UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 **FORM
10-KSB**
 
 x
    ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the
fiscal year ended December
31, 2004
 
 o
    TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 Commission
file number 0-33027
 
 **STERLING
EQUITY HOLDINGS. INC.**
 (Exact
name of small business issuer as specified in its charter)
 
 Nevada        88-0485488
 (State or
other jurisdiction of incorporation or organization)  (IRS
Employer Identification No.)
 
 1600
Airport Freeway, Suite 370, Bedford, Texas     76022
 (Address
of principal executive offices)      (Zip
Code)
 
 Registrant’s
telephone number, including area code:   (817)
358-0551
  Securities
      registered pursuant to Section 12(b) of the Act -
None
  
 Securities
registered pursuant to Section 12(g) of the Act: $.001 Par Value Common
Stock
 
 Check
whether the Issuer (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 o
 
 Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. x
 
 Issuer’s
revenues for the fiscal year ended December 31, 2004, were
$1,150,455.
 
 The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Issuer as of April 6, 2005, based upon the last reported
sales price on the Pink Sheets was $47,925.
 
 The
Registrant’s common stock outstanding as of April 6, 2005, was 28,335,061
shares.
 
 DOCUMENTS
INCORPORATED BY REFERENCE:
 None
 
 Transitional
Small Business Disclosure Format (Check One): Yes o No x
  
  **STERLING
EQUITY HOLDINGS, INC.**
 
 **INDEX
TO FORM 10-KSB**
 **December
31, 2004**
 
 **Part I**
    Item 1.
    Description of BusinessItem 2.
    Description of PropertyItem 3.
    Legal ProceedingsItem 4.
    Submission of Matters to a Vote of Security
      Holders**Part II**
    Item 5.
    Market for Common Equity and Related Stockholder
      MattersItem 6.
    Management’s
      Discussion and Analysis and Results ofOperations
      and Financial ConditionItem 7.
    Financial StatementsItem 8.
    Changes
      in and Disagreements with Accountants onAccounting
      and Financial DisclosureItem 8A.
    Controls and ProceduresItem 8B.
    Other Information**Part III**
    Item 9.
    Directors,
      Executive Officers, Promoters and Control Persons,Compliance
      with Section 16(a) of the Exchange ActItem 10.
    Executive CompensationItem 11.
    Security
      Ownership of Certain Beneficial Owners andManagementItem 12.
    Certain Relationships and Related Party
      TransactionsItem 13.
    ExhibitsItem 14.
    Principal Accountant Fees and
  Services
 
  
  **FORWARD-LOOKING
STATEMENTS**
 
 This
annual report on Form 10-KSB contains forward-looking statements within the
meaning of the federal securities laws. These forwarding-looking statements
include, without limitation, statements regarding the Company’s expectations and
beliefs about the market and industry, its goals, plans, and expectations
regarding its properties and services, its intentions and strategies regarding
future acquisitions and sales of properties and businesses, its intentions and
strategies regarding the formation of strategic relationships, its beliefs
regarding the future success of its properties and services, its expectations
and beliefs regarding competition, competitors, the basis of competition and its
ability to compete, its beliefs and expectations regarding its ability to hire
and retain personnel, its beliefs regarding period to period results of
operations, its expectations regarding revenues, its expectations regarding
future growth and financial performance, its beliefs and expectations regarding
the adequacy of its facilities, and its beliefs and expectations regarding its
financial position, ability to finance operations and growth and the amount of financing
necessary to support its operations. These statements are subject to risks and
uncertainties that could cause actual results and events to differ materially.
The Company undertakes no obligation to update forward-looking statements to
reflect events or circumstances occurring after the date of this annual report
on Form 10-KSB.
 
 **PART I**
 
 **ITEM
1.****BUSINESS**
 
 *GENERAL*
 
 Sterling
Equity Holdings, Inc., a Nevada corporation (“Sterling Holdings” or the
“Company”), originally incorporated under the name BlueStar Leasing, Inc., was
formed in January 2001 and, following a series of acquisitions during 2002 and
the sale of certain operations in 2003, is principally engaged in the business
of acquiring, operating and holding equity interests in business entities
primarily in the aviation and real estate industries.
 
 *HISTORY
AND DEVELOPMENT OF THE COMPANY*
 
 BlueStar
was originally formed as a "small ticket" regional leasing company working
within select niche markets of vendors, small business owners and brokers.
BlueStar was formed to provide a funding alternative to typical "credit scoring
matrix" leasing companies for transactions that are slightly "outside the box"
building a loyal customer base one lease at a time. BlueStar planned to
establish a strong sales and marketing group specializing in bringing creative
and flexible leasing and financing solutions to vendors, users of commercial
equipment and small business owners with "bruised credit". BlueStar intended to
fill the void that exists between the matrix lenders focusing on "A" credit
ratings and small business owners in need of capital for the acquisition of
equipment needed to grow their business.
 
 Effective
at the close of business on September 30, 2002, BlueStar completed an exchange
(the "Exchange") pursuant to which BlueStar issued an aggregate of 5,638,334
shares of common stock in exchange for 100% of the outstanding shares of common
stock of Sterling FBO Holdings, Inc. ("Sterling FBO"). Pursuant to the terms of
the Exchange, each share of Sterling FBO common stock was exchangeable for one
share of BlueStar common stock. As a result of the Exchange, Sterling FBO became
a wholly owned subsidiary of BlueStar.
 
 Sterling
FBO is a Nevada corporation formed in May 2002 to acquire own and operate
private airport Fixed Base Operations ("FBO’s") and income producing real
estate. At the time of the Exchange, Sterling FBO owned 88.9% or greater
interests in, and operated, four industrial office facilities located in Austin,
Texas and leased to governmental agencies. Additionally, at the time of the
Exchange, Sterling FBO was engaged in negotiations with certain affiliates to
acquire additional properties and FBO operations, which negotiations resulted in
the acquisitions, between October and December 2002, of interests in a retail
shopping center and five FBO’s, as follows:
 
 ·
    In
      October 2002, the Company, through Sterling FBO, completed the acquisition
      of a 99% limited partnership interest in Commodore Plaza, Ltd. The Company
      issued an aggregate of 2,000,000 shares of common stock to acquire
      Commodore Plaza, Ltd.
 
 ·
    On
      October 30, 2002, the Company, through Sterling FBO, completed the
      acquisition of a 100% ownership interest in Greeley FBO, L.L.C. and
      Sterling Austin Aero, L.P. The Company issued an aggregate of 3,143,334
      shares of common stock to acquire Greeley FBO and 2,166,666 shares of
      common stock to acquire Sterling Austin
Aero.
 
 ·
    On
      November 25, 2002, the Company, through Sterling FBO, completed the
      acquisition of a 100% ownership interest in Casper Jet Center, L.L.C.,
      Austin Aero FBO, Ltd., and Sterling-Ft. Worth Jet Center, Ltd. The Company
      issued an aggregate of 3,723,894 shares of common stock to acquire Casper
      Jet Center, L.L.C., 4,355,554 shares of common stock to acquire Austin
      Aero FBO, Ltd., and 1,153,333 shares of common stock to acquire
      Sterling-Ft. Worth Jet Center, Ltd.
 
 ·
    On
      December 30, 2002, the Company completed an exchange pursuant to which
      BlueStar issued an aggregate of 8,223,953 shares of common stock in
      exchange for 100% of the outstanding shares of common stock of Ft. Worth
      Jet Center, Inc.
 
 Commodore
Plaza, Ltd. owns the Commodore Plaza Shopping Center in Gulfport, Mississippi
that leases retail shopping space to various establishments on a net lease
basis.
 
 Greeley
FBO, LLC, Sterling Austin Aero, L.P., Casper Jet Center, L.L.C., Austin Aero
FBO, Ltd., Sterling-Ft. Worth Jet Center, Ltd., and Ft. Worth Jet Center, Inc.
(collectively, the FBO Companies), each owned and/or operated private airport
facilities located in Greeley, Colorado, Austin, Texas, Casper, Wyoming, Fort
Worth, Texas, and Tuscan, Arizona.
 
 Each of
Commodore Plaza, Ltd. and the FBO Companies was acquired from persons and/or
entities (including Sterling REIT, Inc., Hugo Verhaeghe, Chaz Glace and Thomas
Mathew, and affiliated entities) that may be deemed to be affiliates of the
Company by reason of the holdings of the common stock of the Company and/or by
reason of common officers.
 
 On
January 6 and February 7, 2003, the Company completed the sale of its FBO's in
Fort Worth and Austin, Texas; Casper, Wyoming; Tucson, Arizona; and Greeley,
Colorado for approximately $20,787,000 in cash and liquidation of debts and an
"earn-out" of up to $6,000,000 in future revenues in excess of a specified base.
Under the terms of the sale, the Company agreed to liquidate outstanding
liabilities and obligations associated with the FBO operations and properties.
Consequently, the Company paid creditors approximately $17,476,000, established
an escrow fund of $589,000 to satisfy potential claims and obligations and
deposited approximately $2,556,000 in the bank.
 
 In March
2003, the Company changed its name from BlueStar Leasing, Inc. to Sterling
Equity Holdings, Inc.
 
 As a
result of the Exchange, the acquisitions during 2002 and the subsequent sale of
operating FBO's, the Company altered its business plan to focus on the
acquisition, ownership and operation of income producing real estate with an
emphasis on FBO's and leased properties. The Company terminated the equipment
leasing operations originally conducted by BlueStar. Following the sale of FBO
properties in 2003, operations have been limited to operation of the four
state-leased properties and the Commodore Plaza property.
 
 On
January 13, 2004, Ron F. Bearden resigned as Chairman and President of the
Company and Thomas Mathew was appointed President, Treasurer and a director and
Lloyd Shoppa was appointed Chairman, Secretary and a director of the
Company.
 
 In
conjunction with the change of management, the new management team began an
investigation of circumstances and events at the Company following the sale of
the FBO properties in 2003 with the intent of bringing all financial statements
and SEC reports current and implementing various procedures and initiatives to
improve internal controls and protect corporate assets.
 
 Initial
results of the investigation conducted by the new management team indicated that
$2,553,261 of funds of the Company had been advanced to Sterling REIT, Inc. at
the direction of Lucky Srinivasan, a former officer of the Company, without
proper authorization. The funds advanced to Sterling REIT were purportedly used
to pay certain expenses of the Company and to pay certain expenses relating to
properties of Sterling REIT that were to be transferred to the
Company.
 
 Based on
the initial findings of the new management, the Company and Sterling REIT
entered into a Settlement Agreement pursuant to which Sterling REIT delivered to
the Company a Promissory Note evidencing the obligation of Sterling REIT to pay
the amounts advanced by the Company and a Pledge Agreement, Security Agreement
and multiple Deeds of Trust securing repayment of the note with substantially
all of the assets of Sterling REIT. All amounts owed by Sterling REIT have been
written off as bad debts. During 2004, the Company received certain excess
proceeds from the sale of properties by Sterling REIT resulting in a partial
recovery of bad debt.
 
