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 March 31, 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 510
                  Houston,
      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  ̈ 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 May
10, 2010, 2,922,794 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 March 31, 2010 (unaudited) and December 31,
      2009
                      3Consolidated
      Condensed Statements of Operations for the three monthsended
      March 31, 2010 and 2009 (unaudited)
                      4Consolidated
      Condensed Statements of Cash Flows for the three monthsended
      March 31, 2010 and 2009 (unaudited)
                      5Notes
      to Consolidated Condensed Financial Statements
                      6Item
      2
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      17Item
      4T
                      Controls
      and Procedures
                      22PART
      II
                      OTHER
      INFORMATIONItem
      1
                      Legal
      Proceedings
                      23Item
      6
                      Exhibits
      and Reports on Form 8-K
                      23




2




PART
I.  FINANCIAL INFORMATION





ITEM
1.  FINANCIAL STATEMENTS




AMERICAN
SPECTRUM REALTY, INC.


CONSOLIDATED
CONDENSED BALANCE SHEETS


(Dollars
in thousands, except share amounts)


(Unaudited)





March 31, 2010
                    
                    
                    December 31, 2009ASSETSReal
      estate held for investment
                    
                    $
                    252,375
                    
                    
                    $
                    251,336Accumulated
      depreciation
                    
                    
                    (75,673
                    )
                    
                    
                    (72,404
                    )Real
      estate held for investment, net
                    
                    
                    176,702
                    
                    
                    
                    178,932Real
      estate held for sale
                    
                    
                    -
                    
                    
                    
                    6,364Cash
      and cash equivalents
                    
                    
                    5,058
                    
                    
                    
                    462Restricted
      cash
                    
                    
                    992
                    
                    
                    
                    992Tenant
      and other receivables, net of allowance for doubtful accounts of $767 and
      $701, respectively
                    
                    
                    1,896
                    
                    
                    
                    891Deferred
      rents receivable
                    
                    
                    1,992
                    
                    
                    
                    1,883Deferred
      tax asset
                    
                    
                    8,348
                    
                    
                    
                    8,813Investment
      in management company
                    
                    
                    4,000
                    
                    
                    
                    4,000Purchased
      intangibles
                    
                    
                    18,000
                    
                    
                    
                    -Prepaid
      and other assets, net
                    
                    
                    10,956
                    
                    
                    
                    12,749Total
      Assets
                    
                    $
                    227,944
                    
                    
                    $
                    215,086LIABILITIESLiabilities:Notes
      payable
                    
                    $
                    203,863
                    
                    
                    $
                    193,920Liabilities
      related to real estate held for sale
                    
                    
                    -
                    
                    
                    
                    6,091Accounts
      payable
                    
                    
                    6,377
                    
                    
                    
                    5,070Liabilities
      related to insurance claims
                    
                    
                    1,443
                    
                    
                    
                    1,474Accrued
      and other liabilities
                    
                    
                    8,431
                    
                    
                    
                    9,520Total
      Liabilities
                    
                    
                    220,114
                    
                    
                    
                    216,075Commitments
      and Contingencies (Notes 10 and 11):Non-controlling
      interest classified as temporary equity
                    
                    
                    1,785
                    
                    
                    
                    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, 3,394,206
      and 3,291,310 shares, respectively; outstanding, 2,922,794 and 2,819,898
      shares, respectively
                    
                    
                    34
                    
                    
                    
                    33Additional
      paid-in capital
                    
                    
                    49,092
                    
                    
                    
                    48,546Accumulated
      deficit
                    
                    
                    (51,963
                    )
                    
                    
                    (52,472
                    )Treasury
      stock, at cost, 471,412 and 471,412 shares, respectively
                    
                    
                    (3,095
                    )
                    
                    
                    (3,095
                    )Total
      American Spectrum Realty, Inc. stockholders’ (deficit)
    equity
                    
                    
                    (5,931
                    )
                    
                    
                    (6,987
                    )Non-controlling
      interests
                    
                    
                    11,976
                    
                    
                    
                    2,036Total
      Equity (Deficit)
                    
                    
                    6,045
                    
                    
                    
                    (4,951
                    )Total
      Liabilities and Equity (Deficit)
                    
                    $
                    227,944
                    
                    
                    $
                    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 March 31,2010
                                    
                                    
                                    2009REVENUES:Rental
      revenue
                                    
                                    $
                                    8,183
                                    
                                    
                                    $
                                    8,440Third
      party management and leasing revenue
                                    
                                    
                                    964
                                    
                                    
                                    
                                    17Interest
      and other income
                                    
                                    
                                    64
                                    
                                    
                                    
                                    8Total
      revenues
                                    
                                    
                                    9,211
                                    
                                    
                                    
                                    8,465EXPENSES:Property
      operating expense
                                    
                                    
                                    3,625
                                    
                                    
                                    
                                    3,893Corporate
      general and administrative
                                    
                                    
                                    1,622
                                    
                                    
                                    
                                    870Depreciation
      and amortization
                                    
                                    
                                    3,570
                                    
                                    
                                    
                                    3,597Interest
      expense
                                    
                                    
                                    3,400
                                    
                                    
                                    
                                    3,295Total
      expenses
                                    
                                    
                                    12,217
                                    
                                    
                                    
                                    11,655Loss
      from continuing operations before deferred income tax
    benefit
                                    
                                    
                                    (3,006
                                    )
                                    
                                    
                                    (3,190
                                    )Deferred
      income tax benefit
                                    
                                    
                                    1,134
                                    
                                    
                                    
                                    1,110Loss
      from continuing operations
                                    
                                    
                                    (1,872
                                    )
                                    
                                    
                                    (2,080
                                    )Discontinued
      operations:Income
      from operations
                                    
                                    
                                    173
                                    
                                    
                                    
                                    45Gain
      on sale of discontinued operations
                                    
                                    
                                    4,315
                                    
                                    
                                    
                                    -Income
      tax expense
                                    
                                    
                                    (1,641
                                    )
                                    
                                    
                                    (16
                                    )Income
      from discontinued operations
                                    
                                    
                                    2,847
                                    
                                    
                                    
                                    29Net
      income (loss), including noncontrolling interests
                                    
                                    $
                                    975
                                    
                                    
                                    $
                                    (2,051
                                    )Plus: 
       Net (income) loss attributable to noncontrolling
      interests
                                    
                                    
                                    (466
                                    )
                                    
                                    
                                    250Net
      income (loss) attributable to American Spectrum Realty,
    Inc.
                                    
