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Home Properties 10-K 2007
                                                                   Page 1 of 120

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-K
(Mark One)

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

                   For the fiscal year ended December 31, 2006

                                       or

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

     For the transition period from                      to
                                    --------------------    --------------------

                         Commission File Number 1-13136
                              HOME PROPERTIES, INC.
             (Exact name of Registrant as specified in its Charter)

            MARYLAND                                            16-1455126
  (State or other jurisdiction                               (I.R.S. Employer
of incorporation or organization)                         Identification Number)

                               850 CLINTON SQUARE
                            ROCHESTER, NEW YORK 14604
                    (Address of principal executive offices)

Registrant's telephone number, including area code: (585) 546-4900
Securities registered pursuant to Section 12(b) of the Act:

     Title of each class            Name of each exchange on which registered
Common Stock, $.01 par value                 New York Stock Exchange
----------------------------        -----------------------------------------

           Securities registered pursuant to section 12(g) of the Act:

                          -----------------------------
                                (Title of class)

                          -----------------------------
                                (Title of class)

Indicate by checkmark if the  registrant  is a well-known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act.

YES         X           NO
          ------               ------

Indicate by checkmark if the registrant is not required to file reports pursuant
to Section 13 or Section 15(d) of the Act.

YES                     NO       X
          ------               ------

Indicate by checkmark  whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

YES         X           NO
          ------               ------

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (ss.229.405 of this chapter) is not contained herein,  and will not
be contained,  to the best of  registrant's  knowledge,  in definitive  proxy or
information  statements  incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.

YES                     NO         X
          ------               ------

Indicate by checkmark  whether the registrant is a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer. See definition of "accelerated
filer and large  accelerated  filer" in Rule 12b-2 of the Exchange  Act.  (Check
one):

Large accelerated filer / X /     Accelerated filer / /      Non-accelerated filer /     /

Indicate by checkmark  whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Act).

YES                     NO       X
          ------               ------

The aggregate market value of the shares of common stock held by  non-affiliates
(based on the  closing  sale price on the New York Stock  Exchange)  on June 30,
2006, was approximately $1,796,700,000.

As of February 16, 2007, there were 33,205,831  shares of common stock, $.01 par
value, outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

                         Document                                         Parts Into Which Incorporated

 Proxy Statement for the Annual Meeting of Stockholders to                           Part III
                  be held on May 1, 2007


                              HOME PROPERTIES, INC.
                              ---------------------
                                TABLE OF CONTENTS
                                -----------------
                                                                                              Page
                                                                                              ----
PART I.

        Item 1.   Business                                                                       4
        Item 1A.  Risk Factors                                                                  12
        Item 1B.  Unresolved Staff Comments                                                     16
        Item 2.   Properties                                                                    16
        Item 3.   Legal Proceedings                                                             22
        Item 4.   Submission of Matters to a Vote of Security Holders                           22
        Item 4A.  Executive Officers                                                            23

PART II.

        Item 5.   Market for the Registrant's Common Equity, Related Shareholder Matters, and
                           Issuer Purchases of Equity Securities                                25
        Item 6.   Selected Financial Data                                                       28
        Item 7.   Management's Discussion and Analysis of Financial Condition and Results of
                           Operations                                                           31
        Item 7A.  Quantitative and Qualitative Disclosures About Market Risk                    54
        Item 8.   Financial Statements and Supplementary Data                                   55
        Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial
                           Disclosure                                                           55
        Item 9A.  Controls and Procedures                                                       55
        Item 9B.  Other Information                                                             56

PART III.

        Item 10.  Directors and Executive Officers of the Registrant                            57
        Item 11.  Executive Compensation                                                        60
        Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related
                           Stockholders Matters                                                 60
        Item 13.  Certain Relationships and Related Transactions                                60
        Item 14.  Principal Accountant Fees and Services                                        60

PART IV.

        Item 15.  Exhibits, Financial Statement Schedules                                       61


                                     PART I

Forward-Looking Statements
--------------------------

This Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Our actual results could differ materially from those set forth in each
forward-looking  statement.  Certain  factors that might cause such a difference
are  discussed in this report,  included in the section  entitled  "Overview" on
page 31 of this Form 10-K.

Item 1.  Business
-------  --------

The Company
-----------

Home   Properties,   Inc.   ("Home   Properties"   or   the   "Company")   is  a
self-administered  and self-managed  real estate  investment trust ("REIT") that
owns, operates,  acquires, develops and rehabilitates apartment communities. The
Company's  properties  are  regionally  focused  primarily in select  Northeast,
Mid-Atlantic and Southeast Florida markets of the United States. The Company was
formed in November 1993 to continue and expand the  operations  of  Home Leasing
Corporation  ("Home Leasing").  The Company completed an initial public offering
of 5,408,000 shares of common stock (the "IPO") on August 4, 1994.

The Company conducts its business through Home Properties,  L.P. (the "Operating
Partnership"),  a New York limited partnership in which the Company held a 71.4%
partnership  interest as of December 31, 2006 (65.2% at December 31, 2005) (such
interest has been  calculated  as the  percentage of  outstanding  common shares
divided by the total outstanding common shares and limited  partnership units in
the Operating Partnership ("UPREIT Units") outstanding) and a management company
-  Home  Properties  Resident  Services,  Inc.  ("HPRS"),  which  is a  Maryland
corporation. Formerly, a portion of the Company's business was also conducted by
Home Properties Management,  Inc. also a Maryland corporation,  which was merged
into HPRS on November 21, 2006.

Home  Properties,  through its affiliates  described  above,  as of December 31,
2006,  operated 127 communities with 39,136  apartment  units. Of these,  36,954
units in 123 communities are owned outright (the "Owned Properties"),  868 units
in one  community  are  managed  and  partially  owned by the Company as general
partner,  and 1,314 units in three  communities  are  managed  for other  owners
(collectively, the "Managed Properties").

The Owned Properties and the Managed Properties (collectively, the "Properties")
are concentrated in the following market areas:

                                Apts.   Apts. Managed As          Apts.        Apt.
Market Area                     Owned    General Partner    Fee Managed      Totals
-----------                     -----    ---------------    -----------      ------
Suburban Washington, D.C.       9,579                  -              -       9,579
Suburban New York City          8,340                  -              -       8,340
Baltimore, MD                   6,632                  -          1,314       7,946
Philadelphia, PA                6,467                  -              -       6,467
Chicago, IL                     2,242                  -              -       2,242
Boston, MA                      2,143                  -              -       2,143
Southeast Florida                 836                  -              -         836
Portland, ME                      715                  -              -         715
Columbus, OH                        -                868              -         868
                               ------                ---          -----      ------
Total # of Units               36,954                868          1,314      39,136
                               ======                ===          =====      ======
Total Number of Communities       123                  1              3         127

The Company's mission is to maximize  long-term  shareholder value by acquiring,
repositioning,  developing and managing market-rate  apartment communities while
enhancing the quality of life for its residents  and  providing  employees  with
opportunities  for growth and  accomplishment.  Our vision is to be a  prominent
owner and manager of market-rate apartment communities, located in selected high
barrier,  high growth  markets.  The areas we have  targeted  for growth are the
Baltimore,   Boston,  New  York  City,   Philadelphia,   Southeast  Florida  and
Washington,  D.C.  regions.  We expect to maintain or grow portfolios in markets
that profitably support our mission as economic conditions permit.

The  Company's  business  strategies  include:  (i)  aggressively  managing  and
improving  its  communities  to achieve  increased net  operating  income;  (ii)
acquiring  additional  apartment  communities with attractive  returns at prices
that  provide a positive  spread over the  Company's  long-term  blended cost of
capital;  (iii)  developing  new  apartment  communities  on raw  land,  on land
adjacent to existing owned communities and where there are density opportunities
to replace existing garden  apartments with mid- or high-rise  structures;  (iv)
disposing of properties that have reached their potential, are less efficient to
operate,  or are located in markets  where growth has slowed to a pace below the
markets  targeted for  acquisition;  and (v)  maintaining  a strong and flexible
capital structure with cost-effective access to the capital markets.

Structure
---------

The  Company was formed in November  1993 as a Maryland  corporation  and is the
general partner of the Operating  Partnership.  On December 31, 2006, it owned a
72.8% interest in the Operating  Partnership  (such interest has been calculated
as the  percentage of  outstanding  common and preferred  units in the Operating
Partnership owned by the Company divided by the total outstanding common shares,
preferred  shares,  and UPREIT Units  outstanding) - one percent as sole general
partner  and the  remainder  as a  limited  partner  through  its  wholly  owned
subsidiary, Home Properties I, LLC, which owns 100% of the limited partner, Home
Properties  Trust.  A portion  of the  limited  partner  interests  held by Home
Properties  Trust as of  December  31,  2006  consisted  of all of the  Series F
Limited  Partnership  Units  (2,400,000  units,  or  4.9% of the  total).  Those
preferred  interests in the Operating  Partnership  have rights and  preferences
that mirror the rights and  preferences  of the holders of the related series of
preferred shares in the Company. The remaining units (32,615,310 or 66.9% of the
total) held by Home Properties Trust have basically the same rights as the other
holders of the other UPREIT Units.  Those other holders are certain  individuals
and entities who received UPREIT Units as  consideration  for their interests in
entities owning apartment  communities  purchased by the Operating  Partnership,
including certain officers and directors of the Company.

The Operating  Partnership is a New York limited  partnership formed in December
1993. Holders of UPREIT Units in the Operating  Partnership may redeem an UPREIT
Unit  for one  share of the  Company's  common  stock or cash  equal to the fair
market  value at the  time of the  redemption,  at the  option  of the  Company.
Management  expects that it will  continue to utilize  UPREIT Units as a form of
consideration for a portion of its acquisition properties.

HPRS is and HP Management was, prior to its merger into HPRS in November 2006, a
wholly  owned  subsidiary  of  the Company,  and as a  result  the  accompanying
consolidated  financial statements include the accounts of both companies.  HPRS
is and HP  Management  was a  taxable  REIT  subsidiary  under  the  Tax  Relief
Extension  Act of 1999.  HP  Management  was formed in January 1994 and HPRS was
formed in December  1995.  Both  companies  managed,  for a fee,  certain of the
commercial,  residential and development  activities of the Company and provided
construction,  development and redevelopment  services for the Company. With the
transfers of the affordable  management  properties  and  commercial  management
contracts,  the amount of activity in HPRS and HP Management was minimal in 2006
and HP Management therefore was merged into HPRS.

In September 1997,  Home Properties  Trust ("QRS") was formed as a Maryland real
estate trust and as a qualified REIT subsidiary. The QRS is wholly owned by Home
Properties  I, LLC  which is owned  100% by the  Company.  The QRS is a  limited
partner of the Operating  Partnership and holds all of the Company's interest in
the  Operating  Partnership,  except for the 1% held  directly by the Company as
sole general partner.

The Company  currently  has  approximately  1,200  employees  and its  executive
offices are  located at  850 Clinton  Square,  Rochester,  New York  14604.  Its
telephone number is (585) 546-4900.

Operating Strategies
--------------------

The  Company  will  continue  to  focus  on  enhancing  investment  returns  by:
(i) developing   new  apartments  and  acquiring   apartment   communities   and
repositioning  those apartment  communities for long-term  growth at prices that
provide a positive spread over the Company's  long-term blended cost of capital;
(ii) recycling assets by disposing of properties in low growth markets and those
that have reached their  potential or are less  efficient to operate due to size
or remote  location;  (iii)  balancing  its  decentralized  property  management
philosophy  with  the   efficiencies  of  centralized   support   functions  and
accountability including volume purchasing; (iv) enhancing the quality of living
for the  Company's  residents  by improving  the service and physical  amenities
available at each community  every year; (v) adopting new technology so that the
time and cost  spent on  administration  can be  minimized  while the time spent
attracting and serving  residents can be maximized;  (vi)  continuing to utilize
its written  "Pledge" of customer  satisfaction  that is the foundation on which
the  Company  has built its brand  recognition;  and (vii)  focusing on reducing
expenses while constantly improving the level of service to residents.

Acquisition and Sale Strategies
-------------------------------

The Company's strategy is to grow primarily through  acquisitions in the suburbs
of  major   metropolitan   markets  that  have   significant   barriers  to  new
construction,  easy access to the Company's headquarters,  and enough apartments
available for  acquisition  to achieve a critical  mass.  Targeted  markets also
possess  other  characteristics,   including  acquisition   opportunities  below
replacement  costs,  a mature  housing stock,  high average  single-family  home
prices and stable or moderate job growth. The Company currently expects that its
growth  will be  focused  primarily  within  suburban  sub-markets  of  selected
metropolitan  areas within the  Northeast,  Mid-Atlantic  and Southeast  Florida
regions of the United States where it has already  established  a presence.  The
largest metropolitan areas the Company will focus on include Baltimore,  Boston,
New York City, Philadelphia, Southeast Florida, and Washington, D.C. The Company
may expand into new markets that possess the  characteristics  described  above.
Continued  geographic  specialization  is expected  to have a greater  impact on
operating efficiencies versus widespread accumulation of properties. The Company
will  continue to pursue the  acquisition  of  individual  properties as well as
multi-property  portfolios.  It may also consider strategic investments in other
apartment companies, as well as strategic alliances, such as joint ventures. The
Company has  anticipated  closing on  acquisitions of $400 million in its budget
for 2007.

During 2006, the Company acquired eight  communities with a total of 3,067 units
for an aggregate consideration of $360.1 million, or an average of approximately
$117,400  per  apartment  unit.  The  weighted   average   expected  first  year
capitalization rate for the acquired  communities was 6.7%.  Capitalization rate
("cap  rate") is defined as the rate of interest  used to convert the first year
expected net operating  income ("NOI") less a 3.0%  management fee into a single
present value. NOI is defined by the Company as rental income and property other
income  less  operating  and  maintenance   expenses.   The  acquisitions   were
concentrated in Boston, Baltimore and Washington, D.C.

During 2006, the Company  completed the sale of 39  communities  with a total of
9,705 units for an  aggregate  consideration  of $495.3  million,  at a weighted
average expected first-year cap rate of 7.6%. Of the properties, 37 sold were in
markets that management  viewed as mature markets (Detroit and Upstate New York)
where the  properties  had reached  their  potential.  The Company  recycled the
proceeds  from  those  properties,  which  were  expected  to produce a weighted
average  unleveraged  internal rate of return ("IRR") of 7.4%, with the purchase
of properties  expected to produce an unleveraged IRR of 9.0%. IRR is defined as
the  discount  rate at which the  present  value of the future cash flows of the
investment  is equal to the cost of the  investment.  Several of the  properties
sold were originally  acquired through  transactions  where the sellers received
UPREIT Units as  consideration  in order to provide them with the opportunity to
defer tax obligations.  We refer to these transactions as "UPREIT transactions."
Generally,  in UPREIT transactions,  the Company has made certain commitments to
the sellers  regarding the  Company's  sale of the  property.  As a result,  tax
deferred  Section 1031 exchanges were used to continue to defer taxable gains of
the UPREIT investor.

The Company will continue to  contemplate  the sale of some of its  communities.
Typically,  a property will be targeted for sale if management is of the opinion
that it has reached its  potential or if it is located in a slower growth market
or is less  efficient  to  operate.  A  certain  number  of the  properties  may
originally  have been acquired  through UPREIT  transactions.  Therefore,  those
sales will have to be matched with  suitable  acquisitions  using a tax deferred
exchange.  The Company has  anticipated  closing on sales of  $50 million in its
budget for 2007.

Financing and Capital Strategies
--------------------------------

The  Company  intends  to  adhere  to  the  following  financing  policies:  (i)
maintaining a ratio of debt-to-total  market  capitalization  (total debt of the
Company as a percentage of the market value of outstanding  diluted common stock
(including the common stock equivalents of the UPREIT Units) plus total debt) of
approximately  55% or less;  (ii) utilizing  primarily  fixed rate  debt;  (iii)
varying debt maturities to avoid  significant  exposure to interest rate changes
upon  refinancing;  and (iv) maintaining a line of credit so that it can respond
quickly to acquisition opportunities.

On December 31, 2006, the Company's debt was approximately  $2.1 billion and the
debt-to-total  market  capitalization  ratio  was  42.9%  based on the  year-end
closing  price of the  Company's  common stock of $59.27.  The weighted  average
interest rate on the Company's  mortgage debt as of  December 31,  2006 was 5.8%
and the weighted average maturity was approximately six and one-half years. Debt
maturities are staggered,  ranging from June 2007,  through  January 2042. As of
December 31, 2006, the Company had an unsecured line of credit facility from M&T
Bank of $140  million.  This  facility is available  for  acquisition  and other
corporate  purposes and bears an interest rate at 0.75% over the one-month LIBOR
rate. As of December 31, 2006,  the one-month  LIBOR rate was 5.3% and there was
nothing outstanding on the line of credit.

Management  expects to  continue  to fund a portion of its  continued  growth by
taking  advantage of its UPREIT  structure and using UPREIT Units as currency in
acquisition  transactions.  During 2006,  the Company  issued  $20.4  million of
UPREIT Units as  consideration  for one  acquired  property.  During  2005,  the
Company  issued $55.6 million worth of UPREIT Units as  consideration  for three
acquired properties. It is difficult to predict the level of demand from sellers
for this type of transaction.

During  periods  when the  Company's  shares  are  trading  at a premium  to its
estimate of net asset value ("NAV"), it is unlikely that management would engage
in share repurchases.  In such circumstances,  it is more likely that management
would  pursue  issuing  equity in order to raise  capital to be used to pay down
existing  indebtedness.  This should be neutral to both  earnings  per share and
NAV,  increase the level of unencumbered  assets and better position the Company
to fund future acquisition and development pipeline needs.

The Company's Board of Directors has approved a stock  repurchase  program under
which the Company may  repurchase  shares of its  outstanding  common  stock and
UPREIT Units.  Shares or units may be repurchased  through the open market or in
privately-negotiated    transactions.    The    Company's    strategy    is   to
opportunistically  repurchase  shares at a discount to its  underlying net asset
value, thereby continuing to build value for long-term shareholders. At December
31, 2004, there was approval  remaining to purchase 2,000,000 shares. On each of
February  16,  2005 and  November  4, 2005,  the Board of  Directors  approved a
2,000,000-share  increase in the stock  repurchase  program.  During  2005,  the
Company  repurchased  2,779,805 shares of its outstanding common stock at a cost
of $111.7 million at a weighted average price of $40.20 per share.  During 2006,
the Company  repurchased  2,613,747 shares of its outstanding  common stock at a
cost of $142.5  million at a  weighted  average  price of $54.53  per share.  On
October 27, 2006, the Board of Directors approved an additional  2,000,000-share
increase in the stock repurchase program, resulting in a remaining authorization
level of 2,606,448 shares as of December 31, 2006.

Competition
-----------

The Company's  properties are primarily  located in developed  areas where there
are other multi-family properties which directly compete for residents. There is
also competition from single family homes and condominiums for sale or rent. The
competitive  environment may have a detrimental  effect on the Company's ability
to lease apartments at existing and at newly developed properties, as well as on
rental rates.

In addition,  the Company  competes with other real estate  investors in seeking
property for acquisition and development.  These competitors include pension and
investment  funds,  insurance  companies,  private  investors,  local owners and
developers and other apartment REITs. This competition could increase prices for
properties  that the  Company  would like to purchase  and impact the  Company's
ability to achieve its long-term growth targets.

The Company believes, however, that it is well positioned to compete effectively
for both residents and properties as a result of its:

*    focus on  service  and  resident  satisfaction,  as  evidenced  by The Home
     Properties Pledge,  which provides a money-back service guarantee and lease
     flexibility;

*    ability to issue  UPREIT  Units in purchase  transactions,  which  provides
     sellers with the opportunity to defer taxes; and

*    unique  re-positioning  strategy that  differentiates  the Company from its
     competitors both for residents and properties.

Market Environment
------------------

The markets in which Home Properties  operates could be characterized as stable,
with moderate levels of job growth. For 2006, there continues to be the trend of
slightly lower job growth in the Company's  markets of 1.2% compared to 1.7% for
the country.

The information on the Market  Demographics  and  Multifamily  Supply and Demand
tables on Pages 9 and 10 were compiled by the Company from the sources indicated
on the tables.  The methods used include  estimates and, while the Company feels
that the estimates are reasonable,  there can be no assurance that the estimates
are accurate.  There can also be no assurance  that the  historical  information
included on the table will be consistent with future trends.

New  construction  in the  Company's  markets is low  relative  to the  existing
multifamily housing stock and compared to other regions of the country. In 2006,
Home Properties'  markets represented 27.7% of the total estimated existing U.S.
multifamily  housing  stock,  but only 19.9% of the country's  estimated net new
supply of multifamily housing units.

An analysis of future  multifamily  supply  compared  to  projected  multifamily
demand can indicate whether a particular  market is tightening,  softening or in
equilibrium.  The  fourth to last  column in the  Multifamily  Supply and Demand
table on Page 10 reflects  current  estimated  net new  multifamily  supply as a
percentage of new  multifamily  demand for the Company's  markets and the United
States. In 2006, net new multifamily  supply as a percent of net new multifamily
demand in Home Properties' markets was approximately 65%, compared to a national
average of 68%. Both Home Properties' markets and the country as a whole seem to
be tightening on a measurement of supply/demand equilibrium. In 2005, these same
percentages were 71% and 81% for the Company and the country, respectively. On a
year over  year  basis,  there  seems to be less  supply  to meet the  estimated
demand.

The third to the last column in the Multifamily  Supply and Demand table on Page
10 shows the  estimated  net new  multifamily  supply  as  percent  of  existing
multifamily  housing  stock.  In the  Company's  markets,  net new  supply  only
represents 0.6% of the existing  multifamily housing stock. This compares to the
national average net new multifamily supply estimates at 0.8% of the multifamily
housing stock.


                               Market Demographics
                               -------------------
                                                      December     December                                      2006
                                                           Job          Job                               Multifamily
                                                        Growth       Growth                     2006     Units as a %          2006
                                % of          2006    Trailing     Trailing      December     Median         of Total   Multifamily
                               Owned     Number of   12 Months    12 Months  Unemployment       Home    Housing Units       Housing
MSA Market Area                Units    Households    % Change       Actual          Rate      Value        Stock (4)     Stock (5)
---------------                -----    ----------    --------       ------          ----      -----        ---------     ---------
Northern VA/DC                 25.9%     1,980,700        2.4%       71,200          2.9%    314,752            30.9%       642,981
Suburban New York City (1)     22.6%     6,842,970        0.6%       54,400          3.7%    385,095            44.9%     3,272,898
Baltimore, MD                  18.0%     1,032,049        1.1%       14,800          3.8%    246,006            21.9%       240,707
Eastern PA  (2)                17.5%     2,526,694        1.2%       38,000          3.9%    185,800            19.3%       521,041
Chicago, IL                     6.0%     3,416,814        1.1%       52,000          3.9%    232,978            32.5%     1,181,709
Boston, MA                      5.8%     1,710,643        0.7%       17,000          4.4%    379,590            33.2%       593,994
Southeast Florida (3)           2.3%     2,055,392        2.3%       56,700          3.1%    206,634            41.8%       971,424
Portland, ME                    1.9%       212,885        0.5%        1,000          3.3%    217,379            17.2%        43,266
-----------------------------------------------------------------------------------------------------------------------------------
Home Properties Markets       100.0%    19,778,147        1.2%      305,100          3.6%    290,192            35.3%     7,468,020
-----------------------------------------------------------------------------------------------------------------------------------
United States                          112,267,302        1.7%    2,301,000          4.6%    161,602            21.7%    26,915,288

(1)  Suburban New York City is defined for this report as New  York-Northern New
     Jersey-Long Island, NY-NJ-PA MSA.

(2)  Eastern     Pennsylvania     is    defined     for    this     report    as
     Philadelphia-Camden-Wilmington,          PA-NJ-DE-MD          MSA         &
     Allentown-Bethlehem-Easton PA-NJ MSA.

(3)  Southeast Florida is defined for this report as Miami-Fort Lauderdale-Miami
     Beach, FL MSA.

(4)  Based on  Claritas  2006  estimates  calculated  from the 2000 U.S.  Census
     figures.

(5)  2006 Multifamily Housing Stock is from Claritas estimates based on the 2000
     U.S. Census.

Sources:  Bureau of Labor Statistics (BLS);  Claritas,  Inc.; US Census Bureau -
Manufacturing & Construction Div.

Data collected is data available as of February 8, 2007 and in some cases may be
preliminary.

BLS is the principal fact-finding agency for the Federal Government in the broad
field of labor economics and statistics.

Claritas,  Inc.  is a leading  provider of  precision  marketing  solutions  and
related products/services.

U.S. Census Bureau's parent federal agency is the U.S. Dept. of Commerce,  which
promotes American business and trade.


                                                                 Multifamily Supply and Demand
                                                                 -----------------------------
                                                                     Estimated     Estimated      Estimated
                            Estimated                                     2006       Net New        Net New
                                 2006     Estimated     Estimated          New   Multifamily    Multifamily                Expected
                                  New          2006          2006  Multifamily   Supply as a    Supply as a                  Excess
                            Supply of   Multifamily       Net New    Household      % of New           % of     Expected    Revenue
                          Multifamily  Obsolescence   Multifamily       Demand   Multifamily    Multifamily       Excess     Growth
MSA Market Area                   (6)           (7)    Supply (8)          (9)        Demand          Stock  Demand (10)       (11)
---------------                   ---           ---    ----------          ---        ------          -----  -----------       ----

Northern VA/DC                  8,745         3,215         5,530       14,675         37.7%           0.9%        9,145       1.4%
Suburban New York City (1)     29,692        16,364        13,328       16,292         81.8%           0.4%        2,964       0.1%
Baltimore, MD                   1,699         1,204           495        2,162         22.9%           0.2%        1,667       0.7%
Eastern PA ((2))                3,643         2,605         1,038        4,892         21.2%           0.2%        3,854       0.7%
Chicago, IL                    14,432         5,909         8,523       11,272         75.6%           0.7%        2,749       0.2%
Boston, MA                      6,301         2,970         3,331        3,765         88.5%           0.6%          434       0.1%
Southeast Florida              17,738         4,857        12,881       15,808         81.5%           1.3%        2,927       0.3%
Portland, ME                      220           216             4          115          3.5%           0.0%          111       0.3%
-----------------------------------------------------------------------------------------------------------------------------------
Home Properties Markets        82,470        37,340        45,130       68,981         65.4%           0.6%       23,851       0.3%
-----------------------------------------------------------------------------------------------------------------------------------
United States                 360,999       134,576       226,423      333,044         68.0%           0.8%      106,621       0.4%

     (1)-(5) see footnotes prior page

(6)  Estimated  2006 New  Supply of  Multifamily  =  Multifamily  permits  (2006
     figures U.S. Census Bureau, Mfg. & Constr.  Div., 5+ permits only) adjusted
     by the average % of permits resulting in a construction start (estimated at
     95%).

(7)  Estimated   2006   Multifamily   Obsolescence  =  0.5%  of  Estimated  2006
     multifamily housing stock.

(8)  Estimated  2006 Net New  Multifamily  Supply = Estimated 2006 New Supply of
     Multifamily - Estimated 2006 multifamily obsolescence.

(9)  Estimated  2006 New  Multifamily  Household  Demand = Trailing 12 month job
     growth  (Nonfarm,  not  seasonally  adjusted  payroll  employment  figures)
     (12/31/2005-12/31/2006)  multiplied  by the  expected  % of  new  household
     formations  resulting  from  new  jobs  (66.7%)  and  the % of  multifamily
     households in each market (based on Claritas estimates).

(10) Expected Excess Demand = Estimated 2006 New Multifamily  Household Demand -
     Estimated 2006 Net New Multifamily Supply.

(11) Expected  Excess  Revenue  Growth = Expected  Excess Demand divided by 2006
     Multifamily  Housing  Stock.  This  percentage  is  expected to reflect the
     relative  impact  that  changes in the  supply  and demand for  multifamily
     housing  units will have on  occupancy  rates  and/or  rental rates in each
     market,  beyond the  impact  caused by broader  economic  factors,  such as
     inflation and interest rates.

Environmental Matters
---------------------

Under  various  laws  and   regulations   relating  to  the  protection  of  the
environment, an owner of real estate may be held liable for the costs of removal
or remediation  of certain  hazardous or toxic  substances  located on or in its
property.   Environmental   laws  include  those  regulating  the  existence  of
asbestos-containing  materials,  management of surfaces with  lead-based  paints
(including  related required notices to residents),  use of and/or the existence
of underground storage tanks and waste management  activities.  These laws often
impose  liability  without regard to whether the owner was  responsible  for, or
even knew of, the presence of such  substances.  The presence of such substances
may adversely affect the owner's ability to rent or sell the property or use the
property as collateral.  Independent  environmental  consultants  have conducted
"Phase I"  environmental  site assessments  (which involve visual inspection but
not soil or groundwater  analysis) on substantially all of the Owned Properties.
Phase I assessments did not reveal any environmental liability that would have a
material adverse effect on the Company. In addition, the Company is not aware of
any  environmental  liability  that  management  believes  would have a material
adverse  effect on the Company.  There is no assurance  that Phase I assessments
would reveal all environmental  liabilities or that environmental conditions not
known to the  Company  may  exist now or in the  future  which  would  result in
liability to the Company for  remediation  or fines,  either under existing laws
and regulations or future changes to such requirements.

Available Information
---------------------

The  Company's  annual  reports  on Form 10-K,  quarterly  reports on Form 10-Q,
current  reports on Form 8-K and other  reports  required by Sections  13(a) and
15(d) of the  Securities  Exchange Act of 1934, as amended,  are  electronically
filed with the Securities and Exchange Commission  ("SEC").  The public may read
and copy any  materials  the  Company  files  with the SEC at the  SEC's  Public
Reference Room at 100 F Street NE,  Washington,  DC 20549-2521.  Please call the
SEC at  1-800-SEC-0330  for further  information  on the operation of the Public
Reference  Room.  The SEC  maintains  a Web site at  www.sec.gov  that  contains
reports,  proxy and  information  statements,  and other  information  regarding
issuers that file electronically with the SEC.

Company Web Site
----------------

The  Company  maintains  an  Internet  Web site at  www.homeproperties.com.  The
Company  provides  free of charge  access to its reports filed with the SEC, and
any amendments  thereto,  through this Web site.  These reports are available as
soon as reasonably  practicable after the reports are filed  electronically with
the SEC and are found under  "Investors/Financials/SEC  Filings."  In  addition,
paper copies of annual and periodic  reports  filed with the SEC may be obtained
at no charge by contacting the Corporate Secretary,  Home Properties,  Inc., 850
Clinton Square,  Rochester,  New York 14604. The address is also included within
the SEC filings or under "Investors/Shareholder  Services/Contact  Information,"
on the Company's Web site.

Current  copies of the Company's  Code of Business  Conduct and Ethics,  Code of
Ethics  for Senior  Financial  Officers,  Corporate  Governance  Guidelines  and
Charters for the Audit, Compensation,  Corporate  Governance/Nominating and Real
Estate Investment Committees of the Board of Directors are also available on the
Company's     Web    site     under     the     heading     "Investors/Corporate
Governance/Highlights."  Copies of the these  documents are also available at no
charge upon request  addressed to the  Corporate  Secretary at Home  Properties,
Inc.,  850  Clinton  Square,  Rochester,  New  York 14604.  The  address is also
included on the Company's Web site under "Investors/Shareholder Services/Contact
Information".

The reference to our Web site does not  incorporate by reference the information
contained in the Web site and such  information  should not be considered a part
of this report.

Item 1A.  Risk Factors
--------  ------------

As used in this  section,  references  to  "we" or "us" or  "our"  refer  to the
Company, the Operating Partnership, and HPRS.

The following risks apply to Home  Properties,  the Operating  Partnership,  and
HPRS,  in addition to other risks and factors set forth  elsewhere  in this Form
10-K.

Real Estate Investment Risks
----------------------------

We are subject to risks that are part of owning real estate.
------------------------------------------------------------

Real  property  investments  are  subject  to varying  degrees  of risk.  If our
communities  do not generate  revenues  sufficient to meet  operating  expenses,
including  debt service and capital  expenditures,  our cash flow and ability to
make distributions to our stockholders will be adversely affected. A multifamily
apartment  community's  revenues  and value  may be  adversely  affected  by the
general  economic  conditions;  local  economic  conditions;  local real  estate
considerations  (such as over supply of or reduced demand for  apartments);  the
perception   by   prospective   residents   of  the  safety,   convenience   and
attractiveness of the communities or neighborhoods in which they are located and
the quality of local schools and other amenities;  and increased operating costs
(including real estate taxes and utilities).  Certain significant fixed expenses
are  generally not reduced when  circumstances  cause a reduction in income from
the investment.

We depend on rental income for cash flow to pay expenses and make distributions.
--------------------------------------------------------------------------------

We are dependent on rental income to pay operating expenses and to generate cash
to enable us to make  distributions  to our  stockholders.  If we are  unable to
attract and retain  residents or if our residents are unable,  due to an adverse
change in the economic condition of the region or otherwise, to pay their rental
obligations,  our  ability  to make  expected  distributions  will be  adversely
affected. In addition,  the weather and other factors outside of our control can
result in an increase in the operating expenses for which we are responsible.

Real  estate  investments  are  relatively  illiquid,  and we may not be able to
--------------------------------------------------------------------------------
respond to changing conditions quickly.
---------------------------------------

Real estate investments are relatively illiquid and, therefore,  we have limited
ability to vary our  portfolio  quickly in  response  to changes in  economic or
other conditions. In addition, the prohibition in the Internal Revenue Code (the
"Code") on REITs holding  property for sale and related  regulations  may affect
our ability to sell properties  without  adversely  affecting  distributions  to
stockholders.  A significant number of our properties were acquired using UPREIT
Units and are subject to certain agreements,  which restrict our ability to sell
such properties in transactions  that would create current taxable income to the
former owners.

Our business is subject to competition.
---------------------------------------

We plan to continue to acquire additional multifamily  residential properties in
the Northeast,  Mid-Atlantic and Southeast Florida regions of the United States.
There are a number of  multifamily  developers  and other real estate  companies
that  compete  with  us  in  seeking  properties  for  acquisition,  prospective
residents  and land for  development.  Most of our  properties  are in developed
areas where there are other properties of the same type.  Competition from other
properties may affect our ability to attract and retain  residents,  to increase
rental  rates  and to  minimize  expenses  of  operation.  Competition  for  the
acquisition of properties  could increase  prices for the types of properties we
would like to pursue and adversely affect our financial performance.

Repositioning and development risks could affect our profitability.
-------------------------------------------------------------------

A key component of our strategy is to acquire  properties and to reposition them
for long-term growth.  In addition,  we have developed and are in the process of
developing new apartment  units.  We plan to continue to expand our  development
activities.  A variety of factors could negatively  impact our ability to timely
complete  repositioning  activities and to develop new units within  anticipated
budgets and time-lines. These include delays in obtaining necessary governmental
permits and authorizations and increased costs of construction. Our inability to
charge rents that will be  sufficient  to offset the effects of these delays and
any increase in costs may impair our profitability.

Short-term leases expose us to the effects of declining market conditions.
--------------------------------------------------------------------------

Virtually all of the leases for our Properties are short-term leases (generally,
one year or  less).  Typically,  our  residents  can  leave  after  the end of a
one-year lease term. As a result,  our rental  revenues are impacted by declines
in market conditions more quickly than if our leases were for longer terms.

A significant  uninsured property or liability loss could adversely affect us in
a material way.

Certain extraordinary losses may not be covered by our comprehensive  liability,
fire,  extended and rental loss  insurance.  If an uninsured loss  occurred,  we
could lose our investment in, and cash flow from, the affected  property (but we
would be required to repay any indebtedness secured by that property and related
taxes and other charges).

Compliance with laws and regulations may be costly.
---------------------------------------------------

Many laws and  governmental  regulations  are  applicable to the  Properties and
changes in the laws and regulations, or their interpretation by agencies and the
courts, occur frequently. Under the Americans with Disabilities Act of 1990 (the
"ADA"), all places of public  accommodation are required to meet certain federal
requirements  related to access and use by disabled  persons.  In addition,  the
Fair Housing Amendments Act of 1988 (the "FHAA") requires apartment  communities
first  occupied  after  March  13,  1990 to be  accessible  to the  handicapped.
Non-compliance  with the ADA or the FHAA could result in the imposition of fines
or an award of  damages  to  private  litigants.  Management  believes  that the
Properties  are   substantially   in  compliance   with  present  ADA  and  FHAA
requirements.  Under the Federal Fair  Housing Act and state fair housing  laws,
discrimination  on  the  basis  of  certain  protected  classes  is  prohibited.
Violation of these laws can result in significant damage awards to victims.  The
Company has a strong  policy  against any kind of  discriminatory  behavior  and
trains  its   employees   to  avoid   discrimination   or  the   appearance   of
discrimination.  There  is no  assurance,  however,  that an  employee  will not
violate the  Company's  policy  against  discrimination  and thus  violate  fair
housing  laws.  This could subject the Company to legal actions and the possible
imposition of damage awards.

Real Estate Financing Risks
---------------------------

There are general risks related to debt.
----------------------------------------

We are subject to the customary risks  associated with debt financing  including
the  potential  inability  to  refinance  existing  mortgage  indebtedness  upon
maturity on favorable  terms.  If a property is  mortgaged to secure  payment of
indebtedness  and we are  unable  to meet  its  debt  service  obligations,  the
property could be foreclosed  upon.  This could  adversely  affect our cash flow
and, consequently, the amount available for distributions to stockholders.

There is no legal limit on the amount of debt we can incur.
-----------------------------------------------------------

The Board of  Directors  has adopted a policy of limiting  our  indebtedness  to
approximately 55% of our total market  capitalization (with the equity component
of total market  capitalization based on the per share net asset value published
by Home Properties in its most recent quarterly earnings press release), but our
organizational  documents  do  not  contain  any  limitation  on the  amount  or
percentage of indebtedness,  we may incur.  Accordingly,  the Board of Directors
could alter or eliminate its current  policy on  borrowing.  If this policy were
changed, we could become more highly leveraged, resulting in an increase in debt
service that could adversely  affect our ability to make expected  distributions
to stockholders  and increase the risk of default on our  indebtedness.  Our net
asset  value  fluctuates  based  on a number  of  factors.  Our  line of  credit
agreement and agreement with holders of our preferred  stock limit the amount of
indebtedness we may incur.

We may not be able to refinance our debt when it matures.
---------------------------------------------------------

We are subject to the risks normally  associated with debt financing,  including
the risk that our cash flow will be insufficient  to meet the required  payments
of principal and interest.  Because a significant amount of the financing is not
fully self-amortizing, we anticipate that only a portion of the principal of our
indebtedness  will be repaid  prior to  maturity.  So, we will need to refinance
debt. Accordingly, there is a risk that we will not be successful in refinancing
existing  indebtedness  or that  the  terms of such  refinancing  will not be as
favorable as the terms of the existing indebtedness.  We aim to stagger our debt
maturities  with  the  goal of  minimizing  the  amount  of debt  which  must be
refinanced in any year.

Financing may not be available and issuing equity could dilute our stockholders'
--------------------------------------------------------------------------------
interests.
----------

Our  ability  to  execute  our  business  strategy  depends  on our access to an
appropriate  blend of debt  financing,  including  unsecured lines of credit and
other forms of secured  and  unsecured  debt,  and equity  financing,  including
common and preferred  equity.  Debt or equity  financing may not be available in
sufficient  amounts,  or on  favorable  terms or at all. If we issue  additional
equity securities to finance  developments and acquisitions instead of incurring
debt, the interests of our existing stockholders could be diluted.

Federal Income Tax Risks
------------------------

There is no assurance that we will continue to qualify as a REIT.
-----------------------------------------------------------------

We believe that we have been organized and have operated in such manner so as to
qualify  as a REIT  under the  Code,  commencing  with our  taxable  year  ended
December 31,  1994.  A REIT  generally  is not taxed at the  corporate  level on
income it currently  distributes to its  shareholders  as long as it distributes
currently at least 90% of its taxable income  (excluding  net capital gain).  No
assurance can be provided,  however,  that we have qualified or will continue to
qualify as a REIT or that new legislation, Treasury Regulations,  administrative
interpretations  or court decisions will not  significantly  change the tax laws
with  respect  to  our  qualification  as a  REIT  or  the  federal  income  tax
consequences of such qualification.

We are required to make certain distributions to qualify as a REIT, and there is
no assurance that we will have the funds necessary to make the distributions.

In order to continue to qualify as a REIT,  we currently  are required each year
to distribute to our stockholders at least 90% of our taxable income  (excluding
net capital gain). In addition,  we will be subject to a 4% nondeductible excise
tax on the  amount,  if any,  by  which  certain  distributions  made by us with
respect  to the  calendar  year  are less  than  the sum of 85% of our  ordinary
income,  95% of our capital gain net income for that year, and any undistributed
taxable  income  from  prior  periods.  We intend to make  distributions  to our
stockholders  to comply with the 90%  distribution  requirement and to avoid the
nondeductible  excise tax and will rely for this purpose on  distributions  from
the Operating Partnership. However, differences in timing between taxable income
and cash available for distribution could require us to borrow funds or to issue
additional  equity to enable us to meet the 90% distribution  requirement  (and,
therefore,  to maintain our REIT  qualification)  and to avoid the nondeductible
excise tax. The  Operating  Partnership  is required to pay (or reimburse us, as
its general partner,  for) certain taxes and other liabilities and expenses that
we incur,  including  any taxes that we must pay in the event we were to fail to
qualify  as a REIT.  In  addition,  because  we are  unable to  retain  earnings
(resulting from REIT distribution  requirements),  we will generally be required
to refinance debt that matures with additional  debt or equity.  There can be no
assurance  that any of these  sources of funds,  if available  at all,  would be
available to meet our distribution and tax obligations.

Our failure to qualify as a REIT would have adverse consequences.
-----------------------------------------------------------------

If we fail to  qualify  as a REIT,  we will be  subject  to  federal  income tax
(including  any  applicable  alternative  minimum tax) on our taxable  income at
regular  corporate  rates. In addition,  unless entitled to relief under certain
statutory  provisions,  we will be disqualified from treatment as a REIT for the
four taxable years following the year during which REIT  qualification  is lost.
The  additional tax burden on us would  significantly  reduce the cash available
for  distribution  by us to our  stockholders.  Our failure to qualify as a REIT
could  reduce  materially  the value of our common stock and would cause all our
distributions  to be taxable as ordinary income to the extent of our current and
accumulated earnings and profits (although, subject to certain limitations under
the Code,  corporate  distributees  may be eligible for the  dividends  received
deduction with respect to these distributions).

The Operating  Partnership  intends to qualify as a partnership  but there is no
--------------------------------------------------------------------------------
guaranty that it will qualify.
------------------------------

We believe that the Operating Partnership qualifies as a partnership for federal
income tax purposes.  No assurance can be provided,  however,  that the Internal
Revenue  Service (the "IRS") will not challenge its status as a partnership  for
federal income tax purposes, or that a court would not sustain such a challenge.
If the IRS were to be  successful in treating the  Operating  Partnership  as an
entity  that is taxable as a  corporation,  we would  cease to qualify as a REIT
because the value of our ownership  interest in the Operating  Partnership would
exceed 5% of our assets and because we would be considered to hold more than 10%
of the voting  securities  of another  corporation.  Also,  the  imposition of a
corporate tax on the Operating Partnership would reduce significantly the amount
of cash  available  for  distribution  to its  limited  partners.  Finally,  the
classification  of the Operating  Partnership  as a corporation  would cause its
limited  partners to  recognize  gain (upon the event that causes the  Operating
Partnership to be classified as a corporation) at least equal to their "negative
capital accounts" (and possibly more, depending upon the circumstances).

Other Risks
-----------

The  ability  of our  stockholders  to effect a change of  control is limited by
--------------------------------------------------------------------------------
certain  provisions of our Articles of  Incorporation as well as by Maryland law
--------------------------------------------------------------------------------
and our Executive Retention Plan.
---------------------------------

Our Articles of Amendment and Restatement of the Articles of  Incorporation,  as
amended (the "Articles of  Incorporation"),  authorize the Board of Directors to
issue up to a total of 80 million shares of common stock,  10 million  shares of
excess  stock and  10 million  shares of preferred  stock and to  establish  the
rights and  preferences  of any shares  issued.  Further,  under the Articles of
Incorporation, the stockholders do not have cumulative voting rights.

In order for us to maintain our  qualification  as a REIT,  not more than 50% in
value of our outstanding stock may be owned, directly or indirectly,  by five or
fewer  individuals (as defined in the Code to include  certain  entities) at any
time during the last half of its taxable year. We have limited  ownership of the
issued and outstanding  shares of common stock by any single stockholder to 8.0%
of the aggregate value of our outstanding shares

The percentage  ownership limit described above, the issuance of preferred stock
in the future and the absence of cumulative  voting rights could have the effect
of:  (i) delaying  or  preventing  a change of control of us even if a change in
control were in the stockholders' interest; (ii) deterring tender offers for our
common stock that may be beneficial to the stockholders;  or (iii) limiting  the
opportunity  for  stockholders  to receive a premium for their common stock that
might otherwise exist if an investor attempted to assemble a block of our common
stock in excess  of the  percentage  ownership  limit or  otherwise  to effect a
change of control of us.

As a Maryland  corporation,  we are subject to the  provisions  of the  Maryland
General  Corporation  Law.  Maryland law imposes  restrictions  on some business
combinations  and requires  compliance  with  statutory  procedures  before some
mergers and acquisitions may occur, which may delay or prevent offers to acquire
us or increase the difficulty of completing any offers,  even if they are in our
stockholders'  best  interests.  In addition,  other  provisions of the Maryland
General  Corporation  Law permit the Board of Directors to make elections and to
take actions  without  stockholder  approval (such as classifying our Board such
that the entire Board is not up to re-election annually) that, if made or taken,
could have the effect of discouraging or delaying a change in control.

Also, to assure that our management has  appropriate  incentives to focus on our
business and  Properties in the face of a change of control  situation,  we have
adopted an executive  retention  plan which  provides  some key  employees  with
salary,  bonus  and some  benefits  continuation  in the  event  of a change  of
control.

