UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





(Mark
One)


x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF


THE
SECURITIES EXCHANGE ACT OF 1934





For the
quarterly period ended September 30, 2010


OR


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


THE
SECURITIES EXCHANGE ACT OF 1934





COMMISSION
FILE NUMBER 001-16785





American
Spectrum Realty, Inc.


(Exact
name of Registrant as specified in its charter)





State of Maryland
              
              52-2258674(State
      or other jurisdiction of
                incorporation
      or organization)
              
              (I.R.S.
      Employer
                Identification
      No.)2401
      Fountain View, Suite 510Houston, Texas 77057
              
              77057(Address
      of principal executive offices)
              
              (Zip
      Code)





(713) 706-6200(Registrant’s
      telephone number, including area
code)


(Former
      name, former address and former fiscal year, if changed since last
      report





Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No  ̈





Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 Regulation 405 of Regulation S-T
(232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the Registrant was required to submit and post such
files.  Yes x No  ̈





Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definition of “accelerated filer”, “large accelerated
filer” and “small reporting company” in Rule 12b-2 of the Exchange
Act.  (Check one):





Large
accelerated filer  ̈  Accelerated
filer  ̈   Non-accelerated
filer  ̈   Smaller
reporting company x





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


 ̈
Yes   x No





As of
November 2, 2010, 2,934,294 shares of Common Stock ($.01 par value) were
outstanding.





TABLE
OF CONTENTS





Page
      No.PART
      I
                FINANCIAL
      INFORMATIONItem
      1
                Financial
      Statements
                3Consolidated
      Condensed Balance Sheets at September 30, 2010 (unaudited) and December
      31, 2009
                3Consolidated
      Condensed Statements of Operations for the three and nine months ended
      September 30, 2010 and 2009 (unaudited)
                4Consolidated
      Statement of Equity (Deficit) for the nine months ended September 30, 2010
      (unaudited)
                5Consolidated
      Condensed Statements of Cash Flows for the nine months ended September 30,
      2010 and 2009 (unaudited)
                6Notes
      to Consolidated Condensed Financial Statements
                7Item
      2
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                20Item
      4T
                Controls
      and Procedures
                27PART
      II
                OTHER
      INFORMATIONItem
      1
                Legal
      Proceedings
                28Item
      5
                Exhibits
                28


2


PART
I.  FINANCIAL INFORMATION





ITEM
1.  FINANCIAL STATEMENTS




AMERICAN
SPECTRUM REALTY, INC.


CONSOLIDATED
CONDENSED BALANCE SHEETS


(Dollars
in thousands, except share amounts)





September 30, 2010
                
                
                December 31, 2009(Unaudited)
                
                
                (Audited)ASSETSReal
      estate held for investment
                
                $
                280,033
                
                
                $
                251,336Accumulated
      depreciation
                
                
                (82,344
                )
                
                
                (72,404
                )Real
      estate held for investment, net
                
                
                197,689
                
                
                
                178,932Real
      estate held for sale
                
                
                -
                
                
                
                6,364Cash
      and cash equivalents
                
                
                1,013
                
                
                
                462Restricted
      cash
                
                
                992
                
                
                
                992Tenant
      and other receivables, net of allowance for doubtful accounts of $881 and
      $701, respectively
                
                
                1,223
                
                
                
                891Deferred
      rents receivable
                
                
                2,138
                
                
                
                1,883Deferred
      tax asset
                
                
                11,883
                
                
                
                8,813Purchased
      intangibles
                
                
                18,000
                
                
                
                -Investment
      in management company
                
                
                4,000
                
                
                
                4,000Investments
      in unconsolidated real estate assets from related parties
                
                
                142
                
                
                
                -Notes
      receivable from related parties
                
                
                2,400
                
                
                
                -Interest
      receivable from related parties
                
                
                267
                
                
                
                -Accounts
      receivable from related parties
                
                
                754
                
                
                
                -Account
      receivable from Evergreen
                
                
                414
                
                
                
                -Prepaid
      and other assets, net
                
                
                12,821
                
                
                
                12,749Total
      Assets
                
                $
                253,736
                
                
                $
                215,086LIABILITIESLiabilities:Notes
      payable
                
                $
                221,187
                
                
                $
                193,920Liabilities
      related to real estate held for sale
                
                
                -
                
                
                
                6,091Accounts
      payable
                
                
                8,408
                
                
                
                5,070Accounts
      payable to related parties
                
                
                372
                
                
                
                -Liabilities
      related to insurance claims
                
                
                1,323
                
                
                
                1,474Accrued
      and other liabilities
                
                
                11,008
                
                
                
                9,520Total
      Liabilities
                
                
                242,298
                
                
                
                216,075Commitments
      and Contingencies (Notes 12 and 13):Non-controlling
      interest classified as temporary equity
                
                
                -
                
                
                
                3,962Equity
      (Deficit):American
      Spectrum Realty, Inc. stockholders’ (deficit) equity:Preferred
      stock, $.01 par value; authorized, 25,000,000 shares; issued and
      outstanding, 55,172 and 55,172 shares, respectively
                
                
                1
                
                
                
                1Common
      stock, $.01 par value; authorized, 100,000,000 shares; issued, 3,405,706
      and 3,291,310 shares, respectively; outstanding, 2,934,294 and 2,819,898
      shares, respectively
                
                
                34
                
                
                
                33Additional
      paid-in capital
                
                
                49,028
                
                
                
                48,546Accumulated
      deficit
                
                
                (56,171
                )
                
                
                (52,472
                )Treasury
      stock, at cost, 471,412 shares, respectively
                
                
                (3,095
                )
                
                
                (3,095
                )Total
      American Spectrum Realty, Inc. stockholders’ (deficit)
    equity
                
                
                (10,203
                )
                
                
                (6,987
                )Non-controlling
      interests
                
                
                21,641
                
                
                
                2,036Total
      Equity (Deficit)
                
                
                11,438
                
                
                
                (4,951
                )Total
      Liabilities and Equity (Deficit)
                
                $
                253,736
                
                
                $
                215,086





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


3


AMERICAN
SPECTRUM REALTY, INC.


CONSOLIDATED
CONDENSED STATEMENTS OF OPERATIONS


(Dollars
in thousands, except for share and per share amounts)


(Unaudited)





Three Months Ended
                      September 30,
                    
                    
                    Nine Months Ended
                      September 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009REVENUES:Rental
      revenue
                    
                    $
                    8,307
                    
                    
                    $
                    8,016
                    
                    
                    $
                    24,093
                    
                    
                    $
                    24,451Third
      party management and leasing revenue
                    
                    
                    973
                    
                    
                    
                    71
                    
                    
                    
                    3,208
                    
                    
                    
                    112Interest
      and other income
                    
                    
                    140
                    
                    
                    
                    10
                    
                    
                    
                    167
                    
                    
                    
                    37Total
      revenues
                    
                    
                    9,420
                    
                    
                    
                    8,097
                    
                    
                    
                    27,468
                    
                    
                    
                    24,600EXPENSES:Property
      operating expense
                    
                    
                    4,703
                    
                    
                    
                    4,158
                    
                    
                    
                    12,241
                    
                    
                    
                    12,030Corporate
      general and administrative
                    
                    
                    2,557
                    
                    
                    
                    1,002
                    
                    
                    
                    6,695
                    
                    
                    
                    2,896Depreciation
      and amortization
                    
                    
                    3,608
                    
                    
                    
                    3,656
                    
                    
                    
                    10,757
                    
                    
                    
                    10,951Interest
      expense
                    
                    
                    3,494
                    
                    
                    
                    3,393
                    
                    
                    
                    10,418
                    
                    
                    
                    10,000Total
      expenses
                    
                    
                    14,362
                    
                    
                    
                    12,209
                    
                    
                    
                    40,111
                    
                    
                    
                    35,877Loss
      from continuing operations before deferred income tax
    benefit
                    
                    
                    (4,942
                    )
                    
                    
                    (4,112
                    )
                    
                    
                    (12,643
                    )
                    
                    
                    (11,277
                    )Deferred
      income tax benefit
                    
                    
                    1,697
                    
                    
                    
                    1,458
                    
                    
                    
                    4,593
                    
                    
                    
                    3,996Loss
      from continuing operations
                    
                    
                    (3,245
                    )
                    
                    
                    (2,654
                    )
                    
                    
                    (8,050
                    )
                    
                    
                    (7,281
                    )Discontinued
      operations:Income
      from operations
                    
                    
                    -
                    
                    
                    
                    29
                    
                    
                    
                    173
                    
                    
                    
                    172Gain
      on sale of discontinued operations
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,315
                    
                    
                    
                    -Income
      tax expense
                    
                    
                    -
                    
                    
                    
                    (11
                    )
                    
                    
                    (1,641
                    )
                    
                    
                    (63
                    )Income
      from discontinued operations
                    
                    
                    -
                    
                    
                    
                    18
                    
                    
                    
                    2,847
                    
                    
                    
                    109Net
      loss, including noncontrolling interests
                    
                    $
                    (3,245
                    )
                    
                    $
                    (2,636
                    )
                    
                    $
                    (5,203
                    )
                    
                    $
                    (7,172
                    )Plus:
      Net loss attributable to noncontrolling interests
                    
                    
                    1,092
                    
                    
                    
                    314
                    
                    
                    
                    1,504
                    
                    
                    
                    856Net
      loss attributable to American Spectrum Realty, Inc.
                    
                    
                    (2,153
                    )
                    
                    
                    (2,322
                    )
                    
                    
                    (3,699
                    )
                    
                    
                    (6,316
                    )Preferred
      stock dividends
                    
                    
                    (60
                    )
                    
                    
                    (60
                    )
                    
                    
                    (180
                    )
                    
                    
                    (180
                    )Net
      loss attributable to American Spectrum Realty, Inc. common
      stockholders
                    
                    $
                    (2,213
                    )
                    
                    $
                    (2,382
                    )
                    
                    $
                    (3,879
                    )
                    
                    $
                    (6,496
                    )Basic
      and diluted per share data:Loss
      from continuing operations attributable to American Spectrum Realty, Inc.
      common stockholders
                    
                    $
                    (0.73
                    )
                    
                    $
                    (0.83
                    )
                    
                    $
                    (1.96
                    )
                    
                    $
                    (2.28
                    )Income
      from discontinued operations attributable to American Spectrum Realty,
      Inc. common stockholders
                    
                    
                    -
                    
                    
                    
                    0.01
                    
                    
                    
                    0.69
                    
                    
                    
                    0.03Net
      loss attributable to American Spectrum Realty, Inc. common
      stockholders
                    
                    $
                    (0.73
                    )
                    
                    $
                    (0.82
                    )
                    
                    $
                    (1.27
                    )
                    
                    $
                    (2.25
                    )Basic
      and diluted weighted average shares used
                    
                    
                    2,934,294
                    
                    
                    
                    2,818,898
                    
                    
                    
                    2,906,317
                    
                    
                    
                    2,812,048Amounts
      attributable to American Spectrum Realty, Inc. common
      stockholders:Loss
      from continuing operations
                    
                    $
                    (2,153
                    )
                    
                    $
                    (2,338
                    )
                    
                    $
                    (5,710
                    )
                    
                    $
                    (6,413
                    )Income
      from discontinuing operations
                    
                    $
                    -
                    
                    
                    $
                    55
                    
                    
                    $
                    2,011
                    
                    
                    $
                    97Net
      loss
                    
                    $
                    (2,213
                    )
                    
                    $
                    (2,382
                    )
                    
                    $
                    (3,879
                    )
                    
                    $
                    (6,496
                    )





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


4


AMERICAN
SPECTRUM REALTY INC.