                                    
                                    509
                                    
                                    
                                    
                                    (1,801
                                    )Preferred
      stock dividend
                                    
                                    
                                    (60
                                    )
                                    
                                    
                                    (60
                                    )Net
      income (loss) attributable to American Spectrum Realty,
    Inc.common
      stockholders
                                    
                                    $
                                    449
                                    
                                    
                                    $
                                    (1,861
                                    )Basic
      and diluted per share data:Loss
      from continuing operations attributable to AmericanSpectrum
      Realty, Inc. common stockholders
                                    
                                    $
                                    (0.53
                                    )
                                    
                                    $
                                    (0.65
                                    )Income
      from discontinued operations attributable to AmericanSpectrum
      Realty, Inc. common stockholders
                                    
                                    
                                    0.71
                                    
                                    
                                    
                                    0.01Net
      income (loss) attributable to American Spectrum Realty,
    Inc.common
      stockholders
                                    
                                    $
                                    0.18
                                    
                                    
                                    $
                                    (0.64
                                    )Basic
      and diluted weighted average shares used
                                    
                                    
                                    2,854,196
                                    
                                    
                                    
                                    2,795,330Amounts
      attributable to American Spectrum Realty, Inc. commonstockholders:Loss
      from continuing operations
                                    
                                    $
                                    (1,502
                                    )
                                    
                                    $
                                    (1,827
                                    )Income
      from discontinuing operations
                                    
                                    $
                                    2,011
                                    
                                    
                                    $
                                    26Net
      income (loss)
                                    
                                    $
                                    449
                                    
                                    
                                    $
                                    (1,861
                                    )





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




4




AMERICAN
SPECTRUM REALTY, INC


CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS


(Dollars
in thousands)





Three Months Ended March 31,2010
                    
                    
                    2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
                    
                    $
                    975
                    
                    
                    $
                    (2,051
                    )Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                    
                    
                    3,578
                    
                    
                    
                    3,712Gain
      on sale of real estate asset
                    
                    
                    (4,315
                    )
                    
                    
                    -Income
      tax benefit
                    
                    
                    507
                    
                    
                    
                    (1,094
                    )Deferred
      rental income
                    
                    
                    (107
                    )
                    
                    
                    (62
                    )Stock-based
      compensation expense
                    
                    
                    26
                    
                    
                    
                    20Amortization
      of note payable premium, included in interest expense
                    
                    
                    -
                    
                    
                    
                    (11
                    )Changes
      in operating assets and liabilities:Increase
      in tenant and other receivables
                    
                    
                    (798
                    )
                    
                    
                    (314
                    )Increase
      (decrease) in accounts payable
                    
                    
                    792
                    
                    
                    
                    (217
                    )Decrease
      in prepaid and other assets
                    
                    
                    1,683
                    
                    
                    
                    1,706Decrease
      in accrued and other liabilities
                    
                    
                    (1,801
                    )
                    
                    
                    (2,137
                    )Net
      cash provided by (used in) operating activities:
                    
                    
                    540
                    
                    
                    
                    (448
                    )CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      received from sales of real estate assets
                    
                    
                    10,166
                    
                    
                    
                    -Capital
      improvements to real estate assets
                    
                    
                    (1,044
                    )
                    
                    
                    (878
                    )Advance
      to third party
                    
                    
                    (200
                    )
                    
                    
                    -Proceeds
      received related to insurance claims
                    
                    
                    -
                    
                    
                    
                    1,350Payments
      for damages related to insurance claims
                    
                    
                    (31
                    )
                    
                    
                    (742
                    )Net
      cash provided by (used in) investing activities:
                    
                    
                    8,891
                    
                    
                    
                    (270
                    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from borrowings
                    
                    
                    1,250
                    
                    
                    
                    -Repayment
      of borrowings – property sales
                    
                    
                    (5,317
                    )
                    
                    
                    -Repayment
      of borrowings – scheduled payments
                    
                    
                    (580
                    )
                    
                    
                    (599
                    )Acquisition
      of non-controlling interest in the operating partnership
                    
                    
                    (10
                    )
                    
                    
                    -Dividend
      payments to preferred stockholders
                    
                    
                    (43
                    )
                    
                    
                    -Distributions
      to non-controlling interests
                    
                    
                    (135
                    )
                    
                    
                    -Net
      cash used in financing activities:
                    
                    
                    (4,835
                    )
                    
                    
                    (599
                    )Increase
      (decrease) in cash and cash equivalents
                    
                    
                    4,596
                    
                    
                    
                    (1,317
                    )Cash
      and cash equivalents, beginning of period
                    
                    
                    462
                    
                    
                    
                    2,092Cash
      and cash equivalents, end of period
                    
                    $
                    5,058
                    
                    
                    $
                    775SUPPLEMENTAL
      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
                    
                    
                    
                    -Financing
      in connection with Evergreen acquisition
                    
                    
                    9,500
                    
                    
                    
                    -SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid for interest
                    
                    $
                    3,931
                    
                    
                    $
                    3,401Cash
      paid for income taxes
                    
                    
                    40
                    
                    
                    
                    19




5




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 March 31, 2010, held an
interest of 73.34% (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.  No properties were acquired during the
first quarter of 2010.





As of
March 31, 2010, through its majority-owned subsidiary, the Operating
Partnership, the Company owned and operated 29 properties, which consisted of 22
office buildings, five industrial properties, one retail property and a parcel
of land.  The 29 properties are located in five states.




American
Spectrum Management Group, Inc., (“ASMG”) a wholly-owned subsidiary of the
Operating Partnership, provides management and leasing services on the Company’s
29 properties.  ASMG also manages and leases 14 properties in Texas
for third parties representing 687,678 square feet of office, retail and
industrial space.





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 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 283 at March 31, 2010.





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 obtain new mortgages, to refinance
current debt and to sell properties.




