**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

----

**Form 10-Q**

**(MarkOne)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**For the quarterly periodended September 30, 2006**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition period from                                    to                                     **

**Commissionfile number 0-12138              **

**New England Realty Associates Limited Partnership**

(Exact name of registrantas specified in its charter)

| **Massachusetts**                         |   | **04-2619298**                        |
|-------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of          |   | (I.R.S. employer  identification no.) |
| incorporation or  organization)           |   |                                  |
|                                      |   |                                  |
| **39  Brighton Avenue,**                  |   | ** **                            |
| **Allston,  Massachusetts**               |   | **02134**                             |
| (Address of  principal executive offices) |   | (Zip code)                            |

 

Registrant’s telephonenumber, including area code: **(617) 783-0039**

**Not Applicable**

(Former Name, FormerAddress and Former Fiscal Year, if Changed Since Last Report)

Indicate by check xwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes o   No x

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer (asdefined in rule 12b-2 of the Exchange Act.)
| Large accelerated filer o | Accelerated filer x | Non-accelerated filer o |
|---------------------------|---------------------|-------------------------|

 

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

Thenumber of the Registrant’s units and receipts outstanding as of November 2,2006 was 6,730 and 1,316,476, respectively.

 

----

 

**INDEX**
|                  | **PART I — FINANCIAL INFORMATION**                                                                                                                                                   | ** ** |
|------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Item 1.     | Financial  Statements                                                                                                                                                                          |       |
|             |                                                                                                                                                                                           |       |
|             | Consolidated  Balance Sheets as of September 30,  2006 (unaudited) and December 31, 2005 (audited)                                                                                   |       |
|             |                                                                                                                                                                                           |       |
|             | Consolidated  Statements of Income for the Three Months Ended September 30, 2006 and  September 30, 2005, and the Nine Months Ended September 30, 2006 and  September 30, 2005 (all unaudited) |       |
|             |                                                                                                                                                                                           |       |
|             | Consolidated Statement of Changes in Partners’ Capital  for the Nine Months Ended September 30, 2006 and September 30, 2005 (all  unaudited)                                              |       |
|             |                                                                                                                                                                                           |       |
|             | Consolidated  Statements of Cash Flows for the Nine Months Ended September 30, 2006 and  September 30, 2005 (all unaudited)                                                                    |       |
|             |                                                                                                                                                                                           |       |
|             | Notes  to Unaudited Consolidated Financial Statements                                                                                                                                          |       |
|             |                                                                                                                                                                                           |       |
| Item 2.     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                                    |       |
|             |                                                                                                                                                                                           |       |
| Item 3.     | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                                    |       |
|             |                                                                                                                                                                                           |       |
| Item 4.     | Controls and  Procedures                                                                                                                                                                       |       |
|             |                                                                                                                                                                                           |       |
|             | **PART II  — OTHER INFORMATION**                                                                                                                                                     | ** ** |
|             | ** **                                                                                                                                                                                     | ** ** |
| Item 1.     | Legal Proceedings                                                                                                                                                                              |       |
|             |                                                                                                                                                                                           |       |
| Item  1. A. | Risk  Factors                                                                                                                                                                                  |       |
|             |                                                                                                                                                                                           |       |
| Item 2.     | Changes in  Securities and Use of Proceeds                                                                                                                                                     |       |
|             |                                                                                                                                                                                           |       |
| Item 3.     | Defaults  Upon Senior Securities                                                                                                                                                               |       |
|             |                                                                                                                                                                                           |       |
| Item 4.     | Submission  of Matters to a Vote of Security Holders                                                                                                                                           |       |
|             |                                                                                                                                                                                           |       |
| Item 5.     | Other Information                                                                                                                                                                              |       |
|             |                                                                                                                                                                                           |       |
| Item 6.     | Exhibits  and Reports on Form 8-K                                                                                                                                                         |       |
|             |                                                                                                                                                                                           |       |
| **SIGNATURES**   |                                                                                                                                                                                           |

 

2

----

**NEW ENGLAND REALTY ASSOCIATES, L.P.**

**PART 1 — FINANCIALINFORMATION**

Item 1. Financial Statements

The accompanying unaudited consolidated balancesheets, statements of income, changes in partners’ capital, and cash flows andrelated notes thereto, have been prepared in accordance with generally acceptedaccounting principles in the United States of America (“GAAP”) for interimfinancial information and in conjunction with the rules and regulations ofthe Securities and Exchange Commission (“SEC”). Accordingly, they do notinclude all of the disclosures required by GAAP for complete financialstatements. The financial statements reflect all adjustments consisting only ofnormal, recurring adjustments, which are in the opinion of management,necessary for a fair presentation for the interim periods.

The aforementioned financial statements should be readin conjunction with the notes to the aforementioned financial statements andManagement’s Discussion and Analysis of Financial Condition and Results ofOperations and the financial statements and notes thereto included in NewEngland Realty Associates L.P.’s Annual Report on Form 10-K for thefiscal year ended December 31, 2005.

The results of operations for the nine month periodended September 30, 2006 are not necessarily indicative of the results tobe expected for the entire fiscal year or any other period.

3

----

**NEW ENGLAND REALTY ASSOCIATESLIMITED PARTNERSHIP AND SUBSIDIARIES**

** **

**CONSOLIDATED BALANCE SHEETS**
| ** **                                                         | ** ** | **September 30,  2006** | ** **  | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------|-------------|-----------------------------|------------|
| ** **                                                         | ** ** | **(Unaudited)**              | ** **  | **(Audited)**               | ** ** |
| **ASSETS**                                                         |       |                         |        |                        |       |
| Rental Properties                                                  |       | $                            | 98,990,941  |                        | $          | 102,209,561 |   |
| Cash and Cash  Equivalents                                         |       | 11,363,167                   |        | 12,049,392                  |       |
| Rents Receivable                                                   |       | 500,859                      |        | 480,118                     |       |
| Real Estate Tax Escrows                                            |       | 831,444                      |        | 758,820                     |       |
| Prepaid Expenses and  Other Assets                                 |       | 2,508,514                    |        | 2,649,595                   |       |
| Investment in  Partnerships                                        |       | 17,154,263                   |        | 16,337,832                  |       |
| Financing and Leasing  Fees                                        |       | 498,415                      |        | 568,622                     |       |
|                                                               |       |                         |        |                        |       |
| **Total  Assets**                                                  |       | $                            | 131,847,603 |                        | $          | 135,053,940 |   |
|                                                               |       |                         |        |                        |       |
| **LIABILITIES AND PARTNERS’  CAPITAL**                        |       |                         |        |                        |       |
| Mortgage Notes Payable                                             |       | $                            | 114,911,056 |                        | $          | 115,585,241 |   |
| Accounts Payable and  Accrued Expenses                             |       | 1,284,530                    |        | 1,443,461                   |       |
| Advance Rental Payments  and Security Deposits                     |       | 2,844,836                    |        | 2,943,219                   |       |
|                                                               |       |                         |        |                        |       |
| **Total  Liabilities**                                             |       | 119,040,422                  |        | 119,971,921                 |       |
|                                                               |       |                         |        |                        |       |
| Commitments and  Contingent Liabilities (Note 9)                   |       |                         |        |                        |       |
|                                                               |       |                         |        |                        |       |
| Partners’ Capital 173,252  units outstanding in 2006 and 2005 |       | 12,807,181                   |        | 15,082,019                  |       |
|                                                               |       |                         |        |                        |       |
| **Total Liabilities and Partners’  Capital**                  |       | $                            | 131,847,603 |                        | $          | 135,053,940 |   |

 

See notes to consolidatedfinancial statements.

4

----

**NEWENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**(UNAUDITED)**

 
| ** **                                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenue                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Rental income                                             |       | $                                                    | 7,900,595  |                                                | $          | 7,836,797 |   | $ | 23,715,253 |   | $ | 23,446,985 |   |
| Laundry and  sundry income                                |       | 91,387                                               |       | 105,951                                             |       | 322,888 |   | 310,007 |   |
|                                                      |       | 7,991,982                                            |       | 7,942,748                                           |       | 24,038,141 |   | 23,756,992 |   |
| Expense                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Administrative                                            |       | 342,895                                              |       | 307,881                                             |       | 1,018,189 |   | 967,199 |   |
| Depreciation and  amortization                            |       | 1,769,965                                            |       | 1,642,148                                           |       | 5,127,899 |   | 4,745,603 |   |
| Interest                                                  |       | 1,945,283                                            |       | 1,960,195                                           |       | 5,792,084 |   | 5,842,077 |   |
| Management fees                                           |       | 329,542                                              |       | 315,741                                             |       | 976,570 |   | 956,485 |   |
| Operating                                                 |       | 773,417                                              |       | 692,382                                             |       | 2,929,957 |   | 2,870,006 |   |
| Renting                                                   |       | 173,460                                              |       | 190,651                                             |       | 367,566 |   | 448,420 |   |
| Repairs and  maintenance                                  |       | 1,593,550                                            |       | 1,371,378                                           |       | 4,056,687 |   | 3,661,190 |   |
| Taxes and  insurance                                      |       | 885,277                                              |       | 861,060                                             |       | 2,639,607 |   | 2,690,951 |   |
|                                                      |       | 7,813,389                                            |       | 7,341,436                                           |       | 22,908,559 |   | 22,181,931 |   |
|                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Income Before Other  Income                               |       | 178,593                                              |       | 601,312                                             |       | 1,129,582 |   | 1,575,061 |   |
|                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Other Income (Loss)                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Interest income                                           |       | 118,909                                              |       | 58,907                                              |       | 321,686 |   | 156,815 |   |
| Income (Loss)  from investment in joint ventures          |       | 34,502                                               |       | 521,993                                             |       | (83,569 | ) | 1,189,475 |   |
|                                                      |       | 153,411                                              |       | 580,900                                             |       | 238,117 |   | 1,346,290 |   |
|                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Income from Continuing  Operations                        |       | 332,004                                              |       | 1,182,212                                           |       | 1,367,699 |   | 2,921,351 |   |
|                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Discontinued Operations                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Income (Loss)  from discontinued operations               |       | —                                               |       | 1,727                                               |       | (10,125 | ) | 6,111 |   |
| Gain on sale of  real estate from discontinued operations |       | —                                               |       | 189,670                                             |       | — |   | 5,960,033 |   |
|                                                      |       | —                                               |       | 191,397                                             |       | (10,125 | ) | 5,966,144 |   |
|                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Net Income                                                |       | $                                                    | 332,004    |                                                | $          | 1,373,609 |   | $ | 1,357,574 |   | $ | 8,887,495 |   |
|                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Income per Unit                                           |       |                                                 |       |                                                |       |   |   |   |   |
| Income before  discontinued operations                    |       | 1.91                                                 |       | 6.82                                                |       | 7.89 |   | 16.86 |   |
| Income (Loss)  from discontinued operations               |       | —                                               |       | 1.11                                                |       | (.06 | ) | 34.44 |   |
|                                                      |       | $                                                    | 1.91       |                                                | $          | 7.93 |   | $ | 7.83 |   | $ | 51.30 |   |
|                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Net Income per Unit                                       |       | $                                                    | 1.91       |                                                | $          | 7.93 |   | $ | 7.83 |   | $ | 51.30 |   |
|                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted Average Number of Units Outstanding              |       | 173,252                                              |       | 173,252                                             |       | 173,252 |   | 173,252 |   |

 

See notes to consolidated financial statements.

5

----

# **NEWENGLAND REALTY ASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES**

# **CONSOLIDATEDSTATEMENT OF CHANGES IN PARTNERS’ CAPITAL**

**(UNAUDITED**)
| ** **                                                                      | ** ** | **Limited**      | ** ** | **General**      | ** ** | ** **      | ** ** |
|---------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|-----------------|------------|
| ** **                                                                      | ** ** | **Class A** | ** ** | **Class B** | ** ** | **Partnership** | ** ** | **Total** | ** ** |
| Balance,  January 1, 2005                                                  |       | $                | 8,372,714  |             | $          | 1,991,972       |       | $ | 104,870 |   | $ | 10,469,556 |   |
|                                                                            |       |             |       |             |       |            |       |   |   |
| Distribution to  Partners                                                       |       | (2,905,929       | )          | (690,158         | )          | (36,324         | )          | (3,632,411 | ) |
|                                                                            |       |             |       |             |       |            |       |   |   |
| Net Income                                                                      |       | 7,109,996        |       | 1,688,624        |       | 88,875          |       | 8,887,495 |   |
|                                                                            |       |             |       |             |       |            |       |   |   |
| Balance, September 30,  2005                                                    |       | $                | 12,576,781 |             | $          | 2,990,438       |       | $ | 157,421 |   | $ | 15,724,640 |   |
|                                                                            |       |             |       |             |       |            |       |   |   |
| Units authorized and  Issued, net of 6,973 Treasury Units at September 30, 2005 |       | 138,602          |       | 32,918           |       | 1,732           |       | 173,252 |   |
|                                                                            |       |             |       |             |       |            |       |   |   |
| Balance, January 1,  2006                                                  |       | $                | 12,062,684 |             | $          | 2,868,340       |       | $ | 150,995 |   | $ | 15,082,019 |   |
|                                                                            |       |             |       |             |       |            |       |   |   |
| Distribution to  Partners                                                       |       | (2,905,930       | )          | (690,158         | )          | (36,324         | )          | (3,632,412 | ) |
|                                                                            |       |             |       |             |       |            |       |   |   |
| Net Income                                                                      |       | 1,086,059        |       | 257,939          |       | 13,576          |       | 1,357,574 |   |
|                                                                            |       |             |       |             |       |            |       |   |   |
| Balance, September 30,  2006                                                    |       | $                | 10,242,813 |             | $          | 2,436,121       |       | $ | 128,247 |   | $ | 12,807,181 |   |
|                                                                            |       |             |       |             |       |            |       |   |   |
| Units authorized and Issued, net of 6,973 Treasury Units at September  30, 2006 |       | 138,602          |       | 32,918           |       | 1,732           |       | 173,252 |   |