CONSOLIDATED
STATEMENT OF EQUITY (DEFICIT)


(In
thousands, except share amounts)





Preferred
                                        Shares
                                      
                                      Common
                                        Shares
                                      
                                      Non-
                                        controlling
                                        Interests
                                      
                                      Pre-
                                        ferred
                                        Stock
                                      
                                      Common
                                        Stock
                                      
                                      Additional
                                        Paid-In
                                        Capital
                                      
                                      Accum-
                                        ulated
                                        Deficit
                                      
                                      Treasury
                                        Stock
                                      
                                      Total
                                        Equity
                                        (Deficit)Balance,
      December 31, 2009 (audited)
                                      
                                      
                                      55,172
                                      
                                      
                                      1,645,655
                                      
                                      $
                                      2,036
                                      
                                      $
                                      1
                                      
                                      $
                                      16
                                      
                                      $
                                      48,563
                                      
                                      $
                                      (52,472
                                      )
                                      $
                                      (3,095
                                      )
                                      $
                                      (4,951
                                      )Issuance
      of one-for-one stock dividend
                                      
                                      
                                      
                                      
                                      
                                      1,645,655
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      18
                                      
                                      
                                      (18
                                      )
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -Issuance
      of common stock
                                      
                                      
                                      
                                      
                                      
                                      11,500
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -Conversion
      of operating partnership units to common stock
                                      
                                      
                                      
                                      
                                      
                                      102,896
                                      
                                      
                                      (211
                                      )
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      211
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -Issuance
      of operating partnership units
                                      
                                      
                                      
                                      
                                      
                                      -
                                      
                                      
                                      13,645
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      13,645Non-controlling
      interests in acquired properties
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      6,232
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      6,232Acquisition
      of non-controlling interest in the operating partnership
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (20
                                      )
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      (20
                                      )Reclassification
      of non-controlling interest from temporary equity
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      3,962
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      3,962Reclassification
      of non-controlling interest to additional paid-in capital
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (370
                                      )
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      370
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -Repurchase
      of non-controlling interest in consolidated partnership
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (1,785
                                      )
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      (1,785
                                      )Distributions
      to non-controlling interests
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (344
                                      )
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      (344
                                      )Non-controlling
      interests share of loss
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      (1,504
                                      )
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      (1,504
                                      )Preferred
      stock dividends
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      (180
                                      )
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      (180
                                      )Stock-based
      compensation
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      82
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      82Net
      loss
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      -
                                      
                                      
                                      (3,699
                                      )
                                      
                                      -
                                      
                                      
                                      (3,699
                                      )Balance,
      September 30, 2010 (unaudited)
                                      
                                      
                                      55,172
                                      
                                      
                                      3,405,706
                                      
                                      $
                                      21,641
                                      
                                      $
                                      1
                                      
                                      $
                                      34
                                      
                                      $
                                      49,028
                                      
                                      $
                                      (56,171
                                      )
                                      $
                                      (3,095
                                      )
                                      $
                                      11,438





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


5


AMERICAN
SPECTRUM REALTY, INC


CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS


(Dollars
in thousands)


(Unaudited)





Nine Months Ended September 30,2010
                    
                    
                    2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                    
                    $
                    (5,203
                    )
                    
                    $
                    (7,172
                    )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                    
                    
                    10,757
                    
                    
                    
                    11,292Gain
      on sale of real estate asset
                    
                    
                    (4,315
                    )
                    
                    
                    -Income
      tax benefit
                    
                    
                    (2,952
                    )
                    
                    
                    (3,933
                    )Deferred
      rental income
                    
                    
                    (253
                    )
                    
                    
                    (330
                    )Stock-based
      compensation expense
                    
                    
                    82
                    
                    
                    
                    69Amortization
      of note payable premium, included in interest expense
                    
                    
                    -
                    
                    
                    
                    (19
                    )Changes
      in operating assets and liabilities:Increase
      in tenant and other receivables
                    
                    
                    (95
                    )
                    
                    
                    (132
                    )Increase
      in related party receivables
                    
                    
                    (556
                    )
                    
                    
                    -Increase
      in accounts payable
                    
                    
                    3,290
                    
                    
                    
                    1,611Increase
      in accounts payable to related parties
                    
                    
                    372
                    
                    
                    
                    -Decrease
      in prepaid and other assets
                    
                    
                    (82
                    )
                    
                    
                    (516
                    )Increase
      (decrease) in accrued and other liabilities
                    
                    
                    44
                    
                    
                    
                    (1,448
                    )Net
      cash provided by (used in) operating activities:
                    
                    
                    1,089
                    
                    
                    
                    (578
                    )CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      received from sale of real estate asset
                    
                    
                    10,166
                    
                    
                    
                    -Capital
      improvements to real estate assets
                    
                    
                    (3,281
                    )
                    
                    
                    (1,785
                    )Real
      estate acquisitions
                    
                    
                    (317
                    )
                    
                    
                    -Investments
      in unconsolidated real estate assets
                    
                    
                    (82
                    )
                    
                    
                    -Proceeds
      received related to insurance claims
                    
                    
                    -
                    
                    
                    
                    2,700Payments
      for damages related to insurance claims
                    
                    
                    (151
                    )
                    
                    
                    (1,741
                    )Net
      cash provided by (used in) investing activities:
                    
                    
                    6,335
                    
                    
                    
                    (826
                    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      proceeds from borrowings
                    
                    
                    5,180
                    
                    
                    
                    3,105Repayment
      of borrowings – property sales
                    
                    
                    (5,067
                    )
                    
                    
                    -Repayment
      of borrowings – refinances
                    
                    
                    -
                    
                    
                    
                    (1,474
                    )Repayment
      of borrowings – other
                    
                    
                    (1,260
                    )
                    
                    
                    (2,050
                    )Repayment
      of borrowings – scheduled payments
                    
                    
                    (3,361
                    )
                    
                    
                    (2,215
                    )Repurchase
      of preferred partnership interest
                    
                    
                    (1,785
                    )
                    
                    
                    -Proceeds
      from partial sale of consolidated partnership interests
                    
                    
                    -
                    
                    
                    
                    4,000Acquisition
      of non-controlling interests in the operating partnership
                    
                    
                    (20
                    )
                    
                    
                    -Dividend
      payments to preferred stockholders
                    
                    
                    (225
                    )
                    
                    
                    (80
                    )Distributions
      to non-controlling interests
                    
                    
                    (335
                    )
                    
                    
                    -Net
      cash (used in) provided by financing activities:
                    
                    
                    (6,873
                    )
                    
                    
                    1,286Increase
      (decrease) in cash and cash equivalents
                    
                    
                    551
                    
                    
                    
                    (118
                    )Cash
      and cash equivalents, beginning of period
                    
                    
                    462
                    
                    
                    
                    2,092Cash
      and cash equivalents, end of period
                    
                    $
                    1,013
                    
                    
                    $
                    1,974SUPPLEMENTAL
      DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:Conversion
      of operating partnership units to common stock
                    
                    $
                    211
                    
                    
                    $
                    314Issuance
      of operating partnership units in connection with Evergreen
      acquisition
                    
                    
                    8,000
                    
                    
                    
                    -Issuance
      of operating partnership units in connection with notes receivable and
      account receivable acquisition
                    
                    
                    3,081
                    
                    
                    
                    -Issuance
      of operating partnership units in connection with real estate
      acquisitions
                    
                    
                    2,586
                    
                    
                    
                    -Issuance
      of operating partnership units in connection with investment in
      unconsolidated real estate asset
                    
                    
                    28
                    
                    
                    
                    -Debt
      assumed in connection with real estate acquisition
                    
                    
                    6,297
                    
                    
                    
                    -Conversion
      of accounts payable to notes payable
                    
                    
                    498
                    
                    
                    
                    -Financing
      in connection with investment in unconsolidated real estate
      asset
                    
                    
                    33
                    
                    
                    
                    -Financing
      in connection with Evergreen acquisition
                    
                    
                    9,500
                    
                    
                    
                    -SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid for interest
                    
                    $
                    9,173
                    
                    
                    $
                    6,797Cash
      paid for income taxes
                    
                    
                    279
                    
                    
                    
                    60





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


6


AMERICAN
SPECTRUM REALTY, INC.


Notes
to Consolidated Condensed Financial Statements





NOTE
1.  DESCRIPTION OF BUSINESS





American
Spectrum Realty, Inc. (“ASR” or, collectively, as a consolidated entity with its
subsidiaries, the “Company”) is a Maryland corporation established on August 8,
2000.  The Company is a full-service real estate corporation, which
owns, manages and operates income-producing properties.  Substantially
all of the Company’s assets are held through an operating partnership (the
“Operating Partnership”) in which the Company, as of September 30, 2010, held an
interest of 65.13% (consisting of the sole general partner interest and a
limited partnership interest).  In January 2010, in connection with
the Evergreen acquisition discussed below, the Operating Partnership issued
1,600,000 operating partnership units, which reduced the Company’s interest in
the Operating Partnership from 88.39% at December 31, 2009 to 70.75% at January
31, 2010.  The number of operating partnership units issued in
connection with the Evergreen acquisition is subject to adjustment as of
December 31, 2010 (Also see Note 4).





In March
2010, the Company sold 5850 San Felipe, a 101,880 square foot office property
located in Houston, Texas.  In June 2010, the Company acquired
2620-2630 Fountain View, a 125,000 square foot office property consisting of two
buildings located in Houston, Texas, and a 55% partnership interest in Sabo
Road, a 57,850 square foot self-storage property located in Houston,
Texas.  The partnership interest acquired in Sabo Road consists of the
sole general partnership interest and a limited partnership
interest.  Also in June 2010, the Company acquired a 38.4% undivided
interest in Loop 1604, a 178,595 square foot self-storage property located in
San Antonio, Texas.  In September 2010, the Company acquired an 11.2%
undivided interest in Campus Court, a 72,480 square foot student housing
facility located in Cedar Falls, Iowa.  The $301,647 purchase price
for the Campus Court acquisition was funded solely by the issuance of 46,612 OP
Units.





As of
September 30, 2010, through its majority-owned subsidiary, the Operating
Partnership, the Company owned 33 properties, which consisted of 23 office
buildings, five industrial properties, one retail property, two self-storage
properties, one apartment complex and a parcel of land.  The 33
properties are located in six states. American Spectrum Management Group, Inc.,
(“ASMG”) a wholly-owned subsidiary of the Operating Partnership, provides
management and leasing services on the Company’s properties.





American
Spectrum Realty Management, LLC, (“ASRM”) a wholly-owned subsidiary of the
Operating Partnership, manages and leases 22 properties in Texas for third
parties representing 921,518 square feet of office, retail and industrial
space.   In addition, ASRM acquired the property management and
asset management contracts held by Evergreen Realty Group, LLC and its
affiliates in January 2010, which represent 80 separate assets.  The
former Evergreen-managed properties, which consist of 5,051,240 square feet of
office and industrial properties, 2,934 multi-family units, 12,098 self storage
units consisting of 1,793,881 square feet, 3,206 student housing units
consisting of 9,107 beds and nine assisting living facilities consisting of 776
beds, are all now under the management of ASRM.  This portfolio
comprises properties located in 22 states – Alabama, Arizona, California,
Florida, Georgia, Iowa, Idaho, Indiana, Kansas, Minnesota, Missouri, Nevada, New
Mexico, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee,
Texas, Virginia and Washington.  The acquisition of the management
agreements from Evergreen gives the Company the ability to continue its
expansion of its third-party management and leasing capabilities throughout the
United States.This acquisition has resulted in a significant
change in the Company’s operations, including an increase in employees from 46
at December 31, 2009 to 223 at September 30, 2010.





NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





BASIS
OF PRESENTATION





The
accompanying unaudited condensed financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission.  Certain information and note disclosures normally
included in the annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to those rules and regulations, although the Company believes that the
disclosures made are adequate to make the information not
misleading.  The consolidated condensed financial statements reflect
all adjustments, which are, in the opinion of management, necessary for a fair
presentation of its financial position, results of operations and cash flows for
the interim periods.  Such adjustments are considered to be of a
normal recurring nature unless otherwise identified.  Operating
results for the three and nine months ended September 30, 2010 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2010 or for any future period.


7


The
accompanying consolidated condensed financial statements and notes thereto
should be read in conjunction with the audited consolidated financial statements
and notes thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2009.





The
financial statements include the accounts of the Operating Partnership and all
other subsidiaries of the Company.  All significant intercompany
transactions, receivables and payables have been eliminated in
consolidation.





The
Company accounts for unconsolidated real estate investments using the equity
method of accounting.  Accordingly, the Company’s share of earnings of
these real estate investments is included in the consolidated results of
operations.




Certain
prior year balances have been reclassified to conform with the current year
presentation.   Real estate designated as held for sale is
presented as discontinued operations and the results of operations of these
properties are included in income (loss) from discontinued
operations.





In April
2010, the Company’s Board of Directors declared a stock dividend of one share of
Common Stock for each share currently outstanding to shareholders of record at
the close of business on April 30, 2010.  On May 7, 2010, each
shareholder received one additional share of common stock for every outstanding
share held.  Share and per share data and the operating partnership
unit (“OP Unit”) exchange ratio in the consolidated financial statements and
notes for all periods presented have been adjusted to reflect the stock
dividend.





VARIABLE
INTEREST ENTITIES





When we
obtain an economic interest in an entity, we evaluate the entity to determine if
it is deemed a variable interest entity (“VIE”) and, if so, whether we are
deemed to be the primary beneficiary and are therefore required to consolidate
the entity.  Significant judgment is required to determine whether a
VIE should be consolidated. We review the contractual arrangements provided for
in the partnership agreement or other related contracts to determine whether the
entity is considered a VIE under current authoritative accounting guidance, and
to establish whether we have any variable interests in the VIE.  We
then compare our variable interests, if any, to those of the other venture
partners to identify the party that is exposed to the majority of the VIE’s
expected losses, expected residual returns, or both.  We use this
analysis to determine which VIE companies should be consolidated for financial
accounting purposes.   The comparison uses both qualitative and
quantitative analytical techniques that may involve the use of a number of
assumptions about the amount and timing of future cash flows.