The
Company expects to meet its short-term liquidity requirements for normal
operating expenses from cash generated by operations and cash on
hand.   The Company received net proceeds of approximately
$5,200,000 from the March 2010 sale of 5850 San Felipe.  The proceeds
will be used to repurchase the preferred interest in the partnership that owned
5850 San Felipe, reduce accounts payable, debt and for other
investments.   In addition, the Company anticipates generating
proceeds from borrowing activities, additional property sales and/or equity
offerings to provide additional funds for payments of accounts payables,
consisting primarily of tenant improvements and capital improvements on
properties.   As of March 31, 2010, accounts payable over 90 days
totaled $5,673,000, of which $1,588,000 was related to Hurricane Ike expenses,
the 2010 Evergreen acquisition and other business development
costs.  Also, the Company expects to incur capital costs related to
leasing space and making improvements to properties provided the estimated
leasing of space is completed.  The Company anticipates meeting these
obligations with the use of funds held in escrow by lenders, proceeds from
borrowing activities, additional property sales and/or equity
offerings.  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.




6




The
Company has loans totaling $27,986,000, maturing over the next twelve
months.  One of these loans, with a balance of $17,170,000 maturing in
May 2010, contains two one-year extension options.  The extension
options are contingent upon satisfaction of certain terms and conditions
required by the lender.  The Company believes it will be able to meet
the extension criteria for this loan.  Most of the Company’s mortgage
debt is not cross-collateralized.  The Company has three 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.




NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





BASIS
OF PRESENTATION





The
accompanying consolidated condensed financial statements have been prepared
without audit in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange
Commission (“SEC”).  Pursuant to such rules and regulations, these
financial statements do not include all disclosures required by accounting
principles generally accepted in the United States of America for complete
financial statements.  The consolidated condensed financial statements
reflect all adjustments, which are, in the opinion of management, necessary for
a fair presentation of 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 months ended March 31, 2010 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2010 or for
any future period.





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.





RECLASSIFICATIONS




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 OP Unit exchange ratio
in the consolidated financial statements and notes for all periods presented
have been adjusted to reflect the stock dividend.





SEGMENT
REPORTING





The
Company operates as one business operating and reportable segment.




7




NEW
ACCOUNTING PRONOUNCEMENTS





In August
2009, the Financial Accounting Standards Board (“FASB”) issued changes to fair
value accounting for liabilities. These changes clarify existing guidance that
in circumstances in which a quoted price in an active market for the identical
liability is not available, an entity is required to measure fair value using
either a valuation technique that uses a quoted price of a similar liability or
a quoted price of an identical or similar liability when traded as an asset, or
another valuation technique that is consistent with the principles of fair value
measurements, such as an income approach (e.g., present value technique). This
guidance also states that both a quoted price in an active market for the
identical liability and a quoted price for the identical liability when traded
as an asset in an active market when no adjustments to the quoted price of the
asset are required are Level 1 fair value measurements. These changes became
effective for the Company on October 1, 2009.  The adoption of
these changes did not have a material impact on the Company’s consolidated
results of operations and financial condition.





In
May 2009, the FASB issued changes to accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued, otherwise known as “subsequent
events.” Specifically, these changes set forth the period after the balance
sheet date during which management of a reporting entity should evaluate events
or transactions that may occur for potential recognition or disclosure in the
financial statements, the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date in its financial
statements, and the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. The adoption of these
changes had no impact on the Company’s consolidated financial
statements.  The Company has evaluated subsequent events through the
date the accompanying financial statements were issued.





STOCK-BASED
COMPENSATION





Stock-based
compensation expense beginning with the first quarter of 2006 included
compensation expense for all stock-based compensation awards granted prior to,
but not yet vested as of January 1, 2006, based on the estimated grant date fair
value. Stock-based compensation expense for all stock-based compensation awards
granted after January 1, 2006 is based on the estimated grant-date fair
value.  The Company is recognizing these compensation costs on a
straight-line basis over the requisite service period of the award, which ranges
from immediate vesting to vesting over a three-year period.





NON-CONTROLLING
INTERESTS





Unit
Holders in the Operating Partnership





Unit
holders in the Operating Partnership (other than the Company) held an 26.66% and
11.61% partnership interest in the Operating Partnership, as limited partners,
at March 31, 2010 and December 31, 2009, respectively.  Each of the
holders of the interests in the Operating Partnership (other than the Company)
has the option (exercisable after the first anniversary of the issuance of the
OP Units) to redeem its OP Units and to receive, at the option of the Company,
in exchange for each two OP Units, either (i) one share of Common Stock of the
Company, or (ii) cash equal to the value of one share of Common Stock of the
Company at the date of conversion, but no fractional shares will be
issued.





In
January 2010, the Company issued 1,600,000 OP Units 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), which 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 (Also see Note
4).





Partial
Sale of Consolidated Partnership Interests





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.




8




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
from the third party for $1,785,000.





As of
March 31, 2010, non-controlling interests related to the partial sale of
consolidated partnership interests was $3,484,000, of which $1,785,000
repurchased in April 2010, was classified as temporary equity.





NET
INCOME (LOSS) PER SHARE





Net
income (loss) per share is calculated based on the weighted average number of
common shares outstanding.  The Company incurred net losses from
continuing operations for the three months ended March 31, 2010 and March 31,
2009.  Stock options outstanding of 58,750 and 58,750 and OP Units
(other than those held by the Company) outstanding of 2,136,760 and 744,982
(convertible into approximately 1,068,380 and 372,492 shares of common stock),
at March 31, 2010 and March 31, 2009, respectively, have not been included in
the Company’s net loss per share calculations for periods presented since their
effect would be anti-dilutive.





INCOME
TAXES





In May
2006, the State of Texas enacted a margin tax which became effective in
2008.  This margin tax required each of the Company’s limited
partnerships and limited liability companies that operate in Texas to pay a tax
of 1.0% on their “margin” as defined in the law, beginning in 2008 based on 2007
results.  The legislation revised the Texas franchise tax to create a
new tax on virtually all Texas businesses.  The margin tax has not had
a material effect on the Company’s income tax liability.





In June
2006, the FASB issued guidance regarding the uncertainty in income taxes
recognized in an enterprise’s financial statements.  The guidance clarifies
the criteria that an individual tax position must satisfy for some or all of the
benefits of that position to be recognized in a company’s financial
statements.  There is a recognition threshold of more-likely–than-not,
and a measurement attribute for all tax positions taken or expected to be taken
on a tax return, in order for those tax positions to be recognized in the
financial statements.




