**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**Washington,D.C. 20549

**FORM10-Q**

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

For the quarterly periodended September 30, 2006

**NTS REALTY HOLDINGS LIMITEDPARTNERSHIP**

(Exact name of registrantas specified in its charter)

**Delaware**(State of incorporation or organization)

 

** **

**001-32389**

(Commission File No.)

**41-2111139**

(I.R.S. EmployerIdentification No.)

**10172 Linn Station Road****Louisville, Kentucky 40223**

(Address of principalexecutive offices)

**(502) 426-4800**

(Registrant’s telephonenumber, including area code)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.**Yes**S     **No**£

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct.  (Check one):

Large acceleratedfiler  £           Accelerated filer  £             Non-accelerated filer  S

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).**Yes**£    ** No**S

As of November 7, 2006,there were 11,381,608 of the registrant’s limited partnership unitsoutstanding.

 

 

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**NTSREALTY HOLDINGS LIMITED PARTNERSHIP**

**FORM 10-Q**

**TABLE OF CONTENTS**
| **PART I — FINANCIAL  INFORMATION**                                                                   |   | 4  |
|------------------------------------------------------------------------------------------------------------|--------|----|
| Item 1 — Financial  Statements                                                                        |   | 4  |
| Balance Sheets  as of September 30, 2006 and December 31, 2005                                             |   | 4  |
| Statement of  Partners’ Equity as of September 30, 2006                                               |   | 4  |
| Statements of  Operations for the Three and Nine Months Ended September 30, 2006 and 2005                  |   | 5  |
| Statements of  Cash Flows for the Nine Months Ended September 30, 2006 and 2005                            |   | 6  |
| Notes to Financial  Statements                                                                             |   | 7  |
| Item 2 —  Management’s Discussion and Analysis of Financial Condition and Results of  Operations |   | 18 |
| Item 3 —  Quantitative and Qualitative Disclosures About Market Risk                                  |   | 29 |
| Item 4 — Controls and  Procedures                                                                     |   | 29 |
| **PART II — OTHER  INFORMATION**                                                                      |   | 30 |
| Item 1 — Legal Proceedings                                                                            |   | 30 |
| Item 1A — Risk Factors                                                                                |   | 30 |
| Item 2 —  Unregistered Sales of Equity Securities and Use of Proceeds                                 |   | 30 |
| Item 3 —  Defaults Upon Senior Securities                                                             |   | 31 |
| Item 4 —  Submission of Matters to a Vote of Security Holders                                         |   | 31 |
| Item 5 — Other Information                                                                            |   | 31 |
| Item 6 — Exhibits                                                                                     |   | 31 |
| SIGNATURES                                                                                                 |   | 33 |

 

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**INFORMATIONREGARDING FORWARD-LOOKING STATEMENTS**

Some of the statements included in this quarterlyreport on Form 10-Q, particularly those included in Part I, Item 2 — Management’sDiscussion and Analysis of Financial Condition and Results of Operations (“MD&A”),may be considered “forward-looking statements” because the statements relate tomatters which have not yet occurred.  Forexample, phrases such as “we anticipate,” “believe” or “expect” indicate thatit is possible that the event anticipated, believed or expected may notoccur.  If these events do not occur, theresult which we expected also may, or may not, occur in a different manner,which may be more or less favorable to us. We do not undertake any obligation to update these forward-looking statements.

Any forward-looking statements included in MD&A,or elsewhere in this report, reflect our managing general partner’s bestjudgment based on known factors, but involve risks and uncertainties.  Actual results could differ materially fromthose anticipated in any forward-looking statements as a result of a number offactors, including but not limited to those described in our filings with theSecurities and Exchange Commission, particularly our most recent annual reporton Form 10-K, which was filed on April 3, 2006. Any forward-looking information provided by us pursuant to the safeharbor established by the Private Securities Litigation Reform Act of 1995should be evaluated in the context of these factors.

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**PART I — FINANCIALINFORMATION**

**Item 1 — FinancialStatements**

**NTSREALTY HOLDINGS LIMITED PARTNERSHIP**BalanceSheets as of September 30, 2006 and December 31, 2005
| ** **                                                                                                                                  | ** ** | **(Unaudited)**              | ** **  | ** **                  | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|-------------|-----------------------------|------------|
| ** **                                                                                                                                  | ** ** | **September 30,  2006** | ** **  | **December 31,  2005** | ** ** |
| **ASSETS:**                                                                                                                                 | ** ** | ** **                   | ** **  |                        |       |
| Cash and  equivalents                                                                                                                       |       | $                            | 362,231     |                        | $          | 5,409,318 |   |
| Cash and equivalents  - restricted                                                                                                          |       | 607,419                      |        | 386,858                     |       |
| Accounts  receivable, net of allowance for doubtful accounts of $325,001 at September 30,  2006 and $331,186 at December 31, 2005 |       | 1,533,920                    |        | 1,588,460                   |       |
| Land, buildings  and amenities, net                                                                                                         |       | 278,644,561                  |        | 119,745,821                 |       |
| Long-lived  assets held for sale                                                                                                            |       | 26,790,237                   |        | 54,432,359                  |       |
| Other assets                                                                                                                                |       | 3,355,530                    |        | 6,246,007                   |       |
|                                                                                                                                        |       |                         |        |                        |       |
| **Total  assets**                                                                                                                           |       | $                            | 311,293,898 |                        | $          | 187,808,823 |   |
|                                                                                                                                        |       |                         |        |                        |       |
| **LIABILITIES:**                                                                                                                            |       |                         |        |                        |       |
| Mortgages and  notes payable                                                                                                                |       | $                            | 219,356,656 |                        | $          | 138,012,832 |   |
| Accounts payable  and accrued expenses                                                                                                      |       | 3,375,719                    |        | 2,801,960                   |       |
| Accounts payable  and accrued expenses due to affiliate                                                                                     |       | 384,108                      |        | 373,138                     |       |
| Distributions  payable                                                                                                                      |       | 1,138,161                    |        | 2,276,321                   |       |
| Security  deposits                                                                                                                          |       | 903,870                      |        | 634,274                     |       |
| Long-lived  liabilities held for sale                                                                                                       |       | 586,006                      |        | 605,806                     |       |
| Other  liabilities                                                                                                                          |       | 3,710,297                    |        | 1,054,297                   |       |
|                                                                                                                                        |       |                         |        |                        |       |
| **Total  liabilities**                                                                                                                      |       | 229,454,817                  |        | 145,758,628                 |       |
|                                                                                                                                        |       |                         |        |                        |       |
| COMMITMENTS AND  CONTINGENCIES (NOTE 11)                                                                                                    |       |                         |        |                        |       |
|                                                                                                                                        |       |                         |        |                        |       |
| **PARTNERS’ EQUITY**                                                                                                                   |       | 81,839,081                   |        | 42,050,195                  |       |
|                                                                                                                                        |       |                         |        |                        |       |
| **Total liabilities and partners’  equity**                                                                                            |       | $                            | 311,293,898 |                        | $          | 187,808,823 |   |

 

**NTSREALTY HOLDINGS LIMITED PARTNERSHIP**Statementof Partners’ Equity as of September 30, 2006(Unaudited)
| ** **                          | ** ** | **General  Partner  Interests** | ** ** | **Limited  Partners  Interests** | ** ** | **General  Partner** | ** ** | **Limited  Partners** | ** ** | **Total**  | ** ** |
|-------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|----------------------|------------|-----------------------|------------|------------|------------|
| **PARTNERS’  EQUITY:**         |       |                            |       |                             |       |                 |       |                  |       |       |       |
| Initial equity                      |       | 714,491                         |       | 10,667,117                       |       | $                    | 3,131,381  |                  | $          | 46,750,444 |       | $ | 49,881,825 |   |
| Net loss prior year                 |       | —                          |       | —                           |       | (134,392             | )          | (2,006,434            | )          | (2,140,826 | )          |
| Net income current year             |       | —                          |       | —                           |       | 2,712,131            |       | 40,491,237            |       | 43,203,368 |       |
| Cash distributions declared to date |       | —                          |       | —                           |       | (571,593             | )          | (8,533,693            | )          | (9,105,286 | )          |
|                                |       |                            |       |                             |       |                 |       |                  |       |       |       |
| Balances on  September 30, 2006     |       | 714,491                         |       | 10,667,117                       |       | $                    | 5,137,527  |                  | $          | 76,701,554 |       | $ | 81,839,081 |   |

 

The accompanying notes to financial statements are anintegral part of these statements.

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**NTSREALTY HOLDINGS LIMITED PARTNERSHIP**Statementsof Operations for the Three and Nine Months EndedSeptember 30, 2006 and 2005(Unaudited)
| ** **                                                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                             | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| **REVENUE:**                                                           |       |                                                 |       |                                                |       |   |   |   |   |
| Rental income                                                          |       | $                                                    | 9,707,138  |                                                | $          | 5,242,887 |   | $ | 26,693,661 |   | $ | 15,570,449 |   |
| Tenant  reimbursements                                                 |       | 441,909                                              |       | 458,006                                             |       | 1,327,610 |   | 1,332,038 |   |
|                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| **Total  revenue**                                                     |       | 10,149,047                                           |       | 5,700,893                                           |       | 28,021,271 |   | 16,902,487 |   |
|                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| **EXPENSES:**                                                          | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating expenses                                                     |       | 2,683,409                                            |       | 1,345,922                                           |       | 6,290,289 |   | 3,829,493 |   |
| Operating  expenses reimbursed to affiliate                            |       | 1,205,509                                            |       | 652,095                                             |       | 3,315,486 |   | 1,910,714 |   |
| Management fees                                                        |       | 506,790                                              |       | 251,305                                             |       | 1,418,255 |   | 736,510 |   |
| Property taxes  and insurance                                          |       | 1,157,990                                            |       | 635,009                                             |       | 3,210,559 |   | 1,768,864 |   |
| Professional and  administrative expenses                              |       | 546,452                                              |       | 601,731                                             |       | 1,510,004 |   | 2,035,144 |   |
| Professional and  administrative expenses reimbursed to affiliate      |       | 389,360                                              |       | 346,258                                             |       | 1,197,736 |   | 1,042,840 |   |
| Depreciation and  amortization                                         |       | 3,818,742                                            |       | 1,530,045                                           |       | 10,205,963 |   | 4,526,949 |   |
|                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| **Total  operating expenses**                                          |       | 10,308,252                                           |       | 5,362,365                                           |       | 27,148,292 |   | 15,850,514 |   |
|                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| **OPERATING (LOSS) INCOME**                                            |       | (159,205                                             | )          | 338,528                                             |       | 872,979 |   | 1,051,973 |   |
|                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Interest and other  income                                             |       | 21,536                                               |       | 100,426                                             |       | 155,881 |   | 234,180 |   |
| Interest expense                                                       |       | (3,134,864                                           | )          | (1,395,370                                          | )          | (8,360,755 | ) | (3,997,961 | ) |
| Loss on disposal of  assets                                            |       | (42,826                                              | )          | (93,439                                             | )          | (156,394 | ) | (224,292 | ) |
|                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| **LOSS FROM CONTINUING OPERATIONS**                                    |       | (3,315,359                                           | )          | (1,049,855                                          | )          | (7,488,289 | ) | (2,936,100 | ) |
| Discontinued operations,  net                                          |       | 216,929                                              |       | 325,487                                             |       | 741,171 |   | 1,149,605 |   |
| Gain on sale of  discontinued operations                               |       | —                                               |       | —                                              |       | 49,950,486 |   | — |   |
|                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| **NET (LOSS) INCOME**                                                  |       | $                                                    | (3,098,430 | )                                                   | $          | (724,368 | ) | $ | 43,203,368 |   | $ | (1,786,495 | ) |
|                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| **Loss from continuing operations  allocated to limited partners**     |       | $                                                    | (3,107,234 | )                                                   | $          | (983,949 | ) | $ | (7,018,205 | ) | $ | (2,751,783 | ) |
| Discontinued  operations, net allocated to limited partners            |       | 203,311                                              |       | 305,054                                             |       | 694,644 |   | 1,077,437 |   |
| Gain on sale of  discontinued operations allocated to limited partners |       | —                                               |       | —                                              |       | 46,814,798 |   | — |   |
| ** **                                                             | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **NET (LOSS) INCOME ALLOCATED TO  LIMITED PARTNERS**                   |       | $                                                    | (2,903,923 | )                                                   | $          | (678,895 | ) | $ | 40,491,237 |   | $ | (1,674,346 | ) |
|                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| **Loss from continuing operations  per limited partnership unit**      |       | $                                                    | (0.29      | )                                                   | $          | (0.09 | ) | $ | (0.66 | ) | $ | (0.26 | ) |
| Discontinued  operations, net per limited partnership unit             |       | 0.02                                                 |       | 0.03                                                |       | 0.07 |   | 0.10 |   |
| Gain on sale of  discontinued operations per limited partnership unit  |       | —                                               |       | —                                              |       | 4.39 |   | — |   |
|                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| **NET (LOSS) INCOME PER LIMITED  PARTNERSHIP  UNIT**                   |       | $                                                    | (0.27      | )                                                   | $          | (0.06 | ) | $ | 3.80 |   | $ | (0.16 | ) |
|                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| **Number of limited partnership interests**                            |       | 10,667,117                                           |       | 10,667,117                                          |       | 10,667,117 |   | 10,667,117 |   |

 

The accompanying notes to financial statements are anintegral part of these statements.