PURCHASED
INTANGIBLES





The
Company has determined that the property management and asset management
contracts acquired from Evergreen are indefinite lived
intangibles.  As such, the contracts are not subject to amortization
but are evaluated for impairment if events or changes in circumstances indicate
that the asset might be impaired.  If the carrying amount of an
intangible asset is determined to exceed its fair value, an impairment loss is
recognized in an amount equal to that excess.  After an impairment
loss is recognized, the adjusted carrying amount of the intangible asset will be
its new accounting basis.  Subsequent reversal of a previously
recognized impairment loss is prohibited.




NOTES
RECEIVABLE





The
Company’s notes receivable are recorded at amortized cost, net of loan loss
reserves (if any), and evaluated for impairment whenever circumstances indicate
that the asset might be impaired.  The amortized cost of a note
receivable is the outstanding unpaid principal balance, net of unamortized
acquisition premiums or discounts and unamortized costs and fees directly
associated with the origination or acquisition of the loan.  As of
September 30, 2010, there was no loan loss reserve and the Company did not
record any impairment losses related to notes receivable during the nine months
ended September 30, 2010.


8


NEW
ACCOUNTING PRONOUNCEMENTS





In June
2009, the FASB issued changes to the accounting for variable interest entities.
These changes require an enterprise to perform an analysis to determine whether
the enterprise’s variable interest or interests give it a controlling financial
interest in a variable interest entity; to require ongoing reassessments of
whether an enterprise is the primary beneficiary of a variable interest entity;
to eliminate the quantitative approach previously required for determining the
primary beneficiary of a variable interest entity; to add an additional
reconsideration event for determining whether an entity is a variable interest
entity when any changes in facts and circumstances occur such that holders of
the equity investment at risk, as a group, lose the power from voting rights or
similar rights of those investments to direct the activities of the entity that
most significantly impact the entity’s economic performance; and to require
enhanced disclosures that will provide users of financial statements with more
transparent information about an enterprise’s involvement in a variable interest
entity.  These changes became effective for the Company on
January 1, 2010.  The Company determined that it owned no
variable interest entities as of the date of the  adoption of these
new guidelines and had no effect on the Company’s consolidated financial
statements.  However, these changes did affect post adoption
transactions.





NOTE
3.  REAL ESTATE





Acquisitions





The
Company acquired controlling interests in four properties in 2010 as mentioned
below.  Pursuant to ASC 810, the entities that own these properties
have been consolidated.





In
September 2010, the Company acquired an 11.2% undivided interest in Campus
Court, a 72,480 square foot student housing facility located in Cedar Falls,
Iowa.   The $301,647 purchase price for this acquisition was
funded solely by the issuance of 46,612 OP Units.





In June
2010, the Company acquired a 55% interest in Sabo Road, a 57,850 square foot
self-storage property located in Houston, Texas.  The partnership
interest acquired in Sabo Road consists of the sole general partnership interest
and a limited partnership interest.  Also in June 2010, the Company
acquired a 38.4% undivided interest in Loop 1604, a 178,595 square foot
self-storage property located in San Antonio, Texas.  The total
purchase price of $1,681,670 for these acquisitions was funded by the issuance
of 300,949 OP Units and cash of $50,000.





In June
2010, the Company created a subsidiary entity to acquire 2620-2630 Fountain
View, a 125,000 square foot office property, consisting of two adjacent
buildings in Houston, Texas.  The acquisition was funded with the
issuance of 102,834 OP Units, an equity contribution to the new entity of
$1,000,000 from a third party investor, the assumption of debt of $5,350,000 and
cash.  The third party investor received a 49% interest in the single
purpose consolidated limited partnership that owns the property in consideration
for the equity contribution.





Dispositions





5850 San
Felipe, a 101,880 square foot office property located in Houston, Texas was sold
in March 2010.  The sale generated proceeds of approximately
$5,200.000.  The proceeds were used to repurchase the preferred
interest in the partnership that owned 5850 San Felipe, to reduce debt and
payables and for other investments.  The transaction generated a gain
on sale before income tax expense of approximately $4,300,000.


9


NOTE
4.  PURCHASED INTANGIBLES





In January 2010, the Company acquired
the property management and asset management contracts held by Evergreen Realty
Group, LLC and affiliates (“Evergreen”) and
Evergreen’s   managing membership interest or the general partner
interest in entities which own tenant in common interests.  Property
management and asset management contracts for a total of 80 separate assets were
acquired in the transaction.  The interests in real estate acquired
represent Evergreen’s non-economic interest in many of the properties associated
with the contracts acquired, held in most cases as the manager or general
partner of entities which own tenant in common interests.





The Company completed the $18,000,000
acquisition by assuming $500,000 of Evergreen payables, issuing 1,600,000 OP
Units and issuing a $9,500,000 10-year non-recourse promissory
note.  The note bears interest at a fixed rate of 5% per
annum.





The
Company has determined that the contracts acquired are indefinite lived
intangibles. The property management agreements which were acquired provide that
they continue indefinitely until the earlier of the following: sale of the
property; termination by manager; or termination by the owner of the
property.  The owner may terminate the agreement for “cause” (as
defined) at any time; otherwise, the owner has the option to terminate the
agreement annually.  The Company has also acquired in some of the
properties that are the subject of the management agreements, either a
tenancy-in-common interest in the property or an interest in an entity that owns
a tenancy-in-common interest in the property.  Therefore, even though
any tenant in common can terminate its own management contract since employment
of a new manager and the creation of a property management agreement typically
requires action by all tenants-in-common, the property management agreement
effectively cannot be replaced without the consent of the Company in those
entities in which the Company has acquired an interest in the property, except
for “cause”, without the consent of the Company.  As such, the
contracts are not subject to amortization but are reviewed each reporting period
for possible impairment. The review includes evaluating triggering events or
changes in business circumstances indicating the Company needs to address
impairment.  If the carrying amount of an intangible asset is
determined to exceed its fair value, an impairment loss is recognized in an
amount equal to that excess.  After an impairment loss is recognized,
the adjusted carrying amount of the intangible asset would be its new accounting
basis.  Subsequent reversal of a previously recognized impairment loss
is prohibited.





The purchase price is subject to
adjustment after December 31, 2010, based on the revenues generated by the
property management and asset management contracts during 2010 and certain costs
incurred.  Evergreen shall have the option to exchange the OP Units into
common stock of the Company 90 days after December 31, 2010, at the rate of one
share of common stock for each two OP Units, or if the Company so elects, to pay
cash in lieu of issuing common stock.   The number of OP Units issued
was based on a common stock price of $10 per share (after effect of the
one-for-one stock dividend), and is subject to adjustment on December 31, 2010,
based on the higher of the then-existing stock price of the Company’s shares or
the Company’s net asset value per share.  The option to exchange the
OP Units for cash or common stock has been accounted for as an embedded
derivative.  However, the exchange option was determined to have no
fair value at either the date of the acquisition of the contacts or as of
September 30, 2010.  Although any purchase price adjustment cannot be
determined at this time, management believes that an adjustment is
likely.





The
former Evergreen-managed properties, which consist of 5,051,240 square feet of
office and industrial properties, 2,934 multi-family units, 12,098 self storage
units consisting of 1,793,881 square feet, 3,206 student housing units
consisting of 9,107 beds and nine assisting living facilities consisting of 776
beds, are all now under the management of ASRM.  This portfolio
comprises properties located in 22 states – Alabama, Arizona, California,
Florida, Georgia, Iowa, Idaho, Indiana, Kansas, Minnesota, Missouri, Nevada, New
Mexico, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee,
Texas, Virginia and Washington.





NOTE
5.  INVESTMENTS IN UNCONSOLIDATED REAL ESTATE ASSETS





During
2010, the Company acquired ownership interests in Evergreen Realty REIT I, Inc
and the shareholders then elected to change the name to American Spectrum REIT
I, Inc. (“ASRI”) for a total purchase price of $77,000.  The Company
also acquired undivided ownership interests in three apartment complexes and one
student housing facility for a total of $65,000.  These acquisitions
were funded by the issuance of OP Units, a note payable and
cash.


10


NOTE
6.  ACQUISITION OF NOTES RECEIVABLE AND ACCOUNT
RECEIVABLE





In
September 2010, the Company acquired two notes receivable, each with a face
amount of $500,000 from ASRI.  The acquisition was funded by the
issuance of 154,524 OP Units.





The two
$500,000 notes bear interest at a rate of 12% per annum and are payable on
demand from Evergreen.   The Company anticipates the notes
receivable will be offset against either its note payable to Evergreen or
through a reduction in OP Units currently held by Evergreen in the first quarter
of 2011.





In June
2010, the Company acquired two notes receivable and an account receivable with a
total face amount of $2,080,883 from Evergreen Income and Growth REIT, LP
(“EIGRLP”), whose general partner is Evergreen Income and Growth REIT, Inc.
(“EIGRI”).  The acquisition was funded by the issuance of 428,680 OP
Units.





The first
note acquired in June 2010, in the amount of $1,000,000, bears interest at 12%
per annum.  The note acquired in June 2010 and accrued interest is
payable on demand from Central Florida Self Storage Acquisitions,
LLC.  The second note, in the amount of $400,000, bears interest at
10% per annum.  The note and accrued interest is payable on demand
from ASRI.  Accrued and unpaid interest on the notes totaled $266,907
as of June 30, 2010.  The notes were acquired to ultimately acquire
certain real estate assets in which the obligors on the notes have ownership
interests.  The Company is not recognizing interest income on the
notes.





The
account receivable acquired, which totaled $413,877, is due from
Evergreen.  The account receivable is related to organizational and
offering costs paid in excess of the amounts established in EIGRI’s 2008 private
placement agreement.  The Company anticipates the receivable from
Evergreen will be offset against either its note payable to Evergreen or through
a reduction in OP Units currently held by Evergreen in the first quarter of
2011.





NOTE
7.  DISCONTINUED OPERATIONS





Real estate assets held for
sale.





At
December 31, 2009, 5850 San Felipe, a 101,880 square foot office property
located in Houston, Texas, was classified as “Real estate held for
sale.”  The property was sold on March 31, 2010 for
$10,750,000.  No real estate assets were classified as held for sale
by the Company at September 30, 2010.





The
carrying amount of 5850 San Felipe at December 31, 2009 is summarized below
(dollars in thousands):





Condensed Consolidated Balance Sheet
                  
                  December 31, 2009
                    (audited)Real
      estate
                  
                  $
                  5,847Other
                  
                  
                  517Real
      estate assets held for sale
                  
                  $
                  6,364Note
      payable
                  
                  $
                  5,090Accounts
      payable
                  
                  
                  515Accrued
      and other liabilities
                  
                  
                  486Liabilities
      related to real estate held for sale
                  
                  $
                  6,091





Net
income from discontinued operations.





Income
from discontinued operations of $2,847,000 for the nine months ended September
30, 2010 includes the gain on sale of 5850 San Felipe and the property’s
operating results through its disposition date of March 31,
2010.   Net income from discontinued operations of $18,000 and
$109,000 for the three and nine months ended September 30, 2009, respectively,
represent the property’s operating results for the periods.


11


The
condensed statements of operations of discontinued operations are summarized
below (in thousands):





Condensed Statements of Operations
                  
                  Three Months Ended
                    September 30, (unaudited)
                  
                  
                  Nine Months Ended September
                    30, (unaudited)2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Rental
      revenue
                  
                  $
                  -
                  
                  
                  $
                  482
                  
                  
                  $
                  482
                  
                  
                  $
                  1,429Total
      expenses (1)
                  
                  
                  -
                  
                  
                  
                  (453
                  )
                  
                  
                  (309
                  )
                  
                  
                  (1,257
                  )Income
      from discontinued operations before gain on sale and income tax
      expense
                  
                  
                  -
                  
                  
                  
                  29
                  
                  
                  
                  173
                  
                  
                  
                  172Gain
      on sale of discontinued operations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4,315
                  
                  
                  
                  -Income
      tax expense
                  
                  
                  -
                  
                  
                  
                  (11
                  )
                  
                  
                  (1,641
                  )
                  
                  
                  (63
                  )Income
      from discontinued operations
                  
                  $
                  -
                  
                  
                  $
                  18
                  
                  
                  $
                  2,847
                  
                  
                  $
                  109





(1)
Includes interest expense of  $77 for the three months ended September
30, 2009 and interest expense of $75 and $229 for the nine months ended
September 30, 2010 and 2009, respectively.  Mortgage debt related to
the property included in discontinued operations was individually
secured.  As such, interest expense was based on the property’s
respective debt.