 

See notes toconsolidated financial statements

6

----

**NEW ENGLAND REALTY ASSOCIATES LIMITEDPARTNERSHIP AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(UNAUDITED)**
| ** **                                                                           | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| Cash Flows from  Operating Activities                                                |       |                                                |       |   |   |
| Net income                                                                           |       | $                                                   | 1,357,574  |   | $ | 8,887,495 |   |
|                                                                                 |       |                                                |       |   |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:   |       |                                                |       |   |   |
| Depreciation and  amortization                                                       |       | 5,127,899                                           |       | 4,764,508 |   |
| (Income) Loss  from investments in joint venture                                     |       | 83,569                                              |       | (1,189,475 | ) |
| (Gain) on sale  of rental properties                                                 |       | —                                              |       | (5,770,363 | ) |
| Change in operating assets  and liabilities                                          |       |                                                |       |   |   |
| (Increase)  Decrease in rents receivable                                             |       | (20,741                                             | )          | 14,409 |   |
| (Increase) in  financing and leasing fees                                            |       | (14,808                                             | )          | (44,854 | ) |
| (Decrease) in  accounts payable and accrued expense                                  |       | (158,931                                            | )          | (84,363 | ) |
| (Increase)  Decrease in real estate tax escrow                                       |       | (72,624                                             | )          | 28,692 |   |
| (Increase)  Decrease in prepaid expenses and other assets                            |       | 141,081                                             |       | (301,601 | ) |
| Increase  (Decrease) in advance rental payments and security deposits                |       | (98,383                                             | )          | (364,132 | ) |
|                                                                                 |       |                                                |       |   |   |
| Total Adjustments                                                                    |       | 4,987,062                                           |       | (2,947,179 | ) |
|                                                                                 |       |                                                |       |   |   |
| Net cash provided by  operating activities                                           |       | 6,344,636                                           |       | 5,940,316 |   |
|                                                                                 |       |                                                |       |   |   |
| Cash Flows (used in)  provided by Investing Activities (Investment in) joint venture |       | (900,000                                            | )          | (2,122,653 | ) |
| Purchase and  improvement of rental properties                                       |       | (1,824,264                                          | )          | (4,827,500 | ) |
| Net proceeds  from the sale of rental properties                                     |       | —                                              |       | 6,169,417 |   |
|                                                                                 |       |                                                |       |   |   |
| Net cash (used in)  provided by investing activities                                 |       | (2,724,264                                          | )          | (780,736 | ) |
|                                                                                 |       |                                                |       |   |   |
| Cash Flows (used in)  provided by Financing Activities                               |       |                                                |       |   |   |
| Proceeds of  mortgage notes payable                                                  |       | —                                              |       | 2,000,000 |   |
| Principal  payments of mortgage notes payable                                        |       | (674,185                                            | )          | (1,845,569 | ) |
| Distributions to  partners                                                           |       | (3,632,412                                          | )          | (3,632,411 | ) |
|                                                                                 |       |                                                |       |   |   |
| Net cash (used in)  financing activities                                             |       | (4,306,597                                          | )          | (3,477,980 | ) |
|                                                                                 |       |                                                |       |   |   |
| Net (Decrease) Increase  in Cash and Cash Equivalents                                |       | (686,225                                            | )          | 1,681,600 |   |
| Cash and Cash  Equivalents, at beginning of period                                   |       | 12,049,392                                          |       | 9,862,810 |   |
|                                                                                 |       |                                                |       |   |   |
| Cash and Cash Equivalents, at end of period                                          |       | $                                                   | 11,363,167 |   | $ | 11,544,410 |   |

 

See notes toconsolidated financial statements.

7

----

**NEW ENGLAND REALTYASSOCIATES LIMITED PARTNERSHIP AND SUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS SEPTEMBER 30, 2006**

**NOTE1. SIGNIFICANT ACCOUNTING POLICIES**

*Lineof Business:*   NewEngland Realty Associates Limited Partnership (“NERA” or the “Partnership”) wasorganized in Massachusetts in 1977. NERA and its subsidiaries own and operatevarious residential apartment buildings, condominium units and commercialproperties located in Massachusetts and New Hampshire. NERA has also madeinvestments in other real estate partnerships and has participated in otherreal estate-related activities, primarily located in Massachusetts. Inconnection with the mortgages referred to in Note 5, a substantial numberof NERA’s properties are owned by separate subsidiaries without any change inthe historical cost basis.

*Principlesof Consolidation:*   The consolidated financialstatements include the accounts of NERA and its subsidiaries. NERA has a 99.67%to 100% ownership interest in each subsidiary except for six limited liabilitycompanies (the “Investment Properties”) in which the Partnership has a 50%ownership interest. The consolidated group is referred to as the“Partnerships.” Minority interests are not recorded, since they areinsignificant. All significant intercompany accounts and transactions areeliminated in consolidation. The Partnership accounts for its investment in theabove-mentioned limited liability companies using the equity method ofconsolidation. (See Note 14 for information on the Investment Properties).

*AccountingEstimates:*   The preparation of the financialstatements, in conformity with accounting principles generally accepted in theUnited State of America, requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosures ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reported period.Accordingly, actual results could differ from those estimates.

*RevenueRecognition:*   Rental income from residential andcommercial properties is recognized over the term of the related lease. Amounts60 days in arrears are charged against income. Certain leases of thecommercial properties provide for increasing stepped minimum rents, which areaccounted for on a straight-line basis over the term of the lease.

*RentalProperties:*   Rental properties are stated at costless accumulated depreciation. Maintenance and repairs are charged to expenseas incurred; improvements and additions are capitalized. When assets areretired or otherwise disposed of, the cost of the asset and related accumulateddepreciation is eliminated from the accounts, and any gain or loss on suchdisposition is included in income. Fully depreciated assets are removed fromthe accounts. Rental properties are depreciated by both straight-line andaccelerated methods over their estimated useful lives.

In the event that facts and circumstances indicatethat the carrying value of a rental property may be impaired, an analysis of  the value is prepared. The estimated futureundiscounted cash flows are compared to the asset’s carrying value to determineif a write-down to fair value is required.

*Financingand Leasing Fees:*   Financing fees are capitalizedand amortized, using the interest method, over the life of the relatedmortgages. Leasing fees are capitalized and amortized on a straight-line basisover the life of the related lease. Unamortized balances are expensed when thecorresponding fee is no longer applicable.

*IncomeTaxes:*   The financial statements have beenprepared on the basis that NERA and its subsidiaries are entitled to taxtreatment as partnerships. Accordingly, no provision for income taxes has beenrecorded.

*CashEquivalents:*   The Partnership considers cash equivalentsto be all highly liquid instruments purchased with a maturity of three monthsor less.

8

----

*SegmentReporting:*   Operating segments are revenue-producingcomponents of the Partnership for which separate financial information isproduced internally for management. Under the definition, NERA operated, forall periods presented, as one segment.

*ComprehensiveIncome:*   Comprehensive income is defined aschanges in partners’ equity, exclusive of transactions with owners (such ascapital contributions and dividends). NERA did not have any comprehensiveincome items in 2006 or 2005 other than net income as reported.

*IncomePer Unit:*   Net income per unit has beencalculated based upon the weighted average number of units outstanding duringeach year presented. The Partnership has no dilutive units and, therefore,basic net income is the same as diluted net income per unit (see Note 7).

*Concentrationof Credit Risks and Financial Instruments:*   The Partnership’s properties arelocated in New England, and the Partnership is subject to the general economicrisks related thereto. No single tenant accounted for more than 5% of thePartnership’s revenues in 2006 or 2005. The Partnership makes its temporarycash investments with high-credit-quality financial institutions. At September30, 2006, substantially all of the Partnership’s cash and cash equivalents wereheld in interest-bearing accounts at financial institutions, earninginterest at rates from 0.10% to 5.16%. At September 30, 2006 and December 31, 2005, approximately $12,000,000of cash and cash equivalents, and cash included in prepaid expenses and otherassets exceeded federally insured amounts.

*Advertising Expense:*   Advertising is expensed as incurred. Advertisingexpense was $85,922 and $101,497 for the nine months ended September 30, 2006and 2005, respectively.

*Discontinued Operations and Rental Property Held forSale:*   Whenassets are identified by management as held for sale, the Partnershipdiscontinues depreciating the assets and estimates the sales price, net ofselling costs, of such assets. If, in management’s opinion, the net sales priceof the assets which have been identified as held for sale is less than the netbook of the assets, a valuation allowance is established. Properties identifiedas held for sale and/or sold are presented in discontinued operations for allperiods presented.

If circumstances arise that previously were consideredunlikely and, as a result, the Partnership decides not to sell a propertypreviously classified as held for sale, the property is reclassified as heldand used. A property that is reclassified is measured and recorded individuallyat the lower of (a) its carrying amount before the property was classifiedas held for sale, adjusted for any depreciation (amortization) expense thatwould have been recognized had the property been continuously classified asheld and used, or (b) the fair value at the date of the subsequentdecision not to sell.

*InterestCapitalized:*   The Company follows the policy ofcapitalizing interest as a component of the cost of rental property when thetime of construction exceeds one year. During the nine months ended September30, 2006 and the year ended December 31, 2005, there was no capitalizedinterest.

*Reclassifications:*   Certainreclassifications have been made to prior period amounts in order to conformwith current period presentation.

**NOTE2. RENTAL PROPERTIES**

As of September 30, 2006, the Partnership and itsSubsidiary Partnerships owned 2,378 residential apartment units in 22residential and mixed-use complexes (collectively, the “Apartment Complexes”).The Partnership also owns 24 condominium units in 2 residential condominiumcomplexes, all of which are leased to residential tenants (collectivelyreferred to as the “Condominium Units”). The Apartment Complexes andCondominium Units are located primarily in the metropolitan Boston area ofMassachusetts.

Additionally, as of September 30, 2006, the Subsidiary Partnerships owned a commercialshopping center in Framingham, Massachusetts and mixed-use properties inBoston, Brockton and Newton, Massachusetts. These properties are referred tocollectively as the “Commercial Properties.”

9

----

Additionally, as of September 30, 2006, the Partnershipowned a 50% ownership interest in six residential and mixed use complexes (the“Investment Properties”) with a total of 518 units, accounted for using theequity method of consolidation. See Note 14 for summary information onthese investments.

On June 30, 2003, the Partnership purchased fivecondominium units from a group of investors who are also affiliated with thePartnership. The total purchase price for the five units was $2,421,286,including closing costs. The Partnership obtained a $1,600,000 mortgage onthese condominiums. The original mortgage of $1,600,000 has been extended toAugust 2009.  The mortgage rate of 6.5%is fixed for three years. The costs associated with this financing isapproximately $8,000. The majority owner of the General Partner has agreed toindemnify the Partnership for any losses incurred from the sale of any of theseunits through the new or extended maturity date of the mortgage.  See Note 3 for a discussion of certainrelated parties associated with this acquisition.

See Note 3 for a description of the sale of Middlesexto the majority shareholder of the management company.

Rental properties consist of the following:
| ** **                           | ** ** | **September  30, 2006** | ** ** | **December 31, 2005** | ** ** | **Useful Life** | ** ** |
|--------------------------------------|------------|------------------------------|------------|---------------------------------|------------|----------------------|------------|
| Land, improvements and  parking lots |       | $                            | 23,200,659 |                            | $          | 23,187,429           |       | 10-31 years |   |
| Buildings and  improvements          |       | 105,590,888                  |       | 105,416,158                     |       | 15-31 years          |       |
| Kitchen cabinets                     |       | 4,359,732                    |       | 3,821,968                       |       | 5-10 years           |       |
| Carpets                              |       | 3,709,027                    |       | 3,179,205                       |       | 5-10 years           |       |
| Air conditioning                     |       | 840,557                      |       | 734,154                         |       | 7-10 years           |       |
| Laundry equipment                    |       | 191,235                      |       | 182,855                         |       | 5-7 years            |       |
| Elevators                            |       | 735,364                      |       | 725,882                         |       | 20 years             |       |
| Swimming pools                       |       | 147,082                      |       | 142,428                         |       | 10 years             |       |
| Equipment                            |       | 1,721,907                    |       | 1,489,966                       |       | 5-7 years            |       |
| Motor vehicles                       |       | 119,076                      |       | 119,076                         |       | 5 years              |       |
| Fences                               |       | 269,659                      |       | 265,209                         |       | 5-10 years           |       |
| Furniture and fixtures               |       | 4,437,578                    |       | 4,279,508                       |       | 5-7 years            |       |
| Smoke alarms                         |       | 164,073                      |       | 118,734                         |       | 5-7 years            |       |
|                                 |       | 145,486,837                  |       | 143,662,572                     |       |                 |       |
| Less accumulated  depreciation       |       | 46,495,896                   |       | 41,453,011                      |       |                 |       |
|                                 |       | $                            | 98,990,941 |                            | $          | 102,209,561          |       |   |   |

 

**NOTE 3. RELATED PARTYTRANSACTIONS**

The Partnership’s properties are managed by an entitythat is owned by the majority shareholder of the General Partner. Themanagement fee is equal to 4% of rental revenue and laundry income. Total feespaid were approximately $977,000 and $956,000 for the nine months endedSeptember 2006 and 2005, respectively.