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**NTSREALTY HOLDINGS LIMITED PARTNERSHIP**Statementsof Cash Flows for the Nine Months EndedSeptember 30, 2006 and 2005(Unaudited)
| ** **                                                                                | ** ** | **2006**     | ** **  | **2005**    | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------|-------------|-------------|------------|
| **OPERATING ACTIVITIES:**                                                                 | ** ** | ** **   | ** **  | ** **  | ** ** |
| **Net  income (loss)**                                                                    |       | $            | 43,203,368  |        | $          | (1,786,495 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |         |        |        |       |
| Gain from sale  of discontinued assets                                                    |       | (49,950,486  | )           | —      |       |
| Loss on disposal  of assets                                                               |       | 233,148      |        | 397,518     |       |
| Depreciation and  amortization                                                            |       | 11,937,980   |        | 6,975,613   |       |
| Write-off of  loan costs                                                                  |       | —       |        | 113,102     |       |
| **Changes  in assets and liabilities:**                                                   | ** ** | ** **   | ** **  | ** **  | ** ** |
| Cash and  equivalents – restricted                                                   |       | (220,561     | )           | (60,900     | )          |
| Accounts  receivable                                                                      |       | (4,215       | )           | (581,182    | )          |
| Other assets                                                                              |       | (629,305     | )           | (1,145,986  | )          |
| Accounts payable  and accrued expenses                                                    |       | 573,759      |        | 272,937     |       |
| Accounts payable  and accrued expenses due to affiliate                                   |       | 10,970       |        | 299,725     |       |
| Distributions  declared payable                                                           |       | (1,138,161   | )           | 1,174,414   |       |
| Security  deposits                                                                        |       | 159,327      |        | 245,802     |       |
| Other  liabilities                                                                        |       | 1,608,309    |        | 930,867     |       |
|                                                                                      |       |         |        |        |       |
| **Net  cash provided by operating activities**                                            |       | 5,784,133    |        | 6,835,415   |       |
|                                                                                      |       |         |        |        |       |
| **INVESTING ACTIVITIES:**                                                                 | ** ** | ** **   | ** **  | ** **  | ** ** |
| Additions to  land, buildings and amenities                                               |       | (3,576,206   | )           | (5,999,618  | )          |
| Proceeds from  sale of discontinued operations                                            |       | 77,483,821   |        | —      |       |
| Acquisitions                                                                              |       | (131,111,503 | )           | (15,975,000 | )          |
| Investment in  and notes receivable from joint venture                                    |       | —       |        | (9,010,224  | )          |
| Cash and  equivalents – restricted                                                   |       | 874,079      |        | (1,702,354  | )          |
|                                                                                      |       |         |        |        |       |
| **Net  cash used in investing activities**                                                |       | (56,329,809  | )           | (32,687,196 | )          |
|                                                                                      |       |         |        |        |       |
| **FINANCING ACTIVITIES:**                                                                 | ** ** | ** **   | ** **  | ** **  | ** ** |
| Proceeds from  mortgages and notes payable                                                |       | 42,500,000   |        | 30,000,000  |       |
| Proceeds from  revolving note payable                                                     |       | 44,211,343   |        | 14,344,857  |       |
| Principal  payments on mortgages and notes payable                                        |       | (38,745,501  | )           | (1,353,067  | )          |
| Payoff of notes  payable                                                                  |       | —       |        | (14,986,826 | )          |
| Additions to  loan costs                                                                  |       | (190,932     | )           | (478,259    | )          |
| Cash  distributions.                                                                      |       | (2,276,321   | )           | (2,276,321  | )          |
|                                                                                      |       |         |        |        |       |
| **Net  cash provided by financing activities**                                            |       | 45,498,589   |        | 25,250,384  |       |
|                                                                                      |       |         |        |        |       |
| **NET DECREASE IN CASH AND  EQUIVALENTS**                                                 |       | (5,047,087   | )           | (601,397    | )          |
|                                                                                      |       |         |        |        |       |
| **CASH AND EQUIVALENTS, beginning  of period**                                            |       | 5,409,318    |        | 2,573,855   |       |
|                                                                                      |       |         |        |        |       |
| **CASH AND EQUIVALENTS, end of  period**                                                  |       | $            | 362,231     |        | $          | 1,972,458 |   |
| ** **                                                                                | ** ** | ** **   | ** **  | ** **  | ** ** |
| **NON-CASH INVESTING AND  FINANCING ACTIVITIES:**                                         | ** ** | ** **   | ** **  | ** **  | ** ** |
| Acquisitions of  land, buildings and amenities by debt assumption                         |       | $            | (33,377,982 | )           | $          | — |   |
| Mortgage payable  assumed in acquisition                                                  |       | $            | 33,377,982  |        | $          | — |   |

 

The accompanying notes to financial statementsare an integral part of these statements.

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**NTS REALTY HOLDINGS LIMITED PARTNERSHIP**Notes toFinancial Statements(Unaudited)

The unaudited financial statements included hereinshould be read in conjunction with NTS Realty Holdings Limited Partnership’s (“NTSRealty”) 2005 annual report on Form 10-K as filed with the Securities andExchange Commission on April 3, 2006.  Inthe opinion of NTS Realty Capital, Inc., our managing general partner, alladjustments, consisting only of normal recurring accruals, necessary for a fairpresentation have been made to the accompanying financial statements for thethree and nine months ended September 30, 2006 and 2005.  The results of operations for the interimperiods are not necessarily indicative of the results that may be expected forthe full year or any other interim period. As used in this quarterly report on Form 10-Q, the terms “we,” “us” or “our,”as the context requires, may refer to NTS Realty or its interests in itsproperties.

**Note 1 — Summary of Significant AccountingPolicies**

***Organization and DistributionPolicy***

We are in the business of developing, constructing,owning and operating multifamily properties, commercial and retail real estateand land leases.  At September 30, 2006,we owned twenty-nine properties, comprised of nine multifamily properties,sixteen office and business centers, three retail properties, and one groundlease.  The properties are located in andaround Louisville (17) and Lexington (1), Kentucky, Fort Lauderdale (3),Florida, Indianapolis (4), Indiana, Nashville (2), Tennessee, Richmond (1),Virginia, and Atlanta (1), Georgia.  Ouroffice and business centers aggregate approximately 1.5 million squarefeet.  We own multifamily propertiescontaining approximately 2,540 units and retail properties containingapproximately 210,000 square feet of space, as well as one ground leaseassociated with a 120-space parking lot attached to one of our properties.

We pay distributions if and when authorized by ourmanaging general partner.  We arerequired to pay distributions on a quarterly basis, equal to sixty-five percent(65%) of our “net cash flow from operations” as this term is defined inregulations promulgated by the Treasury Department under the Internal RevenueCode of 1986, as amended; provided that if a law is enacted or existing law ismodified or interpreted in a manner that subjects us to taxation as acorporation or otherwise subjects us to entity level taxation for federal,state or local income tax purposes, we will adjust the amount distributed toreflect our obligation to pay tax.  Anydistribution other than a distribution with respect to the final quarter of acalendar year will be made no later than forty-five (45) days after the lastday of such quarter based on our estimate of “net cash flow from operations”for the year.  Any distribution withrespect to the final quarter of a calendar year will be made no later thanninety (90) days after the last day of such quarter based on actual “net cashflow from operations” for the year, adjusted for any excess or insufficientdistributions made with respect to the first three quarters of the calendaryear.

“Net cash flow from operations” may be reduced by theamount of reserves as determined by us each quarter.  Our managing general partner will establishthese reserves for, among other things, working capital or capital improvementneeds.  Therefore, there is no assurancethat we will have “net cash flow from operations” from which to paydistributions in the future.  Forexample, our partnership agreement permits our managing general partner toreinvest sales or refinancing proceeds in new and existing properties or tocreate reserves to fund future capital expenditures.  Because “net cash flow from operations” iscalculated after reinvesting sales or refinancing proceeds or establishingreserves, we may not have any “net cash flow from operations” from which to paydistributions.

We paid quarterly distributions of $0.10 per unit tolimited partners on April 14, 2006, July 14, 2006, and October 13, 2006.

**Note 2 — Use of Estimates and Reclassificationsin the Preparation of Financial Statements**

The preparation of financial statements in accordancewith U.S. generally accepted accounting principles requires us to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates.

 

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Certain reclassifications have been made to theSeptember 30, 2005 and December 31, 2005 financial statements to conform to theSeptember 30, 2006 classifications. These reclassifications have no effect on previously reported operatingresults or partners’ equity.

**Note 3 — Real Estate Transactions**

***Acquisitions***

Duringthe nine months ended September 30, 2006 and the year ended December 31, 2005,we made the following property acquisitions:
| **Property – Multifamily** | ** ** | ** **        | **Location** | ** ** | **Units** | ** ** | **Our  Ownership** | ** **        | **Date of  Purchase** | ** ** | **Purchase  Price** | ** ** |
|-------------------------------------------|------------|-------------------|--------------|------------|-----------|------------|--------------------|-------------------|----------------------------|------------|---------------------|------------|
| The Lakes  Apartments                     |       | Indianapolis,  IN |         | 230        |      | 100%       |               | August  26, 2005  |                       | $          | 15,975,000          |       |
| The Grove at  Richland Apartments         |       | Nashville,  TN    |         | 292        |      | 100%       |               | February  3, 2006 |                       | 45,757,500 |                |
| The Grove at  Swift Creek Apartments      |       | Richmond,  VA     |         | 240        |      | 100%       |               | February  3, 2006 |                       | 27,200,000 |                |
| The Grove at  Whitworth Apartments        |       | Nashville,  TN    |         | 301        |      | 100%       |               | February  3, 2006 |                       | 44,254,500 |                |
| Castle Creek  Apartments                  |       | Indianapolis,  IN |         | 276        |      | 100%       |               | March  23, 2006   |                       | 27,000,000 |                |
| Lake Clearwater  Apartments               |       | Indianapolis, IN  |         | 216        |      | 100%       |               | March 23, 2006    |                       | 23,000,001 |                |
|                                           |            |                   |              |            |           |            |                    |                   |                            |            |                     |            |  |

 

On August 24, 2005, we closed on a $20.0 million lineof credit from PNC Bank, National Association. We used a portion of the proceeds from the line of credit to pay thepurchase price for The Lakes Apartments. On March 23, 2006, we obtained permanent financing and the line ofcredit was increased to $24.0 million to assist in future acquisitions andother working capital needs.  Inaddition, on February 3, 2006, we assumed a mortgage with an outstandingbalance of approximately $33.4 million in the purchase of three multifamilyproperties known as The Grove of Richland, The Grove at Swift Creek and TheGrove at Whitworth.  Further, on March23, 2006, we closed on our agreement to purchase Castle Creek Apartments andLake Clearwater Apartments located in Indianapolis, Indiana, using a bank loanof approximately $42.5 million, which we guaranteed, and an advance on our lineof credit for the balance.

The acquisitions were accounted for using the purchasemethod of accounting in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 141 “Business Combinations.”  The assets and liabilities purchased wererecorded at their fair market value at the date of the acquisition.  We allocated the purchase price for each ofthe properties to net tangible and identified intangible assets acquired basedon fair values (including land, buildings, tenant improvements, acquired aboveand below market leases and the origination cost of acquired in-place leases)and acquired liabilities.  For the 2006acquisitions listed above, we recorded land, buildings and amenities ofapproximately $166.7 million.  We alsorecorded approximately $200,000 in security deposits and approximately $541,000in prepaid liabilities and accrued property taxes.  We recorded an intangible asset for theacquired in-place leases of approximately $657,000, which is included in otherassets.  This will be amortized over a periodof one year, which approximates the weighted average lease lives.  Amortization of approximately $164,000 and$379,000 was included in our amortization expense for the three and nine monthsended September 30, 2006, respectively. No above or below market leases or customer relationship intangiblesexist.  At the date of the acquisitions,the carrying value of mortgages and other liabilities approximated fair marketvalue.  We retained an independentappraiser to assess fair value based on estimated cash flow projections thatutilize discount and capitalization rates deemed appropriate and availablemarket information.

*** ***

8

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*** ***

***ProForma Information***

The followingtable presents our unaudited pro forma results of operations and per unitamounts as if we had consummated our 2006 and 2005 acquisitions as of thebeginning of each period presented.
| ** **                                                     | ** ** | **(Unaudited)**                                      | ** ** | **(Unaudited)**                                     | ** ** |
|----------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
| ** **                                                     | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues                                                       |       | $                                                    | 10,149,047 |                                                | $          | 9,536,396 |   | $ | 29,921,978 |   | $ | 28,978,111 |   |
| Expenses and  other income, net                                |       | 13,464,406                                           |       | 11,964,576                                          |       | 38,382,223 |   | 36,330,020 |   |
|                                                           |       |                                                 |       |                                                |       |   |   |   |   |
| Loss from  continuing operations                               |       | $                                                    | (3,315,359 | )                                                   | $          | (2,428,180 | ) | $ | (8,460,245 | ) | $ | (7,351,909 | ) |
|                                                           |       |                                                 |       |                                                |       |   |   |   |   |
| Net (loss)  income                                             |       | $                                                    | (3,098,430 | )                                                   | $          | (2,102,693 | ) | $ | 42,231,412 |   | $ | (6,202,304 | ) |
|                                                           |       |                                                 |       |                                                |       |   |   |   |   |
| Loss from  continuing operations allocated to limited partners |       | $                                                    | (3,107,234 | )                                                   | $          | (2,275,749 | ) | $ | (7,929,145 | ) | $ | (6,890,386 | ) |
|                                                           |       |                                                 |       |                                                |       |   |   |   |   |
| Net (loss)  income allocated to limited partners               |       | $                                                    | (2,903,923 | )                                                   | $          | (1,970,694 | ) | $ | 39,580,296 |   | $ | (5,812,949 | ) |
|                                                           |       |                                                 |       |                                                |       |   |   |   |   |
| Loss from  continuing operations per limited partnership unit  |       | $                                                    | (0.29      | )                                                   | $          | (0.21 | ) | $ | (0.74 | ) | $ | (0.65 | ) |
|                                                           |       |                                                 |       |                                                |       |   |   |   |   |
| Net (loss)  income per limited partnership unit                |       | $                                                    | (0.27      | )                                                   | $          | (0.18 | ) | $ | 3.71 |   | $ | (0.54 | ) |
| ** **                                                     | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Number of limited  partnership interests                       |       | 10,667,117                                           |       | 10,667,117                                          |       | 10,667,117 |   | 10,667,117 |   |

 

***Dispositions***

During the ninemonths ended September 30, 2006, we made the following property dispositions:
| **Property — Multifamily** | ** ** | **Location** | ** ** | **Units** | ** ** | **Our  Ownership** | ** ** | **Date of Sale** | ** ** | **Sale Price** | ** ** |
|-------------------------------------------|------------|--------------|------------|-----------|------------|--------------------|------------|----------------------------|------------|---------------------|------------|
| Golf Brook  Apartments                    |       | Orlando,  FL |       | 195       |       | 100%               |       | February 2, 2006           |       | $                   | 43,153,500 |   |
| Sabal Park Apartments                     |       | Orlando, FL  |       | 162       |       | 100%               |       | February 2, 2006           |       | 28,350,000          |       |
|                                           |            |              |            |           |            |                    |            |                            |            |                     |            |  |

 
| **Property — Commercial** | ** ** | **Location**   | ** ** | **Square Feet** | ** ** | **Our  Ownership** | ** ** | **Date of Sale** | ** ** | **Sale Price** | ** ** |
|------------------------------------------|------------|----------------|------------|----------------------|------------|--------------------|------------|----------------------------|------------|---------------------|------------|
| Commonwealth  Business Center Phase I    |       | Louisville, KY |       | 60,661               |       | 100%               |       | May 18, 2006               |       | $                   | 4,331,000  |   |
| Commonwealth Business  Center Phase II   |       | Louisville, KY |       | 65,869               |       | 100%               |       | May 18, 2006               |       | 2,769,000           |       |
|                                          |            |                |            |                      |            |                    |            |                            |            |                     |            |  |

 

On February 2, 2006, we closed on our agreements tosell Golf Brook Apartments and Sabal Park Apartments, our multifamilyproperties located in Orlando, Florida, to an unaffiliated Florida corporationfor an aggregate sales price of approximately $71.5 million, resulting in again of approximately $48.3 million.