 On
January 20, 2004, the Company entered into a Settlement Agreement relating to
the 2003 sale of FBO properties pursuant to which the $6 million earn-out was
terminated and $350,000 was distributed to the Company in full settlement of the
contingency escrow.
 
 On
December 15, 2004, the Company completed the sale of its property known as
4719-4735 South Congress, consisting of approximately 1.14 acres with
improvements located in Austin, Texas, which property was leased by the Company
to agencies of the State of Texas. The property was sold to SAGA Building, LLP,
an unaffiliated third party. The sale price of the property was $1,200,000 in
cash. The sales proceeds were used to reduce existing indebtedness on the
Company’s properties.
 
 Simultaneous
with the appointment of the new management team, the Company relocated its
executive offices to 1600 Airport Freeway, Suite 370, Bedford, Texas 76022,
telephone number (817) 358-0551.
 
 *PROPERTIES*
 
 As of
December 31, 2004, the Company owned interests in four properties owned in fee
simple.
 
 Three of
the Company’s properties held at December 31, 2004 were located in Austin, Texas
and were leased to agencies of the State of Texas. Under those leases, the
Company receives fixed monthly rental payments and the tenants are responsible
for payment of various operating costs of the property. All of its Austin leases
specify a minimum amount of insurance coverage required to be carried by each
tenant. The Company believes that the insurance policies required to be carried
by the tenants will adequately cover the replacement cost of the properties and
any personal liability losses, which the tenants may sustain.
  The following table
summarizes, as of April 1, 2005, the principal terms and significant data
regarding each of the leased properties in Austin, Texas:
 
 4501Springdale
    4405Springdale
    4708
      MLKLease
      term (1)Suite A
    Vacant
    5
      Yrs
    5
      YrsSuite
B
    8
      Yrs
    5
      Yrs
    NASuite C
    NA
    5
      Yrs
    NAWarehouse
    NA
    NA
    VacantExpirationSuite A
    NA
    1/31/07
    7/31/07Suite B
    1/31/09
    1/31/07
    NASuite C
    NA
    1/31/07
    NAWarehouse
    NA
    NA
    NARenewal
      options
    NA
    NA
    NASquare
      footageSuite A
    4,663
    16,475
    12,000Suite
B
    7,945
    10,975
    NASuite C
    NA
    16,470
    NAWarehouse
    NA
    NA
    32,800Base
      Annual RentalSuite
A
    NA
    $145,102
    $108,000Suite
B
    $81,975
    $84,649
    NASuite
C
    NA
    $114,636
    NAWarehouse
    NA
    NA
    NA
 
 (1)  Each of
the leases includes a right on the part of the State of Texas as tenant to
terminate the lease based on budgetary restraints.
 
 The
fourth leased property held at December 31, 2004 is the Commodore Plaza Shopping
Center located in Gulfport, Mississippi and leased to retail establishments.
Under those leases, the Company receives fixed monthly rental payments and the
tenants are responsible for payment of all property taxes, general liability
insurance, utility expenses and maintenance of the interior of their space. All
of the leases specify a minimum amount of insurance coverage required to be
carried by each tenant in addition to the "all risks" insurance policy for 100%
of the replacement value of the property.
 
 The
following table summarizes, as of April 1, 2005, the principal terms and
significant data regarding each of the tenants of Commodore Plaza Shopping
Center:
 
 OfficeMax
    Michaels
    NextelLease
      term
    15
      Yrs
    10
      Yrs
    5
      YrsExpiration
      of primary term
    6/03
    7/08
    3/10Expiration
      of current term
    7/13
    1/09
    3/10Renewal
      option
    4
      Options,5
      years each
    4
      Options,5
      years each
    2
      Options,5
      years eachSquare
      footage
    23,500
    19,834
    3,181Base
      annual rental
    $246,756
    $178,512
    $35,774
 
 *DISCONTINUED
OPERATIONS*
 
 *Sale
of Austin, Texas Property*
 
 On
December 15, 2004, the Company completed the sale of its property known as
4719-4735 South Congress in Austin, Texas, consisting of approximately 1.14
acres with improvements, which property was leased by the Company to agencies of
the State of Texas. The property was sold to SAGA Building, LLP, an unaffiliated
third party. The sale price of the property was $1,200,000, the proceeds of
which were applied in full to transaction costs and reduction of the Company’s
secured debt. The Company recorded a loss of approximately $37,000, which loss
is included in “Gain (loss) from discontinued operations” on the consolidated
statements of operations.
 
 *Sale
of FBO Operations*
 
 From
their acquisition, between October and December 2002, and their sale in February
2003, the Company operated five FBO properties, consisting of two properties
located in Texas, one property located in Colorado, one property located in
Arizona and one property located in Wyoming. Each of the FBO properties
consisted of physical improvements, generally consisting of offices, hangars and
related improvements typically used in conducting airport operations, located on
airport property and leased from the airport. The Company’s FBO business
included aviation fueling services, aircraft ground services and other aviation
services.
 
 On
February 27, 2003, the Company completed the sale of all of the assets and
operations of its Sterling-Austin Aero, Sterling-Forth Worth Jet Center, Austin
Aero FBO, Fort Worth Jet Center, Casper Jet Center and Greeley FBO subsidiaries,
comprising all of its FBO properties and operations. The assets and operations
sold consisted principally of real estate, permits to conduct fixed base flight
support operations for commercial, private, military and government aircraft,
facilities improvements, equipment and related assets.
 
 The
assets and operations were sold to Trajen Flight Support, L.P., an unaffiliated
third party, for a total purchase price of $20.8 million plus an "earn-out"
capped at $6 million based on jet fuel sales from the five defined FBO
operations over the succeeding three years as compared to certain benchmarks.
The purchase price consisted of $11.5 million paid on January 6, 2003 with the
balance being paid in full at closing on February 27, 2003. Pursuant to a
Settlement Agreement entered into in January 2004, the earn-out provision
relating to the Company’s sale to Trajen was terminated.
 
 *OPERATING
STRATEGY*
 
 The
Company intends to continue its business of operating and holding real
properties for investment and may evaluate the acquisition of aviation related
businesses. It will seek to acquire operating businesses that are aviation
related including service businesses with the objective to own the business as a
subsidiary or as an investment which can generate income under the Company’s
management. While it is not a principal objective, the Company may from time to
time acquire businesses for investment or development not in the aviation
industry. Each potential acquisition and leasing transaction will be evaluated
based on the ability to generate sufficient rates of return in excess of the
Company’s cost of capital. The Company’s objectives are:
 
 (1) to
preserve and protect its capital by the acquisition of income producing
businesses or improved real estate properties on an "all cash" basis or where
favorable financing is available;
 (2) to
purchase income-producing businesses and properties at prices that are below
appraised values; and
 (3) to
obtain capital appreciation through increases in the value of its businesses and
properties.
 
 There can
be no assurance that such objectives can be attained.
  *PROPERTY
MANAGEMENT*
 
 The
supervision of the operations of the properties is managed principally by
management of the Company’s subsidiary, Sterling FBO. Because of the nature of
the Company’s properties and the leases on those properties, necessary
management functions are limited. If and when needed to supplement the efforts
and capabilities of the Company’s management, the Company may retain third-party
real estate professionals to provide leasing services in connection with
identifying and qualifying prospective tenants, assist in the negotiation of
leases, provide periodic financial statements, receive and deposit monthly lease
payments, periodically verify tenant payments of real estate taxes and insurance
coverage, and periodically inspect properties and tenant records where
applicable. Third party real estate professionals, and affiliates providing
services in lieu of such real estate professionals, will be compensated for
administrative and management services in an amount not to exceed those fees
which would be customarily charged in an arms-length transaction by others
rendering similar services. The tenants are responsible, at their expense, for
day-to-day on-site management and maintenance of the properties.
 
 *FINANCING*
 
 The
Company has no specific guidelines relating to the manner in which it finances
the acquisition and operation of businesses or properties. Management intends to
seek out, evaluate and select the most favorable financing option available to
acquire and operate properties, which options may include, among others: (1) use
of available funds on hand; (2) conventional lenders; (3) seller financing; (4)
institutional lending sources; and (5) joint venture or similar structures. Debt
financing received will typically include the granting of a first lien on assets
or a mortgage first lien position on properties financed and require compliance
with a variety of standard borrowing covenants.
 
 *COMPETITIVE
CONDITIONS*
 
 The
properties the Company owns in Austin, Texas at December 31, 2004 are leased to
various agencies of the State of Texas. While those state agencies are not
subject to competition, upon the expiration of the leases those agencies may
seek out other space to lease. The tenants of the Company’s other retail
property in Mississippi have long-term leases with options to extend and upon
lease expiration, other competing tenants will be sought. Similarly, properties
that the Company may acquire in the future will be subject to risks affecting
the tenants and risks that tenants will relocate at the end of the lease term.
The real estate rental market in the markets in which the Company operates now
and in the future are subject to fluctuations and are affected by local economic
conditions. There will typically be a large number of comparable properties that
compete with the Company’s properties for tenants. Many property owner/operators
may be willing to lease space on terms significantly more favorable to tenants
than is the Company, in which case the Company may lose tenants. The Company
attempts to mitigate competitive factors by acquiring properties with existing
tenants that are financially sound and long-term leases.
 
 *EMPLOYEE* S
 
 As of
April 1, 2005, the Company employed one full-time employee/officer of the
Company. The Company’s current operations are limited to the acquisition,
oversight, collection of lease payments and other administrative functions
associated with the ownership of leased properties. In that regard, the Company
may, from time to time retain consultants or part-time employees to provide
services.
 
 **ITEM
2.****PROPERTIES**
 
 As of
April 1, 2005, the Company owned properties that are described more fully under
Item 1. “Business - Properties”.
 
 As of
April 1, 2005, the Company’s principal offices are located at 1600 Airport
Freeway, Suite 370, Bedford, Texas 76022. Those offices are leased from a third
party pursuant to a short-term lease at a monthly rent of approximately $1,200.
Management believes that its facilities are adequate to support operations for
the foreseeable future.
 
 **ITEM
3.****LEGAL
PROCEEDINGS**
 
 The
Company may from time to time be a party to lawsuits incidental to its business.
The Company is not aware of any current, pending, or threatened litigation or
proceedings that could have a material adverse effect on its results of
operations, cash flows or financial condition.
 
 **ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS**
 
 No
matters were submitted during the fourth quarter of the period covered in this
report to a vote of shareholders.
 
 **PART II**
 
 **ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS**
 
 
 **Market
Information**
 
 The
Company’s common stock trades on the Pink Sheets under the symbol
“SEQU”.
 
 There is
no established trading market in the Company’s common stock and trading therein
is sporadic. The last reported price of the Company’s common stock, as of April
1, 2005, was $0.01.
 
 **Holders**
 
 As of
April 1, 2005, there were approximately 42 holders of record of the Company’s
common stock.
 
