##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    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.
  State of Maryland
    
    52-2258674(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)5850 San Felipe, Suite 450Houston, Texas 77057
    
    77057(Address of principal executive offices)
    
    (Zip Code)
 (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report
 þ o
  o o þ
 o þ




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##### 



TABLE OF CONTENTS
 Page No.PART I
    
    FINANCIAL INFORMATIONItem 1
    
    Financial Statements
    
    
    3Consolidated Condensed Balance Sheets at September 30, 2006 (unaudited) and December 31, 2005
    
    
    3Consolidated Condensed Statements of Operations for the nine months ended September 30, 2006 and 2005 (unaudited)
    
    
    4Consolidated Condensed Statement of Stockholders Equity for the nine months ended September 30, 2006 (unaudited)
    
    
    5Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2006 and 2005 (unaudited)
    
    
    6Notes to Consolidated Condensed Financial Statements
    
    
    8Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    29Item 4
    
    Controls and Procedures
    
    
    30PART II
    
    OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    31Item 1A
    
    Risk Factors
    
    
    31Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 6
    
    Exhibits and Reports on Form 8-K
    
    
    31Certification pursuant to Section 302Certification pursuant to Section 906
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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 AMERICAN SPECTRUM REALTY, INC.
 
 CONSOLIDATED CONDENSED BALANCE SHEETS
  September 30, 2006
    
    
    December 31, 2005(Unaudited)ASSETSReal estate held for investment
    
    $
    209,429
    
    
    $
    154,826Accumulated depreciation
    
    
    (35,791
    )
    
    
    (28,115
    )Real estate held for investment, net
    
    
    173,638
    
    
    
    126,711Real estate held for sale
    
    
    
    
    
    
    22,272Cash and cash equivalents
    
    
    882
    
    
    
    300Tenant and other receivables, net of allowance for doubtful
accounts of $250 and $135, respectively
    
    
    349
    
    
    
    455Deferred rents receivable
    
    
    1,282
    
    
    
    1,245Deferred tax asset
    
    
    
    
    
    
    53Deposits held in escrow for tax-deferred exchanges
    
    
    
    
    
    
    5,210Investment in management company
    
    
    4,000
    
    
    
    4,000Prepaid and other assets, net
    
    
    10,492
    
    
    
    8,939Total Assets
    
    $
    190,643
    
    
    $
    169,185LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Notes payable, including premiums of $1,569 and $1,900, respectively
    
    $
    153,197
    
    
    $
    114,543Notes payable, litigation settlement
    
    
    
    
    
    
    4,877Liabilities related to real estate held for sale
    
    
    
    
    
    
    27,953Accounts payable
    
    
    1,970
    
    
    
    2,194Deferred tax liability
    
    
    5,906
    
    
    
    Accrued and other liabilities (including $169 and $331,
respectively, to related parties)
    
    
    5,489
    
    
    
    5,468Total Liabilities
    
    
    166,562
    
    
    
    155,035Minority interest
    
    
    6,453
    
    
    
    5,136Stockholders Equity:Preferred stock, $.01 par value; authorized, 25,000,000 shares,
none issued and outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; authorized, 100,000,000 shares;
issued, 1,605,451 and 1,598,615 shares, respectively; outstanding,
1,378,920 and 1,390,214 shares, respectively
    
    
    16
    
    
    
    16Additional paid-in capital
    
    
    46,515
    
    
    
    46,367Accumulated deficit
    
    
    (26,033
    )
    
    
    (34,889
    )Treasury stock, at cost, 226,531 and 208,401 shares, respectively
    
    
    (2,870
    )
    
    
    (2,480
    )Total Stockholders Equity
    
    
    17,628
    
    
    
    9,014Total Liabilities and Stockholders Equity
    
    $
    190,643
    
    
    $
    169,185
  3




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AMERICAN SPECTRUM REALTY, INC.
 
 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005REVENUES:Rental revenue
    
    $
    6,832
    
    
    $
    5,051
    
    
    $
    18,549
    
    
    $
    14,928Interest and other income
    
    
    26
    
    
    
    80
    
    
    
    174
    
    
    
    337Total revenues
    
    
    6,858
    
    
    
    5,131
    
    
    
    18,723
    
    
    
    15,265EXPENSES:Property operating expense
    
    
    3,294
    
    
    
    2,439
    
    
    
    8,644
    
    
    
    6,442Corporate general and administrative
    
    
    806
    
    
    
    901
    
    
    
    2,730
    
    
    
    2,745Depreciation and amortization
    
    
    2,871
    
    
    
    2,132
    
    
    
    8,098
    
    
    
    6,242Interest expense
    
    
    2,657
    
    
    
    2,209
    
    
    
    7,211
    
    
    
    6,640Total expenses
    
    
    9,628
    
    
    
    7,681
    
    
    
    26,683
    
    
    
    22,069OTHER INCOME:Gain on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    1,849
    
    
    
    Total other income
    
    
    
    
    