On March 6, 2006, we announced that we entered into anagreement to sell Commonwealth Business Center Phases I and II, two of ourbusiness centers located in Jefferson County, Kentucky, to an unaffiliatedKentucky limited liability company for an aggregate sales price of $7.1million.

On May 18, 2006, we closed on our agreement to sellCommonwealth Business Center Phases I and II, two of our business centerslocated in Jefferson County, Kentucky, to an unaffiliated Kentucky limitedliability company for an aggregate sales price of $7.1 million, resulting in a gainof approximately $1.7 million.

On August 17,2006, we announced that on August 16, 2006 we entered into an agreement to sellBlankenbaker Business Centers I and II, two business centers located inLouisville, Kentucky, to an unaffiliated individual for a total of $21.6million.

On September 15,2006, we announced that we were notified by the prospective purchaser ofBlankenbaker Business Centers I and II, two of our business centers located inLouisville, Kentucky, that such purchaser was unable to fulfill his obligationsunder the purchase agreement and, thus terminated the agreement.

9

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On September 18,2006, the board of directors of our managing general partner authorizedmanagement to sell Blankenbaker Business Center I and II, Springs MedicalOffice Center and Springs Office Center at specified minimum prices.

We have presented separately as discontinuedoperations in all periods the results of operations for Golf Brook Apartments,Sabal Park Apartments, Commonwealth Business Center Phases I and II,Blankenbaker Business Center I and II, Springs Medical Office Center, andSprings Office Center. These assets and liabilities held for sale have beenseparately identified on our balance sheets at September 30, 2006 and December31, 2005.

The components of discontinued operations are outlinedbelow and include the results of operations for the respective periods in whichwe owned such assets during the three and nine months ended September 30, 2006and 2005.
| ** **                                                          | ** ** | **(Unaudited)**                                      | ** ** | **(Unaudited)**                                     | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
| ** **                                                          | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| **REVENUE:**                                                        | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Rental income                                                       |       | $                                                    | 1,510,851  |                                                | $          | 3,104,623 |   | $ | 5,185,799 |   | $ | 9,076,295 |   |
| Tenant  reimbursements                                              |       | 77,130                                               |       | 104,401                                             |       | 311,234 |   | 316,791 |   |
|                                                                |       |                                                 |       |                                                |       |   |   |   |   |
| **Total  revenue**                                                  |       | 1,587,981                                            |       | 3,209,024                                           |       | 5,497,033 |   | 9,393,086 |   |
|                                                                |       |                                                 |       |                                                |       |   |   |   |   |
| **EXPENSES:**                                                       | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating  expenses and operating expenses reimbursed  to affiliate |       | 411,799                                              |       | 1,075,373                                           |       | 1,581,052 |   | 3,153,469 |   |
| Management fees                                                     |       | 76,537                                               |       | 175,389                                             |       | 265,528 |   | 503,446 |   |
| Property taxes  and insurance                                       |       | 105,515                                              |       | 259,903                                             |       | 418,145 |   | 791,696 |   |
| Depreciation and  amortization                                      |       | 267,530                                              |       | 639,925                                             |       | 1,006,251 |   | 1,914,548 |   |
|                                                                |       |                                                 |       |                                                |       |   |   |   |   |
| **Total  expenses**                                                 |       | 861,381                                              |       | 2,150,590                                           |       | 3,270,976 |   | 6,363,159 |   |
|                                                                |       |                                                 |       |                                                |       |   |   |   |   |
| **DISCONTINUED OPERATING INCOME**                                   |       | 726,600                                              |       | 1,058,434                                           |       | 2,226,057 |   | 3,029,927 |   |
|                                                                |       |                                                 |       |                                                |       |   |   |   |   |
| Interest and other  income                                          |       | 1,036                                                |       | 19,312                                              |       | 6,285 |   | 49,043 |   |
| Interest expense                                                    |       | (450,615                                             | )          | (605,665                                            | )          | (1,414,418 | ) | (1,756,140 | ) |
| Loss on disposal of  assets                                         |       | (60,092                                              | )          | (146,594                                            | )          | (76,753 | ) | (173,225 | ) |
| ** **                                                          | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Discontinued operations, net**                                    |       | $                                                    | 216,929    |                                                | $          | 325,487 |   | $ | 741,171 |   | $ | 1,149,605 |   |
|                                                                |       |                                                 |       |                                                |       |   |   |   |   |
| **Gain on sale of discontinued operations**                         |       | $                                                    | -          |                                                | $          | - |   | $ | 49,950,486 |   | $ | - |   |

 

The components of long-lived assets held for saleconsisted primarily of land, buildings and amenities for the properties beingsold. The components of long-lived liabilities held for sale included the accruedproperty tax liabilities and security deposit liabilities for the propertiesbeing sold.

**Note 4 — Concentration of Credit Risk**

We own and operate multifamily properties, commercialand retail real estate and a land lease in Louisville and Lexington, Kentucky,Fort Lauderdale, Florida, Indianapolis, Indiana, Nashville, Tennessee,Richmond, Virginia and Atlanta, Georgia.

Our financial instruments that are exposed toconcentrations of credit risk consist of cash and equivalents. We maintain ourcash accounts primarily with banks located in Kentucky. The total cash balancesare insured by the FDIC up to $100,000 per bank account. We may at times, incertain accounts, have deposits in excess of $100,000.

10

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**Note 5 — Cash and Equivalents**

Cash and equivalents include cash on hand andshort-term, highly liquid investments with initial maturities of three monthsor less. We have a cash management program which provides for the overnightinvestment of excess cash balances. Under an agreement with a bank, excess cashis invested in a mutual fund for U.S. government and agency securities eachnight.

**Note 6 — Cash and Equivalents - Restricted**

Cash and equivalents - restricted represents cash onhand and short-term, highly liquid investments with initial maturities of threemonths or less which have been escrowed with certain mortgage companies andbanks for property taxes, insurance and tenant improvements in accordance withcertain loan and lease agreements and certain security deposits.

**Note 7 — Property and Depreciation**

Land, buildings and amenities are stated at cost. Costsdirectly associated with the acquisition, development and construction of aproject are capitalized. Depreciation is computed using the straight-linemethod over the estimated useful lives of the assets which are 5-30 years forland improvements, 7-30 years for buildings and improvements and 5-30 years foramenities. Tenant improvements are generally depreciated over the life of theinitial or renewal term of the respective tenant lease. Depreciation expensefor the three months ended September 30, 2006 and 2005 was approximately$3,571,000 and $1,267,000, respectively. Depreciation expense on continuingoperations for the nine months ended September 30, 2006 and 2005 wasapproximately $9,547,000 and $3,754,000, respectively.

SFAS No. 144 “Accounting for the Impairment orDisposal of Long-Lived Assets,” specifies circumstances in which certainlong-lived assets must be reviewed for impairment. If the carrying amount of anasset exceeds the sum of its expected future cash flows, the asset’s carryingvalue must be written down to fair value. In determining the value of aninvestment property and whether the investment property is impaired, managementconsiders several factors such as projected rental and vacancy rates, propertyoperating expenses, capital expenditures and interest rates. The capitalizationrate used to determine property valuation is based on the market in which theinvestment property is located, length of leases, tenant financial strength,the economy in general, demographics, environment, property location,visibility, age and physical condition among others. All of these factors areconsidered by management in determining the value of any particular investmentproperty. The value of any particular investment property is sensitive to theactual results of any of these factors, either individually or taken as awhole. If the actual results differ from management’s judgment, the valuationcould be negatively or positively affected. Application of this standard duringthe three and nine months ended September 30, 2006 and 2005 did not result inan impairment loss.

11

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**Note 8 — Mortgages and Notes Payable**

Mortgages and notes payable consist of the following:
| ** **                                                                                                                                                                                                                                                                                                                                              | ** ** | **(Unaudited)**              | ** **  | ** **                  | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|-------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                              | ** ** | **September 30,  2006** | ** **  | **December 31,  2005** | ** ** |
| Mortgage payable to an  insurance company in monthly installments of principal and interest, bearing  interest at 5.07%, maturing on March 15, 2015, secured by certain land  and buildings, with a carrying value of $48,334,494                                                                                                                  |       | $                            | 29,069,682  |                        | $          | 29,543,665 |   |
|                                                                                                                                                                                                                                                                                                                                                    |       |                         |        |                        |       |
| Mortgage payable to a  bank in monthly installments of principal and interest, bearing interest at a  variable rate based on LIBOR one-month rate plus 2.50%, currently 7.83%, due  January 1, 2008, secured by certain land and buildings, with a carrying value  of $17,190,715. The mortgage is guaranteed by Mr. Nichols (75%) and Mr. Lavin  (25%) |       | 13,560,000                   |        | 13,758,000                  |       |
|                                                                                                                                                                                                                                                                                                                                                    |       |                         |        |                        |       |
| Mortgage payable to an  insurance company in monthly installments of principal and interest, bearing  interest at 5.98%, maturing January 15, 2015, secured by certain land and  buildings, with a carrying value of $162,422,819                                                                                                                       |       | 73,427,888                   |        | 74,154,709                  |       |
|                                                                                                                                                                                                                                                                                                                                                    |       |                         |        |                        |       |
| Mortgage payable to an  insurance company in monthly installments of principal and interest, bearing  interest at 5.35%, maturing January 15, 2015, secured by certain land and  buildings, with a carrying value of $162,422,819                                                                                                                       |       | 33,111,393                   |        | —                      |       |
|                                                                                                                                                                                                                                                                                                                                                    |       |                         |        |                        |       |
| Revolving note payable  to a bank for $24.0 million, with interest payable in monthly installments,  unsecured, at a variable rate based on LIBOR plus 1.75%, currently 7.07%, due  August 24, 2007                                                                                                                                                     |       | 14,565,022                   |        | —                      |       |
|                                                                                                                                                                                                                                                                                                                                                    |       |                         |        |                        |       |
| Mortgage payable to a  bank in monthly installments of principal and interest, bearing interest at  9.00%, maturing August 1, 2010, secured by certain land and a building, with  a carrying value of $2,858,247                                                                                                                                        |       | 2,651,076                    |        | 2,720,522                   |       |
|                                                                                                                                                                                                                                                                                                                                                    |       |                         |        |                        |       |
| Mortgage payable to an  insurance company in monthly installments of principal and interest, bearing  interest at 8.45%, maturing November 1, 2015, secured by certain land and a  building, with a carrying value of $2,411,430                                                                                                                        |       | 2,774,703                    |        | 2,920,614                   |       |
|                                                                                                                                                                                                                                                                                                                                                    |       |                         |        |                        |       |
| Mortgage payable to an  insurance company in monthly installments of principal and interest, bearing  interest at 8.375%, maturing December 1, 2010, secured by certain land, a  building and amenities, with a carrying value of $2,660,197                                                                                                            |       | 2,742,491                    |        | 2,815,322                   |       |
|                                                                                                                                                                                                                                                                                                                                                    |       |                         |        |                        |       |
| Mortgage payable to a  bank in monthly installments of principal and interest, bearing interest at  5.11%, maturing December 1, 2014, secured by certain land and buildings, with  a carrying value of $14,978,048                                                                                                                                      |       | 11,976,504                   |        | 12,100,000                  |       |
|                                                                                                                                                                                                                                                                                                                                                    |       |                         |        |                        |       |
| Mortgage payable to a  bank, with interest payable in monthly installments, bearing interest at  LIBOR plus 1.75%, currently 7.07%, maturing November 15, 2007, secured by  certain land and buildings, with a carrying value of $28,678,208                                                                                                            |       | 35,477,897                   |        | —                      |       |
|                                                                                                                                                                                                                                                                                                                                                    |       |                         |        |                        |       |
| ** **                                                                                                                                                                                                                                                                                                                                              |       | $                            | 219,356,656 |                        | $          | 138,012,832 |   |

 

Based on the borrowing rates currently available to usfor loans with similar terms and average maturities, the fair value oflong-term debt on September 30, 2006 was approximately $205.7 million.

On August 22, 2006, the maturity date for ourrevolving note payable to a bank was extended from August 24, 2006 to August24, 2007.

On October 11, 2006, we announced that an Amended andRestated Loan Agreement in connection with our existing $30.0 million mortgagepayable to an insurance company and a note in connection with our existing$35.5 million note payable to a bank became effective as of October 11, 2006. Theseagreements effectuate an exchange of collateral under the loans. The agreementin connection with the $35.5 million note payable to a bank will reduce theinterest rate payable from 250 basis points to 175 basis points over LIBORrate. The maturity date for the $35.5 million note payable to a bank wasextended from October 1, 2006 to November 15, 2007.