The Partnership Agreement permits the General Partneror management company to charge the costs of professional services (such ascounsel, accountants and contractors) to NERA. In the nine months endedSeptember 30, 2006 and 2005, approximately $275,000 and $363,000, respectively,was charged to NERA for legal, construction, maintenance, rental andarchitectural services and supervision of capital improvements. Of the 2006expenses referred to above, approximately $152,000 consisted of repairs andmaintenance and $111,000 of administrative expense. Approximately $12,000 ofexpenses for construction, architectural services and supervision of capitalprojects was capitalized in rental properties.

Additionally in 2006, the Hamilton Company receivedapproximately $862,000 from the Investment Properties of which approximately$208,000 was the management fee, $220,000 for construction costs, $20,000 wasfor construction supervision and architectural fees, $404,000 was formaintenance services and $9,000 was for administrative services.  The Hamilton Company legal department acts asclosing attorney on certain condo sales receiving approximately $78,000 duringthe nine months ended September 30, 2006. As more fully described in

10

----

Note 14, an entitypartially owned by the majority shareholder of the General Partner is the salesagent for certain condominium sales receiving approximately $187,000 ofcommissions through September 30, 2006.

On January 1, 2004, all employees weretransferred to the management company’s payroll. The Partnership reimburses themanagement company for the payroll and related expenses of the employeesdirectly employed by the properties. Total reimbursement was approximately$2,073,000 for the nine months ended September 30, 2006.

In 1996, prior to becoming an employee and Presidentof the management company, the current President of the management companyperformed asset management consulting services to the Partnership. Thisindividual continues to perform this service and receives an asset managementfee from the Partnership, receiving $37,500 during the nine months endedSeptember 30, 2006, and $50,000 for the year ended December 31, 2005.

The Partnership has invested in six limited liabilitycompanies to purchase six residential apartment complexes (the “InvestmentProperties”). The Partnership owns 50% of each entity, the majority shareholderof the General Partner owns between 43.2% and 47.5% and the President ofHamilton owns between 2.5% and 4.5%, and five other management employees ofHamilton own collectively between 0% and 2.3% respectively. See Note 14for a description of the properties and their operations.

On June 30, 2003, the Partnership purchased fivecondominium units in a 42-unit building located in Brookline,Massachusetts. These were purchased from Harvard 45 Associates LLC (“Harvard45”) which is owned 70% by the 75% shareholder and treasurer of the GeneralPartner, and 5% by the President of Hamilton. The total purchase price forthese condominiums was approximately $2,416,000 and was approved both by thePartnership’s Advisory Committee and the General Partner. Harvard 45 realized again of approximately $648,000 from these sales. Harvard 45 also sold 16 unitsto unrelated parties; the prices for all 21 units sold were comparable. Themajority shareholder of the general partner has guaranteed the $1,600,000mortgage for these five units. The original mortgage of $1,600,000 has beenextended to August 2009.  Themortgage rate of 6.5% is fixed for three yeare and the costs associated withthis extension is approximately $8,000.

The above 42-unit condominium building ismanaged by an entity wholly owned by the 25% shareholder and President of theGeneral Partner. That entity will receive annual management fees from the fiveunits of approximately $1,500, and Hamilton will reduce its management fees toapproximately 2%, so that the total management fee will not exceed the 4%allowed by the Partnership’s Partnership Agreement.

In March 2005, the Partnership sold the MiddlesexApartments to an entity wholly owned by the majority shareholder of the GeneralPartner. The selling price was $6,500,000 which resulted in a capital gain forthe Partnership of approximately $5,800,000 and an increase in thePartnership’s cash reserves of approximately $4,800,000 after payment off theexisting $1,300,000 mortgage, prepayment penalties and other selling expenses.The buyer is selling the property as condominium units. An entity 31% owned by themajority shareholder of the General Partner and 5% owned by the President ofthe management company is the sales agent and will receive a variablecommission of 3% to 5% on each sale. Total commissions paid to date areapproximately $138,000. Although the buyer is assuming the costs and economicrisks of converting and selling the condominium units, if the net gains fromthe sale of these units exceed $500,000, the excess will be split equallybetween the buyer and the Partnership. The buyer estimated that the gain fromthe sale of these units would exceed $500,000 and an additional profit of$189,670 was recognized at December 31, 2005.

**NOTE 4. OTHER ASSETS**

Included in prepaid expenses and other assets atSeptember 30, 2006 and December 31, 2005 is approximately $419,000 and$313,000, respectively, held in escrow to fund future capital improvements.

Financing and leasing fees of $498,415 and $568,622are net of accumulated amortization of $493,290 and $443,417 at September 30,2006 and December 31, 2005, respectively.

11

----

**NOTE 5. MORTGAGENOTES PAYABLE**

At September 30, 2006 and December 31, 2005, themortgages payable consisted of various loans, all of which were secured byfirst mortgages on properties referred to in Note 2. At September 30,2006, the fixed interest rates on these loans ranged from 4.84% to 8.46%,payable in monthly installments aggregating approximately $704,000, includinginterest, to various dates through 2016. The majority of the mortgages aresubject to prepayment penalties. At September 30, 2006, the weighted averageinterest rate on the above mortgages was 6.63%. The effective rate of 6.72%includes the amortization expense of deferred financing costs. See Note 12for fair value information.

The Partnerships have pledged tenant leases asadditional collateral for certain of these loans.

Approximate annualmaturities at September 30, 2006 are as follows:

| 2007- current  maturities |   | $          | 1,036,000   |   |
|---------------------------|--------|------------|-------------|--------|
| 2008                      |   | 5,702,000  |        |
| 2009                      |   | 2,770,000  |        |
| 2010                      |   | 41,796,000 |        |
| 2011                      |   | 3,114,000  |        |
| Thereafter                |   | 60,493,000 |        |
|                      |   | $          | 114,911,000 |   |

 

The above schedule reflects the extension to August2009 the $1,600,000 mortgage on the Harvard Street condominiums.

In January 2005, the Partnership obtained amortgage on the Courtyard at Westgate for $2,000,000 at an interest rate of5.25%. These funds were added to cash reserves. The loan requires interest-onlypayments through December 2014, when the entire balance is due.

**NOTE 6. ADVANCERENTAL PAYMENTS AND SECURITY DEPOSITS**

The Partnership’s residential lease agreements mayrequire tenants to maintain a one-month advance rental payment and/or asecurity deposit. At September 30, 2006, amounts received for prepaid rents ofapproximately $1,471,000 are included in cash and cash equivalents; securitydeposits of approximately $1,112,000 are included with other assets.

**NOTE 7.  PARTNERS’ CAPITAL**

The Partnership has two classes of Limited Partners(Class A and B) and one category of General Partner. Under the terms ofthe Partnership Agreement, Class B Units and General Partnership Unitsmust represent 19% and 1%, respectively, of the total units outstanding. Allclasses have equal profit sharing and distribution rights, in proportion totheir ownership interests.

In 2006, the Partnership approved quarterlydistributions of $7.00 per unit ($.70 per receipt) payable on March 31, June30, and September 30, 2006. 

The Partnership paid quarterly distributions of $7.00per unit ($.70 per receipt) in March, June, September andDecember 31, 2005 for a total distribution of $28.00 per unit ($2.80 perreceipt).

12

----

The Partnershiphas entered into a deposit agreement with an agent to facilitate public tradingof limited partners’ interests in Class A Units. Under the terms of thisagreement, the holders of Class A Units have the right to exchange eachClass A Unit for 10 Depositary Receipts. The following is information perDepositary Receipt:

|                                                                  | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                       | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| Income per Depositary  Receipt before Discontinued Operations    |       | $                                                   | 0.79       |   | $ | 1.69 |   |
| Income (loss) from  Discontinued Operations                      |       | (0.01                                               | )          | 3.44 |   |
| Net Income per  Depositary Receipt after Discontinued Operations |       | $                                                   | 0.78       |   | $ | 5.13 |   |
| Distributions per Depositary Receipt                             |       | $                                                   | 2.10       |   | $ | 2.10 |   |

 

**NOTE 8. TREASURY UNITS**

Treasury units atSeptember 30, 2006 are as follows:

| Class A        |   | 5,681 |   |
|---------------------|--------|-------|--------|
| Class B        |   | 1,228 |   |
| General Partnership |   | 64    |   |
|                |   | 6,973 |   |

 

**NOTE 9.COMMITMENTS AND CONTINGENCIES**

From time to time, the Partnerships are involved invarious ordinary routine litigation incidental to their business. ThePartnership either has insurance coverage or has provided for any uninsuredclaims which, in the aggregate, are not significant. The Partnerships are notinvolved in any material pending legal proceedings.

**NOTE 10. RENTALINCOME**

During the ninemonths ended September 30, 2006, approximately 93% of rental income was relatedto residential apartments and condominium units with leases of one year orless. The remaining 7% was related to commercial properties, which have minimumfuture annual rental income on noncancellable operating leases at September 30,2006 as follows:

|            | ** ** | **Commercial  Property  Leases** | ** ** |
|------------|------------|----------------------------------|------------|
| 2007       |       | $                                | 1,806,000  |   |
| 2008       |       | 1,749,000                        |       |
| 2009       |       | 1,606,000                        |       |
| 2010       |       | 1,207,000                        |       |
| 2011       |       | 1,010,000                        |       |
| Thereafter |       | 3,268,000                        |       |
|       |       | $                                | 10,646,000 |   |

 

The aggregate minimum future rental income does notinclude contingent rentals that may be received under various leases inconnection with percentage rents, common area charges and real estate taxes.Aggregate contingent rentals from continuing operations were approximately$291,000 for the nine months ended September 30, 2006 and $394,000 for the yearended December 31, 2005.

Rents receivable are net of allowances for doubtfulaccounts of $581,856 and $284,005 at September 30, 2006 and December 31,2005, respectively. Included in rents receivable is approximately $369,000resulting from recognizing rental income from non-cancelable commercial leaseswith future rental increases on a straight-line basis. The majority of this amountis for a long-term lease with Staples at Staples Plaza in Framingham,Massachusetts.

13

----

**NOTE 11. CASH FLOW INFORMATION**

During the nine months ended September 30, 2006 and2005, cash paid for interest was $5,791,671 and $5,851,573 respectively.

**NOTE 12. FAIR VALUEOF FINANCIAL INSTRUMENTS**

The following methods and assumptions were used by thePartnership in estimating the fair value of its financial instruments:

·              For cash and cash equivalents,other assets, investment in partnerships, accounts payable, advance rents andsecurity deposits: fair value approximates the carrying value of such assetsand liabilities.

·              For mortgage notes payable: fairvalue is generally based on estimated future cash flows, which are discountedusing the quoted market rate from an independent source for similarobligations. Refer to the table below for the carrying amount and estimatedfair value of such instruments.

|                            | ** ** | **Carrying  Amount** | ** **  | **Estimated  Fair Value** | ** ** |
|----------------------------|------------|----------------------|-------------|--------------------------------|------------|
| Mortgage Notes Payable     |       |                 |        |                           |       |
| At September 30,  2006     |       | $                    | 114,911,056 |                           | $          | 118,127,325 |   |
| At December 31,  2005 |       | $                    | 115,585,241 |                           | $          | 119,817,130 |   |

 

Disclosure about fair value of financial instrumentsis based on pertinent information available to management as of  September 30, 2006 and December 31,2005. Although management is not aware of any factors that would significantlyaffect the fair value amounts, such amounts have not been comprehensivelyrevalued for purposes of these financial statements since December 31,2005 and current estimates of fair value may differ significantly from theamounts presented herein.

**NOTE 13. TAXABLEINCOME AND TAX BASIS**

Taxable income reportable by the Partnership andincludable in its partner’s tax returns is different than financial statementincome because of accelerated depreciation, different tax lives, and timingdifferences related to prepaid rents and allowances. Taxable income isapproximately $650,000 greater than statement income for the nine months endedSeptember 30, 2006 and approximately $13,000 less than statement income for theyear ended December 31, 2005. The cumulative tax basis of thePartnership’s real estate at September 30, 2006 is approximately $1,060,000greater than the statement basis. The Partnership’s tax basis in its jointventure investments is approximately $380,000 less than statement basis. Thedepreciation rules that generated substantial tax deductions in 2004 and2003 expired in 2004, accordingly taxable income in future years may exceedstatement income.

