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 June 30, 2010


OR


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


THE
SECURITIES EXCHANGE ACT OF 1934





COMMISSION
FILE NUMBER 001-16785





American
Spectrum Realty, Inc.


(Exact
name of Registrant as specified in its charter)





State
      of Maryland
                  
                  52-2258674(State
      or other jurisdiction of
                    incorporation
      or organization)
                  
                  (I.R.S.
      Employer
                    Identification
      No.)2401
      Fountain View, Suite 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
August 6, 2010, 2,934,294 shares of Common Stock ($.01 par value) were
outstanding.








TABLE
OF CONTENTS





Page No.PART
      I
                                            
                                            FINANCIAL
      INFORMATIONItem
      1
                                            
                                            Financial
      Statements
                                            
                                            3Consolidated
      Condensed Balance Sheets at June 30, 2010 (unaudited) and December 31,
      2009 (unaudited)
                                            
                                            3Consolidated
      Condensed Statements of Operations for the three and six monthsended June 30, 2010 and 2009 (unaudited)
                                            
                                            4Consolidated
      Condensed Statements of Cash Flows for the three and six monthsended June 30, 2010 and 2009 (unaudited)
                                            
                                            5Notes
      to Consolidated Condensed Financial Statements
                                            
                                            7Item
      2
                                            
                                            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                            
                                            20Item
      4T
                                            
                                            Controls
      and Procedures
                                            
                                            27PART
      II
                                            
                                            OTHER
      INFORMATIONItem
      1
                                            
                                            Legal
      Proceedings
                                            
                                            27Item
      2
                                            
                                            Unregistered
      Sales of Equity Securities and Use of Proceeds
                                            
                                            27Item
      5
                                            
                                            Exhibits
                                            
                                            27


2


PART
I.  FINANCIAL INFORMATION





ITEM
1.  FINANCIAL STATEMENTS




AMERICAN
SPECTRUM REALTY, INC.


CONSOLIDATED
CONDENSED BALANCE SHEETS


(Dollars
in thousands, except share amounts)


(Unaudited)




June 30, 2010
                
                
                December 31, 2009ASSETSReal
      estate held for investment
                
                $
                263,359
                
                
                $
                251,336Accumulated
      depreciation
                
                
                (79,238
                )
                
                
                (72,404
                )Real
      estate held for investment, net
                
                
                184,121
                
                
                
                178,932Real
      estate held for sale
                
                
                -
                
                
                
                6,364Cash
      and cash equivalents
                
                
                984
                
                
                
                462Restricted
      cash
                
                
                992
                
                
                
                992Deposits
      held in escrow for debt assumption
                
                
                947
                
                
                
                -Tenant
      and other receivables, net of allowance for doubtful accounts of $859 and
      $701, respectively
                
                
                1,314
                
                
                
                891Deferred
      rents receivable
                
                
                2,004
                
                
                
                1,883Deferred
      tax asset
                
                
                10,146
                
                
                
                8,813Purchased
      intangibles
                
                
                18,000
                
                
                
                -Investment
      in management company
                
                
                4,000
                
                
                
                4,000Investments
      in unconsolidated real estate assets from related parties
                
                
                1,386
                
                
                
                -Notes
      receivable from related parties
                
                
                1,400
                
                
                
                -Interest
      receivable from related parties
                
                
                267
                
                
                
                -Accounts
      receivable from related parties
                
                
                2,090
                
                
                
                -Account
      receivable from Evergreen
                
                
                413
                
                
                
                -Prepaid
      and other assets, net
                
                
                11,803
                
                
                
                12,749Total
      Assets
                
                $
                239,867
                
                
                $
                215,086LIABILITIESLiabilities:Notes
      payable
                
                $
                214,663
                
                
                $
                193,920Liabilities
      related to real estate held for sale
                
                
                -
                
                
                
                6,091Accounts
      payable
                
                
                6,125
                
                
                
                5,070Liabilities
      related to insurance claims
                
                
                1,367
                
                
                
                1,474Accrued
      and other liabilities
                
                
                9,132
                
                
                
                9,520Total
      Liabilities
                
                
                231,287
                
                
                
                216,075Commitments
      and Contingencies (Notes 12 and 13):Non-controlling
      interest classified as temporary equity
                
                
                -
                
                
                
                3,962Equity
      (Deficit):American
      Spectrum Realty, Inc. stockholders’ (deficit) equity:Preferred
      stock, $.01 par value; authorized, 25,000,000 shares; issued and
      outstanding, 55,172 and 55,172 shares, respectively
                
                
                1
                
                
                
                1Common
      stock, $.01 par value; authorized, 100,000,000 shares; issued, 3,405,706
      and 3,291,310 shares, respectively; outstanding, 2,934,294 and 2,819,898
      shares, respectively
                
                
                34
                
                
                
                33Additional
      paid-in capital
                
                
                49,058
                
                
                
                48,546Accumulated
      deficit
                
                
                (54,018
                )
                
                
                (52,472
                )Treasury
      stock, at cost, 471,412 shares, respectively
                
                
                (3,095
                )
                
                
                (3,095
                )Total
      American Spectrum Realty, Inc. stockholders’ (deficit)
    equity
                
                
                (8,020
                )
                
                
                (6,987
                )Non-controlling
      interests
                
                
                16,600
                
                
                
                2,036Total
      Equity (Deficit)
                
                
                8,580
                
                
                
                (4,951
                )Total
      Liabilities and Equity (Deficit)
                
                $
                239,867
                
                
                $
                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
                                    June
      30,
                                  
                                  
                                  Six
      Months Ended
                                    June
      30,2010
                                  
                                  
                                  2009
                                  
                                  
                                  2010
                                  
                                  
                                  2009REVENUES:Rental
      revenue
                                  
                                  $
                                  7,603
                                  
                                  
                                  $
                                  7,995
                                  
                                  
                                  $
                                  15,786
                                  
                                  
                                  $
                                  16,435Third
      party management and leasing revenue
                                  
                                  
                                  1,221
                                  
                                  
                                  
                                  24
                                  
                                  
                                  
                                  2,235
                                  
                                  
                                  
                                  41Interest
      and other income
                                  
                                  
                                  13
                                  
                                  
                                  
                                  19
                                  
                                  
                                  
                                  27
                                  
                                  
                                  
                                  27Total
      revenues
                                  
                                  
                                  8,837
                                  
                                  
                                  
                                  8,038
                                  
                                  
                                  
                                  18,048
                                  
                                  
                                  
                                  16,503EXPENSES:Property
      operating expense
                                  
                                  
                                  3,913
                                  
                                  
                                  
                                  3,979
                                  
                                  
                                  
                                  7,538
                                  
                                  
                                  
                                  7,872Corporate
      general and administrative
                                  
                                  
                                  2,516
                                  
                                  
                                  
                                  1,024
                                  
                                  
                                  
                                  4,138
                                  
                                  
                                  
                                  1,894Depreciation
      and amortization
                                  
                                  
                                  3,579
                                  
                                  
                                  
                                  3,698
                                  
                                  
                                  
                                  7,149
                                  
                                  
                                  
                                  7,295Interest
      expense
                                  
                                  
                                  3,524
                                  
                                  
                                  
                                  3,312
                                  
                                  
                                  
                                  6,924
                                  
                                  
                                  
                                  6,607Total
      expenses
                                  
                                  
                                  13,532
                                  
                                  
                                  
                                  12,013
                                  
                                  
                                  
                                  25,749
                                  
                                  
                                  
                                  23,668Loss
      from continuing operations before deferred income tax
    benefit
                                  
                                  
                                  (4,695
                                  )
                                  
                                  
                                  (3,975
                                  )
                                  
                                  
                                  (7,701
                                  )
                                  
                                  
                                  (7,165
                                  )Deferred
      income tax benefit
                                  
                                  
                                  1,762
                                  
                                  
                                  
                                  1,428
                                  
                                  
                                  
                                  2,896
                                  
                                  
                                  
                                  2,538Loss
      from continuing operations
                                  
                                  
                                  (2,933
                                  )
                                  
                                  
                                  (2,547
                                  )
                                  
                                  
                                  (4,805
                                  )
                                  
                                  
                                  (4,627
                                  )Discontinued
      operations:Income
      from operations
                                  
                                  
                                  -
                                  
                                  
                                  
                                  98
                                  
                                  
                                  
                                  173
                                  
                                  
                                  
                                  143Gain
      on sale of discontinued operations
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  4,315
                                  
                                  
                                  
                                  -Income
      tax expense
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (36
                                  )
                                  
                                  
                                  (1,641
                                  )
                                  
                                  
                                  (52
                                  )Income
      from discontinued operations
                                  
                                  
                                  -
                                  
                                  
                                  
                                  62
                                  
                                  
                                  
                                  2,847
                                  
                                  
                                  
                                  91Net
      loss, including noncontrolling interests
                                  
                                  $
                                  (2,933
                                  )
                                  
                                  $
                                  (2,485
                                  )
                                  
                                  $
                                  (1,958
                                  )
                                  
                                  $
                                  (4,536
                                  )Plus:
      Net loss attributable to noncontrolling interests
                                  
                                  
                                  878
                                  
                                  
                                  
                                  292
                                  
                                  
                                  
                                  412
                                  
                                  
                                  
                                  542Net
      loss attributable to American Spectrum Realty, Inc.
                                  