 **Dividends**
 
 The
Company has not paid any cash dividends since its inception and presently
anticipates that all earnings, if any, will be retained for development of the
Company's business and that no dividends on the shares of common stock will be
declared in the foreseeable future. Any future dividends will be subject to the
discretion of the Company's Board of Directors and will depend upon, among other
things, future earnings, the operating and financial condition of the Company,
its capital requirements, general business conditions and other pertinent facts.
Therefore, there can be no assurance that any dividends on the common stock will
be paid in the future.
 ****
 **ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS AND RESULTS OF
OPERATIONS AND FINANCIAL CONDITION**
 
 *The
following discussion and analysis of the Company’s financial condition as of
December 31, 2004, and the Company’s results of operations for the years in the
two-year period ended December 31, 2004 and 2003, should be read in conjunction
with the Company’s audited consolidated financial statements and notes thereto
included elsewhere in this report.*
 
 **Overview**
 
 Sterling
Equity Holdings, Inc.’s (“Sterling Holdings” or the “Company”) business during
the 2004 period included operation of five properties under leases. During the
2003 period, the Company also operated five FBO properties offering aviation
fueling services, aircraft ground services and other aviation services. As a
result of the disposal of all FBO operations in 2003, all operating results
relating to the FBO operations have been reclassified as “discontinued
operations” and are reported as a single entry on the Consolidated Statements of
Operations. Additionally, on December 15, 2004, the Company completed the sale
of its property known as 4719-4735 South Congress, consisting of
approximately 1.14 acres with improvements located in Austin, Texas, which
property was leased by the Company to agencies of the State of Texas. As a
result of this sale, all operating results relating to 4719-4735 South Congress
operations have been reclassified as “discontinued operations” and are reported
as a single entry on the Consolidated Statements of Operations.
 
 Leased
properties held during the 2004 period consisted of four properties located in
Austin, Texas, each of which was leased to agencies of the State of Texas under
leases in which the tenant pays a fixed monthly rental and a negotiated portion
of the operating costs relating to the property. During the 2004 period, the
Company also owned one retail property in Gulfport, Mississippi, which is
currently leased to retail tenants on a "net lease" basis.
 
 **2004
Developments**
 
 During
the 2004 period, the Company's operations were focused on operation of its
existing properties and cost control measures. During the period, the Company
was also engaged in efforts to identify and secure opportunities in the aviation
industry.
 
 In
January 2004, the Company entered into a Settlement Agreement relating to the
2003 sale of FBO properties pursuant to which the $6 million earn-out was
terminated and $350,000 was distributed to the Company in full settlement of the
contingency escrow.
 
 In April
2004, the Company received $485,000 from the settlement of a lawsuit relating to
the Fort Worth Jet Center property that was sold in 2003. The property incurred
hail damage to its roof and, in lieu of replacing the roof, the Company's
insurer recommended that repairs be made by contractors and used products
recommended by the insurer. The repairs performed by the contractor were
ineffective. As a result, the Company filed suit against the insurer, the
contractor and the product manufacturer. The Company retained the rights under
the suit following the sale of the Fort Worth Jet Center property.
 
 In 2004,
Sterling REIT sold an existing property on which the Company had a junior lien
position granted in connection with the previous settlement of claims regarding
amounts advanced to Sterling REIT. In connection with the Company's agreement to
release its junior lien, Sterling REIT remitted excess proceeds from the sale,
in the amount of $85,000. As amounts owed by Sterling REIT had previously been
written off as bad debts, the receipt of the payment was reflected as recovery
of a bad debt.
 
 In
September 2004, the Company settled a lawsuit with the City of Austin related to
property taxes. This resulted in a release of escrowed funds of $222,000
established in the sale of assets in 2002. This amount is included in “other
income” on the Consolidated Statements of Operations.
 
 In
December 2004, the Company completed the sale of its property known as 4719-4735
South Congress, consisting of approximately 1.14 acres with improvements located
in Austin, Texas, which property was leased by the Company to agencies of the
State of Texas. The property was sold to SAGA Building, LLP, an unaffiliated
third party. The sale price of the property was $1,200,000 in cash. The sales
proceeds were used to reduce existing indebtedness of the Company's
properties.
 
 **Critical
Accounting Policies**
 
 The
following describes the critical accounting policies used in reporting the
Company’s financial condition and results of operations. In some cases,
accounting standards allow more than one alternative accounting method for
reporting. In those cases, reported results of operations would be different
should the Company employ an alternative accounting method.
 
 *Impairment
of Long-Lived Assets*
 
 The
Company reviews all long-lived assets on a regular basis to determine if there
has been impairment in the value of those assets. If, upon review, it is
determined that the carrying value of those assets may not be recoverable, the
Company will record a charge to earnings and reduce the value of the asset on
the balance sheet to the amount determined to be recoverable.
 
 For
purposes of evaluating recoverability of long-lived assets, the recoverability
test is performed using undiscounted cash flows of the individual assets and
consolidated undiscounted net cash flows for long-lived assets not identifiable
to individual properties compared to the related carrying value. If the
undiscounted operating income is less than the carrying value, the amount of the
impairment, if any, will be determined by comparing the carrying value of each
asset with its fair value. Fair value is generally based on a discounted cash
flow analysis.
 
 Based on
the Company’s review of present operating properties and other long-lived
assets, during the fiscal year ended December 31, 2004, the Company recorded no
impairments of long-lived assets.
 
 *Revenue
Recognition*
 
 Rental
income is recognized on a straight-line basis over the term of the lease. The
Company establishes, on a current basis, an allowance for future potential
tenant credit losses that may occur against this account. Amounts reflected as
accounts receivable on the balance sheet are net of such allowance, if required.
In establishing the allowance, the Company evaluates the ability of each tenant
to make required rental payments. If the financial condition of a specific
tenant were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances will be required.
 
 Based on
the Company’s review of the ability of tenants to pay required rental payments,
no allowance for tenant credit losses were established as of December 31,
2004.
 
 **Results
of Operations**
 
 *Revenue*
 
 Revenue
totaled $1,150,455 during the year ended December 31, 2004 as compared to
$1,144,808 during the year ended December 31, 2003. All revenue was derived from
the leases of the four properties owned and operated by the Company at December
31, 2004. Base rental amounts are fixed by contract subject to contractual
escalation provisions and obligations of tenants to pay certain operating
expenses associated with the properties. Estimated minimum annual rental
payments to the Company, after giving effect to the sale of a property in
December 2004, for the current leased properties are approximately $960,000
annually through 2006 and decrease thereafter.
 
 *Real
Estate Operating Expenses*
 
 Real
estate operating expenses are costs associated with the ownership and operation
of rental properties. Principal rental operating expenses consist of interest,
taxes, depreciation and professional and consulting fees. Real estate operating
expenses totaled $1,927,555 during the year ended December 31, 2004 as compared
to $2,118,981 during the same period in 2003. The reduction in real estate
operating expenses reflects a reduction in interest, taxes, professional and
consulting and depreciation and amortization, partially offset by increases in
repairs and maintenance expense and in other expenses. The decline in interest
expense was attributable to the consolidation of three separate mortgage notes
into one with more favorable interest terms while the decline in property taxes
was attributable to interest and penalties paid in 2003 for late payment of
property taxes for prior years.  Professional and consulting fees decreased
7% during 2004 as compared to 2003 reflecting a reduction of costs associated
with bringing the Company's public company reports current, but still remained
at high levels due to ongoing efforts to bring delinquent reports current and
costs associated with settling various disputes. Professional and
consulting fees in 2004  included accounting fees of $141,339, legal fees
of $193,290 and management fees and other consulting fees of $186,661, which
amount includes $180,000 paid to Mr. Mathew, the Company's President. The
Company anticipates that professional fees will be substantially reduced in
2005 with completion of various settlements and efforts to bring reports
current. The increase in other expense reflects certain recurring office and
general and administrative expenses which were included in discontinued
operations during 2003.
 
 *Other
Operating Expenses*
 
 Other
operating expenses related to penalties due the IRS for unpaid income taxes
totaling $55,491 and bad debts totaling $87,196 during the year ended December
31, 2004, compared to $1,694,264 of bad debts during the same period in 2003.
Bad debt expense for both periods relate to funds advanced to Sterling REIT, an
affiliated shareholder of the Company, in connection with the payment of certain
expenses relating to properties to be transferred from Sterling REIT to the
Company. The properties in question were never transferred to the Company. In
2004, pursuant to the terms of a Settlement Agreement, Sterling REIT pledged
substantially all of its assets to the Company to secure repayment of amounts
advanced by the Company. Based on an evaluation by management, all advances made
to Sterling REIT at December 31, 2003 were determined to be uncollectible.
During April 2005, the Company foreclosed and cancelled 11,320,007 shares of its
common stock owned by Sterling REIT and pledged to the Company to secure
repayment of advances to Sterling REIT by the Company totaling
$2,553,261.
 
 *Other
Income*
 
 Other
income, consisting of interest, recovery of bad debts, settlement of lawsuits
and other income, totaled $833,919 during the year ended December 31, 2004 as
compared to $47,175 during the same period in 2003. The increase in other income
related to a recovery of bad debts of $85,000, receipt of settlement proceeds
from two lawsuits of $707,000 and receipt of other miscellaneous income of
$22,431 during the 2004 period, partially offset by a reduction in interest
income from $47,175 in 2003 to $19,488 in 2004.
 
 *Income
Taxes*
 
 Income
tax expense of $53,178 was recorded during the 2004 period as compared to an
income tax benefit of $811,290 during the 2003 period. The deferred income tax
benefit during the 2003 period reflected the net operating losses for the period
and the gain from discontinued operations.
 
 *Discontinued
Operations*
 
 As a
result of the sale of all FBO operations in 2003, all revenue and expenses
relating to those operations was classified as discontinued operations and was
recorded, net of a gain arising from the sale, as a net amount. During the 2003
period, the Company recorded a gain from discontinued operations of $3,199,334,
including a gain on the sale of the FBO operations of $3,632,981. As a result of
the sale of its property known as 4719-4735 South Congress in Austin, Texas, the
Company recorded a loss from discontinued operations of $139,284 and $102,161
for the years ended December 31, 2004 and 2003, respectively.
 
 The
Company also recorded a tax provision of $1,339,144 in the 2003 period in
connection with the discontinued FBO operations and a tax benefit of $47,356 in
the 2004 period in connection with the sale of its 4719-4735 South Congress
property.
 
 **Liquidity
and Capital Resources**
 
 *Cash
and Working Capital Position*
 
 At
December 31, 2004, the Company had cash balances in non-restrictive accounts of
$214,058 and a working capital deficit of approximately $5,079,177 as compared
to cash balances in non-restrictive accounts of $3,695 and a working capital
deficit of approximately $706,397 at December 31, 2003. Included in the working
capital balance at December 31, 2004 was $201,346 of restricted cash held in
trust by the lender on the Austin, Texas properties to assure compliance with
financial ratios under the loan pending the leasing of vacant office space. The
note on the three Austin buildings has normal covenants regarding liquidation,
merger, sale of assets, indebtedness, transfer of ownership, payment of
dividends and other restrictions. The note also has a “debt service coverage
ratio" as defined in the note agreement and reporting requirements. At December
31, 2004, the Company was in default of the debt service coverage ratio and
received a verbal waiver of this covenant until September 30, 2005. The entire
amount of this note, which is due on March 27, 2006, has been classified as a
current liability on the balance sheet. The Company is currently seeking
alternative financing to retire this note and extend the due date.
 
