*General and Administrative Expense.*   General and administrative expense increased primarily due
to salary increases and benefit costs during both comparison periods, an increase of $242,000 and
$653,000 for the three month and nine month periods, respectively, in directors' compensation and an
increase of $179,000 and $481,000 for the three and nine month periods, respectively, in share-based
compensation.  The increase in directors' compensation was primarily the result of increases in the deferred
portion of the directors' compensation, which is held as share units and valued using the closing price of our
common shares at the end of each period.  Additionally, during the second and third quarters of 2006, we
recorded a loss contingency that is discussed in Note 10 of the Notes to Consolidated Financial Statements

*****Index*****

presented in Part 1, Item 1 of this report on Form 10-Q.  For additional information on share-based
compensation, see Note 1 of the Notes to Consolidated Financial Statements presented in Part I, Item 1 of
this report on Form 10-Q.

*Interest Expense.*Interest expense increased in 2006 during the three month comparison period
primarily due to $7.2 million in costs recorded related to the defeasance of five mortgage loans and
$300,000 in costs recorded related to the prepayment of three mortgage loans.  Interest expense increased
in 2006 during the nine month comparison period primarily due to $14.6 million in costs recorded related to
the defeasance and prepayment of sixteen mortgage loans.  The increases in both comparison periods were
partially offset by reduced interest expense resulting from lower weighted average interest rates and a
reduction in total debt outstanding in 2006 compared to 2005.

*Income from Discontinued Operations.*  Discontinued operations includes the operating results of
the property that has been classified as held for sale and the properties that were sold during 2006 and
2005.  For further details on "Income from discontinued operations," see Note 3 of the Notes to Consolidated
Financial Statements presented in Part I, Item 1 of this report on Form 10-Q.

**CONTINGENCIES**

For a discussion of contingencies, see Note 10 of the Notes to Consolidated Financial Statements
presented in Part I, Item 1 of this report on Form 10-Q.

******ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

During the nine months ended September 30, 2006, we entered into forward contracts to manage
our exposure to fluctuations in natural gas prices.  We do not expect to use these contracts for trading or
other speculative purposes.  These contracts have been designated as cash flow hedges and the changes
in the fair values are not material to our financial condition or results of operations.  Additionally, we are
exposed to interest rate changes associated with variable rate debt as well as refinancing risk on our fixed-

rate debt.  We occasionally use derivative instruments to manage our exposure to interest rates.  See our
Form 10-K "Item 7A Qualitative and Quantitative Disclosures About Market  Risk" for a more complete
discussion of interest rate sensitive assets and liabilities.

**ITEM 4.  CONTROLS AND PROCEDURES**

*Disclosure Controls and Procedures.*  We have evaluated the design and operation of our disclosure
controls and procedures to determine whether they are effective in ensuring that the disclosure of required
information is timely made in accordance with the Securities Exchange Act of 1934 ("Exchange Act") and
the rules and forms of the Securities and Exchange Commission.  This evaluation was made under the
supervision and with the participation of management, including our Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO"), as of the end of the period covered by this report on Form 10-Q.  The CEO
and CFO have concluded, based on their review, that our disclosure controls and procedures, as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e), are effective to ensure that information required to be
disclosed in reports that we file under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules and forms.

*Changes in Internal Control over Financial Reporting.*There were no changes in our internal control
over financial reporting during the third quarter of 2006 that materially affected, or are reasonably likely to
materially affect, internal control over financial reporting.

We believe that because of its inherent limitations, internal control over financial reporting may not
always prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.

*****Index*****

**PART II.	OTHER INFORMATION**

**ITEM 1.	LEGAL PROCEEDINGS**

For information related to legal proceedings, see Note 10 of the Notes to Consolidated Financial
Statements presented in Part I, Item 1 of this Report on Form 10-Q.

**ITEM 1A.	RISK FACTORS**

See "Risk Factors" in Part I, Item 1A of our report on Form 10-K for the year ended December 31,
2005.

**ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

|Issuer Purchases of Equity Securities for the three months ended September 30, 2006
|-----------------------------------------------------------------------------------
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|                                                                                   
|Period                                                                             
|                                                                                   
|July 1 through                                                                     
|July 31                                                                            
|August 1 through                                                                   
|August 31                                                                          
|September 1 through                                                                
|September 30                                                                       
|Total                                                                              

On July 27, 2005, our Board of Directors authorized the repurchase of up to $50.0 million of our
common shares.  On October 20, 2006, our Board of Directors expanded this authorization to include the
repurchase of our Class B Series II Preferred Shares.  Additionally, we have a policy which allows
employees to pay their portion of the payroll taxes related to restricted share vesting by surrendering shares
equal in value on the day of vesting to the amount of taxes due.