As of
March 31, 2010, the Company had unrecognized tax benefits of approximately
$133,000, all of which would affect our effective tax rate if
recognized.  The Company does not expect that the amounts of
unrecognized tax benefits will change significantly within the next 12
months.  The Company’s policy is to recognize interest related to any
unrecognized tax benefits as interest expense and penalties as operating
expenses.  There are no significant penalties or interest accrued at
March 31, 2010.  The Company believes that it has appropriate support
for the income tax positions taken and to be taken on its tax returns and that
its accruals for tax liabilities are adequate for all open years based on an
assessment of many factors including past experience and interpretations of tax
law applied to the facts of each matter.  The Company’s federal and
state income tax returns are open to audit under the statute of limitations for
the years ending December 31, 2006 through 2009.




9




NOTE
3.  REAL ESTATE





Acquisitions





No
properties were acquired during the first quarter of 2010.





Dispositions





5850 San
Felipe, a 101,880 square foot office property located in Houston, Texas was sold
on March 31, 2010.  The sale generated proceeds of approximately
$5,200.000.  The proceeds will be 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.





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 interest in real estate assets, held in most cases as the manager or
general partner of entities, in which the Company is not the primary
beneficiary, owning 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, held in each
case as tenant in common interests, represent Evergreen’s non-economic interest
in many of the properties associated with the contracts
acquired.




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.  As such, the contracts are not subject to amortization
but are tested for impairment quarterly.  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.  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 March
31, 2010.





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.  DISCONTINUED OPERATIONS





Real estate assets held for
sale.





At
December 31, 2009, 5850 San Felipe, a 101,882 square foot office property
located in Houston, Texas, was classified as “Real estate held for
sale.”  The property was sold on March 31, 2010.  No real
estate assets were classified as held for sale by the Company at March 31,
2010.




10




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





Condensed Consolidated Balance Sheet
                      
                      December 31,
                        2009Real
      estate
                      
                      $
                      5,847Other
                      
                      
                      517Real
      estate assets held for sale
                      
                      $
                      6,364Notes
      payable, net
                      
                      $
                      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 three months ended March 31,
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 $29,000 for the three months ended March
31, 2009 represents the property’s operating results for the
quarter.





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





Condensed Statements of Operations
                  
                  Three Months Ended March 31,2010
                  
                  
                  2009Rental
      revenue
                  
                  $
                  482
                  
                  
                  $
                  451Total
      expenses (1)
                  
                  
                  (309
                  )
                  
                  
                  (406
                  )Income
      from discontinued operations before gain on sale and income tax
      expense
                  
                  
                  173
                  
                  
                  
                  45Gain
      on sale of discontinued operations
                  
                  
                  4,315
                  
                  
                  
                  -Income
      tax expense
                  
                  
                  (1,641
                  )
                  
                  
                  (16
                  )Income
      from discontinued operations
                  
                  $
                  2,847
                  
                  
                  $
                  29





(1)
Includes interest expense of $75 and $76 for the three months ended March 31,
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.




11




NOTE
6.  NOTES PAYABLE, NET OF PREMIUM





The
Company had the following notes payable outstanding as of March 31, 2010 and
December 31, 2009 (dollars in thousands):





March 31, 2010
                    
                    
                    December 31, 2009Property (unless otherwise noted)
                    
                    Maturity
                      Date
                    
                    Principal
                      Balance
                    
                    
                    Interest Rate
                    
                    
                    Principal
                      Balance
                    
                    
                    Interest
                      RateFixed
      RateCorporate
      – Secured (1)
                    
                    2/7/2010
                    
                    
                    1,950
                    
                    
                    
                    7.50
                    %
                    
                    
                    1,950
                    
                    
                    
                    7.50
                    %Corporate
      – Unsecured
                    
                    5/31/2010
                    
                    
                    500
                    
                    
                    
                    11.00
                    %
                    
                    
                    500
                    
                    
                    
                    11.00
                    %Pacific
      Spectrum
                    
                    6/10/2010
                    
                    
                    5,234
                    
                    
                    
                    8.02
                    %
                    
                    
                    5,248
                    
                    
                    
                    8.02
                    %1501
      Mockingbird/6430 Richmond
                    
                    9/21/2010
                    
                    
                    890
                    
                    
                    
                    8.75
                    %
                    
                    
                    890
                    
                    
                    
                    8.75
                    %Northwest
      Spectrum
                    
                    12/3/2010
                    
                    
                    750
                    
                    
                    
                    8.75
                    %
                    
                    
                    750
                    
                    
                    
                    8.75
                    %Corporate-Secured
                    
                    12/4/2010
                    
                    
                    992
                    
                    
                    
                    4.50
                    %
                    
                    
                    992
                    
                    
                    
                    4.50
                    %Fountain
      View Place (2)
                    
                    4/29/2011
                    
                    
                    1,377
                    
                    
                    
                    10.00
                    %
                    
                    
                    1,423
                    
                    
                    
                    10.00
                    %Bristol
      Bay
                    
                    8/1/2011
                    
                    
                    6,869
                    
                    
                    
                    7.58
                    %
                    
                    
                    6,899
                    
                    
                    
                    7.58
                    %Technology
                    
                    8/1/2011
                    
                    
                    7,114
                    
                    
                    
                    7.44
                    %
                    
                    
                    7,131
                    
                    
                    
                    7.44
                    %Creekside
                    
                    12/1/2011
                    
                    
                    5,788
                    
                    
                    
                    7.17
                    %
                    
                    
                    5,814
                    
                    
                    
                    7.17
                    %16350
      Park Ten Place
                    
                    5/11/2012
                    
                    
                    4,442
                    
                    
                    
                    7.45
                    %
                    
                    
                    4,466
                    
                    
                    
                    7.45
                    %16360
      Park Ten Place
                    
                    5/11/2012
                    
                    
                    3,481
                    
                    
                    
                    7.45
                    %
                    
                    
                    3,499
                    
                    
                    
                    7.45
                    %2855
      Mangum
                    
                    5/11/2012
                    
                    
                    2,565
                    
                    
                    