 At
December 31, 2003, working capital balances included $759,947 of restricted cash
reserved pursuant to the terms of a $750,000 line of credit. An additional
$140,809 was held in escrow at December 31, 2004 and $107,540 was held in escrow
at December 31, 2003 by the lender for the Commodore Plaza Shopping Center in
Gulfport, Mississippi.
 
 During
the year ended December 31, 2004, the Company entered into a settlement
agreement relating to certain disputes arising in connection with the sale of
the FBO properties. Pursuant to that settlement, the Company released to the
purchaser of the FBO properties the amount in escrow other than $350,000 that
the Company retained.
 
 During
the year ended December 31, 2004, the Company also received $485,000 from the
settlement of a lawsuit retained following the sale of the FBO properties,
$222,000 from settlement of a lawsuit with the City of Austin relating to taxes
owing on the Austin FBO properties and $85,000 was recovered that had previously
been written off as a bad debt.
 
 During
the year ended December 31, 2004, a $750,000 certificate of deposit, comprising
substantially all of the restricted cash balance, was released to settle a
$750,000 line of credit.
 
 During
the year ended December 31, 2004, the Company borrowed $175,000 from a bank. The
note was due February 16, 2005, payable in monthly installments of $15,027
including interest of 5.5% per annum, however the bank could call the note at
any time. The note was guaranteed by an officer of the Company. In May 2004, the
Company borrowed $300,000 from the same bank. The note was due June 5, 2005 with
an interest rate of 5.5% and interest only was due for the first three months.
Starting the fourth month, nine monthly installments of $30,773, including
interest, were due; however the bank could call the note at any time. The note
was guaranteed by an officer of the Company. Approximately $147,000 of this loan
was used to pay off the loan incurred in February 2004 at the same bank and the
Company repaid the $300,000 note with the proceeds from the sale of its Austin,
Texas property in December 2004.
 
 *Cash
Flows*
 
 Operations
provided $124,257 of cash during the year ended December 31, 2004, as compared
to $2,381,533 of cash used in operations during the year ended December 31,
2003. The improvement in operating cash flows during the 2004 period was a
result of reduced expenses during the current period and the incurrence of bad
debt expense of $1,688,288 during the 2003 period.
 
 Investing
activities provided cash of $20,619 during the 2004 period, relating to the sale
of the Austin, Texas property. Investing activities provided $1,369,819 of cash
during the 2003 period. The cash provided by investing activities during the
2003 period related to the receipt of net proceeds from the sale of discontinued
operations, partially offset by the use of a certificate of deposit to secure a
line of credit and investments in leasehold improvements.
 
 Financing
activities provided $65,487 of cash during the year ended December 31, 2004, and
provided $539,564 of cash during the 2003 period. Cash provided by financing
activities during the 2004 period related principally to proceeds received under
the line of credit and borrowings. The cash provided by financing activities
during the 2003 period related to proceeds from a line of credit, partially
offset by payments on mortgages and notes payable.
 
 *Long-Term
Debt*
 
 At
December 31, 2004, the Company had long-term debt, consisting of real estate
notes payable, of $3,979,676 as compared to $9,632,435 of long-term debt at
December 31, 2003. The reduction in long-term debt during 2004 was attributable
to regular scheduled debt service payments, the payoff of a mortgage note with
the sale of its Austin, Texas property in 2004 and the classification as
“Current portion - notes payable” of the loan on its Austin, Texas properties as
a result of the Company being in default of the debt service coverage ratio. The
Company received a verbal waiver of this ratio until September 30, 2005. The
Company is currently seeking alternative financing to retire this note and
extend its due date. This note is secured by a first lien position on the
Company’s Austin, Texas real estate.
 
 The
long-term indebtedness at December 31, 2004 was comprised of one loan on the
Company's Gulfport, Mississippi property, which is secured by a first lien
position on the Company's Gulfport, Mississippi real estate.
 
 *Financial
Commitments and Requirements*
 
 The
Company's principal financial commitments and requirements relate to funding
operational deficits, if any, overhead and servicing debt on Company real
estate.
 
 The
Company’s only material contractual obligations requiring determinable future
payments on its part are its notes payable secured by real estate. Scheduled
debt service payments on real estate notes, excluding debt relating to assets
held for sale, at December 31, 2004 are as follows:
 
 Years
      Ending December 31,
    
    Amounts2005
    
    $
    5,007,7172006
    
    
    41,8212007
    
    
    45,1062008
    
    
    47,8032009
    
    
    52,401Thereafter
    
    
    3,752,545Total
    
    $
    8,947,393
 
 *Due
from Affiliates*
 
 Due from
affiliates, totaling $65,289, represents amounts owed to the Company by Sterling
REIT. The amounts due from Sterling REIT represent rents previously collected by
Sterling REIT and belonging to the Company and amounts advanced by the Company
to Sterling REIT to facilitate the sale by Sterling REIT of various properties
with the agreement that Sterling REIT will repay all amounts owed to the Company
from the proceeds of the sale of the properties.  The due from affiliates
owed by Sterling REIT was repaid in full in 2005.
 
 *Inflation*
 
 Inflation
has historically not had a material effect on the Company’s operations. Each of
its leases includes escalation provisions based on cost-of-living increases.
Accordingly, the Company believes inflation will not have a material adverse
effect on its future operations.
 
 **Off-Balance
Sheet Arrangements**
 
 The
Company does not have any off-balance sheet arrangements.
 
 **New
Accounting Pronouncements**
 
 In
December 2004, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 123R “Share-Based Payment” (SFAS
123R). This statement revises SFAS No. 123, supersedes APB No. 25, and requires
companies to recognize the cost of employee stock options and other awards of
stock-based compensation based on the fair value of the award as of the grant
date. The effective date of this pronouncement is as of the beginning of the
first interim or annual period that begins after June 15, 2005. The adoption of
FASB No. 123R will not have a material effect on the Company’s consolidated
financial position, results of operations or cash flows.
 
 In
December 2004, the FASB published the following two final FASB Staff Positions,
effective immediately. FAS 109-1, "Application of FASB Statement No. 109,
Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004," giving guidance
on applying FASB Statement No. 109, Accounting for Income Taxes, to the tax
deduction on qualified production activities provided by the American Jobs
Creation Act of 2004. FAS 109-2 "Accounting and Disclosure Guidance for that
Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004" provides guidance on the Act's repatriation provision. The Company does
not believe that the adoption of FAS 109-1 or FAS 109-2 will have a material
impact on its consolidated financial position, results of operations or cash
flows.
 
 In
November 2004, the FASB Emerging Issues Task Force, or EITF, reached a consensus
in applying the conditions in Paragraph 42 of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets, in Determining Whether to Report
Discontinued Operations" (EITF 03-13). Evaluation of whether operations and cash
flows have been eliminated depends on whether (1) continuing operations and cash
flows are expected to be generated, and (2) the cash flows, based on their
nature and significance, are considered direct or indirect. This consensus
should be applied to a component that is either disposed of or classified as
held for sale in fiscal periods beginning after December 15, 2004. The Company
does not believe that the adoption of EITF 03-13 will have a material impact on
its consolidated financial position, results of operations or cash
flows.
 
 In
November 2004, the FASB issued SFAS No. 151, "Inventory Costs—An Amendment of
ARB No. 43, Chapter 4" (SFAS No. 151). SFAS No. 151 amends the guidance in ARB
No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Among other provisions, the new rule requires that items such as
idle facility expense, excessive spoilage, double freight, and rehandling costs
be recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal" as stated in ARB No. 43. SFAS No. 151 is effective
for fiscal years beginning after June 15, 2005 and is required to be adopted by
the Company in the first quarter of fiscal 2006, beginning on January 1, 2006.
The Company does not believe the adoption of SFAS No. 151 will have a material
impact on the consolidated financial position, results of operations and cash
flows.
 
  
  **ITEM 7. FINANCIAL STATEMENTS**
 
 
 
 **REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 
 
 
 
 To the
Board of Directors of:
 Sterling
Equity Holdings, Inc. and Subsidiary
 Bedford,
Texas
 
 We have
audited the accompanying balance sheets of Sterling Equity Holdings, Inc. and
Subsidiary, as of December 31, 2004 and 2003 and the related consolidated
statements of operations, shareholders’ deficit and cash flows for the two years
ended December 31, 2004 and 2003. These consolidated financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our
audit.
 
 We
conducted our audit in accordance with auditing standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Sterling Equity Holdings,
Inc. and Subsidiary as of December 31, 2004 and 2003, and the results of its
operations and cash flows for the two years ended December 31, 2004 and 2003 in
conformity with accounting principles generally accepted in the United States of
America.
 
 The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has suffered recurring
losses from operations and has cash flow problems. These conditions raise
substantial doubt about the Company’s ability to continue as a going concern.
Management’s plans in regard to those matters also are described in Note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
 
 
 
 Thomas Leger &
Co., L.L.P.
 Houston,
Texas
 March 22,
2005
  
  **STERLING
EQUITY HOLDINGS, INC.**
 **AND
SUBSIDIARY**
 **CONSOLIDATED
BALANCE SHEETS**
 
 December
      31,2004
    
    2003**ASSETS**Current
      assets:Cash
    
    $
    214,058
    
    $
    3,695Cash in restricted accounts
    
    
    201,346
    
    
    759,947Accounts receivable
    
    
    35,692
    
    
    441,098Prepaid items and other
    
    
    30,249
    
    
    42,921Total current assets
    
    
    481,345
    
    
    1,247,661Investment
      in real estate:Land, improvements and leaseholds
    
    
    9,077,316
    
    
    10,264,212Accumulated depreciation
    
    
    (2,740,269
    )
    
    (2,711,243
    )6,337,047
    
    
    7,552,969Land
    
    
    1,258,643
    
    
    1,389,420Net investment in real estate
    
    
    7,595,690
    
    
    8,942,389Other
      assets:Goodwill
    
    
    647,043
    
    
    908,523Deferred financing costs, net of amortization of $72,047 and $79,643 at
      December 31, 2004 and 2003, respectively
    
    
    133,902
    
    
    175,054Due
      from affiliates
    
    
    65,289
    
    
    --Escrowed funds
    
    
    140,809
    
    
    107,540Total other assets
    
    
    987,043
    
    
    1,191,117Total
      assets
    
    $
    9,064,078
    
    $
    11,381,167**LIABILITIES
      AND SHAREHOLDERS' DEFICIT**Current
      liabilities:Accounts payable, trade
    
    $
    41,938
    
    $
    191,233Accrued liabilities
    
    
    202,041
    
    
    438,008Income taxes payable
    
    
    307,912
    
    
    253,000Line of credit
    
    
    --
    
    
    750,000Current portion - notes payable
    
    
    5,007,717
    
    
    279,152Other notes payable
    
    
    914
    
    
    42,665Total current liabilities
    
    
    5,560,522
    
    
    1,954,058Long-term
      debt
    
    
    3,939,676
    
    
    9,632,435Commitments
      and contingencies (Note 11)Shareholders'
      equity (deficit):Preferred stock, $.001 par value, 5,000,000 shares authorized, none
      issued
    
    
    --
    
    
    --Common stock, $.001 par value, 70,000,000 shares authorized, 39,655,068
      shares issued and outstandingat December 31, 2004 and 2003
    
    
    39,655
    
    
    39,655Additional paid-in capital
    
    
    607,163
    
    
    607,163Accumulated deficit
    
    
    (1,082,938
    )
    
    (852,144
    )Total shareholders’ deficit
    
    
    (436,120
    )
    
    (205,326
    )Total
      liabilities and shareholders' deficit
    
    $
    9,064,078
    
    $
    11,381,167
 
 See
accompanying notes to consolidated financial statements.
  