NOTE
8.  NOTES PAYABLE





The
Company had the following notes payable outstanding as of September 30, 2010 and
December 31, 2009 secured by the following properties (dollars in
thousands):





September 30, 2010
                    
                    
                    December 31, 2009Property (unless otherwise noted)
                    
                    Maturity
                      Date
                    
                    Principal
                      Balance
                    
                    
                    Interest
                      Rate
                    
                    
                    Principal
                      Balance
                    
                    
                    Interest
                      RateFixed
      RatePacific
      Spectrum (1)
                    
                    6/10/2010
                    
                    
                    5,192
                    
                    
                    
                    8.02
                    %
                    
                    
                    5,248
                    
                    
                    
                    8.02
                    %Northwest
      Spectrum
                    
                    12/3/2010
                    
                    
                    750
                    
                    
                    
                    8.75
                    %
                    
                    
                    750
                    
                    
                    
                    8.75
                    %Corporate-Unsecured
      (2)
                    
                    2/19/2011
                    
                    
                    1,134
                    
                    
                    
                    3.40
                    %
                    
                    
                    -
                    
                    
                    
                    -Fountain
      View Place (3)
                    
                    4/29/2011
                    
                    
                    1,065
                    
                    
                    
                    10.00
                    %
                    
                    
                    1,423
                    
                    
                    
                    10.00
                    %Corporate-Secured
      (4)
                    
                    5/12/2011
                    
                    
                    950
                    
                    
                    
                    8.75
                    %
                    
                    
                    -
                    
                    
                    
                    -Sabo
      Road (5)
                    
                    7/31/2011
                    
                    
                    1,989
                    
                    
                    
                    7.42
                    %
                    
                    
                    -
                    
                    
                    
                    -Bristol
      Bay
                    
                    8/1/2011
                    
                    
                    6,820
                    
                    
                    
                    7.58
                    %
                    
                    
                    6,899
                    
                    
                    
                    7.58
                    %Technology
                    
                    8/1/2011
                    
                    
                    7,091
                    
                    
                    
                    7.44
                    %
                    
                    
                    7,131
                    
                    
                    
                    7.44
                    %Corporate
      – Secured (6)
                    
                    9/21/2011
                    
                    
                    890
                    
                    
                    
                    8.75
                    %
                    
                    
                    890
                    
                    
                    
                    8.75
                    %Creekside
                    
                    12/1/2011
                    
                    
                    5,744
                    
                    
                    
                    7.17
                    %
                    
                    
                    5,814
                    
                    
                    
                    7.17
                    %Corporate-Unsecured
      (7)
                    
                    5/1/2012
                    
                    
                    48
                    
                    
                    
                    4.00
                    %
                    
                    
                    -
                    
                    
                    
                    -16350
      Park Ten Place
                    
                    5/11/2012
                    
                    
                    4,419
                    
                    
                    
                    7.45
                    %
                    
                    
                    4,466
                    
                    
                    
                    7.45
                    %16360
      Park Ten Place
                    
                    5/11/2012
                    
                    
                    3,463
                    
                    
                    
                    7.45
                    %
                    
                    
                    3,499
                    
                    
                    
                    7.45
                    %2855
      Mangum
                    
                    5/11/2012
                    
                    
                    2,551
                    
                    
                    
                    7.45
                    %
                    
                    
                    2,575
                    
                    
                    
                    7.45
                    %2855
      Mangum
                    
                    5/11/2012
                    
                    
                    1,390
                    
                    
                    
                    6.00
                    %
                    
                    
                    1,422
                    
                    
                    
                    6.00
                    %6430
      Richmond Atrium
                    
                    5/11/2012
                    
                    
                    2,141
                    
                    
                    
                    7.45
                    %
                    
                    
                    2,161
                    
                    
                    
                    7.45
                    %Corporate-Unsecured
      (8)
                    
                    5/31/2012
                    
                    
                    1,000
                    
                    
                    
                    9.50
                    %
                    
                    
                    500
                    
                    
                    
                    11.00
                    %Southwest
      Pointe
                    
                    6/1/2012
                    
                    
                    2,685
                    
                    
                    
                    7.33
                    %
                    
                    
                    2,710
                    
                    
                    
                    7.33
                    %Corporate-Secured
      (9)
                    
                    6/15/2012
                    
                    
                    992
                    
                    
                    
                    4.50
                    %
                    
                    
                    992
                    
                    
                    
                    4.50
                    %Corporate-Unsecured
      (7)
                    
                    6/30/2012
                    
                    
                    60
                    
                    
                    
                    0.00
                    %
                    
                    
                    -
                    
                    
                    
                    -16350
      Park Ten Place
                    
                    8/11/2012
                    
                    
                    486
                    
                    
                    
                    7.45
                    %
                    
                    
                    492
                    
                    
                    
                    7.45
                    %16360
      Park Ten Place
                    
                    8/11/2012
                    
                    
                    381
                    
                    
                    
                    7.45
                    %
                    
                    
                    386
                    
                    
                    
                    7.45
                    %Corporate
      – Secured (10)
                    
                    2/1/2013
                    
                    
                    1,746
                    
                    
                    
                    5.50
                    %
                    
                    
                    1,950
                    
                    
                    
                    7.50
                    %Corporate-Secured
      (4)
                    
                    3/5/2013
                    
                    
                    905
                    
                    
                    
                    8.75
                    %
                    
                    
                    -
                    
                    
                    
                    -11500
      Northwest Freeway
                    
                    6/1/2014
                    
                    
                    4,025
                    
                    
                    
                    5.93
                    %
                    
                    
                    4,079
                    
                    
                    
                    5.93
                    %11500
      Northwest Freeway
                    
                    6/1/2014
                    
                    
                    291
                    
                    
                    
                    5.93
                    %
                    
                    
                    295
                    
                    
                    
                    5.93
                    %Morenci
                    
                    7/1/2014
                    
                    
                    1,640
                    
                    
                    
                    7.25
                    %
                    
                    
                    1,689
                    
                    
                    
                    7.25
                    %Northwest
      Corporate Center
                    
                    8/1/2014
                    
                    
                    5,312
                    
                    
                    
                    6.26
                    %
                    
                    
                    5,370
                    
                    
                    
                    6.26
                    %14741
      Yorktown
                    
                    9/1/2014
                    
                    
                    8,573
                    
                    
                    
                    5.32
                    %
                    
                    
                    8,600
                    
                    
                    
                    5.32
                    %8100
      Washington
                    
                    2/22/2015
                    
                    
                    2,171
                    
                    
                    
                    5.59
                    %
                    
                    
                    2,196
                    
                    
                    
                    5.59
                    %8300
      Bissonnet
                    
                    5/1/2015
                    
                    
                    4,484
                    
                    
                    
                    5.51
                    %
                    
                    
                    4,527
                    
                    
                    
                    5.51
                    %Corporate-Unsecured
      (7)
                    
                    6/1/2015
                    
                    
                    292
                    
                    
                    
                    5.00
                    %
                    
                    
                    -
                    
                    
                    
                    -Corporate-Unsecured
      (7)
                    
                    6/1/2015
                    
                    
                    55
                    
                    
                    
                    5.00
                    %
                    
                    
                    -
                    
                    
                    
                    -1501
      Mockingbird
                    
                    7/1/2015
                    
                    
                    3,206
                    
                    
                    
                    5.28
                    %
                    
                    
                    3,239
                    
                    
                    
                    5.28
                    %2620-2630
      Fountain View (11)
                    
                    7/31/2015
                    
                    
                    5,350
                    
                    
                    
                    7.00
                    %
                    
                    
                    -
                    
                    
                    
                    -5450
      Northwest Central
                    
                    9/1/2015
                    
                    
                    2,597
                    
                    
                    
                    5.38
                    %
                    
                    
                    2,631
                    
                    
                    
                    5.38
                    %800/888
      Sam Houston Parkway
                    
                    12/29/2015
                    
                    
                    4,552
                    
                    
                    
                    6.25
                    %
                    
                    
                    4,638
                    
                    
                    
                    6.25
                    %2401
      Fountain View
                    
                    3/1/2016
                    
                    
                    11,999
                    
                    
                    
                    5.82
                    %
                    
                    
                    12,139
                    
                    
                    
                    5.82
                    %Campus
      Court (5)
                    
                    4/25/2016
                    
                    
                    4,765
                    
                    
                    
                    5.78
                    %
                    
                    
                    -
                    
                    
                    
                    -12000
      Westheimer/2470 Gray Falls
                    
                    1/1/2017
                    
                    
                    7,301
                    
                    
                    
                    5.70
                    %
                    
                    
                    7,350
                    
                    
                    
                    5.70
                    %6420
      Richmond Atrium
                    
                    6/5/2017
                    
                    
                    6,311
                    
                    
                    
                    5.87
                    %
                    
                    
                    6,364
                    
                    
                    
                    5.87
                    %7700
      Irvine Center
                    
                    8/1/2017
                    
                    
                    45,000
                    
                    
                    
                    5.99
                    %
                    
                    
                    45,000
                    
                    
                    
                    5.99
                    %Loop
      1604 (5)
                    
                    9/11/2017
                    
                    
                    4,357
                    
                    
                    
                    6.70
                    %
                    
                    
                    -
                    
                    
                    
                    -Fountain
      View Place
                    
                    4/29/2018
                    
                    
                    12,403
                    
                    
                    
                    6.50
                    %
                    
                    
                    12,521
                    
                    
                    
                    6.50
                    %Corporate-Secured
      (12)
                    
                    12/31/2019
                    
                    
                    9,440
                    
                    
                    
                    5.00
                    %
                    
                    
                    -
                    
                    
                    
                    -Subtotal
                    
                    $
                    198,016
                    
                    
                    
                    
                    
                    
                    $
                    169,946Variable
      RateBeltway
      Industrial (1)
                    
                    5/9/2010
                    
                    
                    17,170
                    
                    
                    
                    7.00
                    %
                    
                    
                    17,170
                    
                    
                    
                    7.00
                    %Corporate
      – Unsecured (8)
                    
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    500
                    
                    
                    
                    6.00
                    %Northwest
      Spectrum
                    
                    4/19/2012
                    
                    
                    2,856
                    
                    
                    
                    2.90
                    %
                    
                    
                    3,013
                    
                    
                    
                    2.90
                    %Windrose
      Plaza
                    
                    4/19/2012
                    
                    
                    2,645
                    
                    
                    
                    2.90
                    %
                    
                    
                    2,791
                    
                    
                    
                    2.90
                    %Corporate
      – Unsecured
                    
                    12/12/2013
                    
                    
                    500
                    
                    
                    
                    6.00
                    %
                    
                    
                    500
                    
                    
                    
                    6.00
                    %Subtotal
                    
                    $
                    23,171
                    
                    
                    
                    
                    
                    
                    $
                    23,974Total
                    
                    $
                    221,187
                    
                    
                    
                    
                    
                    
                    $
                    193,920


12


(1)
            The
      Company is currently negotiating extension terms with the
      lender.





(2)
            In
      May 2010, the Company obtained financing for insurance premiums on its
      owned and managed properties.





(3)
            In
      April 2010, the Company made a principal payment of $240,000 on the note
      and the lender extended the maturity date of the note to April 29,
      2011.





(4)
            Represents
      bank loans of $950,000 obtained in May 2010 and $1,000,000 obtained in
      March 2010.





(5)
            Represents
      mortgage debt on properties in which the Company acquired partial
      ownership interests in 2010.  The Company holds a 55% interest
      in Sabo Road, an 38.4% interest in Loop 1604 and an 11.2% interest in
      Campus Court.





(6)
            In
      September 2010, maturity of the loan was extended to September 21,
      2011.





(7)
            Represents
      the conversion of accounts payables to promissory notes during the second
      quarter of 2010.





(8)
            In
      May 2010, the Company refinanced two $500,000 notes which were due to
      mature on May 31, 2010 with a new loan in the amount of $1,000,000 with
      the same lender.





(9)
            In
      October 2010, maturity of the loan was extended to June 15,
      2012.





(10)
            In
      August 2010, the Company made a principal pay-down of $195,000 on the note
      and the lender extended the maturity date to February 1,
    2013.





(11)
            Represents
      mortgage debt the Company assumed from the seller in connection with the
      property acquisition.  The Company holds a 51% ownership
      interest in the property.





(12)
            Represents
      promissory note issued by the Company in January 2010 in connection with
      the Evergreen acquisition.





The
Company has six mortgage loans that are in default due to non-payment of
scheduled monthly debt service. The principal balance of these loans totaled
approximately $27,400,000 with delinquent payments approximating $500,000 as of
September 30, 2010.  Of these six mortgages, the Company elected not
to pay current the notes as the unpaid balances of the six mortgages exceeded
the book value of the properties covered by the mortgages. The loans are secured
by real estate assets that currently have operating deficits.  The
Company elected not to make the payments but intends to enter into negotiations
with the lenders on these loans or to bring the loans current.  There
can be no assurance, however, that these negotiations, which may result in loan
modifications or discounted pay-offs, will be successful.  The Company
has evaluated the impairment related to the long-lived assets of the properties
secured by these loans and has determined that these delinquent loans are not
material to the financial condition of the Company based on the current book
values of the long-lived assets.  Also relevant is the fact that each
of the properties are held by a special purpose entity and the mortgages are
non-recourse.