*****Index*****

**ITEM 6.	EXHIBITS**



|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | **Filed herewith or**                                                            
|---------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | **incorporated**                                                                 
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | **herein by**                                                                    
|**Number** | **Title**                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | **reference**                                                                    
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|3.1        | Amendment to Second Amended and Restated Articles of Incorporation                                                                                                                                                                                                                                                                                                                                                                                                                      |  | Exhibit 3.1 to Form 8-K
filed December 8, 2004.                                  
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|3.2        | Second Amended and Restated Articles of Incorporation, as amended by the
Company.                                                                                                                                                                                                                                                                                                                                                                                                       |  | Exhibit 3.2 to Form 8-K
filed December 8, 2004.                                  
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|3.3        | Amended and Restated Code of Regulations of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                |  | Exhibit 3.3  to Form 10-Q
filed August 1, 2006.                                  
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.1        | Specimen Common Share Certificate.                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | Exhibit 3.1 to Form S-11
filed September 2, 1993
(File No. 33-68276 as
amended). 
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.2        | Specimen 8.70% Class B Series II Cumulative Redeemable Preferred
Shares                                                                                                                                                                                                                                                                                                                                                                                                                 |  | Exhibit 4.3 to Form 8-A
filed December 8, 2004.                                  
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.3        | Deposit Agreement by and among Associated Estates Realty Corporation
and National City Bank and Depositary Receipts                                                                                                                                                                                                                                                                                                                                                                     |  | Exhibit 4.5 to Form 8-A
filed December 8, 2004                                   
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.4        | Form of Indemnification Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | Exhibit 4.2 to Form S-11
filed September 2, 1993
(File No. 33-68276 as
amended). 
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.5        | Form of Promissory Note and Form of Mortgage and Security Agreement
dated May 10, 1999 from AERC to The Chase Manhattan Bank.                                                                                                                                                                                                                                                                                                                                                           |  | Exhibit 4.5 to Form 10-Q
filed August 13, 1999.                                  
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.5a       | Form of Promissory Note and Form of Mortgage and Security Agreement
dated September 10, 1999 from AERC to The Chase Manhattan Bank.                                                                                                                                                                                                                                                                                                                                                     |  | Exhibit 4.5a to Form 10-Q filed November 12,
1999.                               
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.5b       | Form of Promissory Note and Form of Mortgage and Security Agreement