                    7.45
                    %
                    
                    
                    2,575
                    
                    
                    
                    7.45
                    %2855
      Mangum
                    
                    5/11/2012
                    
                    
                    1,408
                    
                    
                    
                    6.00
                    %
                    
                    
                    1,422
                    
                    
                    
                    6.00
                    %6430
      Richmond Atrium
                    
                    5/11/2012
                    
                    
                    2,153
                    
                    
                    
                    7.45
                    %
                    
                    
                    2,161
                    
                    
                    
                    7.45
                    %Southwest
      Pointe
                    
                    6/1/2012
                    
                    
                    2,699
                    
                    
                    
                    7.33
                    %
                    
                    
                    2,710
                    
                    
                    
                    7.33
                    %16350
      Park Ten Place
                    
                    8/11/2012
                    
                    
                    490
                    
                    
                    
                    7.45
                    %
                    
                    
                    492
                    
                    
                    
                    7.45
                    %16360
      Park Ten Place
                    
                    8/11/2012
                    
                    
                    384
                    
                    
                    
                    7.45
                    %
                    
                    
                    386
                    
                    
                    
                    7.45
                    %Corporate-Secured
      (3)
                    
                    3/5/2013
                    
                    
                    987
                    
                    
                    
                    8.75
                    %
                    
                    
                    -
                    
                    
                    
                    -11500
      Northwest Freeway
                    
                    6/1/2014
                    
                    
                    4,061
                    
                    
                    
                    5.93
                    %
                    
                    
                    4,079
                    
                    
                    
                    5.93
                    %11500
      Northwest Freeway
                    
                    6/1/2014
                    
                    
                    293
                    
                    
                    
                    5.93
                    %
                    
                    
                    295
                    
                    
                    
                    5.93
                    %Morenci
                    
                    7/1/2014
                    
                    
                    1,676
                    
                    
                    
                    7.25
                    %
                    
                    
                    1,689
                    
                    
                    
                    7.25
                    %Northwest
      Corporate Center
                    
                    8/1/2014
                    
                    
                    5,357
                    
                    
                    
                    6.26
                    %
                    
                    
                    5,370
                    
                    
                    
                    6.26
                    %14741
      Yorktown
                    
                    9/1/2014
                    
                    
                    8,600
                    
                    
                    
                    5.32
                    %
                    
                    
                    8,600
                    
                    
                    
                    5.32
                    %8100
      Washington
                    
                    2/22/2015
                    
                    
                    2,190
                    
                    
                    
                    5.59
                    %
                    
                    
                    2,196
                    
                    
                    
                    5.59
                    %8300
      Bissonnet
                    
                    5/1/2015
                    
                    
                    4,516
                    
                    
                    
                    5.51
                    %
                    
                    
                    4,527
                    
                    
                    
                    5.51
                    %1501
      Mockingbird
                    
                    7/1/2015
                    
                    
                    3,232
                    
                    
                    
                    5.28
                    %
                    
                    
                    3,239
                    
                    
                    
                    5.28
                    %5450
      Northwest Central
                    
                    9/1/2015
                    
                    
                    2,619
                    
                    
                    
                    5.38
                    %
                    
                    
                    2,631
                    
                    
                    
                    5.38
                    %800/888
      Sam Houston Parkway
                    
                    12/29/2015
                    
                    
                    4,610
                    
                    
                    
                    6.25
                    %
                    
                    
                    4,638
                    
                    
                    
                    6.25
                    %2401
      Fountain View
                    
                    3/1/2016
                    
                    
                    12,090
                    
                    
                    
                    5.82
                    %
                    
                    
                    12,139
                    
                    
                    
                    5.82
                    %12000
      Westheimer/2470 Gray Falls
                    
                    1/1/2017
                    
                    
                    7,343
                    
                    
                    
                    5.70
                    %
                    
                    
                    7,350
                    
                    
                    
                    5.70
                    %6420
      Richmond Atrium
                    
                    6/5/2017
                    
                    
                    6,352
                    
                    
                    
                    5.87
                    %
                    
                    
                    6,364
                    
                    
                    
                    5.87
                    %7700
      Irvine Center
                    
                    8/1/2017
                    
                    
                    45,000
                    
                    
                    
                    5.99
                    %
                    
                    
                    45,000
                    
                    
                    
                    5.99
                    %Fountain
      View Place
                    
                    4/29/2018
                    
                    
                    12,479
                    
                    
                    
                    6.50
                    %
                    
                    
                    12,521
                    
                    
                    
                    6.50
                    %Corporate-Secured
      (4)
                    
                    12/31/2019
                    
                    
                    9,500
                    
                    
                    
                    5.00
                    %
                    
                    
                    -
                    
                    
                    
                    -Subtotal
                    
                    $
                    179,991
                    
                    
                    
                    
                    
                    
                    $
                    169,946Variable
      RateBeltway
      Industrial (5)
                    
                    5/9/2010
                    
                    
                    17,170
                    
                    
                    
                    7.00
                    %
                    
                    
                    17,170
                    
                    
                    
                    7.00
                    %Corporate
      – Unsecured
                    
                    5/31/2010
                    
                    
                    500
                    
                    
                    
                    6.00
                    %
                    
                    
                    500
                    
                    
                    
                    6.00
                    %Northwest
      Spectrum
                    
                    4/19/2012
                    
                    
                    2,960
                    
                    
                    
                    2.90
                    %
                    
                    
                    3,013
                    
                    
                    
                    2.90
                    %Windrose
      Plaza
                    
                    4/19/2012
                    
                    
                    2,742
                    
                    
                    
                    2.90
                    %
                    
                    
                    2,791
                    
                    
                    
                    2.90
                    %Corporate
      – Unsecured
                    
                    12/12/2013
                    
                    
                    500
                    
                    
                    
                    6.00
                    %
                    
                    
                    500
                    
                    
                    
                    6.00
                    %Subtotal
                    
                    $
                    23,872
                    
                    
                    
                    
                    
                    
                    $
                    23,974Total
                    
                    $
                    203,863
                    
                    
                    
                    
                    
                    
                    $
                    193,920





(1)
            The
      Company is currently negotiating a maturity extension on the note with the
      lender.





(2)
            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.