  **STERLING
EQUITY HOLDINGS, INC.**
 **AND
SUBSIDIARY**
 **CONSOLIDATED
STATEMENTS OF OPERATIONS**
 **FOR
THE YEARS ENDED DECEMBER 31, 2004 AND 2003**
 
 
 Twelve
      Months EndedDecember
      31,2004
    
    2003Rental
      revenue
    
    $
    1,150,455
    
    $
    1,144,808Real
      estate operating expenses:Interest expense
    
    
    575,228
    
    
    666,707Real estate taxes
    
    
    163,650
    
    
    197,596Depreciation and amortization
    
    
    455,976
    
    
    565,409Repairs and maintenance
    
    
    43,449
    
    
    34,353Utilities
    
    
    18,703
    
    
    18,763Professional and consulting fees
    
    
    514,331
    
    
    556,310Other
    
    
    156,218
    
    
    79,843Total
      real estate operating expenses
    
    
    1,927,555
    
    
    2,118,981Penalties
    
    
    55,491
    
    
    --Bad debt expense
    
    
    87,196
    
    
    1,694,264Total operating expenses
    
    
    2,070,242
    
    
    3,813,245Other
      income:Interest income
    
    
    19,488
    
    
    47,175Recovery of bad debts
    
    
    85,000
    
    
    --Settlement of lawsuits
    
    
    707,000
    
    
    --Other
    
    
    22,431
    
    
    --Total other income
    
    
    833,919
    
    
    47,175Loss
      before income taxes
    
    
    (85,868
    )
    
    (2,621,262
    )Benefit
      (provision) for income tax expense
    
    
    (53,178
    )
    
    811,290Net
      loss from continuing operations
    
    
    (139,046
    )
    
    (1,809,972
    )Discontinued
      operations:Gain (loss) from discontinued operations, including loss of $37,015 in
      2004 and gainof $3,632,981 in 2003 from disposition
    
    
    (139,104
    )
    
    3,199,334Benefit (provision) for income tax expense
    
    
    47,356
    
    
    (1,339,144
    )Net gain (loss) from discontinued operations
    
    
    (91,748
    )
    
    1,860,190Net
      income (loss)
    
    $
    (230,794
    )
    $
    50,218Basic
      and diluted net income (loss) per share:Loss from continuing operations
    
    $
    (0.01)
    
    $
    (0.05
    )Gain (loss) from discontinued operations
    
    
    --
    
    
    0.05Net
      income (loss) per share
    
    $
    (0.01
    )
    $
    --Weighted
      average number of common shares outstanding:Basic and diluted
    
    
    39,655,068
    
    
    39,655,068
 
 
 See
accompanying notes to consolidated financial statements.
  
  **STERLING
EQUITY HOLDINGS, INC.**
 **AND
SUBSIDIARY**
 **CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT**
 **FOR
THE PERIOD JANUARY 1, 2003 THROUGH DECEMBER 31, 2004**
 
 
 Additional
    
    
    
    TotalCommon
      Stock
    
    Paid-in
    
    Accumulated
    
    Shareholders’Shares
    
    Amount
    
    Capital
    
    Deficit
    
    DeficitBalances
      January 1, 2003
    
    
    39,655,068
    
    $
    39,655
    
    $
    607,163
    
    $
    (902,362
    )
    $
    (255,544
    )Net
      income
    
    
    --
    
    
    --
    
    
    --
    
    
    50,218
    
    
    50,218Balances
      December 31, 2003
    
    
    39,655,068
    
    
    39,655
    
    
    607,163
    
    
    (852,144
    )
    
    (205,326
    )Net
      loss
    
    
    --
    
    
    --
    
    
    --
    
    
    (230,794
    )
    
    (230,794
    )Balances
      December 31, 2004
    
    
    39,655,068
    
    $
    39,655
    
    $
    607,163
    
    $
    (1,082,938
    )
    $
    (436,120
    )
 
 
 See
accompanying notes to consolidated financial statements.
  
  **STERLING
EQUITY HOLDINGS, INC.**
 **AND
SUBSIDIARY**
 **CONSOLIDATED
STATEMENTS OF CASH FLOWS**
 **FOR
THE YEARS ENDED DECEMBER 31, 2004 AND 2003**
 
 2004
    
    2003Cash
      flows from operating activities:Net income (loss)
    
    $
    (230,794
    )
    $
    50,218Adjustments to reconcile net income (loss) to net cash provided by (used
      in) operating activities:Depreciation and amortization
    
    
    507,897
    
    
    645,677Expenses paid directly from new borrowings
    
    
    --
    
    
    140,801Gain from settlement of law suit
    
    
    (200,000
    )
    
    --Gain from settlement of notes payable
    
    
    (12,300
    )
    
    --(Gain) loss from discontinued operations
    
    
    37,015
    
    
    (3,379,557
    )Changes in assets and liabilities:Accounts receivable
    
    
    405,406
    
    
    (375,094
    )Prepaid items and other
    
    
    12,672
    
    
    (20,937
    )Other assets
    
    
    --
    
    
    177,402Due from affiliates
    
    
    (65,289
    )
    
    --Accounts payable
    
    
    (149,295
    )
    
    37,854Income taxes payable
    
    
    54,912
    
    
    253,000Accrued liabilities
    
    
    (235,967
    )
    
    89,103Net
      cash provided by (used in) operating activities
    
    
    124,257
    
    
    (2,381,533
    )Cash
      flows from investing activities:Net proceeds from sale of discontinued operations
    
    
    --
    
    
    2,142,566Payment of closing expenses from sale of property
    
    
    45,287
    
    
    --Certificate of deposit for security line of credit
    
    
    --
    
    
    (759,947
    )Decrease in restricted cash
    
    
    8,601
    
    
    --Increase in escrowed funds
    
    
    (33,269
    )
    
    --Land, building and improvements
    
    
    --
    
    
    (12,800
    )Net
      cash provided by investing activities
    
    
    20,619
    
    
    1,369,819Cash
      flows from financing activities:Proceeds from borrowings, net of repayments
    
    
    40,487
    
    
    --Repayment of mortgage and other notes payable
    
    
    --
    
    
    (210,436
    )Proceeds from line of credit
    
    
    25,000
    
    
    750,000Net
      cash provided by financing activities
    
    
    65,487
    
    
    539,564Net
      increase (decrease) in cash
    
    
    210,363
    
    
    (472,150
    )Cash
      and cash equivalents, beginning of year
    
    
    3,695
    
    
    475,845Cash
      and cash equivalents, end of year
    
    $
    214,058
    
    $
    3,695
  Supplemental
      cash flow disclosures:Interest paid
    
    $
    649,917
    
    $
    522,222Income taxes paid
    
    
    16,900
    
    
    --Supplemental
      non-cash disclosures:Certificate of deposit used to pay line of credit
    
    
    750,000
    
    
    --Cash proceeds from sale of assets deposited intoCash proceeds from sale of assets deposited into affiliate’s bank
      account
    
    
    --
    
    
    363,620Proceeds from sale of assets
    
    
    --
    
    
    16,398,850Liabilities liquidated with proceeds from asset sales
    
    
    --
    
    
    (16,398,850
    )Increase in notes payable
    
    
    --
    
    
    228,828Increase in loan costs
    
    
    --
    
    
    73,851New borrowings used to pay existing notes payable
    
    
    --
    
    
    5,741,172Decrease in goodwill
    
    
    --
    
    
    109,194
 
 See
accompanying notes to consolidated financial statements.
  
  **STERLING
EQUITY HOLDINGS, INC.**
 **AND
SUBSIDIARY**
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **NOTE
1.**  **HISTORY
AND DEVELOPMENT OF THE COMPANY**
 
 Sterling
Equity Holdings, Inc. (the “Company”) was chartered as BlueStar Leasing, Inc.
(”BLS”) in January 2001 and in March 2003 the name was changed with a charter
amendment. In July 2002, the majority shareholders of BLS reached an agreement
with the shareholders of Sterling FBO Holdings, Inc. (“SFBO”). The Company
exchanged its stock with the shareholders of SFBO resulting in SFBO becoming a
wholly-owned subsidiary of the Company. SFBO, a Nevada corporation, was formed
in May 2002 to acquire, own and operate income producing real estate and
airplane service operations.
 
 The
exchange, completed through a series of stock for stock exchanges between BLS
and SFBO, commenced at the close of business on September 25, 2002, and was
completed on December 30, 2002. At the time of the September 25, 2002 stock
exchange, SFBO owned interests in, and operated, four office facilities that
were leased to state governmental units located in Austin, Texas. SFBO acquired
these interests from Sterling REIT, Inc., (“SRI”) and other affiliated parties
in exchange for shares of common stock. SFBO owns 100% interest in three of the
office facilities and approximately 89% in one of the office facilities. These
facilities are hereinafter referred to as the “Austin Properties”. This
acquisition was accounted for as a purchase. Contemporaneously with that
acquisition, SFBO exchanged 100% of its then outstanding common shares, on a
share for share basis, for 5,638,334 common shares of BLS.
 
 In a
series of transactions consummated during the period between October 30, 2002
and December 30, 2002, the Company exchanged shares of its common stock for a
100% interest that SFBO had acquired or exchanged common stock for outstanding
stock of a corporation in five private aircraft flight service organizations and
the real estate and operating licenses associated with each. Such service
organizations are generally referred to as Fixed Base Operations or
“FBO’s.”
 
 SFBO
acquired these FBO’s from SRI and affiliated shareholders for common stock in
three planned separate transactions occurring in October, November and December
of 2002. Those shareholders then immediately traded common shares, on a one for
one basis, for common stock of BLS, except for the December 30, 2002 acquisition
of operations in Fort Worth, Texas. For the December 30, 2002 acquisition, the
Company exchanged its stock for the outstanding stock of Ft. Worth Jet Center,
Inc. resulting in it becoming a wholly owned subsidiary of the Company. The
acquisition of the five FBO’S was treated as a purchase as of the various
effective dates, with its assets and obligations recorded at their fair
value.
 