Potential conflicts of interest could affect some directors' decisions.
-----------------------------------------------------------------------

Unlike persons acquiring common stock, certain of our directors,  who constitute
less than a majority of the Board of  Directors,  own a  significant  portion of
their  interest  in us  through  UPREIT  Units.  As a result of their  status as
holders of UPREIT Units,  those  directors  and other limited  partners may have
interests  that conflict with  stockholders  with respect to business  decisions
affecting us and the Operating Partnership.  In particular,  those directors may
suffer  different  or more  adverse  tax  consequences  than us upon the sale or
refinancing  of  some  of  the  Properties  as  a  result  of  unrealized   gain
attributable to those Properties. Thus, those directors and the stockholders may
have different  objectives  regarding the appropriate  pricing and timing of any
sale or refinancing  of Properties.  In addition,  those  directors,  as limited
partners  of the  Operating  Partnership,  have  the  right to  approve  certain
fundamental  transactions  such as the sale of all or  substantially  all of the
assets of the Operating  Partnership,  merger or consolidation or dissolution of
the Operating  Partnership and certain  amendments to the Operating  Partnership
Agreement.

The future sale of shares may negatively impact our stock price.
----------------------------------------------------------------

Sales of  substantial  amounts of shares of common stock in the public market or
the  perception  that such sales might occur could  adversely  affect the market
price of the common stock. The Operating  Partnership has issued and outstanding
approximately  13.3 million  UPREIT  Units as of December  31, 2006,  to persons
other than us or the Trust,  which may be exchanged on a  one-for-one  basis for
shares of Common Stock under certain circumstances. In addition, Home Properties
has granted options to purchase shares of stock to certain  directors,  officers
and employees of Home Properties,  of which, as of December 31,  2006, 2,348,014
options remained outstanding and unexercised.

Item 1B.  Unresolved Staff Comments
--------  -------------------------

None.

Item 2.  Properties
-------  ----------

As of December  31, 2006,  the Owned  Properties  consisted  of 123  multifamily
residential  communities  containing  36,954 apartment units. At the time of the
IPO (August 4, 1994),  Home Properties  owned 11  communities  containing  3,065
units and simultaneously with the closing of the IPO acquired an additional four
communities  containing  926 units.  In 2006,  Home  Properties  acquired  3,067
apartment   units  in  eight   communities   for  a  total   purchase  price  of
$360.1 million.  Also in 2006, the Company sold 39  communities  with a total of
9,705 units for total consideration of $495.3 million.

The Owned  Properties are generally  located in established  markets in suburban
neighborhoods  and  are  well  maintained  and  well  leased.  Average  economic
occupancy at the Owned  Properties  was 93.9% for 2006.  Occupancy is defined as
total  possible  rental  income,  net of  vacancy  and  bad  debt  expense  as a
percentage of total  possible  rental income.  Total  possible  rental income is
determined  by valuing  occupied  units at  contract  rates and vacant  units at
market rents.  The Owned  Properties are typically two- and  three-story  garden
style apartment  buildings in landscaped settings and a majority are of brick or
other masonry  construction.  The Company  believes that its strategic  focus on
appealing to middle income residents and the quality of the services it provides
to such residents  results in lower resident  turnover.  Average turnover at the
Owned Properties was  approximately  44% for 2006, which is significantly  below
the national average of approximately 60% for garden-style apartments.

Resident  leases are generally for a one year term.  Security  deposits equal to
one month's rent or less are generally required.

Certain  of the  Owned  Properties  secure  mortgage  loans.  See  Schedule  III
contained herein (F-39 to F-42).

The  table  on  the  following  pages  illustrates   certain  of  the  important
characteristics of the Owned Properties as of December 31, 2006.

Communities Wholly Owned and Managed by Home Properties

                                                                         (2)         (3)        (3)     2006      2005
                                                           Average      2006        2006       2005   Avg Mo    Avg Mo 12/31/2006
                                          #    Age             Apt         %     Average    Average     Rent      Rent      Total
                                         Of     In   Year     Size  Resident           %          %     Rate      Rate       Cost
Regional Area                          Apts  Years    Acq  (Sq Ft)   Tumover   Occupancy  Occupancy  per Apt   per Apt      (000)
-------------                          ----  -----    ---  -------   -------   ---------  ---------  -------   -------      -----
                    Core Communities (1)
                    --------------------
FL-Southeast        The Hamptons        668     17   2004    1,052       52%         94%        96%     $979      $878    $63,628
FL-Southeast        Vinings at
                    Hampton Village     168     17   2004    1,207       42%         94%        95%    1,060       956     15,843
IL-Chicago          Blackhawk
                    Apartments          371     45   2000      793       49%         92%        91%      845       827     23,486
IL-Chicago          Courtyards
                    Village             224     35   2001      674       50%         96%        94%      771       751     16,579
IL-Chicago          Cypress Place       192     36   2000      852       40%         95%        93%      904       887     13,981
IL-Chicago          The Colony          783     33   1999      704       50%         95%        93%      816       807     53,939
IL-Chicago          The New Colonies    672     32   1998      657       55%         93%        91%      701       699     34,072
MA-Boston           Gardencrest
                    Apartments          696     58   2002      847       32%         96%        95%    1,380     1,326    105,291
MA-Boston           Stone Ends
                    Apartments          280     27   2003      815       44%         96%        96%    1,212     1,175     37,008
MA-Boston           The Village at
                    Marshfield          276     34   2004      735       41%         94%        94%    1,128     1,099     34,014
MD-Baltimore        Bonnie Ridge
                    Apartments          960     40   1999      998       39%         93%        92%    1,008       984     77,817
MD-Baltimore        Canterbury
                    Apartments          618     28   1999      934       46%         95%        93%      869       829     35,695
MD-Baltimore        Country Village
                    Apartments          344     35   1998      776       48%         93%        93%      837       803     22,716
MD-Baltimore        Falcon Crest
                    Townhomes           396     37   1999      993       50%         91%        91%      929       883     22,676
MD-Baltimore        Fenland Field       234     36   2001      934       45%         92%        94%    1,057     1,025     19,630
MD-Baltimore        Gateway Village
                    Apartments          132     17   1999      963       47%         92%        93%    1,205     1,144     10,335
MD-Baltimore        Mill Towne
                    Village             384     33   2001      812       42%         94%        95%      816       787     28,200
MD-Baltimore        Morningside
                    Heights
                    Apartments        1,050     41   1998      864       45%         94%        94%      830       807     60,667
MD-Baltimore        Owings Run
                    Apartments          504     11   1999    1,136       44%         94%        94%    1,080     1,008     43,827
MD-Baltimore        Selford
                    Townhomes           102     19   1999      987       44%         94%        92%    1,229     1,193      8,102
MD-Baltimore        Shakespeare
                    Park Apartments      84     23   1999      793       19%         98%        97%      825       810      4,973
MD-Baltimore        The Manor
                    Apartments (MD)     435     37   2001    1,004       39%         93%        92%    1,123     1,113     46,259
MD-Baltimore        Timbercroft
                    Townhomes           284     34   1999      998       17%         99%        99%      797       767     12,858
MD-Baltimore        Village Square
                    (MD)                370     38   1999      948       45%         95%        96%    1,085     1,034     24,281
MD-Baltimore        Woodholme Manor
                    Apartments          177     37   2001      817       26%         94%        91%      788       733     10,263
ME-Portland         Mill Company
                    Gardens              95     55   1998      542       68%         94%        95%      758       747      3,383
ME-Portland         Redbank Village
                    Apartments          500     62   1998      735       40%         93%        92%      805       793     25,621
NJ-Northern         Chatham Hill
                    Apartments          308     39   2004      944       33%         96%        95%    1,574     1,503     55,508
NJ-Northern         East Hill
                    Gardens              33     48   1998      654       24%         98%        96%    1,441     1,386      3,092
NJ-Northern         Lakeview
                    Apartments          106     57   1998      492       35%         98%        97%    1,247     1,195      8,424
NJ-Northern         Northwood
                    Apartments          134     41   2004      937       38%         94%        97%    1,194     1,139     16,426
NJ-Northern         Oak Manor
                    Apartments           77     50   1998      918       26%         98%        97%    1,713     1,682      7,742
NJ-Northern         Pleasant View
                    Gardens           1,142     38   1998      746       35%         94%        93%    1,060     1,022     77,204
NJ-Northern         Pleasure Bay
                    Apartments          270     35   1998      685       43%         94%        96%    1,054       999     15,626
NJ-Northern         Regency Club
                    Apartments          372     32   2004      941       48%         92%        94%    1,105     1,072     41,167
NJ-Northern         Royal Gardens
                    Apartments          550     38   1997      874       33%         93%        92%    1,128     1,083     34,709
NJ-Northern         Wayne Village       275     41   1998      760       37%         97%        96%    1,281     1,219     22,257
NJ-Northern         Windsor Realty
                    Company              67     53   1998      628       48%         94%        95%    1,136     1,101      5,720
NY-Alb/Hudson       Carriage Hill
Valley              Apartments          140     33   1996      898       64%         95%        93%    1,196     1,211      8,501
NY-Alb/Hudson       Cornwall Park
Valley                                   75     39   1996    1,320       48%         94%        88%    1,591     1,624      8,243
NY-Alb/Hudson       Lakeshore Villa
Valley              Apartments          152     31   1996      952       53%         90%        93%    1,056     1,049      9,350
NY-Alb/Hudson       Patricia
Valley              Apartments          100     32   1998      725       26%         94%        95%    1,376     1,345      7,888
NY-Alb/Hudson       Sherwood
Valley              Consolidation       224     37   2002      831       33%         96%        97%    1,189     1,090     19,128
NY-Alb/Hudson       Sunset Garden
Valley              Apartments          217     35   1996      840       50%         94%        95%      926       912     10,375
NY-Long Island      Bayview &
                    Colonial            160     39   2000      884       31%         95%        96%    1,186     1,150     14,849
NY-Long Island      Cambridge
                    Village
                    Associates           82     39   2002      747       39%         96%        97%    1,536     1,454      8,064
NY-Long Island      Coventry
                    Village
                    Apartments           94     31   1998      831       34%         95%        96%    1,357     1,336      6,389
NY-Long Island      Devonshire Hills    297     38   2001      803       37%         95%        96%    1,720     1,662     55,348
NY-Long Island      East Winds
                    Apartments           96     40   2000      888       40%         95%        93%    1,145     1,117      8,987
NY-Long Island      Hawthorne Court     434     38   2002      678       43%         93%        94%    1,361     1,331     48,962
NY-Long Island      Heritage Square      80     57   2002      718       25%         98%        97%    1,529     1,441      9,172
NY-Long Island      Holiday Square      144     27   2002      570       15%         96%        95%    1,087     1,033     11,638
NY-Long Island      Lake Grove
                    Apartments          368     36   1997      836       49%         94%        93%    1,391     1,368     34,138
NY-Long Island      Maple Tree           84     55   2000      936       31%         95%        93%    1,153     1,136      7,679
NY-Long Island      Mid-Island
                    Apartments          232     41   1997      546       42%         93%        95%    1,257     1,227     16,676
NY-Long Island      Rider Terrace        24     45   2000      825       50%         93%        91%    1,245     1,223      2,125
NY-Long Island      South Bay Manor      61     46   2000      849       51%         90%        93%    1,536     1,519      7,658
NY-Long Island      Southern Meadows    452     35   2001      845       36%         95%        95%    1,352     1,325     49,322
NY-Long Island      Stratford
                    Greens
                    Associates          359     32   2002      725       49%         96%        96%    1,399     1,384     54,326
NY-Long Island      Terry Apartments     65     30   2000      722       34%         95%        96%    1,151     1,107      5,249
NY-Long Island      Westwood
                    Village
                    Apartments          242     37   2002      829       34%         95%        96%    2,154     2,088     40,463
NY-Long Island      Woodmont
                    Village
                    Apartments           96     38   2002      704       35%         95%        95%    1,283     1,240     11,180
NY-Long Island      Yorkshire
                    Village
                    Apartments           40     37   2002      779       40%         97%        97%    1,560     1,489      4,277
PA-Philadelphia     Beechwood
                    Gardens             160     39   1998      875       43%         94%        94%      830       826      7,130
PA-Philadelphia     Castle Club
                    Apartments          158     39   2000      878       42%         93%        95%      930       807     13,598
PA-Philadelphia     Chesterfield
                    Apartments          247     33   1997      812       39%         96%        96%      901       872     15,453
PA-Philadelphia     Curren Terrace      318     35   1997      782       53%         94%        93%      907       906     20,279
PA-Philadelphia     Executive House
                    Apartments          100     41   1997      700       55%         92%        95%      938       927      7,088
PA-Philadelphia     Glen Brook
                    Apartments          174     43   1999      707       46%         91%        91%      813       771      9,133
PA-Philadelphia     Glen Manor
                    Apartments          174     30   1997      667       45%         92%        91%      762       763      8,177
PA-Philadelphia     Golf Club
                    Apartments          399     37   2000      857       54%         92%        91%    1,010     1,009     37,789
PA-Philadelphia     Hill Brook
                    Place Apartments    274     38   1999      699       49%         94%        96%      874       849     16,923
PA-Philadelphia     Home Properties
                    of Bryn Mawr        316     55   2000      822       57%         92%        93%    1,051     1,037     31,491
PA-Philadelphia     Home Properties
                    of Devon            631     43   2000      917       58%         93%        90%    1,088     1,062     64,751
PA-Philadelphia     Home Properties
                    of Newark           432     38   1999      860       47%         93%        94%      852       827     28,455
PA-Philadelphia     New Orleans
                    Park                442     35   1997      685       38%         95%        93%      818       792     25,797
PA-Philadelphia     Racquet Club
                    East Apartments     466     35   1998      911       42%         94%        96%    1,022     1,000     33,243
PA-Philadelphia     Racquet Club
                    South               103     37   1999      816       45%         94%        96%      876       858      6,398
PA-Philadelphia     Ridley Brook
                    Apartments          244     44   1999      925       37%         95%        95%      877       842     13,262
PA-Philadelphia     Sherry Lake
                    Apartments          298     41   1998      812       44%         94%        94%    1,159     1,132     27,662
PA-Philadelphia     The Landings        384     33   1996      912       52%         95%        93%      960       961     28,310
PA-Philadelphia     Trexler Park
                    Apartments          249     32   2000      921       49%         90%        93%    1,051     1,030     22,662
PA-Philadelphia     Valley View
                    Apartments          177     33   1997      764       66%         89%        91%      833       807     10,534
PA-Philadelphia     Village Square
                    (PA)                128     33   1997      795       41%         95%        93%      909       909      8,033
PA-Philadelphia     William Henry
                    Apartments          363     35   2000      938       57%         91%        92%    1,095     1,098     37,114
VA-Suburban DC      Braddock Lee
                    Apartments          255     51   1998      757       37%         97%        95%    1,200     1,184     19,251
VA-Suburban DC      Brittany Place      591     38   2002      922       42%         92%        92%    1,072     1,051     58,597
VA-Suburban DC      Cider Mill          864     28   2002      834       46%         93%        94%    1,055     1,034     92,616
VA-Suburban DC      East Meadow
                    Apartments          150     35   2000    1,034       46%         96%        96%    1,262     1,229     14,898
VA-Suburban DC      Elmwood Terrace     504     33   2000      946       44%         93%        90%      848       831     28,631
VA-Suburban DC      Falkland Chase
                    Apartments          450     69   2003      759       35%         95%        93%    1,220     1,162     64,518
VA-Suburban DC      Orleans Village     851     38   2000    1,015       42%         93%        94%    1,254     1,193     86,359
VA-Suburban DC      Park
                    Shirlington
                    Apartments          294     51   1998      858       36%         96%        93%    1,185     1,159     23,109
VA-Suburban DC      Seminary Hill
                    Apartments          296     46   1999      888       60%         93%        93%    1,186     1,172     22,232
VA-Suburban DC      Seminary Towers
                    Apartments          539     42   1999      879       37%         94%        93%    1,211     1,186     41,922
VA-Suburban DC      Tamarron
                    Apartments          132     19   1999    1,075       33%         96%        95%    1,325     1,243     12,051
VA-Suburban DC      The Apartments
                    at Wellington
                    Trace               240      4   2004    1,106       53%         96%        97%    1,201     1,166     30,756
VA-Suburban DC      The Manor
                    Apartments (VA)     198     32   1999      845       49%         94%        94%      981       973     11,653
VA-Suburban DC      The Sycamores       185     28   2002      876       43%         96%        97%    1,285     1,200     23,077
VA-Suburban DC      Virginia Village    344     39   2001    1,010       51%         95%        95%    1,210     1,204     35,858
VA-Suburban DC      West
                    Springfield
                    Terrace             244     28   2002    1,019       51%         95%        96%    1,336     1,268     37,940
VA-Suburban DC      Woodleaf
                    Apartments          228     21   2004      709       35%         93%        93%    1,050       998     22,814

                    Core Total/
                    Weighted Average 31,253    37             856       44%         94%        94%   $1,073    $1,040  $2,702,570


                    2005 Acquisition Communities (4)
                    --------------------------------
MD-Baltimore        Ridgeview at
                    Wakefield Valley    204      9   2005      916       51%         94%        93%   $1,013    $1,007    $22,373
NJ-Northern         Barrington
                    Gardens             148     33   2005      922       22%         97%        95%      853       792     10,029
NJ-Northern         Hackensack
                    Gardens             198     58   2005      636       14%         98%        97%      865       805     15,980
NY-Long Island      Sayville Commons    342      5   2005    1,106       15%         98%        97%    1,395     1,333     65,079
PA-Philadelphia     The Brooke at
                    Peachtree
                    Village             146     20   2005    1,261       34%         97%        97%    1,014       972     17,291
VA-Suburban DC      Cinnamon Run        511     46   2005    1,006       35%         95%        98%    1,112     1,041     70,174
VA-Suburban DC      Peppertree Farm     881     52   2005    1,051       39%         87%        92%    1,095     1,050    101,744

                    2005 Total/
                    Weighted Average  2,430     32           1,009       33%         93%        96%   $1,096      $996   $302,670




                    2006 Acquisition Communities (4)
                    --------------------------------
MA-Boston           Highland House      172     37   2006      733       32%         94%        N/A   $1,108       N/A    $18,257
MA-Boston           Liberty Place       107     18   2006      994       50%         93%        N/A    1,344       N/A     15,234
MA-Boston           The Heights at
                    Marlborough         348     33   2006      876       56%         92%        N/A    1,179       N/A     50,604
MA-Boston           The Meadows at
                    Marlborough         264     34   2006      855       58%         90%        N/A    1,189       N/A     35,452
MD-Baltimore        Heritage Woods      164     33   2006      965       41%         97%        N/A      928       N/A     14,127
MD-Baltimore        The Coves at
                    Chesapeake          469     24   2006      986       57%         89%        N/A    1,152       N/A     66,889
MD-Baltimore        Top Field           156     33   2006    1,149       27%         97%        N/A    1,072       N/A     18,348
ME-Portland         Liberty Commons
                    (5)                 120      1   2006    1,064       35%         96%        N/A    1,074       N/A     14,738
VA-Suburban DC      Mount Vernon
                    Square            1,387     32   2006      868       42%         93%        N/A    1,076       N/A    143,266


                    2006 Total/
                    Weighted Average  3,187     27             908       46%         93%        N/A   $1,142       N/A   $376,915




                    2006 Construction Communities (6)
                    ---------------------------------
PA-Philadelphia     Trexler Park
                    West                 84      0   2006    1,071       15%         67%        N/A   $1,204       N/A    $12,042



                    Owned Portfolio
                    Total/
                    Weighted Avg     36,954    36             871       44%         94%        94%   $1,076    $1,040  $3,394,197

(1)  "Core Communities" represents the 31,253 apartment units owned consistently
     throughout 2005 and 2006.

(2)  "Resident  Turnover"  reflects,  on an annual basis, the number of moveouts
     divided by the total number of apartment units.

(3)  "Average % Occupancy" is the average  economic  occupancy for the 12 months
     ended December 31, 2005 and 2006.

(4)  For  communities  acquired  during  2005  and  2006,  this  is the  average
     occupancy from the date of acquisition.

(5)  Liberty Commons was constructed during a period spanning from 2004 to 2006.
     As construction was completed and 100% of the units were all in service for
     some part of 2006, this property has been grouped with the 2006 Acquisition
     Communities.

(6)  Trexler Park West is under construction.  Upon completion,  there will be a
     total of 216 apartment  units.  As of December 31, 2006, 84 apartment units
     were in service.

Property Development
--------------------

The Company has the ability to develop new market-rate communities.  It plans to
engage in  development  activity  only in markets in which it currently is doing
business to add net asset value and supplement  future  earnings and growth.  It
expects to develop new apartment communities on raw land and on land adjacent to
existing owned  properties,  as well as to increase the density of units at some
communities currently owned.

The Company has completed the development of a 120-unit  apartment  community in
South Portland, Maine adjacent to a market-rate property the Company acquired in
1998. The first phase of the project,  consisting of 48 units,  was completed in
the  summer of 2005.  The  second  and third  phases  added 72 units  which were
completed in the summer of 2006. The total  construction  cost of this community
was $14.6 million, or approximately  $122,000 per unit. In addition, the Company
is  developing  a  216-unit  apartment  community  in  Allentown,  Pennsylvania,
adjacent to a  market-rate  community  purchased in 2000.  At year-end  2006, 84
units were completed at a cost of $10.6 million.  The entire project is expected
to be completed in the fourth quarter of 2008. The total  construction  cost for
this development is anticipated to be $25.9 million upon  completion.  The costs
associated with  construction in progress for this  development was $1.4 million
as of December 31, 2006. An additional project was in the pre-construction stage
during 2006. That project is Falkland Chase, located in Silver Spring, Maryland,
with 450  garden  apartments  constructed  between  1936 and 1939.  The  Company
acquired  the property in 2003 for $58.9  million.  The property is well located
within  walking  distance  of the metro line into  Washington  and is near seven
million square feet of office space. The Company is planning on redeveloping the
North  parcel,  which will be renamed  Falkland  North.  This  parcel  currently
contains 182 apartments that will be demolished and redeveloped into 1,020 units
in four high-rise  buildings with a community  center,  exercise room,  swimming
pool,  convenience  retail  shops  and a  major  supermarket.  If  this  project
progresses as expected,  approvals will be obtained in 2007, design completed in
2008,  construction  started  in 2009,  and units  placed in service in 2011 and
2012. The pre-construction  costs for this project,  included in other assets on
the balance  sheet,  was $755,000 as of December 31, 2006.  Based on preliminary
budgets,  the total  construction cost for this development is anticipated to be
$306 million.

During 2006, the Company hired a Vice President of Development who has extensive
multifamily   development   experience  in  the  Mid-Atlantic   region  and  has
demonstrated  his  ability to source  projects  in that  region.  The  Company's
management of an extensive  property  portfolio and its  acquisition  activities
also provide a source of potential new development opportunities.

On February 2, 2007,  the Company  purchased two land parcels  located in Silver
Spring,  MD and Alexandria,  VA from a single seller for total  consideration of
$46.5   million.   The  projects  are  fully  designed  and  have  obtained  all
discretionary  approvals.  While  several  administrative  approvals  are  still
necessary,  construction  on both  projects is  expected to start in 2007,  with
completion  anticipated  in 2009  for the  Maryland  project  and  2010  for the
Virginia  project.  The  development  in Silver  Spring,  Maryland is a 14-story
building  which will contain 247  apartments and 10,600 square feet of retail or
nonresidential  space. The property is approximately  three blocks south of Home
Properties'  Falkland  Chase  apartment  community  described  above.  The other
development parcel is adjacent to the Huntington Metro station just south of Old
Town Alexandria in Fairfax  County,  Virginia and consists of 421 units in four,
four-story buildings. Based on preliminary budgets, the Silver Spring project is
anticipated  to cost  approximately  $74 million and the  Alexandria  project is
estimated to cost approximately $123 million upon completion.

Property Management
-------------------

As of December 31, 2006,  the Managed  Properties  consist of: (i) 868 apartment
units where  Home Properties  is the general partner of the entity that owns the
property; and (ii) 1,314 apartment units managed for others.

On January 1, 2004, the Company sold certain  assets of its commercial  property
management  division to Home Leasing  LLC,  which was owned by Nelson and Norman
Leenhouts and is now owned by Nelson Leenhouts.  Nelson and Norman Leenhouts are
the founders of the Company,  former Co-Chief Executive Officers of the Company,
and current  Co-Chairs of the Company's Board of Directors (the  "Leenhoutses").
This division  managed  approximately  2.2 million square feet of gross leasable
area,  as well as certain  planned  communities.  The  majority  of the  managed
commercial  properties  are and  have  been  owned  in  whole  or in part by the
Leenhoutses  since before the Company's IPO in 1994.  Subsequently,  some of the
assets  were  transferred  from Home  Leasing to  Broadstone  Real  Estate,  LLC
("Broadstone"), which is owned in part by Norman Leenhouts, Amy L. Tait and Mrs.
Tait's  spouse.  The sale was  completed in order to permit the Company to focus
solely  on  the  direct  ownership  and  management  of  market-rate   apartment
communities.  The contribution from the commercial  property management division
to  Home Properties'  2003 earnings was significantly  less than one-half of one
percent.  The  initial  amount paid was  $82,000.  In  addition,  the Company is
entitled to receive a percentage  of the  management  fee received by Broadstone
and its  assigns in  connection  with the  management  of one of the  commercial
properties  for a period not to exceed 36 months.  As  Broadstone  continued  to
manage  that  property  for three  years,  the Company  received  an  additional
deferred purchase price of $139,000,  for a total consideration of $221,000. The
gain on sale  amounted  to  approximately  $108,000  for the three  years  ended
December 31, 2006.

The Company may pursue the management of additional  properties not owned by the
Company, but will only do so when such additional  properties can be effectively
and efficiently managed in conjunction with other properties owned or managed by
Home  Properties,  or where  the  Company  views  the  properties  as  potential
acquisitions in desirable markets.

The  following  table details  managed  multifamily  communities  broken down by
market area.

Communities Managed by Home Properties by Market Area as of December 31, 2006
-----------------------------------------------------------------------------

Community Managed as General Partner
------------------------------------

MARKET AREA/Community                                         City            # of Apts.
---------------------                                         ----            ----------

NORTHERN/CENTRAL OHIO
---------------------
Briggs/Wedgewood Apartments                                   Columbus               868
                                                                                   -----
Total Apt. Units in Community Managed as General Partner                             868

Communities Fee Managed
-----------------------
MARYLAND
--------
Annapolis Roads Apartments                                    Annapolis              282
Dunfield Townhomes                                            Baltimore              312
Fox Hall                                                      Baltimore              720
                                                                                   -----
Total Apt. Units in Communities Fee Managed                                        1,314

Total                                                                              2,182

Supplemental Property Information
---------------------------------

At December 31, 2006,  none of the Properties  have an individual net book value
equal to or greater than ten percent of the total assets of the Company or would
have accounted for ten percent or more of the Company's aggregate gross revenues
for 2006. There is no tenant who has one or more leases which, in the aggregate,
account for more than 10% of the  aggregate  gross  revenues  for the year ended
December 31, 2006.

Item 3.  Legal Proceedings
-------  -----------------

The  Company is subject to a variety of legal  actions  for  personal  injury or
property  damage arising in the ordinary  course of its business,  most of which
are covered by liability  insurance.  Various  claims of employment and resident
discrimination  are also  periodically  brought.  While the  resolution of these
matters cannot be predicted with certainty,  management  believes that the final
outcome of such legal  proceedings  and claims will not have a material  adverse
effect on the Company's liquidity, financial position or results of operations.

Item 4.  Submission of Matters to Vote of Security Holders
-------  -------------------------------------------------

None.

Item 4A.  Executive Officers
--------  ------------------

The following  table sets forth,  as of February 16, 2007,  the eight  executive
officers of the Company,  together  with their  respective  ages,  positions and
offices.

Name                     Age    Position
----                     ---    --------

Edward J. Pettinella     55     President and Chief Executive Officer of Home Properties and HPRS

David P. Gardner         51     Executive Vice President and Chief Financial Officer of Home Properties  and HPRS

Ann M. McCormick         50     Executive Vice President, General Counsel and Secretary of Home Properties and HPRS

Scott A. Doyle           45     Senior Vice President, Property Management of Home Properties and HPRS

Johanna A. Falk          42     Senior Vice President and Chief Administrative/Information Officer of Home
                                Properties and HPRS

Robert J. Luken          42     Senior Vice President, Chief Accounting Officer and Treasurer of Home Properties and
                                HPRS

Janine M. Schue          44     Senior Vice President, Human Resources of Home Properties and HPRS

John E. Smith            56     Senior Vice President and Chief Investment Officer of Home Properties and HPRS

Information  regarding Edward Pettinella is set forth below under "Directors" in
Item 10.

David P. Gardner has served as  Executive  Vice  President of the Company  since
2004 and a Vice President and Chief  Financial  Officer of the Company since its
inception.  He holds the same titles in HPRS.  Mr.  Gardner  joined Home Leasing
Corporation  in 1984 as Vice  President  and  Controller.  In 1989, he was named
Treasurer of Home Leasing and Chief  Financial  Officer in December  1993.  From
1977 until  joining Home Leasing,  Mr.  Gardner was an accountant at Cortland L.
Brovitz & Co. Mr. Gardner is a graduate of the Rochester Institute of Technology
and is a Certified Public Accountant.

Ann M. McCormick has served as Executive  Vice  President  since 2004 and a Vice
President, General Counsel and Secretary of the Company since its inception. She
holds the same titles in HPRS. Mrs.  McCormick  joined  Home Leasing in 1987 and
was named Vice  President,  Secretary  and  General  Counsel  in 1991.  Prior to
joining Home  Leasing,  she was an associate  with the law firm of Nixon Peabody
LLP. Mrs. McCormick is a graduate of Colgate University and holds a Juris Doctor
from Cornell  University.  She is on the Board of Directors of Greater Rochester
Housing  Partnership,  the Alzheimer's  Association of the Finger Lakes, and St.
Ann's of Greater Rochester, Inc.

Scott A. Doyle has served as a Senior Vice President  since 2000, and, from 1997
until 2000,  was a Vice  President  of the  Company.  He holds the same title in
HPRS.  He  joined  Home  Properties  in 1996  as a  Regional  Property  Manager.
Mr. Doyle  has  been in  property  management  for more  than 20 years  and is a
Certified  Property  Manager (CPM) as designated by the Institute of Real Estate
Management.  Prior to joining  Home Properties,  he worked with CMH  Properties,
Inc.,  Rivercrest Realty Associates and Arcadia  Management  Company.  Mr. Doyle
serves on the Advisory Board of the Residential  Property  Management Program at
Virginia Tech. He is a graduate of State University at Plattsburgh, New York.

Johanna  A. Falk has  served as Senior  Vice  President  since 2000 and as Chief
Administrative/Information  Officer since 2003. She had been a Vice President of
the  Company  since  1997.  She holds the same  titles in HPRS.  She  joined the
Company in 1995 as an investor  relations  specialist,  was  responsible for the
Information   Systems  Department  through  2002,  and  was  promoted  to  Chief
Administrative/Information  Officer  in  February  2003.  Prior to  joining  the
Company,  Mrs. Falk  was  employed  as a  marketing  manager  at  Bausch  & Lomb
Incorporated and Champion  Products,  Inc. and as a financial  analyst at Kidder
Peabody.  She is a  graduate  of  Cornell  University  and holds an MBA from the
Wharton School of The University of Pennsylvania.

Robert J. Luken has served as Senior Vice  President  since  2004,  and as Chief
Accounting  Officer since  January,  2005.  He has been the Company's  Treasurer
since 2000 and became a Vice President in 1997. He holds the same title in HPRS.
He joined the Company in 1996,  serving as its Controller.  Prior to joining the
Company,  he was  the  Controller  of  Bell  Corp.  of  Rochester  and an  Audit
Supervisor for  PricewaterhouseCoopers LLP.  Mr. Luken is a graduate of St. John
Fisher  College  and is a  Certified  Public  Accountant.  He is on the Board of
Directors of St. Joseph's Villa of Rochester.

Janine M. Schue has served as  Senior Vice President  of the Company since 2004,
after joining the Company in October of 2001.  She holds the same title in HPRS.
Prior to joining the Company,  she was employed by NetSetGo as Vice President of
Human  Resources and prior to that by Wegmans Food Markets,  Inc. as Director of
Human  Resources.  Ms.  Schue is a graduate of and holds a Masters of  Education
from the State  University  of New York at Albany.  Ms.  Schue has  notified the
Company that she is resigning her position effective March 31, 2007.

John E.  Smith has  served as Chief  Investment  Officer  of the  Company  since
January, 2006, and as Senior Vice President since 2001. From 1998 until 2001, he
was a Vice President of the Company.  He holds the same title in HPRS.  Prior to
joining the Company in 1997, Mr. Smith was general  manager for Direct  Response
Marketing,  Inc. and Executive Vice President for The Equity  Network,  Inc. Mr.
Smith was Director of Investment  Properties at Hunt  Commercial Real Estate for
20 years.  He has been a Certified  Commercial  Investment  Member  (CCIM) since
1982, a New York State Certified Instructor and has taught accredited commercial
real estate courses at various institutions in four states.

                                     PART II

Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
--------------------------------------------------------------------------------
and Issuer Purchases of Equity Securities
-----------------------------------------

Market Information, Holders and Dividends
-----------------------------------------

The Common Stock has been traded on the New York Stock  Exchange  ("NYSE") under
the symbol "HME" since July 28,  1994.  The  following  table sets forth for the
previous two years the quarterly high and low sales prices per share reported on
the NYSE, as well as all distributions paid with respect to the common stock.

                        High      Low  Distribution
                        ----      ---  ------------
2006
----
First Quarter         $52.47   $41.70          $.64
Second Quarter        $55.51   $47.24          $.64
Third Quarter         $58.98   $53.79          $.64
Fourth Quarter        $63.52   $57.36          $.65

2005
----
First Quarter         $42.39   $38.75          $.63
Second Quarter        $43.15   $38.78          $.63
Third Quarter         $46.27   $38.50          $.63
Fourth Quarter        $42.45   $36.05          $.64

As of February 16, 2007, the Company had  approximately  4,024  shareholders  of
record,  33,205,831 common shares (plus 13,556,434 UPREIT Units convertible into
13,556,434 common shares) were outstanding, and the closing price was $62.50. It
is the Company's  policy to pay  dividends.  The Company has  historically  paid
dividends  on a  quarterly  basis in the  months of  February,  May,  August and
November.

Securities Authorized for Issuance Under Equity Compensation Plans
------------------------------------------------------------------

The following table provides information as of December 31, 2006 with respect to
shares of our common stock that may be issued under the Stock Benefit Plans:

                                                                           Number of                        Number of
                                                                       Securities to         Weighted      Securities
                                                                      be Issued Upon          Average       Remaining
                                                                         Exercise of   Exercise Price   Available for
                                                                         Outstanding   of Outstanding          Future
Plan Category                                                                Options          Options        Issuance
-------------                                                                -------          -------        --------

Options:
    Equity compensation plans approved by security holders                 2,170,612           $40.85         625,300
    Equity compensation plans not approved by security holders               177,402            32.78               -
                                                                           ---------           ------         -------
Total Options                                                              2,348,014           $40.24         625,300
                                                                           ---------           ------         -------

Restricted Stock Awards:
    Equity compensation plans approved by security holders                   218,305              N/A          66,534
    Equity compensation plans not approved by security holders                52,100              N/A               -
                                                                           ---------           ------         -------
Total Restricted Stock Awards                                                270,405              N/A          66,534
                                                                           ---------           ------         -------

Performance Graph
-----------------

The following graph compares the cumulative return on the Company's common stock
during the five year period ended December 31, 2006 to the cumulative  return of
the NAREIT All Equity REIT Index and the  Standard  and Poor's 500 Index for the
same period.  The total return assumes that dividends were reinvested  quarterly
at the same  discounted  price as provided under the Company's DRIP and is based
on a $100  investment on December 31, 2001.  Stockholders  should note that past
performance does not predict future results.

                 12/31/2001    12/31/2002    12/31/2003   12/31/2004    12/31/2005    12/31/2006
                 ----------    ----------    ----------   ----------    ----------    ----------
HME                 $100.00       $117.24       $147.28      $166.90       $168.35       $256.56

NAREIT Equity       $100.00       $103.82       $142.37      $187.33       $210.12       $283.78

S&P 500             $100.00        $77.90       $100.24      $111.15       $116.61       $135.02

Our future  filings with the SEC may  "incorporate  information  by  reference,"
including  this  Form  10-K.  Unless  we  specifically  state  otherwise,   this
Performance  Graph shall not be deemed to be incorporated by reference and shall
not constitute  soliciting  material or otherwise be considered  filed under the
Securities Act of 1933, as amended,  or the Securities  Exchange Act of 1934, as
amended.

Issuer Purchases of Equity Securities
-------------------------------------

In 1997, the Company's Board of Directors  approved a stock  repurchase  program
under which the Company may repurchase  shares of its  outstanding  common stock
and UPREIT Units.  The  shares/units  may be repurchased  through open market or
privately negotiated  transactions at the discretion of Company management.  The
Board's  action does not  establish a specific  target stock price or a specific
timetable for share repurchase. In addition, participants in the Company's Stock
Benefit  Plan can use common  stock of the Company  that they already own to pay
all or a portion of the exercise  price payable to the Company upon the exercise
of an option.  In such event, the common stock used to pay the exercise price is
returned to authorized  but unissued  status,  and for purposes of this table is
deemed to have been repurchased by the Company. At December 31, 2005 the Company
had  authorization  to  repurchase  3,220,195  shares of common stock and UPREIT
Units under the stock repurchase  program.  During 2006, the Company repurchased
2,613,747  shares at a cost of  $142,532,597.  On October  27, 2006 the Board of
Directors approved a 2,000,000-share  increase in the stock repurchase  program,
resulting in a remaining  authorization level of 2,606,448 shares as of December
31, 2006.

The following table summarizes the total number of shares (units) repurchased by
the Company during the year ended December 31, 2006:

                                                                          Total               Board
                                                                   shares/units            approved             Maximum
                                                                      purchased            increase        shares/units
                                             Total      Average           under               under     available under
                                      shares/units    price per         Company             Company         the Company
Period                               purchased (1)   share/unit         program             program             program
------                               -------------   ----------         -------             -------             -------
Balance January 1, 2006:                                                                                      3,220,195

January, 2006                              109,359       $41.54         107,800                   -           3,112,395

February, 2006                               2,188       $48.20               -                   -           3,112,395

March, 2006                                 22,341       $50.16               -                   -           3,112,395

April, 2006                                  1,189       $49.54               -                   -           3,112,395

May, 2006                                  313,968       $47.78         308,000                   -           2,804,395

June, 2006                               1,276,898       $51.67       1,264,721                   -           1,539,674

July, 2006                                   2,651       $55.94               -                   -           1,539,674

August, 2006                                 1,582       $57.00               -                   -           1,539,674

September, 2006                              8,802       $56.04               -                   -           1,539,674

October, 2006                              934,871       $62.15         933,226           2,000,000           2,606,448

November, 2006                              15,724       $61.50               -                   -           2,606,448

December, 2006                                 567       $60.32               -                   -           2,606,448
                                         ---------       ------       ---------           ---------           ---------
Balance December 31, 2006:               2,690,140       $54.51       2,613,747           2,000,000           2,606,448
                                         =========       ======       =========           =========           =========


(1)  During 2006, and as permitted by the Company's  stock option plans,  28,150
     shares of common stock already  owned by option  holders were used by those
     holders to pay the exercise price  associated  with their option  exercise.
     These shares were returned to the status of authorized but unissued shares.
     In addition,  the Company repurchased 48,243 shares of common stock through
     share  repurchase  by the transfer  agent in the open market in  connection
     with the Company's Dividend Reinvestment Plan.

Item 6.  Selected Financial and Operating Information
-------  --------------------------------------------

The  following  table sets forth  selected  financial  and  operating  data on a
historical  basis for the  Company  and should be read in  conjunction  with the
financial   statements  appearing  elsewhere  in  this  Form  10-K  (amounts  in
thousands, except per share data).

                                                                 2006        2005        2004        2003        2002
                                                                 ----        ----        ----        ----        ----
Revenues:
Rental income                                                $420,988    $378,506    $348,932    $311,682    $268,468
Other income (1)                                               33,004      22,019      18,200      17,187      14,201
                                                             --------     -------     -------     -------     -------
Total Revenues                                                453,992     400,525     367,132     328,869     282,669
                                                             --------     -------     -------     -------     -------
Expenses:
Operating and maintenance                                     190,845     174,906     157,802     136,584     112,320
General and administrative                                     22,626      19,652      23,978      22,607      12,649
Interest                                                      106,773      92,178      77,145      70,277      59,981
Depreciation and amortization                                  96,142      80,944      70,710      57,794      45,898
Prepayment penalties                                                -           -           -           -       3,275
Impairment of assets held as general partner                        -         400       1,116       2,518       3,533
                                                             --------     -------     -------     -------     -------
Total Expenses                                                416,386     368,080     330,751     289,780     237,656
                                                             --------     -------     -------     -------     -------

Income from operations                                         37,606      32,445      36,381      39,089      45,013
Equity in losses of unconsolidated affiliates                       -           -       (538)     (1,892)    (17,493)
                                                             --------     -------     -------     -------     -------
Income before minority interest, discontinued operations
and
   extraordinary item                                          37,606      32,445      35,843      37,197      27,520
Minority interest in limited partnership                            -           -         441           -           -
Minority interest in operating partnerships                    (9,614)     (8,629)     (9,204)     (9,171)     (3,017)
                                                             --------     -------     -------     -------     -------
Income from continuing operations                              27,992      23,816      27,080      28,026      24,503
Discontinued operations, net of minority interest              82,493      57,696      20,330      13,781      20,638
                                                             --------     -------     -------     -------     -------
Income before loss on disposition of property and
   business and cumulative effect of change in accounting
   principle                                                  110,485      81,512      47,410      41,807      45,141
Loss on disposition of property and business, net of
   minority interest                                                -           -         (67)         (9)       (202)
                                                             --------     -------     -------     -------     -------
Income before cumulative effect of change in accounting
   principle                                                  110,485      81,512      47,343      41,798      44,939
Cumulative effect of change in accounting principle, net
   of minority interest                                             -           -       (321)           -           -
                                                             --------     -------     -------     -------     -------
Net income                                                    110,485      81,512      47,022      41,798      44,939

Preferred dividends                                            (5,400)     (6,279)     (7,593)    (11,340)    (14,744)
Premium on Series B preferred stock repurchase                      -           -           -           -      (5,025)
                                                             --------     -------     -------     -------     -------
Net income available to common shareholders                  $105,085     $75,233     $39,429     $30,458     $25,170
                                                             ========     =======     =======     =======     =======

Basic earnings per share data:
  Income from continuing operations                             $0.69       $0.55       $0.59       $0.57       $0.18
  Discontinued operations                                        2.52        1.80        0.62        0.47        0.79
  Cumulative effect of change in accounting principle               -           -      (0.01)           -           -
                                                                -----       -----       -----       -----       -----
Net income available to common shareholders                     $3.21       $2.35       $1.20       $1.04       $0.97
                                                                =====       =====       =====       =====       =====
Diluted earnings per share data:
  Income from continuing operations                             $0.68       $0.54       $0.58       $0.56       $0.17
  Discontinued operations                                        2.47        1.79        0.61        0.47        0.79
  Cumulative effect of change in accounting principle               -           -      (0.01)           -           -
Net income available to common shareholders                     $3.15       $2.33       $1.18       $1.03       $0.96
                                                                =====       =====       =====       =====       =====
Cash dividends declared per common share                        $2.57       $2.53       $2.49       $2.45       $2.41
                                                                =====       =====       =====       =====       =====
Balance Sheet Data:
Real estate, before accumulated depreciation                $3,451,762 $3,330,710  $3,123,901  $2,752,992  $2,597,278
Total assets                                                3,240,418   2,977,870   2,816,796   2,513,317   2,456,266
Total debt (including held for sale)                        2,124,313   1,924,086   1,702,722   1,380,696   1,335,807
Redeemable/convertible preferred stock ((2))                   60,000      60,000      85,000      85,000     167,680
Stockholders' equity                                          755,617     656,812     720,422     741,263     726,242

Other Data:
Net cash provided by operating activities                    $162,996    $136,466    $159,342    $154,227    $135,581
Net cash provided by (used in) investing activities           159,653    (179,944)   (160,654)   (109,253)   (297,680)
Net cash provided by (used in) financing activities          (209,828)     40,944       3,284    (48,653)     160,162
Funds From Operations ((3))                                   147,089     137,606     126,953     132,803     121,745
Adjusted Funds From Operations((4))                           125,530     115,720     104,787     111,020     100,654

Weighted average number of shares outstanding:
  Basic                                                     32,697,794 31,962,082  32,911,945  29,208,242  26,054,535
  Diluted                                                   33,337,557 32,328,105  33,314,038  29,575,660  26,335,316

Total communities owned at end of period                          123         153         150         147         152
Total apartment units owned at end of period                   36,954      43,432      41,776      40,946      41,776

(1)  Other income  includes  property  other income,  interest  income and other
     income.

(2)  Redeemable  preferred  stock is  redeemable  solely  at the  option  of the
     Company.

(3)  Pursuant to the revised definition of Funds From Operations ("FFO") adopted
     by the  Board of  Governors  of the  National  Association  of Real  Estate
     Investment  Trusts  ("NAREIT"),  FFO is defined as net income  (computed in
     accordance  with  accounting  principles  generally  accepted in the United
     States  of  America  ("GAAP"))  excluding  gains or  losses  from  sales of
     property,  minority interest and extraordinary items plus depreciation from
     real property  including  adjustments for  unconsolidated  partnerships and
     joint ventures less dividends from  non-convertible  preferred  shares.  In
     2006 and 2003, the Company added back debt extinguishment  costs which were
     incurred as a result of repaying property specific debt triggered upon sale
     as a gain or loss on sale of the property.  In 2002, the Company added back
     the  premium on the Series B  preferred  stock  repurchase.  Because of the
     limitations  of the FFO  definition  as  published  by  NAREIT as set forth
     above,  the  Company  has made  certain  interpretations  in  applying  the
     definition.  The Company believes all adjustments not specifically provided
     for are consistent with the definition.

     FFO falls within the definition of "non-GAAP  financial  measure" set forth
     in  Regulation  S-K and as a result the  Company is  required to include in
     this report a statement disclosing the reasons why management believes that
     presentation  of this measure  provides  useful  information  to investors.
     Management  believes that in order to facilitate a clear  understanding  of
     the combined  historical  operating  results of the Company,  FFO should be
     considered in conjunction  with net income as presented in the consolidated
     financial statements included elsewhere herein. Management believes that by
     excluding gains or losses related to dispositions of property and excluding
     real estate  depreciation (which can vary among owners of similar assets in
     similar  condition  based on  historical  cost  accounting  and useful life
     estimates),  FFO can  help  one  compare  the  operating  performance  of a
     company's  real  estate  between   periods  or  as  compared  to  different
     companies. The Company also uses this measure to compare its performance to
     that of its  peer  group.  FFO  does  not  represent  cash  generated  from
     operating  activities  in accordance  with  generally  accepted  accounting
     principles and is not necessarily indicative of cash available to fund cash
     needs.  FFO should not be considered as an  alternative to net income as an
     indication  of the  Company's  performance  or to cash flow as a measure of
     liquidity.