(3)
            Represents
      bank loan in the amount of $1,000,000 obtained in March
    2010.





(4)
            Represents
      promissory note issued by the Company in January 2010 in connection with
      the Evergreen acquisition.





(5) The
loan contains two one-year extension options.  The extension options
are contingent upon satisfaction of certain terms and conditions required by the
lender.





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
7.  NONCONTROLLING INTERESTS





Unit
Holders in the Operating Partnership





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.




12




In March
2010, 160,266 OP Units were exchanged for 80,132 shares of Common Stock by the
spouse of William J. Carden and 45,529 OP Units were exchanged for 22,764 shares
of Common Stock by an entity controlled by Mr. Carden.  Mr. Carden is
the Chief Executive Officer, Chairman of the Board, and a principal stockholder
in the Company.





During
the three months ended March 31, 2010, 1,942 OP Units were redeemed for cash of
approximately $10,000.





During
2009, Mr. Carden exchanged 78,406 OP Units for 39,202 shares of Common
Stock.





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





OP Units
(other than those held by the Company) of 2,136,760 (convertible into
approximately 1,068,380 shares of common stock) were outstanding as of March 31,
2010.  As of March 31, 2010, non-controlling interest in the Operating
Partnership was $10,277,000.





Partial
Sale of Consolidated Partnership Interests





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
from the third party for $1,785,000.





As of
March 31, 2010, non-controlling interests related to the partial sale of
consolidated partnership interests was $3,484,000, of which $1,785,000 was
repurchased in April 2010, was classified as temporary equity.





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 months ended March 31, 2010 and 2009 (dollars in
thousands):





Three Months
                  Ended March 31,
                  2010
                
                
                Three Months
                  Ended March 31,
                  2009Net
      income (loss) attributable to the Company
                
                $
                509
                
                
                $
                (1,801
                )Transfers
      from noncontrolling interestsIncrease
      in the Company’s paid-in capital on exchange of OP Units for shares of
      Common Stock
                
                $
                211
                
                
                $
                314Increase
      in the Company’s paid-in capital on reclassification of preferred interest
      from temporary equity sale of consolidated partnership
      interests
                
                $
                370
                
                
                
                -Net
      transfers from noncontrolling interests
                
                $
                581
                
                
                $
                314Change
      from net income (loss) attributable to the Company on exchange of OP Units
      for shares of Common Stock and reclassification of preferred interest from
      temporary equity
                
                $
                1,090
                
                
                $
                (1,487
                )




13




NOTE
8.  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 March 31,
2010, 211,128 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 March 31,
2010 amounted to $26,000, or $0.01 per basic and diluted earnings per
share.  Total stock-based compensation expense recognized for the
three months ended March 31, 2009 amounted to $20,000, or $0.01 per basic and
diluted earnings per share.  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 March 31, 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 three months ended March 31, 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 March 31, 2010
                  
                  
                  58,750
                  
                  
                  $
                  11.97
                  
                  
                  $
                  95,838Exercisable
      as of  March 31, 2010
                  
                  
                  58,750
                  
                  
                  $
                  11.97
                  
                  
                  $
                  95,838





The
following table summarizes certain information for stock options, all of which
are exercisable and outstanding on March 31, 2010:





Range of
                        Exercise
                        Price
                      
                      Number
                        Exercisable
                      
                      Weighted Average
                        Remaining
                        Contractual
                        Life
                      
                      Weighted
                        Average
                        Exercise
                        Price$4.05
      - $6.10
                      
                      
                      25,000
                      
                      4.0
      years
                      
                      $
                      5.33$9.13
      - $13.58
                      
                      
                      22,500
                      
                      4.4
      years
                      
                      $
                      10.33$30.00
      - $30.00
                      
                      
                      11,250
                      
                      1.5
      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 year ended
December 31, 2009.  No Common Stock was issued under the Plan during
the three months ended March 31, 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.




14




Compensation
expense of $26,000 and $17,000, respectively, was recognized for restricted
shares during the three months ended March 31, 2010 and March 31, 2009,
respectively.  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 three months ended March 31, 2010 is presented
below:





Restricted Stock Awards
                  
                  Number of
                    Shares
                  
                  
                  Weighted Average Grant
                    Date Fair ValueNonvested
      at January 1, 2010
                  
                  
                  20,012
                  
                  
                  $
                  10.72Granted
                  
                  
                  -
                  
                  
                  
                  -Vested
                  
                  
                  -
                  
                  
                  
                  -Forfeited
                  
                  
                  -
                  
                  
                  
                  -Nonvested
      at March 31, 2010
                  
                  
                  20,012
                  
                  
                  $
                  10.72





As of
March 31, 2010, there was $122,000 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
1.8 years.





NOTE
9.  RELATED PARTY TRANSACTIONS





In March
2010, 160,266 OP Units were exchanged for 80,132 shares of Common Stock by the
spouse of William J. Carden and 45,529 OP Units were exchanged for 22,764 shares
of Common Stock by an entity controlled by Mr. Carden.  Mr. Carden is
the Chief Executive Officer, Chairman of the Board, and a principal stockholder
in the Company.  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 March 31, 2010,
the Company had accrued and unpaid dividends on the Preferred Stock of
$105,000.





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 $22,076 for the three months ended March
31, 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 Timothy R. Brown, a director of the Company,
is a partner.





During
2007, the Company entered into a lease agreement with Galardi Group 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.




15




NOTE
10.  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.





NOTE
11.  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 9 – 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 March 31,
2010, the Company had accrued and unpaid dividends on the Preferred Stock of
$105,000.





NOTE
12.  SUBSEQUENT EVENT





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 OP Unit exchange ratio
the consolidated financial statements and notes for all periods presented have
been adjusted to reflect the stock dividend.




16




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 March 31, 2010, held an
interest of 73.34% (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).





In the
accompanying financial statements, the results of operations for 5850 San
Felipe, a 101,880 square foot office property located in Houston, Texas 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 and 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 84% occupied at March 31, 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 29 properties.  ASMG also manages and leases 14 properties
in Texas for third parties representing 687,628 square feet of office, retail
and industrial space.





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 283 at March 31, 2010.