 On
October 28, 2002, the Company acquired Commodore Plaza, Ltd, a limited
partnership for an aggregate of 2,000,000 shares of its common stock. Commodore
Plaza, Ltd. was acquired from four shareholders, each of which may be deemed to
be affiliates of the Company by reason of the holdings of common stock.
Commodore Plaza, Ltd. owns the Commodore Plaza Shopping Center in Gulfport,
Mississippi which leases retail-shopping space to two major tenants on a net
lease basis. The acquisition was accounted for as a purchase with its assets and
obligations recorded at their fair value.
  **NOTE
2.**  **SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES**
 
 **Critical
Accounting Policies** - The
Company believes that the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
 
 *a)*
    *Acquired
      Companies*
 
 The
Company has fully implemented Statement of Financial Accounting Standards No.
141 “Business Combinations”. As required by that standard, all acquired
companies and properties were accounted for utilizing the “purchase method” of
accounting and the fair value of the assets received and obligations assumed was
the valuation basis for recording these transactions.
 
 The
assets acquired and the liabilities assumed were recorded at their fair values
as of the closing dates of the transactions. Additionally, in accordance with
the rules of the Securities and Exchange Commission, the recorded fair value was
not in excess of the “cash cost” of assets acquired from affiliated parties. The
acquired companies’ results of operations are included in the consolidated
statement of operations from the closing date of their acquisition.
 
 *b)*
    *Use
      of Estimates*
 
 The
preparation of the Company’s financial statements in conformity with accounting
principles generally accepted in the United States of America requires the
Company’s 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 reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
 
 *c)*
    *Fair
      Value of Financial Instruments*
 
 Financial
instruments that are subject to fair disclosure requirements are carried in the
financial statements at amounts that approximate fair value and include cash and
cash equivalents, accounts receivable and accounts payable. Fair values are
based on assumptions concerning the amount and timing of estimated cash flows
and assumed discount rates reflecting varying degrees of perceived
risk.
 
 *d)*
    *Long-lived
      Assets*
 
 The
Company reviews for impairment of long-lived assets whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss would be recognized when future cash flows
expected to result from the use of the asset and its eventual disposition are
less than its carrying amount. As of December 31, 2004, the Company has not
identified any such impairment losses.
 
 *e)*
    *Comprehensive
      Income (Loss)*
 
 Comprehensive
income is defined as all changes in shareholders’ equity, exclusive of
transactions with owners, such as capital instruments. Comprehensive income
includes net income or loss, changes in certain assets and liabilities that are
reported directly in equity such as translation adjustments on investments in
foreign subsidiaries, changes in market value of certain investments in
securities and certain changes in minimum pension liabilities. The Company’s
comprehensive loss was equal to its net loss for the year ended December 31,
2004, and comprehensive income was equal to its net income for the year ended
December 31, 2003.
 
 *f)*
    *Discontinued
      Operations*
 
 In
accordance with SFAS 144 “Accounting for the Impairment or Disposal of Long
Lived Assets”, effective for financial statements issued for fiscal years
beginning after December 15, 2001, the results of operations and gain from the
sale of the Company’s FBO entities sold in 2003 are reflected in the
consolidated statements of operations as “Gain (loss) from discontinued
operations” for the year ended December 31, 2003.
 
 The
results of operations and loss from the sale of the Company’s property known as
4719-4735 South Congress in 2004 are reflected in the consolidated statements of
operations as “Gain (loss) from discontinued operations” for the years ended
December 31, 2004 and 2003.
 
 *g)*
    *Real
      Estate and Depreciation*
 
 Costs
incurred for the acquisition, development, construction and improvement of real
properties, as well as significant renovations and betterments to the
properties, are capitalized.  Maintenance and repairs are charged to
expense as incurred. Depreciation and amortization expense for the years ended
December 31, 2004 and 2003, was $455,976 and $565,409,
respectively.
 
 Amounts  included
under the caption land, improvements and leaseholds on the consolidated balance
sheets include the cost of the land fee interest, the land improvements, the
leasehold improvements paid for tenants and are depreciated on the straight-line
method over their estimated useful lives of 15 to 20 years.
 
 The
Company’s rental properties are individually evaluated for impairment when
conditions exist that may indicate that it is probable that the sum of their
expected future cash flows (over the anticipated holding period on an
undiscounted basis) is less than its historical net cost carrying value. Upon
determination that a permanent impairment has occurred, rental properties are
reduced to their fair value. For properties to be disposed of, an impairment
loss is recognized when the fair value of the property, less the estimated cost
to sell, is less than the carrying amount of the property measured at the time
the Company has a commitment to sell the property and/or is actively marketing
the property for sale. Subsequent to the date that a property is held for
disposition, depreciation expense is not recorded.
 
 The
Company evaluated for impairment its four remaining properties as of December
31, 2004, and has determined no impairment is warranted.
 
 *h)*
    *Cash
      and Cash Equivalents*
 
 Cash and
cash equivalents consist of cash on hand and held in banks in unrestricted
accounts. The Company considers all liquid investments with an original maturity
date of three months or less to be cash equivalents.
 
 *i)*
    *Restricted
      Cash*
 
 Restricted
cash consists of a $200,000 certificate of deposit which has been placed in
trust with Plains Capital Bank to fulfill the loan ratio covenant of the
mortgage agreement with the bank. The bank orally agreed to release the
certificate of deposit when vacant office space in one of the Austin, Texas
buildings has been rented.
 
 *j)*
    *Escrowed
      Funds*
 
 Escrowed
funds primarily consist of amounts held by lenders to provide for future real
estate tax expenditures and tenant improvements.
 
 *k)*
    *Rental
      Revenue Recognition*
 
 Rental
revenue is recognized on a straight-line basis over the term of the lease. The
Company establishes, on a current basis, an allowance for future potential
tenant credit losses that may occur against this account. The Company has not
established such an allowance.
 
 *l)*
    *Deferred
      Financing Co*sts
 
 Deferred
financing costs represent commitment fees, legal and other third party costs
associated with obtaining commitments for financing which result in a closing of
such financing. These costs are amortized over the terms of the respective
agreements. Unamortized deferred financing costs are expensed when the
associated debt is refinanced before maturity. Costs incurred in seeking
financial transactions, which do not close, are expensed in the period incurred.
The amortization of loan costs for the years ended December 31, 2004 and 2003,
was $41,152 and $174,941, respectively.
 
 *m)*
    *Goodwill*
 
 The
Company has adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets." The adoption of FAS 142 requires an
initial impairment assessment involving a comparison of the fair value of
goodwill to current carrying value. Goodwill represents the excess of cost over
the fair value of net assets acquired and is not amortized. The Company performs
tests for impairment of goodwill annually or more frequently if events or
circumstances indicate it may be impaired. Such tests include comparing the fair
value of a reporting unit with its carrying value, including goodwill.
Impairment assessments are performed pursuant to appropriate
guidance.
 
 The
Company’s recorded goodwill is associated with the acquisition of the three
office facilities in Austin, Texas. This goodwill represents the difference
between the net assets and liabilities acquired in exchange for Company common
stock. None of the recorded goodwill is deductible for tax purposes. As of
December 31, 2004, the Company had goodwill of $647,043 related to the remaining
office facilities in Austin, Texas.
 
 The
Company performed an impairment test of its three Austin, Texas properties as of
December 31, 2004, and determined an impairment was not warranted.
 
 *n)*
    *Concentrations
      of Risk*
 
 Financial
instruments that potentially subject the Company to concentrations of credit
risk are primarily accounts receivable. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its tenants. The allowance for non-collection of accounts
receivable is based upon the expected collection of all accounts receivable. As
of December 31, 2004, the Company did not have an allowance for uncollectible
accounts receivable.
 
 The
Company does not rely on any one vendor or supplier for its raw materials and
management believes that alternative suppliers are available that could provide
for the Company's needs on comparable terms.
 
 The
Company’s three office and shop facilities in Austin, Texas are leased to
various State of Texas governmental units. Such leases are subject to short-term
cancellation upon the occurrence of adverse state budgetary
reductions.
 
 *o)*
    *Income
      Taxes*
 
 The
Company recognizes deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between the carrying amounts and the
tax bases of assets and liabilities. Temporary differences in financial and tax
bases giving rise to deferred tax assets and liabilities include fixed assets,
certain accrued liabilities and net operating loss carry forwards. The provision
for income taxes includes the amount of income taxes for the year that would be
paid by the Company without its net operating loss carry forwards, as determined
by applying the provisions of the current tax law to taxable income for the
year; and the net change during the year in the Company's deferred tax assets
and liabilities. In determining the amount of any valuation allowance required
to offset deferred tax assets, an assessment is made that includes anticipating
future income and determining the likelihood of realizing deferred tax
assets.
 
 The
carrying value of the Company's net deferred tax assets assumes that the Company
will be able to generate sufficient future taxable income, which is based on
estimates and assumptions. If these estimates and assumptions change in the
future, the Company may be required to record additional valuation allowances
against its deferred tax assets, resulting in increased income tax expense. The
Company continually reviews the adequacy of the valuation allowance and
recognizes deferred tax asset benefits only as reassessment indicates that it is
more likely than not that the benefits will be realized.
 
 The
utilization of the Company's net operating loss and tax credit carry forwards
may be impaired or reduced under certain circumstances. Events which may affect
the Company's ability to utilize these carry forwards include, but are not
limited to, future profitability, or stock ownership changes as defined by
Section 382 of the Internal Revenue Code.
 
 *p)*
    *Advertising*
 
 Advertising
costs are expensed as incurred and for the year ended December 31, 2004 was $325
and there were no advertising expenses incurred in the year ended December 31,
2003.
 
 *q)*
    *Earnings
      Per Share*
 
 The
Company computes net income (loss) per share pursuant to Statement of Financial
Accounting Standards No. 128 “Earnings Per Share”. Basic net income or loss per
share is computed by dividing income or loss applicable to common shareholders
by the weighted average number of shares of the Company’s common stock
outstanding during the period. Diluted net income per share is determined in the
same manner as basic net income per share except that the number of shares is
increased assuming exercise of dilutive stock options and warrants using the
treasury stock method and dilutive conversion of the Company’s convertible debt
and preferred stock.
 
 During
the years ended December 31, 2004 and 2003, there were no stock options or
warrants outstanding, no convertible debt outstanding and no preferred stock
outstanding.
 
 *r)***
    *Consolidation
      and Basis of Presentation*
 The accompanying consolidated
financial statements include the accounts of the Company and its subsidiary. All
significant intercompany balances and transactions have been
eliminated.
 