    
    
    
    
    
    1,849
    
    
    
    Net loss from continuing operations before deferred income tax benefit and minority interest
    
    
    (2,770
    )
    
    
    (2,550
    )
    
    
    (6,111
    )
    
    
    (6,804
    )Deferred income tax benefit
    
    
    1,019
    
    
    
    
    
    
    
    2,237
    
    
    
    Net loss from continuing operations before minority interest
    
    
    (1,751
    )
    
    
    (2,550
    )
    
    
    (3,874
    )
    
    
    (6,804
    )Minority interest (share from continuing operations)
    
    
    234
    
    
    
    328
    
    
    
    517
    
    
    
    863Net loss from continuing operations
    
    
    (1,517
    )
    
    
    (2,222
    )
    
    
    (3,357
    )
    
    
    (5,941
    )Discontinued operations:Loss from discontinued operations
    
    
    
    
    
    
    (515
    )
    
    
    (65
    )
    
    
    (1,551
    )Gain on sale of discontinued operations
    
    
    
    
    
    
    1,535
    
    
    
    22,349
    
    
    
    3,995Deferred income tax expense
    
    
    
    
    
    
    
    
    
    
    (8,196
    )
    
    
    Minority interest
    
    
    
    
    
    
    (131
    )
    
    
    (1,875
    )
    
    
    (308
    )Income from discontinued operations
    
    
    
    
    
    
    889
    
    
    
    12,213
    
    
    
    2,136Net (loss) income
    
    $
    (1,517
    )
    
    $
    (1,333
    )
    
    $
    8,856
    
    
    $
    (3,805
    )Basic and diluted per share data:Net loss from continuing operations
    
    $
    (1.10
    )
    
    $
    (1.54
    )
    
    $
    (2.41
    )
    
    $
    (4.03
    )Income from discontinued operations
    
    
    
    
    
    
    0.62
    
    
    
    8.78
    
    
    
    1.45Net (loss) income
    
    $
    (1.10
    )
    
    $
    (0.92
    )
    
    $
    6.37
    
    
    $
    (2.58
    )Basic weighted average shares used
    
    
    1,383,404
    
    
    
    1,441,866
    
    
    
    1,388,660
    
    
    
    1,472,549
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AMERICAN SPECTRUM REALTY INC.
 
 CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS EQUITY
  AdditionalCommon
    
    Common
    
    Paid-In
    
    Accumulated
    
    TreasuryShares
    
    Stock
    
    Capital
    
    Deficit
    
    Stock
    
    Total EquityBalance, January 1, 2006
    
    
    1,598,615
    
    
    $
    16
    
    
    $
    46,367
    
    
    $
    (34,889
    )
    
    $
    (2,480
    )
    
    $
    9,014Exercise of stock options (unaudited)
    
    
    5,624
    
    
    
    
    
    
    
    63
    
    
    
    
    
    
    
    
    
    
    
    63Common stock repurchase (unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (390
    )
    
    
    (390
    )Stock-based compensation (unaudited)
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    43Conversion of operating partnership
units
to common stock (unaudited)
    
    
    1,212
    
    
    
    
    
    
    
    42
    
    
    
    
    
    
    
    
    
    
    
    42Net income (unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,856
    
    
    
    
    
    
    
    8,856Balance, September 30, 2006
(unaudited)
    
    
    1,605,451
    
    
    $
    16
    
    
    $
    46,515
    
    
    $
    (26,033
    )
    
    $
    (2,870
    )
    
    $
    17,628
  5




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##### Table of Contents



AMERICAN SPECTRUM REALTY, INC
 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
   Nine Months Ended September 30,2006
    
    
    2005(Revised)(See Note 2)CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    8,856
    
    
    $
    (3,805
    )Adjustments to reconcile net income (loss) to net cash used in operating activities:Depreciation and amortization
    
    
    8,173
    
    
    
    8,444Deferred rental income
    
    
    (37
    )
    
    
    (138
    )Minority interest
    
    
    1,359
    
    
    
    (555
    )Deferred income tax expense
    
    
    5,959
    
    
    
    Gain on sales of real estate assets
    
    
    (22,349
    )
    
    
    (3,995
    )Gain on extinguishment of debt
    
    
    (1,849
    )
    
    
    Stock-based compensation expense
    
    
    43
    
    
    
    55Interest on receivable from principal stockholders
    
    
    
    
    
    
    (39
    )Amortization of note payable premiums, included in interest expense
    
    
    (331
    )
    
    
    (348
    )Changes in operating assets and liabilities:Decrease (increase) in tenant and other receivables
    
    
    277
    
    
    
    (17
    )(Decrease) increase in accounts payable
    
    
    (441
    )
    
    
    494Increase in prepaid and other assets
    
    
    (1,390
    )
    
    
    (1,731
    )Increase in accrued and other liabilities
    
    
    1,063
    
    
    
    936Net cash used in operating activities
    
    
    (667
    )
    