**NOTE 14—INVESTMENTIN PARTNERSHIPS**

Since November 2001, the Partnership has investedin six limited partnerships, each of which has invested primarily inresidential apartment complexes. The Partnership has a 50% ownership interestin each investment. The other investors are Harold Brown,  the President of the management company andfive other employees of the management company. Harold Brown’s ownershipinterest is between 43.2% and 47.5%, with the balance of 6.8% and 2.5% owned byothers. A description of each investment is as follows:

On March 7, 2005, the Partnership invested$2,000,000 for a 50% ownership interest in a building comprising 49 apartments,one commercial space and a 50-car surface parking lot located in Boston,Massachusetts. The purchase price was $14,300,000, and a $10,750,000 30-monthmortgage with a floating interest rate (7.38%) of 2% over the 30 day LiborIndex (5.38% at September 30, 2006) was obtained to finance this acquisition.The Partnership plans to operate the building and initiate development of theparking lot. The plan may also include disposition of selected units, ascondominiums in order to reduce the above mentioned mortgage. Any profits from

14

----

the condominium saleswill be taxed at ordinary rates. Mr. Brown has guaranteed 25% of thismortgage until such time as $2,687,500 of principal has been paid. ThePartnership and the other investor have, in turn agreed to indemnifyMr. Brown for their proportional share of any losses incurred by thisguarantee. This investment is referred to as Essex Street.

OnMarch 2, 2005, the Partnership invested $2,352,000 for a 50% ownershipinterest in a 176-unit apartment complex with an additional smallcommercial building located in Quincy, Massachusetts. The purchase price was$23,750,000, and a $19,200,000 30-month mortgage with a floating interestrate (7.38%) of 2% over the 30 day Libor Index (5.38% at September 30, 2006)was obtained to finance this acquisition. The Partnership plans to sell themajority of units as condominiums and retain 48 units for long-term investment.The proceeds from the condominium sales will primarily be used to reduce theabove-mentioned mortgage. Harold Brown has guaranteed 30% of this mortgageuntil such time as $9,950,000 of principal has been paid. The Partnership andthe other investors have, in turn agreed to indemnify Mr. Brown theirproportionate share of any losses incurred by this guarantee. The Partnershipis obtaining a new 10 year mortgage in the amount of $5,000,000 on the units tobe retained by the Partnership.  Theinterest on the new loan is 5.67% fixed for the 10 year term with interest onlypayments for five years and amortized over a 30 year period for the balance ofthe loan term.  The closing costsassociated with the new mortgage will be approximately $20,000 which will beamortized over the 10 year term.  Theloan is due in 2016 and will close in the fourth quarter of 2006.  As of October 24, 2006, 106 units have been sold, and 3 units have a signedpurchase and sales agreement. Gains from the sales of units (approximately $55,000per unit) will be taxed at ordinary income rates. This investment is referredto as 1025 Hamilton.

OnOctober 3, 2005, the Partnership invested $2,500,000 for a 50% ownershipinterest in a 168-unit apartment complex in Quincy, Massachusetts. Thepurchase price was $30,875,000 and a $26,165,127 30-month mortgage with afloating interest rate (7.38%) of 2% over the 30 day Libor Index (5.38% atSeptember 30, 2006) was obtained to finance this acquisition. The Partnershipplans to sell the majority of units as condominium and retain 48 units forlong-term investment. The proceeds from the condominium sales are primarily tobe used to reduce the above-mentioned mortgage. Gains from the sales of unitswill be taxed at ordinary income rates (approximately $51,000 per unit). As ofOctober 24, 2006, 44 units have been sold and an additional 9 units have asigned purchase and sales agreement. This investment is referred to as HamiltonBay.

InSeptember 2004, the Partnership invested approximately $5,075,000 for a 50%ownership interest in a 42-unit apartment complex located in Lexington,Massachusetts. The purchase price was $10,100,000. In October 2004, thePartnership obtained a mortgage on the property in the amount of $8,025,000 andreturned $3,775,000 to the Partnership. The Partnership is obtaining a new 10year mortgage in the amount of $5,500,000. The interest on the new loan is 5.67% fixed for the 10 year term withinterest only payments for five years and amortized over a 30 year period forthe balance of the loan.  This new loanwill require a cash contribution by the Partnership of $1,250,000.  The closing costs associated with the newmortgage will be approximately $20,000 which will be amortized over the 10 yearterm.  The unamortized deferred financingcosts of $30,000 will be written off in the fourth quarter of 2006.  This investment is referred to as HamiltonMinuteman.

InAugust 2004, the Partnership invested $8,000,000 for a 50% ownershipinterest in a 280-unit apartment complex located in Watertown,Massachusetts. The total purchase price was $56,000,000. The Partnership plansto sell, over time, three buildings with a total of 137 units as condominiumscommencing in January 2005. As of October 24, 2006, 90 units have been sold and an additional 3 units wereunder contract. Gains from these sales will be taxed as ordinary income(approximately $60,000 per unit.)  Themajority of the sales proceeds will be used to reduce the mortgage. An entitypartially owned by the majority shareholder of the General Partner and thePresident of the management company, 31% and 5% respectively, is the salesagent and will receive a variable commission on each sale of 3% to 5%. Thisinvestment is referred to as Hamilton Place.

In2005, Hamilton Place obtained a new 10 year mortgage on the three buildings tobe retained.  The new mortgage is$16,825,000, with interest only of 5.18% for 3 years and amortizing on a 30year schedule for the remaining 7 years when the balance is due. The netproceeds after funding escrow accounts and closing costs on the new mortgagewere approximately $16,700,000, which were used to reduce the existingmortgage. Hamilton Place paid a fee of approximately $400,000 in connectionwith this early extinguishment of debt.

InNovember 2001, the Partnership formed a limited liability company topurchase a 40-unit apartment building in Cambridge, Massachusetts. Thisproperty has a 12-year mortgage, which is amortized on a 30-yearschedule, with

15

----

a finalpayment of approximately $6,000,000 in 2014. The Partnership is a 50% owner in this investment and is referred to asFranklin Street.

Commencingin 2005, the mortgages on Hamilton Place and Hamilton Minuteman require minimumprincipal payments (“Curtailment Payments”) and additional investment by thePartnership will be required if the proceeds from sales cannot provide forthese payments.   See Note 17 –Subsequent Events for additional disclosures relating to new mortgages onHamilton Place and 1025 Hamilton.

As required by the lender for the 2004 and 2005acquisitions, the Treasurer of the General Partner has provided a limitedrepayment guaranty equal to fifty percent (50%) of the outstanding balance,reducing to zero percent (0%) upon the completion of the Curtailment Payments.In the event that he is obligated to make payments to the lender as a result ofthis guaranty, the Partnership and other investors have, in turn, agreed toindemnify him for their proportionate share of any such payments.

 

**Summary financial information for the nine monthsended September 30, 2006 (unaudited)**

 
| ** **                                                     | ** ** | **Franklin  Street** | ** ** | **Hamilton  Place** | ** ** | **Hamilton  Place** | ** ** | **Hamilton  Minuteman** | ** ** | **Essex 81** | ** ** | **1025  Hamilton** | ** ** | **Hamilton  Bay** | ** ** | ** **  | ** ** |
|----------------------------------------------------------------|------------|----------------------|------------|---------------------|------------|---------------------|------------|-------------------------|------------|-------------------|------------|--------------------|------------|-------------------|------------|-------------|------------|
| **Acquisition Date**                                      | ** ** | **November  2001**   | ** ** | **August  2004**    | ** ** | **August  2004**    | ** ** | **August  2004**        | ** ** | **March  2005**   | ** ** | **March  2005**    | ** ** | **October  2005** | ** ** | **Total**   | ** ** |
| Property assets — net                                     |       | 9,676,213            |       | 26,923,317          |       | 9,527,795           |       | 9,194,086               |       | 13,986,133        |       | 9,529,866          |       | 22,771,436        |       | 101,608,846 |       |
| Mortgages payable                                              |       | 7,738,220            |       | 16,825,000          |       | 3,279,769           |       | 7,941,811               |       | 10,750,000        |       | 4,989,861          |       | 16,683,822        |       | 68,208,483  |       |
| Total Equity                                                   |       | 1,872,658            |       | 13,376,940          |       | 3,759,650           |       | 1,323,350               |       | 3,295,934         |       | 4,685,846          |       | 5,994,148         |       | 34,308,526  |       |
| NERA — 50% equity                                         |       | 936,329              |       | 6,688,470           |       | 1,879,825           |       | 661,675                 |       | 1,647,967         |       | 2,342,923          |       | 2,997,074         |       | 17,154,263  |       |
| Summary income  statement:                                     |       |                 |       |                |       |                |       |                    |       |              |       |               |       |              |       |        |       |
| Rental income                                                  |       | 753,522              |       | 1,779,647           |       | 469,576             |       | 527,999                 |       | 1,077,768         |       | 705,018            |       | 1,352,260         |       | 6,665,790   |       |
| Operating expenses                                             |       | 229,665              |       | 824,214             |       | 464,770             |       | 164,858                 |       | 382,916           |       | 671,543            |       | 1,220,619         |       | 3,958,585   |       |
| Management fees                                                |       | 31,449               |       | 71,452              |       | 4,573               |       | 21,449                  |       | 43,639            |       | 10,785             |       | 25,041            |       | 208,388     |       |
| Interest expense                                               |       | 405,374              |       | 663,584             |       | 363,624             |       | 428,502                 |       | 584,599           |       | 386,772            |       | 1,202,106         |       | 4,034,561   |       |
| Depreciation &  amortization                          |       | 268,170              |       | 1,119,277           |       | 365,636             |       | 410,506                 |       | 333,243           |       | 381,824            |       | 814,975           |       | 3,693,631   |       |
| Financing expense                                              |       | —               |       | —              |       | —              |       | —                  |       | —            |       | —             |       | —            |       | —      |       |
| Gain on sale of  condominiums                                  |       | —               |       | —              |       | 1,493,198           |       | —                  |       | —            |       | 1,305,886          |       | 2,263,152         |       | 5,062,236   |       |
| Net profit (loss)                                              |       | (181,136             | )          | (898,880            | )          | 764,171             |       | (497,316                | )          | (266,629          | )          | 559,980            |       | 352,671           |       | (167,139    | )          |
| NERA — 50%                                                |       | (90,568              | )          | (449,440            | )          | 382,085             |       | (248,658                | )          | (133,314          | )          | 279,990            |       | 176,336           |       | (83,569     | )          |
| Total units/  condominiums                                     |       | 40                   |       | 146                 |       | 137                 |       | 42                      |       | 49                |       | 176                |       | 168               |       | 758         |       |
| Units to be retained                                           |       | 40                   |       | 146                 |       | 0                   |       | 42                      |       | 49                |       | 49                 |       | 48                |       | 374         |       |
| Units to be sold                                               |       | 0                    |       | 0                   |       | 137                 |       | 0                       |       | 0                 |       | 127                |       | 120               |       | 384         |       |
| Units sold through Oct.  24, 2006                              |       | 0                    |       | 0                   |       | 90                  |       | 0                       |       | 0                 |       | 106                |       | 44                |       | 240         |       |
| Balance of unsold units                                        |       | 0                    |       | 0                   |       | 47                  |       | 0                       |       | 0                 |       | 21                 |       | 76                |       | 144         |       |
| Unsold units with deposits for future sale as of Oct. 24, 2006 |       | 0                    |       | 0                   |       | 3                   |       | 0                       |       | 0                 |       | 3                  |       | 9                 |       | 15          |       |

** **

**Summary financial information for the three monthsended September 30, 2006 (unaudited)**

** **
| ** **                            | ** ** | **Franklin  Street** | ** ** | **Hamilton  Place** | ** ** | **Hamilton  Place** | ** ** | **Hamilton  Minuteman** | ** ** | **Essex 81** | ** ** | **1025  Hamilton** | ** ** | **Hamilton  Bay** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|----------------------|------------|---------------------|------------|---------------------|------------|-------------------------|------------|-------------------|------------|--------------------|------------|-------------------|------------|-----------|------------|
| Summary income  statement:            |       |                 |       |                |       |                |       |                    |       |              |       |               |       |              |       |      |       |
| Rental income                         |       | 250,572              |       | 592,537             |       | 127,444             |       | 178,311                 |       | 351,963           |       | 243,721            |       | 412,599           |       | 2,157,147 |       |
| Operating expenses                    |       | 94,740               |       | 287,579             |       | 143,479             |       | 57,673                  |       | 137,609           |       | 162,428            |       | 358,811           |       | 1,242,319 |       |
| Management fees                       |       | 11,017               |       | 24,356              |       | 1,309               |       | 7,243                   |       | 16,427            |       | 3,757              |       | 5,732             |       | 69,841    |       |
| Interest expense                      |       | 134,594              |       | 223,619             |       | 84,812              |       | 152,164                 |       | 206,506           |       | 108,174            |       | 361,085           |       | 1,270,954 |       |
| Depreciation &  amortization |       | 90,011               |       | 376,096             |       | 121,878             |       | 134,847                 |       | 111,889           |       | 111,693            |       | 270,732           |       | 1,217,146 |       |
| Financing expense                     |       | —               |       | —              |       | —              |       | —                  |       | —            |       | —             |       | —            |       | —    |       |
| Gain on sale of  condominiums         |       | —               |       | —              |       | 659,608             |       | —                  |       | —            |       | 308,150            |       | 744,360           |       | 1,712,118 |       |
| Net profit (loss)                     |       | (79,790              | )          | (319,113            | )          | 435,574             |       | (173,616                | )          | (120,468          | )          | 165,819            |       | 160,599           |       | 69,005    |       |
| NERA — 50%                       |       | (39,895              | )          | (159,557            | )          | 217,787             |       | (86,808                 | )          | (60,234           | )          | 82,910             |       | 80,300            |       | 34,503    |       |