                                  
                                  (2,055
                                  )
                                  
                                  
                                  (2,193
                                  )
                                  
                                  
                                  (1,546
                                  )
                                  
                                  
                                  (3,994
                                  )Preferred
      stock dividend
                                  
                                  
                                  (60
                                  )
                                  
                                  
                                  (60
                                  )
                                  
                                  
                                  (120
                                  )
                                  
                                  
                                  (120
                                  )Net
      loss attributable to American Spectrum Realty, Inc.common
      stockholders
                                  
                                  $
                                  (2,115
                                  )
                                  
                                  $
                                  (2,253
                                  )
                                  
                                  $
                                  (1,666
                                  )
                                  
                                  $
                                  (4,114
                                  )Basic
      and diluted per share data:Loss
      from continuing operations attributable to American Spectrum Realty, Inc.
      common stockholders
                                  
                                  $
                                  (0.70
                                  )
                                  
                                  $
                                  (0.80
                                  )
                                  
                                  $
                                  (1.23
                                  )
                                  
                                  $
                                  (1.45
                                  )Income
      from discontinued operations attributable to American Spectrum Realty,
      Inc. common stockholders
                                  
                                  
                                  -
                                  
                                  
                                  
                                  0.02
                                  
                                  
                                  
                                  0.71
                                  
                                  
                                  
                                  0.03Net
      loss attributable to American Spectrum Realty, Inc. common
      stockholders
                                  
                                  $
                                  (0.70
                                  )
                                  
                                  $
                                  (0.78
                                  )
                                  
                                  $
                                  (0.52
                                  )
                                  
                                  $
                                  (1.42
                                  )Basic
      and diluted weighted average shares used
                                  
                                  
                                  2,930,461
                                  
                                  
                                  
                                  2,814,064
                                  
                                  
                                  
                                  2,892,329
                                  
                                  
                                  
                                  2,804,698Amounts
      attributable to American Spectrum Realty, Inc. common
      stockholders:Loss
      from continuing operations
                                  
                                  $
                                  (2,055
                                  )
                                  
                                  $
                                  (2,248
                                  )
                                  
                                  $
                                  (3,557
                                  )
                                  
                                  $
                                  (4,075
                                  )Income
      from discontinuing operations
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  55
                                  
                                  
                                  $
                                  2,011
                                  
                                  
                                  $
                                  81Net
      loss
                                  
                                  $
                                  (2,115
                                  )
                                  
                                  $
                                  (2,253
                                  )
                                  
                                  $
                                  (1,666
                                  )
                                  
                                  $
                                  (4,114
                                  )





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)





Six Months Ended June 30,2010
                          
                          
                          2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                          
                          $
                          (1,958
                          )
                          
                          $
                          (4,536
                          )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                          
                          
                          7,157
                          
                          
                          
                          7,519Gain
      on sale of real estate asset
                          
                          
                          (4,315
                          )
                          
                          
                          -Income
      tax benefit
                          
                          
                          (1,255
                          )
                          
                          
                          (2,486
                          )Deferred
      rental income
                          
                          
                          (119
                          )
                          
                          
                          (31
                          )Stock-based
      compensation expense
                          
                          
                          52
                          
                          
                          
                          44Amortization
      of note payable premium, included in interest expense
                          
                          
                          -
                          
                          
                          
                          (19
                          )Changes
      in operating assets and liabilities:Increase
      in tenant and other receivables
                          
                          
                          (100
                          )
                          
                          
                          (379
                          )Increase
      in related party receivables
                          
                          
                          (433
                          )
                          
                          
                          -Increase
      in accounts payable
                          
                          
                          951
                          
                          
                          
                          569Decrease
      in prepaid and other assets
                          
                          
                          575
                          
                          
                          
                          572Decrease
      in accrued and other liabilities
                          
                          
                          (1,146
                          )
                          
                          
                          (1,606
                          )Net
      cash used in operating activities:
                          
                          
                          (591
                          )
                          
                          
                          (353
                          )CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      received from sale of real estate asset
                          
                          
                          10,166
                          
                          
                          
                          -Capital
      improvements to real estate assets
                          
                          
                          (1,954
                          )
                          
                          
                          (1,500
                          )Real
      estate acquisition
                          
                          
                          (267
                          )
                          
                          
                          -Investments
      in unconsolidated real estate assets
                          
                          
                          (131
                          )
                          
                          
                          -Proceeds
      received related to insurance claims
                          
                          
                          -
                          
                          
                          
                          2,700Payments
      for damages related to insurance claims
                          
                          
                          (107
                          )
                          
                          
                          (1,386
                          )Net
      cash provided by (used in) investing activities:
                          
                          
                          7,707
                          
                          
                          
                          (186
                          )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      proceeds from borrowings
                          
                          
                          3,156
                          
                          
                          
                          2,215Repayment
      of borrowings – property sales
                          
                          
                          (5,067
                          )
                          
                          
                          -Repayment
      of borrowings – refinances
                          
                          
                          -
                          
                          
                          
                          (1,474
                          )Repayment
      of borrowings – other
                          
                          
                          (490
                          )
                          
                          
                          -Repayment
      of borrowings – scheduled payments
                          
                          
                          (1,959
                          )
                          
                          
                          (1,614
                          )Repurchase
      of preferred partnership interest
                          
                          
                          (1,785
                          )
                          
                          
                          -Acquisition
      of non-controlling interests in the operating partnership
                          
                          
                          (20
                          )
                          
                          
                          -Dividend
      payments to preferred stockholders
                          
                          
                          (182
                          )
                          
                          
                          (40
                          )Distributions
      to non-controlling interests
                          
                          
                          (247
                          )
                          
                          
                          -Net
      cash used in financing activities:
                          
                          
                          (6,594
                          )
                          
                          
                          (913
                          )Increase
      (decrease) in cash and cash equivalents
                          
                          
                          522
                          
                          
                          
                          (1,452
                          )Cash
      and cash equivalents, beginning of period
                          
                          
                          462
                          
                          
                          
                          2,092Cash
      and cash equivalents, end of period
                          
                          $
                          984
                          
                          
                          $
                          640


5





SUPPLEMENTAL
      DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:Conversion
      of operating partnership units to common stock
                
                $
                211
                
                
                $
                314Issuance
      of operating partnership units in connection with Evergreen
      acquisition
                
                
                8,000
                
                
                
                -Issuance
      of operating partnership units in connection with notes receivable and
      account receivable acquisition
                
                
                2,081
                
                
                
                -Issuance
      of operating partnership units in connection with real estate
      acquisitions
                
                
                1,018
                
                
                
                -Issuance
      of operating partnership units in connection with investment in
      unconsolidated real estate asset
                
                
                1,266
                
                
                
                -Debt
      assumed in connection with real estate acquisition
                
                
                6,297
                
                
                
                -Conversion
      of accounts payable to notes payable
                
                
                426
                
                
                
                -Financing
      in connection with investment in unconsolidated real estate
      asset
                
                
                33
                
                
                
                -Financing
      in connection with Evergreen acquisition
                
                
                9,500
                
                
                
                -SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid for interest
                
                $
                7,697
                
                
                $
                6,797Cash
      paid for income taxes
                
                
                257
                
                
                
                60


6





AMERICAN
SPECTRUM REALTY, INC.