    
    (699
    )CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds received from sales of real estate assets
    
    
    36,163
    
    
    
    9,072Capital improvements to real estate assets
    
    
    (3,005
    )
    
    
    (2,916
    )Net cash provided by investing activities:
    
    
    33,158
    
    
    
    6,156CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from borrowings
    
    
    2,250
    
    
    
    20,228Repayment of borrowings  property sales
    
    
    (26,165
    )
    
    
    (5,325
    )Repayment of borrowings  refinances
    
    
    (1,500
    )
    
    
    (17,302
    )Repayment of borrowings  scheduled payments
    
    
    (1,290
    )
    
    
    (1,652
    )Repayment of borrowing from principal stockholder and director
    
    
    
    
    
    
    (532
    )Note payments, litigation settlement
    
    
    (4,877
    )
    
    
    Repurchase of common stock
    
    
    (390
    )
    
    
    (615
    )Proceeds from exercise of stock options
    
    
    63
    
    
    
    Net cash used in financing activities:
    
    
    (31,909
    )
    
    
    (5,198
    )Increase in cash
    
    
    582
    
    
    
    259Cash and cash equivalents, beginning of period
    
    
    300
    
    
    
    589Cash and cash equivalents, end of period
    
    $
    882
    
    
    $
    848SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    7,356
    
    
    $
    8,502Cash paid for income taxes
    
    
    133
    
    
    
    88
 6




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Nine Months Ended September 30,2006
    
    
    2005(Revised)(See Note 2)SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:Conversion of operating partnership units into common stock
    
    $
    43
    
    
    $
    24Debt assumed in connection with acquisitions of real estate assets
    
    
    16,914
    
    
    
    Borrowings in connection with acquisitions of real estate assets
    
    
    16,452
    
    
    
    Deposits held in escrow for acquisition of real estate assets
    
    
    
    
    
    
    552Financing in connection with repurchase of common stock
    
    
    
    
    
    
    85Financing in connection with cancellation of participating profit agreement
    
    
    
    
    
    
    10
  7




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##### Table of Contents



AMERICAN SPECTRUM REALTY, INC.
 
 Notes to Consolidated Condensed Financial Statements
 NOTE 1. DESCRIPTION OF BUSINESS
       NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 BASIS OF PRESENTATION
  8




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RECLASSIFICATIONS AND REVISIONS
   STOCK-BASED COMPENSATION
 Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
 MINORITY INTEREST
  NET INCOME (LOSS) PER SHARE
 Earnings Per Share,
 9




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##### Table of Contents



INCOME TAXES
     NOTE 3. REAL ESTATE
 ACQUISITIONS
 2006.
   10




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##### Table of Contents



2005.
  DISPOSITIONS
 2006.
  2005.
    NOTE 4. DISCONTINUED OPERATIONS
 Real estate assets held for sale
   December 31, 2005Condensed Consolidated Balance SheetReal estate
    
    $
    19,984Other
    
    
    2,288Real estate assets held for sale
    
    $
    22,272Note payable, net
    
    $
    26,186Accounts payable
    
    
    755Accrued and other liabilities
    
    
    1,012Liabilities related to real estate held for sale
    
    $
    27,953
 11




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##### Table of Contents



Net income from discontinued operations.
    Three Months Ended September 30,2006
    
    2005Condensed Consolidated Statements of OperationsRental revenue
    
    $
    
    
    
    $
    1,868Total expenses
    
    
    
    
    
    
    2,383Net loss from discontinued operations before
gain on sale and minority interest
    
    
    
    
    
    
    (515
    )Gain on sale of discontinued operations
    
    
    
    
    
    
    1,535Minority interest from discontinued operations
    
    
    
    
    
    
    (131
    )Net income from discontinued operations
    
    $
    
    
    
    $
    889
 Nine Months Ended September 30,2006
    
    2005Condensed Consolidated Statements of OperationsRental revenue
    
    $
    381
    
    
    $
    5,557Total expenses
    
    
    446
    
    
    
    7,108Net loss from discontinued operations before
gain on sale, income tax expense and minority
interest
    
    
    (65
    )
    
    
    (1,551
    )Gain on sale of discontinued operations
    
    
    22,349
    
    
    
    3,995Income tax expense
    
    
    (8,196
    )
    
    
    Minority interest from discontinued operations
    
    
    (1,875
    )
    
    
    (308
    )Net income from discontinued operations
    
    $
    12,213
    
    
    $
    2,136
 12




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##### Table of Contents





NOTE 5. NOTES PAYABLE, NET OF PREMIUMS




September 30, 2006
    
    
    December 31, 2005Maturity
    
    
    Principal
    
    
    Interest
    
    
    Principal
    
    
    InterestProperty (unless otherwise noted)
    
    Date
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    RateFixed Rate2470 Gray Falls
    
    
    12/29/2006
    
    
    
    2,076
    
    
    
    5.00
    %
    
    
    
    
    
    
    12000 Westheimer
    
    
    5/7/2007
    
    
    