12

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Our mortgages may be prepaid but are generally subjectto a yield-maintenance premium.  Certainmortgages and notes payable contain covenants and requirements that we maintainspecified debt limits and ratios related to our debt balances and property values.  We complied with all covenants andrequirements at September 30, 2006.  Weintend to renew or refinance our notes payable coming due in the next twelvemonths.

**Note 9 — Accounts Payable and Accrued ExpensesDue to Affiliate**

Accounts payable and accrued expenses due to affiliateincludes amounts owed to NTS Development Company for reimbursement of employeecosts and overhead expenses and fees for services rendered as provided for inour management agreement.

**Note 10 — Related Party Transactions**

On April 11, 2006, pursuant to the terms of thesettlement agreement with respect to the class action litigation involving thePartnerships, the independent directors of our managing general partnerapproved an amended and restated management agreement with NTS DevelopmentCompany, one of our affiliates.  Theindependent directors engaged a nationally recognized real estate expert toassist them in their review of the management agreement entered into as ofDecember 28, 2004.  The amended andrestated management agreement became effective as of December 29, 2005.

Pursuant to the agreement with us, NTS DevelopmentCompany receives a variety of fees including property management fees andrepair and maintenance fees.  Theproperty management fees are paid in an amount equal to 5% of the grosscollected revenue from our properties. In addition, NTS Development Company receives construction supervisionfees in an amount equal to 5% of the costs incurred which relate to capitalimprovements.  These constructionsupervision fees are capitalized as part of land, buildings and amenities.  Also pursuant to the agreement, NTSDevelopment Company receives commercial leasing fees equal to 4% of the grossrental amount for new leases and 2% of the gross rental amount for new leasesin which a broker is used and for renewals or extensions.  NTS Development Company is reimbursed itsactual costs for services rendered to NTS Realty.

Employee costs are allocated among NTS Realty, otheraffiliates of our managing general partner and for the benefit of thirdparties, so that a full time employee can be shared by multiple entities.  Each employee’s services which are dedicatedto a particular entity’s operations are allocated as a percentage of eachemployee’s costs to that entity.  We onlyreimburse charges from NTS Development Company for actual costs of employeeservices incurred for our benefit.

We were charged the following amounts pursuant to anagreement with NTS Development Company for the three and nine months endedSeptember 30, 2006 and 2005.  Thesecharges include items which have been expensed as operating expenses reimbursedto affiliate or professional and administrative expenses reimbursed toaffiliate and items which have been capitalized as other assets or as land,buildings and amenities.  Certain ofthese items are included in our results of discontinued operations.

13

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** **
| ** **                                                        | ** ** | **(Unaudited)**                                                        | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                        | ** ** | **For the Three Months Ended  September 30,** | ** ** |
| ** **                                                        | ** ** | **2006**                                                               | ** ** | **2005** | ** ** |
| Property  management fees                                         | ** ** | $                                                                      | 583,327    |   | $ | 426,693 |   |
|                                                              |       |                                                                   |       |   |   |
| Operating  expenses reimbursement — Property                 |       | 841,854                                                                |       | 638,515 |   |
| Operating  expenses reimbursement — Multifamily Leasing      |       | 107,261                                                                |       | 54,984 |   |
| Operating  expenses reimbursement — Administrative           |       | 345,203                                                                |       | 291,353 |   |
| Operating  expenses reimbursement — Other                    |       | 28,833                                                                 |       | 26,967 |   |
|                                                              |       |                                                                   |       |   |   |
| Total operating expenses reimbursed to affiliate                  |       | 1,323,151                                                              |       | 1,011,819 |   |
|                                                              |       |                                                                   |       |   |   |
| Professional and  administrative expenses reimbursed to affiliate |       | 389,360                                                                |       | 346,258 |   |
|                                                              |       |                                                                   |       |   |   |
| Construction  supervision fees                                    |       | 74,856                                                                 |       | - |   |
| Commercial  leasing fees                                          |       | 120,029                                                                |       | - |   |
|                                                              |       |                                                                   |       |   |   |
| **Total  related party transactions**                             |       | $                                                                      | 2,490,723  |   | $ | 1,784,770 |   |

 

 
| ** **                                                        | ** ** | **(Unaudited)**                                                       | ** ** |
|-------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                        | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
| ** **                                                        | ** ** | **2006**                                                              | ** ** | **2005** | ** ** |
| Property  management fees                                         | ** ** | $                                                                     | 1,683,783  |   | $ | 1,239,956 |   |
|                                                              |       |                                                                  |       |   |   |
| Operating  expenses reimbursement — Property                 |       | 2,485,143                                                             |       | 1,861,455 |   |
| Operating  expenses reimbursement — Multifamily Leasing      |       | 307,638                                                               |       | 156,197 |   |
| Operating  expenses reimbursement — Administrative           |       | 1,118,835                                                             |       | 888,252 |   |
| Operating  expenses reimbursement — Other                    |       | 83,145                                                                |       | 76,210 |   |
|                                                              |       |                                                                  |       |   |   |
| Total operating expenses reimbursed to affiliate                  |       | 3,994,761                                                             |       | 2,982,114 |   |
|                                                              |       |                                                                  |       |   |   |
| Professional and  administrative expenses reimbursed to affiliate |       | 1,197,736                                                             |       | 1,042,840 |   |
|                                                              |       |                                                                  |       |   |   |
| Construction  supervision fees                                    |       | 180,429                                                               |       | - |   |
| Commercial  leasing fees                                          |       | 265,344                                                               |       | - |   |
|                                                              |       |                                                                  |       |   |   |
| **Total  related party transactions**                             |       | $                                                                     | 7,322,053  |   | $ | 5,264,910 |   |

 

Property, multifamily leasing, administrative andother operating expenses reimbursed include employee costs charged to us by NTSDevelopment Company and other actual costs incurred by NTS Development Companyon our behalf, which were reimbursed by us.

During the three months ended September 30, 2006 and2005, we were charged approximately $13,000 and $15,000, respectively, forproperty maintenance fees from affiliates of NTS Development Company.  During the nine months ended September 30,2006 and 2005, we were charged approximately $53,000 and $46,000, respectively,for property maintenance fees from affiliates of NTS Development Company.

NTS Development Company leased 20,368 square feet inNTS Center at a rental rate of $14.50 per square foot.  We received rental payments from NTSDevelopment Company of approximately $74,000 during each of the three monthsended September 30, 2006 and 2005 and $222,000 during each of the nine monthsended September 30, 2006 and 2005.  Theaverage per square foot rental rate for similar space in NTS Center as ofSeptember 30, 2006 was $13.85 per square foot.

 

14

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NTS Development Company leased 1,604 square feet inCommonwealth Business Center Phase I at a rental rate of $5.50 per square foot.We received rental payments of $0 and approximately $4,000 from NTS DevelopmentCompany during the three and nine months ended September 30, 2006,respectively. We received rental payments of approximately $2,000 and $7,000from NTS Development Company during the three and nine months endedSeptember 30, 2005, respectively. Commonwealth Business Center Phase I wassold May 18, 2006.

Pursuant to the amended and restated managementagreement with us, NTS Development Company received a disposition fee equal to1% of the sale price of Golf Brook Apartments and Sabal Park Apartments and 3%of the sale price of Commonwealth Business Center Phases I and II. The totalfees were $715,035 and $213,000, respectively, which is included in gain onsale of discontinued operations on our statement of operations.

**Note 11 — Commitments and Contingencies**

We, as an owner of real estate, are subject to variousenvironmental laws of federal, state and local governments. Our compliance withexisting laws has not had a material adverse effect on our financial conditionand results of operations. However, we cannot predict the impact of new orchanged laws or regulations on our current properties or on properties that wemay acquire in the future.

***Litigation***

On May 6, 2004, the Superior Court of the State ofCalifornia for the County of Contra Costa granted its final approval of thesettlement agreement jointly filed by the general partners (the “Former GeneralPartners”) of the Partnerships, along with certain of their affiliates, withthe class of plaintiffs in the action originally captioned Buchanan, et al. v.NTS-Properties Associates, et al. (Case No. C 01-05090) (the “CaliforniaLitigation”) on December 5, 2003. On October 26, 2006, the Superior Courtentered an order holding that defendants had fulfilled their financialobligations required by the settlement.

On February 27, 2003, two individuals filed a classand derivative action in the Circuit Court of Jefferson County, Kentuckycaptioned Bohm, et al. v. J.D. Nichols, et al. (Case No. 03-CI-01740) (the “KentuckyLitigation”) against certain of the Former General Partners and severalindividuals and entities affiliated with us. The complaint was amended on anumber of occasions to add parties such as the general partner ofNTS-Properties III and the general partner of NTS-Properties Plus Ltd.,and to add various claims seeking, among other things, compensatory andpunitive damages in an unspecified amount, an accounting, a declaratoryjudgment and injunctive relief.

The parties recently entered into an agreement for thesettlement of the case. The agreement is subject to completion of a signedsettlement agreement which would result in the dismissal of the litigation.

At September 30, 2006, we have accrued approximately$141,000 for the pending settlement of the Kentucky Litigation.

We do not believe there is any other litigationthreatened against us other than routine litigation arising out of the ordinarycourse of business, some of which is expected to be covered by insurance, noneof which is expected to have a material effect on our financial position orresults of operations.

**Note 12 — Segment Reporting**

Our reportable operating segments include — Land,Retail, Commercial and Multifamily Real Estate Operations. The followingunaudited financial information of the operating segments has been preparedusing a management approach, which is consistent with the basis and manner inwhich our management internally disaggregates financial information for thepurpose of assisting in making internal operating decisions. We evaluateperformance based on stand-alone operating segment net income or loss. Expensesat the Partnership level are represented in the nonsegment column.

15

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| ** **                                                                                                         | ** ** | **(Unaudited)**                                                    | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                                         | ** ** | **Three Months Ended September 30, 2006** | ** ** |
| ** **                                                                                                         | ** ** | **Land**                                                           | ** ** | **Retail** | ** ** | **Commercial** | ** ** | **Multifamily** | ** ** | **Nonsegment** | ** ** | **Total** | ** ** |
| Rental income                                                                                                      |       | $                                                                  | 9,042      |   | $ | 341,950 |   | $ | 2,316,323 |   | $ | 7,113,621 |   | $ | (73,798 | ) | $ | 9,707,138 |   |
| Tenant  reimbursements                                                                                             |       | —                                                             |       | 19,560 |   | 422,349 |   | — |   | — |   | 441,909 |   |
|                                                                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Total revenue**                                                                                                  |       | 9,042                                                              |       | 361,510 |   | 2,738,672 |   | 7,113,621 |   | (73,798 | ) | 10,149,047 |   |
|                                                                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Operating  expenses and operating expenses reimbursed to affiliate                                                 |       | 135                                                                |       | 33,218 |   | 960,926 |   | 2,894,639 |   | — |   | 3,888,918 |   |
| Management fees                                                                                                    |       | 452                                                                |       | 17,652 |   | 136,385 |   | 352,301 |   | — |   | 506,790 |   |
| Property taxes  and insurance                                                                                      |       | 622                                                                |       | 10,599 |   | 296,020 |   | 828,346 |   | 22,403 |   | 1,157,990 |   |
| Professional and  administrative expenses and   professional and administrative expenses   reimbursed to affiliate |       | —                                                             |       | — |   | — |   | — |   | 935,812 |   | 935,812 |   |
| Depreciation and  amortization                                                                                     |       | 652                                                                |       | 70,293 |   | 739,534 |   | 3,008,263 |   | — |   | 3,818,742 |   |
|                                                                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Total operating expenses**                                                                                       |       | 1,861                                                              |       | 131,762 |   | 2,132,865 |   | 7,083,549 |   | 958,215 |   | 10,308,252 |   |
|                                                                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Operating  income (loss)**                                                                                       |       | 7,181                                                              |       | 229,748 |   | 605,807 |   | 30,072 |   | (1,032,013 | ) | (159,205 | ) |
|                                                                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Interest and  other income                                                                                         |       | —                                                             |       | — |   | 5,158 |   | 16,378 |   | — |   | 21,536 |   |
| Interest expense                                                                                                   |       | —                                                             |       | (97,357 | ) | (542,417 | ) | (2,256,261 | ) | (238,829 | ) | (3,134,864 | ) |
| Loss on disposal  of assets                                                                                        |       | —                                                             |       | — |   | (42,826 | ) | — |   | — |   | (42,826 | ) |
|                                                                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Income  (loss) from continuing operations**                                                                      |       | 7,181                                                              |       | 132,391 |   | 25,722 |   | (2,209,811 | ) | (1,270,842 | ) | (3,315,359 | ) |
| Discontinued  operations, net                                                                                      |       | —                                                             |       | — |   | 216,929 |   | — |   | — |   | 216,929 |   |
| ** **                                                                                                         | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net income (loss)**                                                                                              |       | $                                                                  | 7,181      |   | $ | 132,391 |   | $ | 242,651 |   | $ | (2,209,811 | ) | $ | (1,270,842 | ) | $ | (3,098,430 | ) |