(3)  (continued)

     The following  table sets forth the  calculation  of FFO and Adjusted Funds
     From  Operations  for the previous five years,  beginning  with "net income
     available to common  shareholders"  from the  Company's  audited  financial
     statements prepared in accordance with GAAP:

                                                                   2006       2005        2004       2003       2002
                                                                   ----       ----        ----       ----       ----

Net income available to common shareholders                    $105,085  $  75,233     $39,429    $30,458    $25,170
Convertible preferred dividends(a)                                    -        880       2,194      5,939     10,589
Depreciation from real property(b)                               99,421     97,686      91,564     79,577     67,919
Impairment on general partner investment                              -          -         945      1,785      1,470
Loss from sale of property                                            -          -          50        260        202
Minority interest                                                 9,614      8,629       9,204      9,171      3,017
Minority interest - discontinued operations                       1,947      1,828       4,353      6,179      9,209
Impairment of real property                                           -          -           -        423      1,565
Gain from sale of discontinued operations                      (78,748)   (46,650)    (21,107)    (2,599)    (5,696)
Prepayment penalties                                                  -          -           -          -      3,275
Cumulative effect of change in accounting principle                   -          -         321          -          -
                                                               --------   --------    --------   --------   --------
FFO - Diluted, as defined by NAREIT                             137,319    137,606     126,953    131,193    116,720
Loss from early extinguishment of debt in connection with
   sale of real estate                                            9,770          -           -      1,610          -
Premium paid on Series B repurchased                                  -          -           -          -      5,025
                                                               --------   --------    --------   --------   --------
FFO - Diluted, as adjusted by the Company                       147,089    137,606     126,953    132,803    121,745
Reserve(4)                                                      (21,559)   (21,886)    (22,166)   (21,783)   (21,091)
                                                               --------   --------    --------   --------   --------
Adjusted Funds From Operations                                 $125,530   $115,720    $104,787   $111,020   $100,654
                                                               ========   ========    ========   ========   ========

Weighted average common shares/units outstanding:
      Basic                                                    47,262.7   47,714.3    48,675.0   45,276.7   42,062.1
                                                               ========   ========    ========   ========   ========
      Diluted(a)                                               47,902.4   48,411.3    49,910.5   47,873.8   46,466.4
                                                               ========   ========    ========   ========   ========

FFO as adjusted by the Company per share diluted (a)              $3.07      $2.84       $2.54      $2.77      $2.62
                                                                  =====      =====       =====      =====      =====

(a)  The calculation of FFO and FFO per share assumes the conversion of dilutive
     common stock equivalents and convertible  preferred stock.  Therefore,  the
     convertible  preferred  dividends  are added to FFO,  and the common  stock
     equivalent  is  included  in both the basic and  diluted  weighted  average
     common  shares/units  outstanding.  The convertible  preferred stock had an
     anti-dilutive effect in 2004 on the per-share calculation;  therefore,  the
     convertible  preferred  dividends of $2,194 are not included in FFO for the
     2004  diluted   calculation.   The  weighted  average  common  shares/units
     outstanding  assumes  conversion of all UPREIT Units to common shares.  The
     diluted  shares/units for the year ended December 31, 2004 used for Diluted
     FFO are 49,910.5 instead of the regular diluted shares/units of 49,077.1.

(b)  Includes amounts passed through from unconsolidated investments.

     All REITs may not be using the same  definition for FFO.  Accordingly,  the
     above presentation may not be comparable to other similarly titled measures
     of FFO of other REITs.

(4)  Adjusted Funds From  Operations is defined as Funds from Operations less an
     annual   reserve  for   anticipated   recurring,   non-revenue   generating
     capitalized  costs ("Reserve") of $525 per apartment unit (weighted average
     units owned during the year).  The  adjustment  from FFO to AFFO only takes
     into  account  this  reserve  level as  previously  described.  The  NAREIT
     definition of FFO or AFFO does not take into account any  additional  costs
     of capital  improvements  and capitalized  interest that also are incurred.
     The total level of capital improvements and capitalized interest (including
     the amount  defined as reserve)  for the five years are as follows:  2006 -
     $101,723;  2005 - $100,013;  2004 - $102,700;  2003 - $106,346;  and 2002 -
     $115,692.

Item 7. Management's  Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
     of Operations
     -------------

Overview
--------

The following  discussion  should be read in conjunction  with the  consolidated
financial  statements,  the  notes  thereto,  and the  selected  financial  data
appearing  elsewhere  in this  Form  10-K.  Historical  results  and  percentage
relationships  set forth in the  consolidated  financial  statements,  including
trends  which  might  appear,  should  not be  taken  as  indicative  of  future
operations.   The  Company   considers   portions  of  the   information  to  be
"forward-looking statements" within the meaning of Section 27A of the Securities
Exchange  Act of 1933 and Section 21E of the  Securities  Exchange  Act of 1934,
both as amended, with respect to the Company's  expectations for future periods.
Some  examples  of  forward-looking  statements  include  statements  related to
acquisitions  (including  any related pro forma  financial  information,  future
capital  expenditures,  financing sources and  availability,  and the effects of
environmental  and other  regulations.  Although the Company  believes  that the
expectations  reflected  in those  forward-looking  statements  are  based  upon
reasonable  assumptions,  it can give no assurance that its expectations will be
achieved.  Factors  that may cause  actual  results  to differ  include  general
economic and local real estate conditions, the weather and other conditions that
might  affect  operating  expenses,   the  timely  completion  of  repositioning
activities and development within anticipated budgets, the actual pace of future
development,  acquisitions  and sales,  and continued  access to capital to fund
growth. For this purpose,  any statements  contained in this report that are not
statements  of  historical  fact  should  be  considered  to be  forward-looking
statements.  Some of the  words  used  to  identify  forward-looking  statements
include "believes", "anticipates", "plans", "expects", "seeks", "estimates", and
similar expressions. Readers should exercise caution in interpreting and relying
on  forward-looking  statements  since they  involve  known and  unknown  risks,
uncertainties  and other factors which are, in some cases,  beyond the Company's
control and could materially affect the Company's actual results, performance or
achievements.

The Company is engaged in the ownership, management, acquisition, rehabilitation
and  development  of  residential  apartment  communities  primarily in selected
Northeast,  Mid-Atlantic and Southeast Florida markets. As of December 31, 2006,
the Company operated 127 apartment  communities with 39,136 apartments.  Of this
total,  the Company  owned 123  communities,  consisting  of 36,954  apartments,
managed as general  partner one partnership  that owned 868 apartments,  and fee
managed three properties with 1,314 apartments for third parties.

Executive Summary
-----------------

The Company operated during 2006 and 2005 in an improving economic  environment.
The recession,  which started in 2001,  continued through mid-2004  resulting in
job  losses  in many  parts  of the  country.  For  historical  reference,  Home
Properties' markets  experienced  negative job growth of -0.4% in 2001 and -0.9%
in 2002.  For 2003,  the Company's  markets,  as well as the country as a whole,
experienced flat job growth. For 2004, 2005 and 2006, both the Company's markets
and the country as a whole experienced  positive job growth; 1.0%, 1.1% and 1.2%
for the  Company,  and 1.7%,  1.5% and 1.7% for the  country,  respectively.  An
increase in job growth leads to household formations,  which creates an increase
in demand for rental housing. In addition, during 2005 and continuing into 2006,
the increasing home mortgage  interest rate environment made it more challenging
for potential residents who considered making the switch to home ownership. Home
ownership  continues to be the number one reason our  residents  give for moving
out of our  communities.  In  2001,  home  purchases  represented  17.8%  of our
move-outs,  growing to 18.8% in 2002,  leveling off at 19.6% in 2003,  19.5% for
2004 and 19.4% in 2005. In 2006 we  experienced  the first  significant  drop in
years,  with the  percentage  reducing to 18.5%.  A  continued  increase in home
mortgage  rates  could push this level down  further,  which  should  positively
affect our turnover  rates and improve  occupancy.  As  referenced in our Market
Demographics table on Page 9 of this report, job growth for our markets improved
in 2006 with 1.2% growth  over 2005,  on top of the  approximate  1.0% growth in
2005 and 2004.  As there is  usually a lag  between  job  growth  and  household
formation,  this recovery did not create a measurable  increased  demand for our
apartments  until the second half of 2005.  During the first six months of 2005,
same property total revenue was up 1.8%. This improved to 4.0% for same property
total  revenue  growth  for the second  six  months of 2005.  During  2006 these
figures improved further with 5.0% same property revenue growth for the year.

The  reason  for  using  rent  concessions,  and the  ultimate  level  of  those
concessions,  has changed over the past few years. Concessions for 2003 were 119
basis points of rental  revenue,  87 basis points for 2004, 105 basis points for
2005 and 94 basis points for 2006.  In 2003,  the Company  positioned  itself to
improve occupancy, which resulted in less aggressive rental rate increases and a
greater use of rent  concessions.  In 2004, we were able to maintain and improve
occupancies  while reducing  concessions as the economy  improved.  In 2005, the
overall level of concessions  increased to help soften the much more  aggressive
rental  increases and significant use of water and sewer expense  recovery which
the Company started to pass through to the residents  during 2005. The levels of
concessions  in 2006  are  affected  by two  main  components  - our  geographic
repositioning  efforts and the utility recovery  programs.  With the Detroit and
Upstate  New  York  regions  sold  in  2006  and  out of the  same  store  pool,
concessions  have reduced as these were our two weakest  markets needing support
from  concessions.  At the same time,  the  natural  gas  portion of the utility
recovery  program was rolled out in 2006,  leading to significant  increases for
the recovery dollars in property other income and increased  concession activity
for rents to counteract these aggressive increases.

The Company owned 106 communities  with 31,253  apartment units  throughout 2005
and  2006  where  comparable  operating  results  are  available  for the  years
presented (the "2006 Core Properties").  Occupancies at the 2006 Core Properties
increased slightly by 20 basis points,  from 93.8% to 94.0%.  Occupancies in the
fourth quarter of 2006 averaged 93.5%, compared to 94.0% a year ago. The Company
uses a  measurement  referred to as Available to Rent, or ATR. This is a leading
indicator to assess future  occupancy  rates by reference to units which will be
available for rent,  based upon leases signed or  termination  notices  received
relating to future move  in/move  out dates.  As of the third week of  February,
2007, our ATR was 6.2%, compared to the same time period a year ago when ATR was
6.2%. For 2007, we are projecting occupancy averaging 0.1% better than 2006.

Total Same Store Properties (including Detroit and Upstate New York for at least
part of the year)  rental  revenue  growth  for 2006 was  projected  to be 3.8%,
consisting  of 3.4% in rental rate growth,  0.3% in occupancy  improvement,  and
0.1% in  reduction  to  concessions.  Actual  results  were 3.1% in rental  rate
growth, 0.2% increase in occupancy, and 0.1% reduction to concessions,  totaling
3.4% total rental revenue growth,  or 0.4% behind the guidance.  It is difficult
to compare rental growth without including the utility recovery revenue which is
classified  as property  other  income.  The Company  recorded  $8.3  million of
recovery  revenue in 2006  verses  only $2.9  million in 2005.  Actual  results,
including  utility  recovery  revenue,  were 4.5% in rental  rate  growth,  0.2%
increase in occupancy,  and 0.1% reduction to  concessions,  totaling 4.8% total
rental revenue growth including utility recovery income.

The guidance for 2007 Core Properties (apartment units owned throughout 2006 and
2007,  the "2007 Core  Properties")  revenue  growth is 5.1%.  Rental  rates are
projected to increase 3.6%, including  above-average rental increases at certain
communities  resulting  from the  continued  efforts to upgrade the  properties.
Occupancies  are expected to increase  0.1% for the year,  and  concessions  are
projected to increase  slightly,  reducing net rental income by 0.3%,  such that
rental  revenues  are  projected  to increase  3.4%.  Property  other  income is
expected to increase  substantially  year over year,  increasing the 3.4% rental
revenue  growth to 5.1% total  revenue  growth.  The items  driving the property
other  income  growth are a $0.8  million  marginal  increase in water and sewer
recovery revenue and a $7.8 million  marginal  increase in heating cost recovery
revenue from the utility recovery initiatives.

Expenses for 2007 Core  Properties  are  projected to increase  5.4%.  See below
under "Results of Operations" for more details on expense comparisons.

These  revenue  and  expense  projections  result  in 2007 Core  Properties  net
operating  income  ("NOI")  growth of 4.9% at the  mid-point  of 2007  guidance.
Markets where the Company expects above average NOI growth include:  Washington,
D.C. 5.6%;  Philadelphia  5.6%;  Florida 5.5% and Baltimore  5.0%.  Markets with
below average  expectations  include: New York City Metro area 4.2%; Boston 3.7%
and Chicago 2.6%. Certain historical  demographic  information for these markets
may be found in the tables on Pages 9 and 10 of this report.

Of the two items  making up NOI - revenue and  operating  expenses,  the revenue
component  is likely to be more  volatile.  An  improving  economy  could create
higher demand for rental housing above that projected. An economic recovery that
stumbles or creates  little new job growth could put  pressure on the  Company's
ability to reach the  mid-point of guidance.  The Company has given FFO guidance
for 2007 with a range of $3.12 to $3.24 per share.

The Company  has  anticipated  closing on  acquisitions  of $400  million in its
budget  for  2007.  The  Company  is  committed  to a  disciplined  approach  to
acquisitions,  but at the same time  recognizes that the continued long term low
interest  rate levels allow the Company  flexibility  to adjust hurdle rates and
bids to reflect market conditions.  The Company is also targeting $50 million in
dispositions from properties that have reached their potential.  The acquisition
market  continues to be very  competitive,  making the 2007  acquisition goal of
$400 million slightly aggressive.

During 2005 and 2006, the Company increased its level of stock buy-back activity
substantially, repurchasing approximately 5.4 million shares at a weighted price
slightly  in  excess  of  $47.00  per  share.  The  Company's   strategy  is  to
opportunistically  repurchase  shares at a discount to its  underlying net asset
value ("NAV"),  thereby continuing to build value for shareholders.  The Company
estimates  its NAV per  share  at  December  31,  2006 to be  $62.08,  based  on
capitalizing  at 5.9% the  annualized  and  seasonally  adjusted  fourth quarter
property net income,  plus a 4% growth  factor,  minus a management  fee. At the
present time,  the 2007  guidance  assumes no stock  buy-back.  The Company will
continue to monitor stock prices, the published NAV and acquisition alternatives
to  determine  the  current  best  use  of  capital   between  stock   buy-back,
acquisitions  and leverage  levels.  During  periods when our common  shares are
trading at a premium to NAV,  we are not likely to  repurchase  shares.  In such
circumstances,  it would be more likely  that we would issue  equity in order to
raise capital in order to pay down existing debt. This should be neutral to both
NAV and  earnings  per share,  increase the level of  unencumbered  assets,  and
better position the Company to fund future acquisition and development  pipeline
needs.  During 2007, the Company will target  leverage of  approximately  43% of
debt-to-total  market  capitalization  in  order  to  meet  its  above-described
acquisition goals.

Results of Operations
---------------------

Comparison of year ended December 31, 2006 to year ended December 31, 2005.

The Company owned 106 communities  with 31,253  apartment units  throughout 2005
and  2006  where  comparable  operating  results  are  available  for the  years
presented (the "2006 Core Properties").  For the year ended  December 31,  2006,
the 2006 Core Properties  showed an increase in total revenues of 5.0% and a net
operating income increase of 6.8% over the 2005 period. Property level operating
expenses increased 2.8%. Average economic occupancy for the 2006 Core Properties
increased from 93.8% to 94.0%, with average monthly rental rates increasing 3.1%
to $1,073 per apartment unit.

A summary of the 2006 Core Property NOI is as follows (in thousands):

                                      2006         2005    $ Change    % Change
                                      ----         ----    --------    --------
Rent                             $ 378,289    $ 365,911     $12,378        3.4%

Utility recovery revenue             8,323        2,907       5,416      186.3%
                                 ---------    ---------     -------        ---
Rent including recoveries          386,612      368,818      17,794        4.8%

Other income                        17,710       16,093       1,617       10.0%
                                 ---------    ---------     -------        ---
Total revenue                      404,322      384,911      19,411        5.0%

Operating and maintenance         (172,392)    (167,770)     (4,622)      (2.8%)
                                 ---------    ---------     -------        ---
Net operating income             $ 231,930    $ 217,141     $14,789        6.8%
                                 =========    =========     =======        ===

NOI may fall within the definition of "non-GAAP  financial measure" set forth in
Regulation S-K and, as a result,  Home  Properties may be required to include in
this report a statement  disclosing  the reasons why  management  believes  that
presentation  of this measure  provides  useful  information to investors.  Home
Properties  believes that NOI is helpful to investors as a supplemental  measure
of the operating  performance  of a real estate  company  because it is a direct
measure of the actual operating results of the Company's apartment  communities.
In  addition,  the  apartment  communities  are valued and sold in the market by
using a multiple  of NOI.  The  Company  also uses this  measure to compare  its
performance to that of its peer group.

During 2006, the Company  acquired/developed a total of 3,271 apartment units in
ten communities (the "2006 Acquisition  Communities").  In addition, the Company
experienced  full-year  results for the 2,430 apartment units in seven apartment
communities  (the "2005  Acquisition  Communities")  acquired  during 2005.  The
inclusion of these acquired communities  generally accounted for the significant
changes in operating  results for the year ended December 31, 2006. In addition,
the reported  income from  operations  include the  consolidated  results of one
investment  where the  Company is the  managing  general  partner  that has been
determined to be a Variable Interest Entity ("VIE").

A summary of the NOI from continuing operations for the Company as a whole is as
follows (in thousands):

                                       2006        2005    $ Change     % Change
                                       ----        ----    --------     --------

Rental income                     $ 420,988   $ 378,506     $42,482        11.2%
                                  ---------   ---------     -------        ----
Utility recovery revenue              9,082       2,964       6,118       206.4%
Other income                         18,693      16,451       2,242        13.6%
                                  ---------   ---------     -------        ----
Total property other income          27,775      19,415       8,360        43.1%
                                  ---------   ---------     -------        ----
Total revenue                       448,763     397,921      50,842        12.8%

Operating and maintenance          (190,845)   (174,906)    (15,939)       (9.1%)
                                  ---------   ---------     -------        ----
Net operating income              $ 257,918   $ 223,015     $34,903        15.7%
                                  =========   =========     =======        ====

During 2006, the Company  disposed of 39 properties with a total of 9,705 units,
which had  partial  results  for 2006 and full year  results for 2005 (the "2006
Disposed  Communities").  During 2005, the Company sold four  properties  with a
total of 816 units,  which had  partial  results  for 2005 (the  "2005  Disposed
Communities").  The results of these disposed  properties have been reflected in
discontinued operations and are not included in the table above.

For the year ended  December 31, 2006,  income from  operations  (income  before
equity in losses of unconsolidated affiliates,  minority interest,  discontinued
operations  and loss on  disposition  of property  and  business)  increased  by
$5,161,000 when compared to the year ended  December 31,  2005. The increase was
primarily attributable to the following factors: an increase in rental income of
$42,482,000,  an increase in property other income of $8,360,000, an increase in
interest and other income of $2,625,000,  and a decrease in impairment of assets
held as general partner of $400,000.  These changes were partially  offset by an
increase in operating and  maintenance  expense of  $15,939,000,  an increase in
general  and  administrative  expense of  $2,974,000,  an  increase  in interest
expense of  $14,595,000,  and an increase in  depreciation  and  amortization of
$15,198,000. Each of the items are described in more detail below.

Of the $42,482,000 increase in rental income, $21,578,000 is attributable to the
2005 Acquisition Communities, $8,228,000 is attributable to the 2006 Acquisition
Communities and $298,000 is attributable  to the  consolidation  of the VIE. The
balance of $12,378,000  relates to a 3.4% increase from the 2006 Core Properties
due  primarily  to an  increase  of  3.1%  in  weighted  average  rental  rates,
accompanied by an increase in average economic occupancy from 93.8% to 94.0%.

In the current improving economic  environment,  it is very difficult to project
rental rate and occupancy  results.  The Company has provided guidance for 2007,
which, at the mid-point of the range,  anticipates  same store revenue growth of
5.1%,  including  above-average  rental increases from the continued  efforts to
upgrade the properties.  Occupancy  levels are expected to slightly improve from
the  level at the end of the  fourth  quarter  of 2006,  producing  an  expected
average for 2007 Same Store Properties of 94.0%, 10 basis points higher than all
of 2006.

Property other income,  which consists primarily of income from utility recovery
charges,  operation of laundry facilities,  late charges,  administrative  fees,
garage and carport rentals,  revenue from corporate  apartments,  cable revenue,
pet  charges,  and  miscellaneous  charges to  residents,  increased  in 2006 by
$8,360,000. Of this increase, $1,097,000 is attributable to the 2005 Acquisition
Communities,  $259,000 is attributable to the 2006  Acquisition  Communities and
partially offset by a $29,000  decrease  attributable to the VIE. The balance of
$7,033,000 represents a 37.0% increase attributable to the 2006 Core Properties.
Included in the 2006 Core Properties  increase is $5,416,000,  which  represents
increased utility recovery revenue compared to 2005.

Interest  income  increased  $1,180,000 due to a higher level of invested excess
cash on hand available from sale proceeds of the 2006 Disposed  Communities  and
proceeds from exchangeable  senior notes awaiting  reinvestment into replacement
property.

Other income,  which primarily reflects management and other real estate service
fees  recognized by the Company,  increased in 2006 by  $1,445,000.  This is due
primarily to the post closing  consultation  fees earned in connection  with the
2006 Disposed Communities.

Of the $15,939,000 increase in operating and maintenance expenses, $8,521,000 is
attributable to the 2005 Acquisition Communities,  $2,969,000 is attributable to
the  2006  Acquisition  Communities  partially  offset  by a  $173,000  decrease
attributable to the VIE. The balance for the 2006 Core Properties,  a $4,622,000
increase in  operating  expenses or 2.8%,  is primarily a result of increases in
electricity,  gas heating costs,  repairs & maintenance and property  insurance.
These increases were offset in part by reductions in personnel, advertising, and
snow removal costs.

The breakdown of operating and maintenance costs for the 2006 Core Properties by
line item is listed below (in thousands):

                                        2006        2005   $ Variance   % Variance
                                        ----        ----   ----------   ----------
Electricity                          $ 6,959     $ 6,414      $ (545)       (8.5%)
Gas                                   20,113      18,871      (1,242)       (6.6%)
Water & sewer                         11,297      10,691        (606)       (5.7%)
Repairs & maintenance                 25,885      24,704      (1,181)       (4.8%)
Personnel expense                     33,818      34,199         381         1.1%
Site level incentive compensation      2,252       2,419         167         6.9%
Advertising                            4,161       4,591         430         9.4%
Legal & professional                   1,176         896        (280)      (31.3%)
Office & telephone                     5,425       5,535         110         2.0%
Property insurance                     6,813       5,746      (1,067)      (18.6%)
Real estate taxes                     38,512      38,292        (220)       (0.6%)
Snow                                     610       1,190         580        48.7%
Trash                                  2,438       2,452          14         0.6%
Property management G&A               12,933      11,770      (1,163)       (9.9%)
                                   ---------   ---------     -------        ----
Total                              $ 172,392   $ 167,770     $(4,622)       (2.8%)
                                   =========   =========     =======        ====

With a $1,242,000 increase, natural gas heating costs were up 6.6% over 2005. We
experienced  significant  increases in the cost of natural gas per  decatherm in
the first quarter. These increases were not unexpected, and rates and usage have
come down the balance of the year with positive  comparisons  to the other three
quarters.

As  of  December 31,  2006,  the  Company  had  fixed-price  contracts  covering
approximately  95% of its natural gas exposure for the balance of the  2006/2007
heating  season.  Risk  is  further  diversified  by  staggering  contract  term
expirations.  For the  balance of the  2006/2007  heating  season,  the  Company
estimates the average  price per  decatherm  will be  approximately  $9.50.  For
calendar year 2007, where the Company has coverage for 85% of its exposure,  the
Company's  negotiated average price per decatherm was approximately  $9.22, with
an all-in  weighted  expectation  of $8.99  including  an  estimate  for the 15%
variable  portion.  For 2006, the average commodity cost for the year was $9.29.
The Company has provided  guidance for 2007 which  anticipates a 13.1%  increase
(or  $2,700,000) in natural gas heating costs.  This is based on the thirty-year
average  for the number of degrees  days for 2007.  Both the winter of the first
quarter and fourth quarter of 2006 were mild,  making for a tough  comparison in
2007. Even though the cost per decatherm is expected to go down slightly,  usage
is expected to increase significantly. For guidance, the portion of the calendar
year not  covered by fixed  price  contracts  (15%) is assumed to be priced at a
level that reflects twelve month strip pricing as of February, 2007.

The  increase  in repairs  and  maintenance  of 4.8% is mainly  attributed  to a
non-recurring  $618,000 reduction in 2005 due to cost  reimbursements  from fire
losses.  After  factoring  the fire  reimbursement,  the 2006  increase was only
$563,000,  or 2.2%. The Company has provided guidance for 2007 which anticipates
a 4.3% increase in repairs and maintenance.

Personnel  expenses were down 1.1% in 2006 versus 2005. The Company  experienced
favorable variances in workers compensation and health insurance, down $322,000,
or 10%. For 2007  guidance,  personnel  costs are  anticipated to increase 5.7%.
Part of this increase is  attributable  to a more  normalized  level of overtime
expected during winter months.  As with heating costs described  above, the more
mild winter in 2006 produced lower snowfall which reduces labor costs.

Site level incentive compensation was down $167,000, or 6.9%. The hurdle rate to
earn incentive  compensation  was set higher in 2006 due to increased  optimism,
resulting in a slightly lower overall payout.

Advertising costs were down 9.4% as a result of property  management  decreasing
spending on major newspaper ads and focusing instead on internet advertising and
resident referral programs.

Legal and professional fees were up $280,000, or 31.3%, due in part to increased
efforts for property tax assessment appeals.

Property  insurance  costs were up 18.6% over 2005,  primarily  due to a general
increase in our property and general  liability  insurance  premiums.  Insurance
costs have  continued  to climb due to  catastrophe  rate  increases  and higher
reinsurance  rates.  The guidance for 2007 reflects a similar 18.8%  increase in
insurance costs.

Real  estate  taxes  were up only  0.6% in 2006,  reflecting  general  increased
assessments  and rates as tax  authorities  struggle  to raise  revenues in many
regions of the  country,  mostly  offset by  selected  successful  property  tax
appeals which  resulted in $555,000  savings in 2006.  The Company  expects real
estate taxes to increase only 3.0% in 2007 reflecting  continued  initiatives to
challenge assessments and obtain cost reductions.

Snow removal  costs were down  580,000 or 48.7%.  The year 2006  produced  below
normal  snowfalls  compared to normal  snowfall in 2005.  Snow removal costs are
anticipated to revert to normal levels in 2007.

The  operating  expense ratio (the ratio of operating  and  maintenance  expense
compared to rental and property  other income) for the 2006 Core  Properties was
42.6% and 43.6% for 2006 and 2005,  respectively.  This 1.0%  decrease  resulted
from the 5.0%  increase in total revenue  achieved  through  ongoing  efforts to
upgrade and reposition  properties for maximum  potential and the Company's roll
out of its heating cost recovery program in 2006, offset by the 2.8% increase in
operating and maintenance  expense. In general,  the Company's operating expense
ratio is higher  than that  experienced  in other  parts of the  country  due to
relatively high real estate taxes and heating costs in its markets.

General and  administrative  expenses ("G&A") increased in 2006 by $2,974,000 or
15% from $19,652,000 in 2005 to $22,626,000 in 2006.  General and administrative
expenses as a percentage of total revenues (including  discontinued  operations)
were 4.4% for 2006 as compared to 4.0% for 2005. The recently enacted accounting
rules  effecting  stock options and restricted  stock,  SFAS 123R,  required the
Company to  recognize  compensation  costs in 2006 for  retirement-eligible  and
near-retirement-eligible  employees and directors over a shorter  vesting period
than 2005,  coupled  with a  significantly  higher  stock  price,  resulting  in
$879,000  higher  expense for 2006.  Part of the  increase  ($1,667,000)  is the
direct result of the increase in corporate incentive  compensation bonus accrued
in 2006,  partially offset by a $1,331,000  reduction in external costs incurred
for  auditing,  tax and  consultation  expense,  including  costs to comply with
Section  404 of  Sarbanes-Oxley.  G&A for 2006 also  included  $505,000  for the
development  department which was non-existent in 2005. A significant portion of
the costs in 2005  related to the  non-recurring  first year efforts for Section
404  compliance.  G&A is  expected  to  decrease  6.5%  for  2007,  based on the
retirement as an employee of Norman Leenhouts, who will remain as Co-Chairman of
the Board; partially offset by the ramp up of the development department.

Interest expense  increased in 2006 by $14,595,000 as a result of a full year of
interest expense for the 2005 Acquisition Communities,  the increased borrowings
in connection with acquisition of the 2006 Acquisition  Communities and interest
expense on the exchangeable senior notes,  partially offset by lower interest on
line of  credit  expenses.  In  addition,  amortization  from  deferred  charges
relating to the financing of properties totaled  $2,389,000 and $1,975,000,  and
was included in interest expense for 2006 and 2005, respectively.

Included  in 2005  interest  expense  are  prepayment  penalties  of $147,000 in
connection with the refinancing or payoff of certain mortgages not in connection
with a sale any property.

Depreciation  and  amortization   expense  increased   $15,198,000  due  to  the
additional  depreciation expense on the 2006 Acquisition  Communities and a full
year of depreciation  expense for the 2005 Acquisition  Communities,  as well as
the  incremental  depreciation  on the capital  expenditures  for  additions and
improvements  to the  Core  Properties  in  2006  and  2005 of  $67,787,000  and
$72,696,000, respectively.

The Company has sold  virtually  all of the assets  associated  with its general
partner  interests in the affordable  properties in order to focus solely on the
direct  ownership and  management of market rate apartment  communities.  During
2005, the Company recorded impairment charges of $400,000,  which pertains to an
impairment  charge taken on the one  remaining  VIE to reduce its  investment to
fair market value.

Minority  interest  increased  $985,000  as a direct  result of the  increase in
income from operations,  partially offset by a decrease in the minority interest
percentage over the prior year.

Included in discontinued  operations for 2006 are the operating results,  net of
minority interest,  of the 2006 Disposed  Communities.  Included in discontinued
operations for 2005 are the operating results, net of minority interest,  of the
2006 Disposed Communities and the 2005 Disposed Communities. For purposes of the
discontinued operations presentation, the Company only includes interest expense
and losses from early  extinguishment  of debt associated with specific mortgage
indebtedness of the properties that are sold or held for sale.

Included in the  $78,748,000 net gain on disposition of property for 2006 is the
sale of 39 apartment  communities  where the Company  recorded a combined  gross
gain on sale of $110,514,000, net of minority interest of $31,766,000.

Included in the  $53,975,000  gain on disposition  of property  reported for the
year  2005 is the sale of four  apartment  communities  where  the  Company  has
recorded a combined gross gain on sale of $73,022,000,  net of minority interest
of  $24,227,000.  In addition,  the Company  recorded a $7,686,000  gain, net of
minority interest of $2,506,000,  during the year related to the disposal of two
affordable partnerships.

Net income increased  $28,973,000  primarily due to the increase in gain on sale
of  discontinued  operations  of  $24,773,000  in 2006  compared  to 2005;  plus
$4,176,000 higher income from continuing operations in 2006 compared to 2005.

Comparison of year ended December 31, 2005 to year ended December 31, 2004.

The Company owned 98 communities with 28,855 apartment units throughout 2004 and
2005 where  comparable  operating  results are available for the years presented
(the "2005 Core  Properties").  For the year ended  December 31,  2005, the 2005
Core Properties showed an increase in total revenues of 3.6% and a net operating
income increase of 3.4% over the 2004 year-end period.  Property level operating
expenses increased 4.0%. Average economic occupancy for the 2005 Core Properties
increased  from 93.4% to 93.5%,  with average  monthly  rental rates  increasing
2.4%.

A summary of the 2005 Core Property NOI is as follows (in thousands):

                                      2005         2004    $ Change    % Change
                                      ----         ----    --------    --------
Rent                             $ 336,613    $ 327,737      $8,876        2.7%

Utility recovery revenue             2,595           95       2,500     2631.6%
                                 ---------    ---------      ------     ------
Rent including recoveries          339,208      327,832      11,376        3.5%

Other income                        15,179       14,168       1,011        7.1%
                                 ---------    ---------      ------     ------
Total revenue                      354,387      342,000      12,387        3.6%

Operating and maintenance         (153,463)    (147,628)     (5,835)      (4.0%)
                                 ---------    ---------      ------     ------
Net operating income             $ 200,924    $ 194,372      $6,552        3.4%
                                 =========    =========      ======     ======

During  2005,  the Company  acquired a total of 2,430  apartment  units in seven
communities  (the "2005  Acquisition  Communities").  In  addition,  the Company
experienced  full-year  results for the 2,394 apartment units in eight apartment
communities  (the "2004  Acquisition  Communities")  acquired  during 2004.  The
inclusion of these acquired communities  generally accounted for the significant
changes in operating  results for the year ended December 31, 2005. In addition,
effective  April 1, 2004,  the  reported  income  from  operations  include  the
consolidated results of one investment where the Company is the managing general
partner that has been determined to be a VIE.

A summary of the NOI from continuing operations for the Company as a whole is as
follows (in thousands):

                                       2005        2004    $ Change     % Change
                                       ----        ----    --------     --------
Rental income                     $ 378,506   $ 348,932     $29,574         8.5%
                                  ---------   ---------     -------      ------
Utility recovery revenue              2,964         133       2,831      2128.6%
Other income                         16,451      14,804       1,647        11.1%
                                  ---------   ---------     -------      ------
Total property other income          19,415      14,937       4,478        30.0%
                                  ---------   ---------     -------      ------
Total revenue                       397,921     363,869      34,052         9.4%

Operating and maintenance         (174,906)   (157,802)    (17,104)      (10.8%)
                                  ---------   ---------     -------      ------
Net operating income              $ 223,015   $ 206,067     $16,948         8.2%
                                  =========   =========     =======      ======

During  2004,  the  Company  disposed of five  properties  with a total of 1,646
units, which had partial results for 2004 (the "2004 Disposed Communities"). The
results of the 2004 Disposed Communities,  along with the 2006 and 2005 Disposed
Communities, have been reflected in discontinued operations and are not included
in the table above.

For the year ended  December 31, 2005,  income from  operations  (income  before
equity in losses of unconsolidated affiliates,  minority interest,  discontinued
operations  and gain on  disposition  of property  and  business)  decreased  by
$3,936,000 when compared to the year ended  December 31,  2004. The decrease was
primarily attributable to the following factors: an increase in rental income of
$29,574,000,  an increase in property other income of $4,478,000,  a decrease in
general and administrative expense of $4,326,000 and a decrease in impairment of
assets held as general partner of $716,000.  These changes were more than offset
by an increase in operating and maintenance expense of $17,104,000,  an increase
in interest expense of $15,033,000, an increase in depreciation and amortization
of $10,234,000 and a decrease in interest and other income of $659,000.  Each of
the items are described in more detail below.

Of the $29,574,000 increase in rental income, $11,451,000 is attributable to the
2004 Acquisition Communities, $8,180,000 is attributable to the 2005 Acquisition
Communities and $1,067,000 is attributable to the  consolidation of the VIE. The
balance of $8,876,000  relates to a 2.7% increase from the 2005 Core  Properties
due  primarily  to an  increase  of  2.4%  in  weighted  average  rental  rates,
accompanied by an increase in average economic occupancy from 93.4% to 93.5%.

Property other income,  which consists primarily of income from utility recovery
charges,  operation of laundry facilities,  late charges,  administrative  fees,
garage and carport rentals,  revenue from corporate  apartments,  cable revenue,
pet  charges,  and  miscellaneous  charges to  residents,  increased  in 2005 by
$4,478,000.  Of this increase,  $661,000 is attributable to the 2004 Acquisition
Communities,  $287,000 is attributable to the 2005  Acquisition  Communities and
$19,000 is attributable to the VIE. The balance of $3,511,000 represents a 24.6%
increase  attributable  to the 2005 Core  Properties.  Included in the 2005 Core
Properties  increase is $2,500,000 which represents  increased  utility recovery
revenue compared to 2004.

Other income,  which primarily reflects management and other real estate service
fees  recognized  by the Company,  decreased  in 2005 by  $759,000.  This is due
primarily to a decrease in the level of  management  activity as a result of the
sale of the affordable  limited  partnerships  partially  offset by increases in
other fee managed properties.

Of the $17,104,000 increase in operating and maintenance expenses, $6,439,000 is
attributable to the 2004 Acquisition Communities,  $3,750,000 is attributable to
the 2005 Acquisition  Communities and $1,080,000 is attributable to the VIE. The
balance  for the 2005  Core  Properties,  a  $5,835,000  increase  in  operating
expenses or 4.0%, is primarily a result of increases in utilities, personnel and
real estate  taxes,  offset in part by reductions  in  advertising,  repairs and
maintenance, and property insurance.

The breakdown of operating and maintenance costs for the 2005 Core Properties by
line item is listed below (in thousands):

                                        2005          2004    $ Variance    % Variance
                                        ----          ----    ----------    ----------
Electricity                          $ 6,115       $ 5,951       $ (164)        (2.8%)
Gas                                   18,013        15,300       (2,713)       (17.7%)
Water & sewer                          9,617         9,142         (475)        (5.2%)
Repairs & maintenance                 22,838        22,894            56          0.2%
Personnel expense                     31,449        30,937         (512)        (1.7%)
Site level incentive compensation      2,220         1,323         (897)       (67.8%)
Advertising                            4,246         4,297            51          1.2%
Legal & professional                     802           740          (62)        (8.4%)
Office & telephone                     5,172         5,428           256          4.7%
Property insurance                     4,334         5,383         1,049         19.5%
Real estate taxes                     34,563        32,889       (1,674)        (5.1%)
Snow                                   1,018           877         (141)       (16.1%)
Trash                                  2,146         2,070          (76)        (3.7%)
Property management G&A               10,930        10,397         (533)        (5.1%)
                                   ---------     ---------      -------         ----
Total                              $ 153,463     $ 147,628      $(5,835)        (4.0%)

The natural gas heating cost variance of 17.7% reflects significant increases in
the cost of natural gas per  decatherm.  For calendar  year 2005,  the Company's
average price per decatherm was $6.98.  A year ago, the average  commodity  cost
for the year was approximately $6.00.

The 5.2%  increase  in water and sewer  costs is a  function  of  municipalities
across all regions looking at ways to increase revenues. The Company initiated a
program to  allocate  water and sewer  costs to  residents  at a majority of the
Owned Properties in March 2005.

The  decrease  in repairs  and  maintenance  of 0.2% is mainly  attributed  to a
$919,000  decrease in sales tax charges  between  periods.  Included in contract
repairs in 2004 is $808,000  of sales tax  expense,  compared to a reduction  in
sales tax expense of $111,000 in 2005.

Personnel  expense was up 1.7% in 2005 versus 2004.  Significant  variances were
normal payroll increases of $958,000, or 2.7%, increase in workers compensation,
up $421,000, or 27%, and health insurance, down $867,000, or 33%.

Site level incentive  compensation was up $897,000, or 67.8%. This represents an
increased focus on creating a higher level of property  management  compensation
coming from incentive based performance measures.

Advertising costs were down 1.2% as a result of property  management  decreasing
spending on major newspaper ads and focusing instead on internet advertising and
resident referral programs.

Property  insurance  costs were down 19.5% over 2004.  The  Company  renewed the
property and general liability insurance policy for the year beginning November,
2004 at  significantly  reduced  rates,  due to a reduced  number of claims  and
better management of those claims.

Real estate taxes were up 5.1% in 2005,  reflecting  increased  assessments  and
rates as tax  authorities  struggle  to raise  revenues  in many  regions of the
country.

Snow  removal  costs  were up 16.1%.  The year 2005  produced  normal  snowfalls
compared to below normal snowfall in 2004.

The  operating  expense ratio (the ratio of operating  and  maintenance  expense
compared to rental and property  other income) for the 2005 Core  Properties was
43.3% and 43.2% for 2005 and 2004,  respectively.  This 0.1%  increase  resulted
from the 3.6%  increase in total revenue  achieved  through  ongoing  efforts to
upgrade and reposition properties for maximum potential being offset by the 4.0%
increase  in  operating  and  maintenance  expense.  In general,  the  Company's
operating  expense ratio is higher than that  experienced  in other parts of the
country  due to  relatively  high  real  estate  taxes  in its  markets  and the
Company's  practice,  typical in its markets,  of including  heating expenses in
base rent.

General and  administrative  expenses ("G&A") decreased in 2005 by $4,326,000 or
18%  from  $23,978,000  in 2004  to  $19,652,000  in  2005.  Of  this  decrease,
$3,800,000  is  attributable  to an  accrued  liability  recorded  in the fourth
quarter of 2004  relating  to the March  2005  settlement  of a lawsuit  and the
payment of certain  related  legal fees, as described  below.  After taking into
account the settlement  expense,  all other items of G&A decreased $526,000 year
over year. Of this net variance,  there was a $481,000  decrease in the level of
corporate incentive  compensation and a $573,000 decrease in other items of G&A;
partially offset by $528,000 increased  external costs incurred  specifically to
comply with  Section 404 of  Sarbanes-Oxley.  The total  direct  external  costs
incurred   during  2005  for  Section  404  compliance   totaled   approximately
$2,300,000.  A significant  portion of this related to costs incurred in 2005 to
satisfy the first year efforts for Section 404 compliance.

The $3,800,000  accrued for  settlement  costs  ($3,500,000)  and the legal fees
($300,000)  relates to a legal action,  commenced in 2000,  against the Company,
the Operating  Partnership and Home Leasing Corporation.  Home Leasing was owned
by Nelson B. Leenhouts and Norman Leenhouts,  who are the Co-Chairs of the Board
of  Directors of the Company.  The Company was  originally  formed to expand and
continue  Home  Leasing's  business.  The essence of the  complaint was that the
entity in which the plaintiffs  were investors was wrongfully  excluded from the
Company's  initial  public  offering.  In their original  complaint,  plaintiffs
sought damages in the amount of $3,000,000. In the subsequent discovery process,
plaintiffs increased damages sought to $10,000,000. Payment in settlement and of
legal  fees was made on behalf of Home  Leasing as well as the  Company  and the
Operating Partnership in recognition of the fact that the matters alleged in the
action  against Home Leasing  related  directly and solely to the  promotion and
creation of the Company.

Interest  expense  increased in 2005 by $15,033,000 as a result of the increased
borrowings in connection with acquisition of the 2005  Acquisition  Communities,
and a full year of interest  expense for the 2004  Acquisition  Communities.  In
addition,  amortization  from  deferred  charges  relating to the  financing  of
properties  totaled  $1,975,000  and  $1,766,000,  and was  included in interest
expense for 2005 and 2004, respectively.

Included in interest expense are prepayment penalties which decreased in 2005 by
$158,000 as  compared  to 2004.  During  2005,  the Company  incurred a total of
$147,000 in prepayment penalties in connection with the refinancing or payoff of
certain mortgages compared to $305,000 in 2004.

Depreciation  and  amortization   expense  increased   $10,234,000  due  to  the
additional  depreciation expense on the 2005 Acquisition  Communities and a full
year of depreciation  expense for the 2004 Acquisition  Communities,  as well as
the  incremental  depreciation  on the capital  expenditures  for  additions and
improvements  to the  Core  Properties  in  2005  and  2004 of  $64,592,000  and
$68,510,000, respectively.

Impairment of assets held as General  Partner  decreased from $1,116,000 in 2004
to $400,000 in 2005.  During 2005, the Company  recorded  impairment  charges of
$400,000  relating to the  Company's  estimate  of fair market  value of the one
remaining  VIE.  During  2004,  the  Company  recorded   impairment  charges  of
$1,116,000  (all in the first  quarter).  Of this  total,  $171,000  represented
advances  made  during the first  quarter  of 2004 to certain of the  affordable
property  limited  partnerships  which the Company  believed would not be repaid
upon the sale of the loans.  The remaining  $945,000  pertained to an additional
net  impairment  charge  taken on the 38  properties  included in the  Company's
planned disposition of its affordable  portfolio to reduce the investment in the
partnerships based upon the revisions to the sale contract in the first quarter.
In connection with FIN 46R, the Company was required to consolidate the majority
of the affordable limited  partnerships results of operations beginning April 1,
2004.

The equity in losses of  unconsolidated  affiliates of $538,000 is primarily the
result  of the  general  partner  recording  a greater  share of the  underlying
investment's  losses due to the loans and advances to certain of the  affordable
property limited  partnerships where the limited partner has no capital account.
This is pursuant to the accounting requirements of EITF 99-10,  "Percentage Used
to Determine the Amount of Equity Method Losses."

Minority  interest  decreased  $575,000  as a direct  result of the  decrease in
income from operations over the prior year.

Included in  discontinued  operations for the year-ended  December 31, 2005, are
the 2006 and 2005 Disposed Communities.

Included in the  $53,975,000  gain on disposition  of property  reported for the
year  2005 is the sale of four  apartment  communities  where  the  Company  has
recorded a combined gross gain on sale of $73,022,000,  net of minority interest
of  $24,227,000.  In addition,  the Company  recorded a $7,686,000  gain, net of
minority interest of $2,506,000,  during the year related to the disposal of two
affordable partnerships.

In  connection  with the  adoption of FIN 46R,  the Company  recorded a $321,000
cumulative  effect  charge  of a change  in  accounting  principle  in the first
quarter of 2004.  This  charge was the result of  negative  capital  accounts of
minority interest partners that were absorbed by the Company.

Net income increased  $34,490,000  primarily due to the increase in gain on sale
of  discontinued  operations of $42,558,000 in 2005 compared to 2004;  partially
offset by $5,192,000 lower income from the operation of discontinued  operations
in 2005 compared to 2004.

Liquidity and Capital Resources
-------------------------------

The Company's  principal  liquidity  demands are expected to be distributions to
the common stockholders and holders of UPREIT Units,,  capital  improvements and
repairs and  maintenance  for the  properties,  acquisition  and  development of
additional  properties,  stock  repurchases,  the  redemption  of the  Series  F
Perpetual Preferred shares described above, and debt repayments. The Company may
also acquire equity ownership in other public or private  companies that own and
manage  portfolios  of  apartment   communities.   Management   anticipates  the
acquisition of properties of approximately  $400 million in 2007, although there
can be no assurance that such acquisitions will actually occur.