13


The
Company has loans totaling $43,051,000 maturing over the next twelve
months.  Two of the loans, with balances totaling $22,362,000, are
matured.  The Company is currently negotiating maturity extensions on
these two loans with the lenders and believes that the extensions will be
granted.  The extensions could require principal pay-downs on the
debt.





Most of
the Company’s mortgage debt is not cross-collateralized.  The Company
has four mortgage loans that are cross-collateralized by a second
property.   It is common for the Company to serve as a guarantor
and/or indemnitor on its mortgage debt.  Because of uncertainties
caused by the current credit crisis, the Company’s current debt level and the
Company’s historical losses there can be no assurances as to the Company’s
ability to obtain funds necessary for the refinancing of its maturing
debts.  If refinancing transactions are not consummated, the Company
will seek extensions and/or modifications from existing lenders.  If
these refinancings or extensions do not occur, the Company will not have
sufficient cash to meet its obligations.





The
Company is not in compliance with a debt covenant on a mortgage loan secured by
one of its office properties located in Houston, Texas.  The debt
covenant requires the Company to maintain a minimum tangible book net worth as
defined in the debt agreement.  In the event the lender elects to
enforce the non-compliance matter, the Company will attempt to negotiate a
revision to the loan covenant.  If a refinance of the loan becomes
necessary, the Company believes it could obtain a new mortgage loan for an
amount in excess of the current debt balance and prepayment costs associated
with the current loan.





NOTE
9.  NONCONTROLLING INTERESTS





Unit
Holders in the Operating Partnership





In
September 2010, 205,394 OP Units were issued in connection with the acquisition
of two notes receivable, each with a face amount of $500,000 and interests in
three apartment complexes and one student housing facility for a total purchase
price of $1,329,209.





In June
2010, 300,949 OP Units were issued in connection with the acquisition of a 55%
interest in Sabo Road, a self storage property located in Houston, Texas and a
38.4% interest in Loop 1604, a self-storage property located in San Antonio,
Texas.





In June
2010, 102,834 OP Units were issued in connection with the acquisition of
2620-2630 Fountain View, an office property located in Houston,
Texas.





In June
2010, 428,680 OP Units were issued in connection with the acquisition of notes
and account receivable totaling $2,080,883.





In March
2010, 102,896 shares of Common Stock were issued in exchange for OP
Units.





In
January 2010, the Company issued 1,600,000 OP Units in connection with the
Evergreen acquisition.  Evergreen shall have the option to exchange
the OP Units into common stock of the Company 90 days after December 31, 2010,
at the rate of one share of common stock for each two OP Units, or if the
Company so elects, cash in lieu of issuing common stock.   The number
of OP Units issued was based on a common stock price of $10 per share (after
effect of the one-for-one stock dividend), and is subject to adjustment on of
December 31, 2010, based on the higher of the then-existing stock price of the
Company’s shares or the Company’s net asset value per share.





During
the nine months ended September 30, 2010, 3,884 OP Units were redeemed for cash
of approximately $20,000.





During
2009, 39,202 shares of Common Stock were issued in exchange for OP
Units.





During
2009, 485 OP Units were redeemed for cash of approximately
$2,000.


14


OP Units
(other than those held by the Company) of 3,172,675 (exchangeable for
approximately 1,586,338 shares of common stock) were outstanding as of September
30, 2010.  As of September 30, 2010, non-controlling interest in the
Operating Partnership was $13,962,000.





Third
Party Interests in Properties





The
portion of the Non-controlling interests reflected on the balance sheet of the
Company, which is not owned by the Company are reflected in the following
paragraphs of this section.





In
September 2010, the Company acquired 11.2% undivided interest in Campus Court,
72,480 square foot student housing facility located in Cedar Falls,
Iowa.   Non-controlling interest associated with the 88.8%
interest not owned by the Company was $2,444,000 as of September 30,
2010.





On June
30 2010, a third party investor contributed $1,000,000 in return for a 49%
limited partnership interest in the Company’s single purpose consolidated
limited partnership that acquired 2620-2630 Fountain
View.  Non-controlling interest associated with the 49% interest not
owned by the Company was $988,000 as of September 30, 2010.





On June
2, 2010, the Company acquired a 55% interest in Sabo Road, a 57,850 square foot
self-storage property located in Houston, Texas.  The partnership
interest acquired in Sabo Road consists of the sole general partnership interest
and a limited partnership interest.   Non-controlling interest
associated with the 45% interest not owned by the Company was $347,000 as of
September 30, 2010.





In
June 2010, the Company acquired 38.4% undivided interest in Loop 1604, 178,595
square foot self-storage property located in San Antonio,
Texas.   Non-controlling interest associated with the 61.6%
interest not owned by the Company was $2,441,000 as of September 30,
2010.





On
September 1, 2009, a third party purchased from the Company a 49% preferred
interest in each of two single purpose limited partnerships for $4,000,000
(“Preferred Capital”).  Proceeds of $3,811,000, net of transaction
costs, were received as a result of the sale.   Each of the
limited partnerships owned an income-producing property in Houston,
Texas.  These limited partnerships are required to distribute,
monthly, an annual 12% cumulative, non-compounding return on the unredeemed
Preferred Capital and a participation in the operating net cash flow of the
limited partnerships.  The Company has a right to repurchase the
preferred interests in each of the partnerships within five years for an amount
equal to the remaining Preferred Capital plus a 15% annual internal rate of
return.  On March 31, 2010, the Company sold 5850 San Felipe, one of
the income-producing properties in which a preferred partnership interest was
held by the third party.  In April 2010, the Company repurchased the
preferred interest associated with 5850 San Felipe from the third party for
$1,785,000.  Non-controlling interests related to the other
consolidated partnership interest sold was $1,459,000 as of September 30,
2010.





The
following represents the effects of changes in the Company’s ownership interest
in the OP and in the two single purpose limited partnerships discussed in the
previous paragraphs for the three and nine months ended September 30, 2010
(dollars in thousands):





Three Months
                  Ended Sept 30, 2010
                
                
                Nine Months Ended
                  Sept 30, 2010Net
      loss attributable to the Company
                
                $
                (2,153
                )
                
                $
                (3,699
                )Transfers
      from noncontrolling interestsIncrease
      in the Company’s paid-in capital on exchange of OP Units for shares of
      Common Stock
                
                $
                -
                
                
                $
                211Increase
      in the Company’s paid-in capital on reclassification of preferred interest
      from temporary equity equity sale of consolidated partnership
      interests
                
                $
                -
                
                
                
                370Net
      transfers from noncontrolling interests
                
                $
                -
                
                
                $
                581Change
      from net loss attributable to the Company on exchange of OP Units for
      shares of Common Stock and reclassification of preferred interest from
      temporary equity
                
                $
                (2,153
                )
                
                $
                (3,118
                )


15


The
following represents the effects of changes in the Company’s ownership interest
in the OP and in the two single purpose Limited Partnerships on the Company’s
equity for the three and nine months ended September 30, 2009 (dollars in
thousands):





Three Months Ended
                  September 30, 2009
                
                
                Nine Months Ended
                  September 30, 2009Net
      loss attributable to the Company
                
                $
                (2,322
                )
                
                $
                (6,316
                )Transfers
      from noncontrolling interestsIncrease
      in the Company’s paid-in capital on exchange of OP Units for shares of
      Common Stock
                
                
                -
                
                
                
                314Increase
      in the Company’s paid-in capital on partial sale of consolidated
      partnership interests
                
                $
                1,971
                
                
                $
                1,971Net
      transfers from noncontrolling interests
                
                $
                1,971
                
                
                $
                2,285Change
      from net loss attributable to the Company on exchange of OP Units for
      shares of Common Stock and partial sale of consolidated partnership
      interests
                
                $
                (351
                )
                
                $
                (4,031
                )





NOTE
10.  STOCK-BASED COMPENSATION





The
Company has in effect its Omnibus Stock Incentive Plan (the “Plan”), which is
administered by the Board of Directors, and provides for the granting of
incentive and non-qualified stock options, stock appreciation rights, restricted
stock, performance units and performance shares.   The Board has
reserved a total of 360,000 shares under the Plan.  As of September
30, 2010, 199,628 ASR shares were available for issuance to executive officers,
directors or other key employees of the Company.




Stock-based
compensation expense for all stock-based compensation awards granted after
January 1, 2006 is based on the grant-date fair value estimated on the grant
date using the Black-Scholes option-pricing model.  The Company
recognizes these compensation costs net of a forfeiture rate and recognizes the
compensation costs for only those shares expected to vest on a straight-line
basis over the requisite service period of the award.





Total
stock-based compensation expense recognized for the three months ended September
30, 2010 and 2009 amounted to $30,000, or $.01 per basic and diluted earnings
per share and $25,000, or $.01 per basic and diluted earnings per share,
respectively.  Total stock-based compensation expense recognized for
the nine months ended September 30, 2010 and 2009 amounted to $82,000, or $.03
per basic and diluted earnings per share and $64,000, or $.02 per basic and
diluted earnings share, respectively.  Compensation expense is
included in general and administrative expense in the Company’s consolidated
condensed statement of operations for all periods presented.





Stock
Options





No stock
options have been granted since 2006.  All of the Company’s stock
options are fully vested.  As of September 30, 2010, there was no
unrecognized compensation cost related to stock options.  The Company
has a policy of issuing new shares upon the exercise of stock
options.  During the nine months ended September 30, 2010, no options
were exercised.





The
following table summarizes activity and outstanding stock options under the
plan:





Shares
                    Under Option
                  
                  
                  Weighted Average
                    Exercise Price
                  
                  
                  Aggregate
                    Intrinsic ValueOutstanding
      on January 1, 2010
                  
                  
                  58,750
                  
                  
                  $
                  11.97Granted
                  
                  
                  -
                  
                  
                  
                  -Forfeited
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      on September 30, 2010
                  
                  
                  58,750
                  
                  
                  $
                  11.97
                  
                  
                  $
                  248,538Exercisable
      as of  September 30, 2010
                  
                  
                  58,750
                  
                  
                  $
                  11.97
                  
                  
                  $
                  248,538


16


The
following table summarizes certain information for stock options, all of which
are exercisable and outstanding on September 30, 2010:





Range of
                      Exercise
                      Price
                    
                    Number
                      Exercisable
                    
                    Weighted Average
                      Remaining
                      Contractual
                      Life
                    
                    Weighted
                      Average
                      Exercise
                      Price$4.05
      - $6.10
                    
                    
                    25,000
                    
                    3.8
      years
                    
                    $
                    5.33$9.13
      - $13.58
                    
                    
                    22,500
                    
                    4.1
      years
                    
                    $
                    10.32$30.00
      - $30.00
                    
                    
                    11,250
                    
                    1.3
      years
                    
                    $
                    30.00





Restricted
Stock





The
Company issued a total of 11,500 shares of Common Stock to its officers,
directors and certain key employees under the Plan during the nine months ended
September 30, 2010.  The restrictions on the shares issued lapse in
three equal annual installments commencing on the first anniversary date of the
issuance.  Compensation expense is recognized on a straight-line basis
over the vesting period.





During
the three months ended September 30, 2010 and 2009, compensation expense of
$30,000 and $25,000, respectively, was recognized for restricted
shares.  During the nine months ended September 30, 2010 and 2009,
compensation expense of $82,000 and $64,000, respectively, was recognized for
restricted shares.  Recipients of restricted stock have the right to
vote all shares, to receive and retain all cash dividends payable to holders of
shares of record on or after the date of issuance and to exercise all other
rights, powers and privileges of a holder of Company shares, with the exception
that the recipient may not transfer the shares during the restriction
period.





A summary
of the status of the Company’s restricted stock awards as of January 1, 2010 and
changes during the nine months ended September 30, 2010 is presented
below:





Restricted Stock Awards
                  
                  Number of
                    Shares
                  
                  
                  Weighted Average Grant
                    Date Fair ValueNonvested
      at January 1, 2010
                  
                  
                  20,012
                  
                  
                  $
                  10.72Granted
                  
                  
                  11,500
                  
                  
                  $
                  11.55Vested
                  
                  
                  (9,500
                  )
                  
                  $
                  11.03Forfeited
                  
                  
                  -
                  
                  
                  
                  -Nonvested
      at September 30, 2010
                  
                  
                  22,012
                  
                  
                  $
                  11.02





As of
September 30, 2010, there was $199,000 of unrecognized compensation cost related
to unvested restricted stock awards, which are expected to be recognized over a
remaining weighted-average restriction period of approximately
2.4 years.





NOTE
11.  RELATED PARTY TRANSACTIONS





During
the three and nine months ended September 30, 2010, the Company recognized third
party management fee and advisory revenues of $903,000 and $2,870,000,
respectively, attributable to the former Evergreen managed
properties.   As of September 30, 2010, accounts receivable
related to these revenues was $556,237.  The Company has a
non-economic interest in many of the properties, held in most cases as the
manager or general partner of entities which own tenant in common
interests.