    448
    
    
    
    6.80
    %
    
    
    452
    
    
    
    6.80
    %Pacific Spectrum
    
    
    6/10/2009
    
    
    
    5,518
    
    
    
    8.02
    %
    
    
    5,571
    
    
    
    8.02
    %1501 Mockingbird
    
    
    6/30/2009
    
    
    
    309
    
    
    
    6.00
    %
    
    
    
    
    
    
    6430 Richmond Atrium
    
    
    6/30/2009
    
    
    
    739
    
    
    
    5.50
    %
    
    
    
    
    
    
    6420 Richmond Atrium
    
    
    7/1/2009
    
    
    
    6,342
    
    
    
    5.50
    %
    
    
    
    
    
    
    Morenci Professional Park
    
    
    12/1/2009
    
    
    
    1,725
    
    
    
    6.60
    %
    
    
    1,786
    
    
    
    6.60
    %7700 Building
    
    
    7/10/2010
    
    
    
    33,240
    
    
    
    8.50
    %
    
    
    33,498
    
    
    
    8.50
    %Columbia
    
    
    7/1/2011
    
    
    
    2,247
    
    
    
    7.15
    %
    
    
    2,787
    
    
    
    10.50
    %Bristol Bay
    
    
    8/1/2011
    
    
    
    7,214
    
    
    
    7.58
    %
    
    
    7,276
    
    
    
    7.58
    %Technology
    
    
    8/1/2011
    
    
    
    7,466
    
    
    
    7.44
    %
    
    
    7,533
    
    
    
    7.44
    %Creekside
    
    
    12/1/2011
    
    
    
    6,094
    
    
    
    7.17
    %
    
    
    6,149
    
    
    
    7.17
    %16350 Park Ten Place
    
    
    5/11/2012
    
    
    
    4,656
    
    
    
    7.45
    %
    
    
    4,694
    
    
    
    7.45
    %16360 Park Ten Place
    
    
    5/11/2012
    
    
    
    3,648
    
    
    
    7.45
    %
    
    
    3,678
    
    
    
    7.45
    %2855 Mangum
    
    
    5/11/2012
    
    
    
    2,688
    
    
    
    7.45
    %
    
    
    
    
    
    
    2855 Mangum
    
    
    5/11/2012
    
    
    
    1,599
    
    
    
    6.00
    %
    
    
    
    
    
    
    6430 Richmond Atrium
    
    
    5/11/2012
    
    
    
    2,256
    
    
    
    7.45
    %
    
    
    
    
    
    
    Southwest Pointe
    
    
    6/1/2012
    
    
    
    2,831
    
    
    
    7.33
    %
    
    
    2,855
    
    
    
    7.33
    %12000 Westheimer
    
    
    8/11/2012
    
    
    
    3,061
    
    
    
    6.80
    %
    
    
    3,090
    
    
    
    6.80
    %16350 Park Ten Place
    
    
    5/11/2012
    
    
    
    514
    
    
    
    7.45
    %
    
    
    518
    
    
    
    7.45
    %16360 Park Ten Place
    
    
    8/11/2012
    
    
    
    403
    
    
    
    7.45
    %
    
    
    406
    
    
    
    7.45
    %11500 Northwest Freeway
    
    
    6/1/2014
    
    
    
    4,281
    
    
    
    5.93
    %
    
    
    4,323
    
    
    
    5.93
    %11500 Northwest Freeway
    
    
    6/1/2014
    
    
    
    309
    
    
    
    5.93
    %
    
    
    312
    
    
    
    5.93
    %5850 San Felipe
    
    
    8/1/2014
    
    
    
    5,361
    
    
    
    5.65
    %
    
    
    5,415
    
    
    
    5.65
    %Northwest Corporate Center
    
    
    8/1/2014
    
    
    
    5,617
    
    
    
    6.26
    %
    
    
    5,667
    
    
    
    6.26
    %6677 North Gessner Road
    
    
    9/1/2014
    
    
    
    8,600
    
    
    
    5.32
    %
    
    
    
    
    
    
    8100 Washington
    
    
    2/22/2015
    
    
    
    2,306
    
    
    
    5.59
    %
    
    
    2,329
    
    
    
    5.59
    %8300 Bissonnet
    
    
    5/1/2015
    
    
    
    4,739
    
    
    
    5.51
    %
    
    
    4,758
    
    
    
    5.51
    %1501 Mockingbird
    
    
    7/1/2015
    
    
    
    3,350
    
    
    
    5.28
    %
    
    
    
    
    
    
    5450 Northwest Central
    
    
    9/1/2015
    
    
    
    2,763
    
    
    
    5.38
    %
    
    
    2,791
    
    
    
    5.38
    %800/888 Sam Houston Parkway
    
    
    12/29/2015
    
    
    
    4,350
    
    
    
    6.25
    %
    
    
    4,400
    
    
    
    6.25
    %2401 Fountainview
    
    
    3/1/2016
    
    
    