The Company intends to meet its short-term  liquidity  requirements  through net
cash flows  provided  by  operating  activities  and its  existing  bank line of
credit,  described below. The Company  considers its ability to generate cash to
be adequate to meet all operating  requirements  and make  distributions  to its
stockholders in accordance with the provisions of the Internal  Revenue Code, as
amended, applicable to REITs.

To the  extent  that  the  Company  does not  satisfy  its  long-term  liquidity
requirements  through net cash flows  provided by operating  activities  and the
line of credit,  it intends to satisfy such  requirements  through property debt
financing,  proceeds from the sale of properties,  the issuance of UPREIT Units,
proceeds from sales of its common stock through the Dividend  Reinvestment Plan,
or issuing additional common shares, shares of the Company's preferred stock, or
other securities. As of December 31, 2006, the Company owned 19 properties, with
3,816 apartment units, which were unencumbered by debt.

During 2006, the Company sold 39  communities  for a total sales price of $495.3
million.  The Company sold four communities  during 2005 for a total sales price
of $142.6 million.  The Company was able to sell these  properties at an average
capitalization  rate of 6.8% and reinvest in the  acquisition of properties with
more growth potential at an expected first year cap rate of 6.4%. Management has
included in its operating  plan that the Company will  strategically  dispose of
assets  totaling  approximately  $50 million  in 2007,  although there can be no
assurance that such dispositions will actually occur.

In May  1998,  the  Company's  Form  S-3  Registration  Statement  was  declared
effective  relating  to the  issuance  of up to $400  million  of common  stock,
preferred  stock or other  securities.  As of  December  31,  2006,  the Company
continued to have available  securities under the registration  statement in the
aggregate amount of $144,392,000.

In June  2000,  the  Company  completed  the  sale of $25  million  of  Series D
Preferred  Stock in a private  transaction  with The  Equitable  Life  Assurance
Society of the United  States.  The Series D Preferred  Stock  carried an annual
dividend rate equal to the greater of 8.775% or the actual  dividend paid on the
Company's common shares into which the preferred shares could be converted.  The
stock  had a  conversion  price  of $30  per  share  and a  five-year,  non-call
provision.  On May 26, 2005, all 250,000 shares of the Series D Preferred  Stock
were converted into 833,333 shares of common stock.  The conversion of preferred
shares  to common  shares  did not have an effect  on the  reported  results  of
operations.

In March,  2002,  the  Company  issued  2,400,000  shares of its 9.00%  Series F
Cumulative  Redeemable  Preferred  Stock ("Series F Preferred  Shares"),  with a
$25.00 liquidation preference per share. This offering generated net proceeds of
approximately $58 million.  The net proceeds were used to fund the repurchase of
the Company's  Series B Preferred  Stock,  property  acquisitions,  and property
upgrades. The Series F Preferred Shares are redeemable by the Company at anytime
on or after March 25, 2007 at a redemption  price of $25.00 per share,  plus any
accumulated,  accrued  and unpaid  dividends.  The  Company  plans to redeem the
Series F Preferred on March 26, 2007.  Each Series F Preferred share receives an
annual  dividend  equal  to  9.00%  of  the  liquidation  preference  per  share
(equivalent to a fixed annual amount of $2.25 per share).

In 2000, the Company  obtained an investment  grade rating from Fitch,  Inc. The
rating in effect at  December  31,  2006 (no change  from  initial  rating) is a
corporate credit rating of "BBB"  (Triple-B),  with a rating of "BBB-" (Triple-B
Minus) for Series F Preferred Stock.

The Company issued  $20,397,000,  $55,600,000 and $12,100,000 of UPREIT Units as
consideration for acquired properties in 2006, 2005 and 2004, respectively.

In 1997, the Company's Board of Directors  approved a stock  repurchase  program
under which the Company may repurchase  shares of its  outstanding  common stock
and UPREIT Units.  The  shares/units  may be repurchased  through open market or
privately negotiated  transactions at the discretion of Company management.  The
Board's  action did not  establish a target  price or a specific  timetable  for
repurchase.  At December  31,  2004,  there was  approval  remaining to purchase
2,000,000  shares.  During 2005, the Company  repurchased  2,779,805 shares at a
cost of  $111,738,000.  On each of February 16, 2005 and  November 4, 2005,  the
Board of Directors  approved a 2,000,000 share increase in the stock  repurchase
program,  resulting in a remaining  authorization  level of 3,220,195  shares at
December 31, 2005.  During 2006, the Company  repurchased  2,613,747 shares at a
cost of  $142,532,597.  On October  27, 2006 the Board of  Directors  approved a
2,000,000-share  increase  in  the  stock  repurchase  program,  resulting  in a
remaining  authorization  level of  2,606,448  shares as of December  31,  2006.
During 2007,  the Company will monitor  stock  prices,  the  published net asset
value, and acquisition alternatives to determine the current best use of capital
between the two major uses of capital - stock buyback and acquisitions.

The Company has a Dividend  Reinvestment  and Direct  Stock  Purchase  Plan (the
"DRIP").  The DRIP provides the  stockholders  of the Company an  opportunity to
automatically invest their cash dividends in common stock. In addition, eligible
participants  may make monthly  payments or other voluntary cash  investments in
shares of common stock.  The maximum  monthly  investment  without prior Company
approval is currently $10,000.  In the fourth quarter of 2004, the Company began
meeting  share demand in the program  through  share  repurchase by the transfer
agent in the open market on the Company's  behalf instead of new share issuance.
This removes  essentially 100% of the dilution caused by issuing new shares at a
price less than the net asset value in an economic and efficient manner.  During
2006 and 2005,  48,243 and 66,525  shares of common  stock,  respectively,  were
issued under this plan,  which were covered by share  repurchases.  As the stock
has been trading at an amount close to NAV, in the fourth  quarter of 2006,  the
Company switched back to issuing new shares to meet demand.

Management  monitors the relationship  between the Company's stock price and its
estimated  NAV.  During times when the  difference  between  these two values is
small,  resulting in little  "dilution"  of NAV by common stock  issuances,  the
Company  can choose to issue new  shares.  At times when the gap between NAV and
stock price is greater,  the Company has the  flexibility  to satisfy the demand
for DRIP shares with stock  repurchased  in the open market.  In  addition,  the
Company can issue waivers to DRIP  participants  to provide for  investments  in
excess of the $10,000 maximum monthly  investment.  No such waivers were granted
during 2006 or 2005.

On October 24,  2006,  the Company  issued $200 million of  exchangeable  senior
notes under an Indenture  Agreement.  This  offering  generated  net proceeds of
$195.8 million.  The coupon rate is 4.125%. The notes are exchangeable into cash
equal to the principal amount of the notes and, at the Company's option, cash or
common  stock for the  exchange  value (to the extent  that the market  price of
common stock exceeds the initial  exchange price of $73.34 per share) subject to
adjustment.  Upon an exchange of the notes,  the Company will settle any amounts
up to the  principal  amount  of the  notes in cash and the  remaining  exchange
value, if any, will be settled,  at the Company's  option, in cash, common stock
or a  combination  of both.  The notes are not  redeemable  at the option of the
Company for five years, except to preserve the status of the Company as a REIT.

Holders of the notes may require the  Company to  repurchase  the notes upon the
occurrence of certain designated events. In addition, prior to November 1, 2026,
the holders may require the Company to repurchase the notes on November 1, 2011,
2016 and 2021.  The notes will  mature on November  1, 2026,  unless  previously
redeemed,  repurchased or exchanged in accordance with their terms prior to that
date.

Noteholders may also require an exchange of the notes subsequent to December 31,
2006 should the closing  sale price of common  stock exceed 130% of the exchange
price for a certain  period of time or should the trading  price on the notes be
less  than  98% of the  product  of the  closing  sales  price of  common  stock
multiplied by the applicable exchange rate for a certain period of time.

The notes are  structurally  subordinated  to the  secured  indebtedness  of the
Company.  The  Company  is not  subject  to any  financial  covenants  under the
Indenture.  In  addition,  the  Indenture  will not  restrict the ability to pay
distributions, incur debt or issue or repurchase securities.

On November 23, 2004,  the Company  signed a  supplemental  demand note with M&T
Bank.  The note had a maximum  principal  amount of $42 million with interest at
1.25% over the  one-month  LIBOR rate.  The demand note was entered into to fund
the Company's stock repurchase  program.  The Company had no outstanding balance
on the note as of December 31, 2004. In connection with the increased  borrowing
capacity of the line of credit as described above,  this  supplemental  note was
terminated during the third quarter of 2005.

On November 23, 2005,  the Company  executed a Standard Libor Grid Note with M&T
Bank.  The note had a maximum  principal  amount of $40 million with an interest
rate at .95% over the  one-month  LIBOR.  Proceeds  from this  demand  note were
utilized to fund the  Company's  stock  repurchase  program.  The Company had no
outstanding balance on the note as of December 31, 2005 and it was terminated.

As of December 31, 2006, the Company had an unsecured line of credit of $140,000
of which there was no  outstanding  balance.  Provided  that no event of default
under  this  agreement  has  occurred,  the  Company  may  request  on or before
September 1, 2007 that the lenders  increase the line of credit to an amount not
to exceed $190,000. The Company has had no occurrences of default as of December
31, 2006. The line of credit is led by  Manufacturers  and Traders Trust Company
("M&T Bank"), as Administrative  Agent, with three other participants:  Citizens
Bank of Rhode Island,  Chevy Chase Bank, F.S.B.,  and Comerica Bank.  Borrowings
under the line of credit bear  interest at 0.75% over the one-month  LIBOR.  The
one-month  LIBOR was 5.32% at December 31, 2006.  The LIBOR  interest  rate plus
0.75% was 6.07% at December 31, 2006.

Increases in interest  rates will raise the  Company's  interest  expense on any
outstanding  balances  and as a result  would  affect the  Company's  results of
operations and financial  condition.  The line of credit expires on September 1,
2008 and can be extended one year upon satisfaction of certain  conditions.  The
credit  agreement  relating  to this  line of credit  requires  the  Company  to
maintain  certain  financial  ratios  and  measurements.   The  Company  was  in
compliance with these financial covenants for the year ended December 31, 2006.

As of December 31, 2006, the weighted  average rate of interest on the Company's
$1.9 billion  mortgage debt was 5.8% and the weighted  average  maturity of such
indebtedness was  approximately six and one half years.  Approximately  98.6% of
total indebtedness  (including the exchangeable senior notes) is at fixed rates.
This limits the exposure to changes in interest rates,  minimizing the effect of
interest  rate   fluctuations  on  the  Company's   results  of  operations  and
cash flows.

The  Company's  net  cash  provided  by  operating   activities  increased  from
$136,466,000 for the year ended December 31,  2005, to $162,996,000 for the year
ended  December 31, 2006. The increase was  principally  due to changes in other
assets, accounts payable and accrued liabilities. The change in other assets was
principally  due to the use of a  $7,303,000  deposit for the  acquisition  of a
property  in 2006 and a  $6,297,000  decrease  in 2006 due to the 2006  Disposed
Communities.  The increase in liabilities  over the prior year was primarily due
to higher  accrued  interest of $1,541,000  for the  exchangeable  senior notes,
$1,089,000  accrued  interest on debt associated with 2006 and 2005  Acquisition
Communities;  $1,842,000 higher accrued bonus with the remaining increase due to
higher  accounts  payable  and  other  accrued  expenses  at the  end of 2006 as
compared to the prior year end.

Cash provided by (used in) investing  activities  increased from  ($179,944,000)
used in 2005 to $159,653,000  provided by in 2006. The dramatic increase in 2006
is  attributable  to the  $349,384,000  increase in proceeds  from 2006 Disposed
Communities. Also, cash used in the purchase of properties was $31,848,000 lower
in 2006 as compared to 2005, and funds added to escrow were  $38,713,000  higher
in 2006.

Cash  provided by (used in)  financing  activities  decreased  from  $40,944,000
provided by in 2005 to ($209,828,000) used in 2006 primarily due to $167,858,000
less cash provided by debt  refinancings;  $150,865,000 in mortgage  retirements
for the 2006 Disposed Communities; $109,000,000 cash used to pay off the line of
credit and $34,449,000 higher  repurchases of common stock,  partially offset by
$195,800,000 proceeds from the sale of exchangeable senior notes and $16,536,000
higher proceeds from stock option exercises.

On February 7, 2007, the Board of Directors approved a dividend on the Company's
common  shares of $.65 per share for the period from October 1, 2006 to December
31, 2006.  This is the equivalent of an annual  distribution of $2.60 per share.
In addition,  the Company declared a dividend of $0.5625 per share on its Series
F Cumulative Redeemable Preferred Stock for the quarter ended February 28, 2007.
The  dividends  were paid on  February  28,  2007 to  shareholders  of record on
February 16, 2007.

Critical Accounting Policies
----------------------------

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States of America requires  management to make
estimates and assumptions in certain  circumstances that affect amounts reported
in the  accompanying  consolidated  financial  statements and related notes.  In
preparing  these  financial  statements,  management  has  utilized  information
available  including  industry  practice and its own past history in forming its
estimates and judgments of certain amounts included in the financial statements,
giving due  consideration  to  materiality.  It is  possible  that the  ultimate
outcome as anticipated by management in  formulating  its estimates  inherent in
these  financial  statements may not  materialize.  However,  application of the
accounting  policies  below  involves  the  exercise  of  judgment  and  use  of
assumptions as to future  uncertainties  and, as a result,  actual results could
differ from these estimates. In addition,  other companies may utilize different
estimates which may impact  comparability of the Company's results of operations
to those of companies in similar businesses.

Revenue Recognition
-------------------

The Operating  Partnership  leases its residential  apartment units under leases
with  terms  generally  one year or  less.  Rental  income  is  recognized  on a
straight-line  basis over the related  lease term. As a result,  deferred  rents
receivable  are created when rental income is recognized  during the  concession
period of certain negotiated leases and amortized over the remaining term of the
lease.  In accordance  with SFAS 141, the Company  recognizes  rental revenue of
acquired  in-place  "above and below" market leases at their fair value over the
weighted  average  remaining lease term.  Property other income,  which consists
primarily of income from  operation  of laundry  facilities,  utility  recovery,
administrative  fees,  garage and carport rentals and  miscellaneous  charges to
residents,  is recognized  when earned (when the services are provided,  or when
the resident incurs the charge).

Property  management  fees are  recognized  when earned  based on a  contractual
percentage of net monthly cash collected on rental income.

Real Estate
-----------

Real estate is recorded at cost. Costs related to the acquisition,  development,
construction  and improvement of properties are capitalized.  Recurring  capital
replacements typically include carpeting and tile,  appliances,  HVAC equipment,
new  roofs,  site  improvements  and  various  exterior  building  improvements.
Non-recurring  upgrades  include,  among other  items,  community  centers,  new
appliances, new windows, kitchens and bathrooms.  Interest costs are capitalized
until construction is substantially complete.  There was $1,087,000,  $1,096,000
and  $763,000  of interest  capitalized  in 2006,  2005 and 2004,  respectively.
Salaries and related costs  capitalized  for the years ended  December 31, 2006,
2005 and 2004 were  $2,097,000,  $2,135,000 and $3,391,000,  respectively.  When
retired or  otherwise  disposed  of,  the  related  asset  cost and  accumulated
depreciation  are cleared from the respective  accounts and the net  difference,
less any amount  realized  from  disposition,  is reflected in income.  Ordinary
repairs and maintenance that do not extend the life of the asset are expensed as
incurred.

Management reviews its long-lived assets used in operations for impairment when,
in accordance  with SFAS No. 144,  Accounting  for the Impairment or Disposal of
Long Lived Assets  ("SFAS  144"),  there is an event or change in  circumstances
that indicates an impairment in value. An asset is considered  impaired when the
undiscounted  future  cash  flows are not  sufficient  to  recover  the  asset's
carrying value. If such impairment is present,  an impairment loss is recognized
based on the excess of the carrying amount of the asset over its fair value. The
Company  records  impairment  losses and reduces the carrying  amounts of assets
held for sale when the carrying  amounts exceed the estimated  selling  proceeds
less the costs to sell.

The Company  accounts  for its  acquisitions  of  investments  in real estate in
accordance with SFAS No. 141, Business Combinations ("SFAS 141"), which requires
the fair value of the real  estate  acquired  to be  allocated  to the  acquired
tangible  assets,  consisting  of land,  building,  and  personal  property  and
identified  intangible  assets  and  liabilities,  consisting  of the  value  of
above-market  and  below-market  leases,  value of in-place  leases and value of
resident  relationships,  based in each case on their fair  values.  The Company
considers  acquisitions of operating real estate assets to be businesses as that
term is defined  in  Emerging  Issues  Task Force  Issue No.  98-3,  Determining
Whether a Nonmonetary  Transaction Involves Receipt of Productive Assets or of a
Business.

The Company allocates purchase price to the fair value of the tangible assets of
an acquired property (which includes the land, building,  and personal property)
determined by valuing the property as if it were vacant.  The as-if-vacant value
is allocated to land,  buildings,  and personal  property based on  management's
determination of the relative fair values of these assets.

Above-market and below-market  in-place lease values for acquired properties are
recorded  based on the present value (using an interest rate which  reflects the
risks  associated  with the leases  acquired) of the difference  between (i) the
contractual  amounts  to be  paid  pursuant  to the  in-place  leases  and  (ii)
management's estimate of fair market lease rates for the corresponding  in-place
leases, measured over a period equal to the remaining non-cancelable term of the
lease.  The capitalized  above-market  lease values are included in other assets
and  are   amortized  as  a  reduction  of  rental  income  over  the  remaining
non-cancelable  terms of the respective  leases.  The  capitalized  below-market
lease values are  included in accrued  expenses  and other  liabilities  and are
amortized  as an  increase  to  rental  income  over  the  initial  term  of the
respective leases.

Other intangible  assets acquired include amounts for in-place lease values that
are based upon the Company's  evaluation of the specific  characteristics of the
leases.  Factors  considered in these  analyses  include an estimate of carrying
costs during  hypothetical  expected lease-up periods considering current market
conditions,  and costs to execute  similar  leases.  The Company also  considers
information  obtained about each property as a result of its pre-acquisition due
diligence,  marketing and leasing activities in estimating the fair value of the
tangible  and  intangible  assets  acquired.   In  estimating   carrying  costs,
management  also  includes  real estate  taxes,  insurance  and other  operating
expenses  and  estimates  of lost  rentals at market  rates  during the expected
lease-up periods depending on the property acquired.

The total amount of other  intangible  assets  acquired is further  allocated to
resident  relationships,  which includes intangible values based on management's
evaluation of the specific  characteristics  of the  residential  leases and the
Company's resident retention history.

The value of  in-place  leases and  resident  relationships  are  amortized  and
included in depreciation and  amortization  expense over the initial term of the
respective leases.

The acquisitions of minority  interests for shares of the Company's common stock
are recorded  under the purchase  method with assets  acquired  reflected at the
fair market value of the Company's common stock on the date of acquisition.  The
acquisition  amounts  are  allocated  to the  underlying  assets  based on their
estimated  fair  values.  During  2006 and 2005,  there were 3.8 million and 0.2
million  shares of UPREIT Units  converted to common  stock,  respectively.  The
Company made an  adjustment  in the amount of $124.6  million and $5.2  million,
respectively, to record the fair market value of the conversions.

Discontinued Operations
-----------------------

The Company  reports its property  dispositions  as  discontinued  operations as
prescribed by the  provisions of SFAS No. 144,  Accounting for the Impairment or
Disposal of  Long-Lived  Assets ("SFAS  144").  Pursuant to the  definition of a
component  of  an  entity  in  SFAS  144,  assuming  no  significant  continuing
involvement  by the  former  owner  after  the  sale,  the sale of an  apartment
community  is  considered  a  discontinued  operation.  In  addition,  apartment
communities  classified  as held for sale are  also  considered  a  discontinued
operation.  The Company generally  considers assets to be held for sale when all
significant  contingencies  surrounding  the closing have been  resolved,  which
often  corresponds  with the actual  closing date. As of December 31, 2005,  the
Company classified 21 properties as held for sale. These 21 properties were sold
during  2006  and are  included  in  discontinued  operations  for  all  periods
presented and classified as held for sale as of December 31, 2005.

Included in discontinued  operations for the three years ended December 31, 2006
are the operating results,  net of minority interest,  of 48 apartment community
dispositions  (39 sold in 2006, 4 sold in 2005 and 5 sold in 2004). In addition,
discontinued  operations for the years ended December 31, 2005 and 2004 includes
the  operating  results  of four VIEs sold  during  2005.  For  purposes  of the
discontinued operations presentation, the Company only includes interest expense
associated  with  specific  mortgage  indebtedness  of the  properties  that are
considered discontinued operations.

Capital Improvements
--------------------

The  Company  has a policy  to  capitalize  costs  related  to the  acquisition,
development,  rehabilitation,   construction,  and  improvement  of  properties.
Capital  improvements  are costs that  increase  the value and extend the useful
life of an asset.  Ordinary repair and maintenance  costs that do not extend the
useful life of the asset are  expensed as  incurred.  Costs  incurred on a lease
turnover  due to normal wear and tear by the  resident are expensed on the turn.
Recurring capital  improvements  typically  include:  appliances,  carpeting and
flooring,  HVAC equipment,  kitchen/bath  cabinets, new roofs, site improvements
and various exterior  building  improvements.  Non-recurring  upgrades  include,
among other items:  community centers, new windows,  and kitchen/bath  apartment
upgrades.  The Company capitalizes interest and certain internal personnel costs
related to the communities under rehabilitation and construction.

The Company is required to make subjective assessments as to the useful lives of
its  properties  and  improvements  for  purposes of  determining  the amount of
depreciation  to reflect on an annual  basis.  These  assessments  have a direct
impact on the Company's net income.

Federal Income Taxes
--------------------

The Company has elected to be taxed as a real estate  investment  trust ("REIT")
under the Internal Revenue Code of 1986, as amended, commencing with the taxable
year ended December 31,  1994. As a result, the Company generally is not subject
to Federal or State  income  taxation  at the  corporate  level to the extent it
distributes annually at least 90% of its REIT taxable income to its shareholders
and satisfies certain other requirements. For the years ended December 31, 2006,
2005 and 2004, the Company  distributed in excess of 100% of its taxable income;
accordingly,  no  provision  has  been  made  for  federal  income  taxes in the
accompanying consolidated financial statements.  Stockholders of the Company are
taxed on  dividends  and must  report  distributions  from the Company as either
ordinary income, capital gains, or as return of capital.

Included in total  assets on the  Consolidated  Balance  Sheets are deferred tax
assets  of  $10,079,000  and  $8,496,000  as of  December  31,  2006  and  2005,
respectively. The deferred tax assets were a result of the net losses associated
with the affordable  property  portfolio sales during 2004 and 2003.  Management
does not believe it is more likely than not that these  deferred  assets will be
used, and  accordingly has recorded a reserve against the deferred tax assets of
$10,078,000  and  $8,421,000  for the years  ended  December  31, 2006 and 2005,
respectively.  The  deferred  tax assets are  associated  with HPRS who performs
certain of the  residential  and  development  activities  of the Company.  HPRS
historically  provided commercial management services and provided loan advances
to affordable housing entities owned through general partnership  interests.  As
these activities are no longer provided,  Management does not currently  believe
there is a source for future material  taxable earnings for HPRS that would give
rise to value for the deferred tax assets.

Variable Interest Entities
--------------------------

Effective  March 31,  2004,  the Company  adopted FASB  Interpretation  No. 46R,
Consolidation of Variable Interest  Entities,  an interpretation of ARB No. 51 -
Consolidated Financial Statements. The interpretation addresses consolidation by
businesses of special purpose entities (variable interest entities,  "VIE"). The
Company  had  made  the  determination  that  all  41 of the  remaining  limited
partnerships at the time were Variable Interest Entities.

The  Company  determined  that it was  not  the  primary  beneficiary  in  seven
partnerships  syndicated under U.S.  Department of Housing and Urban Development
subsidy programs, all of which have been sold as of December 31, 2005.

The Company had further determined that it was the primary  beneficiary in 34 of
the VIEs and,  therefore,  consolidated these entities effective March 31, 2004.
Beginning with the second quarter of 2004, the Company  consolidated the results
of operations of the VIEs.  Effective  December 31, 2005, the Company had closed
on the sale on all but one of the VIEs.  The one remaining VIE is not considered
held for sale and is included in the  Consolidated  Statement of Operations  for
the years ended December 31, 2006, 2005 and 2004.

The Company is currently the general partner in this one VIE with a total of 868
units  syndicated  using low income  housing tax credits under Section 42 of the
Internal  Revenue Code. As general  partner,  the Company manages the day-to-day
operations of this  partnership for a management  fee. In addition,  the Company
has certain  operating deficit and tax credit guarantees to its limited partner.
The Company is responsible  for funding  operating  deficits to the extent there
are any and can receive  operating  incentive awards if cash flows reach certain
levels.  The effect on the consolidated  balance sheets of including this VIE as
of December 31, 2006 and 2005 includes  total assets of $20.5 and $21.3 million,
total liabilities of $17.9 and $17.9 million,  and minority interest of $2.6 and
$3.4 million, respectively.

The  Company  believes  the  property   operations  conform  to  the  applicable
requirements as set forth above.

Acquisitions and Dispositions
-----------------------------

In 2006, the Company acquired a total of eight communities with a total of 3,067
units for total  consideration of  $360,100,000,  or an average of approximately
$117,400 per unit. For the same time period, the Company sold 39 properties with
a total of 9,705 units for total consideration of $495,300,000, or an average of
approximately  $51,000 per unit.  The weighted  average  expected first year cap
rate of the 2006  Acquisition  Communities  was  6.7%  and of the 2006  Disposed
Communities was 7.6%. The weighted average  unleveraged IRR during the Company's
ownership for the properties sold was 9.3%.

In 2005, the Company acquired a total of seven communities with a total of 2,430
units for total  consideration of  $283,400,000,  or an average of approximately
$116,900 per unit.  For the same time period,  the Company sold four  properties
with a total of 816 units for total consideration of $142,600,000, or an average
of $174,700 per unit. The weighted  average  expected first year cap rate of the
2005 Acquisition  Communities was 6.0% and of the 2005 Disposed  Communities was
4.0%. The weighted  average  unleveraged IRR during the Company's  ownership for
the properties sold was 20.0%.

Contractual Obligations and Other Commitments
---------------------------------------------

The primary  obligations of the Company relate to its borrowings  under the line
of credit,  exchangeable senior notes and mortgage notes payable.  The Company's
line of credit  matures in September  2008,  and has no balance  outstanding  at
December 31,  2006.  The $1.9  billion in mortgage  notes  payable  have varying
maturities  ranging from 1 to 36 years.  The principal  payments on the mortgage
notes payable for the years  subsequent to  December 31,  2006, are set forth in
the table below as "long-term debt."

The Company  leases its corporate  office space from an affiliate and the office
space for its regional  offices from third parties.  The corporate  office space
requires an annual base rent plus a pro-rata  portion of property  improvements,
real estate  taxes,  and common area  maintenance.  The regional  office  leases
require an annual base rent plus a pro-rata portion of real estate taxes.  These
leases are set forth in the table below as "operating lease."

Purchase  obligations  represent  those costs that the Company is  contractually
obligated to pay in the future.  The significant  components of this caption are
costs for capital improvements at the Company's properties, as well as costs for
normal  operating  and  maintenance  expenses at the site level that are tied to
contracts  such  as  utilities,   landscaping   and  grounds   maintenance   and
advertising. The purchase obligations include amounts tied to contracts, some of
which  expire in 2007.  It is the  Company's  intention  to renew  these  normal
operating contracts;  however,  there has been no attempt to estimate the length
or future costs of these contracts.

Tabular Disclosure of Contractual Obligations:

                                              Payments Due by Period (in thousands)
                                              -------------------------------------
Contractual Obligations         Total       2007      2008      2009       2010       2011  Thereafter
-----------------------         -----       ----      ----      ----       ----       ----  ----------
Long-term debt (1)         $1,924,313   $171,500  $137,153   $68,351   $307,989   $285,509    $953,811

Operating lease                 6,128      1,980     1,946     1,932        200         70           -

Purchase obligations            9,319      8,371       646       165        106         30           1
                           ----------   --------  --------   -------   --------   --------    --------
Total (2)                  $1,939,760   $181,851  $139,745   $70,448   $308,295   $285,609    $953,812
                           ==========   ========  ========   =======   ========   ========    ========

(1)  Amounts include  principal  payments only. The Company will pay interest on
     outstanding  indebtedness based on the rates and terms summarized in Note 4
     to the Consolidated Financial Statements.

(2)  The  contractual  obligations  and other  commitments  in the table are set
     forth as required by Item  303(a)(5) of Regulation  S-K  promulgated by the
     SEC  in  January  of  2003  and  are  not  prepared  in   accordance   with
     generally-accepted accounting principles.

As discussed in the section entitled "Variable Interest  Entities," the Company,
through  its general  partnership  interest in an  affordable  property  limited
partnership,  has  guaranteed  the Low  Income  Housing  Tax  Credits to limited
partners in this partnership totaling  approximately $3 million. With respect to
the guarantee of the low income  housing tax credits,  the Company  believes the
property's  operations  conform  to the  applicable  requirements  and  does not
anticipate any payment on  the guarantee.  In addition,  the Company,  acting as
general  partner in this  partnership,  is  obligated  to advance  funds to meet
partnership operating deficits.

In connection with the issuance of the Series F Preferred  Stock, the Company is
required to maintain for each fiscal  quarterly  period a fixed charge  coverage
ratio, as defined in the Series F Cumulative  Redeemable Preferred Stock Article
Supplementary, of 1.75 to 1.0.

The fixed charge  coverage ratio and the  components  thereof do not represent a
measure of cash generated from operating activities in accordance with generally
accepted  accounting  principles  and are  not  necessarily  indicative  of cash
available to fund cash needs. Further, this ratio should not be considered as an
alternative measure to net income as an indication of the Company's  performance
or of cash flow as a measure of liquidity.

The  calculation  of the fixed  charge  coverage  ratio for the four most recent
quarters since the issuance of the Series F Preferred  Stock are presented below
(in  thousands).  EBITDA  is  defined  in the  Series  F  Cumulative  Redeemable
Preferred Stock Article  Supplementary as consolidated income before gain (loss)
on disposition  of property and business,  minority  interest and  extraordinary
items,  before giving effect to expenses for interest,  taxes,  depreciation and
amortization.   Net  operating  income  from  discontinued   operations  in  the
calculation below is defined as total revenues from discontinued operations less
operating and maintenance expenses.

                  Calculation Presented for Series F Covenants
                  --------------------------------------------
                                                                         Three-months ended
                                                                         ------------------
                                                           Dec. 31    Sept. 30      June 30     Mar. 31
                                                              2006        2006         2006        2006
                                                              ----        ----         ----        ----
EBITDA
Total revenues                                           $ 118,748   $ 115,255    $ 121,947   $ 119,416
Net operating income from discontinued operations            3,975       5,125        4,950       5,017
Operating and maintenance expense                          (49,781)    (45,650)     (49,397)    (58,135)
General and administrative expense                          (5,923)     (5,607)      (6,057)     (5,039)
                                                          --------    --------     --------    --------
                                                          $ 67,019    $ 69,123     $ 71,443    $ 61,259
Fixed Charges
Interest expense                                          $ 27,800    $ 26,637     $ 27,717    $ 27,195
Interest expense on discontinued operations                  7,691       1,279        4,246       1,286
Preferred dividends                                          1,350       1,350        1,350       1,350
Capitalized interest                                            79         349          346         313
                                                          --------    --------     --------    --------
                                                          $ 36,920    $ 29,615     $ 33,659    $ 30,144

Fixed charge coverage ratio:                                  1.82        2.33         2.12        2.03

Capital Improvements
--------------------

The  Company  has a policy of  capitalizing  costs  related to the  acquisition,
development, rehabilitation, construction and improvement of properties. Capital
improvements  are costs that increase the value and extend the useful life of an
asset.  Ordinary repair and maintenance costs that do not extend the useful life
of the asset are expensed as incurred. Costs incurred on a lease turnover due to
normal wear and tear by the resident are expensed on the turn. Recurring capital
improvements  typically  include:  appliances,   carpeting  and  flooring,  HVAC
equipment,  kitchen/ bath cabinets,  new roofs,  site  improvements  and various
exterior building  improvements.  Non-recurring  upgrades  include,  among other
items:  community centers, new windows, and kitchen/bath apartment upgrades. The
Company capitalizes interest and certain internal personnel costs related to the
communities under rehabilitation and construction.

The table  below is a list of the items  that  management  considers  recurring,
non-revenue enhancing capital and maintenance expenditures for a standard garden
style apartment.  Included are the per unit replacement cost and the useful life
that management estimates the Company incurs on an annual basis.

                                                                                 Maintenance
                                                              Capitalized            Expense       Total
                                     Capitalized              Expenditure           Cost per    Cost per
                                        Cost per   Useful        Per Unit               Unit        Unit
Category                                    Unit  Life(1)     Per Year(2)        Per Year(3)    Per Year
--------                                    ----  -------     -----------        -----------    --------
Appliances                                $1,000       18             $56                $ 5        $ 61
Blinds/Shades                                130        6              22                  6          28
Carpets/cleaning                             840        6             140                 97         237
Computers, equipment, misc.(4)               120        5              24                 29          53
Contract repairs                               -        -               -                102         102
Exterior painting (5)                         84        5              17                  1          18
Flooring                                     250        8              31                  -          31
Furnace/Air (HVAC)                           765       24              32                 43          75
Hot water heater                             130        7              19                  -          19
Interior painting                              -        -               -                138         138
Kitchen/bath cabinets                      1,100       25              44                  -          44
Landscaping                                    -        -               -                106         106
New roof                                     800       24              33                  -          33
Parking lot                                  400       15              27                  -          27
Pool/ Exercise facility                      100       16               6                 23          29
Windows                                      980       36              27                  -          27
Miscellaneous (6)                            705       15              47                 40          87
                                          ------                     ----               ----      ------
Total                                     $7,404                     $525               $590      $1,115
                                          ======                     ====               ====      ======

(1)  Estimated  weighted  average actual physical useful life of the expenditure
     capitalized.

(2)  This amount is not  necessarily  incurred  each and every year.  Some years
     will be higher,  or lower  depending  on the timing of certain  longer life
     expenditures.

(3)  These expenses are included in the Operating and  maintenance  line item of
     the Consolidated  Statement of Operations.  Maintenance labor costs are not
     included  in the $590 per  unit  estimate.  All  personnel  costs  for site
     supervision,  leasing  agents,  and  maintenance  staff  are  combined  and
     disclosed in the Company's same-store expense detail schedule.

(4)  Includes computers, office equipment/furniture, and maintenance vehicles.

(5)  The level of  exterior  painting  may be lower  than other  similar  titled
     presentations as the Company's  portfolio has a significant amount of brick
     exteriors.  In addition,  the other exposed surfaces are most often covered
     in aluminum or vinyl.

(6)  Includes items such as balconies, siding, and concrete/sidewalks.

In  reviewing  the  breakdown of costs above,  one must  consider the  Company's
unique strategy in operating apartments which has been to improve every property
every year regardless of age.  Another part of its strategy is to purchase older
properties  and rehab and reposition  them to enhance  internal rates of return.
This strategy  results in higher costs of capital  expenditures  and maintenance
costs  which is more  than  justified  by  higher  revenue  growth,  higher  net
operating income growth and a higher rate of property appreciation.

The Company estimates that during 2006, approximately $525 per unit was spent on
recurring  capital  expenditures.  The table below  summarizes  the breakdown of
capital  improvements by major categories  between recurring and  non-recurring,
revenue generating capital improvements as follows:

                                        For the year ended December 31,
                                     (in thousands, except per unit data)
                                     ------------------------------------
                                                     2006                                            2005
                       ------------------------------------------------------------------  -------------------------
                                                 Non-
                       Recurring       (a)  recurring        (a) Total Capital        (a)  Total Capital         (a)
                          Cap Ex  Per Unit     Cap Ex   Per Unit  Improvements   Per Unit   Improvements    Per Unit
                          ------  --------     ------   --------  ------------   --------   ------------    --------
New buildings         $        -    $    -    $ 2,392   $     70       $ 2,392     $   70        $ 4,433      $  139
Major building
improvements               3,111        91     14,263        417        17,374        508         16,634         520
Roof replacements          1,128        33      2,803         82         3,931        115          4,676         146
Site improvements          1,128        33      7,222        211         8,350        244          7,659         240
Apartment upgrades         2,256        66     14,207        416        16,463        482         17,788         556
Appliances                 1,915        56      1,923         56         3,838        112          3,701         116
Carpeting/flooring         5,846       171      3,914        114         9,760        285          8,417         263
HVAC/mechanicals           1,744        51      9,989        292        11,733        343          9,677         303
Miscellaneous                821        24      2,263         66         3,084         90          2,770          87
                         -------      ----    -------     ------       -------     ------        -------      ------
Totals                   $17,949      $525    $58,976     $1,724       $76,925     $2,249        $75,755      $2,370
                         =======      ====    =======     ======       =======     ======        =======      ======

(a)  Calculated  using  the  weighted  average  number  of  units   outstanding,
     including  31,253 core units,  2005  acquisition  units of 2,430,  and 2006
     acquisition  units of 505 for the year ended  December  31, 2006 and 31,253
     core units and 2005  acquisition  units of 714 for the year ended  December
     31, 2005.

The  schedule  below  summarizes  the  breakdown of total  capital  improvements
between core and non-core as follows:

                                               For the year ended December 31,
                                             (in thousands, except per unit data)
                                             ------------------------------------
                                                             2006                                          2005
                               ------------------------------------------------------------------  -------------------------
                                                          Non-
                               Recurring       (a)    recurring       (a) Total Capital       (a)  Total Capital       (a)
                                  Cap Ex  Per Unit       Cap Ex  Per Unit  Improvements  Per Unit   Improvements  Per Unit
                                  ------  --------       ------  --------  ------------  --------   ------------  --------
Core Communities                 $16,408      $525      $51,379    $1,644       $67,787    $2,169        $72,696    $2,326
2006 Acquisition Communities         265       525          297       588           562     1,113              -         -
2005 Acquisition Communities       1,276       525        7,300     3,004         8,576     3,529          3,059     4,284
Subtotal                          17,949       525       58,976     1,724        76,925     2,249         75,755     2,370
2006 Disposed Communities          3,552       525        3,515       519         7,067     1,044         12,965     1,336
2005 Disposed Communities              -         -            -         -             -         -          3,313     4,882
Corporate office expenditures (1)      -         -                      -         3,560         -          1,117         -
                                 -------      ----      -------    ------       -------    ------        -------    ------
Totals                           $21,501      $525      $62,491    $1,526       $87,552    $2,051        $93,150    $2,173
                                 =======      ====      =======    ======       =======    ======        =======    ======

(1)  No distinction is made between recurring and non-recurring expenditures for
     corporate  office.   Corporate  office  expenditures  includes  principally
     computer hardware, software and office furniture and fixtures.

Environmental Issues
--------------------

Phase I environmental  site assessments have been completed on substantially all
of the Owned Properties. As of December 31, 2006, there were no recorded amounts
resulting from  environmental  liabilities as there were no known  contingencies
with  respect  thereto.  Furthermore,  no condition is known to exist that would
give rise to a material  liability for site  restoration or other costs that may
be incurred with respect to the sale or disposal of a property.

During the past few years,  there has been media  attention given to the subject
of mold in residential communities.  The Company has responded to this attention
by  providing  to  its  community   management  the  Company's   "Operation  and
Maintenance Plan for the Control of Moisture". The Plan, designed to analyze and
manage all  exposures  to mold,  has been  implemented  at all of the  Company's
communities. There have been only limited cases of mold identified to management
due to the  application and practice of the Plan. No condition is known to exist
that would give rise to a material liability for site restoration or other costs
that may be incurred with respect to mold.

Recent Accounting Pronouncements
--------------------------------

In July 2006, the FASB issued  Interpretation No. 48, Accounting for Uncertainty
in Income Taxes ("FIN 48"). FIN 48 addresses the  recognition and measurement of
assets and  liabilities  associated  with tax positions  taken or expected to be
taken in a tax return. FIN 48 is effective January 1, 2007. The Company reviewed
its current tax positions for any potential  uncertain tax positions  that would
qualify under FIN 48. Based on its review,  the Company does not anticipate that
the  adoption  of FIN 48 in  January  2007  will have a  material  impact on the
Company's cash flows, results of operations, financial position or liquidity.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements  ("SFAS
157").  SFAS 157 defines fair value,  establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures about
fair value measurements.  SFAS 157 applies under other accounting pronouncements
that  require or permit  fair value  measurements;  the FASB  having  previously
concluded  in those  accounting  pronouncements  that fair value is the relevant
measurement attribute. Accordingly, SFAS 157 does not require any new fair value
measurements.  SFAS 157 is effective for financial  statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years.  The Company is required to adopt SFAS 157 in the first  quarter of 2008.
The Company is  currently  evaluating  the impact that SFAS 157 will have on its
financial statements.

Economic Conditions
-------------------

Substantially all of the leases at the communities are for a term of one year or
less, which enables the Company to seek increased rents upon renewal of existing
leases or  commencement  of new leases.  These  short-term  leases  minimize the
potential adverse effect of inflation on rental income,  although  residents may
leave without penalty at the end of their lease terms and may do so if rents are
increased significantly.

Historically,  real estate has been subject to a wide range of cyclical economic
conditions, which affect various real estate sectors and geographic regions with
differing  intensities and at different  times.  Starting in 2001 and continuing
into 2004 many regions of the United States had  experienced  varying degrees of
economic  recession  and  certain  recessionary  trends,  such  as  a  temporary
reduction  in  occupancy  and  reduced  pricing  power  limiting  the ability to
aggressively  raise  rents.  Starting in the second half on 2004 and  continuing
into 2005 and 2006,  we have seen a reversal of these  recessionary  trends.  In
light of this, we will  continue to review our business  strategy;  however,  we
believe that given our property type and the geographic  regions in which we are
located, we do not anticipate any changes in our strategy or material effects on
financial performance.

Contingencies
-------------

The Company is not a party to any legal proceedings which are expected to have a
material  adverse  effect on the  Company's  liquidity,  financial  position  or
results of operations.  The Company is subject to a variety of legal actions for
personal  injury  or  property  damage  arising  in the  ordinary  course of its
business,  most of which are covered by liability  insurance.  Various claims of
employment and resident  discrimination are also periodically brought. While the
resolution  of these  matters  cannot be predicted  with  certainty,  management
believes  that the final outcome of such legal  proceedings  and claims will not
have a material adverse effect on the Company's liquidity, financial position or
results of operations.

During  April,  2004,  the Company  finalized  negotiations  with New York State
settling a sales and use tax audit  covering the period June 1, 1999 through May
31,  2002.  The total cost to the  Company as a result of the audit  amounted to
$861,000.  This was included in the first  quarter  2004  results and  allocated
$448,000  to  expense  and  $413,000  capitalized  to  real  estate  assets  for
improvements.

As a result of this  audit,  during the  second  quarter  of 2004,  the  Company
examined  its sales  and use tax  compliance  in the  other  states in which the
Company operates.  Based upon its internal  analysis,  the Company estimated its
liability as of June 30, 2004 in those states where it found  non-compliance and
recorded at June 30,  2004 a liability of  $1,712,000.  This was included in the
second  quarter   results  and  allocated   $761,000  to  expense  and  $951,000
capitalized  to real estate  assets for  improvements.  The  liability  recorded
relates to the period  beginning on the later of: (i) the date the Company first
purchased  property in the applicable  state; or (ii) January 1, 1997 and ending
on June 30, 2004. In addition, the Company increased the liability for sales tax
exposure  by $68,000 for the  six-month  period  ended  December 31,  2004.  The
Company  filed  Voluntary  Disclosure  Agreements  ("VDAs") with the four states
where it had  significant  financial  exposure.  During  the first six months of
2005, the Company  signed VDAs with these states  limiting the VDA filing period
back to January 1, 2001, and the Company had satisfied all financial obligations
under the VDAs.  For the three- and six-month  periods ended June 30, 2005,  the
Company  had  recorded  adjustments  to the  liability  for both the  effects of
signing the VDAs as well as for the results of the Company's  additional testing
for the first six  months.  The net impact of these  adjustments  resulted  in a
decrease in real estate  assets of  $175,000,  interest  expense of $115,000 and
operating  expenses of $108,000 for a net  decrease to the accrued  liability of
$398,000.  During the third quarter of 2005, the Company finalized  negotiations
with New York State  settling a sales tax audit covering the period June 1, 2002
through November 30, 2004. The settlement was not materially different from what
had been accrued. The result of the payments on the VDAs and this New York State
audit is that the sales tax accrual  which had been  $1,712,000  (as  referenced
above) has been reduced to $0 at December 31, 2005.

In connection with the issuance of the Series F Preferred  Stock, the Company is
required to maintain for each fiscal  quarterly  period a fixed charge  coverage
ratio, as defined in the Series F Cumulative Redeemable Preferred Stock Articles
Supplementary to the Company's  Articles of  Incorporation,  of 1.75 to 1.0. The
fixed  charge  coverage  ratio and the  components  thereof do not  represent  a
measure of cash generated from operating activities in accordance with generally
accepted  accounting  principles  and are  not  necessarily  indicative  of cash
available to fund cash needs. Further, this ratio should not be considered as an
alternative measure to net income as an indication of the Company's  performance
or of cash flow as a measure of  liquidity.  The Company has been in  compliance
with the covenant since the Series F Preferred Stock was issued.  If the Company
fails to be in compliance with this covenant for six or more consecutive  fiscal
quarters, the holders of the Series F Preferred Stock would be entitled to elect
two directors to the board of directors of the Company.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk
--------  ----------------------------------------------------------

The  Company's  primary  market risk exposure is interest rate risk. At December
31, 2006 and December 31,  2005, approximately 89% and 91%, respectively, of the
Company's  secured  debt bore  interest at fixed  rates with a weighted  average
maturity of  approximately 6 and 7 years,  respectively,  and a weighted average
interest rate of approximately 5.77% and 5.95%, respectively,  including the $28
million and $29 million, respectively, of secured debt which has been swapped to
a fixed rate.  The  remainder of the  Company's  secured debt bears  interest at
variable  rates with a weighted  average  maturity  of  approximately  21 and 12
years,  respectively,  and a weighted  average interest rate of 4.95% and 4.54%,
respectively,  at December 31, 2006 and December 31, 2005.  The Company does not
intend  to  utilize a  significant  amount of  permanent  variable  rate debt to
acquire  properties in the future. On occasion,  the Company may use its line of
credit in connection  with a property  acquisition or stock  repurchase with the
intention of refinancing at a later date. The Company believes, however, that in
no  event  would  increases  in  interest  expense  as  a  result  of  inflation
significantly impact the Company's distributable cash flow.