Notes
to Consolidated Condensed Financial Statements





NOTE
1.  DESCRIPTION OF BUSINESS





American
Spectrum Realty, Inc. (“ASR” or, collectively, as a consolidated entity with its
subsidiaries, the “Company”) is a Maryland corporation established on August 8,
2000.  The Company is a full-service real estate corporation, which
owns, manages and operates income-producing properties.  Substantially
all of the Company’s assets are held through an operating partnership (the
“Operating Partnership”) in which the Company, as of June 30, 2010, held an
interest of 66.63% (consisting of the sole general partner interest and a
limited partnership interest).  In January 2010, in connection with
the Evergreen acquisition discussed below, the Operating Partnership issued
1,600,000 operating partnership units, which reduced the Company’s interest in
the Operating Partnership from 88.39% at December 31, 2009 to 70.75% at January
31, 2010.  The number of operating partnership units issued in
connection with the Evergreen acquisition is subject to adjustment as of
December 31, 2010 (Also see Note 4).





In March
2010, the Company sold 5850 San Felipe, a 101,880 square foot office property
located in Houston, Texas.  In June 2010, the Company acquired
2620-2630 Fountain View, a 125,000 square foot office property consisting of two
buildings located in Houston, Texas, and a 55% partnership interest in Sabo
Road, a 57,850 square foot self-storage property located in Houston,
Texas.  The partnership interest acquired in Sabo Road consists of the
sole general partnership interest and a limited partnership
interest.  Also in June 2010, the Company acquired a 38.4% undivided
interest in Loop 1604, a 178,595 square foot self-storage property located in
San Antonio, Texas, which it has accounted for under the equity method of
accounting as an unconsolidated investment.





As of
June 30, 2010, through its majority-owned subsidiary, the Operating Partnership,
the Company owned and operated 31 properties, which consisted of 23 office
buildings, five industrial properties, one retail property, one self-storage
property and a parcel of land.  The 31 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
31 properties.  ASMG also manages and leases 20 properties in Texas
for third parties representing 846,592 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 258 at June 30, 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.


7


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
were used to repurchase the preferred interest in the partnership that owned
5850 San Felipe, reduce accounts payable, debt and for other
investments.   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 June 30, 2010, accounts payable over 90 days
totaled $5,233,165, of which $1,367,000 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 $35,387,000, maturing over the next twelve
months.  One of these loans, with a balance of $17,170,000, which
matured 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 that it has
met the extension criteria; however the lender has yet to approve the
extension.  Most of the Company’s mortgage debt is not
cross-collateralized.  The Company has four mortgage loans that are
cross collateralized by a second property.   It is common for the
Company to serve as a guarantor and/or indemnitor on its mortgage
debt.  Because of uncertainties caused by the current credit crisis,
the Company’s current debt level and the Company’s historical losses there can
be no assurances as to the Company’s ability to obtain funds necessary for the
refinancing of its maturing debts.  If refinancing transactions are
not consummated, the Company will seek extensions and/or modifications from
existing lenders.  If these refinancings or extensions do not occur,
the Company will not have sufficient cash to meet its obligations.





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 and six months ended June 30, 2010 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2010 or for any future period.





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





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





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





For
acquisitions of an interest in an entity, the Company evaluates the entity to
determine if the entity is deemed a variable interest entity and, based on the
variable interest, whether or not the Company is the primary
beneficiary.


8


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 operating partnership
unit (“OP Unit”) exchange ratio in the consolidated financial statements and
notes for all periods presented have been adjusted to reflect the stock
dividend.





SEGMENT
REPORTING





The
Company operates as one business operating and reportable segment.





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.





PURCHASED
INTANGIBLES





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




NOTES
RECEIVABLE





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


9





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 (other than the Company) held a 33.37% and
11.61% partnership interest in the Operating Partnership, as limited partners,
at June 30, 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.





The
Company also has three-single purpose limited partnerships, each of which owns
an income-producing property, that are partially owned by third party
investors.  The accounts of these partnerships are included in the
accompanying consolidated financial statements of the
Company.   The share of income or losses attributable to
interests not owned by the Company is included as a component of non-controlling
interest in the Company’s consolidated financial statements (Also see Note
9).





NET
LOSS PER SHARE





Net 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 and six months ended June 30, 2010 and June 30,
2009.  Stock options outstanding of 58,750 and 58,750 and OP Units
(other than those held by the Company) outstanding of 2,967,281 and 744,982
(convertible into approximately 1,483,640 and 372,491 shares of common stock),
at June 30, 2010 and June 30, 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
June 30, 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
June 30, 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.


10





NOTE
3.  REAL ESTATE





Acquisitions





On June
2, 2010, the Company acquired a 55% interest in Sabo Road, a 57,850 square foot
self-storage property located in Houston, Texas.  The partnership
interest acquired in Sabo Road consists of the sole general partnership interest
and a limited partnership interest.  Also on June 2, 2010, the Company
acquired a 38.4% undivided interest in Loop 1604, a 178,595 square foot
self-storage property located in San Antonio, Texas, which it has accounted for
under the equity method of accounting as an unconsolidated
investment.  The acquisitions, which were acquired for a total
purchase price of $1,681,670, were funded with the issuance of 300,949 OP Units
and cash of $50,000.  Also see Note 11 – Related Party
Transactions.





On June
30, 2010, the Company acquired 2620-2630 Fountain View, a 125,000 square foot
office property, consisting of two adjacent buildings in Houston,
Texas.  The acquisition was funded with the issuance of 102,834 OP
Units, an equity contribution of $1,000,000 from a third party investor, the
assumption of debt and cash.  The third party investor received a 49%
interest in the single purpose consolidated limited partnership that owns the
property in consideration for the equity contribution.





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 were used to repurchase the preferred
interest in the partnership that owned 5850 San Felipe, reduce debt, payables
and for other investments.  The transaction generated a gain on sale
before income tax expense of approximately $4,300,000.





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 which own tenant in common
interests.  Property management and asset management contracts for a
total of 80 separate assets were acquired in the transaction.  The
interests in real estate acquired represent Evergreen’s non-economic interest in
many of the properties associated with the contracts acquired, held in most
cases as the manager or general partner of entities which own tenant in common
interests.





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





The
Company has determined that the contracts acquired are indefinite lived
intangibles.  As such, the contracts are not subject to amortization
but are tested for impairment.  If the carrying amount of an
intangible asset is determined to exceed its fair value, an impairment loss is
recognized in an amount equal to that excess.  After an impairment
loss is recognized, the adjusted carrying amount of the intangible asset would
be its new accounting basis.  Subsequent reversal of a previously
recognized impairment loss is prohibited.




The
purchase price is subject to adjustment after December 31, 2010, based on the
revenues generated by the property management and asset management contracts
during 2010.  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 June
30, 2010.


11





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





NOTE
5.  INVESTMENTS IN UNCONSOLIDATED REAL ESTATE ASSETS





In June
2010, the Company acquired 38.4% undivided interest in Loop 1604, a self-storage
property located in San Antonio, Texas for a purchase price of $1,266,000, which
consisting of OP Units and cash.   The property, which consists
of 178,595 square feet, is secured by a mortgage loan with a balance of
$4,367,000 at June 30, 2010.  The Company has accounted for the
investment under the equity method of accounting.  Also see Note 11 –
Related Party Transactions.





During
the second quarter of 2010, the Company acquired ownership interests in American
Spectrum REIT I, Inc. (“ASRI”) totaling
$114,000.





NOTE
6.  ACQUISITION OF NOTES RECEIVABLE AND ACCOUNT
RECEIVABLE





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





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





The
account receivable acquired, which totaled $413,877, is due from
Evergreen.  The account receivable is related to organizational and
offering costs paid in excess of the amounts established in EIGRI’s 2008 private
placement agreement.  The Company anticipates the receivable from
Evergreen will be offset against either its note payable to Evergreen or through
a reduction in OP Units currently held by Evergreen in the first quarter of
2011.  Also see Note 11 – Related Party Transactions.





NOTE
7.  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 June 30,
2010.


12


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
                  
                  $
                  6,364Note
      payable
                  
                  $
                  5,090Accounts
      payable
                  
                  
                  515Accrued
      and other liabilities
                  
                  
                  486Liabilities
      related to real estate held for sale
                  
                  $
                  6,091





Net
income from discontinued operations.