In
September 2010, the Company acquired two notes receivable, each with a face
amount of $500,000, and interests in three apartment complexes and one student
housing facility.  The acquisitions, which were acquired from ASRI for
a total purchase price of $1,329,209, were funded by the issuance of 205,394 OP
Units.   William J. Carden is a director and President of ASRI
and Jonathan T. Brohard is a director and Vice President of ASRI.  Mr.
Carden is Chief Executive Officer, Chairman of the Board, and a principal
stockholder in the Company.  Mr. Brohard is President of
ASRM.


17


The two
$500,000 notes bear interest at a rate of 12% per annum and are payable on
demand from Evergreen.   The Company anticipates the notes
receivable will be offset against either its note payable to Evergreen or
through a reduction in OP Units currently held by Evergreen in the first quarter
of 2011.





In June
2010, the Company acquired a 55% interest in Sabo Road, a 57,850 square foot
self-storage property located in Houston, Texas.  The partnership
interest acquired in Sabo Road consists of the sole general partnership interest
and a limited partnership interest.  Also in June 2010, the Company
acquired a 38.4% undivided interest in Loop 1604, a 178,595 square foot
self-storage property located in San Antonio, Texas.  The acquisitions
were acquired from ASRI for a total purchase price of $1,681,670, consisting of
the 300,949 OP Units and cash of $50,000.





In June
2010, the Company acquired two notes receivable and an account receivable from
EIGRLP with a total face amount of $2,080,883.  The acquisition was
funded by the issuance of 428,680 OP Units. Mr. Carden is a director and
President of EIGRI, the general partner of EIGRLP. Mr. Brohard is a director and
Vice President of EIGRI.   The Company does not have an ownership
interest in EIRGI or EIGRLP





The first
note, in the amount of $1,000,000, bears interest at 12% per
annum.  The note and accrued interest is payable on demand from
Central Florida Self Storage Acquisitions, LLC, an entity in which the Company
has a non-economic tenant in common interest.  The second note, in the
amount of $400,000, bears interest at 10% per annum.  The note and
accrued interest is payable on demand from ASRI.  Accrued and unpaid
interest on the notes totaled $266,907 as of June 30, 2010.  The notes
were acquired to ultimately acquire certain real estate assets in which the
obligors on the notes have ownership interests.  The Company is not
recognizing interest income on the notes.





The
account receivable acquired, which totaled $413,877, is due from
Evergreen.  The account receivable is related to organizational and
offering costs paid in excess of the amounts established in EIGRI’s 2008 private
placement agreement.  The Company anticipates the receivable from
Evergreen will be offset against either its note payable to Evergreen or through
a reduction in OP Units currently held by Evergreen in the first quarter of
2011.





In May
2010, the Company obtained financing for insurance premiums on both its owned
and third party managed properties of which $2,069,883 was attributable to the
Evergreen property portfolio.   During 2010, the Company received
$1,872,294 from these properties as payment on the premiums.  As of
September 30, 2010 unpaid amounts due to the Company from these properties was
$197,589.  As of September 30, 2010, the Company had premium refunds
of $371,922 due to these properties from the cancellation of the prior insurance
policy.





In March
2010, 160,266 OP Units were exchanged for 80,132 shares of Common Stock by the
spouse of Mr. Carden and 45,529 OP Units were exchanged for 22,764 shares of
Common Stock by an entity controlled by Mr. Carden.  In February 2009,
Mr. Carden exchanged 78,406 OP Units for 39,202 shares of Common
Stock.





On
December 31, 2008, the Company issued a total of 55,172 shares of Series A
Preferred Stock (“Preferred Stock”) to the following individuals: Mr. Carden,
John N. Galardi, director and principal stockholder, and Timothy R. Brown,
director.  Each share of Preferred Stock was sold for $29.00 and is
entitled to annual dividends, payable quarterly, at an annual rate of 15%, and
to a preference on liquidation equal to the following: (a) if on or prior to
December 31, 2011, the sum of $29.00 and any accrued and unpaid dividends or (b)
if after December 31, 2011, the greater of (x) the sum of $29.00 and any accrued
and unpaid dividends or (y) the amount which would be paid on account of each
share of common stock upon liquidation if each share of Preferred Stock had
hypothetically been converted into one share of common stock.  The
Preferred Stock is not required to be redeemed by the Company and the holders
will have no right to require redemption. The Preferred Stock is redeemable at
the option of the Company at any time after December 31, 2011. The shares were
issued in a private transaction exempt from registration pursuant to Section
4(2) under the Securities Act of 1933, as amended.  At September 30,
2010, the Company had accrued and unpaid dividends on the Preferred Stock of
$43,106.


18


The
Company pays a guarantee fee to Mr. Carden, Mr. Galardi and CGS Real Estate
Company, Inc., a company owned indirectly by Messrs. Carden and Galardi (“the
Guarantors”), in consideration for their guarantees of certain obligations of
the Company.  The Guarantors are paid an annual guarantee fee equal to
between .25% and .75% (depending on the nature of the guarantee) of the
outstanding balance as of December 31 of the guaranteed obligations (“Guarantee
Fee”).  The Guarantee Fee is paid for a maximum of three years on any
particular obligation.  The Guarantee fee paid for the 2009 year was
$67,983.  The Company accrued $62,584 for the nine months ended
September 30, 2010 related to the Guarantee Fee for the 2010 year.





During
2009, the Company incurred professional fees of $184,800 to Thompson &
Knight LLP, the law firm in which Mr. Brown is a partner.





During
2007, the Company entered into a lease agreement with Galardi Group as a Tenant
for 15,297 square feet of office space at the Company’s 7700 Irvine Center
property.  Mr. Galardi is a principal stockholder, director and
officer of Galardi Group.  The lease commenced March 1, 2008 and has a
five-year term.  The annual base rent due to the Company pursuant to
the lease is $504,081 over the term of the lease.





NOTE
12.  PREFERRED STOCK





The
Company is authorized to issue up to 25,000,000 shares of one or more classes or
series of preferred stock with a par value of $.01 per share.





On
December 30, 2008, the Company filed Articles Supplementary to its Articles of
Incorporation, which authorized the issuance of 68,965 of Series A Preferred
Stock (“Preferred Stock”).





On
December 31, 2008, Company issued 55,172 shares of the Preferred Stock to
Messrs. Carden, Galardi, and Brown (Also see Note 11 – Related Party
Transactions).  Each share of Preferred Stock was sold for $29.00 and
is entitled to annual dividends, payable quarterly, at an annual rate of 15%,
and to a preference on liquidation equal to the following: (a) if on or prior to
December 31, 2011, the sum of $29.00 and any accrued and unpaid dividends or (b)
if after December 31, 2011, the greater of (x) the sum of $29.00 and any accrued
and unpaid dividends or (y) the amount which would be paid on account of each
share of common stock upon liquidation if each share of Preferred Stock had
hypothetically been converted into one share of common stock.  The
Preferred Stock is not required to be redeemed by the Company and the holders
will have no right to require redemption. The Preferred Stock is redeemable at
the option of the Company at any time after December 31, 2011. The shares were
issued in a private transaction exempt from registration pursuant to Section
4(2) under the Securities Act of 1933, as amended.  At of September
30, 2010, the Company had accrued and unpaid dividends on the Preferred Stock of
$43,106.





NOTE
13.  COMMITMENTS AND CONTINGENCIES





In
February 2010, the Company filed a third party action against its prior
insurance carrier, ACE American Insurance Company, in Harris County, Texas,
seeking payment under its insurance policy for the damage to 20 buildings in
Houston, caused by Hurricane Ike.  In March 2010, the insurance
carrier filed a lawsuit against the Company in Pennsylvania seeking a
declaratory judgment that it owed nothing under the policy.  The total
claims by the Company for actual damages, business interruption, statutory bad
faith damages, interest and attorneys fees exceed $50,000,000.  The
Company can make no prediction as to the result of such litigation.





Certain
claims and lawsuits have arisen against the Company in its normal course of
business. The Company believes that such claims and lawsuits will not have a
material adverse effect on the Company's financial position, cash flow or
results of operations.


19


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





OVERVIEW





American
Spectrum Realty, Inc. (“ASR” or, collectively, as a consolidated entity with its
subsidiaries, the “Company”) is a Maryland corporation established on August 8,
2000.  The Company is a full-service real estate corporation, which
owns, manages and operates income-producing properties.  Substantially
all of the Company’s assets are held through an operating partnership (the
“Operating Partnership”) in which the Company, as of September 30, 2010, held an
interest of 65.13% (consisting of the sole general partner interest and a
limited partnership interest).  In January 2010, in connection with
the Evergreen acquisition discussed below, the Operating Partnership issued
1,600,000 operating partnership units, which reduced the Company’s interest in
the Operating Partnership from 88.39% at December 31, 2009 to 70.75% at January
31, 2010.  The number of operating partnership units issued in
connection with the Evergreen acquisition is subject to adjustment in the first
quarter of 2011 (Also see Note 4 of the Company’s Accompanying Consolidated
Financial Statements).





American
Spectrum Realty Management, LLC, (“ASRM”) a wholly-owned subsidiary of the
Operating Partnership, acquired the property management and asset management
contracts held by Evergreen Realty Group, LLC and its affiliates (“Evergreen”)
in January 2010, which represent 80 separate assets.  The former
Evergreen-managed properties, which consist of 5,051,240 square feet of office
and industrial properties, 2,934 multi-family units, 12,098 self storage units
consisting of 1,793,881 square feet, 3,206 student housing units consisting of
9,107 beds and nine assisting living facilities consisting of 776 beds, are all
now under the management of ASRM.  This portfolio comprises properties
located in 22 states – Alabama, Arizona, California, Florida, Georgia, Iowa,
Idaho, Indiana, Kansas, Minnesota, Missouri, Nevada, New Mexico, North Carolina,
Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Virginia and
Washington.  The
acquisition gives the Company the ability to continue its expansion of its
third-party management and leasing capabilities throughout the United
States.   This acquisition has resulted in a significant
change in the Company’s operations, including an increase in employees from 46
at December 31, 2009 to 223 at September 30, 2010.





The
impact of the acquisition and expansion of the third party management business
of the Company is a dramatic shift that results and will result in an increase
in the fee income and other income not dependent on ownership of real
property.  Specifically, the square footage under management has
increased from 3,221,670 square feet in 2009 to 15,466,130 square feet in the
first nine months of 2010.  In making this shift, the Company has
incurred start-up expenses and additional general and administrative expenses
that should not be recurring.  These increased costs have resulted in
an increase in losses that should not be duplicated and in fact the Company has
taken steps to reduce costs and eliminate duplication that is expected to reduce
operating expenses by approximately $350,000 per month.





In
September 2010, the Company acquired an 11.2% undivided interest in Campus
Court, a 72,480 square foot student housing facility located in Cedar Falls,
Iowa.  The purchase price of $301,647 was funded by the issuance of
46,612 OP Units.





In June
2010, the Company acquired a 55% interest in Sabo Road, a 57,850 square foot
self-storage property located in Houston, Texas.  The partnership
interest acquired in Sabo Road consists of the sole general partnership interest
and a limited partnership interest.  Also in June 2010, the Company
acquired a 38.4% undivided interest in Loop 1604, a 178,595 square foot
self-storage property located in San Antonio, Texas.  The
acquisitions, which totaled $1,681,670, were funded with the issuance of 300,949
OP Units and cash of $50,000.





In June
2010, the Company created a subsidiary that acquired 2620-2630 Fountain View, a
125,000 square foot office property, consisting of two adjacent buildings in
Houston, Texas.  The acquisition was funded with the issuance of
102,834 OP Units, an equity contribution of $1,000,000 from a third party
investor, the assumption of debt and cash.  The third party investor
received a 49% interest in the single purpose consolidated limited partnership
that owns the property in consideration for the equity
contribution.





In March
2010, the Company sold 5850 San Felipe, a 101,880 square foot office property
located in Houston, Texas.  The sale generated proceeds of
approximately $5,200,000 in excess of debt.  The proceeds were used to
repurchase the preferred interest in the partnership that owned 5850 San Felipe,
reduce debt, payables and for other investments.  The transaction
generated a gain on sale before income tax expense of approximately
$4,300,000.


20


In the
accompanying financial statements, the results of operations for 5850 San Felipe
are shown in the section “Discontinued operations”. 5850 San Felipe was
classified as “Real estate held for sale” at December 31, 2009.  The
revenues and expenses reported for the periods presented exclude results from
properties sold or classified as held for sale.  The following
discussion and analysis of the financial condition under the heading “Results of
Operations” of the Company should be read in conjunction with the consolidated
financial statements of the Company, including the notes thereto, included in
Note 5.





The
Company’s properties were 83% occupied at September 30, 2010 and
2009.  The Company continues to aggressively pursue prospective
tenants to increase its occupancy, which if successful, should have the effect
of improving operational results.