At December  31, 2006 and  December  31,  2005,  the  interest  rate risk on $28
million  and $29  million,  respectively,  of such  variable  rate debt has been
mitigated  through the use of interest rate swap  agreements  (the "Swaps") with
major financial institutions. The Company is exposed to credit risk in the event
of non-performance by the  counter-parties to the Swaps. The Company believes it
mitigates  its credit  risk by entering  into these  Swaps with major  financial
institutions. The Swaps effectively convert the variable rate mortgages to fixed
rates of 5.35%, 5.39%, 8.22% and 8.40%.

At December  31, 2006 and December  31,  2005,  the fair value of the  Company's
fixed and variable rate secured debt, including the $28 million and $29 million,
respectively,  which was  swapped to a fixed rate,  amounted  to a liability  of
$1.93 billion and $1.89 billion,  respectively,  compared to its carrying amount
of $1.92 billion and $1.84 billion,  respectively.  The Company estimates that a
100 basis point  increase in market  interest  rates at December  31, 2006 would
have changed the fair value of the  Company's  fixed and  variable  rate secured
debt to a liability of $1.85 billion.

The Company intends to  continuously  monitor and actively manage interest costs
on its variable rate debt portfolio and may enter into swap positions based upon
market fluctuations.  In addition,  the Company believes that it has the ability
to obtain funds  through  additional  debt and/or  equity  offerings  and/or the
issuance of UPREIT Units. Accordingly,  the cost of obtaining such interest rate
protection  agreements  in relation to the Company's  access to capital  markets
will continue to be evaluated.  The Company has not, and does not plan to, enter
into any derivative financial  instruments for trading or speculative  purposes.
As of  December  31,  2006,  the  Company  had no  other  material  exposure  to
market risk.

Additional  disclosure about market risk is incorporated  herein by reference to
the discussion  under the heading "Results of Operations" in Item 7: Managements
Discussion and Analysis of Financial Condition and Results of Operations.

Item 8.  Financial Statements and Supplementary Data
-------  -------------------------------------------

The financial  statements and supplementary data are listed under Item 15(a) and
filed as part of this report on the pages indicated.

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
-------  ------------------------------------------------------------------------------------

None.

Item 9A. Controls and Procedures
--------------------------------

Evaluation of Disclosure Controls and Procedures.
-------------------------------------------------

The Company  maintains  disclosure  controls and procedures that are designed to
ensure  that  information  required  to be  disclosed  in the  reports  filed or
submitted by the Company under the Securities  Exchange Act of 1934 is recorded,
processed,  summarized  and reported  within the time  periods  specified in the
Securities and Exchange  Commission's rules and forms, and that such information
is  accumulated  and  communicated  to the  officers  who certify the  Company's
financial reports and to the other members of senior management and the Board of
Directors.

The principal executive officer and principal financial officer evaluated, as of
December 31, 2006, the  effectiveness of the disclosure  controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities  Exchange Act
of 1934,  as  amended  (the  "Exchange  Act")  and  have  determined  that  such
disclosure controls and procedures are effective.

Management's Annual Report on Internal Control Over Financial Reporting
-----------------------------------------------------------------------

The  Company's  management  is  responsible  for  establishing  and  maintaining
adequate internal control over financial  reporting,  as such term is defined in
Exchange  Act Rule  13a-15(f).  Because of its  inherent  limitations,  internal
control over financial reporting may not prevent or detect misstatements.  Also,
projections of any evaluation of  effectiveness to future periods are subject to
the risk that controls may become  inadequate  because of changes in conditions,
or  that  the  degree  of  compliance   with  the  policies  or  procedures  may
deteriorate.  The  Company's  internal  control  over  financial  reporting is a
process  designed  under the  supervision of the Company's  principal  executive
officer  and  principal  financial  officer  to  provide  reasonable   assurance
regarding the  reliability  of financial  reporting and the  preparation  of the
Company's  financial  statements for external  reporting  purposes in accordance
with the United States of America generally accepted accounting principles.

Under the supervision and with the  participation  of management,  including the
Company's  principal  executive  officer and principal  financial  officer,  the
Company  conducted an evaluation of the  effectiveness  of its internal  control
over financial reporting based on the framework in Internal Control - Integrated
Framework  issued by the Committee of Sponsoring  Organizations  of the Treadway
Commission.  Based on its evaluation under that framework,  management concluded
that the Company's internal control over financial reporting was effective as of
December  31, 2006.  In addition,  management  has not  identified  any material
weaknesses in the Company's internal controls.

Management's  assessment of the effectiveness of the Company's  internal control
over  financial   reporting  as  of  December  31,  2006  has  been  audited  by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report appearing herein, which expresses unqualified opinions on
management's  assessment  and on the  effectiveness  of the  Company's  internal
control over financial reporting as of December 31, 2006.

Changes in Internal Controls Over Financial Reporting
-----------------------------------------------------

There were no changes in the internal  controls over  financial  reporting  that
occurred during the fourth quarter of the year ended December 31, 2006 that have
materially  affected,  or  are  reasonably  likely  to  materially  affect,  the
Company's internal control over financial reporting.

Item 9B. Other Information
--------------------------

None.

                                    PART III

Item 10. Directors and Executive Officers of the Registrant
-----------------------------------------------------------

Directors
---------

The Board of Directors (the "Board") currently  consists of twelve members.  The
terms  for  all  of  the  directors  of  Home  Properties  expire  at  the  2007
Shareholders' Meeting.

The  information  sets forth,  as of February 16, 2007, for each director of the
Company  such  director's  name,  experience  during the last five years,  other
directorships held, age and the year such director was first elected as director
of the Company.

                                              Year First
Name of Director                Age        Elected Director
----------------                ---        ----------------
William Balderston, III         79               1994
Josh E. Fidler                  51               2004
Alan L. Gosule                  66               1996
Leonard F. Helbig, III          61               1994
Roger W. Kober                  73               1994
Nelson B. Leenhouts             71               1993
Norman Leenhouts                71               1993
Edward J. Pettinella            55               2001
Clifford W. Smith, Jr.          60               1994
Paul L. Smith                   71               1994
Thomas S. Summer                53               2004
Amy L. Tait                     48               1993

William Balderston, III has been a director of the Company since 1994. From 1991
to the end of 1992, he was an Executive  Vice  President of The Chase  Manhattan
Bank,  N.A. From 1986 to 1991, he was President and Chief  Executive  Officer of
Chase Lincoln First Bank,  N.A., which was merged into The Chase Manhattan Bank,
N.A. He is a Senior  Trustee of the  University of Rochester and a member of the
Board of Governors of the University of Rochester Medical Center. Mr. Balderston
is a graduate of  Dartmouth  College.  As a result of the  Company's  retirement
policy,  Mr.  Balderston  will not stand for  re-election  at the Company's 2007
Annual Meeting of Stockholders.

Josh E. Fidler has been a director of the Company since August, 2004. Mr. Fidler
is a Founding  Partner of Boulder  Ventures,  Ltd., a manager of venture capital
funds,  which has been in operation  since 1995.  Since 1985, he has also been a
principal in a diversified real estate  development  business known as The Macks
Group.  In 1999, the Company  acquired 3,297  apartment units from affiliates of
The Macks  Group.  Mr.  Fidler was also a principal  of the entity which owned a
240-unit  apartment  community  which the  Company  purchased  in 2004.  He is a
graduate of Brown University and received a law degree from New York University.
Mr. Fidler is a member of the Maryland  Region  Advisory Board of SunTrust Bank,
the Board of Johns Hopkins Medicine and President-elect of the Board of Trustees
of The Park School.

Alan L. Gosule,  has been a director of the Company  since 1996.  Mr. Gosule has
been a partner in the New York Office of the law firm of Clifford  Chance US LLP
since August 1991 and prior to that time was a partner in the law firm of Gaston
& Snow.  Mr.  Gosule is a graduate of Boston  University  and its Law School and
received an LLM in Taxation from Georgetown  University.  Mr. Gosule also serves
on the Board of Directors of MFA  Mortgage  Investments,  Inc. He is a member of
the Board of Advisors of Paloma,  LLC,  which is the general  partner of Simpson
Housing Limited  Partnership,  and is a voting trustee of F.L. Putnam Investment
Management Company.

Leonard F.  Helbig,  III has been a director  of the Company  since 1994.  Since
September  2002 he has  served as a  Director  of  Integra  Realty  Advisors  in
Philadelphia.  Between 1980 and 2002 he was  employed  with Cushman & Wakefield,
Inc. From 1990 until 2002,  Mr. Helbig served as President,  Financial  Services
for Cushman & Wakefield,  Inc.  Prior to that and since 1984, Mr. Helbig was the
Executive Managing Director of the Asset Services and Financial Services Groups.
He was a member of that firm's Board of Directors and Executive  Committee.  Mr.
Helbig  is a member  of the  Urban  Land  Institute,  the  Pension  Real  Estate
Association and the International  Council of Shopping Centers.  Mr. Helbig is a
graduate of LaSalle  University  and holds the MAI  designation  of the American
Institute of Real Estate Appraisers.

Roger W. Kober has been a director of the Company since 1994. He was employed by
Rochester Gas and Electric Corporation from 1965 until his retirement on January
1, 1998. From March 1996 until January 1, 1998, Mr. Kober served as Chairman and
Chief  Executive  Officer of  Rochester  Gas and Electric  Corporation.  He is a
Trustee Emeritas of Rochester  Institute of Technology.  Mr. Kober is a graduate
of Clarkson  College and holds a Masters  Degree in  Engineering  from Rochester
Institute of Technology.

Nelson B.  Leenhouts  has  served as Board  Co-Chair  since  his  retirement  as
Co-Chief  Executive Officer effective January 1, 2004. He had served as Co-Chief
Executive  Officer,  President and a director of the Company since its inception
in 1993.  Since its  formation,  he has also served as a director  of HPRS,  for
which he had also served in various officer  capacities prior to his retirement.
Mr.  Leenhouts  also served as a Senior  Advisor to the  Company  pursuant to an
Employment Agreement with a term that expired on December 31, 2006. In addition,
Nelson   Leenhouts   was   employed  by  the   Company  to  fulfill   additional
responsibilities with respect to the Company's  development  activities pursuant
to a Development Agreement, the term of which also expired on December 31, 2006.
Mr. Leenhouts subsequently entered into an Employment Agreement with a term that
expires on December 31, 2007. Pursuant to the current Employment Agreement,  Mr.
Leenhouts  will continue to lead the Company's  development  activities.  Nelson
Leenhouts is the founder,  and a co-owner,  together with Norman  Leenhouts,  of
Home Leasing,  and has served as President of Home Leasing  since 1967.  He is a
member of the Board of Directors of the Genesee  Valley  Trust  Company.  Nelson
Leenhouts is a graduate of the  University of Rochester.  He is the twin brother
of Norman Leenhouts.

Norman P.  Leenhouts  has  served as Board  Co-Chair  since  his  retirement  as
Co-Chief  Executive  Officer  effective  January 1, 2004. He had served as Board
Chair,  Co-Chief  Executive  Officer  and a director  of the  Company  since its
inception  in 1993.  Since its  formation,  he has also  served as a director of
HPRS.  Mr. Leenhouts  also served as a Senior Advisor to the Company pursuant to
an Employment  Agreement with a term that expired on December 31, 2006. Prior to
January  1,  2006,  Norman  Leenhouts  was  a  co-owner,  together  with  Nelson
Leenhouts, of Home Leasing, where he had served as Board Chair since 1971. He is
currently the Chairman of Broadstone  Ventures,  LLC and Broadstone Real Estate,
LLC, formed to contain the property management business of Home Leasing. He is a
member of the Board of Trustees of the University of Rochester, Roberts Wesleyan
College and The Charles E. Finney School.  He is a graduate of the University of
Rochester and is a certified public accountant. He is the twin brother of Nelson
Leenhouts.

Edward J. Pettinella has served as President and Chief Executive  Officer of the
Company since  January 1, 2004. He is also a director.  He joined the Company in
2001 as an Executive Vice  President and director.  He is also the President and
Chief Executive  Officer of HPRS. From 1997 until February 2001, Mr.  Pettinella
served as President, Charter One Bank (NY Division) and Executive Vice President
of Charter One Financial,  Inc. From 1980 through 1997, Mr. Pettinella served in
several managerial  capacities for Rochester Community Savings Bank,  Rochester,
NY,  including  the  positions of Chief  Operating  Officer and Chief  Financial
Officer.  Mr. Pettinella  serves on the  Board of  Directors  of  United  Way of
Greater  Rochester,   Rochester  Business  Alliance,   The  Lifetime  Healthcare
Companies,  National  Multi  Housing  Counsel,  Syracuse  University  School  of
Business and the Geneseo  Foundation Board. He is also on the Board of Governors
of  National  Association  of Real Estate  Investment  Trusts and is a member of
Urban Land Institute.  Mr.  Pettinella is a graduate of the State  University at
Geneseo and holds an MBA Degree in finance from Syracuse University.

Clifford W. Smith,  Jr. has been a director of the Company since 1994. Mr. Smith
is the Epstein  Professor of Finance of the William E. Simon Graduate  School of
Business Administration of the University of Rochester, where he has been on the
faculty since 1974. He has written  numerous  books and articles on a variety of
financial,  capital  markets and risk  management  topics and has held editorial
positions for a variety of journals. Mr. Smith is a graduate of Emory University
and has a PhD from the University of North Carolina at Chapel Hill.

Paul L. Smith has been a director of the Company  since  1994.  Mr.  Smith was a
director,  Senior Vice President and the Chief Financial  Officer of the Eastman
Kodak  Company  from  1983  until he  retired  in 1993.  He was a member  of the
Financial  Accounting  Standards Advisory Council. He is currently a director of
Constellation  Brands,  Inc. He is also a member of the Board of Trustees of the
George  Eastman House and Ohio Wesleyan  University.  Mr. Smith is a graduate of
Ohio   Wesleyan   University   and  holds  an  MBA   Degree  in   finance   from
Northwestern University.

Thomas S. Summer has been a director  of the Company  since  August,  2004.  Mr.
Summer has been the  Executive  Vice  President and Chief  Financial  Officer of
Constellation  Brands, Inc. since 1997. Mr. Summer and Constellation Brands have
announced  that Mr.  Summer is retiring  from that  position on or about May 15,
2007. Prior to his employment by Constellation Brands, he held various positions
in financial  management with Cardinal Health,  Inc., PepsiCo,  Inc., and Inland
Steel Industries. He is also a member of the Boards of Greatbatch, Inc. and AIDS
Rochester,  Inc. Mr. Summer is a graduate of Harvard University and holds an MBA
degree in finance and accounting from the University of Chicago.

Amy L. Tait has served as a director of the Company since its inception in 1993.
Effective  February 15,  2001,  Mrs.  Tait  resigned her  full-time  position as
Executive Vice President of the Company and as a director of HP Management.  She
continued as a consultant to the Company pursuant to a consulting agreement that
terminated on February 15, 2002.  She is currently the Chief  Executive  Officer
and a director of Broadstone  Ventures,  LLC and  Broadstone  Real Estate,  LLC,
where she also serves as  Secretary.  Mrs.  Tait joined Home Leasing in 1983 and
held several  positions  with the Company,  including  Senior and Executive Vice
President and Chief Operating  Officer.  She currently  serves on the M & T Bank
Regional Advisory Board and the boards of the United Way of Rochester, Princeton
Club of Rochester,  Al Sigl Center, Center for Governmental Research,  Allendale
Columbia School,  Monroe County Center for Civic  Entrepreneurship and the Simon
School  Executive  Advisory  Committee.  Mrs.  Tait is a graduate  of  Princeton
University  and  holds an MBA from the  William  E.  Simon  Graduate  School  of
Business  Administration of the University of Rochester.  She is the daughter of
Norman Leenhouts.

See Item 4A in Part I hereof for information regarding executive officers of the
Company.

Section 16(a) Beneficial Ownership Reporting Compliance.
--------------------------------------------------------

Section 16(a) of the Securities Exchange Act of 1934, as amended, (the "Exchange
Act") requires the Company's  executive officers and directors,  and persons who
own more than 10% of a registered class of the Company's equity  securities,  to
file  reports of  ownership  and changes in ownership  with the  Securities  and
Exchange  Commission and the New York Stock  Exchange.  Officers,  directors and
greater than 10% shareholders are required to furnish the Company with copies of
all Section 16(a) forms they file.

To the Company's knowledge, based solely on review of the copies of such reports
furnished to the Company and written  representations that no other reports were
required  during the fiscal year ended  December  31,  2006,  all Section  16(a)
filing requirements applicable to its executive officers,  directors and greater
than 10% beneficial owners were satisfied on a timely basis, except that each of
the  following  directors  inadvertantly  failed to report on a timely basis one
transaction involving the sale of common shares as follows: William Balderston -
sale of 666 shares of common stock;  Norman Leenhouts - sale of 752 shares;  and
Amy L. Tait - sale of 4,759 shares.  The three sales were subsequently  reported
on a Form 4.

Audit Committee, Audit Committee Independence and Financial Expert
------------------------------------------------------------------

The information required by this item is incorporated herein by reference to the
Company's  proxy statement to be issued in connection with the Annual Meeting of
Stockholders  of the Company to be held on May 1, 2007 under "Audit  Committee."
The proxy statement will be filed within 120 days after the end of the Company's
fiscal year.

Stockholder Nominations to Board
--------------------------------

The information required by this item is incorporated herein by reference to the
Company's  Proxy Statement to be issued in connection with the Annual Meeting of
Stockholders  of the  Company  to be  held  on  May  1,  2007  under  "Board  of
Directors."  The proxy  statement will be filed within 120 days after the end of
the Company's fiscal year.

Code of Ethics
--------------

The  Company  has  adopted a Code of  Business  Conduct and Ethics and a Code of
Ethics for Senior  Financial  Officers,  both which apply to the Company's Chief
Executive Officer, Chief Financial Officer, Chief Accounting Officer,  Treasurer
and  Controller.  Both  codes  are  available  on  the  Company's  Web  site  at
www.homeproperties.com      under     the      heading      "Investors/Corporate
Governance/Highlights."  In  addition,  the Company  will  provide a copy of the
codes  to  anyone  without  charge,  upon  request  addressed  to the  Corporate
Secretary at Home  Properties,  Inc., 850 Clinton  Square,  Rochester,  New York
14604.

The Company  intends to disclose any  amendment to its Code of Business  Conduct
and Ethics and its Code of Ethics for Senior Financial Officers on its Web site.
In  addition,  in the event that the  Company  waives  compliance  by any of its
directors and executive officers with the Code of Business Conduct and Ethics or
compliance  by any of the  individuals  subject to the Code of Ethics for Senior
Financial  Officers  with that Code of Ethics,  the Company will post on its Web
site within four business days the nature of the waiver in  satisfaction  of its
disclosure requirement under Item 5.05 of Form 8-K.

Corporate Guidelines and Committee Charters
-------------------------------------------

The Board of Directors has adopted corporate  Governance  Guidelines and revised
charters in compliance  with  applicable law and NYSE listing  standards for the
Company's Audit, Compensation,  Corporate  Governance/Nominating and Real Estate
Investment  Committees.  The  Guidelines  and  Charters  are  available  on  the
Company's  Web site,  www.homeproperties.com,  and by request  addressed  to the
Corporate Secretary at Home Properties, Inc., 850 Clinton Square, Rochester, New
York 14604.

Item 11. Executive Compensation
-------------------------------

The information required by this Item is incorporated herein by reference to the
Company's  proxy statement to be issued in connection with the Annual Meeting of
the  Stockholders  of the  Company to be held on May 1,  2007  under  "Executive
Compensation."  The proxy  statement will be filed within 120 days after the end
of the Company's fiscal year.

Item 12.  Securities  Ownership of Certain  Beneficial Owners and Management and
--------------------------------------------------------------------------------
Related Stockholder Matters
---------------------------

The  information  required  by this Item,  including  Equity  Compensation  Plan
Information,  is  incorporated  herein  by  reference  to  the  Company's  proxy
statement to be issued in connection  with the Annual Meeting of Stockholders of
the  Company  to be held on May 1, 2007  under  "Security  Ownership  of Certain
Beneficial   Owners  and  Management"  and  under  "Equity   Compensation   Plan
Information." The proxy statement will be filed within 120 days after the end of
the Company's fiscal year.

Item  13.  Certain   Relationships  and  Related   Transactions,   and  Director
--------------------------------------------------------------------------------
Independence
------------

The information required by this Item is incorporated herein by reference to the
Company's  proxy statement to be issued in connection with the Annual Meeting of
Stockholders  of  the  Company  to  be  held  on  May  1,  2007  under  "Certain
Relationships  and  Transactions."  The proxy statement will be filed within 120
days after the end of the Company's fiscal year.

Item 14. Principal Accounting Fees and Services
-----------------------------------------------

The information required by this Item is incorporated herein by reference to the
Company's  proxy statement to be issued in connection with the Annual Meeting of
Stockholders of the Company to be held on May 1, 2007 under "Report of the Audit
Committee" and  "Principal  Accounting  Fees and Services." The proxy  statement
will be filed within 120 days after the end of the Company's fiscal year.

                                     PART IV

Item 15. Exhibits, Financial Statement Schedules
------------------------------------------------

(a) 1 and 2.  Financial Statements and Schedules

The financial  statements  and schedules  listed below are filed as part of this
annual report on the pages indicated.

                              HOME PROPERTIES, INC.

                        Consolidated Financial Statements
                                                                      Page
Report of Independent Registered Public Accounting Firm               F-2

Consolidated Balance Sheets
         as of December 31, 2006 and 2005                             F-3

Consolidated Statements of Operations
         for the Years Ended December 31, 2006, 2005 and 2004         F-4

Consolidated Statements of Stockholders' Equity
         for the Years Ended December 31, 2006, 2005 and 2004         F-5

Consolidated Statements of Comprehensive Income
         for the Years Ended December 31, 2006, 2005 and 2004         F-6

Consolidated Statements of Cash Flows
         for the Years Ended December 31, 2006, 2005 and 2004         F-7

Notes to Consolidated Financial Statements                            F-8

Schedule II:
         Valuation and Qualifying Accounts                            F-38

Schedule III:
         Real Estate and Accumulated Depreciation
                                                                      F-39

                  3.  Exhibits

Exhibit
Number       Exhibit
------       -------

1.0          Underwriting Agreement, dated May 9, 2006, between Home Properties, Inc., UBS Securities LLC and the
             selling shareholders named therein.

2.1          Agreement among Home Properties of New York, Inc. and Philip J. Solondz, Daniel Solondz and Julia
             Weinstein Relating to Royal Gardens I, together with Amendment No. 1

2.2          Agreement among Home Properties of New York, Inc and Philip Solondz and Daniel Solondz relating to
             Royal Gardens II, together with Amendment No. 1

2.24         Contribution Agreement dated March 2, 1998 among Home Properties of New York, L.P., Braddock Lee
             Limited Partnership and Tower Construction Group, LLC

2.25         Contribution Agreement dated March 2, 1998 among Home Properties of New York, L.P., Park Shirlington
             Limited Partnership and Tower Construction Group, LLC

2.27         Form of Contribution Agreement among Home Properties of New York, L.P. and Strawberry Hill Apartment
             Company LLLP, Country Village Limited Partnership, Morningside Six, LLLP, Morningside North Limited
             Partnership and Morningside Heights Apartment Company Limited Partnership with schedule setting forth
             material details in which documents differ from form

2.29         Form of Contribution Agreement dated June 7, 1999, relating to the CRC Portfolio with schedule
             setting forth material details in which documents differ from form

2.30         Form of Contribution Agreement relating to the Mid-Atlantic Portfolio with schedule setting forth
             material details in which documents differ from form

2.31         Contribution Agreement among Home Properties of New York, L.P., Leonard Klorfine, Ridley Brook
             Associates and the Greenacres Associates

2.33         Contribution Agreement among Home Properties of New York, L.P., Gateside-Bryn Mawr Company, L.P.,
             Willgold Company, Gateside-Trexler Company, Gateside-Five Points Company, Stafford Arms,
             Gateside-Queensgate Company, Gateside Malvern Company, King Road Associates and Cottonwood Associates

2.34         Contribution Agreement between Old Friends Limited Partnership and Home Properties of New York, L.P.
             and Home Properties of New York, Inc., along with Amendments Number 1 and 2 thereto

2.35         Contribution Agreement between Deerfield Woods Venture Limited Partnership and Home Properties of New
             York, L.P.

2.36         Contribution Agreement between Macomb Apartments Limited Partnership and Home Properties of New York,
             L.P.

2.37         Contribution Agreement between Home Properties of New York, L.P. and Elmwood Venture Limited
             Partnership

2.38         Sale Purchase and Escrow Agreement between Bank of America as Trustee and Home Properties of New
             York, L.P.

2.39         Contribution Agreement between Home Properties of New York, L.P., Home Properties of New York, Inc.
             and S&S Realty, a New York General Partnership (South Bay)

2.40         Contribution Agreement between Hampton Glen Apartments Limited Partnership and Home Properties of New
             York, L.P.

2.41         Contribution Agreement between Home Properties of New York, L.P. and Axtell Road Limited Partnership

2.42         Contribution Agreement between Elk Grove Terrace II and III, L.P., Elk Grove Terrace, L.P. and Home
             Properties of New York, L.P.

2.43         Agreement for Purchase and Sale of Interests Southeast Michigan Portfolio, dated April 26, 2006,
             together with Second Amendment thereto (First Amendment superceded)

3.1          Articles of Amendment and Restatement of Articles of Incorporation of Home Properties of New York,
             Inc.

3.2          Articles of Amendment of the Articles of Incorporation of Home Properties of New York, Inc.

3.3          Articles of Amendment of the Articles of Incorporation of Home Properties of New York, Inc.

3.9          Amended and Restated By-Laws of Home Properties of New York, Inc. (Revised 12/30/96)

3.10         Series F Cumulative Redeemable Preferred Stock Articles Supplementary to the Amended and Restated
             Articles of Incorporation of Home Properties of New York, Inc.

3.11         Articles of Amendment to the Articles of Incorporation of Home Properties of New York, Inc.

3.12         Amendment Number One to Home Properties of New York, Inc. Amended and Restated Bylaws

4.1          Form of certificate representing Shares of Common Stock

4.2          Agreement of Home Properties of New York, Inc. to file instruments defining the rights of holders of
             long-term debt of it or its subsidiaries with the Commission upon request

4.8          Amended and Restated Stock Benefit Plan of Home Properties of New York, Inc.*

4.14         Directors' Stock Grant Plan*

4.16         Home Properties of New York, Inc., Home Properties of New York, L.P. Executive Retention Plan*

4.17         Home Properties of New York, Inc. Deferred Bonus Plan*

4.23         Home Properties of New York, Inc. Amendment Number One to the Amended and Restated Stock Benefit Plan*

4.26         Home Properties of New York, Inc. Amendment Number Two to the Amended and Restated Stock Benefit Plan*

4.27         Amendment No. One to Home Properties of New York, Inc. Deferred Bonus Plan*

4.29         Amendment No. Two to Deferred Bonus Plan*

4.31         Amended and Restated 2003 Stock Benefit Plan*

4.32         Second Amended and Restated Director Deferred Compensation Plan*

4.33         Seventh Amended and Restated Dividend Reinvestment and Direct Stock Purchase Plan

4.34         Indenture, dated October 24, 2006 between Home Properties, Inc., Home Properties, L.P. and Wells
             Fargo Bank, N.A., as trustee including the form of 4.125% Exchangeable Senior Notes due 2026 of Home
             Properties, L.P. and the Guarantee of Home Properties, Inc. with respect thereto

4.35         Registration Rights Agreement, dated October 24, 2006, between Home Properties, Inc., Home
             Properties, L.P. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Bear
             Stearns & Co., Inc.

10.1         Second Amended and Restated Agreement Limited Partnership of Home Properties of New York, L.P.

10.2         Amendments No. One through Eight to the Second Amended and Restated Agreement of Limited Partnership
             of Home Properties of New York, L.P.

10.3         Articles of Incorporation of Home Properties Management, Inc.

10.4         By-Laws of Home Properties Management, Inc.

10.5         Articles of Incorporation of Conifer Realty Corporation

10.6         Articles of Amendment to the Articles of Incorporation of Conifer Realty Corporation Changing the
             name to Home Properties Resident Services, Inc.

10.7         By-Laws of Conifer Realty Corporation (now, Home Properties Resident Services, Inc.)

10.8         Home Properties Trust Declaration of Trust, dated September 19, 1997

10.13        Indemnification Agreement between Home Properties of New York, Inc. and certain officers and
             directors*

10.15        Indemnification Agreement between Home Properties of New York, Inc. and Alan L. Gosule*

10.26        Amendment No. Nine to the Second Amended and Restated Agreement of Limited Partnership of the
             Operating Partnership

10.27        Master Credit Facility Agreement by and among Home Properties of New York, Inc., Home Properties of
             New York, L.P., Home Properties WMF I LLC and Home Properties of New York, L.P. and P-K Partnership
             doing business as Patricia Court and Karen Court and WMF Washington Mortgage Corp., dated as of
             August 28, 1998

10.28        First Amendment to Master Credit Facility Agreement, dated as of December 11, 1998 among Home
             Properties of New York, Inc., Home Properties of New York, L.P., Home Properties WMF I LLC and Home
             Properties of New York, L.P. and P-K Partnership doing business as Patricia Court and Karen Court and
             WMF Washington Mortgage Corp. and Fannie Mae

10.29        Second Amendment to Master Credit Facility Agreement, dated as of August 30, 1999 among Home
             Properties of New York, Inc., Home Properties of New York, L.P., Home Properties WMF I LLC and Home
             Properties of New York, L.P. and P-K Partnership doing business as Patricia Court and Karen Court and
             WMF Washington Mortgage Corp. and Fannie Mae

10.30        Amendments Nos. Ten through Seventeen to the Second Amended and Restated Limited Partnership Agreement

10.31        Amendments Nos. Eighteen through Twenty- Five to the Second Amended and Restated Limited Partnership
             Agreement

10.32        Credit Agreement, dated 8/23/99 between Home Properties of New York, L.P., certain lenders, and
             Manufacturers and Traders Trust Company as Administrative Agent

10.33        Amendment No. Twenty-Seven to the Second Amended and Restated Limited Partnership Agreement

10.34        Amendments Nos. Twenty-Six and Twenty-Eight through Thirty to the Second Amended and Restated Limited
             Partnership Agreement

10.37        2000 Stock Benefit Plan*

10.41        Home Properties of New York, L.P. Amendment Number One to Executive Retention Plan*

10.42        Amendments No. Thirty-One and Thirty-Two to the Second Amended and Restated Limited Partnership
             Agreement

10.49        Amendment No. Thirty Three to the Second Amended and Restated Limited Partnership Agreement

10.50        Amendment No. Thirty Five to the Second Amended and Restated Limited Partnership Agreement

10.51        Amendment No. Forty Two to the Second Amended and Restated Limited Partnership Agreement

10.52        Amendments Nos. Thirty Four, Thirty Six through Forty One, Forty Three and Forty Four to the Second
             Amended and Restated Limited Partnership Agreement

10.57        Amendment Nos. Forty-Five through Fifty-One to the Second Amendment and Restated Limited Partnership
             Agreement

10.58        Home Properties of New York, Inc. Amendment No. One to 2000 Stock Benefit Plan*

10.59        Home Properties of New York, Inc. Amendment No. Two to 2000 Stock Benefit Plan*

10.60        Amendment Nos. Fifty-Two to Fifty-Five to the Second Amended and Restated Limited Partnership
             Agreement

10.61        Amendment Nos. Fifty-Six to Fifty-Eight to the Second Amended and Restated Limited Partnership
             Agreement

10.62        Amendment No. Two to Credit Agreement

10.63        Purchase and Sale Agreement, dated as of January 1, 2004 among Home Properties of New York, L.P.,
             Home Properties Management, Inc. and Home Leasing, LLC, dated January 1, 2004

10.64        Amendment Nos. Fifty-Nine through Sixty-Seven to the Second Amended and Restated Limited Partnership
             Agreement

10.65        Home Properties of New York, Inc. Amendment No. Three to 2000 Stock Benefit Plan*

10.68        Home Properties of New York, Inc. 2003 Stock Benefit Plan*

10.69        Amendment Number Two to Home Properties of New York, Inc. and Home Properties of New York, L.P.
             Executive Retention Plan*

10.70        Employment Agreement, dated as of May 17, 2004, between Home Properties, L.P., Home Properties, Inc.
             and Edward J. Pettinella*

10.71        Amendment Nos. Sixty-Eight through Seventy-Three to the Second Amended and Restated Limited
             Partnership Agreement

10.72        Summary of Non-Employee Director Compensation Effective January 1, 2007*

10.73        Summary of Named Executive Compensation for 2007

10.74        Amendment No. Three to Credit Agreement, dated April 1, 2004 between Home Properties, L.P., certain
             lenders, and Manufacturers and Traders Trust Company as Administrative Agent

10.76        Libor Grid Note, dated November 23, 2004 from Home Properties, L.P. to Manufacturers and Traders
             Trust Company

10.77        Mutual Release, dated January 24, 2005, given by Home Properties, L.P. and Home Properties, Inc. and
             Boston Capital Tax Credit Fund XIV, a Limited Partnership, Boston Capital Tax Credit Fund XV, a
             Limited Partnership and BCCC, Inc. relating to certain obligations pertaining to Green Meadows and
             related Letter Agreement.

10.78        Amendment No. Four to Credit Agreement, dated September 8, 2005 between Home Properties, L.P.,
             certain Lenders, and Manufacturers and Traders Trust Company, as Administrative Agent

10.79        Agreement, dated September 30, 2005, between General Electric Credit Equities, Inc. and H.P. Knolls I
             Associates, L.P.

10.80        Agreement, dated September 30, 2005, between General Electric Credit Equities, Inc. and H.P. Knolls
             II Associates, L.P.

10.81        Amendments Nos. Seventy-Four to through Seventy-Nine to the Second Amended and Restated Limited
             Partnership

10.82        Amendment No. Eighty to the Second Amended and Restated Limited Partnership Agreement

10.83        Amendment Nos. Eighty-One and Eighty-Two to the Second Amended and Restated Limited Partnership
             Agreement

10.84        Amendment Nos. Eighty-Three and Eighty-Four to the Second Amended and Restated Limited Partnership
             Agreement

10.85        Amendment Nos. Eighty-Five through Eighty-Seven to the Second Amended and Restated Limited
             Partnership Agreement

10.86        Development Agreement, dated March 27, 2006 between Nelson B. Leenhouts and Home Properties, Inc.*

10.87        Amended and Restated Employment Agreement, dated November 20, 2006 between Edward J. Pettinella and
             Home Properties, Inc.*

10.88        Employment Agreement between Nelson B. Leenhouts and Home Properties, Inc.*

10.89        Second Amended and Restated Incentive Compensation Plan*

10.90        Articles of Merger of Home Properties Management, Inc. into Home Properties Resident Services, Inc.

10.91        Purchase Agreement, dated October 18, 2006 between Home Properties, Inc., Home Properties, L.P. and
             Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith and Bear Stearns & Co., Inc.

11           Computation of Per Share Earnings Schedule

21           List of Subsidiaries of Home Properties, Inc.

23           Consent of PricewaterhouseCoopers LLP

31.1**       Section 302 Certification of Chief Executive Officer

31.2**       Section 302 Certification of Chief Financial Officer

32.1         Section 906 Certification of Chief Executive Officer (furnished)

32.2         Section 906 Certification of Chief Financial Officer (furnished)

99           Additional Exhibits - Debt Summary Schedule

*    Management  contract or  compensatory  plan or  arrangement  required to be
     filed as an exhibit to this Form 10-K pursuant to Item 15(b) of Form 10-K.

**   These  exhibits  are not  incorporated  by  reference  in any  registration
     statement or report which  incorporates this Annual Report on Form 10-K for
     the year ended December 31, 2006.

                                    SIGNATURE

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned thereunto duly authorized.

                                HOME PROPERTIES, INC.



                                /s/ Edward J. Pettinella
                                -----------------------------------------------
                                Edward J. Pettinella
                                Director, President and Chief Executive Officer
                                Date:    February 28, 2007


Pursuant to the requirements of the Securities  Exchange Act of 1934, the report
has been signed by the following persons on behalf of Home Properties,  Inc. and
in the capacities and on the dates indicated.

Signature                                     Title                                                Date
---------                                     -----                                                ----
/s/ Edward J. Pettinella                      Director, President and Chief Executive Officer      February 28, 2007
---------------------------
Edward J. Pettinella


/s/ David P. Gardner                          Executive Vice President, Chief Financial Officer    February 28, 2007
---------------------------
David P. Gardner                              (Principal Financial Officer)


/s/ Robert J. Luken                           Senior Vice President, Chief Accounting Officer      February 28, 2007
---------------------------
Robert J. Luken                               and Treasurer (Principal Accounting Officer)


/s/ Kenneth O. Hall                           Vice President and Controller                        February 28, 2007
---------------------------
Kenneth O. Hall


/s/ Norman P. Leenhouts                       Director, Co-Chairman of the Board of Directors      February 28, 2007
---------------------------
Norman P. Leenhouts


/s/ Nelson B. Leenhouts                       Director, Co-Chairman of the Board of Directors      February 28, 2007
---------------------------
Nelson B. Leenhouts


/s/ William Balderston, III                   Director                                             February 28, 2007
---------------------------
William Balderston, III


/s/ Josh E. Fidler                            Director                                             February 28, 2007
---------------------------
Josh E. Fidler


/s/ Alan L. Gosule                            Director                                             February 28, 2007
---------------------------
Alan L. Gosule


/s/ Leonard F. Helbig, III                    Director                                             February 28, 2007
---------------------------
Leonard F. Helbig, III


/s/ Roger W. Kober                            Director                                             February 28, 2007
---------------------------
Roger W. Kober


/s/ Clifford W. Smith, Jr.                    Director                                             February 28, 2007
---------------------------
Clifford W. Smith, Jr.


/s/ Paul L. Smith                             Director                                             February 28, 2007
---------------------------
Paul L. Smith


/s/ Thomas S. Summer                          Director                                             February 28, 2007
---------------------------
Thomas S. Summer


/s/ Amy L. Tait                               Director                                             February 28, 2007
---------------------------
Amy L. Tait

                              HOME PROPERTIES, INC.

         INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

                                                                       Page
                                                                       ----
Report of Independent Registered Public Accounting Firm                F-2

Consolidated Balance Sheets
         as of December 31, 2006 and 2005                              F-3

Consolidated Statements of Operations
         for the Years Ended December 31, 2006, 2005 and 2004          F-4

Consolidated Statements of Stockholders' Equity
         for the Years Ended December 31, 2006, 2005 and 2004          F-5

Consolidated Statements of Comprehensive Income
         for the Years Ended December 31, 2006, 2005 and 2004          F-6

Consolidated Statements of Cash Flows
         for the Years Ended December 31, 2006, 2005 and 2004          F-7

Notes to Consolidated Financial Statements                             F-8

Schedule II:
         Valuation and Qualifying Accounts                             F-38

Schedule III:
         Real Estate and Accumulated Depreciation                      F-39

All other  schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.

             Report of Independent Registered Public Accounting Firm
             -------------------------------------------------------

To the Board of Directors and Shareholders of Home Properties, Inc.:

We have completed  integrated  audits of Home  Properties,  Inc.'s  consolidated
financial  statements and of its internal control over financial reporting as of
December 31,  2006,  in  accordance  with the  standards  of the Public  Company
Accounting Oversight Board (United States).  Our opinions,  based on our audits,
are presented below.

Consolidated financial statements and financial statement schedules
-------------------------------------------------------------------

In our  opinion,  the  consolidated  financial  statements  listed  in the index
appearing under Item 15(a)(1)  present  fairly,  in all material  respects,  the
financial position of Home Properties, Inc. and its subsidiaries at December 31,
2006 and 2005, and the results of their operations and their cash flows for each
of the three years in the period  ended  December  31, 2006 in  conformity  with
accounting  principles  generally  accepted in the United States of America.  In
addition,  in our opinion, the financial statement schedules listed in the index
appearing under Item 15(a)(2)  present  fairly,  in all material  respects,  the
information  set  forth  therein  when  read in  conjunction  with  the  related
consolidated  financial  statements.  These  financial  statements and financial
statement  schedules are the  responsibility  of the Company's  management.  Our
responsibility  is to  express  an opinion  on these  financial  statements  and
financial  statement  schedules based on our audits.  We conducted our audits of
these  statements  in  accordance  with  the  standards  of the  Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material  misstatement.  An audit of financial statements
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

Internal control over financial reporting
-----------------------------------------

Also, in our opinion,  management's assessment,  included in Management's Report
on Internal Control over Financial Reporting appearing under Item 9(a), that the
Company  maintained  effective  internal control over financial  reporting as of
December 31, 2006 based on criteria established in Internal Control - Integrated
Framework  issued by the Committee of Sponsoring  Organizations  of the Treadway
Commission  (COSO), is fairly stated, in all material  respects,  based on those
criteria.  Furthermore,  in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2006, based on criteria  established in Internal Control - Integrated  Framework
issued by the COSO.  The Company's  management is  responsible  for  maintaining
effective  internal  control over financial  reporting and for its assessment of
the   effectiveness   of  internal   control  over  financial   reporting.   Our
responsibility  is to express  opinions on  management's  assessment  and on the
effectiveness of the Company's  internal control over financial  reporting based
on our  audit.  We  conducted  our  audit of  internal  control  over  financial
reporting in  accordance  with the  standards of the Public  Company  Accounting
Oversight  Board  (United  States).  Those  standards  require  that we plan and
perform  the  audit to  obtain  reasonable  assurance  about  whether  effective
internal  control  over  financial  reporting  was  maintained  in all  material
respects.  An  audit of  internal  control  over  financial  reporting  includes
obtaining  an  understanding  of  internal  control  over  financial  reporting,
evaluating  management's  assessment,  testing  and  evaluating  the  design and
operating   effectiveness  of  internal  control,   and  performing  such  other
procedures as we consider  necessary in the  circumstances.  We believe that our
audit provides a reasonable basis for our opinions.

A company's  internal control over financial  reporting is a process designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial  reporting  includes those policies and procedures that (i) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect  the  transactions  and  dispositions  of the  assets  of  the  company;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company;  and (iii) provide  reasonable  assurance  regarding  prevention or
timely  detection  of  unauthorized  acquisition,  use,  or  disposition  of the
company's assets that could have a material effect on the financial statements.

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

/s/ PricewaterhouseCoopers LLP
---------------------------
Boston, Massachusetts
February 28, 2007

                              HOME PROPERTIES, INC.