    12,678
    
    
    
    5.82
    %
    
    
    
    
    
    
    Corporate  Unsecured
    
    
    9/30/2006
    
    
    
    
    
    
    
    7.15
    %
    
    
    60
    
    
    
    7.15
    %Subtotal
    
    
    $
    149,428
    
    
    
    
    
    
    $
    110,348Variable RateCorporate  Unsecured
    
    
    7/27/2006
    
    
    
    
    
    
    
    
    
    
    
    95
    
    
    
    8.25
    %Corporate  Unsecured
    
    
    5/31/2008
    
    
    
    200
    
    
    
    8.75
    %
    
    
    200
    
    
    
    8.25
    %Corporate  Secured
    
    
    10/1/2008
    
    
    
    2,000
    
    
    
    6.83
    %
    
    
    2,000
    
    
    
    6.83
    %Subtotal
    


    
    $
    2,200
    
    
    
    
    
    
    $
    2,295Loan Premiums
    
    
    
    
    
    
    1,569
    
    
    
    
    
    
    
    1,900Total
    



    
    $
    153,197
    
    
    
    
    
    
    $
    114,543






13




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14



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##### Table of Contents



NOTE 6. NOTES PAYABLE, LITIGATION SETTLEMENT
     15




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##### Table of Contents



NOTE 7. GAIN ON EXTINGUISHMENT OF DEBT
  NOTE 8. MINORITY INTEREST
   NOTE 9. REPURCHASE OF COMMON STOCK
       16
    Table of Contents    NOTE 10. STOCK-BASED COMPENSATION
    Pro Forma Information under SFAS No. 123
  Three Months Ended
    
    Nine Months EndedSeptember 30, 2005
    
    September 30, 2005Net loss, as reported
    
    $
    (1,333
    )
    
    $
    (3,805
    )Deduct: Employee compensation
expense for stock option grants
under fair value method, net of
related tax effects
    
    
    (13
    )
    
    
    (55
    )Pro forma net loss
    
    $
    (1,346
    )
    
    $
    (3,860
    )Per share data:Basic and diluted, as reported
    
    $
    (0.92
    )
    
    $
    (2.58
    )Basic and diluted, pro-forma
    
    $
    (0.93
    )
    
    $
    (2.62
    )
 Stock Options
    17




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##### Table of Contents



WeightedShares
    
    Average
    
    AverageUnder
    
    Exercise
    
    IntrinsicOption
    
    Price
    
    ValueOutstanding on January 1, 2003
    
    
    47,375
    
    
    $
    41.68Granted (1)
    
    
    8,750
    
    
    $
    12.20Outstanding on December 31, 2003
    
    
    56,125
    
    
    $
    37.08Granted (1)
    
    
    6,250
    
    
    $
    11.16Forfeited
    
    
    (28,750
    )
    
    $
    43.54Outstanding on December 31, 2004
    
    
    33,625
    
    
    $
    26.76Granted (1)
    
    
    6,250
    
    
    $
    8.10Outstanding on December 31, 2005
    
    
    39,875
    
    
    $
    23.84Granted (1)
    
    
    7,500
    
    
    $
    18.25Forfeited
    
    
    (5,813
    )
    
    $
    32.97Exercised
    
    
    (5,624
    )
    
    $
    11.23
    
    
    $
    58,479Outstanding on September 30, 2006
    
    
    35,938
    
    
    $
    23.17
    
    
    $
    206,710Exercisable as of September 30, 2006
    
    
    26,563
    
    
    $
    26.19
    
    
    $
    134,966
 
 (1)
    
    The exercise price of the stock options granted was equal to the fair market value on the date
of grant.  Weighted Average
    
    WeightedRange of
    
    
    
    
    
    Remaining
    
    AverageExercise
    
    Number
    
    Contractual
    
    ExercisePrice
    
    Outstanding
    
    Life
    
    Price$8.10 - $12.20
    
    
    14,688
    
    
    7.3 years
    
    $
    10.58$18.25 - $27.16
    
    
    15,625
    
    
    6.5 years
    
    $
    21.74$60.00 - $60.00
    
    
    5,625
    
    
    5.0 years
    
    $
    60.00
  WeightedRange of
    
    
    
    
    
    AverageExercise
    
    Number
    
    ExercisePrice
    
    Exercisable
    
    Price$8.10 - $12.20
    
    
    10,938
    
    
    $
    11.08$18.25 - $27.16
    
    
    10,000
    
    
    $
    23.70$60.00 - $60.00
    
    
    5,625
    
    
    $
    60.00
 18




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##### Table of Contents



Weighted AverageGrant DateNonvested Shares
    
    Shares
    
    Fair ValueNonvested at January 1, 2006
    
    
    10,000
    
    
    $
    10.69Granted
    
    
    7,500
    
    
    
    10.10Vested
    
    
    (7,188
    )
    
    
    7.49Forfeited
    
    
    (938
    )
    