CRITICAL
ACCOUNTING POLICIES





The major
accounting policies followed by the Company are listed in Note 2 – Summary of
Significant Accounting Policies – of the Notes to the Consolidated Condensed
Financial Statements.  The consolidated condensed financial statements
of the Company are prepared in accordance with accounting principles generally
accepted in the United States of America, which requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the results of operations during the reporting
period. Actual results could differ materially from those
estimates.




17




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:




Investment
in Real Estate Assets





Rental
properties are stated at cost, net of accumulated depreciation, unless
circumstances indicate that cost, net of accumulated depreciation, cannot be
recovered, in which case the carrying value of the property is reduced to
estimated fair value. Estimated fair value (i) is based upon the Company's plans
for the continued operation of each property and (ii) is computed using
estimated sales price, as determined by prevailing market values for comparable
properties and/or the use of capitalization rates multiplied by annualized net
operating income based upon the age, construction and use of the
building.  The fulfillment of the Company's plans related to each of
its properties is dependent upon, among other things, the presence of economic
conditions which will enable the Company to continue to hold and operate the
properties prior to their eventual sale.  Due to uncertainties
inherent in the valuation process and in the economy, the actual results of
operating and disposing of the Company's properties could be materially
different than current expectations.





Depreciation
is provided using the straight-line method over the useful lives of the
respective assets. The useful lives are as follows:





Building
      and Improvements
                
                5
      to 40 yearsTenant
      Improvements
                
                Term
      of the related leaseFurniture
      and Equipment
                
                3
      to 5 years




Allocation
of Purchase Price of Acquired Assets





Upon
acquisitions of real estate, the Company assesses the fair value of acquired
tangible and intangible assets (including land, buildings, tenant improvements,
above and below market leases, origination costs, acquired in-place leases,
other identified intangible assets and assumed liabilities), and allocates the
purchase price to the acquired assets and assumed liabilities.  The
Company also considers an allocation of purchase price of other acquired
intangibles, including acquired in-place leases.





The
Company evaluates acquired “above and below” market leases at their fair value
(using a discount rate which reflects the risks associated with the leases
acquired) equal to the difference between (i) the contractual amounts to be paid
pursuant to each in-place lease and (ii) management’s estimate of fair market
lease rates for each corresponding in-place lease, measured over a period equal
to the remaining term of the lease for above-market leases and the initial term
plus the term of any below-market fixed rate renewal options for below-market
leases.





Sales
of Real Estate Assets





Gains on
property sales are recognized in full when real estate is sold, provided (i) the
gain is determinable, that is, the collectibility of the sales price is
reasonably assured or the amount that will not be collectible can be estimated,
and (ii) the earnings process is virtually complete, that is, the Company is not
obligated to perform significant activities after the sale to earn the
gain.  Losses on property sales are recognized
immediately.




18




RESULTS
OF OPERATIONS





Discussion
of the three months ended March 31, 2010 and 2009.





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





March 31,
                
                
                March 31,
                
                
                Variance2010
                
                
                2009
                
                
                $
                
                
                %Rental
      revenue
                
                $
                8,183,000
                
                
                $
                8,440,000
                
                
                $
                (257,000
                )
                
                
                (3.1
                )%Third
      party management and leasing revenue
                
                
                964,000
                
                
                
                17,000
                
                
                
                947,000
                
                
                
                5,570.6
                %Operating
      expenses:Property
      operating expenses
                
                
                3,625,000
                
                
                
                3,893,000
                
                
                
                (268,000
                )
                
                
                (6.9
                )%General
      and administrative
                
                
                1,622,000
                
                
                
                870,000
                
                
                
                752,000
                
                
                
                86.4
                %Depreciation
      and amortization
                
                
                3,570,000
                
                
                
                3,597,000
                
                
                
                (27,000
                )
                
                
                (0.1
                )%Interest
      expense
                
                
                3,400,000
                
                
                
                3,295,000
                
                
                
                105,000
                
                
                
                3.2
                %





Rental revenue. Rental
revenue decreased $257,000, or 3.1%, for the three months ended March 31, 2010
in comparison to the three months ended March 31, 2009.  The decrease
was in large part due to an increase in rent concessions.  The
decrease was also due to a decrease in common area maintenance fee revenue
recognized during the first quarter of 2010 in comparison to the first quarter
of 2009.  The weighted average occupancy of the Company’s properties
was 84% at March 31, 2010 and 2009.





Third party management and leasing
revenue.Third party management and leasing revenue increased by $947,000
for the three months ended March 31, 2010, compared to the three months ended
March 31, 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.  Third party management revenues
attributable to the Evergreen acquisition amounted to $910,000 for the first
quarter of 2010.   The increase was also due to an increase in
third party management and leasing revenues attributable to the Company’s other
third party management contracts.





Property operating
expenses.  Property operating expenses decreased by $268,000,
or 6.9%, for the three months ended March 31, 2010 in comparison to the three
months ended March 31, 2009.  The decrease was primarily due to 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 and bad debt expense incurred during the
quarter.





Corporate general and
administrative.  Corporate general and administrative costs
increased by $752,000, or 86.4%, for the three months ended March 31, 2010 when
compared to the three months ended March 31, 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 $860,000.  The increase was principally personnel
related.  The increase was partially offset by a decrease in legal
fees incurred during the quarter.





Depreciation and
amortization.  Depreciation and amortization expense decreased
$27,000, or 0.1%, for the three months ended March 31, 2010 in comparison to the
three months ended March 31, 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 $105,000, or 3.2%, for the
three months ended March 31, 2010 in comparison to the three months ended March
31, 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 $99,000 during the first quarter of
2010.





Non-controlling
interests.The
share of income attributable to non-controlling interests was $466,000 for the
three months ended March 31, 2010, compared to a share of loss attributable to
non-controlling interests of $250,000 for the three months ended March 31,
2009.  The non-controlling interests represent i) unit holders in the
Operating Partnership (other than the Company) that held, as of March 31, 2010
and March 31, 2009, a respective 27% and 12% partnership interest in the
Operating Partnership as limited partners and ii) a 49% interest in two of the
Company’s single purpose limited partnerships sold to a third party in September
2009, one of which was repurchased in April 2010.