                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2006 and 2005
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

                                                                                                  2006           2005
                                                                                                  ----           ----
ASSETS
Real estate:
  Land                                                                                      $  493,017     $  401,747
  Construction in progress                                                                       1,409          4,471
  Buildings, improvements and equipment                                                      2,957,336      2,700,554
  Real estate held for sale or disposal, net                                                         -        223,938
                                                                                            ----------     ----------
                                                                                             3,451,762      3,330,710
  Less:  accumulated depreciation                                                             (450,129)      (446,159)
                                                                                            ----------     ----------
               Real estate, net                                                              3,001,633      2,884,551

Cash and cash equivalents                                                                      118,212          5,391
Cash in escrows                                                                                 74,069         36,674
Accounts receivable                                                                              9,287          7,372
Prepaid expenses                                                                                15,059         16,141
Deferred charges                                                                                13,619         11,156
Other assets                                                                                     8,539         12,536
Other assets held for sale                                                                           -          4,049
                                                                                            ----------     ----------
               Total assets                                                                 $3,240,418     $2,977,870
                                                                                            ==========     ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage notes payable                                                                      $1,924,313     $1,768,483
Exchangeable senior notes                                                                      200,000              -
Line of credit                                                                                       -         82,000
Accounts payable                                                                                20,797         19,458
Accrued interest payable                                                                        10,473          8,274
Accrued expenses and other liabilities                                                          24,697         22,565
Security deposits                                                                               21,979         21,657
Liabilities held for sale                                                                            -         75,352
                                                                                            ----------     ----------
               Total liabilities                                                             2,202,259      1,997,789
Commitments and contingencies
Minority interest                                                                              282,542        323,269
                                                                                            ----------     ----------
Stockholders' equity:
   Cumulative redeemable preferred stock, $.01 par value; 2,400,000 shares issued and
     outstanding at December 31, 2006 and 2005, respectively                                    60,000         60,000
   Common stock, $.01 par value; 80,000,000 shares authorized; 33,103,247 and
     31,184,256 shares issued and outstanding at December 31, 2006 and 2005,
     respectively                                                                                  331            312
   Excess stock, $.01 par value; 10,000,000 shares authorized; no shares issued or
     outstanding                                                                                     -              -
   Additional paid-in capital                                                                  852,036        773,396
   Accumulated other comprehensive income                                                          171            206
   Distributions in excess of accumulated earnings                                           (156,921)      (177,102)
                                                                                            ----------     ----------
               Total stockholders' equity                                                      755,617        656,812
                                                                                            ----------     ----------
               Total liabilities and stockholders' equity                                   $3,240,418     $2,977,870
                                                                                            ==========     ==========

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

                              HOME PROPERTIES, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

                                                                                  2006            2005           2004
                                                                                  ----            ----           ----
Revenues:
Rental income                                                               $  420,988       $ 378,506      $ 348,932
Property other income                                                           27,775          19,415         14,937
Interest income                                                                  1,761             581            481
Other income                                                                     3,468           2,023          2,782
                                                                            ----------      ----------     ----------
          Total Revenues                                                       453,992         400,525        367,132
                                                                            ----------      ----------     ----------

Expenses:
Operating and maintenance                                                      190,845         174,906        157,802
General and administrative                                                      22,626          19,652         23,978
Interest                                                                       106,773          92,178         77,145
Depreciation and amortization                                                   96,142          80,944         70,710
Impairment of assets held as General Partner                                         -             400          1,116
                                                                            ----------      ----------     ----------
          Total Expenses                                                       416,386         368,080        330,751
                                                                            ----------      ----------     ----------
Income from operations                                                          37,606          32,445         36,381
Equity in losses of unconsolidated affiliates                                        -               -          (538)
                                                                            ----------      ----------     ----------
Income before minority interest, discontinued operations and
extraordinary item                                                              37,606          32,445         35,843
Minority interest in limited partnership                                             -               -            441
Minority interest in operating partnership                                     (9,614)         (8,629)        (9,204)
                                                                            ----------      ----------     ----------
Income from continuing operations                                               27,992          23,816         27,080
                                                                            ----------      ----------     ----------
Discontinued operations:
   Income from operations, net of $1,947, $1,828 and $4,354, in 2006,
      2005 and 2004 allocated to minority interest, respectively                 3,745           3,721          8,913
   Gain on disposition of property, net of $31,766, $26,733 and
      $5,382 in 2006, 2005 and 2004 allocated to minority interest,
      respectively                                                              78,748          53,975         11,417
                                                                            ----------      ----------     ----------
Discontinued operations                                                         82,493          57,696         20,330
                                                                            ----------      ----------     ----------
Income before loss on sale of property and business and cumulative
  effect of change in accounting principle                                     110,485          81,512         47,410
Loss on sale of property and business, net of $33 in 2004 allocated to
   minority interest                                                                 -               -           (67)
                                                                            ----------      ----------     ----------
Income before cumulative effect of change in accounting principle              110,485          81,512         47,343
Cumulative effect of change in accounting principle net of $159 in
  2004 allocated to minority interest                                                -               -          (321)
                                                                            ----------      ----------     ----------
Net income                                                                     110,485          81,512         47,022
Preferred dividends                                                            (5,400)         (6,279)        (7,593)
                                                                            ----------      ----------     ----------

Net income available to common shareholders                                  $ 105,085      $   75,233       $ 39,429
                                                                            ==========      ==========     ==========
Basic earnings per share data:
    Income from continuing operations                                            $0.69    $       0.55     $     0.59
    Discontinued operations                                                       2.52            1.80           0.62
    Cumulative effect of change in accounting principle                              -               -         (0.01)
                                                                            ----------      ----------     ----------
Net income available to common shareholders                                      $3.21    $       2.35     $     1.20
                                                                            ==========      ==========     ==========
Diluted earnings per share data:
    Income from continuing operations                                            $0.68    $       0.54     $     0.58
    Discontinued operations                                                       2.47            1.79           0.61
    Cumulative effect of change in accounting principle                              -               -         (0.01)
                                                                            ----------      ----------     ----------
Net income available to common shareholders                                      $3.15    $       2.33     $     1.18
                                                                            ==========      ==========     ==========

Weighted average number of shares outstanding:
    Basic                                                                   32,697,794      31,962,082     32,911,945
                                                                            ==========      ==========     ==========
    Diluted                                                                 33,337,557      32,328,105     33,314,038
                                                                            ==========      ==========     ==========

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

                              HOME PROPERTIES, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

                                                                                                         Officer/
                                 Preferred                                 Distributions   Accumulated   Director
                                  Stock at         Common Stock  Additional in Excess of         Other  Notes for
                               Liquidation         ------------     Paid-In  Accumulated Comprehensive      Stock
                                Preference      Shares   Amount     Capital     Earnings        Income   Purchase    Totals
                                ----------      ------   ------     -------     --------        ------   --------    ------
 Balance, January 1, 2004          $85,000  31,966,240     $320   $ 785,710  $ (128,910)        $ (542)   $ (315)  $741,263
 Issuance of common stock, net               1,251,949       12      43,086                                          43,098
 Repurchase of common stock                 (1,280,196)     (13)    (53,783)                                        (53,796)
 Payments on notes for stock
    purchase                                                                                                 307        307
 Interest receivable on notes
    for stock purchase                                                                                         8          8
 Net income                                                                      47,022                              47,022
 Change in fair value of
    hedge instruments, net of
    minority interest                                                                              180                  180
 Conversion of UPREIT Units
    for stock                                  687,420        7      26,569                                          26,576
 Adjustment of minority
    interest                                                          5,630                                           5,630
 Preferred dividends                                                             (7,593)                             (7,593)
 Dividends paid ($2.49 per
    share)                                                                      (82,273)                            (82,273)
                                   -------  ----------     ----   ---------  ----------          -----      ---    --------
 Balance, December 31, 2004         85,000  32,625,413      326     807,212    (171,754)          (362)       -     720,422
 Issuance of common stock, net                 358,737        4      12,845                                          12,849
 Repurchase of common stock                 (2,850,882)     (28)   (114,737)                                       (114,765)
 Conversion of Series D
    preferred stock for
    common stock                  (25,000)     833,333        8      24,992                                               -
 Net income                                                                      81,512                              81,512
 Change in fair value of
    hedge instruments, net of
    minority interest                                                                              568                  568
 Conversion of UPREIT Units
    for stock                                  217,655        2       9,228                          -                9,230
 Adjustment of minority
    interest                                                         33,856                                          33,856
 Preferred dividends                                                             (6,279)                             (6,279)
 Dividends paid ($2.53 per
    share)                                                                      (80,581)                            (80,581)
                                   -------  ----------     ----   ---------  ----------          -----      ---    --------
 Balance, December 31, 2005         60,000  31,184,256      312     773,396    (177,102)           206        -     656,812
 Issuance of common stock, net                 832,687        8      31,674                                          31,682
 Repurchase of common stock                 (2,683,429)     (26)   (146,273)                                       (146,299)
 Net income                                                                     110,485                             110,485
 Change in fair value of
    hedge instruments, net of
    minority interest                                                                              (35)                 (35)
 Conversion of UPREIT Units
    for stock                                3,769,733       37     195,750                                         195,787
 Adjustment of minority
    interest                                                         (2,511)                                         (2,511)
 Preferred dividends                                                             (5,400)                             (5,400)
 Dividends paid ($2.57 per
    share)                               -           -        -           -     (84,904)             -        -     (84,904)
                                   -------  ----------     ----   ---------  ----------          -----      ---    --------
 Balance, December 31, 2006        $60,000  33,103,247     $331   $ 852,036  $ (156,921)         $ 171     $  -    $755,617
                                   =======  ==========     ====   =========  ==========          =====      ===    ========

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

                              HOME PROPERTIES, INC.

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
              FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                                 (IN THOUSANDS)


                                                    2006             2005            2004
                                                    ----             ----            ----
Net income                                      $110,485          $81,512    $     47,022
   Other comprehensive income:
   Change in fair value of hedged instruments       (35)              568             180
                                                --------          -------    ------------
Net comprehensive income                        $110,450          $82,080    $     47,202
                                                ========          =======    ============

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

                              HOME PROPERTIES, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                                 (IN THOUSANDS)

                                                                                  2006           2005           2004
                                                                                  ----           ----           ----
Cash flows from operating activities:
                                                                              --------       --------     ----------
Net income                                                                    $110,485     $   81,512      $  47,022
Adjustments to reconcile net income to net cash provided by operating
    activities:
    Equity in losses of unconsolidated affiliates                                    -              -            538
    Income allocated to minority interest                                       43,327         37,190         18,747
    Depreciation and amortization                                              103,333        100,584         98,051
    Impairment of assets held as General Partner                                     -            400          1,116
    Impairment of real property                                                      -          7,325          1,100
    Gain on disposition of property and business                              (110,514)       (81,679)       (26,424)
    Issuance of restricted stock, compensation cost of stock options
        and deferred compensation                                                4,961          2,662          2,496
    Changes in assets and liabilities:
              Cash held in escrows                                               1,863          3,519        (2,349)
         Other assets                                                            4,969         (8,423)        (1,431)
         Accounts payable and accrued liabilities                                4,572         (6,624)        20,476
                                                                              --------       --------     ----------
Total adjustments                                                               52,511         54,954        112,320
                                                                              --------       --------     ----------
Net cash provided by operating activities                                      162,996        136,466        159,342
                                                                              --------       --------     ----------
Cash flows from investing activities:
    Purchase of properties and other assets, net of mortgage notes
       assumed and UPREIT Units issued                                        (188,004)      (219,852)      (153,535)
    Additions to properties                                                   (101,839)       (98,917)      (102,700)
    Advances to affiliates                                                           -              -           (820)
    Payments on advances to affiliates                                               -              -            149
    Proceeds from sale of affordable properties, net                                 -              -          2,412
     Proceeds from sale of properties and business, net                        488,457        139,073         89,028
    Withdrawals from (additions to) funds held in escrow, net                  (38,961)          (248)         4,812
                                                                              --------       --------     ----------
    Net cash provided by (used in) investing activities                        159,653      (179,944)      (160,654)
                                                                              --------       --------     ----------
Cash flows from financing activities:
     Proceeds from sale of exchangeable senior notes, net                      195,779              -              -
    Proceeds from sale of common stock, net                                     26,721         10,185         40,599
    Repurchase of common stock                                                (146,299)      (114,765)       (53,796)
    Proceeds from mortgage notes payable                                       202,894        370,752        191,772
    Payments of mortgage notes payable                                        (279,135)      (119,939)       (97,734)
    Proceeds from line of credit                                               379,800        376,370        291,600
    Payments on line of credit                                                (461,800)      (352,370)      (233,600)
    Payments of deferred loan costs                                             (1,842)        (2,991)        (2,672)
    Withdrawals from (additions to) cash escrows, net                              137           (159)        (4,416)
    Repayment of officer and director loans                                          -              -            315
    Dividends and distributions paid                                          (126,083)      (126,139)      (128,784)
                                                                              --------       --------     ----------
    Net cash provided by (used in) financing activities                       (209,828)        40,944          3,284
                                                                              --------       --------     ----------
Net increase (decrease) in cash and cash equivalents                           112,821         (2,534)         1,972
Cash and cash equivalents:
    Beginning of year                                                            5,391          7,925          5,103
    Cash assumed in connection with FIN 46 consolidation                             -              -            850
                                                                              --------       --------     ----------
    End of year                                                               $118,212       $  5,391     $    7,925
                                                                              ========       ========     ==========

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

                              HOME PROPERTIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

1    ORGANIZATION AND BASIS OF PRESENTATION
-    --------------------------------------

Organization
------------

Home  Properties,  Inc.  (the  "Company  ") was formed in  November  1993,  as a
Maryland  corporation  and is engaged  primarily in the  ownership,  management,
acquisition, rehabilitation and development of residential apartment communities
primarily in select Northeast, Mid-Atlantic and Southeast Florida regions of the
United States.  The Company conducts its business through Home Properties,  L.P.
(the "Operating  Partnership"),  a New York limited partnership.  As of December
31, 2006, the Company operated 127 apartment communities with 39,136 apartments.
Of  this  total,  the  Company  owned  123  communities,  consisting  of  36,954
apartments,   managed  as  general  partner  one  partnership   that  owned  868
apartments,  and fee managed three communities,  consisting of 1,314 apartments,
for third parties.

Basis of Presentation
---------------------

The accompanying  consolidated  financial statements include the accounts of the
Company and its 71.4%  (65.2% at December 31,  2005)  interest in the  Operating
Partnership.  Such interest has been calculated as the percentage of outstanding
common  shares  divided by the total  outstanding  common  shares and  Operating
Partnership  Units ("UPREIT Units")  outstanding.  The remaining 28.6% (34.8% at
December  31,  2005) is  reflected  as Minority  Interest in these  consolidated
financial  statements.  The Company owns a 1.0% general partner  interest in the
Operating  Partnership and the remainder indirectly as a limited partner through
its wholly owned  subsidiary,  Home  Properties  I, LLC,  which owns 100% of the
limited  partner,  Home Properties  Trust.  Home Properties  Trust was formed in
September  1997,  as a  Maryland  real  estate  trust  and as a  qualified  REIT
subsidiary ("QRS") and owns the Company's share of the limited partner interests
in the Operating  Partnership.  For financing purposes, the Company has formed a
limited  liability  company  (the  "LLC")  and  a  partnership  (the  "Financing
Partnership"),  which beneficially own certain apartment communities  encumbered
by mortgage indebtedness.  The LLC is wholly owned by the Operating Partnership.
The Financing  Partnership is owned 99.9% by the Operating  Partnership and 0.1%
by the QRS.

The accompanying  consolidated financial statements include the accounts of Home
Properties  Management,  Inc. and Home Properties  Resident Services,  Inc. (the
"Management Companies").  The Management Companies are wholly owned subsidiaries
of  the Company.  On November 21, 2006,  Home  Properties  Management,  Inc. was
merged  into Home  Properties  Resident  Services,  Inc.,  with Home  Properties
Resident  Services,  Inc. the surviving  entity.  All significant  inter-company
balances and transactions have been eliminated in these  consolidated  financial
statements.

Through March 30, 2004,  the Company  accounted  for its  investment as managing
general partner ("GP") in unconsolidated affordable housing limited partnerships
("LP") using the equity  method of  accounting.  Effective  March 31, 2004,  the
Company adopted FASB Interpretation No. 46R,  Consolidation of Variable Interest
Entities ("FIN 46R"). This  interpretation  addresses  consolidation by business
enterprises of variable interest entities in which the equity investment at risk
is not  sufficient  to permit  the  entity to  finance  its  activities  without
additional  subordinated  financial  support from other  parties or in which the
equity  investors do not have the  characteristics  of a  controlling  financial
interest.  This  interpretation  requires  a  variable  interest  entity  to  be
consolidated  by a company if that  company is subject to a majority of the risk
of loss from the variable interest entity's  activities or entitled to receive a
majority of the  entity's  residual  returns or both.  The  interpretation  also
requires  disclosures  about variable  interest entities that the company is not
required to consolidate but in which it has a significant variable interest.  As
of  March  31,  2004,  the  Company  was  the  general  partner  in  41  limited
partnerships in Upstate New York,  Pennsylvania,  Ohio and Maryland. The Company
had made a determination that all 41 limited partnerships were Variable Interest
Entities ("VIEs").  As of March 31, 2004, Home Properties determined that it was
not  the  primary  beneficiary  in  seven  partnerships  syndicated  under  U.S.
Department  of Housing and Urban  Development  subsidy  programs,  none of which
remained as of December 31, 2006 and 2005. These investments continued to be

                              HOME PROPERTIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

1    ORGANIZATION AND BASIS OF PRESENTATION (Continued)
-    --------------------------------------------------

accounted for under the equity method until their sale.  For those  investments,
the  Company   continued  to  record  its  allocable  share  of  the  respective
partnership's income or loss based on the terms of the agreement.  To the extent
it was  determined  that the LPs could not absorb their share of the losses,  if
any,  the GP  recorded  the LPs share of such  losses.  The  Company had further
determined that it was the primary beneficiary in 34 of the VIEs and, therefore,
consolidated these entities effective March 31, 2004.  Beginning with the second
quarter of 2004, the Company consolidated the results of operations of the VIEs.
During 2004 and 2005, the Company sold most of these consolidated VIEs with only
one  partnership  remaining  as of December  31,  2006 and 2005.  The results of
operations  for the VIEs sold during the years ended 2005 and 2004 are  included
in discontinued operations. The one remaining property is classified as held and
used as of December 31, 2006 and 2005 and the results of operations are included
in continuing operations.

Reclassifications
-----------------

Certain  reclassifications  have  been  made to the 2005  and 2004  consolidated
financial statements to conform to the 2006 presentation.

2    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-    ------------------------------------------

Real Estate
-----------

Real estate is recorded at cost. Costs related to the acquisition,  development,
construction  and improvement of properties are capitalized.  Recurring  capital
replacements typically include carpeting and tile,  appliances,  HVAC equipment,
new  roofs,  site  improvements  and  various  exterior  building  improvements.
Non-recurring  upgrades  include,  among other  items,  community  centers,  new
appliances, new windows, kitchens and bathrooms.  Interest costs are capitalized
until construction is substantially complete.  There was $1,087, $1,096 and $763
of interest  capitalized  in 2006,  2005 and 2004,  respectively.  Salaries  and
related costs  capitalized  for the years ended December 31, 2006, 2005 and 2004
were $2,097, $2,135 and $3,391, respectively. When retired or otherwise disposed
of, the related  asset cost and  accumulated  depreciation  are cleared from the
respective  accounts  and the net  difference,  less any  amount  realized  from
disposition,  is reflected in income.  Ordinary  repairs and maintenance that do
not extend the life of the asset are expensed as incurred.

Management reviews its long-lived assets used in operations for impairment when,
in accordance  with SFAS No. 144,  Accounting  for the Impairment or Disposal of
Long Lived Assets  ("SFAS  144"),  there is an event or change in  circumstances
that indicates an impairment in value. An asset is considered  impaired when the
undiscounted  future  cash  flows are not  sufficient  to  recover  the  asset's
carrying value. If such impairment is present,  an impairment loss is recognized
based on the excess of the carrying amount of the asset over its fair value. The
Company  records  impairment  losses and reduces the carrying  amounts of assets
held for sale when the carrying  amounts exceed the estimated  selling  proceeds
less the costs to sell.

The Company  accounts  for its  acquisitions  of  investments  in real estate in
accordance with SFAS No. 141, Business Combinations ("SFAS 141"), which requires
the fair value of the real  estate  acquired  to be  allocated  to the  acquired
tangible  assets,  consisting  of land,  building,  and  personal  property  and
identified  intangible  assets  and  liabilities,  consisting  of the  value  of
above-market  and  below-market  leases,  value of in-place  leases and value of
resident  relationships,  based in each case on their fair  values.  The Company
considers  acquisitions of operating real estate assets to be businesses as that
term is contemplated  in Emerging Issues Task Force Issue No. 98-3,  Determining
Whether a Nonmonetary  Transaction Involves Receipt of Productive Assets or of a
Business.

                              HOME PROPERTIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
-        ------------------------------------------------------

Real Estate (Continued)
-----------------------

The Company allocates purchase price to the fair value of the tangible assets of
an acquired property (which includes the land, building,  and personal property)
determined by valuing the property as if it were vacant.  The as-if-vacant value
is allocated to land,  buildings,  and personal  property based on  management's
determination of the relative fair values of these assets.

Above-market and below-market  in-place lease values for acquired properties are
recorded  based on the present value (using an interest rate which  reflects the
risks  associated  with the leases  acquired) of the difference  between (i) the
contractual  amounts  to be  paid  pursuant  to the  in-place  leases  and  (ii)
management's estimate of fair market lease rates for the corresponding  in-place
leases, measured over a period equal to the remaining non-cancelable term of the
lease.  The capitalized  above-market  lease values are included in other assets
and  are   amortized  as  a  reduction  of  rental  income  over  the  remaining
non-cancelable  terms of the respective  leases.  The  capitalized  below-market
lease values are  included in accrued  expenses  and other  liabilities  and are
amortized  as an  increase  to  rental  income  over  the  initial  term  of the
respective leases.

Other intangible  assets acquired include amounts for in-place lease values that
are based upon the Company's  evaluation of the specific  characteristics of the
leases.  Factors  considered in these  analyses  include an estimate of carrying
costs during  hypothetical  expected lease-up periods considering current market
conditions,  and costs to execute  similar  leases.  The Company also  considers
information  obtained about each property as a result of its pre-acquisition due
diligence,  marketing and leasing activities in estimating the fair value of the
tangible  and  intangible  assets  acquired.   In  estimating   carrying  costs,
management  also  includes  real estate  taxes,  insurance  and other  operating
expenses  and  estimates  of lost  rentals at market  rates  during the expected
lease-up periods depending on the property acquired.

The total amount of other  intangible  assets  acquired is further  allocated to
resident  relationships,  which includes intangible values based on management's
evaluation of the specific  characteristics  of the  residential  leases and the
Company's resident retention history.

The value of  in-place  leases and  resident  relationships  are  amortized  and
included in depreciation and  amortization  expense over the initial term of the
respective leases.

The acquisitions of minority  interests for shares of the Company's common stock
are recorded  under the purchase  method with assets  acquired  reflected at the
fair market value of the Company's common stock on the date of acquisition.  The
acquisition  amounts  are  allocated  to the  underlying  assets  based on their
estimated  fair  values.  During  2006 and 2005,  there were 3.8 million and 0.2
million  shares of UPREIT Units  converted to common  stock,  respectively.  The
Company made an  adjustment  in the amount of $124.6  million and $5.2  million,
respectively, to record the fair market value of the conversions.

                              HOME PROPERTIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
-    ------------------------------------------------------

Depreciation
------------

Properties  are  depreciated  using a  straight-line  method over the  estimated
useful lives of the assets as follows:

Land improvements                   3-20 years
Buildings and improvements          3-40 years
Furniture, fixtures and equipment   5-10 years
Computer software                   5 years

Depreciation  expense  charged to operations was $94,164,  $80,146,  and $69,616
from  continuing  operations and $5,543,  $19,165 and $24,493 from  discontinued
operations for the years ended December 31, 2006, 2005 and 2004, respectively.

Cash and Cash Equivalents
-------------------------

Cash and  cash  equivalents  include  all cash  and  highly  liquid  investments
purchased  with  original  maturities  of  three  months  or less.  The  Company
estimates  that the fair value of cash  equivalents  approximates  the  carrying
value due to the relatively short maturity of these instruments.

Cash in Escrows
---------------

Cash in escrows  consists  of cash  restricted  under the terms of various  loan
agreements to be used for the payment of property taxes and insurance as well as
required  replacement  reserves,  resident  security  deposits  for  residential
properties and funds held in escrow from tax-free exchanges.

Allowance for Doubtful Receivables
----------------------------------

The allowance for doubtful  receivables  was $984,  $513 and $567 as of December
31, 2006, 2005 and 2004, respectively.

Deferred Charges
----------------

Costs  relating to the financing of properties  are deferred and amortized  over
the life of the related financing  agreement.  The straight-line  method,  which
approximates the effective  interest  method,  is used to amortize all financing
costs;  such  amortization is reflected as interest  expense in the consolidated
statement of operations.  The financing  agreement  terms range from 1-18 years.
Accumulated amortization was $7,421, $5,832 and $5,640, as of December 31, 2006,
2005 and 2004, respectively.

Intangible Assets
-----------------

Intangible  assets of $8,080,  $5,080 and $3,281 at December 31, 2006,  2005 and
2004,  respectively,  included in Other  Assets,  consist  primarily of property
management  contracts obtained through the acquisition of real estate management
businesses,  and  intangible  assets  recorded  in  connection  with  SFAS  141.
Intangible  assets  associated with SFAS 141 are amortized on the  straight-line
basis  over their  estimated  useful  lives of 5 months to 3 years.  Accumulated
amortization of intangible  assets was $4,714,  $2,797 and $2,005 as of December
31,  2006,  2005  and  2004,  respectively.   Amortization  expense  charged  to
operations was $1,978,  $798, and $1,094 from continuing  operations and $10, $7
and $26 from discontinued operations for the years ended December 31, 2006, 2005
and

                              HOME PROPERTIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
-    ------------------------------------------------------

Intangible Assets (continued)
-----------------------------

2004,  respectively.  The carrying  value of intangible  assets is  periodically
reviewed by the Company and  impairments are recognized when the expected future
operating  cash flows  derived from such  intangible  assets are less than their
carrying  value.  During  2004,  in  connection  with  the  sale  of the  assets
associated with the general partnership  interests in certain affordable housing
limited partnerships, the Company disposed of $1,771 of intangible assets.

Revenue Recognition
-------------------

The Operating  Partnership  leases its residential  apartment units under leases
with  terms  generally  one year or  less.  Rental  income  is  recognized  on a
straight-line  basis over the related  lease term. As a result,  deferred  rents
receivable  are created when rental income is recognized  during the  concession
period of certain negotiated leases and amortized over the remaining term of the
lease.  In accordance  with SFAS 141, the Company  recognizes  rental revenue of
acquired  in-place  "above and below" market leases at their fair value over the
weighted  average  remaining lease term.  Property other income,  which consists
primarily of income from  operation  of laundry  facilities,  utility  recovery,
administrative  fees,  garage and carport rentals and  miscellaneous  charges to
residents,  is recognized  when earned (when the services are provided,  or when
the resident incurs the charge).

Property  management  fees are  recognized  when earned  based on a  contractual
percentage of net monthly cash collected on rental income.

Other Income
------------

Other  income for the years ended  December 31,  2006,  2005 and 2004  primarily
reflects management and other real estate service fees.

Gains on Real Estate Sales
--------------------------

Gains on disposition of properties are recognized  using the full accrual method
in accordance  with the  provisions of SFAS No. 66,  Accounting  for Real Estate
Sales,  provided  that  various  criteria  relating to the terms of sale and any
subsequent involvement by the Company with the properties sold are met.

Advertising
-----------

Advertising  expenses  are charged to  operations  during the year in which they
were  incurred.  Advertising  expenses  incurred and charged to operations  were
$4,524,  $4,719, and $4,608 from continuing  operations,  and $1,148, $1,889 and
$2,236 from discontinued operations, for the years ended December 31, 2006, 2005
and 2004, respectively.

Legal Settlement
----------------

In March  2005,  the  Company  settled a legal claim for a total cost of $3,800,
which was expensed in 2004. The legal claim was brought against the Company, the
Operating  Partnership,  and Home Leasing Corporation.  Home Leasing is owned by
Nelson B. Leenhouts and Norman Leenhouts,  who are the Co-Chairs of the Board of
Directors  to the  Company.  The  Company  was  originally  formed to expand and
continue  Home  Leasing's  business.  The essence of the  complaint  is that the
entity in which  plaintiffs  were  investors  was  wrongfully  excluded from the
Company's  initial  organization  as a real  estate  investment  trust  and  the
investors, therefore, did not obtain the benefits from

                              HOME PROPERTIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
-    ------------------------------------------------------

Legal Settlement (continued)
-----------------------------

exchanging  their equity  interests  in that entity for equity in the  Operating
Partnership.  In their  original  complaint,  plaintiffs  sought  damages in the
amount of $3,000. In the subsequent discovery process,  plaintiffs increased the
damages sought to $10,000.  Included in general and administrative  expenses for
the year ended  December 31, 2004 is the accrual for payment made during 2005 in
settlement  of $3,500 and for legal fees of $300 made on behalf of Home  Leasing
Corporation,  as well as the Company and the Operating Partnership.  Payment was
made on behalf  of Home  Leasing  in  recognition  of the fact that the  matters
alleged in the action  against Home Leasing  related  directly and solely to the
promotion and creation of the Company.

Federal Income Taxes
--------------------

The Company has elected to be taxed as a real estate  investment  trust ("REIT")
under the Internal Revenue Code of 1986, as amended, commencing with the taxable
year ended December 31,  1994. As a result, the Company generally is not subject
to Federal or State  income  taxation  at the  corporate  level to the extent it
distributes annually at least 90% of its REIT taxable income to its shareholders
and satisfies certain other requirements. For the years ended December 31, 2006,
2005 and 2004, the Company  distributed in excess of 100% of its taxable income;
accordingly,  no  provision  has  been  made  for  federal  income  taxes in the
accompanying consolidated financial statements.  Stockholders of the Company are
taxed on  dividends  and must  report  distributions  from the Company as either
ordinary income, capital gains, or as return of capital. (See Note 8)

The tax basis of assets is less than the amounts  reported  in the  accompanying
consolidated  financial  statements  by  approximately  $554,000 and $619,000 at
December 31, 2006 and 2005, respectively.

The following table  reconciles net income to taxable income for the years ended
December 31, 2006, 2005 and 2004:

                                                                                          2006        2005       2004
                                                                                          ----        ----       ----
Net income                                                                            $110,485     $81,512    $47,022
  Add back: Net  loss of taxable REIT Subsidiaries included in net income above            243         172        987
  Deduct: Net income of taxable REIT subsidiaries included in net income above             (39)        (27)          -
                                                                                      --------     -------    -------
Net income from REIT operations                                                        110,689      81,657     48,009
  Add: Book depreciation and amortization                                               75,151      68,814     64,886
  Less: Tax depreciation and amortization                                              (68,874)    (68,426)   (69,532)
Book/tax difference on gains/losses from capital transactions                          (49,691)    (45,906)    (8,128)
Other book/tax differences, net                                                        (14,094)     (6,450)       (79)
                                                                                      --------     -------    -------
Adjusted taxable income subject to 90% REIT dividend  requirement                     $ 53,181     $29,689    $35,156
                                                                                      ========     =======    =======

The Company made actual distributions in excess of 100% of taxable income before
capital gains.  All  adjustments  to net income from REIT  operations are net of
amounts attributable to minority interest and taxable REIT subsidiaries.

Included in total  assets on the  Consolidated  Balance  Sheets are deferred tax
assets of $10,079  and $8,496 as of December  31,  2006 and 2005,  respectively.
Management  does not  believe it is more  likely  than not that  these  deferred
assets will be used, and accordingly has recorded a reserve against the deferred
tax asset of $10,078 and $8,421 as of December 31, 2006 and 2005, respectively.

                              HOME PROPERTIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
-    ------------------------------------------------------

Earnings Per Share
------------------

Basic  Earnings Per Share ("EPS") is computed as net income  available to common
shareholders divided by the weighted average number of common shares outstanding
for the period.  Diluted EPS reflects the  potential  dilution  that could occur
from common shares issuable  through  stock-based  compensation  including stock
options  (using the treasury  stock method) and the conversion of any cumulative
convertible  preferred  stock.  The  exchange of an UPREIT Unit for common stock
will have no effect on diluted EPS as unitholders and  stockholders  effectively
share equally in the net income of the Operating Partnership.

Income from continuing operations is the same for both the basic and diluted EPS
calculation.  The reconciliation of the basic and diluted earnings per share for
the years ended December 31, 2006, 2005, and 2004, is as follows:

                                                                                2006             2005            2004
                                                                                ----             ----            ----
Income from continuing operations                                       $     27,992      $    23,816    $     27,080
  Add: Gain (loss) on sale of business, net of minority interest                   -                -            (67)
  Less: Preferred dividends                                                   (5,400)          (6,279)         (7,593)
                                                                          ----------       ----------      ----------
Basic and Diluted - Income from continuing operations
   applicable to common shareholders                                          22,592           17,537          19,420

Basic weighted average number of shares outstanding                       32,697,794       31,962,082      32,911,945
  Effect of dilutive stock options                                           593,308          324,268         333,995
  Effect of phantom and restricted shares                                     46,455           41,755          68,098
                                                                          ----------       ----------      ----------
Diluted weighted average number of shares outstanding                     33,337,557       32,328,105      33,314,038
                                                                          ==========       ==========      ==========

Basic earnings per share data:
   Income from continuing operations                                           $0.69            $0.55           $0.59
   Discontinued operations                                                      2.52             1.80            0.62
   Cumulative effect of change in accounting principle                             -                -          (0.01)
                                                                          ----------       ----------      ----------
Net income available to common shareholders                                    $3.21            $2.35           $1.20
                                                                          ==========       ==========      ==========

Diluted earnings per share data:
   Income from continuing operations                                           $0.68            $0.54           $0.58
   Discontinued operations                                                      2.47             1.79            0.61
   Cumulative effect of change in accounting principle                             -                -          (0.01)
                                                                          ----------       ----------      ----------
Net income available to common shareholders                                    $3.15            $2.33           $1.18
                                                                          ==========       ==========      ==========

Unexercised  stock  options to purchase  18,900,  539,500 and zero shares of the
Company's  common  stock were not  included in the  computations  of diluted EPS
because the options'  exercise prices were greater than the average market price
of the Company's  stock during the years ended December 31, 2006, 2005 and 2004,
respectively.  For the years  ended  December 31,  2005  (until  the date of the
conversion)  and 2004, the 833,333 common stock  equivalents on an  as-converted
basis  of  the  Series  D  Convertible   Cumulative   Preferred  Stock  have  an
antidilutive  effect and are not included in the  computation of diluted EPS. To
the  extent the  preferred  stock was  converted,  the  common  shares  would be
included in outstanding shares from the date of conversion.  In conjunction with
the  issuance of the  Exchangeable  Senior  Notes,  there are 490,880  potential
shares  issuable  under  certain  circumstances,  of which  none are  considered
dilutive as of December 31, 2006.

Use of Estimates
----------------

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States of America requires  management to make
estimates  and  assumptions  that  affect  the  reported  amount of  assets  and
liabilities and disclosures of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting period. Actual results could differ from those estimates.

                              HOME PROPERTIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

2    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
-    ------------------------------------------------------

Recent Accounting Pronouncements
--------------------------------

In July 2006, the FASB issued  Interpretation No. 48, Accounting for Uncertainty
in Income Taxes ("FIN 48"). FIN 48 addresses the  recognition and measurement of
assets and  liabilities  associated  with tax positions  taken or expected to be
taken in a tax return. FIN 48 is effective January 1, 2007. The Company reviewed
its current tax positions for any potential  uncertain tax positions  that would
qualify under FIN 48. Based on its review,  the Company does not anticipate that
the  adoption  of FIN 48 in  January  2007  will have a  material  impact on the
Company's cash flows, results of operations, financial position or liquidity.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements  ("SFAS
157").  SFAS 157 defines fair value,  establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures about
fair value measurements.  SFAS 157 applies under other accounting pronouncements
that  require or permit  fair value  measurements;  the FASB  having  previously
concluded  in those  accounting  pronouncements  that fair value is the relevant
measurement attribute. Accordingly, SFAS 157 does not require any new fair value
measurements.  SFAS 157 is effective for financial  statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years.  The Company is required to adopt SFAS 157 in the first  quarter of 2008.
The Company is  currently  evaluating  the impact that SFAS 157 will have on its
financial statements.

                              HOME PROPERTIES, INC.

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

3    VARIABLE INTEREST ENTITIES
-    --------------------------

Effective  March 31,  2004,  the Company  adopted FASB  Interpretation  No. 46R,
Consolidation of Variable Interest  Entities,  an interpretation of ARB No. 51 -
Consolidated  Financial Statements.  The Company had made the determination that
all 41 of the remaining limited partnerships at the time were VIEs.

The  Company  determined  that it was  not  the  primary  beneficiary  in  seven
partnerships  syndicated under U.S.  Department of Housing and Urban Development
subsidy  programs,  all of which had been sold as of  December 31,  2005.  These
investments  were  accounted for under the equity method through their sale. The
Company recorded its allocable share of the respective  partnership's  income or
loss based on the terms of the agreements.  To the extent it was determined that
the LPs could not absorb their share of the losses,  if any, the GP recorded the
LPs share of such losses.  The Company  absorbed  such losses  to the extent the
Company  had  outstanding  loans or  advances  and the  limited  partner  had no
remaining capital account.

The Company had further determined that it was the primary  beneficiary in 34 of
the VIEs and,  therefore,  consolidated these entities effective March 31, 2004.
In connection  with the adoption of FIN 46R, the Company  recorded a $321 charge
of a cumulative  effect,  net of minority  interest,  of a change in  accounting
principle  during  the first  quarter of 2004.  This  charge was a result of the
negative  capital accounts of minority  interest  partners that were absorbed by
the Company. During the first quarter of 2004, prior to the adoption of FIN 46R,
the Company  recorded an impairment  charge of $1,654 to reduce the value of the
Company's investment  associated with the VIEs to management's  estimate of fair
market value. The impairment charge is classified in the financial statements as
"Impairment  of assets held as general  partner" of $1,116 and "Equity in losses
of  unconsolidated  affiliates"  of $538.  Beginning  with the second quarter of
2004,  the Company  consolidated  the  results of  operations  of the VIEs.  The
results of operations of 33 of the VIEs are included in discontinued  operations
as of  December  31,  2004,  as all of the VIEs were  considered  held for sale.
During  2005,  the  Company  closed  on the  sale  of all but  one  VIE.  It was
determined  in the second  quarter of 2005,  that the one  remaining  VIE is not
considered  held for sale  and is  included  in the  Consolidated  Statement  of
Operations for the years ended  December 31, 2006,  2005 and 2004. The effect on
the  Consolidated  Balance  Sheets of including this VIE as of December 31, 2006
and 2005  includes  total assets of $20,500 and $21,300,  total  liabilities  of
$17,900 and $17,900 and minority interest of $2,600 and $3,400, respectively.

As general  partner,  the Company  manages  the  day-to-day  operations  of this
partnership for a management fee. In addition, the Company has certain operating
deficit  and tax  credit  guarantees  to its  limited  partner.  The  Company is
responsible  to fund  operating  deficits  to the  extent  there are any and can
receive operating incentive awards when cash flow reaches certain levels.

Based upon the final contract price established  during final  negotiations with
the buyers for 38 of these partnerships,  an additional $4,000 loss was recorded
during  2004,  included  in  "gain  on  disposition  of  property"  as  part  of
"discontinued operations."

                              HOME PROPERTIES, INC.

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

3    VARIABLE INTEREST ENTITIES (Continued)
-    --------------------------------------

In December,  2004, the Company recorded an obligation to repurchase the limited
partner's  interests in two VIEs in satisfaction of any tax credit guarantees or
other  obligations  to that  partner for $5,700,  resulting  in a loss of $5,000
included  in  "gain  on  disposition  of  property"  as  part  of  "Discontinued
operations." The transfer of the partnership interests was effective in January,
2005.  In  connection  with the  Company's  decision to dispose of the  property
through a transfer  of deed in lieu of  foreclosure,  the  Company  performed  a
valuation  analysis on the underlying real estate,  and as a result,  recorded a
$7,300  impairment of real estate during the first quarter of 2005 to adjust the
net book value of the property to the  Company's  estimated  fair market  value.
This impairment is included as part of "Discontinued operations" in "Income from
operations." Finally, on September 30, 2005, the deed was transferred to the new
mortgage  holder  in lieu  of  foreclosure  resulting  in a gain on sale of real
estate of $7,700,  included  in "gain on  disposition  of  property"  as part of
"Discontinued operations."

Additionally, the Company is no longer marketing for sale the one remaining VIE.
Based  upon  the  Company's  estimate  of fair  market  value,  a $400  and $800
investment impairment charge was recorded in the periods ended December 31, 2005
and  2004,  respectively,  for  this  one  remaining  VIE,  included  as part of
"Impairment of assets held as general partner."

4    MORTGAGE NOTES PAYABLE
-    ----------------------

The Company's mortgage notes payable are summarized as follows:

                                                                 2006             2005
                                                                 ----             ----
Fixed rate mortgage notes payable                          $1,895,448       $1,749,127
Variable rate mortgage notes payable                           28,865           92,959
                                                           ----------       ----------
   Total mortgage notes payable                             1,924,313        1,842,086
Less:  Mortgage notes payable classified as held for sale           -           73,603
                                                           ----------       ----------
   Mortgage notes payable                                  $1,924,313       $1,768,483
                                                           ==========       ==========

For 2006 and 2005,  mortgage notes payable (including  mortgage notes classified
as held for sale) are  collateralized  by  certain  apartment  communities.  The
mortgage  notes  payable  outstanding  as of December 31, 2006 mature at various
dates  from  2007  through  2042.  The  weighted  average  interest  rate of the
Company's  fixed rate notes was 5.77% and 5.95% at  December  31, 2006 and 2005,
respectively.  The weighted average interest rate of the Company's variable rate
notes and line of credit  facility  was 4.95% and 4.82% at December 31, 2006 and
2005, respectively.

Principal  payments  on the  mortgage  notes  payable  for years  subsequent  to
December 31, 2006 are as follows:

              2007             $ 171,500
              2008               137,153
              2009                68,351
              2010               307,989
              2011               285,509
        Thereafter               953,811
                              ----------
                              $1,924,313
                              ==========


                              HOME PROPERTIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

4    MORTGAGE NOTES PAYABLE (Continued)
-    ----------------------------------

The Company determines the fair value of the mortgage notes payable based on the
discounted  future cash flows at a discount rate that approximates the Company's
current effective  borrowing rate for comparable loans.  Based on this analysis,
the Company has  determined  that the fair value of the mortgage  notes  payable
approximates  $1,930,555  and  $1,890,232,   at  December  31,  2006  and  2005,
respectively.

At December 31, 2006 and 2005,  the  consolidated  mortgage  balance  (including
mortgage  notes  payable   classified  as  held  for  sale)  of  $1,924,313  and
$1,842,086,  respectively,  included  mortgage  notes  payable  related  to  the
Company's VIE consolidated in connection with the Company's adoption of FIN 46R,
in the amount of $16,763 and $16,989, respectively.

Prepayment  penalties of $8,621, $147 and $305 were incurred for the years ended
December 31,  2006,  2005 and  2004,  respectively.  For  2006,  the  prepayment
penalties were incurred in connection with the sale of property and are included
in  discontinued  operations.  For 2005,  a  prepayment  penalty was incurred in
connection with the repayment of a mortgage and is included in interest expense.
For 2004,  the prepayment  penalties were incurred in connection  with both debt
restructurings and the sale of property and are included in interest expense and
discontinued operations, respectively.

5    EXCHANGEABLE SENIOR NOTES
-    -------------------------

On October 24,  2006,  the Company  issued $200 million of  exchangeable  senior
notes under an Indenture  Agreement (the  "Indenture").  This offering generated
net  proceeds  of $195.8  million.  The  coupon  rate is  4.125%.  The notes are
exchangeable  into cash equal to the  principal  amount of the notes and, at the
Company's  option,  cash or common stock for the  exchange  value (to the extent
that the market  price of common  stock  exceeds the initial  exchange  price of
$73.34 per share)  subject to  adjustment.  Upon an exchange  of the notes,  the
Company will settle any amounts up to the principal  amount of the notes in cash
and the remaining  exchange  value,  if any,  will be settled,  at the Company's
option,  in cash,  common  stock or a  combination  of both.  The  notes are not
redeemable  at the option of the Company for five years,  except to preserve the
status of the Company as a REIT.

Holders of the notes may require the  Company to  repurchase  the notes upon the
occurrence of certain designated events. In addition, prior to November 1, 2026,
the holders may require the Company to repurchase the notes on November 1, 2011,
2016 and 2021.  The notes will  mature on November  1, 2026,  unless  previously
redeemed,  repurchased or exchanged in accordance with their terms prior to that
date.

Noteholders may also require an exchange of the notes subsequent to December 31,
2006 should the closing  sale price of common  stock exceed 130% of the exchange
price for a certain  period of time or should the trading  price on the notes be
less  than  98% of the  product  of the  closing  sales  price of  common  stock
multiplied by the applicable exchange rate for a certain period of time.

The notes are  structurally  subordinated  to the  secured  indebtedness  of the
Company.  The  Company  is not  subject  to any  financial  covenants  under the
Indenture.  In  addition,  the  Indenture  will not  restrict the ability to pay
distributions, incur debt or issue or repurchase securities.

                              HOME PROPERTIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

6    LINE OF CREDIT
-    --------------

As of December 31, 2006, the Company had an unsecured line of credit of $140,000
of which there was no  outstanding  balance.  Provided  that no event of default
under  this  agreement  has  occurred,  the  Company  may  request  on or before
September 1, 2007 that the lenders  increase the line of credit to an amount not
to exceed $190,000. The Company has had no occurrences of default as of December
31, 2006. The line of credit is led by  Manufacturers  and Traders Trust Company
("M&T Bank"), as Administrative  Agent, with three other participants:  Citizens
Bank of Rhode Island,  Chevy Chase Bank, F.S.B.,  and Comerica Bank.  Borrowings
under the line of credit bear  interest at .75% over the  one-month  LIBOR.  The
one-month  LIBOR was 5.32% at December 31, 2006.  The LIBOR  interest  rate plus
.75% was 6.07% at December 31, 2006.

Increases in interest  rates will raise the  Company's  interest  expense on any
outstanding  balances  and as a result  would  affect the  Company's  results of
operations and financial  condition.  The line of credit expires on September 1,
2008 and can be extended one year upon satisfaction of certain  conditions.  The
credit  agreement  relating  to this  line of credit  requires  the  Company  to
maintain  certain  financial  ratios  and  measurements.   The  Company  was  in
compliance with these financial covenants for the year ended December 31, 2006.

7    MINORITY INTEREST
-    -----------------

Minority  interest  in the  Company  relates to the  interest  in the  Operating
Partnership and affordable  limited  partnerships  not owned by Home Properties,
Inc.  Holders of UPREIT  Units may redeem a unit for one share of the  Company's
common  stock  or  cash  equal  to the  fair  market  value  at the  time of the
redemption, at the option of the Company.

For  2006  and  2005,  the  effect  of  consolidating  the  affordable   limited
partnership  in  connection  with FIN 46R has been  reflected  in the  change in
minority  interest for the year. The changes in minority  interest for the years
ended December 31, 2006 and 2005 are as follows:

                                                                               2006            2005
                                                                               ----            ----
Balance, beginning of year                                                $ 323,269      $  310,775
Issuance of UPREIT Units associated with property acquisitions               20,397          55,598
Adjustment between minority interest and stockholders' equity                 2,511         (33,856)
Exchange of UPREIT Units for Common Shares                                  (71,157)         (4,010)
Net income                                                                   43,327          37,190
Accumulated other comprehensive loss                                             (2)            278
Distributions                                                               (35,779)        (39,279)
Effect of consolidating affordable limited partnerships under FIN 46R           (24)         (3,427)
                                                                          ---------      ----------
Balance, end of year                                                      $ 282,542      $  323,269
                                                                          =========      ==========

                              HOME PROPERTIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

8    PREFERRED STOCK AND STOCKHOLDERS' EQUITY

Preferred Stock
---------------

In June  2000,  the  Company  privately  placed  250,000  of its 8.78%  Series D
convertible  cumulative  preferred  stock  ("Series D Preferred  Shares"),  $100
liquidation  preference  per share.  This  offering  generated  net  proceeds of
approximately  $25,000.  The net proceeds were used to fund Company acquisitions
and property  upgrades.  The Series D Preferred  Shares were  convertible at any
time by the holder into Common Shares at a conversion price of $30.00 per Common
Share, equivalent to a conversion ratio of 3.333 Common Shares for each Series D
Preferred  share  (equivalent to 833,333 Common Shares  assuming 100% converted)
and were non-callable for five years. Each Series D Preferred share received the
greater of a quarterly  distribution of $2.195 per share or the dividend paid on
a share of common stock on an  as-converted  basis. On May 26, 2005, all 250,000
shares of the Series D Preferred  Shares were  converted  into 833,333 shares of
Common stock.  The conversion of the Series D Preferred  Shares to Common Shares
did not have an effect on the reported results of operations. As of December 31,
2005, there were no Series D Preferred Shares outstanding.

In March  2002,  the  Company  issued  2,400,000  shares of its  9.00%  Series F
Cumulative  Redeemable  Preferred  Stock ("Series F Preferred  Shares"),  with a
$25.00 liquidation preference per share. This offering generated net proceeds of
approximately  $58,000. The net proceeds were used to fund the repurchase of the
Company's  Series  B  preferred  stock,  property  acquisitions,   and  property
upgrades. The Series F Preferred Shares are redeemable by the Company at anytime
on or after March 25, 2007 at a redemption  price of $25.00 per share,  plus any
accumulated,  accrued and unpaid  dividends.  Each Series F Preferred share will
receive an annual  dividend  equal to 9.00% of the  liquidation  preference  per
share  (equivalent  to a fixed  annual  amount of $2.25 per share).  The Company
anticipates redeeming the Series F preferred shares in March 2007.