 
| ** **                                                                                                      | ** ** | **(Unaudited)**                                                    | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                                      | ** ** | **Three Months Ended September 30, 2005** | ** ** |
| ** **                                                                                                      | ** ** | **Land**                                                           | ** ** | **Retail** | ** ** | **Commercial** | ** ** | **Multifamily** | ** ** | **Nonsegment** | ** ** | **Total** | ** ** |
| Rental income                                                                                                   |       | $                                                                  | 9,042      |   | $ | 341,392 |   | $ | 2,405,767 |   | $ | 2,562,660 |   | $ | (75,974 | ) | $ | 5,242,887 |   |
| Tenant reimbursements                                                                                           |       | —                                                             |       | 18,594 |   | 439,412 |   | — |   | — |   | 458,006 |   |
|                                                                                                            |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Total  revenue**                                                                                              |       | 9,042                                                              |       | 359,986 |   | 2,845,179 |   | 2,562,660 |   | (75,974 | ) | 5,700,893 |   |
|                                                                                                            |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Operating expenses and  operating expenses reimbursed to affiliate                                              |       | 135                                                                |       | 27,193 |   | 904,367 |   | 1,066,322 |   | — |   | 1,998,017 |   |
| Management fees                                                                                                 |       | —                                                             |       | 12,816 |   | 110,152 |   | 128,337 |   | — |   | 251,305 |   |
| Property taxes and  insurance                                                                                   |       | 403                                                                |       | 9,218 |   | 336,678 |   | 243,129 |   | 45,581 |   | 635,009 |   |
| Professional and  administrative expenses and professional and administrative expenses  reimbursed to affiliate |       | —                                                             |       | — |   | — |   | — |   | 947,989 |   | 947,989 |   |
| Depreciation and  amortization                                                                                  |       | 652                                                                |       | 68,016 |   | 770,110 |   | 691,267 |   | — |   | 1,530,045 |   |
|                                                                                                            |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Total  operating expenses**                                                                                   |       | 1,190                                                              |       | 117,243 |   | 2,121,307 |   | 2,129,055 |   | 993,570 |   | 5,362,365 |   |
|                                                                                                            |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Operating income (loss)**                                                                                     |       | 7,852                                                              |       | 242,743 |   | 723,872 |   | 433,605 |   | (1,069,544 | ) | 338,528 |   |
|                                                                                                            |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Interest and other  income                                                                                      |       | —                                                             |       | 17 |   | 5,523 |   | 1,633 |   | 93,253 |   | 100,426 |   |
| Interest expense                                                                                                |       | —                                                             |       | (99,895 | ) | (482,354 | ) | (547,582 | ) | (265,539 | ) | (1,395,370 | ) |
| Loss on disposal of  assets                                                                                     |       | —                                                             |       | — |   | (52,414 | ) | (41,025 | ) | — |   | (93,439 | ) |
|                                                                                                            |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |
| **Income (loss) from continuing  operations**                                                                   |       | 7,852                                                              |       | 142,865 |   | 194,627 |   | (153,369 | ) | (1,241,830 | ) | (1,049,855 | ) |
| Discontinued operations,  net                                                                                   |       | —                                                             |       | — |   | 181,333 |   | 144,154 |   | — |   | 325,487 |   |
| ** **                                                                                                      | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net income (loss)**                                                                                           |       | $                                                                  | 7,852      |   | 142,865 |   | $ | 375,960 |   | $ | (9,215 | ) | $ | (1,241,830 | ) | $ | (724,368 | ) |
|                                                                                                                 |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

16

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| ** **                                                                                                      | ** ** | **(Unaudited)**                                                   | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                                      | ** ** | **Nine Months Ended September 30, 2006** | ** ** |
| ** **                                                                                                      | ** ** | **Land**                                                          | ** ** | **Retail** | ** ** | **Commercial** | ** ** | **Multifamily** | ** ** | **Nonsegment** | ** ** | **Total** | ** ** |
| Rental income                                                                                                   |       | $                                                                 | 27,127     |   | $ | 1,029,851 |   | $ | 6,999,206 |   | $ | 18,854,856 |   | $ | (217,379 | ) | $ | 26,693,661 |   |
| Tenant reimbursements                                                                                           |       | —                                                            |       | 59,708 |   | 1,267,902 |   | — |   | — |   | 1,327,610 |   |
|                                                                                                            |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |
| **Total revenue**                                                                                               |       | 27,127                                                            |       | 1,089,559 |   | 8,267,108 |   | 18,854,856 |   | (217,379 | ) | 28,021,271 |   |
|                                                                                                            |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Operating expenses and  operating expenses reimbursed to affiliate                                              |       | 407                                                               |       | 98,255 |   | 2,805,213 |   | 6,701,900 |   | — |   | 9,605,775 |   |
| Management fees                                                                                                 |       | 1,356                                                             |       | 54,668 |   | 406,588 |   | 955,643 |   | — |   | 1,418,255 |   |
| Property taxes and  insurance                                                                                   |       | 1,450                                                             |       | 30,902 |   | 863,137 |   | 2,223,871 |   | 91,199 |   | 3,210,559 |   |
| Professional and  administrative expenses and professional and administrative expenses reimbursed  to affiliate |       | —                                                            |       | — |   | — |   | — |   | 2,707,740 |   | 2,707,740 |   |
| Depreciation and  amortization                                                                                  |       | 1,955                                                             |       | 215,551 |   | 2,224,377 |   | 7,764,080 |   | — |   | 10,205,963 |   |
|                                                                                                            |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |
| **Total operating expenses**                                                                                    |       | 5,168                                                             |       | 399,376 |   | 6,299,315 |   | 17,645,494 |   | 2,798,939 |   | 27,148,292 |   |
|                                                                                                            |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |
| **Operating income (loss)**                                                                                     |       | 21,959                                                            |       | 690,183 |   | 1,967,793 |   | 1,209,362 |   | (3,016,318 | ) | 872,979 |   |
|                                                                                                            |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Interest and other  income                                                                                      |       | —                                                            |       | 6,572 |   | 66,114 |   | 28,458 |   | 54,737 |   | 155,881 |   |
| Interest expense                                                                                                |       | —                                                            |       | (294,021 | ) | (1,572,581 | ) | (5,731,625 | ) | (762,528 | ) | (8,360,755 | ) |
| Loss on disposal of assets                                                                                      |       | —                                                            |       | — |   | (77,846 | ) | (78,548 | ) | — |   | (156,394 | ) |
|                                                                                                            |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |
| **Income (loss) from continuing  operations**                                                                   |       | 21,959                                                            |       | 402,734 |   | 383,480 |   | (4,572,353 | ) | (3,724,109 | ) | (7,488,289 | ) |
| Discontinued operations,  net                                                                                   |       | —                                                            |       | — |   | 731,404 |   | 9,767 |   | — |   | 741,171 |   |
| Gain on sale of discontinued  operations                                                                        |       | —                                                            |       | — |   | 1,679,143 |   | 48,271,343 |   | — |   | 49,950,486 |   |
| ** **                                                                                                      | ** ** | ** **                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net income (loss)**                                                                                           |       | $                                                                 | 21,959     |   | $ | 402,734 |   | $ | 2,794,027 |   | $ | 43,708,757 |   | $ | (3,724,109 | ) | $ | 43,203,368 |   |

 

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| ** **                                                                                                      | ** ** | **(Unaudited)**                                                   | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                                      | ** ** | **Nine Months Ended September 30, 2005** | ** ** |
| ** **                                                                                                      | ** ** | **Land**                                                          | ** ** | **Retail** | ** ** | **Commercial** | ** ** | **Multifamily** | ** ** | **Nonsegment** | ** ** | **Total** | ** ** |
| Rental income                                                                                                   |       | $                                                                 | 27,127     |   | $ | 1,024,177 |   | $ | 7,627,983 |   | $ | 7,132,261 |   | $ | (241,099 | ) | $ | 15,570,449 |   |
| Tenant  reimbursements                                                                                          |       | —                                                            |       | 56,032 |   | 1,276,006 |   | — |   | — |   | 1,332,038 |   |
|                                                                                                            |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |
| **Total revenue**                                                                                               |       | 27,127                                                            |       | 1,080,209 |   | 8,903,989 |   | 7,132,261 |   | (241,099 | ) | 16,902,487 |   |
|                                                                                                            |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Operating  expenses and operating expenses reimbursed to affiliate                                              |       | 406                                                               |       | 84,043 |   | 2,661,471 |   | 2,994,287 |   | — |   | 5,740,207 |   |
| Management fees                                                                                                 |       | —                                                            |       | 37,483 |   | 344,545 |   | 354,482 |   | — |   | 736,510 |   |
| Property taxes  and insurance                                                                                   |       | 1,210                                                             |       | 27,947 |   | 886,404 |   | 716,559 |   | 136,744 |   | 1,768,864 |   |
| Professional and  administrative expenses and professional and administrative expenses  reimbursed to affiliate |       | —                                                            |       | — |   | — |   | — |   | 3,077,984 |   | 3,077,984 |   |
| Depreciation and  amortization                                                                                  |       | 1,955                                                             |       | 210,860 |   | 2,434,562 |   | 1,879,572 |   | — |   | 4,526,949 |   |
|                                                                                                            |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |
| **Total operating expenses**                                                                                    |       | 3,571                                                             |       | 360,333 |   | 6,326,982 |   | 5,944,900 |   | 3,214,728 |   | 15,850,514 |   |
|                                                                                                            |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |
| **Operating  income (loss)**                                                                                    |       | 23,556                                                            |       | 719,876 |   | 2,577,007 |   | 1,187,361 |   | (3,455,827 | ) | 1,051,973 |   |
|                                                                                                            |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |
| Interest and  other income                                                                                      |       | —                                                            |       | 66 |   | 16,886 |   | 4,040 |   | 213,188 |   | 234,180 |   |
| Interest expense                                                                                                |       | —                                                            |       | (287,949 | ) | (1,397,204 | ) | (1,363,500 | ) | (949,308 | ) | (3,997,961 | ) |
| Loss on disposal  of assets                                                                                     |       | —                                                            |       | — |   | (109,529 | ) | (114,763 | ) | — |   | (224,292 | ) |
|                                                                                                            |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |
| **Income  (loss) from continuing operations**                                                                   |       | 23,556                                                            |       | 431,993 |   | 1,087,160 |   | (286,862 | ) | (4,191,947 | ) | (2,936,100 | ) |
| Discontinued  operations, net                                                                                   |       | —                                                            |       | — |   | 813,414 |   | 336,191 |   | — |   | 1,149,605 |   |
| ** **                                                                                                      | ** ** | ** **                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net income (loss)**                                                                                           |       | $                                                                 | 23,556     |   | 431,993 |   | $ | 1,900,574 |   | $ | 49,329 |   | $ | (4,191,947 | ) | $ | (1,786,495 | ) |
|                                                                                                                 |            |                                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Item2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations**

Management’s Discussion and Analysis of FinancialCondition and Results of Operations should be read in conjunction with thefinancial statements in Item 1 and the cautionary statements below.

**Critical Accounting Policies**

***General***

A critical accounting policy is one that wouldmaterially affect our operations or financial condition, and requiresmanagement to make estimates or judgments in certain circumstances. Thesejudgments often result from the need to make estimates about the effect ofmatters that are inherently uncertain. Critical accounting policies discussedin this section are not to be confused with accounting principles and methodsdisclosed in accordance with U.S. generally accepted accounting principles (“GAAP”).GAAP requires information in financial statements about accounting principles,methods used and disclosures pertaining to significant estimates. The followingdisclosure discusses judgments known to management pertaining to trends, eventsor uncertainties known which were taken into consideration upon the applicationof those policies and the likelihood that materially different amounts would bereported upon taking into consideration different conditions and assumptions.

***Impairment and Valuation***

Statement of Financial Accounting Standards (“SFAS”)No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,”specifies circumstances in which certain long-lived assets must be reviewed forimpairment. If this review indicates that the carrying amount of an assetexceeds the sum of its expected future cash flows, the asset’s carrying valuemust be written down to fair value. In determining the value of an investmentproperty and whether the investment property is impaired, management considersseveral factors such as projected rental and vacancy rates, property operatingexpenses, capital expenditures, interest rates and recent appraisals when 

18

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available. Thecapitalization rate used to determine property valuation is based on amongothers, the market in which the investment property is located, length ofleases, tenant financial strength, the economy in general, demographics,environment, property location, visibility, age and physical condition. All ofthese factors are considered by management in determining the value of anyparticular investment property. The value of any particular investment propertyis sensitive to the actual results of any of these factors, either individuallyor taken as a whole. If the actual results differ from management’s judgment,the valuation could be negatively or positively affected.

Our property acquisitions were accounted for using thepurchase method of accounting in accordance with SFAS No. 141 “BusinessCombinations.” Each property’s assets and liabilities acquired fromunaffiliated third parties was adjusted to reflect its fair market value. Inaccordance with SFAS No. 141, we have allocated the purchase price of eachacquired investment property among land, buildings and improvements, otherintangibles, including acquired above market leases, acquired below marketleases and acquired in-place lease origination cost which is the market costavoidance of executing the acquired leases. Allocation of the purchase price isan area that requires complex judgments and significant estimates. We used theinformation contained in a third-party appraisal as the primary basis forallocating the purchase price between land and buildings. A pro rata portion ofthe purchase price was allocated to the value of avoiding a lease-up period foracquired in-place leases. The value of in-place leases is amortized to expenseover the remaining initial term of the respective leases. A portion of thepurchase price was allocated to the estimated lease origination cost based onestimated lease execution costs for similar leases and considered variousfactors including geographic location and size of leased space. We thenevaluated acquired leases based upon current market rates at the acquisitiondate and various other factors including geographic location, size and thelocation of leased space within the property, tenant profile and the creditrisk of the tenant in determining whether the acquired lease is above or belowmarket. After acquired leases were determined to be at, above or below market,we allocated a pro rata portion of the purchase price to any acquired above orbelow market lease based upon the present value of the difference between thecontractual lease rate and the estimated market rate. We also consider anallocation of purchase price to in-place leases that have a customerrelationship intangible value. The characteristics we consider in allocatingthese values include the nature and extent of existing business relationshipswith the tenant, growth prospects for developing new business with the tenantand the tenant’s credit quality and expectations of lease renewals. We did nothave any tenants with whom we have identified a developed relationship that webelieve had any intangible value.