dated November 18, 1999 from AERC to The Chase Manhattan Bank.                                                                                                                                                                                                                                                                                                                                                     |  | Exhibit 4.5b to Form 10-K filed March 15, 2000.                                  
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.9        | Second Amended and Restated Loan Agreement dated April 19, 2002
between Associated Estates Realty Corporation and National City Bank.                                                                                                                                                                                                                                                                                                                                                   |  | Exhibit 4.13a to Form 10-Q filed August 13, 2002.                                
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.9a       | Third Amended and Restated Loan Agreement dated November 1, 2005
between Associated Estates Realty Corporation and National City Bank.                                                                                                                                                                                                                                                                                                                                                  |  | Exhibit 4.9a to Form 10-K filed March 1, 2006.                                   
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.9a(i)    | Amendment No. 1 to Third Amended and Restated Loan Agreement dated
May 15, 2006 between Associated Estates Realty Corporation and National
City Bank                                                                                                                                                                                                                                                                                                                                    |  | Exhibit 4.9a(i) to Form
10-Q filed August 1,
2006.                               
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.9b       | First Amendment to Second Amended and Restated Loan Agreement dated
May 14, 2002 between Associated Estates Realty Corporation and National
City Bank.                                                                                                                                                                                                                                                                                                                                  |  | Exhibit 4.13b to Form 10-Q filed August 13, 2002.                                
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.9c       | Second Amendment to Second Amended and Restated Loan Agreement
dated April 17, 2003 between Associated Estates Realty Corporation and
National City Bank.                                                                                                                                                                                                                                                                                                                               |  | Exhibit 4.13c to Form 10-Q filed August 1, 2003.                                 
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.9d       | Third Amendment to Second Amended and Restated Loan Agreement dated
July 15, 2003 between Associated Estates Realty Corporation and National
City Bank.                                                                                                                                                                                                                                                                                                                                 |  | Exhibit 4.13d to Form 10-Q filed November 20,
2003.                              
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.9e       | Fourth Amendment to Second Amended and Restated Loan Agreement
dated September 7, 2004 between Associated Estates Realty Corporation
and National City Bank.                                                                                                                                                                                                                                                                                                                            |  | Exhibit 4.13e to Form 10-Q filed November 2,
2004.                               
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.11       | Loan Agreement dated July 22, 2003 between The Huntington National Bank
and MIG/Orlando Development, Ltd.                                                                                                                                                                                                                                                                                                                                                                               |  | Exhibit 4.15 to Form 10-Q filed November 20,
2003.                               
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|4.12       | Amended and Restated Loan Agreement dated February 20, 2006 between
The Huntington National Bank and MIG/Orlando Development, Ltd.                                                                                                                                                                                                                                                                                                                                                      |  | Exhibit 4.12 to Form 10-Q filed May 2, 2006.                                     
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|           | Certain of the Registrant's assets are subject to mortgage obligations each of
which individually relates to indebtedness totaling less than 10.0% of the total
assets of the Registrant.  The Registrant hereby agrees to furnish a copy of
such agreements to the Commission upon its request.                                                                                                                                                                                        |  |                                                                                  
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|           | The Registrant issued unsecured debt in the form of Trust Preferred
Securities on March 15, 2005 in a private placement in an amount less than
10.0% of the total assets of the Registrant.  The Registrant hereby agrees to
furnish a copy of the Purchase Agreement dated March 15, 2005 between
Associated Estates Realty Corporation, AERC Delaware Trust and Taberna
Preferred Funding 1, Ltd. and a specimen Preferred Securities Certificate to
the Commission upon its request. |  |                                                                                  
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|10         | Associated Estates Realty Corporation Directors' Deferred Compensation
Plan.                                                                                                                                                                                                                                                                                                                                                                                                            |  | Exhibit 10 to Form 10-Q
filed November 14, 1996.                                 
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|10.1       | Stock Option Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | Exhibit 10.2 to Form S-11 filed September 2,
1993 (File No. 33-68276
as amended).
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|10.2       | Amended and Restated Employment Agreement between the Company and
Jeffrey I. Friedman.                                                                                                                                                                                                                                                                                                                                                                                                  |  | Exhibit 10.1 to Form 10-Q filed May 13, 1996.                                    
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|10.3       | Equity-Based Incentive Compensation Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | Exhibit 10.4 to Form 10-K filed March 29, 1995.                                  
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|10.4       | Form of Restricted Agreement dated by and among the Company and Its
Independent Directors.                                                                                                                                                                                                                                                                                                                                                                                              |  | Exhibit 10.9 to Form 10-K filed March 28, 1996.                                  
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|10.8       | Form of Share Option Agreement by and among the Company and Its
Independent Directors.                                                                                                                                                                                                                                                                                                                                                                                                  |  | Exhibit 10.14 to Form 10-K filed March 30, 1993.                                 
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|10.9       | Partnership Interests Purchase Agreement dated July 17, 2004 by and
among Jeffrey I. Friedman and JIFCO, an Ohio Corporation  and Winchester,
Inc., an Ohio Corporation                                                                                                                                                                                                                                                                                                                 |  | Exhibit 10.21 to Form 10-K filed February 25,
2005.                              
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|10.10      | Associated Estates Realty Corporation Amended and Restated 2001 Equity-Based Plan (as amended on May 4, 2005).  Incorporated by reference to
Appendix 1 to the Definitive Proxy Statement filed March 28, 2005.                                                                                                                                                                                                                                                                         |  | Exhibit 99.01 to Form S-8 filed May 26, 2005.                                    
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|10.11      | Form of Equity Award Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  | Exhibit 10.11 to Form 10-Q filed August 2, 2005.                                 
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|10.12      | Long Term Incentive Compensation Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | Exhibit 10.12 to Form 10-Q filed November 1,
2005.                               
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|31         | Certification of Chief Executive Officer Pursuant  to Section 302 of the
Sarbanes Oxley Act.                                                                                                                                                                                                                                                                                                                                                                                            |  | Exhibit 31 to Form 10-Q
filed herewith.                                          
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|31.1       | Certification of Chief Financial Officer Pursuant to Section 302 of the

Sarbanes Oxley Act.                                                                                                                                                                                                                                                                                                                                                                                            |  | Exhibit 31.1 to Form 10-Q filed herewith.                                        
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                  
|32         | Certification of Chief Executive Officer and Chief Financial Officer Pursuant
to Section 906 of the Sarbanes Oxley Act.                                                                                                                                                                                                                                                                                                                                                                 |  | Exhibit 32 to Form 10-Q
filed herewith.                                          

*************Index*********

**SIGNATURES**

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

|                 | ASSOCIATED ESTATES REALTY CORPORATION
|---------------- | -------------------------------------
|                 |                                      
|                 |                                      
|October 31, 2006 | /s/ Lou Fatica                       
|(Date)           | Lou Fatica, Vice President,          
|                 | Chief Financial Officer and Treasurer