Income
from discontinued operations of $2,847,000 for the six months ended June 30,
2010 includes the gain on sale of 5850 San Felipe and the property’s operating
results through its disposition date of March 31, 2010.   Net
income from discontinued operations of $62,000 and $91,000 for the three and six
months ended June 30, 2009, respectively, represent the property’s operating
results for the periods.





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





Condensed Statements of Operations
                              
                              Three Months Ended June 30,
                              
                              
                              Six Months Ended June 30,2010
                              
                              
                              2009
                              
                              
                              2010
                              
                              
                              2009Rental
      revenue
                              
                              $
                              -
                              
                              
                              $
                              496
                              
                              
                              $
                              482
                              
                              
                              $
                              947Total
      expenses (1)
                              
                              
                              -
                              
                              
                              
                              (398
                              )
                              
                              
                              (309
                              )
                              
                              
                              (804
                              )Income
      from discontinued operations beforegain
      on sale and income tax expense
                              
                              
                              -
                              
                              
                              
                              98
                              
                              
                              
                              173
                              
                              
                              
                              143Gain
      on sale of discontinued operations
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              4,315
                              
                              
                              
                              -Income
      tax expense
                              
                              
                              -
                              
                              
                              
                              (36
                              )
                              
                              
                              (1,641
                              )
                              
                              
                              (52
                              )Income
      from discontinued operations
                              
                              $
                              -
                              
                              
                              $
                              62
                              
                              
                              $
                              2,847
                              
                              
                              $
                              91





(1)
Includes interest expense of  $76 for the three months ended June 30,
2009 and interest expense of $75 and $152 for the six months ended June 30, 2010
and 2009, respectively.  Mortgage debt related to the property
included in discontinued operations was individually secured.  As
such, interest expense was based on the property’s respective debt.




13




NOTE
8.  NOTES PAYABLE, NET OF PREMIUM





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





June 30, 2010
                                    
                                    
                                    December 31, 2009Property (unless otherwise noted)
                                    
                                    Maturity
                                      Date
                                    
                                    Principal
                                      Balance
                                    
                                    
                                    Interest Rate
                                    
                                    
                                    Principal
                                      Balance
                                    
                                    
                                    Interest
                                      RateFixed
      RatePacific
      Spectrum (1)
                                    
                                    6/10/2010
                                    
                                    
                                    5,205
                                    
                                    
                                    
                                    8.02
                                    %
                                    
                                    
                                    5,248
                                    
                                    
                                    
                                    8.02
                                    %2620-2630
      Fountain View (8)
                                    
                                    7/31/2010
                                    
                                    
                                    6,297
                                    
                                    
                                    
                                    7.00
                                    %
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Corporate
      – Secured
                                    
                                    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
                                    %Corporate-Unsecured
      (2)
                                    
                                    2/19/2011
                                    
                                    
                                    2,034
                                    
                                    
                                    
                                    3.40
                                    %
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Fountain
      View Place (3)
                                    
                                    4/29/2011
                                    
                                    
                                    1,099
                                    
                                    
                                    
                                    10.00
                                    %
                                    
                                    
                                    1,423
                                    
                                    
                                    
                                    10.00
                                    %Corporate-Secured
      (4)
                                    
                                    5/12/2011
                                    
                                    
                                    950
                                    
                                    
                                    
                                    8.75
                                    %
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Sabo
      Road Self Storage
                                    
                                    7/31/2011
                                    
                                    
                                    1,999
                                    
                                    
                                    
                                    7.42
                                    %
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Bristol
      Bay
                                    
                                    8/1/2011
                                    
                                    
                                    6,851
                                    
                                    
                                    
                                    7.58
                                    %
                                    
                                    
                                    6,899
                                    
                                    
                                    
                                    7.58
                                    %Technology
                                    
                                    8/1/2011
                                    
                                    
                                    7,091
                                    
                                    
                                    
                                    7.44
                                    %
                                    
                                    
                                    7,131
                                    
                                    
                                    
                                    7.44
                                    %Creekside
                                    
                                    12/1/2011
                                    
                                    
                                    5,761
                                    
                                    
                                    
                                    7.17
                                    %
                                    
                                    
                                    5,814
                                    
                                    
                                    
                                    7.17
                                    %Corporate-Unsecured
      (5)
                                    
                                    5/1/2012
                                    
                                    
                                    56
                                    
                                    
                                    
                                    4.00
                                    %
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -16350
      Park Ten Place
                                    
                                    5/11/2012
                                    
                                    
                                    4,431
                                    
                                    
                                    
                                    7.45
                                    %
                                    
                                    
                                    4,466
                                    
                                    
                                    
                                    7.45
                                    %16360
      Park Ten Place
                                    
                                    5/11/2012
                                    
                                    
                                    3,472
                                    
                                    
                                    
                                    7.45
                                    %
                                    
                                    
                                    3,499
                                    
                                    
                                    
                                    7.45
                                    %2855
      Mangum
                                    
                                    5/11/2012
                                    
                                    
                                    2,555
                                    
                                    
                                    
                                    7.45
                                    %
                                    
                                    
                                    2,575
                                    
                                    
                                    
                                    7.45
                                    %2855
      Mangum
                                    
                                    5/11/2012
                                    
                                    
                                    1,398
                                    
                                    
                                    
                                    6.00
                                    %
                                    
                                    
                                    1,422
                                    
                                    
                                    
                                    6.00
                                    %6430
      Richmond Atrium
                                    
                                    5/11/2012
                                    
                                    
                                    2,144
                                    
                                    
                                    
                                    7.45
                                    %
                                    
                                    
                                    2,161
                                    
                                    
                                    
                                    7.45
                                    %Corporate-Unsecured
      (6)
                                    
                                    5/31/2012
                                    
                                    
                                    1,000
                                    
                                    
                                    
                                    9.50
                                    %
                                    
                                    
                                    500
                                    
                                    
                                    
                                    11.00
                                    %Southwest
      Pointe
                                    
                                    6/1/2012
                                    
                                    
                                    2,688
                                    
                                    
                                    
                                    7.33
                                    %
                                    
                                    
                                    2,710
                                    
                                    
                                    
                                    7.33
                                    %16350
      Park Ten Place
                                    
                                    8/11/2012
                                    
                                    
                                    488
                                    
                                    
                                    
                                    7.45
                                    %
                                    
                                    
                                    492
                                    
                                    
                                    
                                    7.45
                                    %16360
      Park Ten Place
                                    
                                    8/11/2012
                                    
                                    
                                    383
                                    
                                    
                                    
                                    7.45
                                    %
                                    
                                    
                                    386
                                    
                                    
                                    
                                    7.45
                                    %Corporate
      – Secured (9)
                                    
                                    2/1/2013
                                    
                                    
                                    1,950
                                    
                                    
                                    
                                    5.50
                                    %
                                    
                                    
                                    1,950
                                    
                                    
                                    
                                    7.50
                                    %Corporate-Secured
      (4)
                                    
                                    3/5/2013
                                    
                                    
                                    946
                                    
                                    
                                    
                                    8.75
                                    %
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -11500
      Northwest Freeway
                                    
                                    6/1/2014
                                    
                                    
                                    4,049
                                    
                                    
                                    
                                    5.93
                                    %
                                    
                                    
                                    4,079
                                    
                                    
                                    
                                    5.93
                                    %11500
      Northwest Freeway
                                    
                                    6/1/2014
                                    
                                    
                                    292
                                    
                                    
                                    
                                    5.93
                                    %
                                    
                                    
                                    295
                                    
                                    
                                    
                                    5.93
                                    %Morenci
                                    
                                    7/1/2014
                                    
                                    
                                    1,655
                                    
                                    
                                    
                                    7.25
                                    %
                                    
                                    
                                    1,689
                                    
                                    
                                    
                                    7.25
                                    %Northwest
      Corporate Center
                                    
                                    8/1/2014
                                    
                                    
                                    5,326
                                    
                                    
                                    
                                    6.26
                                    %
                                    
                                    
                                    5,370
                                    
                                    
                                    
                                    6.26
                                    %14741
      Yorktown
                                    
                                    9/1/2014
                                    
                                    
                                    8,600
                                    
                                    
                                    
                                    5.32
                                    %
                                    
                                    
                                    8,600
                                    
                                    
                                    