***Recognition of RentalIncome***

Under GAAP, we are required to recognize rental incomebased on the effective monthly rent for each lease. The effective monthly rentis equal to the average monthly rent during the term of the lease, not thestated rent for any particular month. The process, known as “straight-lining”or “stepping” rent, has the effect of increasing rental revenues during theearly phases of a lease and decreasing rental revenues in the latter phases ofa lease if the stated rent progressively increases over the term of the lease. Dueto the impact of “straight-lining,” the cash collected exceeded the rentalincome for rent by approximately $44,000 and $127,000 for the three and ninemonths ended September 30, 2006, respectively. Rental income exceeded the cashcollected for rent by approximately $32,000 and $86,000, for the three and ninemonths ended September 30, 2005, respectively. If rental income calculated on astraight-line basis exceeds the cash rent due under the lease, the differenceis recorded as an increase in deferred rent receivable and included as acomponent of accounts receivable on the relevant balance sheet. If the cashrent due under the lease exceeds rental income calculated on a straight-linebasis, the difference is recorded as a decrease in deferred rent receivable andis recorded as a decrease of accounts receivable on the relevant balance sheet.We defer recognition of contingent rental income, such as percentage or excessrent, until the breakpoint that triggers the contingent rental income isachieved. We periodically review the collectability of outstanding receivables.Allowances are generally taken for tenants with outstanding balances due for aperiod greater than ninety days and tenants with outstanding balances due for aperiod less than ninety days if we believe these balances may be uncollectible.

19

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***Recognition of LeaseTermination Income***

We recognize lease termination income upon receipt ofthe income. We accrue lease termination income if there is a signed terminationagreement, all of the conditions of the agreement have been met and the tenantis no longer occupying the property.

***Cost Capitalization andDepreciation Policies***

We review all expenditures and capitalize any item exceeding$2,500 deemed to be an upgrade or a tenant improvement with an expected usefullife greater than one year. Land, buildings and amenities are stated at cost. Depreciationexpense is computed using the straight-line method over the estimated useful livesof the assets. Buildings and improvements have estimated useful lives between7-30 years, land improvements have estimated useful lives between 5-30 yearsand amenities have estimated useful lives between 5-30 years. Acquired aboveand below market leases are amortized on a straight-line basis over the life ofthe related leases as an adjustment to rental income. Acquired in-place leaseorigination cost is amortized over the life of the lease as a component ofamortization expense.

**Results of Operations**

At September 30, 2006, we owned twenty-nineproperties, comprised of nine multifamily properties, sixteen office andbusiness centers, three retail properties and one ground lease. We generatesubstantially all of our operating income from property operations.

Net loss fromcontinuing operations for the three months ended September 30, 2006 and 2005was approximately $3,315,000 and $1,050,000, respectively. Net loss fromcontinuing operations for the nine months ended September 30, 2006 and 2005 wasapproximately $7,488,000 and $2,936,000, respectively. The increases in netloss were primarily due to the acquisitions of The Grove at RichlandApartments, The Grove at Swift Creek Apartments, The Grove at WhitworthApartments, Castle Creek Apartments and Lake Clearwater Apartments and theAugust 2005 acquisition of The Lakes Apartments. These acquisitions resulted inincreased operating expenses as well as increased interest expense related toloans obtained in 2006. Rental income partially offset these expenses as itincreased from the period ended September 30, 2005 to the period endedSeptember 30, 2006, primarily as the result of these acquisitions.

20

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Thefollowing tables include certain selected summarized operating data for thethree and nine months ended September 30, 2006 and 2005. This data should beread in conjunction with our financial statements, including the notes attachedhereto.
| ** **                                                         | ** ** | **(Unaudited)**                                                    | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Three Months Ended September 30, 2006** | ** ** |
| ** **                                                         | ** ** | **Land**                                                           | ** ** | **Retail** | ** ** | **Commercial** | ** ** | **Multifamily** | ** ** | **Nonsegment** | ** ** | **Total** | ** ** |
| Total revenues                                                     |       | $                                                                  | 9,042      |   | $ | 361,510 |   | $ | 2,738,672 |   | $ | 7,113,621 |   | $ | (73,798 | ) | $ | 10,149,047 |   |
| Operating expenses and  operating expenses reimbursed to affiliate |       | 135                                                                |       | 33,218 |   | 960,926 |   | 2,894,639 |   | — |   | 3,888,918 |   |
| Depreciation and  amortization                                     |       | 652                                                                |       | 70,293 |   | 739,534 |   | 3,008,263 |   | — |   | 3,818,742 |   |
| Total interest expense                                             |       | —                                                             |       | (97,357 | ) | (542,417 | ) | (2,256,261 | ) | (238,829 | ) | (3,134,864 | ) |
| Net income (loss)                                                  |       | 7,181                                                              |       | 132,391 |   | 242,651 |   | (2,209,811 | ) | (1,270,842 | ) | (3,098,430 | ) |
|                                                                    |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                         | ** ** | **(Unaudited)**                                                    | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Three Months Ended September 30, 2005** | ** ** |
| ** **                                                         | ** ** | **Land**                                                           | ** ** | **Retail** | ** ** | **Commercial** | ** ** | **Multifamily** | ** ** | **Nonsegment** | ** ** | **Total** | ** ** |
| Total revenues                                                     |       | $                                                                  | 9,042      |   | $ | 359,986 |   | $ | 2,845,179 |   | $ | 2,562,660 |   | $ | (75,974 | ) | $ | 5,700,893 |   |
| Operating expenses and  operating expenses reimbursed to affiliate |       | 135                                                                |       | 27,193 |   | 904,367 |   | 1,066,322 |   | — |   | 1,998,017 |   |
| Depreciation and  amortization                                     |       | 652                                                                |       | 68,016 |   | 770,110 |   | 691,267 |   | — |   | 1,530,045 |   |
| Total interest expense                                             |       | —                                                             |       | (99,895 | ) | (482,354 | ) | (547,582 | ) | (265,539 | ) | (1,395,370 | ) |
| Net income (loss)                                                  |       | 7,852                                                              |       | 142,865 |   | 375,960 |   | (9,215 | ) | (1,241,830 | ) | (724,368 | ) |
|                                                                    |            |                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                         | ** ** | **(Unaudited)**                                                   | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Nine Months Ended September 30, 2006** | ** ** |
| ** **                                                         | ** ** | **Land**                                                          | ** ** | **Retail** | ** ** | **Commercial** | ** ** | **Multifamily** | ** ** | **Nonsegment** | ** ** | **Total** | ** ** |
| Total revenues                                                     |       | $                                                                 | 27,127     |   | $ | 1,089,559 |   | $ | 8,267,108 |   | $ | 18,854,856 |   | $ | (217,379 | ) | $ | 28,021,271 |   |
| Operating expenses and  operating expenses reimbursed to affiliate |       | 407                                                               |       | 98,255 |   | 2,805,213 |   | 6,701,900 |   | — |   | 9,605,775 |   |
| Depreciation and  amortization                                     |       | 1,955                                                             |       | 215,551 |   | 2,224,377 |   | 7,764,080 |   | — |   | 10,205,963 |   |
| Total interest expense                                             |       | —                                                            |       | (294,021 | ) | (1,572,581 | ) | (5,731,625 | ) | (762,528 | ) | (8,360,755 | ) |
| Net income (loss)                                                  |       | 21,959                                                            |       | 402,734 |   | 2,794,027 |   | 43,708,757 |   | (3,724,109 | ) | 43,203,368 |   |
|                                                                    |            |                                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                         | ** ** | **(Unaudited)**                                                   | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Nine Months Ended September 30, 2005** | ** ** |
| ** **                                                         | ** ** | **Land**                                                          | ** ** | **Retail** | ** ** | **Commercial** | ** ** | **Multifamily** | ** ** | **Nonsegment** | ** ** | **Total** | ** ** |
| Total revenues                                                     |       | $                                                                 | 27,127     |   | $ | 1,080,209 |   | $ | 8,903,989 |   | $ | 7,132,261 |   | $ | (241,099 | ) | $ | 16,902,487 |   |
| Operating expenses and  operating expenses reimbursed to affiliate |       | 406                                                               |       | 84,043 |   | 2,661,471 |   | 2,994,287 |   | — |   | 5,740,207 |   |
| Depreciation and  amortization                                     |       | 1,955                                                             |       | 210,860 |   | 2,434,562 |   | 1,879,572 |   | — |   | 4,526,949 |   |
| Total interest expense                                             |       | —                                                            |       | (287,949 | ) | (1,397,204 | ) | (1,363,500 | ) | (949,308 | ) | (3,997,961 | ) |
| Net income (loss)                                                  |       | 23,556                                                            |       | 431,993 |   | 1,900,574 |   | 49,329 |   | (4,191,947 | ) | (1,786,495 | ) |
|                                                                    |            |                                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Occupancy levelsat our continuing properties by segment as of September 30, 2006 and 2005 wereas follows:
| ** **  | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------|------------|----------|------------|----------|------------|
| Commercial  |       | 70.1     | %          | 69.6     | %          |
| Multifamily |       | 94.7     | %          | 91.1     | %          |
| Retail      |       | 100.0    | %          | 99.5     | %          |
| Land        |       | N/A      |       | N/A      |       |

 

We believe the changes in occupancy on September 30from year to year are temporary effects of each property’s specific mix oflease maturities and are not indicative of any known trend or uncertainty.

21

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The average occupancy levels at our continuingproperties by segment for the three and nine months ended September 30, 2006and 2005 were as follows:
| ** **  | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **  | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Commercial  |       | 69.4                                                     | %          | 74.6                                                    | %          | 69.8 | % | 79.7 | % |
| Multifamily |       | 94.6                                                     | %          | 91.4                                                    | %          | 94.2 | % | 89.4 | % |
| Retail      |       | 99.6                                                     | %          | 99.5                                                    | %          | 99.8 | % | 99.5 | % |
| Land        |       | N/A                                                      |       | N/A                                                     |       | N/A |   | N/A |   |

 

We believe the changes in average occupancy fromperiod to period are temporary effects of each property’s specific mix of leasematurities and are not indicative of any known trend or uncertainty.

The leasing and renewal negotiations for ourcommercial properties are primarily handled by leasing agents that areemployees of NTS Development Company. All advertising for the commercialproperties is coordinated by NTS Development Company’s marketing staff locatedin Louisville, Kentucky.

In an effort to continue to improve occupancy at ourmultifamily properties, we have on-site leasing staff, who are employees of NTSDevelopment Company, at each of the multifamily properties. The staff handlesall on-site visits from potential tenants, coordinates local advertising withNTS Development Company’s marketing staff, makes visits to local companies topromote fully furnished apartments, and negotiates lease renewals with currentresidents.

The following discussion relating to changes in ourresults of operations includes only material line items within our Statementsof Operations or line items for which there was a material change between thethree and nine months ended September 30, 2006 and 2005.

***Rental Income and TenantReimbursements***

Rental income and tenant reimbursements fromcontinuing operations for the three months ended September 30, 2006 and 2005were approximately $10,149,000 and $5,701,000, respectively. Rental income andtenant reimbursements from continuing operations for the nine months endedSeptember 30, 2006 and 2005 were approximately $28,021,000 and $16,902,000,respectively. The increases of $4,448,000, or 78%, and $11,119,000, or 66%,respectively, were primarily the result of acquiring The Grove at RichlandApartments, The Grove at Swift Creek Apartments and The Grove at WhitworthApartments (February 2006), Castle Creek Apartments and Lake ClearwaterApartments (March 2006) and The Lakes Apartments (August 2005).

***Operating Expenses andOperating Expenses Reimbursed to Affiliate***

Operating expenses from continuing operations for thethree months ended September 30, 2006 and 2005 were approximately $2,683,000and $1,346,000, respectively. Operating expenses from continuing operations forthe nine months ended September 30, 2006 and 2005 were approximately $6,290,000and $3,829,000, respectively. The increases of $1,337,000, or 99%, and$2,461,000, or 64%, respectively, were primarily due to the 2006 acquisitionsof The Grove at Richland Apartments, The Grove at Swift Creek Apartments, TheGrove at Whitworth Apartments, Castle Creek Apartments and Lake ClearwaterApartments and the August 2005 acquisition of The Lakes Apartments.

Operating expenses reimbursed to affiliate fromcontinuing operations for the three months ended September 30, 2006 and 2005were approximately $1,206,000 and $652,000, respectively. Operating expensesreimbursed to affiliate from continuing operations for the nine months endedSeptember 30, 2006 and 2005 were approximately $3,315,000 and $1,911,000,respectively. The increases of $554,000, or 85%, and $1,404,000, or 73%,respectively, were primarily due to acquiring the five apartments in 2006 (TheGrove at Richland Apartments, The Grove at Swift Creek Apartments, The Grove atWhitworth Apartments, Castle Creek Apartments and Lake Clearwater Apartments)and the one apartment in August 2005 (The Lakes Apartments).

Operating expenses reimbursed to affiliate are for theservices performed by employees of NTS Development Company, an affiliate of ourgeneral partners. These employee services include property management, leasing,maintenance, security and other services necessary to manage and operate ourbusiness.

22

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***Management Fees***

Management fees from continuing operations for thethree months ended September 30, 2006 and 2005 were approximately $507,000 and$251,000, respectively. Management fees from continuing operations for the ninemonths ended September 30, 2006 and 2005 were approximately $1,418,000 and$737,000, respectively. The increases of $256,000, or 102%, and $681,000, or92%, respectively, were primarily due to the 2006 acquisitions of The Grove atRichland Apartments, The Grove at Swift Creek Apartments, The Grove atWhitworth Apartments, Castle Creek Apartments and Lake Clearwater Apartmentsand the August 2005 acquisition of The Lakes Apartments.

Pursuant to our amended and restated managementagreement, NTS Development Company receives property management fees equal to5% of the gross collected revenue from our properties. Management fees arecalculated as a percentage of cash collections, however, for revenue reportingpurposes are recorded on the accrual basis. As a result, the fluctuations inrevenue between years will differ from the fluctuations of management feeexpense.

***Property Taxes and Insurance***

Property taxes and insurance from continuingoperations for the three months ended September 30, 2006 and 2005 wereapproximately $1,158,000 and $635,000, respectively. Property taxes andinsurance from continuing operations for the nine months ended September 30,2006 and 2005 were approximately $3,211,000 and $1,769,000, respectively. Theincreases of $523,000, or 82%, and $1,442,000, or 82%, respectively, wereprimarily due to the February 2006 acquisitions of The Grove at RichlandApartments, The Grove at Swift Creek Apartments and The Grove at WhitworthApartments, the March 2006 acquisitions of Castle Creek Apartments and LakeClearwater Apartments and the August 2005 acquisition of The Lakes Apartments.