** **

16

----

** **

**Future annual mortgage maturities at September 30,2006 are as follows:**
| ** **        | ** ** | **Franklin  Street** | ** ** | **Hamilton  Place** | ** ** | **Hamilton  Place** | ** ** | **Hamilton(1)  Minuteman** | ** ** | **Essex 81** | ** ** | **1025(1)  Hamilton** | ** ** | **Hamilton  Bay** | ** ** | **Total**  | ** ** |
|-------------------|------------|----------------------|------------|---------------------|------------|---------------------|------------|----------------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|------------|------------|
| **Period Ended:** | ** ** | ** **           | ** ** | ** **          | ** ** | ** **          | ** ** | ** **                 | ** ** | ** **        | ** ** | ** **            | ** ** | ** **        | ** ** | ** ** | ** ** |
| June 30, 2007     |       | 117,723              |       | 0                   |       | 3,279,769           |       | 2,441,811                  |       | 10,750,000        |       | 0                     |       | 16,683,822        |       | 33,273,125 |       |
| June 30, 2008     |       | 126,108              |       | 118,587             |       | 0                   |       | 0                          |       | 0                 |       | 0                     |       | 0                 |       | 244,695    |       |
| June 30, 2009     |       | 135,090              |       | 246,569             |       | 0                   |       | 0                          |       | 0                 |       | 0                     |       | 0                 |       | 381,659    |       |
| June 30, 2010     |       | 144,711              |       | 259,649             |       | 0                   |       | 0                          |       | 0                 |       | 0                     |       | 0                 |       | 404,360    |       |
| June 30, 2011     |       | 155,018              |       | 273,423             |       | 0                   |       | 0                          |       | 0                 |       | 0                     |       | 0                 |       | 428,441    |       |
| Thereafter        |       | 7,059,570            |       | 15,926,772          |       | 0                   |       | 5,500,000                  |       | 0                 |       | 4,989,861             |       | 0                 |       | 33,476,203 |       |
|              |       | 7,738,220            |       | 16,825,000          |       | 3,279,769           |       | 7,941,811                  |       | 10,750,000        |       | 4,989,861             |       | 16,683,822        |       | 68,208,483 |       |

 

----

(1) The mortgage maturities for Hamilton Minuteman and1025 Hamilton have been adjusted to reflect the refinancings to be completed inthe fourth quarter of 2006.  See Note 17to the Financial Statements. 

Interest rates, the majority of which are variable,range from 5.18% to 7.48% at September 30, 2006.

**NOTE 15. NEWACCOUNTING PRONOUNCEMENTS**

**Recent Accounting Pronouncements**

In September 2006, the FASB issued SFAS No. 157,“*Fair Value Measurements.*” SFAS 157defines fair value, establishes a framework for measuring fair value in GAAPand expands disclosures about fair value measurements. SFAS 157 appliesunder other accounting pronouncements that require or permit fair valuemeasurements, the FASB having previously concluded in those accountingpronouncements that fair value is the relevant measurement attribute.Accordingly, SFAS 157 does not require any new fair value measurements,but may change current practice for some entities. SFAS 157 is effectivefor fiscal years beginning after December 15, 2006. Our adoption of SFASNo. 157 is not expected to have a material effect on our consolidatedfinancial position or results of operations.

In May 2005, the FASB issued FASB StatementNo. 154, “Accounting Changes and Error Corrections,” a replacement of APBOpinion No. 20, “Accounting Changes”, and FASB Statement No. 3,“Reporting Accounting Changes in Interim Financial Statements.” FASB StatementNo. 154 changes the requirement for the accounting for and reporting of achange in accounting principle. This Statement applies to all voluntary changesin accounting principle. It also applies to changes required by an accountingpronouncement in the unusual instance that the pronouncement does not includespecific transition provisions. When a pronouncement includes specifictransition provisions, those provisions should be followed. FASB StatementNo. 154 is effective for accounting changes and corrections of errors madein fiscal years beginning after December 15, 2005.

In March 2005, the Financial Accounting StandardsBoard (FASB or the “Board”) issued final guidance that clarifies how companiesshould account for “conditional” asset retirement obligations (“AROs”). FASBInterpretation No. 47 “Accounting for Conditional Asset RetirementObligations” (FIN 47 or the “Interpretation”), deals with obligations toperform asset retirement activities in which the timing and (or) method ofsettlement are conditional on a future event (e.g., legal requirementssurrounding asbestos handling and disposal that are triggered by demolishing orrenovating a facility). The new guidance will likely require many companies torecognize liabilities for these obligations. In implementing the new guidance,which must be adopted by calendar year enterprises by December 31, 2005, acompany will need to identify its conditional AROs and determine whether it canreasonably estimate the fair value of each obligation. If the company canreasonably estimate the fair value of an obligation, it will need to recognizea liability for that obligation based on its current present value. Thisliability would then accrete to the ultimate liability over the service period(adjusted periodically for changes in estimates). We have reviewed tangiblelong-lived assets and other agreements for associated AROs in accordance withthis Interpretation and have concluded that we do not have any material AROsthat would require recognition as a liability or disclosure in our financialstatements at December 31, 2005.

17

----

In June 2005, the FASB ratified the consensusreached by the Emerging Issues Task Force (“EITF”) regarding EITF 04-05,“Investor’s Accounting for an Investment in a Limited Partnership When theInvestor is the Sole General Partner and the Limited Partners Have CertainRights.” The conclusion provides a framework for addressing the question ofwhen a sole general partner, as defined in EITF 04-05, should consolidatea limited partnership. The EITF has concluded that the general partner of alimited partnership should consolidate a limited partnership, unless thelimited partners have either (a) the substantive ability to dissolve thelimited partnership or otherwise remove the general partner without cause, or(b) substantive participating rights. In addition, the EITF concluded thatthe guidance should be expanded to include all limited partnerships, includingthose with multiple general partners. We will adopt EITF 04-05 as ofJanuary 1, 2006. We have assessed our investments in unconsolidated realestate joint ventures and have determined that EITF 04-05 will not havean impact on our financial condition or results of operations.

**NOTE 16.DISCONTINUED OPERATIONS and SALES of REAL ESTATE**

The followingtables summarize income from discontinued operations and the related realizedgain on sale of rental property for the nine months ended September 30, 2006and 2005:

|                                            | ** ** | **Nine Months Ended  September 30** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
|                                       |       |                                               |       |   |   |
| Total Revenues                             |       | $                                                  | —     |   | $ | 79,426 |   |
| Operating and other  expenses              |       | 10,125                                             |       | 54,409 |   |
| Depreciation and  amortization             |       | —                                             |       | 18,906 |   |
|                                       |       | 10,125                                             |       | 73,315 |   |
| Income (loss) from discontinued operations |       | $                                                  | (10,125    | ) | $ | 6,111 |   |

 

**ThePartnership realized a gain on the sale of the rental property of approximately$5,960,000 during the nine months ended September 30, 2005.**

**NOTE 17. SUBSEQUENTS EVENTS**

See Note 14 for adescription of the new mortgages on Hamilton Minuteman and Hamilton 1025 to beobtained in the fourth quarter of 2006. 

18

----

**Item2 — MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATION**

The following discussion should be read in conjunctionwith the financial statements and notes thereof appearing elsewhere in thisReport. This Report, on Form 10-Q, contains forward-lookingstatements within the meaning of the securities law. Actual results ordevelopments could differ materially from those projected in such statements asa result of certain factors set forth in the section below entitled “FactorsThat May Affect Future Results” and elsewhere in this Report.

Commercial and residential occupancy rates in Bostonand the suburbs continue to improve. While it would appear that the supply of housing units is in equilibriumwith demand and brokerage rental expenses have abated, tenants continue totrade up to alternative housing including home ownership.  While modest increases in rents do appear tobe on the horizon, increased turnover costs, repairs and maintenance costs andenergy costs appear to outstrip gains.  Management actively manages its utility coststhrough a third party consultant and investment in new heating equipment,however, increases experienced to date will likely keep net operating incomefrom growing.  Management expects theseconditions to finish out 2006 and for 2007. It is presently unclear whether future earnings will improve in the nearterm. 

As the pace of condominium sales slow, the Partnershiphas reevaluated its short term goals and is taking steps to obtain long termfinancing of units that are not presently on the market to be sold ascondominiums (while the interest rate environment is favorable) and improve thecashflow of the joint ventures.  To date,unit sales of the three converted complexes (Hamilton Bay, The Hamilton andHamilton Place) continue to appeal to the widest audience; first time homebuyers.  As such, sale prices haveremained steady and little erosion has occurred.  Profit margins of approximately $55,000 perunit continued to be achieved.  ThePartnership expects these sales to continue at a slower pace than experiencedto date.

Given the low level of taxable income as compared tothe current level of distributions, the Partnership will be reviewing the levelof distributions in its context of current operations and current condominiumsales.  

The Partnership has retained The Hamilton Company(“Hamilton”) to manage and administer the Partnership’s properties. Hamilton isa full-service real estate management company, which has legal, construction,maintenance, architectural, accounting and administrative departments. ThePartnership’s properties represent approximately 40% of the total propertiesand 70% of the residential properties managed by Hamilton. Substantially all ofthe other properties managed by Hamilton are owned - wholly or partially,directly or indirectly - by Harold Brown. The Partnership’s Second Amended andRestated Contract of Limited Partnership (the “Partnership Agreement”)expressly provides that the general partner may employ a management company tomanage the properties, and that such management company may be paid a fee of 4%of rental receipts for administrative and management services (the “ManagementFee”). The Partnership annually pays Hamilton the full Management Fee, inmonthly installments.

Harold Brown, his brother Ronald Brown and thePresident of Hamilton, Carl Valeri, collectively own approximately 22.2 % ofthe depositary receipts representing the Partnership Class A Units(including depositary receipts held by trusts for the benefit of such persons’family members). Harold Brown also owns 75% of the Partnership’s Class BUnits, 75% of the capital stock of NewReal, Inc. (“NewReal”), thePartnership’s sole general partner, and all of the outstanding stock ofHamilton. Ronald Brown also owns 25% of the Partnership’s Class B Unitsand 25% of NewReal’s capital stock. In addition, Ronald Brown is the Presidentand director of NewReal and Harold Brown is NewReal’s Treasurer and also adirector. Three of NewReal’s other directors Thomas Raffoul, Conrad DiGregorio,and Edward Sarkesian also own immaterial amounts of the Partnership’sClass A Units or receipts.

Beyond the Management Fee, the Partnership Agreementfurther provides for the employment of outside professionals to provideservices to the Partnership and allows NewReal to charge the Partnership forthe cost of employing professionals to assist with the administration of thePartnership’s properties. In addition to the Management Fee, from time to timethe Partnership pays Hamilton for repairs and maintenance services, legalservices, construction services and accounting services. The costs charged byHamilton for these services are at the

19

----

same hourly rate chargedto all entities managed by Hamilton, and management believes such rates arecompetitive in the marketplace.

Hamilton accounted for approximately 4% of the repairand maintenance expenses paid for by the Partnership in the nine months endedSeptember 30, 2006 and for the year ended December 31, 2005. Of the fundspaid to Hamilton for this purpose, the great majority was to cover the cost ofservices provided by the Hamilton maintenance department, including plumbing,electrical, carpentry services, and snow removal for those properties close toHamilton’s headquarters. However, several of the larger Partnership propertieshave their own maintenance staff and use limited Hamilton services. Further,those properties that do not have their own maintenance staff but are locatedmore than a reasonable distance from Hamilton’s headquarters in Allston,Massachusetts are generally serviced by local, independent companies.

Hamilton’s legal department handles most of thePartnership’s eviction and collection matters. Additionally, it prepares mostlong-term commercial lease agreements and represents the Partnership inselected purchase and sale transactions. Overall, Hamilton providedapproximately 75% of the legal services paid for by the Partnership during thenine months ended September 30, 2006 and approximately 70% for the year ended December 31,2005.

Additionally, as described in Note 3 to theConsolidated Financial Statements, the Hamilton Company received similar feesfrom the Investment Properties.

R. Brown Partners, which is owned by Ronald Brown,manages the condominium complex where the five condominium units are located inBrookline, Massachusetts. That entity receives annual management fees from thefive units of approximately $1,500, and Hamilton has reduced its managementfees to approximately 2%, so that the total management fee does not exceed the4% allowed by the Partnership’s Partnership Agreement.

The Partnership requires that three bids be obtainedfor construction contracts in excess of $5,000. Hamilton may be one of thethree bidders on a particular project and may be awarded the contract if itsbid and its ability to successfully complete the project are deemedappropriate. For contracts that are not awarded to Hamilton, Hamilton chargesthe Partnership a construction supervision fee equal to 5% of the contractamount. Hamilton’s architectural department also provides services to thePartnership on an as-needed basis. During the nine months ended September 30,2006, Hamilton provided the Partnership approximately $11,000 in constructionand architectural services, compared to $109,000 for the year endedDecember 31, 2005.

Prior to 1991, the Partnership employed an outside,unaffiliated company to perform its bookkeeping and accounting functions. Sincethat time, such services have been provided by the accounting staff at Hamiltonwhich consists of approximately twelve people. Hamilton currently charges thePartnership $80,000 ($20,000 per quarter) per year for bookkeeping andaccounting services.

For more information on related party transactions,see Note 3 to the Consolidated Financial Statements.