 *s)*
    *Going
      Concern*
 
 The
Company’s consolidated financial statements are prepared using generally
accepted accounting principles applicable to a going concern, which contemplates
the realization of assets and liquidation of liabilities in the normal course of
business. However, the Company has suffered recurring losses from operations and
is experiencing cash flow problems. This raises questions as to the ability of
the Company to continue as a going concern. The Company has been reducing
expenses and is developing a strategy to provide sufficient capital through
possible sales of assets and other means.
 
 *t)*
    *Recent
      Accounting Pronouncements*
 
 In
December 2004, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 123R “Share-Based Payment” (SFAS
123R). This statement revises SFAS No. 123, supersedes APB No. 25, and requires
companies to recognize the cost of employee stock options and other awards of
stock-based compensation based on the fair value of the award as of the grant
date. The effective date of this pronouncement is as of the beginning of the
first interim or annual period that begins after June 15, 2005. The adoption of
FASB No. 123R will not have a material effect on the Company’s consolidated
financial position, results of operations or cash flows.
 
 In
December 2004, the FASB published the following two final FASB Staff Positions,
effective immediately. FAS 109-1, "Application of FASB Statement No. 109,
Accounting for Income Taxes, to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004," giving guidance
on applying FASB Statement No. 109, Accounting for Income Taxes, to the tax
deduction on qualified production activities provided by the American Jobs
Creation Act of 2004. FAS 109-2 "Accounting and Disclosure Guidance for that
Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004" provides guidance on the Act's repatriation provision. The Company does
not believe that the adoption of FAS 109-1 or FAS 109-2 will have a material
impact on its consolidated financial position, results of operations or cash
flows.
 
 In
November 2004, the FASB Emerging Issues Task Force, or EITF, reached a consensus
in applying the conditions in Paragraph 42 of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets, in Determining Whether to Report
Discontinued Operations" (EITF 03-13). Evaluation of whether operations and cash
flows have been eliminated depends on whether (1) continuing operations and cash
flows are expected to be generated, and (2) the cash flows, based on their
nature and significance, are considered direct or indirect. This consensus
should be applied to a component that is either disposed of or classified as
held for sale in fiscal periods beginning after December 15, 2004. The Company
does not believe that the adoption of EITF 03-13 will have a material impact on
its consolidated financial position, results of operations or cash
flows.
 
 In
November 2004, the FASB issued SFAS No. 151, "Inventory Costs—An Amendment of
ARB No. 43, Chapter 4" (SFAS No. 151). SFAS No. 151 amends the guidance in ARB
No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Among other provisions, the new rule requires that items such as
idle facility expense, excessive spoilage, double freight, and rehandling costs
be recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal" as stated in ARB No. 43. SFAS No. 151 is effective
for fiscal years beginning after June 15, 2005 and is required to be adopted by
the Company in the first quarter of fiscal 2006, beginning on January 1, 2006.
The Company does not believe the adoption of SFAS No. 151 will have a material
impact on the consolidated financial position, results of operations and cash
flows.
 
 Reclassifications - The
accompanying consolidated financial statements for the prior year contain
certain reclassifications to conform with current year
presentation.
  **NOTE
3.**  **SALE
OF DISCONTINUED OPERATIONS**
 
 On
December 15, 2004, the Company completed the sale of its property known as
4719-4735 South Congress in Austin, Texas, consisting of approximately 1.14
acres with improvements, which property was leased by the Company to agencies of
the State of Texas. The property was sold to SAGA Building, LLP, an unaffiliated
third party. The sale price of the property was $1,200,000, the proceeds of
which were applied in full to transaction costs and reduction of the Company’s
secured debt. Included in the loss from the sale is $261,480 of goodwill
associated with this building. The Company recorded a loss of approximately
$37,000, which loss is included in “Gain (loss) from discontinued operations” on
the consolidated statements of operations.
 
 Following
are the results of operations of the property known as 4719-4735 South Congress
included in the consolidated statements of operations for the years ended
December 31, 2004 and 2003.
 
 2004
    
    2003Revenue
    
    $
    75,872
    
    $
    87,113Cost
      of revenue
    
    
    178,141
    
    
    189,274Loss
      before sale of asset
    
    
    (102,269
    )
    
    (102,161
    )Loss
      on sale of asset
    
    
    (37,015
    )
    
    --Loss
      from discontinued operations before income taxes
    
    $
    (139,284
    )
    $
    (102,161
    )
 
 On
January 6 and February 27, 2003, the Company completed the sale of its FBO’s in
Fort Worth and Austin, Texas; Casper, Wyoming; Tucson, Arizona; and Greeley,
Colorado for approximately $20,787,000 in cash and liquidation of debts and an
“earn-out” of up to $6,000,000 in future revenues in excess of a specified base.
 
 Under the
terms of the sale, the Company agreed to liquidate outstanding liabilities and
obligations associated with the FBO operations and properties. Consequently, the
Company paid creditors approximately $17,476,000, established an escrow fund of
$589,000, to satisfy potential claims and obligations, and deposited
approximately $2,556,000 in the bank.
 
 On
January 20, 2004, the Company and the purchaser entered into a “Settlement
Agreement and Mutual Release” to resolve the disputes, lawsuits and arbitration
demands arising out of the Purchase Agreements and the Escrow Agreement relating
to the transaction for the sale and transfer of the FBO assets. Included in the
settlement was the termination of the $6,000,000 “earn out”, termination of the
escrow fund of $589,000 by disbursing $350,000 to the Company in 2004 and
various other matters.
 
 The sale
resulted in a financial gain before income taxes of approximately $3,633,000,
and a federal income tax gain of approximately $6,127,000. The financial gain on
the sale of discontinued operations includes approximately $5,504,000 of
goodwill.
 
 Following
are the results of operations of acquired FBO’s included in the consolidated
statements of operations for the year ended December 31, 2003.
 
 Revenue
    
    $
    1,593,111Cost
      of revenue
    
    
    1,012,934General
      and administrative expenses
    
    
    911,664Total costs and expenses
    
    
    1,924,598Loss
      from discontinued operations before income taxes
    
    $
    (331,487
    )
 
 **NOTE
4.**  **OTHER
INCOME**
 
 *Settlement
of Lawsuits*
 
 In April
2004, the Company received $485,000 from the settlement of a lawsuit relating to
the Fort Worth Jet Center property that was sold in 2003. The property incurred
hail damage to its roof and, in lieu of replacing the roof, the Company's
insurer recommended that repairs be made by contractors and used products
recommended by the insurer. The repairs performed by the contractor were
ineffective. As a result, the Company filed suit against the insurer, the
contractor and the product manufacturer. The Company retained the rights under
the suit following the sale of the Fort Worth Jet Center property.
 
 In
September 2004, the Company settled a lawsuit with the City of Austin, Texas
related to property taxes. This resulted in a release of escrowed funds of
$222,000 established in the sale of assets in 2002. This amount is included in
other income.
 
 *Recovery
of Bad Debts*
 
 In 2004,
Sterling REIT sold an existing property on which the Company had a junior lien
position granted in connection with the previous settlement of claims regarding
amounts advanced to Sterling REIT. In connection with the Company's agreement to
release its junior lien, Sterling REIT remitted excess proceeds from the sale,
in the amount of $85,000. As amounts owed by Sterling REIT had previously been
written off as bad debts, the receipt of the payment was reflected as a recovery
of bad debt.
 
 **NOTE
5.**  **DUE
FROM AFFILIATES**
 
 Due from
affiliates represents amounts owed to the Company by Sterling REIT. The amounts
due from Sterling REIT represent rents previously collected by Sterling REIT and
belonging to the Company and amounts advanced by the Company to Sterling REIT to
facilitate the sale by Sterling REIT of various properties with the agreement
that Sterling REIT will repay all amounts owed to the Company from the proceeds
of the sale of properties. This amount due from affiliates was collected in full
in 2005.
 
 **NOTE
6.**  **RELATED
PARTY TRANSACTIONS**
 
 All of
the Company’s subsidiaries and acquired assets were, prior to their acquisition,
owned and managed by one or more of the current major shareholders of the
Company. Historically, all of the entities were partnerships or limited
liability companies that passed their profits or losses through to the owners.
The original four Austin and Gulfport, Mississippi properties had recorded
liabilities and obligations greater than their recorded assets. This asset
deficiency was recorded as an intangible asset and is included on the balance
sheet as goodwill for the three remaining Austin properties in the amount of
$647,043 as of December 31, 2004.
 
 During
the year ended December 31, 2003 and for the period from inception (September
25, 2002) to December 31, 2002, Sterling REIT, Inc., (“SRI”), a major
shareholder, on behalf of the Company, received income from Austin buildings and
paid the expenses and note payments for the same buildings. In addition,
proceeds received from refinancing assets and cash was advanced to SRI by the
Company. Expenses of the Company were paid by SRI on behalf of the Company. The
net of these cash transactions amounted to $1,693,151 and $686,142 for the year
ended December 31, 2003 and for the period from inception (September 25, 2002)
to December 31, 2002, respectively. These amounts were written off as bad debts
by the Company during the year ended December 31, 2003. (See Note 7 - Advances
to a Principal Shareholder).
 
 The
Company paid a management fee of $180,000 to a major shareholder, who is the
current President, during the year ended December 31, 2004 and paid a management
fee of $174,000 to the same major shareholder and a consulting fee to another
major shareholder of $7,500 during the year ended December 31,
2003.
 
 **NOTE
7.**  **ADVANCES
TO A PRINCIPAL SHAREHOLDER**
 
 On
January 13, 2004, new management and a new Board of Directors were
appointed.
 
 In
conjunction with the change of management, the new management team began an
investigation of circumstances and events at the Company with the intent of
bringing all financial statements and SEC reports current and implementing
various procedures and initiatives to improve internal controls and protect
corporate assets.
 
 Initial
results of the investigation conducted by the new management team indicated that
during 2002 and 2003 substantial funds (in excess of $2,000,000) of the Company
had been advanced to SRI. It appears that the funds were advanced without proper
authorization. The funds advanced to SRI were purportedly used to pay certain
expenses of the Company and to pay certain expenses relating to properties of
SRI which were to be transferred to the Company.
 
 Based on
the initial findings of the new management team, the Company and SRI entered
into a Settlement Agreement pursuant to which SRI delivered to the Company a
Promissory Note evidencing the obligation of SRI to pay the amounts advanced by
the Company and a Pledge Agreement, Security Agreement and multiple Deeds of
Trust securing repayment of the note with substantially all of the assets of SRI
and 11,320,007 shares of Company common stock owned by SRI.  (See Note 12 -
Subsequent Events).
 
 After
further investigation, the new management team reached the conclusion that in
all probability the Company would receive little, if any, money from SRI or the
assets securing the repayment of the note discussed above. As a result of the
investigation, the Company wrote off $699,342 for the period ended December 31,
2002 and $1,693,151 for the year ended December 31, 2003 of the receivable from
Sterling REIT and a related entity.
 