***Professional and AdministrativeExpenses and Professional and Administrative Expenses Reimbursedto Affiliate***

Professional andadministrative expenses from continuing operations for the three months endedSeptember 30, 2006 and 2005 were approximately $546,000 and $602,000,respectively. Professional and administrative expenses from continuingoperations for the nine months ended September 30, 2006 and 2005 wereapproximately $1,510,000 and $2,035,000, respectively. The decreases of$56,000, or 9%, and $525,000, or 26%, respectively, were primarily due todecreased legal and professional fees related to the merger and the classaction litigation. Professional and administrative expenses for the nine monthsended September 30, 2006 included approximately $0 and $366,000 in merger andlitigation expenses, respectively. The 2006 litigation expense includesapproximately $141,000 for settlement of the shareholder litigation filed inKentucky. Professional and administrative expenses for the nine months endedSeptember 30, 2005 included approximately $142,000 and $735,000 in merger andlitigation expenses, respectively.

Professional and administrative expenses reimbursed toaffiliate from continuing operations for the three months ended September 30,2006 and 2005 were approximately $389,000 and $346,000, respectively. Professionaland administrative expenses reimbursed to affiliate from continuing operationsfor the nine months ended September 30, 2006 and 2005 were approximately$1,198,000 and $1,043,000, respectively. The increases of $43,000, or 12%, and$155,000, or 15%, respectively, were primarily due to increased personnelcosts, which were a result of our apartment acquisitions.

Professional and administrative expenses reimbursed toaffiliate are for the services performed by employees of NTS DevelopmentCompany, an affiliate of our general partners. These employee services includelegal, financial and other services necessary to manage and operate ourbusiness.

23

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Professional andadministrative expenses reimbursed to affiliate consisted of the following:
| ** **          | ** ** | **(Unaudited)**                                          | ** ** | **(Unaudited)**                                         | ** ** |
|---------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **          | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
| ** **          | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Finance             |       | $                                                        | 100,000    |                                                    | $          | 89,000 |   | $ | 311,000 |   | $ | 281,000 |   |
| Accounting          |       | 203,000                                                  |       | 159,000                                                 |       | 621,000 |   | 467,000 |   |
| Investor  Relations |       | 53,000                                                   |       | 51,000                                                  |       | 171,000 |   | 152,000 |   |
| Human Resources     |       | 5,000                                                    |       | 4,000                                                   |       | 14,000 |   | 10,000 |   |
| Overhead            |       | 28,000                                                   |       | 43,000                                                  |       | 81,000 |   | 133,000 |   |
|                |       |                                                     |       |                                                    |       |   |   |   |   |
| **Total**           |       | $                                                        | 389,000    |                                                    | $          | 346,000 |   | $ | 1,198,000 |   | $ | 1,043,000 |   |

 

***Depreciation andAmortization***

Depreciation and amortization expense from continuingoperations for the three months ended September 30, 2006 and 2005 wasapproximately $3,819,000 and $1,530,000, respectively. Depreciation andamortization expense from continuing operations for the nine months endedSeptember 30, 2006 and 2005 was approximately $10,206,000 and $4,527,000,respectively. The increases of $2,289,000 and $5,679,000, respectively, wereprimarily due to the 2006 acquisitions of The Grove at Richland Apartments, TheGrove at Swift Creek Apartments, The Grove at Whitworth Apartments, CastleCreek Apartments and Lake Clearwater Apartments and the August 2005 acquisitionof The Lakes Apartments.

***Interest and Other Income***

Interest and other income for the three months endedSeptember 30, 2006 and 2005 was approximately $22,000 and $100,000,respectively. The decrease of $78,000, or 78%, was primarily the result ofdecreased interest earned on investments.

Interest and other income for the nine months endedSeptember 30, 2006 and 2005 was approximately $156,000 and $234,000,respectively. The decrease of $78,000, or 33%, was primarily the result ofdecreased interest earned on investments, which matured in the first quarter of2006, partially offset by a forfeited deposit due to the cancellation of thesales agreement for the Sears Office Building.

***Interest Expense***

Interest expense from continuing operations for thethree months ended September 30, 2006 and 2005 was approximately $3,135,000 and$1,395,000, respectively. Interest expense from continuing operations for thenine months ended September 30, 2006 and 2005 was approximately $8,361,000 and$3,998,000, respectively. The increases of $1,740,000 and $4,363,000, respectively,were primarily due to additional loan proceeds obtained for our apartmentacquisitions.

***Losson Disposal of Assets***

The loss on disposal of assets from continuingoperations for the three and nine months ended September 30, 2006 and 2005 canbe attributed to assets that were not fully depreciated at the time ofreplacement, spread amongst the majority of our properties. These replacementsinclude heating and air conditioning units, common area renovations, stairwellupgrades, access control upgrades, roof replacements, and tenant improvements,among others.

***Discontinued Operations***

Discontinuedoperations, net for the three months ended September 30, 2006 and 2005 wereapproximately $217,000 and $325,000, respectively. Discontinued operations, netfor the nine months ended September 30, 2006 and 2005 were approximately$741,000 and $1,150,000, respectively. The decreases of $108,000 and $409,000,respectively, were primarily due to the sale of Golf Brook Apartments and SabalPark Apartments on February 2, 2006 and Commonwealth Business Center Phases Iand II on May 18, 2006.

24

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***Gain on Sale of Discontinued Operations***

Gain on sale of discontinued operations for the ninemonths ended September 30, 2006 was approximately $49,950,000 due to the saleof Golf Brook Apartments and Sabal Park Apartments on February 2, 2006 and thesale of Commonwealth Business Center Phases I and II on May 18, 2006.

**Liquidity and Capital Resources**

Our most liquidasset is our cash and equivalents, which consist of cash and short-terminvestments, but do not include any restricted cash. Operating income generatedby the properties will be the primary source from which we generate cash. Othersources of cash include the proceeds from mortgage loans and notes payable. Ourmain uses of cash will relate to capital expenditures, required payments ofmortgages and notes payable, distributions and property taxes.
| ** **                                | ** ** | **(Unaudited)**                                         | ** ** |
|-------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                | ** ** | **Nine Months Ended September 30,** | ** ** |
| ** **                                | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| Operating  activities                     | ** ** | $                                                       | 5,784,133  |   | $ | 6,835,415 |   |
| Investing activities                      |       | (56,329,809                                             | )          | (32,687,196 | ) |
| Financing  activities                     |       | 45,498,589                                              |       | 25,250,384 |   |
|                                      |       |                                                    |       |   |   |
| **Net  decrease in cash and equivalents** |       | $                                                       | (5,047,087 | ) | $ | (601,397 | ) |

 

***Cash Flow from Operating Activities***

Net cash provided by operating activities decreasedfrom approximately $6,835,000 to $5,784,000 for the nine months ended September30, 2005 and 2006, respectively. The decrease was primarily due to theoperations of acquired properties (The Grove at Richland Apartments, The Groveat Swift Creek Apartments, The Grove at Whitworth Apartments, Castle CreekApartments, Lake Clearwater Apartments and The Lakes Apartments) net ofdiscontinued operations of Golf Brook Apartments and Sabal Park Apartments soldin February 2006 and Commonwealth Business Center Phases I and II sold in May2006.

***Cash Flow from InvestingActivities***

Net cash used in investing activities increased fromapproximately $32,687,000 to $56,330,000 for the nine months ended September30, 2005 and 2006, respectively. The increase was primarily due to the 2006acquisitions of The Grove at Richland Apartments, The Grove at Swift CreekApartments, The Grove at Whitworth Apartments, Castle Creek Apartments and LakeClearwater Apartments. The increase is partially offset by the sale of GolfBrook Apartments and Sabal Park Apartments in February 2006 and CommonwealthBusiness Center Phases I and II in May 2006.

***Cash Flow from FinancingActivities***

Net cash providedby financing activities increased from approximately $25,250,000 to $45,499,000for the nine months ended September 30, 2005 and 2006, respectively. The changewas primarily the result of loan proceeds obtained in 2006 used to fund ourapartment acquisitions.

***Future Liquidity***

Our future liquidity depends significantly on ourproperties’ occupancy remaining at a level which provides for debt payments andadequate working capital, currently and in the future. If occupancy were tofall below that level and remain at or below that level for a significantperiod of time, our ability to make payments due under our debt agreements andto continue paying daily operational costs would be greatly impaired. In thenext twelve months, we intend to operate the properties in a similar manner totheir operation in recent years. Cash reserves, which consist of unrestrictedcash as shown on our balance sheet, were approximately $362,000 on September30, 2006.

25

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On March 20, 2006, we announced that the board ofdirectors of our managing general partner approved a quarterly distribution of$0.10 per unit on our limited partnership units. The distribution was paid onApril 14, 2006, to limited partners of record at the close of business on March31, 2006.

On June 13, 2006, we announced that the board ofdirectors of our managing general partner approved a quarterly distribution of$0.10 per unit on our limited partnership units. The distribution was paid onJuly 14, 2006, to limited partners of record at the close of business on June30, 2006.

On September 18, 2006, we announced that the board ofdirectors of our managing general partner approved a quarterly distribution of$0.10 per unit on our limited partnership units. The distribution was paid onOctober 13, 2006, to limited partners of record at the close of business onSeptember 30, 2006.

We expect to incur capital expenditures ofapproximately $7.3 million funded by borrowings on our debt during the nexttwelve months primarily for roof replacements and tenant origination costsnecessary to continue leasing our properties. This discussion of futureliquidity details our material commitments. We anticipate seeking renewal orrefinancing of our notes payable coming due in the next twelve months.

On April 11, 2006, pursuant to the terms of thesettlement agreement with respect to the class action litigation involving thePartnerships, the independent directors of our managing general partnerapproved an amended and restated management agreement with NTS DevelopmentCompany, our affiliate. The independent directors engaged a nationallyrecognized real estate expert to assist them in their review of the existingmanagement agreement. The amended and restated management agreement becameeffective as of December 29, 2005. The resulting disposition fees ofapproximately $928,000, construction supervision fees of approximately $180,000and commercial leasing fees of approximately $265,000 for the nine months endedSeptember 30, 2006, may reasonably be expected to have a significant andmaterial continuing impact on our future liquidity.

***Property Transactions***

On August 24, 2005, we closed on a $20.0 million lineof credit from PNC Bank, National Association. We used a portion of theproceeds from the line of credit to pay the purchase price for The LakesApartments pending permanent financing. On March 23, 2006, the line of creditwas increased to $24.0 million to assist in future acquisitions and otherworking capital needs.

On August 26, 2005, we purchased The Lakes Apartments,a 230-unit luxury multifamily property, located adjacent to Willow LakeApartments in Indianapolis, Indiana.

On November 1, 2005, we announced that we entered intotwo agreements to purchase two multifamily properties located in Nashville,Tennessee, and one multifamily property located in Richmond, Virginia, from anunaffiliated Delaware limited partnership. We agreed to pay approximately$117.2 million for the properties. The properties in Nashville consist ofapartment complexes with 292 units and 301 units, respectively, while theRichmond property has 240 units.

On February 2, 2006, we closed on our agreements tosell Golf Brook Apartments and Sabal Park Apartments, our multifamilyproperties located in Orlando, Florida, to an unaffiliated Florida corporationfor an aggregate sales price of approximately $71.5 million, resulting in asignificant gain.

On February 3, 2006, we closed on our two agreementsto purchase two multifamily properties located in Nashville, Tennessee, and onemultifamily property in Richmond, Virginia, for a purchase price totalingapproximately $117.2 million (a portion of which was satisfied by theassumption of a mortgage loan with an outstanding balance of approximately$33.4 million). The Tennessee properties are commonly known as The Grove atRichland and The Grove at Whitworth, while the Virginia property is commonlyknown as The Grove at Swift Creek.

On February 7, 2006, we announced that we entered intoan agreement to purchase two multifamily properties located in Indianapolis,Indiana. These properties are commonly known as Castle Creek Apartments andLake Clearwater Apartments. Castle Creek has 276 units and Lake Clearwater has216 units. Subject to the terms and conditions of the agreement, we agreed topay a purchase price totaling approximately $50.0 million.

26

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On March 6, 2006, we announced that we entered into anagreement to sell Commonwealth Business Center Phases I and II, two of ourbusiness centers located in Jefferson County, Kentucky, to an unaffiliatedKentucky limited liability company for an aggregate sales price of $7.1million.

On March 23, 2006, we closed on our agreement topurchase Castle Creek Apartments and Lake Clearwater Apartments located inIndianapolis, Indiana, using a bank loan of approximately $42.5 million,guaranteed by the partnership, and an advance on our line of credit for thebalance.

On May 18, 2006,we closed on our agreement to sell Commonwealth Business Center Phases I andII, two of our business centers located in Jefferson County, Kentucky, to anunaffiliated Kentucky limited liability company for an aggregate sales price of$7.1 million.

On August 17,2006, we announced that on August 16, 2006 we entered into an agreement to sellBlankenbaker Business Centers I and II, two business centers located inLouisville, Kentucky, to an unaffiliated individual for a total of $21.6million.

On September 15,2006, we announced that we were notified by the prospective purchaser ofBlankenbaker Business Centers I and II, two of our business centers located inLouisville, Kentucky, that such purchaser was unable to fulfill his obligationsunder the purchase agreement and, thus terminated the agreement.

On September 18,2006, the board of directors of our managing general partner authorizedmanagement to sell Blankenbaker Business Center I and II, Springs MedicalOffice Center and Springs Office Center at specified minimum prices.

27

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**Website Information**

Our website address is www.ntsdevelopment.com. Ourannual reports on Form 10-K, quarterly reports on Form 10-Q, current reports onForm 8-K and amendments to those reports filed or furnished pursuant to Section13(a) of the Securities Exchange Act are available and may be accessed free ofcharge through the “About NTS” section of our website as soon as reasonablypracticable after we electronically file this material with, or furnish it to,the SEC. Our website and the information contained therein or connected theretoare not incorporated into this Quarterly Report on Form 10-Q.