                                    5.32
                                    %8100
      Washington
                                    
                                    2/22/2015
                                    
                                    
                                    2,180
                                    
                                    
                                    
                                    5.59
                                    %
                                    
                                    
                                    2,196
                                    
                                    
                                    
                                    5.59
                                    %8300
      Bissonnet
                                    
                                    5/1/2015
                                    
                                    
                                    4,496
                                    
                                    
                                    
                                    5.51
                                    %
                                    
                                    
                                    4,527
                                    
                                    
                                    
                                    5.51
                                    %Corporate-Unsecured
      (5)
                                    
                                    6/1/2015
                                    
                                    
                                    302
                                    
                                    
                                    
                                    5.00
                                    %
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Corporate-Unsecured
      (5)
                                    
                                    6/1/2015
                                    
                                    
                                    59
                                    
                                    
                                    
                                    5.00
                                    %
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -1501
      Mockingbird
                                    
                                    7/1/2015
                                    
                                    
                                    3,217
                                    
                                    
                                    
                                    5.28
                                    %
                                    
                                    
                                    3,239
                                    
                                    
                                    
                                    5.28
                                    %5450
      Northwest Central
                                    
                                    9/1/2015
                                    
                                    
                                    2,608
                                    
                                    
                                    
                                    5.38
                                    %
                                    
                                    
                                    2,631
                                    
                                    
                                    
                                    5.38
                                    %800/888
      Sam Houston Parkway
                                    
                                    12/29/2015
                                    
                                    
                                    4,582
                                    
                                    
                                    
                                    6.25
                                    %
                                    
                                    
                                    4,638
                                    
                                    
                                    
                                    6.25
                                    %2401
      Fountain View
                                    
                                    3/1/2016
                                    
                                    
                                    12,045
                                    
                                    
                                    
                                    5.82
                                    %
                                    
                                    
                                    12,139
                                    
                                    
                                    
                                    5.82
                                    %12000
      Westheimer/2470 Gray Falls
                                    
                                    1/1/2017
                                    
                                    
                                    7,315
                                    
                                    
                                    
                                    5.70
                                    %
                                    
                                    
                                    7,350
                                    
                                    
                                    
                                    5.70
                                    %6420
      Richmond Atrium
                                    
                                    6/5/2017
                                    
                                    
                                    6,325
                                    
                                    
                                    
                                    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
                                    
                                    
                                    12,441
                                    
                                    
                                    
                                    6.50
                                    %
                                    
                                    
                                    12,521
                                    
                                    
                                    
                                    6.50
                                    %Corporate-Secured
      (7)
                                    
                                    12/31/2019
                                    
                                    
                                    9,470
                                    
                                    
                                    
                                    5.00
                                    %
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Subtotal
                                    
                                    $
                                    191,392
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    169,946Variable
      RateBeltway
      Industrial (1)
                                    
                                    5/9/2010
                                    
                                    
                                    17,170
                                    
                                    
                                    
                                    7.00
                                    %
                                    
                                    
                                    17,170
                                    
                                    
                                    
                                    7.00
                                    %Corporate
      – Unsecured (6)
                                    
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    500
                                    
                                    
                                    
                                    6.00
                                    %Northwest
      Spectrum
                                    
                                    4/19/2012
                                    
                                    
                                    2,908
                                    
                                    
                                    
                                    2.90
                                    %
                                    
                                    
                                    3,013
                                    
                                    
                                    
                                    2.90
                                    %Windrose
      Plaza
                                    
                                    4/19/2012
                                    
                                    
                                    2,693
                                    
                                    
                                    
                                    2.90
                                    %
                                    
                                    
                                    2,791
                                    
                                    
                                    
                                    2.90
                                    %Corporate
      – Unsecured
                                    
                                    12/12/2013
                                    
                                    
                                    500
                                    
                                    
                                    
                                    6.00
                                    %
                                    
                                    
                                    500
                                    
                                    
                                    
                                    6.00
                                    %Subtotal
                                    
                                    $
                                    23,271
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    23,974Total
                                    
                                    $
                                    214,663
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    193,920





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





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





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





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





(5)
            Represents
      the conversion of accounts payables to promissory notes during the second
      quarter of 2010.





(6)
            In
      May 2010, the Company refinanced two $500,000 notes which were due to
      mature on May 31, 2010 with a new loan in the amount of $1,000,000 with
      the same lender





(7)
            Represents
      promissory note issued by the Company in January 2010 in connection with
      the Evergreen acquisition.





(8)
            Represents
      mortgage debt the Company has agreed to assume from the seller of the
      property.  The Company is currently in the process of finalizing
      the loan documents with the lender, which is expected to include a
      five-year maturity extension and principal pay-down of $947,000, which was
      held in escrow at June 30, 2010.





(9)
            In
      August 2010, the Company made a principal pay-down of $195,000 on the note
      and the lender extended the maturity date to February 1,
    2013.





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.


14





NOTE
9.  NONCONTROLLING INTERESTS





Unit
Holders in the Operating Partnership





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





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





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





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





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





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





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





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





OP Units
(other than those held by the Company) of 2,967,281 (exchangeable for
approximately 1,483,640 shares of common stock) were outstanding as of June 30,
2010.  As of June 30, 2010, non-controlling interest in the Operating
Partnership was $13,709,000.





Third
Party Interests in Single Purpose Consolidated Limited Partnerships





On June
30 2010, a third party investor contributed $1,000,000 in return for a 49%
limited partnership interest in the Company’s single purpose consolidated
limited partnership that acquired 2620-2630 Fountain View.





On June
2, 2010, the Company acquired a 55% interest in Sabo Road, a 57,850 square foot
self-storage property located in Houston, Texas.  The partnership
interest acquired in Sabo Road consists of the sole general partnership interest
and a limited partnership interest.   Non-controlling interest
associated with the 45% interest not owned by the Company was $319,000 as of
June 30, 2010.





On
September 1, 2009, a third party purchased from the Company a 49% preferred
interest in each of two single purpose limited partnerships for $4,000,000
(“Preferred Capital”).  Proceeds of $3,811,000, net of transaction
costs, were received as a result of the sale.   Each of the
limited partnerships owned an income-producing property in Houston,
Texas.  These limited partnerships are required to distribute,
monthly, an annual 12% cumulative, non-compounding return on the unredeemed
Preferred Capital and a participation in the operating net cash flow of the
limited partnerships.  The Company has a right to repurchase the
preferred interests in each of the partnerships within five years for an amount
equal to the remaining Preferred Capital plus a 15% annual internal rate of
return.  On March 31, 2010, the Company sold 5850 San Felipe, one of
the income-producing properties in which a preferred partnership interest was
held by the third party.  In April 2010, the Company repurchased the
preferred interest associated with 5850 San Felipe from the third party for
$1,785,000.  Non-controlling interests related to the other
consolidated partnership interest sold was $1,572,000 as of June 30,
2010.


15





The
following represents the effects of changes in the Company’s ownership interest
in the OP and in the single purpose limited partnerships on the Company’s equity
for the six months ended June 30, 2010 and 2009 (dollars in
thousands):





Six Months Ended
                        June 30, 2010
                      
                      
                      Six Months Ended
                        June 30, 2009Net
      loss attributable to the Company
                      
                      $
                      (1,546
                      )
                      
                      $
                      (3,994
                      )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
                      
                      $
                      370
                      
                      
                      
                      -Net
      transfers from noncontrolling interests
                      
                      $
                      581
                      
                      
                      $
                      314Change
      from net loss attributable to the Company on exchange of OP Units for
      shares of Common Stock and reclassification of preferred interest from
      temporary equity
                      
                      $
                      (965
                      )
                      
                      $
                      (3,680
                      )





There was
not an effect of changes in the Company’s ownership interest in the OP and in
the single purpose limited partnerships on the Company’s equity for the three
months ended June 30, 2010 and 2009.





NOTE
10.  STOCK-BASED COMPENSATION





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




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





Total
stock-based compensation expense recognized for the three months ended June 30,
2010 and 2009 amounted to $26,000, or $.01 per basic and diluted earnings per
share and $23,000, or $.02 per basic and diluted earnings per share,
respectively.  Total stock-based compensation expense recognized for
the six months ended June 30, 2010 and 2009 amounted to $52,000, or $.02 per
basic and diluted earnings per share and $44,000, or $.03 per basic and diluted
earnings share, respectively.  Compensation expense is included in
general and administrative expense in the Company’s consolidated condensed
statement of operations for all periods presented.