American
Spectrum Management Group, Inc., (“ASMG”) a wholly-owned subsidiary of the
Operating Partnership, provides management and leasing services for the
Company’s properties.  ASMG also manages and leases 22 properties in
Texas for third parties representing 921,518 square feet of office, retail and
industrial space.





CRITICAL
ACCOUNTING POLICIES





The
Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
condensed financial statements:




Variable
Interest Entities




The
accompanying consolidated financial statements include our accounts, our
subsidiaries, most of which are wholly-owned, and all entities in which we have
a controlling interest.  Arrangements that are not controlled through
voting or similar rights are accounted for as a Variable Interest Entity
(“VIE”), in accordance with the provisions and guidance of ASC Topic 810
“Consolidation”, whereby we have determined that we are a primary beneficiary of
the VIE and meet certain criteria of a sole general partner or managing member
as identified in accordance with Emerging Issues Task Force (“EITF”) Issue 04-5,
Investor’s Accounting for an Investment in a Limited Partnership when the
Investor is the Sole General Partner and the Limited Partners have Certain
Rights (“EITF 04-5”).  VIEs are generally entities that lack
sufficient equity to finance their activities without additional financial
support from other parties or whose equity holders as a group lack adequate
decision making ability, the obligation to absorb expected losses or residual
returns of the entity, or have voting rights that are not proportional to their
economic interests.  The primary beneficiary generally is the entity
that provides financial support and bears a majority of the financial risks,
authorizes certain capital transactions, or makes operating decisions that
materially affect the entity’s financial results.




In determining whether we are the primary beneficiary of a VIE,
we consider qualitative and quantitative factors, including, but not limited to:
the amount and characteristics of our investment; the obligation or likelihood
for us or other investors to provide financial support; our and the other
investors’ ability to control or significantly influence key decisions for the
VIE; and the similarity with and significance to the business activities of us
and the other investors.  Significant judgements related to these
determinations include estimates about the current future fair values and
performance of real estate held by these VIEs and general market
conditions.




For
entities in which we have less than a controlling financial interest or entities
where we are not deemed to be the primary beneficiary, the entities are
accounted for using the equity method of accounting. Accordingly, our share of
the net earnings or losses of these entities are included in consolidated net
income.





Impairment
of Intangible Assets





The Company reviews its
intangible assets for impairment each reporting period.  The review
includes evaluating triggering events or changes in business circumstances
indicating management needs to address impairment.  If the carrying
amount of an intangible asset is determined to exceed its fair value, an
impairment loss is recognized in an amount equal to that
excess.  After an impairment loss is recognized, the adjusted carrying
amount of the intangible asset would be its new accounting
basis.  Subsequent reversal of a previously recognized impairment loss
is prohibited.


21


Notes
Receivable





The
Company’s notes receivable are recorded at amortized cost, net of loan loss
reserves (if any), and evaluated for impairment whenever circumstances indicate
that the asset might be impaired.  The amortized cost of a note
receivable is the outstanding unpaid principal balance, net of unamortized
acquisition premiums or discounts and unamortized costs and fees directly
associated with the origination or acquisition of the loan.  As of
September 30, 2010, there was no loan loss reserve and the Company did not
record any impairment losses related to notes receivable during the nine months
ended September 30, 2010.





RESULTS
OF OPERATIONS





Discussion
of the three months ended September 30, 2010 and 2009.





The
following table shows a comparison of rental revenues and certain expenses for
the quarter ended:





September 30,
                
                
                September 30,
                
                
                Variance2010
                
                
                2009
                
                
                $
                
                
                %Rental
      revenue
                
                $
                8,307,000
                
                
                $
                8,016,000
                
                
                $
                291,000
                
                
                
                3.6
                %Third
      party management and leasing  revenue
                
                
                973,000
                
                
                
                71,000
                
                
                
                902,000
                
                
                
                1,270.4
                %Operating
      expenses:Property
      operating expenses
                
                
                4,703,000
                
                
                
                4,158,000
                
                
                
                545,000
                
                
                
                13.1
                %General
      and administrative
                
                
                2,557,000
                
                
                
                1,002,000
                
                
                
                1,555,000
                
                
                
                155.2
                %Depreciation
      and amortization
                
                
                3,608,000
                
                
                
                3,656,000
                
                
                
                (48,000
                )
                
                
                (1.3
                )%Interest
      expense
                
                
                3,494,000
                
                
                
                3,393,000
                
                
                
                101,000
                
                
                
                3.0
                %





Rental revenue. Rental
revenue increased $291,000, or 3.6%, for the three months ended September 30,
2010 in comparison to the three months ended September 30, 2009.  The
increase was primarily due to $660,000 in revenue generated from Fountain View
Plaza, Sabo Road and Loop 1604, which were acquired in 2010.  The
increase was in large part offset by an increase in rent concessions and by a
decrease in occupancy from properties owned for the full three months ended
September 30, 2010 and September 30, 2009.  Occupancy, on a weighted
average basis, was 83% for the third quarter 2009 compared to 82% for the third
quarter 2010.





Third party management and leasing
revenue.Third party management and leasing revenue increased by $902,000
for the three months ended September 30, 2010, compared to the three months
ended September 30, 2009.  The increase was primarily due to revenues
generated as a result of the January 2010 acquisition of property management and
asset management contracts from Evergreen.





Property operating
expenses.  Property operating expenses increased by $545,000,
or 13.1%, for the three months ended September 30, 2010 in comparison to the
three months ended September 30, 2009.  The increase was primarily due
to $452,000 attributable to the three acquired properties mentioned
above.  This increase was also due an increase in property maintenance
costs and an increase in property general and administrative costs incurred
during the quarter from properties owned for the full three months ended
September 30, 2010 and September 30, 2009.





Corporate general and
administrative.  Corporate general and administrative costs
increased by $1,555,000, or 155.2%, for the three months ended September 30,
2010 when compared to the three months ended September 30, 2009.  The
increase was primarily due to operating expenses associated with the property
management and asset management contracts acquired from Evergreen in January
2010, which amounted to approximately $1,500,000.  The increase was in
large part personnel related.  The increase in corporate general and
administrative expenses was also due to an increase in professional and
consulting fees incurred during the quarter.





Depreciation and
amortization.  Depreciation and amortization expense decreased
$48,000, or 1.3%, for the three months ended September 30, 2010 in comparison to
the three months ended September 30, 2009.  The decrease was primarily
due to a reduction in depreciation and amortization attributable to fully
depreciated tenant improvements and amortized lease costs.


22


Interest
expense.  Interest expense increased $101,000, or 3.0%, for the
three months ended September 30, 2010 in comparison to the three months ended
September 30, 2009.  The increase was primarily attributable to the
$9,500,000 new loan associated with the Evergreen
acquisition.  Interest expense related to the new loan amounted to
$118,000 during the third quarter of 2010.  The increase was also due
to interest expense related to the three properties acquired in 2010, which
accounted for $237,000 of the increase.   The increase was
partially offset by a decrease in interest expense attributable to the pay-off
and/or pay-down of other debt.





Income taxes.  The
Company recognized a deferred income tax benefit from continuing operations of
$1,697,000 for the three months ended September 30, 2010, compared to $1,458,000
for the three months ended September 30, 2009.  The increase in
deferred income tax benefit for the three months ended September 30, 2010
corresponds to the increase in loss from continuing operations for three months
ended September 30, 2010, in comparison to the three months ended September 30,
2009.  The Company has an effective tax rate of 36.5% for
2010.   Management believes that its deferred tax asset balance
as of September 30, 2010 is realizable.





Non-controlling
interests.The
share of loss attributable to non-controlling interests was $1,092,000 for the
three months ended September 30, 2010, compared to $314,000 for the three months
ended September 30, 2009.  The non-controlling interests represent (i)
unit holders in the Operating Partnership (other than the Company) that held, as
of September 30, 2010 and September 30, 2009, a respective 35% and 12%
partnership interest in the Operating Partnership as limited partners and (ii)
third party limited partnership interests in certain single purpose consolidated
partnerships of the Company.





Discontinued
operations.  The Company had no income or loss from
discontinued operations for the three months ended September 30,
2010.  During the three months ended September 30, 2009, the Company
recognized income of $18,000 from discontinued operations.  The income
from discontinued operations for the three months ended September 30, 2009
represented the operating results for 5850 San Felipe for the
quarter.





Discussion
of the nine months ended September 30, 2010 and 2009.





The
following table shows a comparison of rental revenues and certain expenses for
the nine months ended:





September 30,
                
                
                September 30,
                
                
                Variance2010
                
                
                2009
                
                
                $
                
                
                %Rental
      revenue
                
                $
                24,093,000
                
                
                $
                24,451,000
                
                
                $
                (358,000
                )
                
                
                (1.5
                )%Third
      party management and leasing Revenue
                
                
                3,208,000
                
                
                
                112,000
                
                
                
                3,096,000
                
                
                
                2,764.3
                %Operating
      expenses:Property
      operating expenses
                
                
                12,241,000
                
                
                
                12,030,000
                
                
                
                211,000
                
                
                
                1.8
                %General
      and administrative
                
                
                6,695,000
                
                
                
                2,896,000
                
                
                
                3,799,000
                
                
                
                131.2
                %Depreciation
      and amortization
                
                
                10,757,000
                
                
                
                10,951,000
                
                
                
                (194,000
                )
                
                
                (1.8
                )%Interest
      expense
                
                
                10,418,000
                
                
                
                10,000,000
                
                
                
                418,000
                
                
                
                4.2
                %





Rental revenue. Rental
revenue decreased $358,000, or 1.5%, for the nine months ended September 30,
2010 in comparison to the nine months ended September 30, 2009.  The
decrease was in large part due to an increase in rent
concessions.  The decrease was also attributable to a decrease in
occupancy and a decrease in common area maintenance fees from properties owned
for the full nine months ended September 30, 2010 and September 30,
2009.  Occupancy, on a weighted average basis decreased from 83% for
the nine months ended September 30, 2009 to 82% for the nine months ended
September 30, 2010.  The decrease in rental revenue was partially
offset by $695,000 in revenue generated from Fountain View Plaza, Sabo Road and
Loop 1604, which were acquired in 2010.





Third party management and leasing
revenue.Third party management and leasing revenue increased by
$3,096,000 for the nine months ended September 30, 2010, compared to the nine
months ended September 30, 2009.   The increase was due to an
increase in third party management and leasing revenues attributable to the
Company’s third party management and leasing contracts.


23


Property operating
expenses.  Property operating expenses increased by $211,000,
or 1.8%, for the nine months ended September 30, 2010 in comparison to the nine
months ended September 30, 2009.  The increase was primarily due to
$475,000 attributable to the three acquired properties mentioned above. The
increase was partially offset by a decrease in property taxes attributable to a
decrease in the assessed values of several of the Company’s
properties.  The decrease was also due to lower property maintenance
costs incurred during the period for properties owned for the full three months
ended September 30, 2010 and September 30, 2009.





Corporate general and
administrative.  Corporate general and administrative costs
increased by $3,799,000, or 131.2%, for the nine months ended September 30, 2010
when compared to the nine months ended September 30, 2009. The increase was
primarily due to operating expenses associated with the property management and
asset management contracts acquired from Evergreen in January 2010, which
amounted to approximately $3,865,000.  The increase was in large part
personnel related.  The increase was also due to due diligence costs
associated with the acquisition of 2620-2630 Fountain View of
$121,000.  The increase in corporate general and administrative
expenses was partially offset by a decrease in legal and other professional fees
incurred during the period.





Depreciation and
amortization.  Depreciation and amortization expense decreased
$194,000, or 1.8%, for the nine months ended September 30, 2010 in comparison to
the nine months ended September 30, 2009.  The decrease was primarily
due to a reduction in depreciation and amortization attributable to fully
depreciated tenant improvements and amortized lease costs.





Interest
expense.  Interest expense increased $418,000, or 4.2%, for the
nine months ended September 30, 2010 in comparison to the nine months ended
September 30, 2009.  The increase was primarily attributable to the
$9,500,000 new loan associated with the Evergreen
acquisition.  Interest expense related to the new loan amounted to
$334,000 during the nine months ended September 30, 2010.  The
increase was also due to interest expense related to the three properties
acquired in 2010, which accounted for $237,000 of the increase.  The
increase was partially offset by a decrease in interest expense attributable to
the pay-off and/or pay-down of other debt.





Income taxes.  The
Company recognized a deferred income tax benefit from continuing operations of
$4,593,000 for the nine months ended September 30, 2010, compared to $3,996,000
for the nine months ended September 30, 2009.  The increase in
deferred income tax benefit for the nine months ended September 30, 2010
corresponds to the increase in loss from continuing operations for nine months
ended September 30, 2010, in comparison to the nine months ended September 30,
2009.  The Company has an effective tax rate of 36.5% for
2010.   Management believes that its deferred tax asset balance
as of September 30, 2010 is realizable.