28

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## **Item3 — Quantitative and Qualitative Disclosures About Market Risk**

Our primary market risk exposure with regard tofinancial instruments is expected to be our exposure to changes in interestrates. We refinanced substantially all of our debt acquired at the time of ourmerger with instruments which bear interest at a fixed rate, with the exceptionof approximately $63.6 million at variable rates. We anticipate that ahypothetical 100 basis point increase in interest rates would result in anapproximate $8.5 million decrease in the fair value of our fixed rate debtwhile increasing interest expense on our variable rate debt by approximately$636,000 annually.

**Item4 — Controls and Procedures**

Our managing general partner has establisheddisclosure controls and procedures to ensure that our material information ismade known to the officers of our managing general partner who certify our financialreports, to our management and to the board of directors of our managingpartner.

Our managing general partner’s Chief Executive Officerand Chief Financial Officer have evaluated our disclosure controls andprocedures as of September 30, 2006. Based on that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were effective as of September 30, 2006. There were nochanges in our internal controls over financial reporting that materiallyaffected or were reasonably likely to materially affect our internal controlover financial reporting during the three and nine months ended September 30,2006.

29

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**PARTII — OTHER INFORMATION**

**Item1 — Legal Proceedings**

On May 6, 2004, the Superior Court of the State ofCalifornia for the County of Contra Costa granted its final approval of thesettlement agreement jointly filed by the general partners (the “Former GeneralPartners”) of the Partnerships, along with certain of their affiliates, withthe class of plaintiffs in the action originally captioned Buchanan, et al. v.NTS-Properties Associates, et al. (Case No. C01-05090) (the “CaliforniaLitigation”) on December 5, 2003. On October 26, 2006, the Superior Courtentered an order holding that defendants had fulfilled their financialobligations required by the settlement.

On February 27, 2003, two individuals filed a classand derivative action in the Circuit Court of Jefferson County, Kentuckycaptioned Bohm, et al. v. J.D. Nichols, et al. (Case No. 03-CI-01740) (the “KentuckyLitigation”) against certain of the Former General Partners and severalindividuals and entities affiliated with us. The complaint was amended on anumber of occasions to add parties such as the general partner ofNTS-Properties III and the general partner of NTS-Properties Plus Ltd., and toadd various claims seeking, among other things, compensatory and punitivedamages in an unspecified amount, an accounting, a declaratory judgment andinjunctive relief. The parties recently entered into a term sheet for thesettlement of the case. The term sheet is subject to execution of a settlementagreement which would result in the dismissal of the litigation. The settlementagreement is expected to be executed within the next few weeks.

We do not believe there is any other litigationthreatened against us other than routine litigation arising out of the ordinarycourse of business, some of which is expected to be covered by insurance, noneof which is expected to have a material effect on our financial position orresults of operations.

**Item1A — Risk Factors**

There have not been material changes to our RiskFactors as disclosed in our most recent annual report on Form 10-K as filedwith the Securities and Exchange Commission on April 3, 2006.

**Item2 — Unregistered Sales of Equity Securities and Use of Proceeds**

OnNovember 21, 2005, we announced that Mr. J.D. Nichols, Chairman of, ourmanaging general partner, adopted three pre-arranged trading plans to purchaseour limited partnership units pursuant to Rule 10b5-1 under the SecuritiesExchange Act of 1934, as amended. The plans authorize their administrator, PNCInvestments, to purchase up to $922,000 of our limited partnership units fromtime to time, through no later than October 2006, on behalf of three entitiescontrolled or established by Mr. Nichols. Under the terms of the plans, Mr.Nichols has no discretion or control over the timing, effectuation or theamount of each purchase. During the three months ended September 30, 2006, thethree entities controlled or established by Mr. Nichols purchased our limitedpartnership units as follows:
| **Period**     | ** ** | **Total Number of  Units Purchased** | ** ** | **Average Price  Paid Per Unit** | ** ** | **Total Number of  Units Purchased  as Part of Publicly  Announced Plans  or Programs** | ** ** | **Maximum Number  (or Approximate  Dollar Value) of  Units That May  Yet Be Purchased  Under the Plans  or Programs** | ** ** |
|----------------|------------|-----------------------------------------------------|------------|-------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| July 2006      |       | 10,000                                              |       | $7.29                                           |       | 101,350                                                                                                                         |       | (1)                                                                                                                                                                          |       |
|           |       |                                                |       |                                            |       |                                                                                                                            |       |                                                                                                                                                                         |       |
| August 2006    |       | 13,000                                              |       | $7.46                                           |       | 114,350                                                                                                                         |       | (1)                                                                                                                                                                          |       |
|           |       |                                                |       |                                            |       |                                                                                                                            |       |                                                                                                                                                                         |       |
| September 2006 |       |   7,000                                   |       | $7.49                                           |       | 121,350                                                                                                                         |       | (1)                                                                                                                                                                          |       |
|           |       |                                                |       |                                            |       |                                                                                                                            |       |                                                                                                                                                                         |       |
| Total          |       | 30,000                                              |       | $7.41                                           |       | 121,350                                                                                                                         |       | (1)                                                                                                                                                                          |       |

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(1)                   A descriptionof the maximum number of units that may be purchased under the trading plans isincluded in the narrative preceding this table.

30

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**Item3 — Defaults Upon Senior Securities**

None.

**Item4 — Submission of Matters to a Vote of Security Holders**

None.

**Item5 — Other Information**

None.

**Item6 — Exhibits**
| Exhibit No. | ** ** | ** **                                                                                                                                                                                                                                                                             | ** ** | ** ** |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| 2.01        |       | Agreement and Plan of Merger by and among NTS Realty  Holdings Limited Partnership, NTS-Properties III, NTS-Properties IV,  NTS-Properties V, a Maryland limited partnership, NTS-Properties VI, a  Maryland limited partnership and NTS-Properties VII, Ltd., dated February 3,  2004 |       | (3)        |
|        |       |                                                                                                                                                                                                                                                                                   |       |       |
| 2.02        |       | Contribution Agreement by and between NTS Realty  Holdings Limited Partnership and ORIG, LLC, dated February 3, 2004                                                                                                                                                                   |       | (3)        |
|        |       |                                                                                                                                                                                                                                                                                   |       |       |
| 3.01        |       | Certificate of Limited Partnership of NTS Realty  Holdings Limited Partnership                                                                                                                                                                                                         |       | (1)        |
|        |       |                                                                                                                                                                                                                                                                                   |       |       |
| 3.02        |       | Amended and Restated Agreement of Limited  Partnership of NTS Realty Holdings Limited Partnership, dated as of December  29, 2005                                                                                                                                                      |       | (7)        |
|        |       |                                                                                                                                                                                                                                                                                   |       |       |
| 3.03        |       | Certificate of Incorporation of NTS Realty Capital,  Inc.                                                                                                                                                                                                                              |       | (8)        |
|        |       |                                                                                                                                                                                                                                                                                   |       |       |
| 3.04        |       | By-Laws of NTS Realty Capital, Inc.                                                                                                                                                                                                                                                    |       | (2)        |
|        |       |                                                                                                                                                                                                                                                                                   |       |       |
| 10.01       |       | Amended and Restated Management Agreement between  NTS Realty Holdings Limited Partnershipand NTS Development Company, dated as  of December 29, 2005                                                                                                                                  |       | (6)        |
|        |       |                                                                                                                                                                                                                                                                                   |       |       |
| 10.02       |       | Form of Lease Agreement between NTS Realty Holdings  Limited Partnership and SHPS, Inc.                                                                                                                                                                                                |       | (4)        |
|        |       |                                                                                                                                                                                                                                                                                   |       |       |
| 10.03       |       | Purchase and Sale Agreement between NTS Realty  Holdings Limited Partnership and Investors Capital Mortgage Group, Inc.,  dated September 30, 2005 (Golf Brook Apartments)                                                                                                             |       | (5)        |
|        |       |                                                                                                                                                                                                                                                                                   |       |       |
| 10.04       |       | Purchase and Sale Agreement between NTS Realty  Holdings Limited Partnership and Investors Capital Mortgage Group, Inc.,  dated September 30, 2005 (Sabal Park Apartments)                                                                                                             |       | (5)        |
|        |       |                                                                                                                                                                                                                                                                                   |       |       |
| 10.05       |       | Agreement for Purchase and Sale between Schaedle  Worthington Hyde Properties, L.P. and NTS Realty Holdings Limited  Partnership, dated November 1, 2005 (The Grove at Richland and The Grove at  Whitworth)                                                                           |       | (5)        |
|        |       |                                                                                                                                                                                                                                                                                   |       |       |
| 10.06       |       | Agreement for Purchase and Sale between Schaedle  Worthington Hyde Properties, L.P. and NTS Realty Holdings Limited  Partnership, dated November 1, 2005 (The Grove at Swift Creek)                                                                                                    |       | (5)        |
|        |       |                                                                                                                                                                                                                                                                                   |       |       |
| 10.07       |       | Purchase and Sale  Agreement between AMLI at Castle Creek, L.P. and AMLI Residential  Properties, L.P. and NTS  Realty Holdings Limited Partnership,  dated February 7, 2006 (Castle Creek and Lake Clearwater)                                                                        |       | (5)        |
|        |       |                                                                                                                                                                                                                                                                                   |       |       |
| 10.08       |       | Unconditional and Continuing Guarantee by NTS Realty  Holdings Limited Partnership in favor of National City Bank, dated March 23,  2006                                                                                                                                               |       | (5)        |
|        |       |                                                                                                                                                                                                                                                                                   |       |       |
| 10.09       |       | Amended and Restated Loan Agreements between NTS  Realty Holding Limited Partnership and Northwestern Mutual Life Insurance  Company and between NTS Realty Holdings Limited Partnership and National City  Bank, dated October 23, 2006                                               |       | (9)        |
|        |       |                                                                                                                                                                                                                                                                                   |       |       |
| 14.01       |       | Code of Conduct and Ethics of NTS Realty Holdings  Limited Partnership, adopted as of December 28, 2004                                                                                                                                                                           |       | (4)        |
|        |       |                                                                                                                                                                                                                                                                                   |       |       |
| 31.1        |       | Certification of Chief Executive Officer Pursuant to  Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended                                                                                                                                                     |       | (10)       |
|        |       |                                                                                                                                                                                                                                                                                   |       |       |
| 31.2        |       | Certification of Chief Financial Officer Pursuant to  Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended                                                                                                                                                     |       | (10)       |
|        |       |                                                                                                                                                                                                                                                                                   |       |       |

31

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| Exhibit No. | ** ** | ** **                                                                                                                                           | ** ** | ** ** | ** ** | ** ** |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|
| 32.1        |       | Certification of Chief Executive Officer Pursuant to  U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002        |       | (10)       |
|        |       |                                                                                                                                                 |       |       |       |       |
| 32.2        |       | Certification of Chief Financial Officer Pursuant to  U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002        |       | (10)       |
|        |       |                                                                                                                                                 |       |       |       |       |
| 99.01       |       | Form of Lock-Up Agreement by and between NTS Realty  Holdings Limited Partnership and each of the executive officers of NTS Realty  Capital, Inc.    |       | (1)        |
|        |       |                                                                                                                                                 |       |       |       |       |
| 99.02       |       | Registration Statement on Form S-4/A (Amendment No.  5), as filed by the Registrant with the Securities and Exchange Commission on  October 27, 2004 |       | (3)        |
|        |       |                                                                                                                                                 |       |       |       |       |

 
|      |   |                                                                                                                                                                                              |   |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| (1)  |   | Incorporated by reference to the Registrant’s  Registration Statement on Form S-4, as filed with the Securities and Exchange  Commission on February 4, 2004                                 |   |
| (2)  |   | Incorporated by reference to the Registrant’s Registration  Statement on Form S-4/A (Amendment No. 1), as filed with the Securities  and Exchange Commission on June 18, 2004           |   |
| (3)  |   | Incorporated by reference to the Registrant’s  Registration Statement on Form S-4/A (Amendment No. 5), as filed with  the Securities and Exchange Commission on October 27, 2004        |   |
| (4)  |   | Incorporated by reference to the Registrant’s Annual  Report on Form 10-K for the year ended December 31, 2004, as filed with  the Securities and Exchange Commission on March 31, 2005 |   |
| (5)  |   | Incorporated by reference to the Registrant’s Annual  Report on Form 10-K for the year ended December 31, 2005, as filed with the  Securities and Exchange Commission on April 3, 2006       |   |
| (6)  |   | Incorporated by reference to the Registrant’s  Current Report on Form 8-K, as filed with the Securities and Exchange  Commission on April 17, 2006                                           |   |
| (7)  |   | Incorporated by reference to the Registrant’s  Information Statement on Form DEF 14C, as filed with the Securities and  Exchange Commission on May 9, 2006                                   |   |
| (8)  |   | Incorporated by reference to the Registrant’s  Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, as filed  with the Securities and Exchange Commission on May 12, 2006.    |   |
| (9)  |   | Incorporated by reference to the Registrant’s  current Report on Form 8-K/A, as filed with the Securities and Exchange  Commission on October 23, 2006                                       |   |
| (10) |   | Filed herewith                                                                                                                                                                                    |   |   |   |
|      |        |                                                                                                                                                                                                   |        |  |  |

 

32

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## **SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, the registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.
|        | **NTS REALTY HOLDINGS LIMITED PARTNERSHIP** |
|--------|---------------------------------------------|
|   |                                        |   |   |   |
|   | By:                                         | NTS REALTY CAPITAL, INC. |
|   |                                        | Its: | Managing General Partner |
|   |                                        |   |   |   |
|   |                                        | By: | */s/ Brian F. Lavin* |
|   |                                        |   | Brian F. Lavin |
|   |                                        |   | Its: | President and Chief Executive Officer |
|   |                                        |   | Date: | November 7, 2006 |
|   |                                        |   |   |   |
|   |                                        | By: | */s/ Gregory A. Wells* |
|   |                                        |   | Gregory A. Wells |
|   |                                        |   | Its: | Chief Financial Officer |
|   |                                        |   | Date: | November 7, 2006 |
|        |                                             |  |  |  |  |  |

 

33

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