19




Discontinued
operations.  The Company recorded income from discontinued
operations of $2,847,000 for the three months ended March 31, 2010, compared to
$29,000 for the three months ended March 31, 2009.   The income
from discontinued operations for the three months ended March 31, 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 three months ended March 31, 2009 represents the
property’s operating results for the quarter ended March 31, 2009





LIQUIDITY
AND CAPITAL RESOURCES





During
the first three months of 2010, the Company derived cash primarily from the
collection of rents, proceeds from the sale of 5850 San Felipe and borrowing
activities.   Major uses of cash included payments for capital
improvements to real estate assets, primarily for tenant improvements, payment
of operational expenses, repayment of borrowings and scheduled principal and
interest payments on borrowings.





The
Company reported net income of $509,000 for the three months ended March 31,
2010 compared to a net loss of $1,801,000 for the three months ended March 31,
2009.  These results include the following non-cash
items:





Three Months Ended
                      March 31,2010
                    
                    
                    2009Non-Cash
      Items:Depreciation
      and amortization expense
                    
                    $
                    3,578
                    
                    
                    $
                    3,712Income
      tax benefit
                    
                    
                    507
                    
                    
                    
                    (1,094
                    )Deferred
      rental income
                    
                    
                    (107
                    )
                    
                    
                    (62
                    )Noncontrolling
      interests
                    
                    
                    466
                    
                    
                    
                    (250
                    )Stock-based
      compensation expense
                    
                    
                    26
                    
                    
                    
                    20Amortization
      of loan premium
                    
                    
                    -
                    
                    
                    
                    (11
                    )





Net cash
provided by operating activities amounted to $540,000 for the three months ended
March 31, 2010.  The net cash represented $664,000 generated by
property operations partially offset by a net change in operating assets and
liabilities of $124,000.  Net cash used in operating activities
amounted to $448,000 for the three months ended March 31, 2009.  The
net cash used in operating activities included $514,000 generated by property
operations, offset by a change in net operating assets and liabilities of
$962,000.





Net cash
provided by investing activities amounted to $8,891,000 for the three months
ended March 31, 2010.  This amount was 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 $1,044,000 and an
advance of $200,000 to a third party.  Net cash used in investing
activities amounted to $270,000 for the three months ended March 31,
2009.  Cash of $878,000 was used for capital expenditures, primarily
tenant improvements.  The Company received insurance proceeds of
$1,350,000 related to its hurricane and fire claims and paid $742,000 for
damages related to the hurricane and fire.





Net cash
used in financing activities amounted to $4,835,000 for the three months ended
March 31, 2010, which included the debt repayment on the sale of 5850 San Felipe
of $5,317,000, scheduled principal payments on debt of $580,000 and
distributions to non-controlling interests of $135,000.  This amount
was partially offset by new borrowings of $1,250,000.  Cash used in
financing activities of $599,000 for the three months ended March 31, 2009 was
attributable to scheduled principal payments on debt.





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 obtain new mortgages, to refinance
current debt and to sell properties.




20




The
Company expects to meet its short-term liquidity requirements for normal
operating expenses from cash generated by operations and cash on
hand.   The Company received net proceeds of approximately
$5,200,000 from the March 2010 sale of 5850 San Felipe.  The proceeds
will be used to repurchase the preferred interest in the partnership that owned
5850 San Felipe, reduce accounts payable, debt and for other
investments.   In addition, the Company anticipates generating
proceeds from borrowing activities, additional property sales and/or equity
offerings to provide additional funds for payments of accounts payables,
consisting primarily of tenant improvements and capital improvements on
properties.   As of March 31, 2010, accounts payable over 90 days
totaled $5,673,000, of which $1,588,000 was related to Hurricane Ike expenses,
the 2010 Evergreen acquisition and other business development
costs.  Also, the Company expects to incur capital costs related to
leasing space and making improvements to properties provided the estimated
leasing of space is completed.  The Company anticipates meeting these
obligations with the use of funds held in escrow by lenders, proceeds from
borrowing activities, additional property sales and/or equity
offerings.  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.




The
Company has loans totaling $27,986,000, maturing over the next twelve months.
One of these loans, with a balance of $17,170,000 maturing in May 2010, contains
two one-year extension options.  The extension options are contingent
upon satisfaction of certain terms and conditions required by the
lender.  The Company believes it will be able to meet the extension
criteria for this loan.  Most of the Company’s mortgage debt is not
cross-collateralized.  The Company has three 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.





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.




21




The
following table sets forth the Company’s calculation of FFO for the three months
ended March 31, 2010 and 2009 (in thousands):





Three Months Ended
                    March 31, 2010
                  
                  
                  Three Months Ended
                    March 31, 2010Net
      income (loss) attributable to the Company
                  
                  $
                  509
                  
                  
                  $
                  (1,801
                  )Depreciation
      and amortization from discontinued operations
                  
                  
                  8
                  
                  
                  
                  115Net
      income from discontinued operations
                  
                  
                  (2,847
                  )
                  
                  
                  (29
                  )Deferred
      income tax benefit
                  
                  
                  (1,134
                  )
                  
                  
                  (1,110
                  )Net
      income (loss) attributable to noncontrolling interests
                  
                  
                  466
                  
                  
                  
                  (250
                  )Depreciation
      and amortization
                  
                  
                  3,570
                  
                  
                  
                  3,597FFO
                  
                  $
                  572
                  
                  
                  $
                  522




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 PROCEDURES





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 first quarter of 2010 that materially affected or is reasonably
likely to materially affect the Company’s internal control over financial
reporting.




22




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
6.  EXHIBITS AND REPORTS ON FORM 8-K





(a)  Exhibits:





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





(b)  Reports
on Form 8-K:





On
January 19, 2010, a report on Form 8-K was filed with respect to Item
8.01.


On March
8, 2010, a report on Form 8-K was filed with respect to Item 3.01.


On March
31, 2010, a report on Form 8-K was filed with respect to Item 2.02.




23




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:
      May 10, 2010
                By:
                /s/ William J. CardenWilliam
      J. CardenChairman
      of the Board, President and,Chief
      Executive Officer(Principal
      Executive Officer)Date:
      May 10, 2010
                By:
                /s/ G. Anthony EppolitoG.
      Anthony EppolitoVice
      President, Chief Financial Officer,(Principal Financial Officer and Accounting Officer),Treasurer
      and Secretary





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




24