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

The preparation of consolidated financial statements,in accordance with accounting principles generally accepted in the UnitedStates of America, requires the Partnership to make estimates and judgmentsthat affect the reported amounts of assets, liabilities, revenues and expensesand related disclosures of contingent assets and liabilities. The Partnershipregularly and continually evaluates its estimates, including those related toacquiring, developing and assessing the carrying values of its real estateproperties and its investments in and advances to joint ventures. ThePartnership bases its estimates on historical experience, current marketconditions, and on various other assumptions that are believed to be reasonableunder the circumstances. However, because future events and their effectscannot be determined with certainty, the determination of estimates requiresthe exercise of judgment. The Partnership’s critical accounting policies arethose which require assumptions to be made about such matters that are highlyuncertain. Different estimates could have a material effect on thePartnership’s financial results. Judgments and uncertainties affecting theapplication of these policies and estimates may result in materially differentamounts being reported under different conditions and circumstances. See Note 1to the Consolidated Financial Statements, Principles of Consolidation.

20

----

Revenue Recognition: Revenues from rental propertiesare recognized when due from tenants. Residential leases are generally forterms of one year and commercial leases are generally for five to ten years,with renewal options at increased rents. Significant commercial leases withstepped increases over the term of the lease are recorded on the straight-linebasis.

Real Estate and Depreciation: Real estate assets arestated at the lower of cost or fair value, less accumulated depreciation. Costsrelated to the acquisition, development, construction and improvement ofproperties are capitalized, including interest, internal wages and benefits,real estate taxes and insurance. Capitalization usually begins withcommencement of development activity and ends when the property is ready forleasing. Replacements and improvements— such as HVAC equipment, structuralreplacements, windows, appliances, flooring, carpeting and kitchen/bathreplacements and renovations — are capitalized and depreciated over theirestimated useful lives as follows:

·                  Depreciationis computed on a straight-line basis over the estimated useful lives of therelated assets. In assessing estimated useful lives, the Partnership makesassumptions based on historical experience acquired from both within andoutside the Partnership. These assumptions have a direct impact on thePartnership’s net income.

·                  Ordinaryrepairs and maintenance, such as unit cleaning and painting and appliancerepairs, are expensed.

If there is an event or change in circumstances thatindicates an impairment in the value of a property, the Partnership’s policy isto assess the impairment by making a comparison of the current and projectedoperating cash flows of the property over its remaining useful life, on anundiscounted basis, to the carrying amount of the property. If the carryingvalue is in excess of the estimated projected operating cash flows of theproperty, the Partnership would recognize an impairment loss equivalent to theamount required to adjust the carrying amount to its estimated fair value. ThePartnership has not recognized an impairment loss since 1995.

Rental Property Held for Sale and DiscontinuedOperations:  When assets are identifiedby management as held for sale, the Partnership discontinues depreciating theassets and estimates the sales price, net of selling costs, of such assets. If,in management’s opinion, the net sales price of the assets which have beenidentified as held for sale is less than the net book value of the assets, avaluation allowance is established. Properties identified as held for saleand/or sold are presented in discontinued operations for all periods presented.

Investments in Partnerships:  The Partnership accounts for its 50%ownership in the Investment Properties under the equity method of accounting,as it exercises significant influence over, but does not control theseentities. These investments are recorded initially at cost, as Investments inPartnerships, and subsequently adjusted for the Partnership’s share inearnings, cash contributions and distributions. Under the equity method ofaccounting, our net equity is reflected on the consolidated balance sheets, andour share of net income or loss from the Partnership is included on theconsolidated statements of income.

With respect to investments in and advances to theInvestment Properties, the Partnership looks to the underlying properties toassess performance and the recoverability of carrying amounts for thoseinvestments in a manner similar to direct investments in real estateproperties. An impairment charge is recorded if the carrying value of theinvestment exceeds its fair value.

Legal Proceedings: The Partnership is subject tovarious legal proceedings and claims that arise, from time to time, in theordinary course of business. These matters are frequently covered by insurance.If it is determined that a loss is likely to occur, the estimated amount of theloss is recorded in the financial statements. Both the amount of the loss andthe point at which its occurrence is considered likely can be difficult todetermine.

Off Balance Sheet Arrangements: The Partnership has nooff balance sheet arrangements including special purpose entities.

21

----

**RESULTS OFOPERATIONS**

**Comparison of the three months ended September 30,2006 to the three months ended September 30, 2005** (asadjusted for discontinued operations):

ThePartnership and its Subsidiary Partnerships earned income before other incomeand discontinued operations of approximately $178,593 during the three monthsended September 30, 2006 compared to approximately $601,312 for the threemonths ended September 30, 2005, a decrease of $422,719 (70%).  The rental activity is summarized as follows:
| ** **         | ** ** | **Occupancy Date**    | ** ** |
|--------------------|------------|----------------------------|------------|
| ** **         | ** ** | **October 24,  2006** | ** ** | **July 24,  2006** | ** ** | **November 8,  2005** | ** ** |
|               |       |                       |       |   |   |   |   |
| Residential        |       |                       |       |   |   |   |   |
| Units              |       | 2,402                      |       | 2,402 |   | 2,402 |   |
| Vacancies          |       | 39                         |       | 42 |   | 34 |   |
| Vacancy rate       |       | 1.6                        | %          | 1.7 | % | 1.4 | % |
| Commercial         |       |                       |       |   |   |   |   |
| Total square  feet |       | 84,998                     |       | 84,998 |   | 85,275 |   |
| Vacancy            |       | 6,075                      |       | 6,075 |   | 0 |   |
| Vacancy rate       |       | 7.1                        | %          | 7.1 | % | 0 | % |

 
| ** **             | ** ** | **Rental Income (in thousands)  Three Months Ended September 30,** | ** ** |
|------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
| ** **             | ** ** | **2006**                                                                                              | ** ** | **2005** | ** ** |
| ** **             | ** ** | **Total  Operations**                                                                                 | ** ** | **Continuing  Operations** | ** ** | **Total  Operations** | ** ** | **Continuing  Operations** | ** ** |
| Total rents            |       | $                                                                                                     | 7,901      |   | $ | 7,901 |   | $ | 7,837 |   | $ | 7,837 |   |
| Residential percentage |       | 93                                                                                                    | %          | 93 | % | 93 | % | 93 | % |
| Commercial percentage  |       | 7                                                                                                     | %          | 7 | % | 7 | % | 7 | % |
| Contingent rentals     |       | $                                                                                                     | 89         |   | $ | 89 |   | $ | 103 |   | $ | 103 |   |

 

22

----

 

***Three Months Ended September 30, 2006 Compared to Three Months EndedSeptember 30, 2005***
| ** **                                                          | ** ** | **September  30,  2006** | ** ** | **September  30,  2005** | ** ** | **Dollar  Change** | ** ** | **Percent  Change** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                                          | ** ** | ** **               | ** ** | ** **               | ** ** | ** **         | ** ** | ** **          | ** ** |
| Revenues:                                                           |       |                     |       |                     |       |               |       |                |       |
| Rental income                                                       |       | $                        | 7,900,595  |                     | $          | 7,836,797          |       | 63,798              |       | 0.08 | % |
| Laundry and sundry income                                           |       | 91,387                   |       | 105,951                  |       | (14,564            | )          | (13.75              | )%         |
|                                                                |       | 7,991,982                |       | 7,942,748                |       | 49,234             |       | 0.06                | %          |
| Expenses:                                                           |       |                     |       |                     |       |               |       |                |       |
| Administrative                                                      |       | 342,895                  |       | 307,881                  |       | 35,014             |       | 11.37               | %          |
| Depreciation and amortization                                       |       | 1,769,965                |       | 1,642,148                |       | 127,817            |       | 7.78                | %          |
| Interest                                                            |       | 1,945,283                |       | 1,960,195                |       | (14,912            | )          | (0.07               | )%         |
| Management fees                                                     |       | 329,542                  |       | 315,741                  |       | 13,801             |       | 4.37                | %          |
| Operating                                                           |       | 773,417                  |       | 692,382                  |       | 81,035             |       | 11.70               | %          |
| Renting                                                             |       | 173,460                  |       | 190,651                  |       | (17,191            | )          | (9.01               | )%         |
| Repairs and maintenance                                             |       | 1,593,550                |       | 1,371,378                |       | 222,172            |       | 16.20               | %          |
| Taxes and insurance                                                 |       | 885,277                  |       | 861,060                  |       | 24,217             |       | 2.81                | %          |
|                                                                |       | 7,813,389                |       | 7,341,436                |       | 471,953            |       | 6.40                | %          |
|                                                                |       |                     |       |                     |       |               |       |                |       |
| Income  Before Other Income and Discontinued Operations             |       | 178,593                  |       | 601,312                  |       | (422,719           | )          | (70.30              | )%         |
|                                                                |       |                     |       |                     |       |               |       |                |       |
| Other  Income (Loss)                                                |       |                     |       |                     |       |               |       |                |       |
| Interest income                                                     |       | 118,909                  |       | 58,907                   |       | 60,002             |       | 101.86              | %          |
| (Loss) from investment in joint ventures                            |       | 34,502                   |       | 521,993                  |       | (487,491           | )          | (93.39              | )%         |
|                                                                |       | 153,411                  |       | 580,900                  |       | (427,489           | )          | (73.59              | )%         |
| Income from Continuing Operations                                   |       | 332,004                  |       | 1,182,212                |       | (850,208           | )          | (71.90              | )%         |
|                                                                |       |                     |       |                     |       |               |       |                |       |
| Discontinued  Operations:                                           |       |                     |       |                     |       |               |       |                |       |
| Income (loss) from discontinued operations                          |       | —                   |       | 1,727                    |       | (1,727             | )          | (100.00             | )%         |
| Gain (loss) on the sale of real estate from discontinued operations |       | —                   |       | 189,670                  |       | (189,670           | )          | (100.00             | )%         |
|                                                                |       | —                   |       | 191,397                  |       | (191,397           | )          | (100.00             | )%         |
| Net Income                                                          |       | $                        | 332,004    |                     | $          | 1,373,609          |       | (1,041,605          | )          | (75.83 | )% |

 

Rental income for the three months ended September 30,2006 was approximately $7,901,000 compared to approximately $7,837,000 for thethree months ended September 2005, an increase of approximately $64,000 (1%).There were minimal fluctuations at the majority of Partnership properties withno significant change at any one property for the three moinths ended September30, 2006.

Total expenses for the three months ended September30, 2006 were approximately $7,813,000 compared to approximately $7,341,000 forthe three months ended September 30, 2005, an increase of approximately$472,000. The most significant increase was in repairs and maintenance ofapproximately $222,000 due to continued efforts to maintain occupancylevels.  Operating expenses increasedapproximately $81,000 due to increased utility costs.  Depreciation and amortization expenseincreased approximately $128,000 due to continued capital improvements toPartnership properties. These increases are offset by a decrease in interest ofapproximately $15,000 due to a lower level of debt and a decrease in renting expensesof approximately $17,000 due to a decrease in rental commissions. 

At September 30, 2006, the Partnership has a 50%ownership interest in six different investment properties. The net income onthese investments is $34,502 for the three months ended September 30, 2006compared to income of

23

----

$521,993 for the threemonths ended September 30, 2005, a decrease of $487,491. This decrease inincome from the investment properties is due to a gain of approximately$1,712,000 in 2006 compared to a gain of $2,431,341 in 2005 as well asvacancies at the properties while preparing them for resale.  Additionally, expenses such as depreciationand amortization increased due to ongoing capital improvements, andprofessional fees were incurred in connection with converting the propertiesinto condominium units. See Note 14 to the Consolidated Financial Statementsfor financial information of these investment properties. The summaries are asfollows:

**Franklin Street, Cambridge,Massachusetts**

The Partnership invested in a 40-unit property in2001. The Partnership’s share of loss on this investment is $39,895 and $45,230for the three months ended September 30, 2006 and 2005, respectively.  The Partnership’s share of loss on thisinvestment is $90,568 and $107,557 for the nine months ended September 30, 2006and 2005, respectively.  There were nounits vacant at October 24, 2006.

**Hamilton Place, Watertown,Massachusetts**

The Partnership invested in 283 units in six buildingsin August 2004. The Partnership plans to sell 137 of the units ascondominiums located in three buildings. At October 24, 2006, 90 units have been sold and three additional unitshave reservation agreements. The Partnership’s share of loss on the investmentheld as a rental property is approximately $160,000 and $192,000 for the threemonths ended September 30, 2006 and 2005 respectively, and a loss ofapproximately $449,000 and $880,000 for the nine months ended September 30,2006 and 2005 respectively.  The Partnershipsshare of income on the building with the units held for sale is approximately$218,000 and $381,000 for the three months ended September 30, 2006 and 2005respectively.  The Partnership’s share ofincome includes a gain on units sales of approximately $330,000 and 562,000 forthe three months ended September 30, 2006 and 2005 respectively.  The Partnership’s share of income on thebuildings with units held for sale is approximately $382,000 and $1,282,000 forthe nine months ended September 30, 2006 and 2005 respectively.  The Partnership’s share of income includes again on the sale of units of approximately $747,000 and $1,701,000 for the ninemonths ended September 30, 2006 and 2005 respectively.  There were 5 units vacant in the buildingswith units held for sale at October 24, 2006.