    
    9.12Nonvested at September 30, 2006
    
    
    9,374
    
    
    $
    8.48
  Restricted Stock
  NOTE 11. RELATED PARTY TRANSACTIONS
       19




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##### Table of Contents



NOTE 12. SEGMENT INFORMATION
   ShoppingOffice
    
    Industrial
    
    Center
    
    Other
    
    Property TotalThree Months Ended September 30,2006Rental revenue
    
    $
    6,219
    
    
    $
    517
    
    
    $
    96
    
    
    
    
    
    
    $
    6,832Property operating expenses
    
    
    3,087
    
    
    
    157
    
    
    
    37
    
    
    $
    13
    
    
    
    3,294Net operating income (NOI)
    
    $
    3,132
    
    
    $
    360
    
    
    $
    59
    
    
    $
    (13
    )
    
    $
    3,538Real estate held for investment, net
    
    $
    158,738
    
    
    $
    13,331
    
    
    $
    1,533
    
    
    $
    36
    
    
    $
    173,6382005Rental revenue
    
    $
    4,434
    
    
    $
    556
    
    
    $
    61
    
    
    
    
    
    
    $
    5,051Property operating expenses
    
    
    2,180
    
    
    
    220
    
    
    
    31
    
    
    $
    8
    
    
    
    2,439Net operating income (NOI)
    
    $
    2,254
    
    
    $
    336
    
    
    $
    30
    
    
    $
    (8
    )
    
    $
    2,612Real estate held for investment, net
    
    $
    111,455
    
    
    $
    14,074
    
    
    $
    1,626
    
    
    $
    32
    
    
    $
    127,187
 20




---



##### Table of Contents



Shopping
    
    
    
    
    
    PropertyOffice
    
    Industrial
    
    Center
    
    Other
    
    TotalNine Months Ended September 30,2006Rental revenue
    
    $
    16,790
    
    
    $
    1,486
    
    
    $
    259
    
    
    $
    14
    
    
    $
    18,549Property operating expenses
    
    
    8,058
    
    
    
    487
    
    
    
    82
    
    
    
    17
    
    
    
    8,644Net operating income (NOI)
    
    $
    8,732
    
    
    $
    999
    
    
    $
    177
    
    
    $
    (3
    )
    
    $
    9,905Real estate held for investment, net
    
    $
    158,738
    
    
    $
    13,331
    
    
    $
    1,533
    
    
    $
    36
    
    
    $
    173,6382005Rental revenue
    
    $
    13,024
    
    
    $
    1,706
    
    
    $
    198
    
    
    
    
    
    
    $
    14,928Property operating expenses
    
    
    5,818
    
    
    
    552
    
    
    
    49
    
    
    $
    23
    
    
    
    6,442Net operating income (NOI)
    
    $
    7,206
    
    
    $
    1,154
    
    
    $
    149
    
    
    $
    (23
    )
    
    $
    8,486Real estate held for investment, net
    
    $
    111,455
    
    
    $
    14,074
    
    
    $
    1,626
    
    
    $
    32
    
    
    $
    127,187
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005REVENUESTotal revenues for reportable segments
    
    $
    6,832
    
    
    $
    5,051
    
    
    $
    18,549
    
    
    $
    14,928Other revenues
    
    
    26
    
    
    
    80
    
    
    
    174
    
    
    
    337Total consolidated revenues
    
    $
    6,858
    
    
    $
    5,131
    
    
    $
    18,723
    
    
    $
    15,265NET LOSSNOI for reportable segments
    
    $
    3,538
    
    
    $
    2,612
    
    
    $
    9,905
    
    
    $
    8,486Unallocated amounts:Interest and other income
    
    
    26
    
    
    
    80
    
    
    
    174
    
    
    
    337Corporate general and administrative expenses
    
    
    (806
    )
    
    
    (901
    )
    
    
    (2,730
    )
    
    
    (2,745
    )Depreciation and amortization
    
    
    (2,871
    )
    
    
    (2,132
    )
    
    
    (8,098
    )
    
    
    (6,242
    )Interest expense
    
    
    (2,657
    )
    
    
    (2,209
    )
    
    
    (7,211
    )
    
    
    (6,640
    )Gain on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    1,849
    
    
    
    Net loss from
continuing
operations before
deferred income
taxes and minority
interest
    
    $
    (2,770
    )
    
    $
    (2,550
    )
    
    $
    (6,111
    )
    
    $
    (6,804
    )
 September 30,2006
    
    
    2005ASSETSTotal assets for reportable segments
    
    $
    173,638
    
    
    $
    127,187Real estate held for sale
    
    
    
    
    
    
    35,914Cash and cash equivalents
    
    
    882
    
    
    
    848Tenant and other receivables, net
    
    
    349
    
    
    
    615Deferred rent receivable
    
    
    1,282
    
    
    
    1,245Deposits held in escrow
    
    
    
    
    
    
    552Investment in management company
    
    
    4,000
    
    
    