Stock
Options





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


16


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 June 30, 2010
                  
                  
                  58,750
                  
                  
                  $
                  11.97
                  
                  
                  $
                  95,838Exercisable
      as of  June 30, 2010
                  
                  
                  58,750
                  
                  
                  $
                  11.97
                  
                  
                  $
                  95,838





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





Range of
                        Exercise
                        Price
                      
                      Number
                        Exercisable
                      
                      Weighted Average
                        Remaining
                        Contractual
                        Life
                      
                      Weighted
                        Average
                        Exercise
                        Price$4.05
      - $6.10
                      
                      
                      25,000
                      
                      3.8
      years
                      
                      $
                      5.33$9.13
      - $13.58
                      
                      
                      22,500
                      
                      4.1
      years
                      
                      $
                      10.33$30.00
      - $30.00
                      
                      
                      11,250
                      
                      1.3
      years
                      
                      $
                      30.00





Restricted
Stock





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





During
the three months ended June 30, 2010 and 2009, compensation expense of $26,000
and $23,000, respectively, was recognized for restricted
shares.  During the six months ended June 30, 2010 and 2009,
compensation expense of $52,000 and $39,000, respectively, was recognized for
restricted shares.  Recipients of restricted stock have the right to
vote all shares, to receive and retain all cash dividends payable to holders of
shares of record on or after the date of issuance and to exercise all other
rights, powers and privileges of a holder of Company shares, with the exception
that the recipient may not transfer the shares during the restriction
period.





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





Restricted Stock Awards
                  
                  Number of
                    Shares
                  
                  
                  Weighted Average Grant
                    Date Fair ValueNonvested
      at January 1, 2010
                  
                  
                  20,012
                  
                  
                  $
                  10.72Granted
                  
                  
                  11,500
                  
                  
                  $
                  11.55Vested
                  
                  
                  (8,500
                  )
                  
                  $
                  11.50Forfeited
                  
                  
                  -
                  
                  
                  
                  -Nonvested
      at June 30, 2010
                  
                  
                  23,012
                  
                  
                  $
                  10.84





As of
June 30, 2010, there was $228,000 of unrecognized compensation cost related to
unvested restricted stock awards, which are expected to be recognized over a
remaining weighted-average restriction period of approximately
2.7 years.


17


NOTE
11.  RELATED PARTY TRANSACTIONS





During
the three and six months ended June 30, 2010, the Company recognized third party
management fee revenues of $1,065,000 and $1,967,000, respectively, attributable
to the former Evergreen managed properties.   The Company has a
non-economic interest in many of the properties, held in most cases as the
manager or general partner of entities which own tenant in common
interests.





In June
2010, the Company acquired a 55% interest in Sabo Road, a 57,850 square foot
self-storage property located in Houston, Texas.  The partnership
interest acquired in Sabo Road consists of the sole general partnership interest
and a limited partnership interest.  Also in June 2010, the Company
acquired a 38.4% undivided interest in Loop 1604, a 178,595 square foot
self-storage property located in San Antonio, Texas.  The acquisitions
were acquired from ASRI for a total purchase price of $1,681,670, consisting of
the 300,949 OP Units and cash of $50,000.  William J. Carden is a
director and President of ASRI and Jonathan T. Brohard is a director and Vice
President of ASRI.  Mr. Carden is Chief Executive Officer, Chairman of
the Board, and a principal stockholder in the Company.  Mr. Brohard is
President of ASRM.  The Company does not have any ownership interest
in ASRI.





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





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





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





In May
2010, the Company obtained financing for insurance premiums on both its owned
and third party managed properties of which $2,069,883 was attributable to the
Evergreen property portfolio.   During the second quarter of
2010, the Company received $413,487 from these properties as payment on the
premiums.  Unpaid amounts due to the Company from these properties
were $1,656,396 as of June 30, 2010.





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





On
December 31, 2008, the Company issued a total of 55,172 shares of Series A
Preferred Stock (“Preferred Stock”) to the following individuals: Mr. Carden,
John N. Galardi, director and principal stockholder, and Timothy R. Brown,
director.  Each share of Preferred Stock was sold for $29.00 and is
entitled to annual dividends, payable quarterly, at an annual rate of 15%, and
to a preference on liquidation equal to the following: (a) if on or prior to
December 31, 2011, the sum of $29.00 and any accrued and unpaid dividends or (b)
if after December 31, 2011, the greater of (x) the sum of $29.00 and any accrued
and unpaid dividends or (y) the amount which would be paid on account of each
share of common stock upon liquidation if each share of Preferred Stock had
hypothetically been converted into one share of common stock.  The
Preferred Stock is not required to be redeemed by the Company and the holders
will have no right to require redemption. The Preferred Stock is redeemable at
the option of the Company at any time after December 31, 2011. The shares were
issued in a private transaction exempt from registration pursuant to Section
4(2) under the Securities Act of 1933, as amended.  At June 30, 2010,
the Company had accrued and unpaid dividends on the Preferred Stock of
$26,000.


18





The
Company pays a guarantee fee to Mr. Carden, Mr. Galardi and CGS Real Estate
Company, Inc., a company owned indirectly by Messrs. Carden and Galardi (“the
Guarantors”), in consideration for their guarantees of certain obligations of
the Company.  The Guarantors are paid an annual guarantee fee equal to
between .25% and .75% (depending on the nature of the guarantee) of the
outstanding balance as of December 31 of the guaranteed obligations (“Guarantee
Fee”).  The Guarantee Fee is paid for a maximum of three years on any
particular obligation.  The Guarantee fee paid for the 2009 year was
$67,983.  The Company accrued $41,131 for the six months ended June
30, 2010 related to the Guarantee Fee for the 2010 year.





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





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





NOTE
12.  PREFERRED STOCK





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





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





On
December 31, 2008, Company issued 55,172 shares of the Preferred Stock to
Messrs. Carden, Galardi, and Brown (Also see Note 11 – Related Party
Transactions).  Each share of Preferred Stock was sold for $29.00 and
is entitled to annual dividends, payable quarterly, at an annual rate of 15%,
and to a preference on liquidation equal to the following: (a) if on or prior to
December 31, 2011, the sum of $29.00 and any accrued and unpaid dividends or (b)
if after December 31, 2011, the greater of (x) the sum of $29.00 and any accrued
and unpaid dividends or (y) the amount which would be paid on account of each
share of common stock upon liquidation if each share of Preferred Stock had
hypothetically been converted into one share of common stock.  The
Preferred Stock is not required to be redeemed by the Company and the holders
will have no right to require redemption. The Preferred Stock is redeemable at
the option of the Company at any time after December 31, 2011. The shares were
issued in a private transaction exempt from registration pursuant to Section
4(2) under the Securities Act of 1933, as amended.  At of June 30,
2010, the Company had accrued and unpaid dividends on the Preferred Stock of
$26,000.





NOTE
13.  COMMITMENTS AND CONTINGENCIES





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





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


19


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





OVERVIEW





American
Spectrum Realty, Inc. (“ASR” or, collectively, as a consolidated entity with its
subsidiaries, the “Company”) is a Maryland corporation established on August 8,
2000.  The Company is a full-service real estate corporation, which
owns, manages and operates income-producing properties.  Substantially
all of the Company’s assets are held through an operating partnership (the
“Operating Partnership”) in which the Company, as of June 30, 2010, held an
interest of 66.63% (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).





On June
2, 2010, the Company acquired a 55% interest in Sabo Road, a 57,850 square foot
self-storage property located in Houston, Texas.  The partnership
interest acquired in Sabo Road consists of the sole general partnership interest
and a limited partnership interest.  Also on June 2, 2010, the Company
acquired a 38.4% undivided interest in Loop 1604, a 178,595 square foot
self-storage property located in San Antonio, Texas, which it has accounted for
under the equity method of accounting as an unconsolidated
investment.  The acquisitions, which totaled $1,681,670, were funded
with the issuance of 300,949 OP Units and cash of $50,000.