Common Stock
------------

In 1997, the Company's Board of Directors  approved a stock  repurchase  program
under which the Company may repurchase  shares of its  outstanding  common stock
and UPREIT Units.  The  shares/units  may be repurchased  through open market or
privately negotiated  transactions at the discretion of Company management.  The
Board's  action did not  establish a target  price or a specific  timetable  for
repurchase.  At December 31, 2004 the Company had  authorization  to  repurchase
2,000,000  shares of common  stock and UPREIT  Units under the stock  repurchase
program.  On each of February 16, and  November 4, 2005,  the Board of Directors
approved 2,000,000-share increases in the stock repurchase program. During 2005,
the  Company  repurchased  2,779,805  additional  shares at a cost of  $111,700.
During 2006, the Company repurchased  2,613,747 shares at a cost of $142,533. On
October 27, 2006 the Board of Directors of the Company authorized  repurchase of
up to 2,000,000  additional  shares. The Company has authorization to repurchase
2,606,448 shares as of December 31, 2006.

Dividend Reinvestment Plan
--------------------------

The Company has a Dividend Reinvestment Plan (the "DRIP"). The DRIP provides the
stockholders  of the Company an opportunity to  automatically  invest their cash
dividends in common stock. In addition,  eligible  participants may make monthly
payments or other  voluntary  cash  investments  in shares of common stock.  The
maximum  monthly  investment  without prior Company  approval is currently  $10.
Effective  December  10,  2004,  the  discount  was  reduced  from 2% to 0%.  In
addition,  in the fourth  quarter  of 2004 and  during the years  ended 2006 and
2005, the Company has met share demand in the program  through share  repurchase
by the transfer agent in the open market on the Company's  behalf instead of new
share issuance.  This removes essentially 100% of the dilution caused by issuing
new shares at a price less than the net asset value in an economic and efficient
manner. A total of $18,000 was raised through this program during 2004.

                              HOME PROPERTIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

8    PREFERRED STOCK AND STOCKHOLDERS' EQUITY (Continued)
-    ----------------------------------------------------

Dividends
---------

Stockholders  are taxed on  dividends  and must report such  dividends as either
ordinary  income,  capital  gains,  or as return of  capital.  The  Company  has
declared a $2.57  distribution  per common share (CUSIP  437306103)  and a $2.25
distribution  per Series F preferred  share  (CUSIP  437306509)  during its most
recent fiscal year.  Pursuant to Internal  Revenue Code Section 857 (b) (3) (C),
for the years ended December 31, 2006, 2005 and 2004, the Company designates the
taxable composition of the following cash distributions to holders of common and
preferred shares in the amounts set forth in the tables below :


                       Common                                                 Distribution Type
                       ------                                                 -----------------
                                                        Ordinary                                         Unrecaptured
 Declaration     Record       Payable    Distributions   Taxable    Qualified  Return of    Long-Term     Sec. 1250
    Dates         Dates        Dates      Per Share     Dividend    Dividend    Capital    Capital Gain      Gain
    -----         -----        -----      ---------     --------    --------    -------    ------------      ----
     2/7/2006    2/17/2006    2/28/2006      $0.64         29.79%     0.04%        32.86%        0.00%      37.31%
     5/4/2006    5/16/2006    5/26/2006      $0.64         29.79%     0.04%        32.86%        0.00%      37.31%
     8/1/2006    8/15/2006    8/25/2006      $0.64         29.79%     0.04%        32.86%        0.00%      37.31%
   10/27/2006   11/17/2006   11/28/2006      $0.65         29.79%     0.04%        32.86%        0.00%      37.31%
                                             -----         -----      ----         -----         ----       -----
                            TOTALS           $2.57         29.79%     0.04%        32.86%        0.00%      37.31%
                                             =====         =====      ====         =====         ====       =====

The taxable composition of cash distributions for each common share for 2005 and 2004 is as follows:

                                                                              Distribution Type
                                                                              -----------------
                                                        Ordinary                                         Unrecaptured
                                         Distributions   Taxable    Qualified  Return of    Long-Term     Sec. 1250
    Year                                  Per Share     Dividend    Dividend    Capital    Capital Gain      Gain
    ----                                  ---------     --------    --------    -------    ------------      ----
    2005                                     $2.53         42.95%        0.00%     55.34%      0.00%         1.71%
    2004                                     $2.49         41.83%        0.00%     55.24%      0.00%         2.93%


            Series F Cumulative Preferred                                     Distribution Type
            -----------------------------                                     -----------------
                                                        Ordinary                                         Unrecaptured
 Declaration     Record       Payable    Distributions   Taxable    Qualified  Return of    Long-Term     Sec. 1250
    Dates         Dates        Dates      Per Share     Dividend    Dividend    Capital    Capital Gain      Gain
    -----         -----        -----      ---------     --------    --------    -------    ------------      ----
     2/7/2006    2/17/2006    2/28/2006      $0.5625       44.37%     0.06%          0.00%       0.00%      55.57%
     5/4/2006    5/16/2006    5/31/2006      $0.5625       44.37%     0.06%          0.00%       0.00%      55.57%
     8/1/2006    8/15/2006    8/31/2006      $0.5625       44.37%     0.06%          0.00%       0.00%      55.57%
   10/27/2006   11/17/2006   11/30/2006      $0.5625       44.37%     0.06%          0.00%       0.00%      55.57%
                                                           -----      ----         -----         ----       -----
                            TOTALS           $2.2500       44.37%     0.06%          0.00%       0.00%      55.57%
                                             =======       =====      ====           ====        ====       =====

                              HOME PROPERTIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

8    PREFERRED STOCK AND STOCKHOLDERS' EQUITY (Continued)
-    ----------------------------------------------------

The taxable  composition of cash distributions for each preferred share for 2005
and 2004 is as follows:

                                                                              Distribution Type
                                                                              -----------------
                                                        Ordinary                                         Unrecaptured
                                         Distributions   Taxable    Qualified  Return of    Long-Term     Sec. 1250
    Year                                  Per Share     Dividend    Dividend    Capital    Capital Gain      Gain
    ----                                  ---------     --------    --------    -------    ------------      ----
    2005                                       $2.25       96.16%        0.00%      0.00%      0.00%         3.84%
    2004                                       $2.25       93.44%        0.00%      0.00%      0.00%         6.56%

Total Shares/Units Outstanding
------------------------------

At December 31, 2006, 33,103,247 common shares, and 13,290,384 UPREIT Units were
outstanding for a total of 46,393,631 common share equivalents.

In addition, 2,400,000 shares of Series F Cumulative Redeemable Preferred shares
were outstanding as of December 31, 2006.

9    STOCK BENEFIT PLAN
-    ------------------

The  Company's  1994 Stock  Benefit  Plan (the "1994  Plan") was  adopted by the
Company at the time of its initial  public  offering.  On February 1, 2000,  the
Company adopted the 2000 Stock Benefit Plan, which was subsequently amended (the
"2000 Plan").  On May 6, 2003,  the Company  adopted the 2003 Stock Benefit Plan
and on May 6, 2005,  the  shareholders  approved the Amended and  Restated  2003
Stock Benefit Plan (the "2003 Plan"). No additional options will be issued under
the 1994 Plan and the 2000 Plan.  Participants  in each of the above  referenced
plans (the "Stock Plans")  include  officers,  non-employee  directors,  and key
employees  of the  Company.  The 1994 Plan  provided  for the  issuance of up to
1,596,000  options to officers and employees and 154,000 options to non-employee
directors.  The 2000 Plan limits the number of shares issuable under the plan to
2,755,000,   of  which  205,000  were  to  be  available  for  issuance  to  the
non-employee directors. The 2003 Plan limits the number of shares issuable under
the plan to 2,859,475,  of which 249,475 are to be available for issuance to the
non-employee directors.  Under the 1994 Plan, 1,542,381 shares have been granted
to employees  and 153,654  shares have been granted to  non-employee  directors.
Awards  for  2,451,922  shares  have been  granted to  employees  and awards for
166,460 shares have been granted to non-employee  directors under the 2000 Plan.
Under the 2003 Plan and as of December  31,  2006,  2,280,626  awards for shares
have been issued to employees and 204,475  awards for shares have been issued to
non-employee  directors  and 646,834 and 45,000  common shares are available for
future  grant of awards  under  the 2003 Plan for  officers  and  employees  and
non-employee directors, respectively. Options granted under the Stock Plans vest
20% for each year of service until 100% vested on the fifth anniversary,  except
that options issued to certain officers  (276,000) and all of the options issued
to non-employee  directors under the 1994 Plan and 2000 Plan vested  immediately
upon grant.  The exercise  price per share for stock options issued under all of
the Stock Plans may not be less than 100% of the fair market value of a share of
common  stock on the date the  stock  option  is  granted.  Options  granted  to
non-employee  directors  under the 1994 Plan and the 2000 Plan expire after five
years from the date of grant.  All other options expire after ten years from the
date  of  grant.  The  Stock  Plans  allow  for  the  grant  of  options,  stock
appreciation  rights and restricted stock awards. No stock  appreciation  rights
have been  granted.  The  Company  has a policy of issuing  new shares  upon the
exercise of stock options and upon the lapsing of  restrictions  with respect to
restricted stock.

                              HOME PROPERTIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

9    STOCK BENEFIT PLAN (Continued)
-    ------------------------------

On January 1, 2006,  the  Company  adopted  Statement  of  Financial  Accounting
Standards  No. 123R,  Share Based  Payments  ("SFAS  123R").  The statement is a
revision of SFAS No. 123  Accounting  for  Stock-Based  Compensation.  SFAS 123R
supersedes  APB Opinion No. 25 Accounting  for Stock Issued to Employees and its
related implementation  guidance. SFAS 123R requires that entities recognize the
cost of employee services received in exchange for awards of equity  instruments
(i.e., stock options) based on the grant-date fair value of those awards.  Prior
to  January  1,  2006,  the  Company  applied  the  provisions  of SFAS No.  148
Accounting  for  Stock-Based  Compensation  -  Transition  and  Disclosure,   an
Amendment to SFAS No. 123 ("SFAS 148").  Under SFAS 148, the Company  recognized
compensation cost related to stock option grants, based on the fair value on the
date of the grant,  over the expected  service period of the employee  receiving
the award.

The Company uses the  Black-Scholes  formula to estimate the fair value of stock
options granted to employees for both SFAS 123R and SFAS 148. SFAS 123R and SFAS
148 require the estimation of forfeitures when recognizing  compensation expense
and that this estimate of  forfeitures  be adjusted  over the requisite  service
period  should  actual  forfeitures  differ  from  such  estimates.  Changes  in
estimated  forfeitures are recognized through a cumulative catch-up  adjustment,
which is  recognized  in the  period of change and which  impacts  the amount of
unamortized compensation expense to be recognized in future periods. For options
granted prior to January 1, 2006,  the Company uses the nominal  vesting  period
approach.  For option  grants  after  January 1, 2006,  the Company  applies the
non-substantive  vesting  period  approach  which resulted in $724 of additional
compensation  costs for  retirement  eligible  employees and directors than what
would have been  recognized  under SFAS 148. As a result of the adoption of SFAS
123R,  the  Company  began  capitalizing  stock-based  compensation  costs  as a
component   of   employee   compensation   that  is   capitalized   as  part  of
self-constructed  fixed assets  which  amounted to $36 for the year period ended
December 31, 2006. The Company applied the modified  prospective  application in
adopting  SFAS 123R.  The adoption of SFAS 123R reduced  income from  continuing
operations  $601;  net income $416 and basic and diluted  earnings  per share by
$.01 per share.

A summary of stock option  activity  for the year ended  December 31, 2006 is as
follows:

                                                                                             Weighted
                                                                             Weighted         Average
                                                                              Average      Remaining      Aggregate
                                                                       Exercise Price     Contractual      Intrinsic
                                                    Number of Options      Per Option            Term          Value
                                                    -----------------      ----------            ----          -----
Options outstanding at December 31, 2005                    2,662,581          $36.18

Granted                                                       569,430           51.32
Exercised                                                    (732,811)          34.21
Cancelled                                                    (151,186)          39.72
                                                             --------           -----
Options outstanding at December 31, 2006                    2,348,014         $ 40.24             7.3       $ 44,683
                                                            =========         =======             ===       ========
Options exercisable at December 31, 2006                      912,520         $ 34.56             5.8       $ 22,548
                                                            =========         =======             ===       ========
Options nonvested at December 31, 2006                      1,435,494         $ 43.85             8.2       $ 22,135
                                                            =========         =======             ===       ========

                              HOME PROPERTIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

9    STOCK BENEFIT PLAN (Continued)
-    ------------------------------

The total cash  received  from the exercise of options was  $25,070,  $7,029 and
$16,473 during the years ended December 31, 2006,  2005 and 2004,  respectively.
The  weighted-average  grant-date fair value of options granted during the years
2006,  2005 and  2004 was  $6.69,  $3.52  and  $3.33,  respectively.  The  total
intrinsic value of options  exercised was $14,419,  $2,367and  $6,867 during the
years ended December 31, 2006, 2005 and 2004, respectively.

A summary of  nonvested  stock option  activity for the year ended  December 31,
2006 is as follows:

                                                                                                       Weighted Average
                                                                                                         Exercise Price
                                                                               Number of Options             Per Option
                                                                               -----------------             ----------
Nonvested stock options at December 31, 2005                                           1,488,976                 $38.67

Granted                                                                                  569,430                  51.32
Vested                                                                                  (471,726)                 37.84
Cancelled                                                                               (151,186)                 39.72
                                                                                       ---------                -------
Nonvested stock options at December 31, 2006                                           1,435,494                $ 43.85
                                                                                       =========                =======

As of December 31,  2006,  there was $3,336 of total  unrecognized  compensation
cost related to nonvested  share-based  compensation  arrangements granted under
the  stock  option  plans;  that  cost  is  expected  to be  recognized  over  a
weighted-average  period of 2.22 years.  The total fair value of options  vested
during the years ended  December  31, 2006,  2005 and 2004 was $1,279,  $987 and
$890, respectively.

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes   option-pricing   model  with  the  following   weighted  average
assumptions for the years ended December 31, 2006, 2005 and 2004 as follows:

Assumption                                                         2006        2005        2004
----------                                                         ----        ----        ----
Expected dividend yields                                          5.26%       6.55%       6.74%

Expected volatility                                              18.73%      18.76%      19.79%

Expected lives of the options with a lifetime of ten years    6.5 Years   7.5 Years   7.5 Years

Expected lives of the options with a lifetime of five years         N/A   5.0 Years   5.0 Years

Risk free interest rate                                           5.09%       4.10%       4.04%

                              HOME PROPERTIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

9    STOCK BENEFIT PLAN (Continued)
-    ------------------------------

The  computation  of expected  dividend  yield is computed  using an anticipated
increase of the  dividend by  approximately  2% to 5% a year based on the annual
dividend  exercised each year over the  Black-Scholes  stock value. The expected
volatility is based on the historical volatility of our stock over a time period
from the initial  public  offering and ending on the grant date.  Commencing  in
2006,  the  expected  lives of the  options  with a  lifetime  of ten  years was
determined by applying the  "simplified  method"  approach  (median  between the
average vesting term and the  contractual  term) for plain vanilla option grants
made prior to January 1, 2008 as  prescribed  by Staff  Accounting  Bulletin No.
107,  Share-Based  Payment ("SAB 107").  Prior to 2006, the median point between
the vesting date and expiration date was used. The risk-free  interest rates are
based on the U.S. Treasury yield curve in effect at the time of grant.

In  2006,  2005  and  2004,  the  Company  recognized  $1,793,  $872  and  $948,
respectively,  in stock  compensation  costs  related to its  outstanding  stock
options.

     A summary of restricted stock activity for the year ended December 31, 2006
     is as follows:

                                                                                             Weighted
                                                                             Weighted         Average
                                                                              Average       Remaining      Aggregate
                                                                          Grant Price     Contractual    Outstanding
                                                     Number of Shares       Per Share            Term          Value
                                                     ----------------       ---------            ----          -----
Restricted stock outstanding and nonvested at
     December 31, 2005                                        277,822          $36.74

Granted                                                        62,066           51.00
Vested and issued                                             (65,833)          36.94
Cancelled                                                      (3,650)          38.35
                                                              -------          ------
Restricted stock outstanding and nonvested at
     December 31, 2006                                        270,405          $39.94             1.4        $10,800
                                                              =======          ======             ===        =======

In 2006, 2005 and 2004, the Company granted a total of 62,066, 57,375 and 65,932
shares of restricted  stock to both employees and directors,  respectively.  The
directors'  grants included above for 2006, 2005 and 2004 were 9,000,  7,875 and
3,600 shares,  respectively.  All the  directors'  shares vest 100% on the fifth
anniversary of the date of grant. All of the 53,066, 49,500 and 62,332 shares of
restricted  stock  granted to employees  during 2006,  2005 and 2004 vest 25% on
each anniversary of the date of grant for a period of four years. The restricted
stock  outstanding at December 31, 2006, 2005 and 2004 was 270,405,  277,822 and
267,928 shares, respectively.

Effective  January  1, 2006,  the  Company  began  recognizing  expense  for the
restricted stock grants based on the expected service period of the grantee. For
grant recipients that have met or exceeded the retirement eligible age (59.5 for
employees  and 75 for  directors),  the expense is  recognized  upon grant.  For
recipients  approaching  retirement,  the expense is recognized ratably over the
lesser of the term  between the grant date and the expected  retirement  date or
the vesting  period.  All other  grants are  expensed  ratably  over the vesting
period of 5 and 4 years for director and employee grants, respectively. Prior to
2006,  grants were expensed ratably over the vesting period of 5 and 4 years for
director and employee grants, respectively

The  restricted  shares were granted  during  2006,  2005 and 2004 at a weighted
average price of $51.00,  $41.47 and $40.10 per share,  respectively.  The total
fair value of restricted shares vested during the years ended December 31, 2006,
2005 and 2004 was $3,562, $1,629, and $1,208,  respectively.  Total compensation
cost  recorded  for the years ended  December  31,  2006,  2005 and 2004 for the
restricted share grants was $2,656, $1,557, and $1,171, respectively.

                              HOME PROPERTIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

10   SEGMENT REPORTING
--   -----------------

The Company is engaged in the ownership and  management of market rate apartment
communities.  Each  apartment  community  is  considered  a  separate  operating
segment.  Each segment on a stand alone basis is less than 10% of the  revenues,
profit or loss, and assets of the combined reported operating segments and meets
all of the  aggregation  criteria  under SFAS 131.  The  operating  segments are
aggregated as Core and Non-core properties.

Non-segment  revenue to  reconcile  to total  revenue  consists of interest  and
dividend  income and other  income.  Non-segment  assets to  reconcile  to total
assets include cash and cash equivalents,  cash in escrows, accounts receivable,
prepaid expenses, deferred charges, other assets and other assets held for sale.

Core properties  consist of all apartment  communities owned throughout 2005 and
2006 where  comparable  operating  results are  available.  Therefore,  the Core
Properties  represent   communities  owned  as  of  January  1,  2005.  Non-core
properties consist of apartment  communities acquired during 2005 and 2006, such
that full year comparable operating results are not available.  In addition, the
core properties segment does not include assets held for sale as of December 31,
2006, 2005 and 2004.

The  Company  assesses  and  measures  segment  operating  results  based  on  a
performance measure referred to as net operating income. Net operating income is
defined  as  total  revenues  less  operating  and  maintenance  expenses.   The
accounting  policies of the segments are the same as those  described in Notes 1
and 2.

The revenues and net operating  income for each of the  reportable  segments are
summarized as follows for the years ended December 31, 2006, 2005, and 2004.

                                                                             2006             2005              2004
                                                                             ----             ----              ----
Revenues
Apartments owned
    Core properties                                                      $404,322         $384,911          $363,869
    Non-core properties                                                    44,441           13,010                 -
Reconciling items                                                           5,229            2,604             3,263
                                                                         --------         --------          --------
Total Revenue                                                            $453,992         $400,525          $367,132
                                                                         ========         ========          ========

Net operating income
Apartments owned
    Core properties                                                      $231,930         $217,141          $206,067
    Non-core properties                                                    25,988            5,874                 -
Reconciling items                                                           5,229            2,604             3,263
                                                                         --------         --------          --------
Net operating income                                                      263,147          225,619           209,330

General & administrative expenses                                         (22,626)         (19,652)          (23,978)
Interest expense                                                         (106,773)         (92,178)          (77,145)
Depreciation and amortization                                             (96,142)         (80,944)          (70,710)
Impairment of assets held as general partner                                    -            (400)           (1,116)
Equity in losses of unconsolidated affiliates                                   -                -             (538)
Minority interest in limited partnership                                        -                -               441
Minority interest in operating partnership                                 (9,614)          (8,629)           (9,204)
                                                                         --------         --------          --------
Income from continuing operations                                        $ 27,992         $ 23,816          $ 27,080
                                                                         ========         ========          ========

                              HOME PROPERTIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

10   SEGMENT REPORTING (Continued)
--   -----------------------------

The assets for each of the  reportable  segments are summarized as follows as of
December 31, 2006 and 2005:

Assets                                 2006         2005
------                                 ----         ----
Apartments owned
    Core properties              $2,286,589   $2,193,661
    Held for sale properties              -      223,938
    Non-core properties             715,044      466,952
Reconciling items                   238,785       93,319
                                 ----------   ----------
Total assets                     $3,240,418   $2,977,870
                                 ==========   ==========

11   DERIVATIVE FINANCIAL INSTRUMENTS
--   --------------------------------

The  Company  has  entered  into  interest  rate swaps to  minimize  significant
unplanned  fluctuations in earnings that are caused by interest rate volatility.
The  Company  does not utilize  these  arrangements  for trading or  speculative
purposes.  The principal  risk to the Company  through its interest rate hedging
strategy is the potential inability of the financial institutions from which the
interest rate  protection  was purchased to cover all of their  obligations.  To
mitigate  this  exposure,  the Company  purchases  its interest  rate swaps from
either the institution that holds the debt or from  institutions  with a minimum
A- credit rating.

All derivatives,  which have  historically  been limited to interest rates swaps
designated  as cash flow hedges,  are  recognized  on the balance sheet at their
fair value.  On the date that the Company  enters into an interest rate swap, it
designates the  derivative as a hedge of the  variability of cash flows that are
to be received or paid in connection with a recognized liability.  To the extent
effective,  subsequent changes in the fair value of a derivative designated as a
cash flow hedge are recorded in other comprehensive  income,  until earnings are
affected by the variability of cash flows of the hedged  transaction.  Any hedge
ineffectiveness  will  be  reported  in  interest  expense  in the  consolidated
statement of operations.

The Company formally documents all relationships between hedging instruments and
hedged  items,  as  well  as its  risk-management  objective  and  strategy  for
undertaking various hedge  transactions.  The Company formally assesses (both at
the hedge's  inception and on an ongoing basis) whether the derivatives that are
used in hedging transactions have been highly effective in offsetting changes in
the cash flows of the hedged items and whether those derivatives may be expected
to remain highly  effective in future  periods.  Should it be determined  that a
derivative is not (or has ceased to be) highly effective as a hedge, the Company
will discontinue hedge accounting prospectively.

The Company has four interest rate swaps that effectively  convert variable rate
debt to fixed rate debt. The notional amount  amortizes in conjunction  with the
principal payments of the hedged items. The terms as follows:

    Original
Notional Amount              Fixed Interest Rate        Variable Interest Rate            Maturity Date
---------------              -------------------        ----------------------            -------------
$16,384,396                       5.35%                     LIBOR + 1.50%                 June 25, 2007
 10,000,000                       5.39%                     LIBOR + 1.50%                 June 25, 2007
  3,000,000                       8.22%                     LIBOR + 1.40%                 June 25, 2007
  4,625,000                       8.40%                     LIBOR + 1.40%                 June 25, 2007

On January 1, 2001, the Company adopted SFAS No. 133,  Accounting for Derivative
Instruments  and Hedging  Activities  ("SFAS  133").  At that time,  the Company
designated all of its interest rate swaps as cash flow hedges in accordance with
the requirements of SFAS 133.

                              HOME PROPERTIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

11   DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
--   --------------------------------------------

As of December 31, 2006, the aggregate fair value of the Company's interest rate
swaps was $149 prior to the allocation of minority interest,  and is included in
other assets in the  Consolidated  Balance Sheets.  For the year ending December
31, 2006, as the critical  terms of the interest rate swaps and the hedged items
are the same, no ineffectiveness was recorded in the consolidated  statements of
operations.  All  components  of the  interest  rate swaps were  included in the
assessment  of hedge  effectiveness.  The Company  expects  that within the next
twelve  months it will  reclassify  as a charge to earnings  $149,  prior to the
allocation of minority  interest,  of the amount  recorded in accumulated  other
comprehensive  income.  The fair value of the interest  rate swaps is based upon
the  estimate of amounts  the  Company  would  receive or pay to  terminate  the
contract at the  reporting  date and is  estimated  using  interest  rate market
pricing models.

12   TRANSACTIONS WITH AFFILIATES
--   ----------------------------

The Company and the HPRS  recognized  management  and  development  fee revenue,
interest income and other miscellaneous  income from affiliated entities of $59,
$230  and  $696  for  the  years  ended  December  31,  2006,  2005,  and  2004,
respectively.   The  Company  had  accounts  receivable   outstanding  due  from
affiliated  entities of $157, $157 and $12 at December 31,  2006, 2005 and 2004,
respectively.

On January 1, 2004, the Company sold certain  assets of its commercial  property
management  division to Home Leasing,  LLC, which was owned by Nelson and Norman
Leenhouts  and  is  now  owned  by  Nelson  Leenhouts.   This  division  managed
approximately 2.2 million square feet of gross leasable area, as well as certain
planned  communities.  Subsequently,  some of the assets were sold to Broadstone
Real Estate LLC ("Broadstone"),  which is owned in part by Norman Leenhouts, Amy
L. Tait and Mrs. Tait's spouse. The initial amount received was $82. In addition
to the initial  amount,  the Company was entitled to receive a percentage of the
management  fee received by Broadstone in connection  with the management of one
of the commercial  properties for a period not to exceed 36 months. The expected
monthly fee as outlined in the contract was  approximately  $4.6 or $55 per year
and was  adjusted  to $3.4,  or $40 per year  after the first  year.  Broadstone
continued to manage the property for three years, and  accordingly,  the Company
received a total  additional  deferred  purchase price of $139, of which $44 has
been  received  for the year  ended  December  31,  2006.  The  cumulative  gain
recognized  on the sale of these assets  through  December 31, 2006  amounted to
$108.

On March 2, 2004, the Company  acquired  Wellington Trace Apartments for $27,100
from an entity owned in part by an individual who subsequently became one of the
Company's directors.

The Company  leases its  corporate  office  space from an  affiliate.  The lease
requires an annual base rent of $895 for the years ended 2006 through 2009.  The
lease  also  requires  the  Company  to  pay  a pro  rata  portion  of  property
improvements,  real estate taxes and common area maintenance. Rental expense was
$1,699, $1,693 and $1,694 for the years ended December 31, 2006, 2005, and 2004,
respectively.

During 2004, the loan balances aggregating $315,  outstanding as of December 31,
2003, under the officer and director share purchase program were repaid in full.
On August 5, 2002, the Board of Directors of the Company  prohibited any further
loans to officers and directors in  accordance  with the  Sarbanes-Oxley  Act of
2002.

                             HOME PROPERTIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

13   COMMITMENTS AND CONTINGENCIES
--   -----------------------------

Property Lease
--------------

On  December 1, 2004 the Company  entered in to a lease  agreement  with a third
party  owner to manage the  operations  of one of their  communities  with 1,387
apartment  units.  The lease had a term of five years, but after two years (from
the 24th month to the 36th  month),  the owner could  require the Company to buy
the property.  From the 36th month to the end of the lease term, the Company had
the  right to  require  the  owner  to sell the  property  to the  Company.  The
agreement  required an initial  deposit of $5,000,  a deposit in 2005 of $1,230,
with an additional $2,081 deposit requirement during 2006,  representing capital
improvements  paid by the owner.  The net  operating  income of the property (as
defined  in the lease  agreement)  was  remitted  back to the owner as rent on a
monthly  basis.  In exchange for  services,  the Company was entitled to receive
monthly;  a management  fee equal to 5% of collected  income,  as defined in the
lease,  an  incentive  fee of $25,  and  interest  payments  equal to 3%  annual
interest  on the  outstanding  deposit.  Including  interest,  the total  income
recognized  by the  Company  amounted to $1,451,  $1,278 and $98,  for the years
ended December 31, 2006, 2005 and 2004, respectively.  On December 27, 2006, the
Company closed on the acquisition of the property.  The acquisition price of the
property was $144,768.

Ground Lease
------------

The  Company  had a  non-cancelable  operating  ground  lease  for  one  of  its
properties.  The lease had an expiration  date of May 1,  2020,  with options to
extend the term of the lease for two successive terms of twenty-five years each.
The lease provided for  contingent  rental  payments  based on certain  variable
factors. The lease also required the Company to pay real estate taxes, insurance
and certain other operating expenses  applicable to the leased property.  Ground
lease expense was $194, $210 and $226,  including contingent rents of $130, $140
and $156, for the years ended  December 31,  2006, 2005 and 2004,  respectively.
Effective December 2006, the ground lease was sold to an unrelated party.

401(k) Savings Plan
-------------------

The Company  sponsors a contributory  savings plan.  Under the plan, the Company
will  match  75% of the  first 4% of  participant  contributions.  The  matching
expense under this plan was $832, $802 and $690 for the years ended December 31,
2006, 2005 and 2004, respectively.

Incentive Compensation Plan
---------------------------

The  Incentive  Compensation  Plan  for 2005 and  2006  provided  that  eligible
officers  and key  employees  may earn a cash bonus  based upon two  performance
measures:  the  percentage  of growth in the  Company's  funds  from  operations
("FFO")  on a per  share/unit  diluted  basis  from  the  previous  year and the
percentage of growth in same store net  operating  income from the previous year
as compared to industry peers. In 2004, the performance measure was based on the
percentage  growth in the Company's  FFO per  share/unit on the diluted basis as
compared  against the industry  average  growth.  The bonus  expense  charged to
operations was $4,983, $2,582 and $3,414 for the years ended December 31,  2006,
2005 and 2004, respectively.

                              HOME PROPERTIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

13   COMMITMENTS AND CONTINGENCIES (Continued)
--   -----------------------------------------

Contingencies
-------------

During  April,  2004,  the Company  finalized  negotiations  with New York State
settling a sales and use tax audit  covering the period June 1, 1999 through May
31,  2002.  The total cost to the  Company as a result of the audit  amounted to
$861.  This was included in the first quarter 2004 results and allocated $448 to
expense and $413 capitalized to real estate assets for improvements.

As a result of this  audit,  during the  second  quarter  of 2004,  the  Company
examined  its sales  and use tax  compliance  in the  other  states in which the
Company operates.  Based upon its internal  analysis,  the Company estimated its
liability as of June 30, 2004 in those states where it found  non-compliance  of
$1,712.  This was included in the second  quarter of 2004 results and  allocated
$761 to expense and $951 capitalized to real estate assets for improvements. The
liability recorded relates to the period beginning on the later of: (i) the date
the Company first purchased property in the applicable state; or (ii) January 1,
1997 and  ending on June 30,  2004.  In  addition,  the  Company  increased  the
liability  for  sales  tax  exposure  by $68  for  the  six-month  period  ended
December 31,  2004.  The  Company  had  filed  Voluntary  Disclosure  Agreements
("VDAs")  with the four  states  where it had  significant  financial  exposure.
During the first six months of 2005,  the Company  signed VDAs with these states
limiting  the VDA filing  period  back to January 1, 2001,  and the  Company has
satisfied all financial obligations under the VDAs. For the three- and six-month
periods  ended June 30,  2005,  the  Company  has  recorded  adjustments  to the
liability for both the effects of signing the VDAs as well as for the results of
the  Company's  additional  testing for the first six months.  The net impact of
these adjustments resulted in a decrease in real estate assets of $175, interest
expense of $115 and operating expenses of $108 for a net decrease to the accrued
liability  of $398.  During the third  quarter of 2005,  the  Company  finalized
negotiations  with New York State settling a sales tax audit covering the period
June 1, 2002 through  November  30,  2004.  The  settlement  was not  materially
different from what had been accrued.  The result of the recent  payments on the
VDAs and this New York State audit is that the sales tax accrual  which had been
over $1,712 (as referenced above) has been fully paid as of December 31, 2005.

In  connection  with  various  UPREIT  transactions,  the  Company has agreed to
maintain  certain  levels  of  nonrecourse  debt for a  period  of 5 to 10 years
associated with the contributed properties acquired. In addition, the Company is
restricted  in its ability to sell certain  contributed  properties  (52% of the
owned  portfolio)  for a period of 7 to 15 years  except  through a tax deferred
Internal  Revenue Code Section 1031 like-kind  exchange.  The remaining terms on
the sale restrictions range from 1 to 9 years.

Debt Covenants
--------------

The line of credit  loan  agreement  contains  restrictions  which,  among other
things, require maintenance of certain financial ratios (See Note 6).

In connection with the issuance of the Series F Preferred  Stock, the Company is
required to maintain for each fiscal  quarterly  period a fixed charge  coverage
ratio, as defined in the Series F Cumulative  Redeemable Preferred Stock Article
Supplementary, of 1.75 to 1.0. For the year ended December 31, 2006, the Company
maintained the required fixed charge coverage ratio.

                              HOME PROPERTIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

13   COMMITMENTS AND CONTINGENCIES (Continued)
--   -----------------------------------------

Guarantees
----------

As of December 31, 2006, the Company,  through its general partnership  interest
in an affordable  property  limited  partnership,  has guaranteed the Low Income
Housing Tax Credits to limited partners  totaling  approximately  $3,000.  As of
December 31, 2006,  there were no known conditions that would make such payments
necessary  relating to these  guarantees.  In addition,  the Company,  acting as
general  partner in this  partnership,  is  obligated  to advance  funds to meet
partnership operating deficits.

Executive Retention Plan
------------------------

Effective February 2, 1999, the Executive  Retention Plan provides for severance
benefits and other compensation to be received by certain employees in the event
of a change in control of the  Company  and a  subsequent  termination  of their
employment without cause or voluntarily with good cause.

14   PROPERTY ACQUISITIONS
--   ---------------------

For the years ended December 31, 2006,  2005, and 2004, the Company has acquired
the communities listed below:

                                                                                                              Cost of
                                   Market                    Date          Year    Number       Cost of   Acquisition
Apartment Community                Area                  Acquired   Constructed  of Units   Acquisition      Per Unit
-------------------                ----                  --------   -----------  --------   -----------      --------
Chatham Hill                       New Jersey             1/30/04          1967       308       $48,215          $157
Northwood                          New Jersey             1/30/04          1965       134       $15,186          $113
Fairmount                          New Jersey             1/30/04          1943        54       $ 2,256           $42
Kensington                         New Jersey             1/30/04          1943        38       $ 1,843           $49
Wellington Trace                   Northern VA             3/2/04          2002       240       $27,134          $113
Village at Marshfield              Boston                 3/17/04          1972       276       $31,695          $115
Woodleaf                           Northern VA            3/19/04          1985       228       $20,672           $91
The Hamptons                       Southeast Florida       7/7/04     1986-1987       668       $56,395           $84
Vinings                            Southeast Florida       7/7/04          1989       168       $13,986           $83
Regency Club                       New Jersey             9/24/04          1974       372       $37,610          $101
Ridgeview at Wakefield Valley      Baltimore              1/13/05          1988       204       $19,407           $96
Hackensack Gardens                 New Jersey              3/1/05          1948       198       $13,292           $65
Barrington Gardens                 New Jersey              3/1/05          1973       148       $ 7,444           $50
Sayville Commons                   Long Island            7/15/05     2001-2003       342       $63,384          $186
The Brooke at Peachtree            Philadelphia           8/15/05     1986-1989       146       $16,137          $110
Peppertree Farm                    Northern VA           12/28/05     1972-1978       881       $96,322          $110
Cinnamon Run                       Northern VA           12/28/05     1979-1982       511       $67,377          $133
Highland House                     Boston                 5/31/06     1965-1969       172       $17,889          $104
Liberty Place                      Boston                  6/6/06          1988       107       $14,892          $139
The Heights at Marlborough         Boston                  9/7/06          1973       348       $48,914          $141
The Meadows at Marlborough         Boston                  9/7/06     1969-1972       264       $34,162          $129
Heritage Woods                     Baltimore              10/4/06     1972-1973       164       $14,042           $86
Top Field                          Baltimore              10/4/06          1973       156       $18,391          $118
The Coves at Chesapeake            Baltimore             11/20/06   1976 & 1982       469       $67,043          $143
Mount Vernon Square                Northern VA           12/27/06     1968-1974     1,387      $144,768          $104

During  2006,  the Company  completed  construction  and placed  into  service a
120-unit  apartment  community  located in Portland,  ME (Liberty  Commons) at a
total cost of $14,598.

                              HOME PROPERTIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

15   DISCONTINUED OPERATIONS
--   -----------------------

The Company  reports its property  dispositions  as  discontinued  operations as
prescribed by the  provisions of SFAS No. 144,  Accounting for the Impairment or
Disposal of  Long-Lived  Assets ("SFAS  144").  Pursuant to the  definition of a
component  of  an  entity  in  SFAS  144,  assuming  no  significant  continuing
involvement  by the  former  owner  after  the  sale,  the sale of an  apartment
community  is  considered  a  discontinued  operation.  In  addition,  apartment
communities  classified  as held for sale are  also  considered  a  discontinued
operation.  The Company generally  considers assets to be held for sale when all
significant  contingencies  surrounding  the closing have been  resolved,  which
often  corresponds  with the actual  closing date. As of December 31, 2005,  the
Company classified 21 properties as held for sale. These 21 properties were sold
during  2006  and are  included  in  discontinued  operations  for  all  periods
presented and classified as held for sale as of December 31, 2005.

Included in discontinued  operations for the three years ended December 31, 2006
are the operating results,  net of minority interest,  of 48 apartment community
dispositions  (39 sold in 2006, 4 sold in 2005 and 5 sold in 2004). In addition,
discontinued  operations for the years ended December 31, 2005 and 2004 includes
the  operating  results  of four VIEs sold  during  2005.  For  purposes  of the
discontinued operations presentation, the Company only includes interest expense
associated  with  specific  mortgage  indebtedness  of the  properties  that are
considered discontinued operations.

A summary of community dispositions is as follows:

                         Number of                        Number of
                          Disposed        Number of         Related      Total Sales      Sales Price  Total Gain On
Year                   Communities   Disposed Units    Transactions            Price         Per Unit            Sale
----                   -----------   --------------    ------------            -----         --------            ----
2006                            39            9,705               3         $495,300              $51        $110,500
2005                             4              816               3         $142,600             $175         $73,200
2004                             5            1,646               4          $92,500              $56         $26,600

The operating  results of discontinued  operations are summarized as follows for
the years ended December 31, 2006, 2005, and 2004:

                                                                                    2006           2005          2004
                                                                                    ----           ----          ----
Revenues:
   Rental income                                                                $ 56,142     $   91,900     $ 114,652
   Property other income                                                           6,498          7,538         7,425
                                                                                --------      ---------     ---------
Total revenues                                                                    62,640         99,438       122,077
                                                                                --------      ---------     ---------

   Operating and maintenance                                                      34,317         54,155        64,573
   Interest expense                                                               17,078         13,215        19,451
   Depreciation and amortization                                                   5,553         19,171        24,519
   Impairment of real property                                                         -          7,325         1,100
                                                                                --------      ---------     ---------
Total Expenses                                                                    56,948         93,866       109,643
                                                                                --------      ---------     ---------
Income from discontinued operations before minority interest and gain
   on disposition of property                                                      5,692          5,572        12,434
Minority interest in limited partnership                                               -           (23)           833
Minority interest in operating partnership                                        (1,947)        (1,828)       (4,354)
                                                                                --------      ---------     ---------
Income from discontinued operations                                             $  3,745      $   3,721     $   8,913
                                                                                ========      =========     =========

                              HOME PROPERTIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

15   DISCONTINUED OPERATIONS (Continued)
--   -----------------------------------

The results of  discontinued  operations in the tables below have been presented
for the  years  ended  December  31,  2005 and 2004  only,  as the  discontinued
operations for 2006 solely represents the results from owned communities.

                                                                                         Year ended December 31, 2005
                                                                                         ----------------------------
                                                                                       Owned
                                                                                 Communities         VIEs       Total
                                                                                 -----------         ----       -----
Revenues:
   Rental income                                                                    $ 88,686       $3,214    $ 91,900
   Property other income                                                               7,397          141       7,538
                                                                                    --------      -------     -------
Total revenues                                                                        96,083        3,355      99,438
                                                                                    --------      -------     -------

Expenses:
   Operating and maintenance                                                          51,534        2,621      54,155
   Interest expense                                                                   13,204           11      13,215
   Depreciation and amortization                                                      19,171            -      19,171
   Impairment of real property                                                             -        7,325       7,325
                                                                                    --------      -------     -------
Total expenses                                                                        83,909        9,957      93,866
                                                                                    --------      -------     -------
Income (loss) from discontinued operations before minority interest and
   gain on disposition of property                                                    12,174       (6,602)      5,572
Minority interest in limited partnership                                                   -          (23)        (23)
Minority interest in operating partnership                                            (4,021)       2,193      (1,828)
                                                                                    --------      -------     -------
Income (loss) from discontinued operations                                          $  8,153      $(4,432)    $ 3,721
                                                                                    ========      =======     =======

                                                                                         Year ended December 31, 2004
                                                                                         ----------------------------
                                                                                       Owned
                                                                                 Communities         VIEs       Total
                                                                                 -----------         ----       -----
Revenues:
    Rental income                                                                   $102,259     $ 12,393    $114,652
    Property other income                                                              7,143          282       7,425
                                                                                    --------      -------     -------
Total revenues                                                                       109,402       12,675     122,077
                                                                                    --------      -------     -------
Expenses:
    Operating and maintenance                                                         55,288        9,285      64,573
    Interest expense                                                                  16,370        3,081      19,451
    Depreciation and amortization                                                     21,966        2,553      24,519
    Impairment of real property                                                        1,100            -       1,100
                                                                                    --------      -------     -------
Total expenses                                                                        94,724       14,919     109,643
                                                                                    --------      -------     -------
Income (loss) from discontinued operations before minority interest and
    gain on disposition of property                                                   14,678       (2,244)     12,434
Minority interest in limited partnership                                                   -          833         833
Minority interest in operating partnership                                            (4,751)         397      (4,354)
                                                                                    --------      -------     -------
Income (loss) from discontinued operations                                          $  9,927     $ (1,014)   $  8,913
                                                                                    ========     ========    ========

                              HOME PROPERTIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

15   DISCONTINUED OPERATIONS (Continued)
--   -----------------------------------

The major  classes of assets and  liabilities  held for sale as of  December 31,
2005 were as follows:

                                                                                                                 2005
                                                                                                                 ----
Real estate:
  Land                                                                                                     $   28,372
  Buildings, improvements and equipment                                                                       249,999
                                                                                                             --------
                                                                                                              278,371
  Less:  accumulated depreciation                                                                            (54,433)
                                                                                                             --------
    Real estate held for sale or disposal, net                                                                223,938
                                                                                                             --------
Other assets:
  Cash in escrows                                                                                                 434
  Accounts receivable                                                                                             664
  Prepaid expenses and other assets                                                                             2,951
                                                                                                             --------
    Other assets held for sale                                                                                  4,049
                                                                                                             --------
 Liabilities:
  Mortgage notes payable                                                                                       73,603
  Accrued expenses and other liabilities                                                                          431
  Security deposits                                                                                             1,318
                                                                                                             --------
    Liabilities held for sale                                                                                  75,352
                                                                                                             --------
  Net assets held for sale                                                                                   $152,635
                                                                                                             ========

16   PROFORMA CONDENSED FINANCIAL INFORMATION
--   ----------------------------------------

The Company acquired eight apartment  communities ("2006 Acquired  Communities")
with a combined 3,067 units in six unrelated  transactions during the year ended
December 31, 2006. The total combined  purchase price (including  closing costs)
of  $360,100  equates  to  approximately  $117 per unit.  Consideration  for the
communities  was funded  through  the  assumption  or  placement  of new debt of
$156,900  of debt,  $182,800  from the  Company's  line of credit  and  disposed
property proceeds, and $20,400 of UPREIT Units.

The Company acquired seven apartment  communities ("2005 Acquired  Communities")
with a combined 2,430 units in six unrelated  transactions during the year ended
December 31, 2005. The total combined  purchase price (including  closing costs)
of  $283,400  equates  to  approximately  $117 per unit.  Consideration  for the
communities  was funded  through  the  assumption  or  placement  of new debt of
$184,300  of debt,  $43,500  from the  Company's  line of credit and  $55,600 of
UPREIT Units.

The following  unaudited  proforma  information was prepared as if: (i) the 2006
transactions  related  to the  acquisition  of  the  2006  Acquired  Communities
occurred as of the  beginning  of each  period,  and (ii) the 2005  transactions
related to the  acquisition of the 2005 Acquired  Communities had occurred as of
the beginning of each period. The proforma  financial  information is based upon
the  historical   consolidated  financial  statements  and  is  not  necessarily
indicative of the consolidated results which actually would have occurred if the
transactions  had been  consummated  at  January  1,  2004 or 2005,  nor does it
purport to represent the results of operations for future  periods.  Adjustments
to the proforma  condensed  combined statement of operations for the years ended
December 31, 2006, 2005, and 2004 consist principally of providing net operating
activity and recording  interest,  depreciation and amortization from January 1,
2004 or 2005 to the acquisition date as appropriate.