    4,000Prepaid and other assets, net
    
    
    10,492
    
    
    
    8,476Total consolidated assets
    
    $
    190,643
    
    
    $
    178,837
 NOTE 13. COMMITMENTS AND CONTINGENCIES
   21




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 OVERVIEW
     CRITICAL ACCOUNTING POLICIES
   
    
    The Board of Directors has concluded that it is not in the best interests of the
Company to elect to be treated as a real estate investment trust (or REIT), as defined
under the Internal Revenue Code of 1986, as amended.In May 2006, the Companys stockholders approved an amendment to the Companys Articles of
Incorporation, which removed a provision restricting the ability of stockholders to acquire
shares in excess of certain ownership limitations. This provision has been included in the
Articles to preserve the Companys ability to elect to be taxed as a REIT in the future,
since one of the requirements of REIT status is that not more than 50% of a REITs equity
securities may be held by 5 or fewer stockholders. The removal of this restriction
effectively precludes the Company
 22




---



##### Table of Contents



from making an election to be taxed as a REIT. (A REIT typically is not subject to federal
income taxation of its net income, provided applicable income tax requirements are
satisfied). Since its inception, the Company has been taxed as a C corporation.Due to the uncertainty of whether the Company would elect REIT status and due to the
uncertainly of gains and losses that would be recognized on property sales, no tax
provision was recorded during the three months ended March 31, 2006 and interim periods in
prior years. (Factors which contributed to the uncertainty of gains and losses that would
be recognized on property sales included the number of properties the Company would
eventually sale during the year, the sales price to be obtained on each sale, the timing of
when the sale would occur, and whether such sale would be part of a tax-deferred exchange
or an outright sale with full gain or loss recognition). With the removal, in May 2006, of
the uncertainty relating to the Companys ability to elect REIT status, the Company
determined that a tax provision should be recorded in future interim periods.
    
    Certain leases provide for tenant occupancy during periods for which no rent is due or
where minimum rent payments increase during the term of the lease. The Company records
rental income for the full term of each lease on a straight-line basis. Accordingly, a
receivable, if deemed collectible, is recorded from tenants equal to the excess of the
amount that would have been collected on a straight-line basis over the amount collected
and currently due (Deferred Rent Receivable). When a property is acquired, the term of
existing leases is considered to commence as of the acquisition date for purposes of this
calculation.
    
    Many of the Companys leases provide for Common Area Maintenance (CAM)/Escalations
(ESC) as the additional tenant revenue amounts due to the Company in addition to base
rent. CAM/ESC represents increases in certain property operating expenses (as defined in
each respective lease agreement) over the actual operating expense of the property in the
base year. The base year is stated in the lease agreement and is typically, the year in
which the lease commenced. Generally, each tenant is responsible for his prorated share
of increases in operating expenses. Tenants are billed an estimated CAM/ESC charge based
on the budgeted operating expenses for the year. Within 90 days after the end of each
fiscal year, a reconciliation and true up billing of CAM/ESC charges is performed based on
actual operating expenses.
    
    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.
    
    Gains on property sales are accounted for in accordance with the provisions of SFAS No.
66, Accounting for Sales of Real Estate. Gains 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.
 23




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##### Table of Contents



RESULTS OF OPERATIONS
 Discussion of the three months ended September 30, 2006 and 2005.
  Variance2006
    
    2005
    
    $
    
    %Rental revenue
    
    $
    6,832,000
    
    
    $
    5,051,000
    
    
    
    1,781,000
    
    
    
    35.3
    %Operating expenses:Property operating expenses
    
    
    3,294,000
    
    
    
    2,439,000
    
    
    
    855,000
    
    
    
    35.1
    %General and administrative
    
    
    806,000
    
    
    
    901,000
    
    
    
    (95,000
    )
    
    
    (10.5
    %)Depreciation and amortization
    
    
    2,871,000
    
    
    
    2,132,000
    
    
    
    739,000
    
    
    
    34.7
    %Interest expense
    
    
    2,657,000
    
    
    
    2,209,000
    
    
    
    448,000
    
    
    
    20.3
    %
 Rental revenue
 Property operating expenses
 Corporate general and administrative
 Depreciation and amortization
 Interest expense
 Deferred income taxes.
 Minority interest.
 24




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##### Table of Contents



Discontinued operations
  Three Months Ended
    
    Three Months EndedSeptember 30, 2006
    
    September 30, 2005Condensed Consolidated Statements of OperationsRental revenue
    
    $
    
    
    
    $
    1,868Total expenses
    
    
    
    
    
    
    2,383Net loss from discontinued operations before minority interest
    
    
    
    
    
    
    (515
    )Gain on sale of discontinued operations
    
    
    
    
    
    
    1,535Minority interest from discontinued operations
    
    
    
    
    
    
    (131
    )Net loss from discontinued operations
    
    $
    
    
    
    $
    889
 Discussion of the nine months ended September 30, 2006 and 2005.
  Variance2006
    