On June
30, 2010, the Company acquired 2620-2630 Fountain View, a 125,000 square foot
office property, consisting of two adjacent buildings in Houston,
Texas.  The acquisition was funded with the issuance of 102,834 OP
Units, an equity contribution of $1,000,000 from a third party investor, the
assumption of debt and cash.  The third party investor received a 49%
interest in the single purpose consolidated limited partnership that owns the
property in consideration for the equity contribution.





On March
31, 2010, the Company sold 5850 San Felipe, a 101,880 square foot office
property located in Houston, Texas.  The sale generated proceeds of
approximately $5,200,000.  The proceeds were used to repurchase the
preferred interest in the partnership that owned 5850 San Felipe, reduce debt,
payables and for other investments.  The transaction generated a gain
on sale before income tax expense of approximately $4,300,000.





In the
accompanying financial statements, the results of operations for 5850 San Felipe
are shown in the section “Discontinued operations”. 5850 San Felipe was
classified as “Real estate held for sale” at December 31, 2009.  The
revenues and expenses reported for the periods presented exclude results from
properties sold or classified as held for sale.  The following
discussion and analysis of the financial condition 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 82% occupied at June 30, 2010 and 84% occupied at June
30, 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 31 properties.  ASMG also manages and leases 20 properties
in Texas for third parties representing 846,592 square feet of office, retail
and industrial space.


20


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 258 at June 30, 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.





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:





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.


21





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.





Impairment
of Intangible Assets





The
Company tests its intangible assets for impairment at each balance sheet
date.  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.





Valuation
of Deferred Tax Asset





The
Company evaluates its deferred tax asset at each balance sheet
date.   The Company expects to sell real estate assets in the
future and has determined that it is more likely than not that future taxable
income, primarily from gains on the sales of real estate assets will be
sufficient to enable it to realize all of its deferred tax assets.





RESULTS
OF OPERATIONS





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





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





June 30,
                  
                  
                  June 30,
                  
                  
                  Variance2010
                  
                  
                  2009
                  
                  
                  $
                  
                  
                  %Rental
      revenue
                  
                  $
                  7,603,000
                  
                  
                  $
                  7,995,000
                  
                  
                  $
                  (392,000
                  )
                  
                  
                  (4.9
                  )%Third
      party management and leasing revenue
                  
                  
                  1,221,000
                  
                  
                  
                  24,000
                  
                  
                  
                  1,197,000
                  
                  
                  
                  4,987.5
                  %Operating
      expenses:Property
      operating expenses
                  
                  
                  3,913,000
                  
                  
                  
                  3,979,000
                  
                  
                  
                  (66,000
                  )
                  
                  
                  (1.7
                  )%General
      and administrative
                  
                  
                  2,516,000
                  
                  
                  
                  1,024,000
                  
                  
                  
                  1,492,000
                  
                  
                  
                  145.7
                  %Depreciation
      and amortization
                  
                  
                  3,579,000
                  
                  
                  
                  3,698,000
                  
                  
                  
                  (119,000
                  )
                  
                  
                  (3.2
                  )%Interest
      expense
                  
                  
                  3,524,000
                  
                  
                  
                  3,312,000
                  
                  
                  
                  212,000
                  
                  
                  
                  6.4
                  %





Rental revenue. Rental
revenue decreased $392,000, or 4.9%, for the three months ended June 30, 2010 in
comparison to the three months ended June 30, 2009.  The decrease was
in large part due to an increase in rent concessions.  The decrease
was also attributable to a decrease in occupancy.  The weighted
average occupancy of the Company’s properties decreased from 84% at June 30,
2009 to 82% at June 30, 2010.





Third party management and leasing
revenue.Third party management and leasing revenue increased by
$1,197,000 for the three months ended June 30, 2010, compared to the three
months ended June 30, 2009.  The increase was primarily due to
revenues generated as a result of the January 2010 acquisition of property
management and asset management contracts from Evergreen.  Third party
management revenues attributable to the Evergreen acquisition amounted to
$1,065,000 for the second 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 $66,000, or
1.7%, for the three months ended June 30, 2010 in comparison to the three months
ended June 30, 2009.  The decrease was primarily due to a decrease in
property maintenance cost and due to a decrease in bad debt
expense.  The decrease in property operating expenses was partially
offset by an increase in property general and administrative costs incurred
during the quarter.


22





Corporate general and
administrative.  Corporate general and administrative costs
increased by $1,492,000, or 145.7%, for the three months ended June 30, 2010
when compared to the three months ended June 30, 2009. The increase was
primarily due to operating expenses associated with the property management and
asset management contracts acquired from Evergreen in January 2010, which
amounted to approximately $1,551,000.  The increase was in large part
personnel related.  The increase was also due to due diligence costs
associated with the second quarter acquisition of 2620-2630 Fountain View of
$121,000.  The increase in corporate general and administrative
expenses was partially offset by a decrease in legal and other professional fees
incurred during the quarter.





Depreciation and
amortization.  Depreciation and amortization expense decreased
$119,000, or 3.2%, for the three months ended June 30, 2010 in comparison to the
three months ended June 30, 2009.  The decrease was primarily due to a
reduction in depreciation and amortization attributable to fully depreciated
tenant improvements and amortized lease costs.





Interest
expense.  Interest expense increased $212,000, or 6.4%, for the
three months ended June 30, 2010 in comparison to the three months ended June
30, 2009.  The increase was primarily attributable to the $9,500,000
new loan associated with the Evergreen acquisition.  Interest expense
related to the new loan amounted to $118,000 during the second quarter of
2010.





Non-controlling
interests.The
share of loss attributable to non-controlling interests was $878,000 for the
three months ended June 30, 2010, compared to $292,000 for the three months
ended June 30, 2009.  The non-controlling interests represent (i) unit
holders in the Operating Partnership (other than the Company) that held, as of
June 30, 2010 and June 30, 2009, a respective 33% and 12% partnership interest
in the Operating Partnership as limited partners and (ii) third party limited
partnership interests in certain single purpose consolidated partnerships of the
Company.





Discontinued
operations.  The Company had no income or loss from
discontinued operations for the three months ended June 30,
2010.  During the three months ended June 30, 2009, the Company
recognized income of $62,000 from discontinued operations.  The income
from discontinued operations for the three months ended June 30, 2009
represented the operating results for 5850 San Felipe for the
quarter.





Discussion
of the six months ended June 30, 2010 and 2009.





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





June 30,
                  
                  
                  June 30,
                  
                  
                  Variance2010
                  
                  
                  2009
                  
                  
                  $
                  
                  
                  %Rental
      revenue
                  
                  $
                  15,786,000
                  
                  
                  $
                  16,435,000
                  
                  
                  $
                  (649,000
                  )
                  
                  
                  (3.9
                  )%Third
      party management and leasing revenue
                  
                  
                  2,235,000
                  
                  
                  
                  41,000
                  
                  
                  
                  2,194,000
                  
                  
                  
                  5,351.2
                  %Operating
      expenses:Property
      operating expenses
                  
                  
                  7,538,000
                  
                  
                  
                  7,872,000
                  
                  
                  
                  (334,000
                  )
                  
                  
                  (4.2
                  )%General
      and administrative
                  
                  
                  4,138,000
                  
                  
                  
                  1,894,000
                  
                  
                  
                  2,244,000
                  
                  
                  
                  118.5
                  %Depreciation
      and amortization
                  
                  
                  7,149,000
                  
                  
                  
                  7,295,000
                  
                  
                  
                  (146,000
                  )
                  
                  
                  (2.0
                  )%Interest
      expense
                  
                  
                  6,924,000
                  
                  
                  
                  6,607,000
                  
                  
                  
                  317,000
                  
                  
                  
                  4.8
                  %





Rental revenue. Rental
revenue decreased $649,000, or 3.9%, for the six months ended June 30, 2010 in
comparison to the six months ended June 30, 2009.  The decrease was in
large part due to an increase in rent concessions.  The decrease was
also attributable to a decrease in common area maintenance fee revenue
recognized during the period.  The decrease was partially offset by
revenue recognized from a lease buy-out during the six months ended June 30,
2010.  The weighted average occupancy of the Company’s properties was
82% at June 30, 2010 in comparison to 84% at June 30,
2009.