**Hamilton Minuteman, Lexington,Massachusetts**

The Partnership invested in a 42-unit residentialcomplex in September 2004.  ThePartnership’s share of loss on this investment is approximately $87,000 and$62,000 for the three months ended September 30, 2006 and 2005, respectively.The Partnership’s share of loss is approximately $249,000 and $190,000 for thenine months ended September 30, 2006 and 2005 respectively.  The increase in loss is due to the feesassociated with preparing the building as condominium units and ultimatelyready for resale. It had been the Partnership’s plan to sell this property ascondominiums, however due to the current real estate market the Partnership hasdecided to keep this property as rental units.The Partnership is obtaining anew 10 year mortgage on this property in the amount of $5,500,000.  The interest on the new loans is 5.67% fixedfor the 10 year term with interest only payments for five years and amortizedover 30 years for the balance of the loan term. The new loan requires a cash contribution by the Partnership of$1,250,000. The new loan will close during the fourth quarter of 2006. Therewere no vacant units at October 24,2006.

**Essex 81, Boston, Massachusetts**

The Partnership invested in this property inMarch 2005. The property consists of 49 residential units, one commercialspace, and a 50 car surface parking lot. The Partnership’s share of loss onthis investment is approximately $60,000 and $51,000 for the three months endedSeptember 30, 2006 and 2005, respectively. The Partnership’s share of loss onthis investment is approximately $133,000 and $122,000 for the nine monthsended September 30, 2006 and 2005 respectively. There were no vacant units at October 24, 2006.

24

----

1025 Hamilton, Quincy, Massachusetts

 

The Partnership invested in a 176-unit property inMarch 2005. The Partnership plans to sell 127 units as condominiums.  As of October 24,  2006, 106 units have been sold, and 3 unitshave been reserved. The Partnership’s share of income is approximately $83,000and $491,000 for the three months ended September 30, 2006 and 2005respectively.  The Partnership’s share ofincome includes gains on unit sales of $154,000 and $654,000 during the threemonths ended September 30, 2006 and 2005 respectively. The Partnership’s shareof income is approximately $280,000 and $1,208,000 for the nine months endedSeptember 30, 2006 and 2005 respectively. The Partnership’s share of income includes gains on unit sales of approximately$653,000 and $1,579,000 for the nine months ended September 30, 2006 and 2005,respectively. There were 4 vacant units at October 24, 2006.

**Hamilton Bay, Quincy, Massachusetts**

The Partnership invested $2,500,000 in a 168 unitapartment complex in Quincy, Massachusetts in October 2005. The Partnershipplans to sell the majority of units as condominiums and retain 48 units forlong-term investment. The proceeds from the condominium sales will be usedprimarily to reduce the outstanding mortgage. Gains from the sales of unitswill be taxed at ordinary income tax rates. The Partnership’s share of incomeon this investment is approximately $80,000 and $176,000 for the three and ninemonths ended September 30, 2006 respectively.  The Partnership’sshare of income includes a gain on the sale of units of $372,000 and $1,132,000for the three and nine months ended September 30, 2006 respectively.  As of October 24, 2006, 44 units have beensold and an additional nine units have a signed purchase and sales agreement.There were 12 vacant units at October 24, 2006.

Interest income was approximately $119,000 for thethree months ended September 30, 2006 compared to approximately $59,000 for thethree months ended September 30, 2005, an increase of approximately $60,000.This increase reflects an increase in interest rates.

As a result of the changes discussed above, net incomefor the three months ended September 30, 2006 was $332,004 compared to$1,373,609 for the three months ended September 30, 2005, a decrease of$1,041,605.

25

----

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

 

The Partnership and itsSubsidiary Partnerships earned income before other income of $1,129,582 for thenine months ended September 30, 2006 compared to $1,575,061 for the nine monthsended September 30, 2005, a decrease of $445,479 (28%).  The following is a summary of thePartnership’s rental income and operating expenses for the nine months endedSeptember 30, 2006 and 2005.  As morefully described in the schedules below, the decrease in income from operationsis due to an increase in operating expenses specifically depreciation andamortization as well as repairs and maintenance expenses.  This increase in expenses are offset bydecreases in interest expense, renting expense and taxes and insurance. 

 

***Nine Months Ended September 30, 2006 Compared to Nine Months EndedSeptember 30, 2005***

 
| ** **                                                     | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** | **Dollar  Change** | ** ** | **Percent  Change** | ** ** |
|----------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                                     | ** ** | ** **                   | ** ** | ** **                   | ** ** | ** **         | ** ** | ** **          | ** ** |
| Revenues:                                                      |       |                         |       |                         |       |               |       |                |       |
| Rental income                                                  |       | $                            | 23,715,253 |                         | $          | 23,446,985         |       | $                   | 268,268    |   | 1.14 | % |
| Laundry and sundry income                                      |       | 322,888                      |       | 310,007                      |       | 12,881             |       | 4.15                | %          |
|                                                           |       | 24,038,141                   |       | 23,756,992                   |       | 281,149            |       | 1.18                | %          |
|                                                           |       |                         |       |                         |       |               |       |                |       |
| Expenses:                                                      |       |                         |       |                         |       |               |       |                |       |
| Administrative                                                 |       | 1,018,189                    |       | 967,199                      |       | 50,990             |       | 5.27                | %          |
| Depreciation and amortization                                  |       | 5,127,899                    |       | 4,745,603                    |       | 382,292            |       | 8.06                | %          |
| Interest                                                       |       | 5,792,084                    |       | 5,842,077                    |       | (49,993            | )          | (0.08               | )%         |
| Management fees                                                |       | 976,570                      |       | 956,485                      |       | 20,085             |       | 2.10                | %          |
| Operating                                                      |       | 2,929,957                    |       | 2,870,006                    |       | 59,951             |       | 2.09                | %          |
| Renting                                                        |       | 367,566                      |       | 448,420                      |       | (80,854            | )          | (18.03              | )%         |
| Repairs and maintenance                                        |       | 4,056,687                    |       | 3,661,190                    |       | 395,497            |       | 10.78               | %          |
| Taxes and insurance                                            |       | 2,639,607                    |       | 2,690,951                    |       | (51,344            | )          | (1.90               | )%         |
|                                                           |       | 22,908,559                   |       | 22,181,931                   |       | 726,628            |       | 3.28                | %          |
|                                                           |       |                         |       |                         |       |               |       |                |       |
| Income before other income                                     |       | 1,129,582                    |       | 1,575,061                    |       | (445,479           | )          | (28.28              | )%         |
|                                                           |       |                         |       |                         |       |               |       |                |       |
| Other Income (Loss)                                            |       |                         |       |                         |       |               |       |                |       |
| Interest income                                                |       | 321,686                      |       | 156,815                      |       | 164,871            |       | 105.14              | %          |
| (Loss) from investment in  partnerships                        |       | (83,569                      | )          | 1,189,475                    |       | (1,273,044         | )          | (107.03             | )%         |
|                                                           |       | 238,117                      |       | 1,346,290                    |       | (1,108,173         | )          | (82.31              | )%         |
| Income from continuing  operations                             |       | 1,367,699                    |       | 2,921,351                    |       | (1,553,652         | )          | (53.18              | )%         |
|                                                           |       |                         |       |                         |       |               |       |                |       |
| Discontinued Operations:                                       |       |                         |       |                         |       |               |       |                |       |
| Income (loss) from  discontinued operations                    |       | (10,125                      | )          | 6,111                        |       | (16,236            | )          | 265.68              | %          |
| Gain on the sale of real  estate from discontinued  operations |       | —                       |       | 5,960,033                    |       | (5,960,033         | )          | 100.00              | %          |
|                                                           |       | (10,125                      | )          | 5,966,144                    |       | (5,976,269         | )          | (100.02             | )%         |
| Net  Income                                                    |       | $                            | 1,357,574  |                         | $          | 8,887,495          |       | $                   | (7,529,921 | ) | (84.72 | )% |

 

Rental income fromcontinuing operations for the nine months ended September 30, 2006 wasapproximately $23,715,000 compared to approximately $23,447,000 for the ninemonths ended September 30, 2005, an increase of approximately $270,000.  The properties with the most significantrental income increases include 62 Boylston Street in the amount ofapproximately $207,000, Westgate Apartments of approximately $70,000, HamiltonOaks of approximately $66,000 and 1144 Commonwealth Avenue of approximately$30,000. These increases are offset by decreases of approximately $32,000 atExecutive Apartments and decreases of approximately $18,000 each at Dean

26

----

Street and Riverside Condo.The Middlesex Apartments sold in March 2005 collected rental income ofapproximately $79,000 in 2005.

 

Total expenses fromcontinuing operations for the nine months ended September 30, 2006 wereapproximately $22,909,000 compared to approximately $22,182,000 for the ninemonths ended September 30, 2005, an increase of approximately $727,000.  The most significant increases were indepreciation and amortization of approximately $382,000, repairs andmaintenance expenses of approximately $395,000 due to ongoing repairs toproperties in an effort to maintain occupancy levels, an increase ofapproximatley $60,000 in operating expenses due to higher utility costs and anincrease in administrative expenses of approximately $51,000 due to increasedprofessional fees.  The Partnership alsohad decreases in expenses such as renting expenses of approximately $81,000 dueto decreases in advertising and rental commissions, taxes and insurance ofapproximately $51,000 due to decreases in real estate taxes and insurancepremiums, and a decrease in interest expense of approximately $50,000 due to alower level of debt.

 

Interest income wasapproximately $332,000 for the nine month ended September 30, 2006, compared toapproximately $157,000 for the nine months ended September 30, 2005, anincrease of approximately $165,000.  Thisincrease is due primarily to an increase in interest rates.

 

As discussed previously,the Partnership has a 50% ownership interest in six investment properties.  The net loss from these investments isapproximately $84,000 for the nine months ended September 30, 2006 compared toincome of approximately $1,189,000 for the nine months ended September 30,2005.  The Partnership’s share of incomeincludes a gain on the sale of units of $2,531,000 and $3,280,000 for the ninemonths ended September 30, 2006 and 2005, respectively.  (See Note 14 to the financial statements foradditional information.)

 

On March 22, 2005,the Partnership sold the Middlesex Apartments located in Newton, Massachusetts.The selling price was $6,500,000. The loss on discontinued operation for thenine months ended September 30, 2006 was $10,125 which represents state taxespaid. The operating profit for the nine months ended September 30, 2005 was$6,111 and the gain of $5,960,033, net of mortgage prepayment penalties ofapproximately $382,000 and selling expenses are included in income fromdiscontinued operations.  See Note 3 tothe Consolidated Financial Statements.

 

As a result of thechanges discussed above, net income for the nine months ended September 30,2006 was $1,357,574 compared to $8,887,495 for the nine months ended September30, 2005, a decrease of $7,529,921.

 

**LIQUIDITY ANDCAPITAL RESOURCES**

The Partnership’sprincipal sources of cash during 2006 and 2005 were the collection of rents,sale of a Partnership property and the refinancing of a Partnership property in2005.

 

The majority of cash andcash equivalents of $11,363,167 at September 30, 2006 and $12,049,392 atDecember 31, 2005 was held in interest bearing accounts at creditworthyfinancial institutions.

 

This decrease in cash forthe nine months ended September 30, 2006 is summarized as follows:

 
|                                                       | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| Cash provided by  operating activities                |       | $                                                   | 6,344,636  |   | $ | 5,940,316 |   |
| Cash provided by  (used in) investing activities      |       | (2,724,264                                          | )          | (780,736 | ) |
| Cash provided by  (used in) financing activities      |       | (674,185                                            | )          | 154,431 |   |
| Distributions  paid                                   |       | (3,632,412                                          | )          | (3,632,411 | ) |
| Net increase (decrease)  in cash and cash equivalents |       | $                                                   | (686,225   | ) | $ | 1,681,600 |   |

 

27

----

 

The cash provided by operating activities iscalculated primarily by adding depreciation expense to the net income. Thedecrease in cash provided by investing activities is due to the following  (i) the sale in March 2005 of aPartnership property resulting in proceeds of approximately $6,000,000 in2005  (ii) continued capitalimprovements to Partnership properties in 2006 and (iii) capital contributionsto the Partnership’s investment in the joint venture. The increase in cash usedin financing activities is due to the refinancing of a Partnership property in2005 resulting in an increase in cash of $2,000,000 in 2005.

The Partnership is refinancing two propertiers held bythe investment properties, Hamilton Minuteman and Hamilton 1025.  In connection with the refinancing ofHamilton Minuteman, the Partnership is required to contribute $1,250,000 to paydown the present mortgage.  Thiscontribution will be funded from the Partnershiup’s cash reserves.  These loans will close during the fourthquarter of 2006. 

During the nine months ended September 30, 2006 thePartnership invested an additional $600,000 in Hamilton Bay and $300,000 inHamilton on Main for a total investment of $900,000. As discussed in Notes 14to the Consolidated Financial Statements, the lender requires minimum principalpayments as units are sold. The principal pay downs due to unit sales as wellas the continued capital improvements to the investment properties during thenine months ended September 30, 2006 resulted in the need for an additionalcash investment by the Partnership. See Note 14 of the Consolidated FinancialStatements for additional information on the investments and the related losson these investments.

The Partnership paid quarterly distributions of $7.00per unit ($0.70 per depositary receipts) in March, June, and September 2006 fora total distribution in 2006 of $3,632,412. Management anticipates that similar quarterly distributions willcontinue to be made during 2006.

The portfolio encumbered by debt is comprised of 58%nonamoritizing (interest only) debt.  Thepresent level of distribution is 56% of the net income plus depreciation.  Management continues to be comfortable withthe percentages due to the low debt to equity levels and pace of condominiumsales. Management will continue to review this on a regular basis.