    2005
    
    $
    
    %Rental revenue
    
    $
    18,549,000
    
    
    $
    14,928,000
    
    
    
    3,621,000
    
    
    
    24.3
    %Operating expenses:Property operating expenses
    
    
    8,644,000
    
    
    
    6,442,000
    
    
    
    2,202,000
    
    
    
    34.2
    %General and administrative
    
    
    2,730,000
    
    
    
    2,745,000
    
    
    
    (15,000
    )
    
    
    (0.1
    %)Depreciation and amortization
    
    
    8,098,000
    
    
    
    6,242,000
    
    
    
    1,856,000
    
    
    
    29.8
    %Interest expense
    
    
    7,211,000
    
    
    
    6,640,000
    
    
    
    571,000
    
    
    
    8.6
    %
 Rental revenue
 Property operating expenses
 Corporate general and administrative
 25




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##### Table of Contents



Depreciation and amortization
 Interest expense
 Deferred income taxes.
 Minority interest.
 Gain on extinguishment of debt.
 Discontinued operations
  Nine Months Ended
    
    Nine Months EndedSeptember 30, 2006
    
    September 30, 2005Condensed Consolidated Statements of OperationsRental revenue
    
    $
    381
    
    
    $
    5,557Total expenses
    
    
    446
    
    
    
    7,108Net loss from discontinued operations before
gain on sale, income tax expense and minority
interest
    
    
    (65
    )
    
    
    (1,551
    )Gain on sale of discontinued operations
    
    
    22,349
    
    
    
    3,995Income tax expense
    
    
    (8,196
    )
    
    
    Minority interest from discontinued operations
    
    
    (1,875
    )
    
    
    (308
    )Net income from discontinued operations
    
    $
    12,213
    
    
    $
    2,136
 LIQUIDITY AND CAPITAL RESOURCES
  26




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##### Table of Contents



Nine Months EndedSeptember 30,2006
    
    2005Non-Cash Charges:Depreciation and amortization
    
    $
    8,173
    
    
    $
    8,444Minority interest
    
    
    1,359
    
    
    
    Net deferred income tax expense
    
    
    5,959
    
    
    
    Stock-based compensation expense
    
    
    43
    
    
    
    55Non-Cash Items:Amortization of loan premiums
    
    
    (331
    )
    
    
    (348
    )Deferred rental income
    
    
    (37
    )
    
    
    (138
    )Minority interest
    
    
    
    
    
    
    (555
    )Interest on receivable from principal stockholders
    
    
    
    
    
    
    (39
    )
     27




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28




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##### Table of Contents



CONTRACTUAL OBLIGATIONS AND COMMITMENTS
  Less than
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 yearsLong-term debt (1)
    
    $
    151,628
    
    
    $
    2,524
    
    
    $
    15,108
    
    
    $
    51,893
    
    
    $
    82,103Capital expenditures (2)
    
    
    1,704
    
    
    
    1,704
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    153,332
    
    
    $
    4,228
    
    
    $
    15,108
    
    
    $
    51,893
    
    
    $
    82,103
 
 (1)
    
    See Note 5  Notes Payable. These amounts do not include interest associated with the debt.(2)
    
    Represents estimated cost of commitments for tenant improvements and lease commissions related
to the leasing of space to new or renewing tenants.  INFLATION
  FORWARD-LOOKING STATEMENTS
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 INTEREST RATES
   29




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ITEM 4. CONTROLS AND PROCEDURES
   30




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
 
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Company Purchases of Equity Securities
 Total Number of(1) Total
    
    
    
    
    
    
    Shares Purchased as
    
    
    Maximum Number ofNumber of
    
    
    
    
    
    
    Part of Publicly
    
    
    Shares that May Yet BeShares
    
    
    Average Price
    
    
    Announced Plans or
    
    
    Purchased Under thePeriod
    
    Purchased
    
    
    Paid per Share
    
    
    Programs
    
    
    Plans or ProgramsJuly 1-31, 2006
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    August 1-31, 2006
    
    
    4,476
    
    
    
    21.91
    
    
    
    
    
    
    
    September 1-30, 2006
    
    
    4,972
    
    
    
    22.13
    
    
    
    
    
    
    
    Total
    
    
    9,448
    
    
    $
    22.02
    
    
    
    
    
    
    
    
 
 (1)
    
    Represents shares purchased in open market transactions. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
    
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##### Table of Contents



SIGNATURES
  AMERICAN SPECTRUM REALTY, INC.Date: November 2, 2006
    
    By:
    
    /s/ William J. CardenWilliam J. CardenChairman of the Board, President,Chief Executive Officer and ActingChief Financial OfficerDate: November 2, 2006
    
    By:
    
    /s/ G. Anthony EppolitoG. Anthony EppolitoVice President, Treasurer and Secretary(Principal Accounting Officer)
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EXHIBIT INDEX
 Exhibit No.
    
    Exhibit Title31
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
 33