23


Third party management and leasing
revenue.Third party management and leasing revenue increased by
$2,194,000 for the six months ended June 30, 2010, compared to the six months
ended June 30, 2009.  The increase was primarily due to revenues
generated as a result of the January 2010 acquisition of property management and
asset management contracts from Evergreen.  Third party management
revenues  attributable to the Evergreen acquisition amounted to
$1,967,000 for the six months ended June 30, 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 $334,000,
or 4.2%, for the six months ended June 30, 2010 in comparison to the six months
ended June 30, 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
period.  The decrease in property operating expenses was partially
offset by an increase in property general and administrative costs incurred
during the six months ended June 30, 2010 when compared to the six months ended
June 30, 2009.





Corporate general and
administrative.  Corporate general and administrative costs
increased by $2,244,000, or 118.5%, for the six months ended June 30, 2010 when
compared to the six months ended June 30, 2009. The increase was primarily due
to operating expenses associated with the property management and asset
management contracts acquired from Evergreen in January 2010, which amounted to
approximately $2,411,000.  The increase was in large part personnel
related.  The increase was also due to due diligence costs associated
with the second quarter acquisition of 2620-2630 Fountain View of $121,000. The
increase in corporate general and administrative expenses was partially offset
by a decrease in legal and other professional fees incurred during the
quarter.





Depreciation and
amortization.  Depreciation and amortization expense decreased
$146,000, or 2.0%, for the six months ended June 30, 2010 in comparison to the
six months ended June 30, 2009.  The decrease was primarily due to a
reduction in depreciation and amortization attributable to fully depreciated
tenant improvements and amortized lease costs.





Interest
expense.  Interest expense increased $317,000, or 4.8%, for the
six months ended June 30, 2010 in comparison to the six months ended June 30,
2009.  The increase was primarily attributable to the $9,500,000 new
loan associated with the Evergreen acquisition.  Interest expense
related to the new loan amounted to $216,000 during the six months ended June
30, 2010.





Non-controlling
interests.The
share of loss attributable to non-controlling interests was $412,000 for the six
months ended June 30, 2010, compared to $542,000 for the six months ended June
30, 2009.  The non-controlling interests represent (i) unit holders in
the Operating Partnership (other than the Company) that held, as of June 30,
2010 and June 30, 2009, a respective 33% and 12% partnership interest in the
Operating Partnership as limited partners and (ii) third party limited
partnership interests in certain single purpose consolidated partnerships of the
Company.





Discontinued
operations.  The Company recorded income from discontinued
operations of $2,847,000 for the six months ended June 30, 2010, compared to
$91,000 for the six months ended June 30, 2009.   The income from
discontinued operations for the six months ended June 30, 2010 includes the net
gain on the sale of 5850 San Felipe and the property’s operating results through
its disposition date of March 31, 2010.  The income from discontinued
operations for the six months ended June 30, 2009 represents the property’s
operating results for the quarter.





LIQUIDITY
AND CAPITAL RESOURCES





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





Net cash
used in operating activities amounted to $591,000 for the six months ended June
30, 2010.  The net cash represented $438,000 used in property
operations and a net change in operating assets and liabilities of
$153,000.  Net cash used in operating activities amounted to $353,000
for the six months ended June 30, 2009.  The net cash represented
$491,000 generated by property operations, offset by a change in net operating
assets and liabilities of $844,000.


24





Net cash
provided by investing activities amounted to $7,707,000 for the six months ended
June 30, 2010.  This amount was primarily comprised of proceeds of
$10,166,000 received from the sale of 5850 San Felipe, reduced by funds used for
capital improvements, primarily tenant improvements, of $1,954,000 and funds
used for the acquisition of 2620-2630 Fountain View of $267,000.  Net
cash used in investing activities amounted to $186,000 for the six months ended
June 30, 2009.  Cash of $1,500,000 was used for capital expenditures,
primarily tenant improvements.  The Company received insurance
proceeds of $2,700,000 related to its hurricane and fire claims and paid
$1,386,000 for damages related to the hurricane and fire.





Net cash
used in financing activities amounted to $6,594,000 for the six months ended
June 30, 2010.  This amount was primarily comprised of debt repayment
on the sale of 5850 San Felipe of $5,067,000, the repayment of borrowings of
$490,000, scheduled principal payments on debt of $1,959,000, repurchase of
preferred partnership interest of $1,785,000, dividend payments to preferred
stockholders of $182,000 and distributions to non-controlling interests of
$247,000.  This amount was partially offset by new borrowings of
$3,156,000.  Cash used in financing activities amounted to $913,000
for the six months ended June 30, 2009, which included repayments of borrowings
of $1,474,000 and scheduled principal payments on debt of
$1,614,000.  This amount was partially offset by new borrowings of
$2,215,000.





The
current credit crisis, related turmoil in the global financial system and the
downturn in the United States economy has had an adverse impact on the Company’s
liquidity and capital resources.  The credit crisis and the downturn
in the economy has adversely affected the Company’s business in a number of
ways, including effects on its ability to 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
were used to repurchase the preferred interest in the partnership that owned
5850 San Felipe, reduce accounts payable, debt and for other
investments.   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 June 30, 2010, accounts payable over 90 days
totaled $5,233,165, of which $1,367,000 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 $35,387,000, maturing over the next twelve
months.  One of these loans, with a balance of $17,170,000, which
matured 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 that it has
met the extension criteria; however the lender has yet to approve the
extension.  Most of the Company’s mortgage debt is not
cross-collateralized.  The Company has four mortgage loans that are
cross collateralized by a second property.   It is common for the
Company to serve as a guarantor and/or indemnitor on its mortgage
debt.  Because of uncertainties caused by the current credit crisis,
the Company’s current debt level and the Company’s historical losses there can
be no assurances as to the Company’s ability to obtain funds necessary for the
refinancing of its maturing debts.  If refinancing transactions are
not consummated, the Company will seek extensions and/or modifications from
existing lenders.  If these refinancings or extensions do not occur,
the Company will not have sufficient cash to meet its obligations.






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


25





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.





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





Six Months Ended
                    June 30, 2010
                  
                  
                  Six Months Ended
                    June 30, 2009Net
      loss attributable to the Company
                  
                  $
                  (1,546
                  )
                  
                  $
                  (3,994
                  )Depreciation
      and amortization from discontinued operations
                  
                  
                  8
                  
                  
                  
                  224Gain
      from sale of discontinued operations
                  
                  
                  (4,315
                  )
                  
                  
                  -Deferred
      income tax benefit
                  
                  
                  (1,255
                  )
                  
                  
                  (2,486
                  )Net
      loss attributable to noncontrolling interests
                  
                  
                  (412
                  )
                  
                  
                  (542
                  )Depreciation
      and amortization
                  
                  
                  7,149
                  
                  
                  
                  7,295FFO
                  
                  $
                  (371
                  )
                  
                  $
                  497




FFO for
the six months ended June 30, 2010 included non-recurring acquisition and other
business development costs of approximately $300,000, primarily due to the
Evergreen acquisition and the acquisition of 2620-2630 Fountain
View.






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.


26





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





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
2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS





In May
2010, the Company issued a total of 11,500 shares of Common Stock to its
officers, directors and certain key employees pursuant to the Company’s Omnibus
Stock Option Incentive Plan.  The issuance of Common Stock was exempt
from the registration requirements of the Securities Act of 1933, as amended,
pursuant to Section 4(2) and Rule 506 of Regulation D promulgated
thereunder.





ITEM
5. EXHIBITS





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


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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:
      August 13, 2010
                        
                        By:
                        /s/
      William J. CardenWilliam
      J. CardenChairman
      of the Board, President and,Chief
      Executive Officer(Principal
      Executive Officer)Date:
      August 13, 2010
                        
                        By:
                        /s/
      G. Anthony EppolitoG.
      Anthony EppolitoVice
      President, Chief Financial Officer,(Principal Financial Officer and Accounting Officer),Treasurer
      and Secretary


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EXHIBIT
INDEX





Exhibit No.
                
                Exhibit Title10.45
                
                Letter
      Agreement to Purchase Agreement dated December 18, 2009 between the
      Company and Evergreen Parties (First Amendment to Purchase
      Agreement)10.46
                
                Second
      Amendment to Purchase Agreement dated January 17, 2010 between the Company
      and Evergreen Parties31.1
                
                Certification
      of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.2
                
                Certification
      of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232.1
                
                Certification
      of CEO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
      906 of the Sarbanes-Oxley Act of 200232.2
                
                Certification
      of CFO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
      906 of the Sarbanes-Oxley Act of
2002


29