Non-controlling
interests.The
share of loss attributable to non-controlling interests was $1,504,000 for the
nine months ended September 30, 2010, compared to $856,000 for the nine months
ended September 30, 2009.  The non-controlling interests represent (i)
unit holders in the Operating Partnership (other than the Company) that held, as
of September 30, 2010 and September 30, 2009, a respective 35% and 12%
partnership interest in the Operating Partnership as limited partners and (ii)
third party limited partnership interests in certain single purpose consolidated
partnerships of the Company.





Discontinued
operations.  The Company recorded income from discontinued
operations of $2,847,000 for the nine months ended September 30, 2010, compared
to $109,000 for the nine months ended September 30, 2009.   The
income from discontinued operations for the nine months ended September 30, 2010
includes the net gain on the sale of 5850 San Felipe and the property’s
operating results through its disposition date of March 31, 2010.  The
income from discontinued operations for the nine months ended September 30, 2009
represents the property’s operating results for the nine months ended September
30, 2010.


24


LIQUIDITY
AND CAPITAL RESOURCES





During
the first nine months of 2010, the Company derived cash primarily from the
collection of rents, net proceeds from the sale of 5850 San Felipe and borrowing
activities.   Major uses of cash included capital improvements to
real estate assets, primarily for tenant improvements, the acquisition of
2620-2630 Fountain View, repayment of debt, scheduled principal and interest
payments on debt, and payment of operational expenses.





Net cash
provided by operating activities amounted to $1,089,000 for the nine months
ended September 30, 2010.  The net cash represented $1,884,000 used in
property operations, offset by a net change in operating assets and liabilities
of $2,973,000.  The net cash provided by operating activities included
an increase in accounts payable of $3,290,000 for the nine months ended
September 30, 2010.  Net cash used in operating activities amounted to
$578,000 for the nine months ended September 30, 2009.  The net cash
represented $93,000 used in property operations and a net change in operating
assets and liabilities of $485,000.





Net cash
provided by investing activities amounted to $6,335,000 for the nine months
ended September 30, 2010.  This amount was primarily comprised of
proceeds of $10,166,000 received from the sale of 5850 San Felipe, reduced by
funds used for capital improvements, primarily tenant improvements, of
$3,281,000 and funds used for real estate acquisitions of
$317,000.  Net cash used in investing activities amounted to $826,000
for the nine months ended September 30, 2009.  Cash of $1,785,000 was
used for capital expenditures, primarily tenant improvements.  The
Company received insurance proceeds of $2,700,000 related to its hurricane and
fire claims and paid $1,741,000 for damages related to the hurricane and
fire.





Net cash
used in financing activities amounted to $6,873,000 for the nine months ended
September 30, 2010.  This amount was primarily comprised of debt
repayment on the sale of 5850 San Felipe of $5,067,000, the repayment of
borrowings of $1,260,000, scheduled principal payments on debt of $3,361,000,
repurchase of preferred partnership interest of $1,785,000, dividend payments to
preferred stockholders of $225,000 and distributions to non-controlling
interests of $335,000.  This amount was partially offset by new
borrowings of $5,180,000.  Net cash provided by financing activities
amounted to $1,286,000 for the nine months ended September 30,
2009.  This amount consisted of new borrowings of $3,105,000 and
proceeds from the sale of consolidated partnership interests of
$4,000,000.  The amount was partially offset by repayment of
borrowings of $3,524,000 and scheduled principal payments on debt of
$2,215,000.





The
current credit crisis, related turmoil in the global financial system and the
downturn in the United States economy has had an adverse impact on the Company’s
liquidity and capital resources.  The credit crisis and the downturn
in the economy has adversely affected the Company’s business in a number of
ways, including effects on its ability to fund operating deficits of selected
properties, to obtain new mortgages, to refinance current debt and to sell
properties.





The
Company received net proceeds of approximately $5,200,000 from the March 2010
sale of 5850 San Felipe.  The proceeds were used to repurchase the
non-controlling interest in the partnership that owned 5850 San Felipe, reduce
accounts payable, debt and for other investments.





The
Company needs to generate cash to meet its current liquidity
requirements.  As of September 30, 2010, accounts payable over 90 days
totaled $7,678,922,  which were related to Hurricane Ike expenses, the
2010 Evergreen and other management contract acquisition and other business
development costs.  This increase in accounts payable was also
exacerbated by loss of rental income caused by Hurricane Ike, The Company has
recently made demand to its insurance carrier for approximately
$6,000,000  in lost rental income as well as the demand for the other
damages caused by Ike as referenced in Note 13 of the Company’s Accompanying
Consolidated Financial Statements.  The Company intends to meet these
obligations from proceeds from planned property sales, borrowing activities and
a preferred equity offering.  There can be no assurance, however, that
these activities will occur.  If these activities do not occur, the
Company will not have sufficient cash to meet its obligations.





25




The
Company has six mortgage loans that are in default due to non-payment of
scheduled monthly debt service.  The principal balance of these loans
totaled approximately $27,400,000 with delinquent payments approximating
$500,000 as of September 30, 2010.  Of these six mortgages, the
Company elected not to pay current the notes as the unpaid balances of the six
mortgages exceeded the book value of the properties covered by the
mortgages.  The loans are secured by real estate assets that currently
have operating deficits.  The Company elected not to make the payments
but intends to enter into negotiations with the lenders on these loans or to
bring the loans current.  There can be no assurance, however, that
these negotiations, which may result in loan modifications or discounted
pay-offs, will be successful.  The Company has evaluated the
impairment related to the long-lived assets of the properties secured by these
loans and has determined that these delinquent loans are not material to the
financial condition of the Company based on the current book values of the
long-lived assets.  Also relevant is the fact that each of the
properties are held by a special purpose entity and the mortgages are non
recourse.





The
Company has loans totaling $43,051,000 maturing over the next twelve
months.  Two of the loans, with balances totaling $22,362,000, are
matured.  The Company is currently negotiating maturity extensions on
these two loans with the lenders and believes that the extensions will be
granted.  The extensions could require principal pay-downs on the
debt.





Most of
the Company’s mortgage debt is not cross-collateralized.  The Company
has four mortgage loans that are cross-collateralized by a second
property.   It is common for the Company to serve as a guarantor
and/or indemnitor on its mortgage debt.  Because of uncertainties
caused by the current credit crisis, the Company’s current debt level and the
Company’s historical losses there can be no assurances as to the Company’s
ability to obtain funds necessary for the refinancing of its maturing
debts.  If refinancing transactions are not consummated, the Company
will seek extensions and/or modifications from existing lenders.  If
these refinancings or extensions do not occur, the Company will not have
sufficient cash to meet its obligations.





The
Company is not in compliance with a debt covenant on a mortgage loan secured by
one of its office properties located in Houston, Texas.  The debt
covenant requires the Company to maintain a minimum tangible book net worth as
defined in the debt agreement.  In the event the lender elects to
enforce the non-compliance matter, the Company will attempt to negotiate a
revision to the loan covenant.  If a refinance of the loan becomes
necessary, the Company believes it could obtain a new mortgage loan for an
amount in excess of the current debt balance and prepayment costs associated
with the current loan.





Reference
is made to reports filed September 15, 2010 and September 16, 2010 on Form 8-K
with respect to certain forward-looking statements.





FUNDS
FROM OPERATIONS





The
Company believes that Funds From Operations (“FFO”) is a useful supplemental
measure of its operating performance.  The Company computed FFO in
accordance with standards established by the White Paper on FFO approved by the
Board of Governors of the National Association of Real Estate Investment Trusts
(“NAREIT”) in April 2002.  The White Paper defines FFO as net income
or loss computed in accordance with GAAP, excluding extraordinary items, as
defined by GAAP, and gains and losses from sales of depreciable operating
property plus real estate-related depreciation and amortization and after
adjustments for unconsolidated partnerships and joint ventures.  The
Company believes that FFO is helpful to investors as a measure of performance of
the Company because, along with cash flow from operating activities, FFO
provides investors with an indication of our ability to incur and service debt,
to make capital expenditures and to fund other cash needs.  FFO is a
non-GAAP financial measure.  FFO does not represent net income or cash
flows from operations, as defined by GAAP, and should not be considered as an
alternative to net income (determined in accordance with GAAP) as an indicator
of the Company's operating performance or as an alternative to cash flows from
operating, investing and financing activities (determined in accordance with
GAAP) as a measure of liquidity.  FFO does not necessarily indicate
that cash flows will be sufficient to fund all of the Company's cash needs,
including principal amortization, capital improvements and distributions to
stockholders.  Further, FFO as disclosed by other companies may not be
comparable to the Company's calculation of FFO.


26


The
following table sets forth the Company’s calculation of FFO for the nine months
ended September 30, 2010 and 2009 (in thousands):





Nine Months Ended
                  September 30, 2010
                
                
                Nine Months Ended
                  September 30, 2009Net
      loss attributable to the Company
                
                $
                (3,879
                )
                
                $
                (6,496
                )Preferred
      stock dividends
                
                
                180
                
                
                
                180Depreciation
      and amortization from discontinued operations
                
                
                -
                
                
                
                341Gain
      from sale of discontinued operations
                
                
                (4,315
                )
                
                
                -Deferred
      income tax benefit
                
                
                (2,952
                )
                
                
                (3,933
                )Net
      loss attributable to noncontrolling interests
                
                
                (1,504
                )
                
                
                (856
                )Depreciation
      and amortization
                
                
                10,757
                
                
                
                10,951FFO
                
                $
                (1,713
                )
                
                $
                187




The
decrease in FFO for the nine months ended September 30, 2010 compared to the
nine months ended September 30, 2009 was in large part attributable to the
Evergreen acquisition, costs associated with the acquisition of 2620-2630
Fountain View and other business development costs.




INFLATION





Substantially
all of the leases at the industrial and retail properties provide for
pass-through to tenants of certain operating costs, including real estate taxes,
common area maintenance expenses, and insurance.  Leases at the office
properties typically provide for rent adjustment and pass-through of increases
in operating expenses during the term of the lease.  All of these
provisions may permit the Company to increase rental rates or other charges to
tenants in response to rising prices and therefore, serve to reduce the
Company's exposure to the adverse effects of inflation.





FORWARD-LOOKING
STATEMENTS





This
Report on Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities and
Exchange Act of 1934.  These forward-looking statements are based on
management’s beliefs and expectations, which may not be
correct.  Important factors that could cause actual results to differ
materially from the expectations reflected in these forward-looking statements
include the following: the Company’s level of indebtedness and ability to
refinance its debt; risks inherent in the Company’s acquisition and development
of properties in the future, including risks associated with the Company’s
strategy of investing in under-valued assets; general economic, business and
market conditions, including the impact of the current global financial crisis
and recent downturn in the United States economy; the potential delisting of the
Company’s stock; changes in federal and local laws, and regulations; increased
competitive pressures; and other factors, as well as factors set forth elsewhere
in this Report on Form 10-Q.





ITEM
4T.  CONTROLS AND PROCEDURE





Management,
including the Company’s Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of the Company’s disclosure controls and procedures
as of the end of the quarter covered by this report.  Based on, and as
of the date of, that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the disclosure controls and procedures were effective, in
all material respects, to ensure that information required to be disclosed in
the reports the Company files and submits under the Exchange Act is recorded,
processed, summarized and reported as and when required.





There
were no changes made in the Company’s internal controls over financial reporting
during the third quarter of 2010 that materially affected or is reasonably
likely to materially affect the Company’s internal control over financial
reporting.


27





PART
II.  OTHER INFORMATION





ITEM
1.  LEGAL PROCEEDINGS





Certain
claims and lawsuits have arisen against the Company in its normal course of
business. The Company believes that such claims and lawsuits will not have a
material adverse effect on the Company's financial position, cash flow or
results of operations.





ITEM
5. EXHIBITS





The
Exhibit Index attached hereto is hereby incorporated by reference this
item.





SIGNATURES





Pursuant
to the requirements of Section l3 or l5(d) of the Securities Exchange Act of
l934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





AMERICAN
SPECTRUM REALTY, INC.





Date:
      November 11, 2010
              By:
              /s/ William J. CardenWilliam
      J. CardenChairman
      of the Board, President and,Chief
      Executive Officer(Principal
      Executive Officer)Date:
      November 11, 2010
              By:
              /s/ G. Anthony
    EppolitoG.
      Anthony EppolitoVice
      President, Chief Financial Officer,(Principal
      Financial Officer and Accounting Officer),Treasurer
      and Secretary


28


EXHIBIT
INDEX





Exhibit No.
              
              Exhibit Title31.1
              
              Certification
      of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.2
              
              Certification
      of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232.1
              
              Certification
      of CEO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
      906 of the Sarbanes-Oxley Act of 200232.2
              
              Certification
      of CFO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
      906 of the Sarbanes-Oxley Act of
2002


29