                              HOME PROPERTIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

16   PROFORMA CONDENSED FINANCIAL INFORMATION (Continued)
--   ----------------------------------------------------


                                                                                                         Proforma (i)
                                                                                                  For the years ended
                                                                                             December 31, (unaudited)
                                                                                             ------------------------
                                                                                                   2006          2005
                                                                                                   ----          ----
Total revenues                                                                                 $481,746      $456,184
Net income available to common shareholders                                                      24,303        19,519
Per common share data:
Net income available to common shareholders:
   Basic                                                                                          $0.74         $0.61
   Diluted                                                                                        $0.73         $0.60
Weighted average numbers of shares outstanding:
  Basic                                                                                      32,697.794    31,962.082
                                                                                             ==========    ==========
  Diluted                                                                                    33,337.557    32,328.105
                                                                                             ==========    ==========





                                                                                                        Proforma (ii)
                                                                                                  For the years ended
                                                                                             December 31, (unaudited)
                                                                                             ------------------------
                                                                                                   2005          2004
                                                                                                   ----          ----
Total revenues                                                                                 $421,869      $405,511
Net income available to common shareholders before cumulative effect of change in
  accounting principle                                                                           17,139        19,990
Net income available to common shareholders                                                      17,139        19,669
Per common share data:
Net income available to common shareholders before cumulative effect of change in
accounting principle
   Basic                                                                                          $0.54         $0.61
   Diluted                                                                                        $0.53         $0.60
Net income available to common shareholders:
   Basic                                                                                          $0.54         $0.60
   Diluted                                                                                        $0.53         $0.59
Weighted average numbers of shares outstanding:
  Basic                                                                                      31,962.082    32,911.945
                                                                                             ==========    ==========
  Diluted                                                                                    32,328.105    33,314.038
                                                                                             ==========    ==========

                              HOME PROPERTIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

17   SUPPLEMENTAL CASH FLOW DISCLOSURES
--   ----------------------------------

Supplemental  cash flow  information  including non cash financing and investing
activities for the years ended December 31, 2006, 2005, and 2004 are as follows:

                                                                                        2006         2005        2004
                                                                                        ----         ----        ----
Cash paid for interest                                                              $120,781     $104,674    $ 92,150
Mortgage loans assumed associated with property acquisitions                         159,782        7,916      90,568
Issuance of UPREIT Units associated with property and other acquisitions              20,397       55,598      12,105
Increase in real estate associated with the purchase of UPREIT Units                 124,631        5,220      12,470
Exchange of UPREIT Units for common shares                                            71,157        4,010      14,106
Fair value of hedge instruments                                                         (35)          845         659
Net real estate assumed in connection with FIN 46R consolidation                           -            -     152,319
Other assets assumed in connection with FIN 46R consolidation                              -            -      11,916
Mortgage debt assumed in connection with FIN 46R consolidation                             -            -     129,149
Other liabilities assumed in connection with FIN 46R consolidation                         -            -       5,363
Net real estate disposed in connection with FIN 46R consolidation                          -     (50,467)    (69,743)
Other assets disposed in connection with FIN 46R consolidation                             -      (6,940)     (3,054)
Mortgage debt disposed in connection with FIN 46R consolidation                            -     (59,339)    (48,611)
Other liabilities disposed in connection with FIN 46R consolidation                        -      (1,187)     (2,759)

18   QUARTERLY FINANCIAL STATEMENT INFORMATION (UNAUDITED)
--   -----------------------------------------------------

Quarterly  financial  information for the years ended December 31, 2006 and 2005
are as follows:

                                                                                          2006
                                                                                          ----
                                                                     First        Second        Third        Fourth
                                                                     -----        ------        -----        ------
Total revenue                                                     $108,789      $111,200     $115,255      $118,748

Net income available to common shareholders                          4,138        11,003       10,361        79,583

Basic earnings per share data:
Net income (loss) available to common shareholders                   $0.13         $0.33        $0.31         $2.39

Diluted earnings per share data:
Net income (loss) available to common shareholders                   $0.13         $0.33        $0.30         $2.33

                                                                                         2005
                                                                                         ----
                                                                     First        Second        Third        Fourth
                                                                     -----        ------        -----        ------
Total revenue                                                    $  95,731     $  98,252     $102,520      $104,022

Net income available to common shareholders                        (1,870)         8,038       15,353        53,712

Basic earnings per share data:
Net income available to common shareholders                        $(0.06)         $0.25        $0.47         $1.70

Diluted earnings per share data:
Net income available to common shareholders                        $(0.06)         $0.25        $0.47         $1.68

Full year per share data does not equal the sum of the quarterly data due to the
impact of the convertible  securities on the quarterly  results and not the year
to date amounts. The quarterly reports for the years ended December 31, 2006 and
2005 have been  reclassified  to reflect  discontinued  operations in accordance
with SFAS 144.

                              HOME PROPERTIES, INC.


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

19   SUBSEQUENT EVENTS
--   -----------------

On February 2, 2007,  the Company  acquired two land  parcels  located in Silver
Spring,  MD and Alexandria,  VA from a single seller for total  consideration of
$46.5 million. The transaction was funded in cash. Both parcels are entitled for
development. The projects are fully designed and have obtained all discretionary
approvals.   While  several   administrative   approvals  are  still  necessary,
construction on both projects should start in 2007, with completion  anticipated
in 2009.

On February  7, 2007,  the Board of  Directors  declared a dividend of $0.65 per
share for the quarter  ended  December 31,  2006.  This is the  equivalent of an
annual  distribution  of $2.60 per share.  The dividend is payable  February 28,
2007 to shareholders of record on February 16, 2007.

On  February  7, 2007,  the Board of  Directors  declared a regular  dividend of
$0.5625 per share on its Series F Cumulative Redeemable Preferred Stock, for the
quarter  ending  February 28,  2007.  The  dividend on the  preferred  shares is
payable on February  28, 2007 to  shareholders  of record on February  16, 2007.
This dividend is equivalent to an annualized rate of $2.25 per share.

On February  15,  2007,  the  Company  acquired  two  communities  in  unrelated
transactions:  The  Townhomes  of Beverly  (204 units) in Beverly,  MA for $36.4
million and Jacob Ford Village (270 units) in Morristown,  NJ for $26.7 million.
Consideration  for Jacob  Ford  Village  included  $22.3  million  of  Operating
Partnership UPREIT Units with the balance paid in cash. The Townhomes of Beverly
were purchased with cash.

                                                                     SCHEDULE II

                              HOME PROPERTIES, INC.

                        VALUATION AND QUALIFYING ACCOUNTS
                        FOR THE YEARS ENDED DECEMBER 31:
                                 (IN THOUSANDS)

                                      Balance at     Charged to     Adjustments/
                                       Beginning      Costs and          Amounts     Balance at
                                         of Year       Expenses      Written Off    End of Year
                                         -------       --------      -----------    -----------
Allowance for Doubtful Receivables
----------------------------------
December 31, 2006:                        $  513         $4,289         ($3,818)         $  984
                                          ------         ------         -------          ------
December 31, 2005:                           567          3,472          (3,526)            513
                                          ------         ------         -------          ------
December 31, 2004:                           241          3,527          (3,201)            567
                                          ------         ------         -------          ------

Deferred Tax Asset Valuation Allowance
--------------------------------------
December 31, 2006:                         8,421              -            1,657         10,078
                                          ------         ------         -------          ------
December 31, 2005:                         8,680              -            (259)          8,421
                                          ------         ------         -------          ------
December 31, 2004:                         8,185            495                -          8,680
                                          ------         ------         -------          ------

                                                                    SCHEDULE III
                              HOME PROPERTIES, INC.
                    REAL ESTATE AND ACCUMULATED DEPRECIATION
                                DECEMBER 31, 2006
                                 (IN THOUSANDS)

                                                                                                                Total
                                            Initial                            Total                             Cost
                                               Cost        Costs                Cost                           Net of
                                         Buildings,  Capitalized          Buildings,               Accumu-    Accumu-
                                           Improve-   Subsequent            Improve-                 lated      lated  Year of
                       Encum-               ments &           to             ments &       Total    Depre-     Depre-   Acqui-
Community             brances      Land   Equipment  Acquisition     Land  Equipment         (a)   ciation    ciation   sition
---------             -------      ----   ---------  -----------     ----  ---------         ---   -------    -------   ------
Barrington Gardens      4,170       914       6,556       2,559       914      9,115      10,029       466      9,563     2005
Bayview & Colonial     11,487     1,652       8,471       4,726     1,652     13,197      14,849     2,416     12,433     2000
Beechwood Gardens           -       591       3,442       3,097       591      6,539       7,130     1,695      5,435     1998
Blackhawk
Apartments             13,267     3,026      14,568       5,892     3,026     20,460      23,486     3,942     19,544     2000
Bonnie Ridge
Apartments             33,996     5,129      42,769      29,919     5,129     72,688      77,817    15,424     62,393     1999
Braddock Lee
Apartments             21,232     3,923       8,842       6,486     3,923     15,328      19,251     4,353     14,898     1998
Brittany Place         17,323     4,929      39,608      14,060     4,929     53,668      58,597     6,624     51,973     2002
Cambridge Village
Associates              3,061     2,502       3,188       2,374     2,502      5,562       8,064       764      7,300     2002
Canterbury
Apartments             29,067     5,117      21,384       9,194     5,117     30,578      35,695     5,830     29,865     1999
Carriage Hill
Apartment               5,688       615       3,827       4,059       615      7,886       8,501     2,497      6,004     1996
Castle Club
Apartments              6,630       990       8,909       3,699       990     12,608      13,598     2,312     11,286     2000
Chatham Hill
Apartments             45,000     2,067      46,150       7,291     2,067     53,441      55,508     4,013     51,495     2004
Chesterfield
Apartments              9,735     1,547       8,206       5,700     1,547     13,906      15,453     3,841     11,612     1997
Cider Mill             61,199    15,920      65,938      10,758    15,920     76,696      92,616     8,701     83,915     2002
Cinnamon Run
Apartments             52,300     7,923      59,646       2,605     7,923     62,251      70,174     1,738     68,436     2005
Cornwall Park           5,497       469       2,947       4,827       469      7,774       8,243     2,408      5,835     1996
Country Village
Apartments             19,885     2,318      11,149       9,249     2,318     20,398      22,716     4,964     17,752     1998
Courtyards Village      4,711     3,397       9,824       3,358     3,397     13,182      16,579     2,076     14,503     2001
Coventry Village
Apartments                  -       819       2,328       3,242       819      5,570       6,389     1,472      4,917     1998
Curren Terrace         14,537     1,989      10,957       7,333     1,989     18,290      20,279     5,118     15,161     1997
Cypress Place           5,991     2,335       7,861       3,785     2,335     11,646      13,981     2,243     11,738     2000
Devonshire Hills       44,257    15,099      32,934       7,315    15,099     40,249      55,348     5,761     49,587     2001
East Hill Gardens           -       249       1,560       1,283       249      2,843       3,092       716      2,376     1998
East Meadow
Apartments              7,140     2,315      10,803       1,780     2,315     12,583      14,898     2,078     12,820     2000
East Winds
Apartments              6,523       989       5,079       2,919       989      7,998       8,987     1,503      7,484     2000
Elmwood Terrace        21,050     6,161      14,680       7,790     6,161     22,470      28,631     3,995     24,636     2000
Executive House
Apartments              3,903       628       3,420       3,040       628      6,460       7,088     1,845      5,243     1997
Falcon Crest
Townhomes              18,279     2,891      11,116       8,669     2,891     19,785      22,676     4,148     18,528     1999
Falkland Chase
Apartments             38,909     9,251      49,705       5,562     9,251     55,267      64,518     4,635     59,883     2003
Fenland Field          11,874     3,604      11,050       4,976     3,604     16,026      19,630     2,405     17,225     2001
Gardencrest
Apartments                  -    25,071      61,525      18,695    25,071     80,220     105,291    10,006     95,285     2002
Gateway Village
Apartments              6,872     1,373       6,621       2,341     1,373      8,962      10,335     1,752      8,583     1999
Glen Brook
Apartments                  -     1,447       4,816       2,870     1,447      7,686       9,133     1,638      7,495     1999
Glen Manor
Apartments              5,796     1,076       4,564       2,537     1,076      7,101       8,177     1,813      6,364     1997
Golf Club
Apartments             15,363     4,127      21,236      12,426     4,127     33,662      37,789     6,881     30,908     2000
Hackensack Gardens      9,286     2,417      10,916       2,647     2,417     13,563      15,980       678     15,302     2005
Hawthorne Court        37,197     9,147      23,447      16,368     9,147     39,815      48,962     5,520     43,442     2002
Heritage Square         6,285     2,046       4,805       2,321     2,046      7,126       9,172       917      8,255     2002
Heritage Woods
Apartments              5,138     1,640      12,455          32     1,640     12,487      14,127        81     14,046     2006
Highland House          6,543     3,414      14,761          82     3,414     14,843      18,257       257     18,000     2006
Hill Brook Place
Apartments             11,185     2,253       9,118       5,552     2,253     14,670      16,923     2,880     14,043     1999
Holiday Square          3,387     3,635       6,109       1,894     3,635      8,003      11,638       949     10,689     2002
Home Properties
of Bryn Mawr           14,939     3,275      17,907      10,309     3,275     28,216      31,491     5,633     25,858     2000
Home Properties
of Devon               28,892     6,524      35,545      22,682     6,524     58,227      64,751    11,333     53,418     2000
Home Properties
of Newark              16,261     2,694      12,713      13,048     2,694     25,761      28,455     5,858     22,597     1999
Lake Grove
Apartments             37,057     7,555      11,952      14,631     7,555     26,583      34,138     7,854     26,284     1997
Lakeshore Villa
Apartments              4,915       615       3,849       4,886       615      8,735       9,350     2,579      6,771     1996
Lakeview
Apartments              8,639       679       4,552       3,193       679      7,745       8,424     2,011      6,413     1998
Liberty Commons             -     1,344           -      13,394     1,344     13,394      14,738       590     14,148     2005
Liberty Place
Apartments              6,467     2,033      13,125          76     2,033     13,201      15,234       199     15,035     2006
Maple Tree                  -       866       4,445       2,368       866      6,813       7,679     1,260      6,419     2000
Mid-Island
Apartments             19,913     4,256       6,567       5,853     4,256     12,420      16,676     3,702     12,974     1997
Mill Company
Gardens                 2,592       406       1,671       1,306       406      2,977       3,383       785      2,598     1982
Mill Towne Village     24,239     3,958      13,747      10,495     3,958     24,242      28,200     3,948     24,252     2001
Morningside
Heights Apartments     17,019     6,450      28,699      25,518     6,450     54,217      60,667    14,229     46,438     1998
Mount Vernon
Square Apartments      89,724    56,300      86,923          43    56,300     86,966     143,266       207    143,059     2006
New Orleans Park
Apartments             19,169     3,008      13,215       9,574     3,008     22,789      25,797     5,877     19,920     1997
Northwood
Apartments             10,675       858      14,286       1,282       858     15,568      16,426     1,164     15,262     2004
Oak Manor
Apartments              6,932       668       4,111       2,963       668      7,074       7,742     1,868      5,874     1998
Orleans Village        65,993     8,822      58,912      18,625     8,822     77,537      86,359    13,709     72,650     2000
Owings Run
Consolidation          43,081     5,722      32,622       5,483     5,722     38,105      43,827     7,334     36,493     1999
Park Shirlington
Apartments             18,537     4,524      10,180       8,405     4,524     18,585      23,109     5,232     17,877     1998
Patricia
Apartments              5,213       637       4,196       3,055       637      7,251       7,888     1,822      6,066     1998
Peppertree Farm
Apartments             80,500    12,843      83,751       5,150    12,843     88,901     101,744     2,505     99,239     2005
Pleasant View
Gardens                51,824     6,067      47,816      23,321     6,067     71,137      77,204    17,507     59,697     1998
Pleasure Bay
Apartments             15,019     1,711       6,234       7,681     1,711     13,915      15,626     3,115     12,511     1998
Racquet Club East
Apartments             31,690     2,035      23,107       8,101     2,035     31,208      33,243     7,272     25,971     1998
Racquet Club South      2,786       335       3,891       2,172       335      6,063       6,398     1,498      4,900     1999
Redbank Village
Apartments             15,925     2,126      14,030       9,465     2,126     23,495      25,621     5,600     20,021     1998
Regency Club
Apartments             26,126     2,761      34,825       3,581     2,761     38,406      41,167     2,356     38,811     2004
Rider Terrace               -       248       1,270         607       248      1,877       2,125       330      1,795     2000
Ridgeview at
Wakefield Valley            -     2,360      17,107       2,906     2,360     20,013      22,373     1,080     21,293     2005
Ridley Brook
Apartments              9,661     2,006       7,719       3,537     2,006     11,256      13,262     2,446     10,816     1999
Royal Gardens
Apartment              31,774     5,690      14,067      14,952     5,690     29,019      34,709     8,554     26,155     1997
Sayville Commons       42,735     8,163      55,379       1,537     8,163     56,916      65,079     2,158     62,921     2005
Selford Townhomes       3,960     1,266       4,200       2,636     1,266      6,836       8,102     1,465      6,637     1999
Seminary Hill
Apartments              9,900     3,059      10,194       8,979     3,059     19,173      22,232     3,817     18,415     1999
Seminary Towers
Apartments             27,715     5,695      19,348      16,879     5,695     36,227      41,922     7,148     34,774     1999
Shakespeare Park
Apartments              2,275       514       3,433       1,026       514      4,459       4,973       840      4,133     1999
Sherry Lake
Apartments             19,450     2,548      15,618       9,496     2,548     25,114      27,662     5,642     22,020     1998
Sherwood
Consolidation           7,324     3,330      10,735       5,063     3,330     15,798      19,128     1,825     17,303     2002
South Bay Manor         8,000     1,133       1,958       4,567     1,133      6,525       7,658     1,218      6,440     2000
Southern Meadows       18,691     9,317      31,874       8,131     9,317     40,005      49,322     5,796     43,526     2001
Stone Ends
Apartments             22,812     5,729      28,428       2,851     5,729     31,279      37,008     3,163     33,845     2003
Stratford Greens
Associates             33,078    12,764      33,779       7,783    12,764     41,562      54,326     5,133     49,193     2002
Sunset Gardens
Apartments              8,561       753       4,663       4,959       753      9,622      10,375     2,814      7,561     1996
Tamarron
Apartments              5,200     1,387       8,474       2,190     1,387     10,664      12,051     2,054      9,997     1999
Terry Apartments            -       668       3,439       1,142       668      4,581       5,249       774      4,475     2000
The Apts at
Wellington Trace       25,603     3,188      23,904       3,664     3,188     27,568      30,756     1,938     28,818     2004
The Brooke at
Peachtree                   -     1,033      15,145       1,113     1,033     16,258      17,291       602     16,689     2005
The Colony                  -     7,967      34,121      11,851     7,967     45,972      53,939     9,334     44,605     1999
The Coves at
Chesapeake                  -     8,915      57,953          21     8,915     57,974      66,889       248     66,641     2006
The Hamptons           54,201     5,984      50,647       6,997     5,984     57,644      63,628     3,706     59,922     2004
The Heights at
Marlborough            23,523     6,253      44,264          87     6,253     44,351      50,604       380     50,224     2006
The Landings           12,488     2,579      16,753       8,978     2,579     25,731      28,310     7,035     21,275     1996
The Manor
Apartments (MD)        24,448     8,900      27,703       9,656     8,900     37,359      46,259     5,353     40,906     2001
The Manor
Apartments (VA)         5,600     1,450       5,738       4,465     1,450     10,203      11,653     2,582      9,071     1999
The Meadows at
Marlborough            21,553     6,598      28,736         118     6,598     28,854      35,452       250     35,202     2006
The New Colonies       20,353     1,788      21,350      10,934     1,788     32,284      34,072     8,999     25,073     1998
The Sycamores               -     4,729      15,725       2,623     4,729     18,348      23,077     1,995     21,082     2002
The Village at
Marshfield             24,076     3,263      28,351       2,400     3,263     30,751      34,014     2,241     31,773     2004
Timbercroft
Consolidation           5,875     1,774       6,826       4,258     1,774     11,084      12,858     2,130     10,728     1999
Top Field               6,352     1,635      16,684          29     1,635     16,713      18,348       108     18,240     2006
Trexler Park
Apartments             10,140     2,574      13,802       6,286     2,574     20,088      22,662     3,895     18,767     2000
Trexler Park West
Phase                       -     2,669                   9,373     2,669      9,373      12,042       198     11,844     2006
Valley View
Apartments              5,231     1,090       4,960       4,484     1,090      9,444      10,534     2,726      7,808     1997
Village Square          4,651       799      13,306     (6,072)       799      7,234       8,033     2,151      5,882     1997
Village Square
Apartments             20,699     2,732       3,582      17,967     2,732     21,549      24,281     4,038     20,243     1999
Vinings at
Hampton Village             -     1,830      12,214       1,799     1,830     14,013      15,843       924     14,919     2004
Virginia Village        8,771     5,322      21,918       8,618     5,322     30,536      35,858     4,983     30,875     2001
Wayne Village               -     2,057      12,895       7,305     2,057     20,200      22,257     5,085     17,172     1998
West Springfield
Terrace                23,004     2,589      31,758       3,593     2,589     35,351      37,940     3,795     34,145     2002
Westwood Village
Apts                   33,520     7,471      22,757      10,235     7,471     32,992      40,463     4,449     36,014     2002
William Henry
Apartments             22,548     4,804      22,220      10,090     4,804     32,310      37,114     6,071     31,043     2000
Windsor Realty
Company                 4,650       427       3,300       1,993       427      5,293       5,720     1,367      4,353     1998
Woodholme Manor
Apartments              3,697     1,278       4,599       4,386     1,278      8,985      10,263     1,532      8,731     2001
Woodleaf
Apartments                  -     2,955      17,716       2,143     2,955     19,859      22,814     1,466     21,348     2004
Woodmont Village
Apartments                  -     2,930       5,699       2,551     2,930      8,250      11,180     1,083     10,097     2002
Yorkshire Village
Apartments              1,443     1,221       2,016       1,040     1,221      3,056       4,277       405      3,872     2002
Other Assets            6,098       303       5,915      21,977       303     27,892      28,195    12,899     15,296  Various
Limited
Partnerships           16,763     1,203       9,963      18,204     1,203     28,167      29,370     9,502     19,868     1995
                   ----------  --------  ----------    --------  -------- ----------  ----------  -------- ----------
                   $1,924,313  $493,017  $2,174,366    $784,379  $493,017 $2,958,745  $3,451,762  $450,129 $3,001,633
                   ==========  ========  ==========    ========  ======== ==========  ==========  ======== ==========

(a)  The  aggregate  cost for  Federal  Income Tax  purposes  was  approximately
     $2,868,000.

                                                                    SCHEDULE III

                              HOME PROPERTIES, INC.

                    REAL ESTATE AND ACCUMULATED DEPRECIATION
                                DECEMBER 31, 2006
                                 (IN THOUSANDS)


Depreciation  and  amortization  of the Company's  investments  in buildings and
improvements  reflected  in  the  consolidated   statements  of  operations  are
calculated over the estimated useful lives of the assets as follows:

Land improvements                          3-20 years
Buildings and improvements                 3-40 years
Furniture, fixtures and equipment          5-10 years
Computer software                          5 years

The changes in total real estate assets are as follows:

                                                                                   2006        2005(a)           2004
                                                                                   ----        -------           ----

Balance, beginning of year                                                   $3,385,143     $3,123,901     $2,752,992
New property acquisition                                                        368,301        283,363        256,208
Additions                                                                       101,723        100,013        102,700
Increase in real estate associated with the conversion of UPREIT Units          124,292          5,220         11,864
Assets held for sale associated with consolidated affordable limited
    partnerships                                                                      -              -         78,711
Disposals of assets held for sale associated with consolidated
   affordable limited partnerships                                                    -       (50,627)              -
Disposals, retirements and impairments                                        (527,697)       (76,727)       (78,574)
                                                                             ----------     ----------     ----------
Balance, end of year                                                         $3,451,762     $3,385,143     $3,123,901
                                                                             ==========     ==========     ==========
The changes in accumulated depreciation are as follows:

                                                                                   2006        2005(a)           2004

Balance, beginning of year                                                    $ 500,592      $ 405,919      $ 330,062
Properties previously held for sale, changed to held and used                         -          6,999              -
Depreciation for the year                                                        99,694         99,322         90,787
Disposals and retirements                                                     (150,157)       (11,648)       (14,930)
                                                                             ----------     ----------     ----------
Balance, end of year                                                          $ 450,129      $ 500,592      $ 405,919
                                                                             ==========     ==========     ==========

(a)  $54,433 of accumulated depreciation was included in assets held for sale as
     of December 31, 2005.

                              HOME PROPERTIES, INC.
                                    FORM 10-K
                     For Fiscal Year Ended December 31, 2006
                                  Exhibit Index

Exhibit
Number        Exhibit                                                         Location
------        -------                                                         --------

1.0           Underwriting Agreement, dated May 9, 2006, between Home         Incorporated by reference to the Form
              Properties, Inc., UBS Securities LLC and the selling            8-K filed by Home Properties, Inc. on
              shareholders named therein                                      May 10, 2006

2.1           Agreement among Home Properties of New York, Inc. and Philip    Incorporated by reference to the Form
              J. Solondz, Daniel Solondz and Julia Weinstein Relating to      8- K filed by Home Properties of New
              Royal Gardens I, together with Amendment No. 1                  York, Inc. dated 6/6/97 (the "6/6/97
                                                                              8-K")

2.2           Agreement among Home Properties of New York, Inc and Philip     Incorporated by reference to the
              Solondz and Daniel Solondz relating to Royal Gardens II,        6/6/97 8-K
              together with Amendment No. 1

2.24          Contribution Agreement dated March 2, 1998 among Home           Incorporated by reference to the Form
              Properties of New York, L.P., Braddock Lee Limited              8-K filed by Home Properties of New
              Partnership and Tower Construction Group, LLC                   York, Inc., dated 3/24/98 (the
                                                                              "3/24/98 8-K")

2.25          Contribution Agreement dated March 2, 1998 among Home           Incorporated by reference to the
              Properties of New York, L.P., Park Shirlington Limited          3/24/98 8-K
              Partnership and Tower Construction Group, LLC

2.27          Form of Contribution Agreement among Home Properties of New     Incorporated by reference to the Form
              York, L.P. and Strawberry Hill Apartment Company LLLP,          8-K filed by Home Properties of New
              Country Village Limited Partnership, Morningside Six, LLLP,     York, Inc. on 5/22/98 (the "5/22/98
              Morningside North Limited Partnership and Morningside Heights   8-K")
              Apartment Company Limited Partnership with schedule setting
              forth material details in which documents differ from form

2.29          Form of Contribution Agreement dated June 7, 1999, relating     Incorporated by reference to the Form
              to the CRC Portfolio with schedule setting forth material       8-K filed by Home Properties of New
              details in which documents differ from form                     York, Inc. on 7/2/99 (the "7/2/99 8-K")

2.30          Form of Contribution Agreement relating to the Mid-Atlantic     Incorporated by reference to the Form
              Portfolio with schedule setting forth material details in       8-K filed by Home Properties of New
              which documents differ from form                                York, Inc. on 7/30/99

2.31          Contribution Agreement among Home Properties of New York,       Incorporated by reference to the Form
              L.P., Leonard Klorfine, Ridley Brook Associates and the         8-K filed by Home Properties of New
              Greenacres Associates                                           York, Inc. on 10/5/99 (the "10/5/99
                                                                              8-K")

2.33          Contribution Agreement among Home Properties of New York,       Incorporated by reference to the Form
              L.P., Gateside-Bryn Mawr Company, L.P., Willgold Company,       8-K filed by Home Properties of New
              Gateside-Trexler Company, Gateside-Five Points Company,         York, Inc. on 4/5/00
              Stafford Arms, Gateside-Queensgate Company, Gateside Malvern
              Company, King Road Associates and Cottonwood Associates

2.34          Contribution Agreement between Old Friends Limited              Incorporated by reference to the Form
              Partnership and Home Properties of New York, L.P. and Home      8-K/A filed by Home Properties of New
              Properties of New York, Inc., along with Amendments Number 1    York, Inc. on 12/5/00 (the "12/5/00
              and 2 thereto                                                   8-K")

2.35          Contribution Agreement between Deerfield Woods Venture          Incorporated by reference to the
              Limited Partnership and Home Properties of New York, L.P.       12/5/00 8-K/A

2.36          Contribution Agreement between Macomb Apartments Limited        Incorporated by reference to the
              Partnership and Home Properties of New York, L.P.               12/5/00 8-K/A

2.37          Contribution Agreement between Home Properties of New York,     Incorporated by reference to the
              L.P. and Elmwood Venture Limited Partnership                    12/5/00 8-K/A

2.38          Sale Purchase and Escrow Agreement between Bank of America as   Incorporated by reference to the
              Trustee and Home Properties of New York, L.P.                   12/5/00 8-K/A

2.39          Contribution Agreement between Home Properties of New York,     Incorporated by reference to the
              L.P., Home Properties of New York, Inc. and S&S Realty, a New   12/5/00 8-K/A
              York General Partnership (South Bay)

2.40          Contribution Agreement between Hampton Glen Apartments          Incorporated by reference to the
              Limited Partnership and Home Properties of New York, L.P.       12/5/00 8-K/A

2.41          Contribution Agreement between Home Properties of New York,     Incorporated by reference to the
              L.P. and Axtell Road Limited Partnership                        12/5/00 8-K/A

2.42          Contribution Agreement between Elk Grove Terrace II and III,    Incorporated by reference to the Form
              L.P., Elk Grove Terrace, L.P. and Home Properties of New        8-K filed by Home Properties of New
              York, L.P.                                                      York, Inc. on 1/10/01

2.43          Agreement for Purchase and Sale of Interests Southeast          Incorporated by reference to the Form
              Michigan Portfolio, dated April 26, 2006, together with         8-K filed by Home Properties, Inc. on
              Second Amendment thereto (First Amendment superceded)           June 30, 2006

3.1           Articles of Amendment and Restatement of Articles of            Incorporated by reference to Home
              Incorporation of Home Properties of New York, Inc.              Properties of New York, Registration
                                                                              Statement on Form S-11, File No.
                                                                              33-78862 (the "S-11 Registration
                                                                              Statement")

3.2           Articles of Amendment of the Articles of Incorporation of       Incorporated by reference to the Home
              Home Properties of New York, Inc.                               Properties of New York, Inc.
                                                                              Registration Statement on Form S-3
                                                                              File No. 333-52601 filed May 14, 1998
                                                                              (the "5/14/98 S-3")

3.3           Articles of Amendment of the Articles of Incorporation of       Incorporated by reference to 7/2/99 8-K
              Home Properties of New York, Inc.

3.9           Amended and Restated By-Laws of Home Properties of New York,    Incorporated by reference to the Form
              Inc. (Revised 12/30/96)                                         8-K filed by Home Properties of New
                                                                              York, Inc. dated December 23, 1996
                                                                              (the "12/23/96 8- K")

3.10          Series F Cumulative Redeemable Preferred Stock Articles         Incorporated by reference to the Form
              Supplementary to the Amended and Restated Articles of           8-A12B filed by Home Properties of New
              Incorporation of Home  Properties of New York, Inc.             York, Inc. on March 20, 2002

3.11          Articles of Amendment of the Articles of Incorporation of       Incorporated by reference to the Form
              Home Properties of New York, Inc.                               10-Q filed by Home Properties, Inc.
                                                                              for the quarter ended 3/31/04 (the
                                                                              "3/31/04 10-Q")

3.12          Amendment Number One to Home Properties of New York, Inc.       Incorporated by reference to the
              Amended and Restated By-laws                                    3/31/04 10-Q

4.1           Form of certificate representing Shares of Common Stock         Incorporated by reference to the Form
                                                                              10- K filed by Home Properties of New
                                                                              York, Inc. for the period ended
                                                                              12/31/94 (the "12/31/94 10-K")

4.2           Agreement of Home Properties of New York, Inc. to file          Incorporated by reference to the
              instruments defining the rights of holders of long-term debt    12/31/94 10-K
              of it or its subsidiaries with the Commission upon request

4.8           Amended and Restated Stock Benefit Plan of Home Properties of   Incorporated by reference to the
              New York, Inc.                                                  6/6/97 8-K

4.14          Directors' Stock Grant Plan                                     Incorporated by reference to the
                                                                              5/22/98 8-K

4.16          Home Properties of New York, Inc., Home Properties of New       Incorporated by reference to the
              York, L.P. Executive Retention Plan                             7/2/99 8-K

4.17          Home Properties of New York, Inc. Deferred  Bonus Plan          Incorporated by reference to the
                                                                              7/2/99 8-K

4.23          Home Properties of New York, Inc. Amendment Number One to the   Incorporated by reference to the Form
              Amended and Restated Stock Benefit Plan                         10-Q of Home Properties of New York,
                                                                              Inc. for the quarter ended 3/31/00
                                                                              (the "3/31/00 10-Q")

4.26          Home Properties of New York, Inc. Amendment Number Two to the   Incorporated by reference to the Form
              Amended and Restated Stock Benefit Plan                         10-K filed by Home Properties of New
                                                                              York, Inc. for the annual period ended
                                                                              12/31/01 (the "12/31/01 10-K")

4.27          Amendment No. One to Home Properties of New York, Inc.          Incorporated by reference to the
              Deferred Bonus Plan                                             12/31/01 10-K

4.29          Amendment No. Two to Deferred Bonus Plan                        Incorporated by reference to  the
                                                                              12/31/02 10-K

4.31          Amended and Restated 2003 Stock Benefit Plan                    Incorporated by reference to the Form
                                                                              8-K filed by Home Properties, Inc.
                                                                              dated May 6, 2005 (the "5/6/05 8-K")

4.32          Second Amended and Restated Director Deferred Compensation      Incorporated by reference to the
              Plan                                                            5/6/05 8-K

4.33          Seventh Amended and Restated Dividend Reinvestment and Direct   Incorporated by reference to the Form
              Stock Purchase Plan                                             8-K filed by Home Properties, Inc. on
                                                                              September 28, 2006

4.34          Indenture, dated October 24, 2006 between Home Properties,      Incorporated by reference to the Form
              Inc., Home Properties, L.P. and Wells Fargo Bank, N.A., as      8-K filed by Home Properties, Inc. on
              trustee including the form of 4.125% Exchangeable Senior        October 25, 2006 (the "10/25/06 8-K")
              Notes due 2026 of Home Properties, L.P. and the Guarantee of
              Home Properties, Inc. with respect thereto

4.35          Registration Rights Agreement, dated October 24, 2006,          Incorporated by reference to the
              between Home Properties, Inc., Home Properties, L.P. and        10/25/06 8-K
              Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
              Incorporated and Bear Stearns & co., Inc.

10.1          Second Amended and Restated Agreement Limited Partnership of    Incorporated by reference to the Form
              Home Properties of New York, L.P.                               8-K filed by Home Properties of New
                                                                              York, Inc. dated 9/26/97 (the "9/26/97
                                                                              8-K")

10.2          Amendments No. One through Eight to the Second Amended and      Incorporated by reference to Form 10-K
              Restated Agreement of Limited Partnership of Home Properties    of Home Properties of New York, Inc.
              of New York, L.P.                                               for the period ended 12/31/97 (the
                                                                              "12/31/97 10-K")

10.3          Articles of Incorporation of Home Properties Management, Inc.   Incorporated by reference to the S-11
                                                                              Registration Statement

10.4          By-Laws of Home Properties Management, Inc.                     Incorporated by reference to S-11
                                                                              Registration Statement

10.5          Articles of Incorporation of Conifer Realty Corporation         Incorporated by reference to 12/31/95
                                                                              10-K

10.6          Articles of Amendment to the Articles of Incorporation of       Incorporated by reference to the
              Conifer Realty Corporation Changing the name to Home            12/31/00 10-K
              Properties Resident Services, Inc.

10.7          By-Laws of Conifer Realty Corporation (now Home Properties      Incorporated by reference to the
              Resident Services, Inc.)                                        12/31/95 10-K

10.8          Home Properties Trust Declaration of Trust, dated September     Incorporated by reference to the Form
              19, 1997                                                        8-K filed by Home Properties of New
                                                                              York, Inc. dated 9/26/97 (the "9/26/97
                                                                              10-K")

10.13         Indemnification Agreement between Home Properties of New        Incorporated by reference to the Form
              York, Inc. and certain officers and directors                   10-Q filed by Home Properties of New
                                                                              York, Inc. for the quarter ended
                                                                              6/30/94 (the "6/30/94 10-Q")

10.15         Indemnification Agreement between Home Properties of New        Incorporated by reference to the Form
              York, Inc. and Alan L. Gosule                                   10-K filed by Home Properties of New
                                                                              York, Inc. for the annual period ended
                                                                              12/31/96 (the 12/31/96 10-K")

10.26         Amendment No. Nine to the Second Amended and Restated           Incorporated by reference to 5/14/98
              Agreement of Limited Partnership of the Operating Partnership   S-3

10.27         Master Credit Facility Agreement by and among Home Properties   Incorporated by reference to the Home
              of New York, Inc., Home Properties of New York, L.P., Home      Properties of New York, Inc. Form 10-Q
              Properties WMF I LLC and Home Properties of New York, L.P.      for the quarter ended 9/30/98 (the
              and P-K Partnership doing business as Patricia Court and        "9/30/98 10-Q")
              Karen Court and WMF Washington Mortgage Corp., dated as of
              August 28, 1998

10.28         First Amendment to Master Credit Facility Agreement, dated as   Incorporated by reference to the Form
              of December 11, 1998 among Home Properties of New York, Inc.,   10-K filed by Home Properties of New
              Home Properties of New York, L.P., Home Properties WMF I LLC    York, Inc. for the annual period ended
              and Home Properties of New York, L.P. and P-K Partnership       12/31/98 ( the "12/31/98 10-K")
              doing business as Patricia Court and Karen Court and WMF
              Washington Mortgage Corp. and Fannie Mae

10.29         Second Amendment to Master Credit Facility Agreement, dated     Incorporated by reference to the
              as of August 30, 1999 among Home Properties of New York,        12/31/99 10-K
              Inc., Home Properties of New York, L.P., Home Properties WMF
              I LLC and Home Properties of New York, L.P. and P-K
              Partnership doing business as Patricia Court and Karen Court
              and WMF Washington Mortgage Corp. and Fannie Mae

10.30         Amendments Nos. Ten through Seventeen to the Second Amended     Incorporated by reference to the
              and Restated Limited Partnership Agreement                      12/31/98 10-K

10.31         Amendments Nos. Eighteen through Twenty- Five to the Second     Incorporated by reference to the Home
              Amended and Restated Limited Partnership Agreement              Properties of New York, Inc. Form 10-Q
                                                                              for the quarter ended 9/30/99 (the
                                                                              "9/30/99 10-Q")

10.32         Credit Agreement, dated 8/23/99 between Home Properties of      Incorporated by reference to the
              New York, L.P., certain Lenders and Manufacturers and Traders   9/30/99 10-Q
              Trust Company as Administrative Agent

10.33         Amendment No. Twenty-Seven to the Second Amended and Restated   Incorporated by reference to the
              Limited Partnership Agreement                                   12/29/99 S-3

10.34         Amendments Nos. Twenty-Six and Twenty-Eight through Thirty to   Incorporated by reference to the
              the Second Amended and Restated Limited Partnership Agreement   12/31/99 10-K

10.37         2000 Stock Benefit Plan                                         Incorporated by reference to the
                                                                              12/31/99 10-K

10.41         Home Properties of New York, L.P. Amendment Number One to       Incorporated by reference to the
              Executive Retention Plan                                        3/31/00 10-Q

10.42         Amendments No. Thirty-One and Thirty-Two to the Second          Incorporated by reference to the
              Amended and Restated Limited Partnership Agreement              3/31/00 10-Q

10.49         Amendment No. Thirty Three to the Second Amended and Restated   Incorporated by reference to the
              Limited Partnership Agreement                                   12/31/00 10-K

10.50         Amendment No. Thirty Five to the Second Amended and Restated    Incorporated by reference to the
              Limited Partnership Agreement                                   12/31/00 10-K

10.51         Amendment No. Forty Two to the Second Amended and Restated      Incorporated by reference to the
              Limited Partnership Agreement                                   12/31/00 10-K

10.52         Amendments Nos. Thirty Four, Thirty Six through Forty One,      Incorporated by reference to the
              Forty Three and Forty Four to the Second Amended and Restated   12/31/00 10-K
              Limited Partnership Agreement

10.57         Amendment Nos. Forty-Five through Fifty-One to the Second       Incorporated by reference to the
              Amendment and Restated Limited Partnership Agreement            12/31/01 10-K

10.58         Home Properties of New York, Inc. Amendment No. One to 2000     Incorporated by reference to the
              Stock Benefit Plan                                              12/31/01 10-K

10.59         Home Properties of New York, Inc. Amendment No. Two to 2000     Incorporated by reference to the
              Stock Benefit Plan                                              12/31/01 10-K

10.60         Amendment Nos. Fifty-Two to Fifty-Five to the  Second Amended   Incorporated by reference to the Form
              and Restated Limited Partnership  Agreement                     10-Q filed by Home Properties of New
                                                                              York, Inc. for the quarter ended
                                                                              9/30/02 (the "9/30/02 10-Q")

10.61         Amendment Nos. Fifty-Six to Fifty-Eight to the  Second          Incorporated by reference to the Form
              Amended and Restated Limited Partnership  Agreement             10-K filed by Home Properties of New
                                                                              York, Inc. for the annual period ended
                                                                              12/31/02 (the "12/31/02 10-K")

10.62         Amendment No. Two to Credit Agreement                           Incorporated by reference to the
                                                                              9/30/02 10Q

10.63         Purchase and Sale Agreement, dated as of  January 1, 2004       Incorporated by reference to the Form
              among Home Properties of New  York, L.P., Home Properties       10-K filed by Home Properties, Inc.
              Management, Inc.  and Home Leasing, LLC, dated January 1, 2004  for the period ended 12/31/2003 (the
                                                                              "12/31/2003 10-K")

10.64         Amendment Nos. Fifty-Nine through Sixty-Seven  to the Second    Incorporated by reference to
              Amended and Restated Limited  Partnership Agreement             12/31/2003 10-K

10.65         Home Properties of New York, Inc. Amendment  No. Three to       Incorporated by reference to
              2000 Stock Benefit Plan                                         12/31/2003 10-K

10.68         Home Properties of New York, Inc. 2003 Stock  Benefit Plan      Incorporated by reference to  Schedule
                                                                              14A filed by Home  Properties of New
                                                                              York, Inc. on  March 28, 2003

10.69         Amendment Number Two to Home Properties of New  York, Inc.      Incorporated by reference to
              and Home Properties of New York,  L.P. Executive Retention      12/31/2003 10-K
              Plan

10.70         Employment Agreement, dated as of May 17, 2004, between Home    Incorporated by reference to the
              Properties, L.P., Home Properties, Inc. and Edward J.           12/31/05 10-K
              Pettinella

10.71         Amendment Nos. Sixty-Eight through Seventy-Three to the         Incorporated by reference to the
              Second Amended and Restated Limited Partnership Agreement       12/31/05 10-K

10.72         Summary of Non-Employee Director Compensation Effective         Filed herewith
              January 1, 2007


10.73         Summary of Named Executive Compensation for 2007                Filed herewith

10.74         Amendment No. Three to Credit Agreement, dated April 1, 2004,   Incorporated by reference to the
              between Home Properties, L.P., certain Lenders, and             12/31/05 10-K
              Manufacturers and Traders Trust Company as Administrative
              Agent

10.76         LIBOR Grid Note, dated November 23, 2004 from Home              Incorporated by reference to the
              Properties, L.P. to Manufacturers and Traders Trust Company     12/31/05 10-K

10.77         Mutual Release, dated January 24, 2005, given by Home           Incorporated by reference to the Form
              Properties, L.P. and Home Properties, Inc. and Boston Capital   8-K filed by Home Properties , Inc.
              Tax Credit Fund XIV, a Limited Partnership, Boston Capital      dated January 24, 2005
              Tax Credit Fund XV, a Limited Partnership, and BCCC, Inc.
              relating to certain obligations pertaining to Green Meadows
              and related Letter Agreement.

10.78         Amendment No. Four to Credit Agreement, dated September 8,      Incorporated by reference to Form 10-Q
              2005 between Home Properties, L.P., certain Lenders, and        filed by Home Properties, Inc. for the
              Manufacturers and Traders Trust Company, as Administrative      quarter ended 9/30/05 (the "9/30/05
              Agent                                                           10-Q")

10.79         Agreement, dated September 30, 2005, between General Electric   Incorporated by reference to the
              Credit Equities, Inc. and H.P. Knolls I Associates, L.P.        9/30/05 10-Q

10.80         Agreement, dated September 30, 2005, between General Electric   Incorporated by reference to the
              Credit Equities, Inc. and H.P. Knolls II Associates, L.P.       9/30/05 10-Q

10.81         Amendments Nos. Seventy-Four to through Seventy-Nine to the     Incorporated by reference to the
              Second Amended and Restated Limited Partnership                 12/31/05 10-K

10.82         Amendment No. Eighty to the Second Amended and Restated         Incorporated by reference to the Form
              Limited Partnership Agreement                                   10-Q filed by Home Properties, Inc.
                                                                              for the quarter ended 3/31/06

10.83         Amendment Nos. Eighty-One and Eighty-Two to the Second          Incorporated by reference to the Form
              Amended and Restated Limited Partnership Agreement              10-Q filed by Home Properties, Inc.
                                                                              for the quarter ended 6/30/06

10.84         Amendment Nos. Eighty-Three and Eighty-Four to the Second       Incorporated by reference to the Form
              Amended and Restated Limited Partnership Agreement              10-Q filed by Home Properties, Inc.
                                                                              for the quarter ended 9/30/06

10.85         Amendment Nos. Eighty-Five through Eighty-Seven to the Second   Filed herewith
              Amended and Restated Limited Partnership Agreement

10.86         Development Agreement, dated March 27, 2006 between Nelson B.   Incorporated by reference to the Form
              Leenhouts and Home Properties, Inc.                             8-K filed by Home Properties, Inc. on
                                                                              March 27, 2006

10.87         Amended and Restated Employment Agreement, dated November 20,   Incorporated by reference to the Form
              2006 between Edward J. Pettinella and Home Properties, Inc.     8-K filed by Home Properties, Inc. on
                                                                              November 21, 2006

10.88         Employment Agreement between Nelson B. Leenhouts and Home       Incorporated by reference to the Form
              Properties, Inc.                                                8-K filed by Home Properties, Inc. on
                                                                              February 16, 2007 (the "2/16/07 8-K")

10.89         Second Amended and Restated Incentive Compensation Plan         Incorporated by reference to the
                                                                              2/16/07 8-K

10.90         Articles of Merger of Home Properties Management, Inc. into     Filed herewith
              Home Properties Resident Services, Inc.

10.91         Purchase Agreement, dated October 18, 2006 between Home         Incorporated by reference to the Form
              Properties, Inc., Home Properties, L.P. and Merrill Lynch &     8-K filed by Home Properties, Inc. on
              Co., Merrill Lynch, Pierce Fenner & Smith and Bear Stearns &    October 19, 2006
              Co., Inc.

11            Computation of Per Share Earnings Schedule                      Filed herewith

21            List of Subsidiaries of Home Properties, Inc.                   Filed herewith

23            Consent of PricewaterhouseCoopers LLP                           Filed herewith

31.1          Section 302 Certification of Chief Executive Officer            Furnished herewith

31.2          Section 302 Certification of Chief Financial Officer            Furnished herewith

32.1          Section 906 Certification of Chief Executive Officer            Furnished herewith

32.2          Section 906 Certification of Chief Financial Officer            Furnished herewith

99            Additional Exhibits - Debt Summary Schedule                     Filed herewith
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