As discussed in Note 3 to the Consolidated FinancialStatements, the Partnership purchased five condominiums in a 42-unit buildinglocated in Brookline, Massachusetts.  Theoriginal mortgage of $1,600,000 due in August 2006 has been extended to August2009.  The interest rate on the new loanis 6.5% fixed for three years.  

During the nine months ended September 30, 2006, thePartnership and its Subsidiary Partnerships completed certain improvements totheir properties at a total cost of approximately $1,824,000. The mostsignificant improvements were made at the following properties: approximately$300,000 at Westgate Woburn in Woburn, Massachusetts; approximately $272,000 atHamilton Oaks in Brockton, Massachusetts; approximately $214,000 at WestsideColonial in Brockton, Massachusetts; approximately $120,000 at 62 Boylston Street in Boston, Massachusetts; approximately$119,000 at School Street in Framingham, Massachusetts and approximately$94,000 at Executive Apartments in Framingham,  Massachusetts.   All suchimprovements were funded from the Partnership’s cash reserves and escrowaccounts established in connection with the financing of applicable properties.

In addition to the improvements made to date in 2006,the Partnership and its Subsidiary Partnerships plan to invest an additional$164,000 in capital improvements during the balance of 2006, the majority ofwhich will be spent at 1144 Commonwealth Avenue, Clovelly, Westside Colonial,62 Boylston, and North Beacon Street. These improvements will be funded fromescrow accounts established in connection with the financing of applicableproperties, as well as from the Partnership’s cash reserves.

As of September 30, 2006, the Partnership had a 50%ownership in six joint ventures, all of which have mortgage indebtedness. We donot have control of these partnerships and therefore we account for them usingthe equity method of consolidation. At September 30, 2006, our proportionateshare of the limited recourse debt related to these investments wasapproximately $34,104,000. See Note 14 to the Consolidated Financial Statementsfor details of the investment properties including results of operations,equity and units sales.

28

----

The Partnership anticipates that cash from operationsand interest-bearing investments will be sufficient to fund its currentoperations, finance current improvements to its properties and meet bankobligations on current mortgages. The Partnership’s net income and cash flowmay fluctuate dramatically from year to year as a result of the sale ofproperties, mortgage financings, unanticipated increases in expenses, or theloss of significant tenants.

**ContractualObligations**

Please see Note 5 to the Consolidated FinancialStatements for a description of mortgage notes payable. The Partnerships haveno other contractual obligation to be disclosed.

**Factors ThatMay Affect Future Results**

Certain information contained herein includes forward-lookingstatements, which are made pursuant to the safe harbor provisions of thePrivate Securities Liquidation Reform Act of 1995 (the “Act”). While forwardlooking statements reflect management’s good faith beliefs when thosestatements are made, caution should be exercised in interpreting and relying onsuch forward looking statements, the realization of which may be impacted byknown and unknown risks and uncertainties, events that may occur subsequent tothe forward-looking statements, and other factors which may be beyond thePartnership’s control and which can materially affect the Partnership’s actualresults, performance or achievements for 2006 and beyond.

Along with risks detailed from time to time in thePartnership’s filings with the Securities and Exchange Commission, some factorsthat could cause the Partnership’s actual results, performance or achievementsto differ materially from those expressed or implied by forward-lookingstatements include but are not limited to the following:

The Partnership depends on the real estate marketswhere its properties are located, primarily in Eastern Massachusetts and thesemarkets may be adversely affected by local economic market conditions, whichare beyond the Partnership’s control.

The Partnership is subject to the general economicrisks affecting the real estate industry, such as dependence on tenant’sfinancial condition and the need to enter into new leases or renew leases onterms favorable to tenants in order to generate rental revenues. The Partnershipis also impacted by changing economic conditions making alternative housingarrangements more or less attractive to the Partnership’s tenants, such as theinterest rates on single family home mortgages and the availability andpurchase price of single-family homes in the Greater Boston metropolitan area.

The Partnership is subject to significant expendituresassociated with each investment, such as debt service payments, real estatetaxes, insurance and maintenance costs, which are generally not reduced whencircumstances cause a reduction in revenues from a property.

The Partnership is subject to increases in heating andutility costs that may arise as a result of economic and market conditions andfluctuations in seasonal weather conditions.

Civil disturbances, earthquakes and other naturaldisasters may result in uninsured or underinsured loses.

Actual or threatened terrorist attacks may adverselyaffect our ability to generate revenues and the value of our properties.

Financing or refinancing of Partnership properties maynot be available to the extent necessary or desirable, or may not be availableon favorable terms.

The Partnership properties face competition fromsimilar properties in the same market. This competition may affect the Partnership’sability to attract and retain tenants and may reduce the rents that can becharged.

29

----

Given the nature of the real estate business, thePartnership is subject to potential environmental liabilities. These includeenvironmental contamination in the soil at the Partnership’s or neighboringreal estate, whether caused by the Partnership, previous owners of the subjectproperty or neighbors of the subject property, and the presence of hazardousmaterials in the Partnership’s buildings, such as asbestos, mold and radon gas.Management is not aware of any material environmental liabilities at this time.

Insurance coverage for and relating to commercialproperties is increasingly costly and difficult to obtain. In addition,insurance carriers have excluded certain specific items from standard insurancepolicies, which have resulted in increased risk exposure for the Partnership.These include insurance coverage for acts of terrorism and war, and coveragefor mold and other environmental conditions. Coverage for these items is eitherunavailable, or prohibitively expensive.

Market interest rates could adversely affect themarket prices for Class A Partnership Units and Depositary Receipts aswell as performance and cash flow.

Changes in the tax laws and regulations may affect theincome taxable to owners of the Partnership. These changes may affect theafter-tax value of future distributions.

The Partnership may fail to identify, acquire,construct, or develop additional properties; may develop or acquire propertiesthat do not produce a desired or expected yield on invested capital; may beunable to sell poorly-performing or otherwise undesirable properties quickly;or may fail to effectively integrate acquisitions of properties or portfoliosof properties.

Risks associated with the use of debt to fundacquisitions and developments.

Competition for acquisitions may result in increasedprices for properties.

The sale of condominium units may not generate enoughnet proceeds to pay the minimum curtailment payments required at the InvestmentProperties. The Partnership may be required to fund any deficiencies.

Any weakness identified in the Partnership’s internalcontrols as part of the evaluation being undertaken by the Company and itsindependent public accountants pursuant to Section 404 of theSarbanes-Oxley Act of 2002 could have an adverse effect on the Company’sbusiness.

Ongoing compliance with Sarbanes-Oxley Act of 2002 mayrequire additional personnel or system changes.

The foregoing factors should not be construed asexhaustive or as an admission regarding the adequacy of disclosures made by thePartnership prior to the date hereof or the effectiveness of said Act. ThePartnership expressly disclaims any obligation to publicly update or revise anyforward-looking statement, whether as a result of new information, futureevents or otherwise.

The residential real estate market in the GreaterBoston area continues to be competitive and the Partnership anticipates theclimate will remain the same in the foreseeable future. This may result inincreases in vacancy rates and/or a reduction in rents. The Partnershipbelieves its present cash reserves as well as anticipated rental revenue willbe sufficient to fund its current operations, and to finance current planned improvementsto its properties and continue dividend payments in the foreseeable future.

Since the Partnership’s long-term goals include theacquisition of additional properties, a portion of the proceeds from therefinancing and sale of properties is reserved for this purpose. ThePartnership will consider refinancing existing properties if the Partnership’scash reserves are insufficient to repay existing mortgages or if thePartnership needs additional funds for future acquisitions.

30

----

**Item3 —QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

As of September 30, 2006, the Partnership and itssubsidiary Partnerships collectively have approximately $114,911,000 inlong-term debt, all of which have fixed interest rates. Accordingly, the fairvalue of these debt instruments is affected by changes in market interestrates. For information regarding the fair value and maturity dates of thesedebt obligations, see Notes 5 and 12 to the Consolidated Financial Statements.

For additional disclosures about market risk, see“Item 2 — Management’s Discussion and Analysis of Financial Condition andResults of Operations — Factors that May Affect Future Results.”

**Item 4—CONTROLS AND PROCEDURES**

*DisclosureControls and Procedures*. The Partnership’s management, with theparticipation of the Partnership’s chief executive officer and chief financialofficer, has evaluated the effectiveness of the Partnership’s disclosurecontrols and procedures (as such term is defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) as of the end of the period covered by thisreport. Based on such evaluation, the Partnership’s chief executive officer andchief financial officer have concluded that, as of the end of such period, thePartnership’s disclosure controls and procedures are effective in recording,processing, summarizing and reporting, on a timely basis, information requiredto be disclosed by the Partnership in the reports that it files or submitsunder the Exchange Act.

*InternalControl Over Financial Reporting*. There have not been anychanges in the Partnership’s internal control over financial reporting (as suchterm is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) duringthe fiscal quarter to which this report relates that have materially affected,or are reasonably likely to materially affect, the Partnership’s internalcontrol over financial reporting.

31

----

**PART II - OTHER INFORMATION**

**Item 1.**         Legal Proceedings

None.

**Item 1A**      Risk Factors

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

**Item2.**         Unregistered Sale of Equity Securities and Use ofProceeds

None.

**Item 3.**         Defaults Upon Senior Securities

None.

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

None.

**Item 5.**         Other Information

We received acomment letter from the SEC on April 24, 2006 regarding our Annual Report onForm 10-K for the year ended December 31, 2005. There was also additional letters of comment on June 30 and August 31,2006  in response to the Partnership’s responseto the aforementioned letter.  Theultimate resolution of an unresolved item will not result in a change infinancial position or results of operations and cash flow for 2005 and what weexpect to file with the SEC will adequately address the issue raised by theSEC.  We can give no assurance, however,that the SEC upon review of this and future filings will not take a contraryview or raise more issues.

**Item 6.**         Exhibits

(a)           Seethe exhibit index below.

32

----

**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
| Date:   November 9, 2006 |                                               |                    |
|-----------------------------------------|----------------------------------------------------|-------------------------|
|                                    |                                               |                    |
|                                    |                                               |                    |
|                                    | NEW ENGLAND REALTY ASSOCIATES  LIMITED PARTNERSHIP |
|                                    |                                               |                    |
|                                    | By:                                                | NEWREAL, INC.,          |
|                                    |                                               | its General Partner*    |
|                                    |                                               |                    |
|                                    |                                               |                    |
|                                    | By:                                                | /s/ Ronald Brown        |
|                                    |                                               | Ronald Brown, President |
|                                    |                                               |                    |
|                                         |                                                    |                         |  |

----

|  | * | Functional equivalent of Chief Executive Officer,  Principal  Financial Officer and Principal Acounting Officer |
|--|---|----------------------------------------------------------------------------------------------------------------------|

 

33

----

**EXHIBIT INDEX**
| Exhibit  No. | ** ** | **Description of Exhibit**                                                                                                                                                                                              |
|--------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **   | ** ** | ** **                                                                                                                                                                                                                        |
| (3)          |       | Second Amended and Restated Contract of Limited  Partnership (1)                                                                                                                                                                  |
|         |       |                                                                                                                                                                                                                              |
| (4)          |       | (a) Specimen certificate representing Depositary  Receipts. (2)                                                                                                                                                                   |
|         |       |                                                                                                                                                                                                                              |
|         |       | (b) Description of rights of holders of Partnership  securities. (2)                                                                                                                                                              |
|         |       |                                                                                                                                                                                                                              |
|         |       | (c) Deposit Agreement, dated August 12, 1987,  between the General Partner and the First National Bank of Boston. (3)                                                                                                             |
|         |       |                                                                                                                                                                                                                              |
| (10)         |       | Purchase and Sale Agreement by and between Sally A.  Starr and Lisa Brown, Trustees of Omnibus Realty Trust, a nominee trust. (4)                                                                                                 |
|         |       |                                                                                                                                                                                                                              |
| (31.1)       |       | Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 of Ronald Brown, Principal Executive Officer of  the Partnership (President and a Director of NewReal, Inc., sole General  Partner of the Partnership).  |
|         |       |                                                                                                                                                                                                                              |
| (31.2)       |       | Certification pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 of Harold, Principal Financial Officer of the Partnership  (Treasurer and a Director of NewReal, Inc., sole General Partner of the  Partnership).        |
|         |       |                                                                                                                                                                                                                              |
| (32.1)       |       | Certification Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, of Ronald Brown, Principal Executive Officer of  the Partnership (President and a Director of NewReal, Inc., sole General  Partner of the Partnership). |
|         |       |                                                                                                                                                                                                                              |
| (32.2)       |       | Certification Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, of Harold Brown, Principal Financial Officer of  the Partnership (Treasurer and a Director of NewReal, Inc., sole General  Partner of the Partnership). |

----

(1)    Incorporatedby reference to Exhibit A to the Partnership’s Statement Furnished inConnection with the Solicitation of Consents filed under the SecuritiesExchange Act of 1934 on October 14, 1986.

(2)    Incorporatedherein by reference to Exhibit A to Exhibit 2(b) to the Partnership’sRegistration Statement on Form 8-A, filed under the Securities Exchange Act of1934 on August 17, 1987.

(3)    Incorporatedherein by reference to Exhibit 2(b) to the Partnership’s Registration Statementon Form 8-A, filed under the Securities Exchange Act of 1934 on August 17,1987.

(4)    Incorporatedby reference to Exhibit 2.1 to the Partnership’s Current Report on Form 8-Kdated June 30, 1995.

34

----