 **NOTE
8.**  **REAL
ESTATE, OTHER NOTES PAYABLE AND LINE OF CREDIT**
 
 *Real
Estate Notes Payable* - The
real estate notes payable, collateralized by the respective properties and
assignment of leases, at December 31, 2004 and 2003 are as follows:
 
 December
      31,Property
      and Note Description
    
    2004
    
    2003Commodore
      Plaza - Gulfport, Mississippi:
      First lien note datedOctober
      28, 2002, with interest at 7.48%,monthly
      installments of $28,263 includingprincipal
      and interest and due in fullNovember
      1, 2012
    
    $
    3,978,452
    
    $
    4,013,588Three
      Austin Buildings - Austin, Texas:
      First lien bearing interest at 5.5% with thirty-fivemonthly
      installments of $41,067 includingprincipal
      and interest starting July 5, 2003 anda
      final payment on March 27, 2006
    
    
    4,968,941
    
    
    5,897,999Total
      real estate notes
    
    
    8,947,393
    
    
    9,911,587Less
      current maturities of long-term debt
    
    
    (5,007,717
    )
    
    (279,152
    )Long-term
      debt
    
    $
    3,939,676
    
    $
    9,632,435
 
 The note
on the three Austin buildings has normal covenants regarding liquidation,
merger, sale of assets, indebtedness, transfer of ownership, payment of
dividends and other restrictions. The note also has a “debt service coverage
ratio, as defined in the note agreement and reporting requirements. At December
31, 2004, the Company was in default of the debt service coverage ratio and
received a verbal waiver of this covenant until September 30, 2005. The entire
amount of this note, which is due on March 27, 2006, has been classified as a
current liability on the balance sheet. The Company is currently seeking
alternative financing to retire this note and extend the due date.
 
 At
December 31, 2004, the net carrying value of the properties collateralizing the
real estate notes was $7,595,690. The real estate note secured by the three
Austin buildings is guaranteed by shareholders of the Company.
 
 *Principal
Maturities* -
Combined aggregate principal maturities of real estate and other notes payable,
as of December 31, 2004, are as follows:
 
 Years
      Ending December 31,
    
    Amounts2005
    
    $
    5,007,7172006
    
    
    41,8212007
    
    
    45,1062008
    
    
    47,8032009
    
    
    52,401Thereafter
    
    
    3,752,545Total
    
    $
    8,947,393
 
 *Line
of Credi* *t* - The
Company had a $750,000 line of credit which was due March 6, 2004 with interest
at 4.25% and was secured by a certificate of deposit in the amount of $759,946,
which was shown as restricted cash on the balance sheet at December 31, 2003.
This line of credit was subsequently repaid during 2004.
 
 *Other
Notes Payable* - During
May 2004, the Company borrowed $300,000 from a bank. The note was due June 5,
2005, with an interest rate of 5.5% and interest only was due for the first
three months. The note was repaid during 2004. As of December 31, 2004, the
Company does not have any material other notes payable.
 
 **NOTE
9.**  **RENTAL
INCOME**
 
 The
Company’s Austin Properties and Commodore Plaza Shopping Center are the lessors
to tenants under operating leases with expiration dates ranging from 2007 to
2013. The minimum rental amounts due under the leases for the Austin Properties
are generally subject to an increase based on a percentage of the Consumer Price
Index. Each of the leases for the Austin Properties includes a right on the
State of Texas tenant to terminate the lease based on budgetary restraints. The
Commodore Plaza leases require that the tenants reimburse the Company for
certain operating costs and real estate taxes. Approximate future minimum rents
to be received over the next five years and thereafter for non-cancelable
operating leases in effect at December 31, 2004 are as follows:
 
 Years
      Ending December 31,
    
    Amounts2005
    
    $
    959,6302006
    
    
    959,6302007
    
    
    598,9422008
    
    
    507,2432009
    
    
    268,463Thereafter
    
    
    884,209Total
    
    $
    4,178,117
 
 **NOTE
10.**  **INCOME
TAXES**
 
 The
following table sets forth a reconciliation of the statutory federal income tax
for the years ended December 31, 2004 and 2003.
 
 2004
    
    2003Income
      (loss) before income taxes
    
    $
    (224,972
    )
    $
    578,073Income
      tax computed at statutory rates
    
    $
    (76,327
    )
    $
    196,544Increase
      (decrease) in valuation allowance
    
    
    (157,934
    )
    
    56,309Utilization
      of prior year net operating loss
    
    
    --
    
    
    326,636Utilization
      of acquired deferred tax asset
    
    
    --
    
    
    (54,315
    )Book
      tax differences on sale of building
    
    
    94,521
    
    
    --Book
      tax differences on income
    
    
    119,000
    
    
    --Permanent
      differences
    
    
    18,525
    
    
    2,680Other
    
    
    8,037
    
    
    --Tax
      provision (benefit)
    
    $
    5,822
    
    $
    527,854Current
      tax provision
    
    $
    5,822
    
    $
    253,000Deferred
      tax provision
    
    
    --
    
    
    274,854Total
      tax provision
    
    $
    5,822
    
    $
    527,854
 
 The
effects of the temporary differences between financial statement income and
taxable income are recognized as a deferred tax asset and liability. Significant
components of the deferred tax asset and liability as of December 31, 2004 and
2003 are as follows:
 
 2004
    
    2003Deferred
      tax asset:Tax basis of assets greater than book
    
    $
    461,363
    
    $
    619,297Valuation allowance
    
    
    (461,363
    )
    
    (619,297
    )Deferred
      tax asset
    
    $
    --
    
    $
    --
 
 **NOTE
11.**  **COMMITMENTS**
 
 *Legal
Contingencies*
 
 The
Company is subject to legal proceedings, claims and liabilities that arise in
the ordinary course of its business. The Company accrues for losses associated
with legal claims when such losses are probable and can be reasonably estimated.
These accruals are adjusted as further information develops or circumstances
change. At December 31, 2004 there were no known assertions, claims or legal
actions pending.
 
 **NOTE
12.**  **SUBSEQUENT
EVENTS**
 
 During
April 2005, the Company foreclosed, cancelled and returned to unissued
11,320,007 shares of its common stock owned by Sterling REIT and pledged to the
Company to secure repayment of advances to Sterling REIT totaling
$2,553,261.
  
  **ITEM
8.****CHANGES
AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE**
 
 In 2003,
following the Exchange, the Company’s Board of Directors dismissed Chavez &
Koch, CPA, Ltd. as the Company's independent accountants and selected Thomas
Leger & Co., L.L.P. as the Company's new independent
accountants.
 
 Chavez
& Koch's report on the financial statements for the period from inception
(January 31, 2001) to December 31, 2001 did not contain an adverse opinion or
disclaimer, and were not qualified or modified as to uncertainty, audit scope,
or accounting principles. During the Company’s two most recent fiscal years and
any subsequent interim period preceding the dismissal of Chavez & Koch,
there were no disagreements with Chavez & Koch on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreement(s) if not resolved to the satisfaction of Chavez
& Koch, would have caused Chavez & Koch to make reference to the subject
matter of the disagreement(s) in connection with its report.
 
 During
the Company's two most recent fiscal years and any subsequent interim period
preceding the dismissal of Chavez & Koch, there have been no reportable
events of the type required to be disclosed by Item 304(a)(1)(v) of Regulation
S-K.
 
 Prior to
the engagement of Thomas Leger & Co., L.L.P., the Company did not consult
with such firm regarding the application of accounting principles to a specific
completed or contemplated transaction, or any matter that was either the subject
of a disagreement or a reportable event. The Company also did not consult with
Thomas Leger & Co., L.L.P. regarding the type of audit opinion which might
be rendered on the Company’s financial statements and no oral or written report
was provided by Thomas Leger & Co., L.L.P.
 
 **ITEM
8A.** **CONTROLS AND PROCEDURES**
 
 As of the
end of the period covered by this report, the Company has evaluated the
effectiveness of the design and operation of its disclosure controls and
procedures under the supervision and with the participation of its chief
executive officer (“CEO”) who also serves as chief financial officer (“CFO”).
Based on this evaluation, management, including the CEO, concluded that the
Company’s disclosure controls and procedures were effective.
 
 During
the quarter ended December 31, 2004, there were no significant changes in the
Company’s internal controls over financial reporting that materially affected,
or are reasonably likely to materially affect, internal controls over financial
reporting.
 
 In
connection with the audit of the Company’s financial statements for the fiscal
year ended December 31, 2004, the Company’s independent registered public
accounting firm informed management that the Company has significant
deficiencies constituting material weaknesses as defined by the standards of the
Public Company Accounting Oversight Board. The material weakness was in the
Company’s internal controls over accounting for non-routine transactions as well
as financial reporting functions. The accounting firm noted that adequate
segregation of duties do not exist in the Company’s financial reporting process,
as the President and CEO also functions as the Company’s CFO. The President is
performing these duties with assistance from a part-time consultant.
Accordingly, the preparation of financial statements and the related monitoring
controls surrounding this process have not been segregated.
 
 The
nature and size of the Company’s business have prevented the Company from being
able to employ sufficient resources to enable the Company to have an adequate
segregation of duties within its internal control system. The Company will
continue to monitor and assess the costs and benefits of additional staffing in
the accounting and financial reporting area.
  **ITEM
8B.****OTHER
INFORMATION**
 
 Not
applicable.
 
 
 **PART III**
  **ITEM
9.****DIRECTORS,
EXECUTIVE OFFICERS; PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16A
OF THE SECURITIES EXCHANGE ACT**
 
 The
Company’s executive officers and directors, and their ages and positions as of
April 1, 2005 are as follows:
 
 **Name**
    **Age**
    **Position**Lloyd
      Shoppa
    73
    Chairman,
      Secretary and DirectorThomas
      Mathew
    47
    President,
      Treasurer and DirectorRon
      F. Bearden
    63
    Director
 
 There are
no family relationships among any of the directors or officers of the
Company.
 
 Lloyd
Shoppa has served as Chairman, Secretary and a director of the Company since
February 2004. Since 1992, Mr. Shoppa has served as Chairman of Shoppa's
Material Handling, a Toyota industrial equipment distributor. Since 1997, Mr.
Shoppa has served as Chairman of Clean Air Flow, Inc., a manufacturer of
emissions reduction products. Since 1985, Mr. Shoppa has also served as Chairman
and a director of Shoppa Farm Supply. From 1964 to 1997, Mr. Shoppa served in
various executive positions, including President and Vice-Chairman, with Bell
Helicopter Textron, a worldwide manufacturer and distributor of helicopters.
Since 2002, Mr. Shoppa has served on the East Bernard Community Development
Board that is operated by Prosperity Bancshares, Inc.
 
 Thomas
Mathew has served as President, Treasurer and a director of the Company since
February 2004. Since 1984, Mr. Mathew has operated Mathew Aviation Services,
providing aircraft management, VIP air transportation and other aviation
services. From 1994 to 2002, Mr. Mathew served as President and Chief Executive
Officer of GateOne, Inc., and its predecessors, a five location fixed base
operator (“FBO”). All of the FBO operations and assets of GateOne were
transferred to the Company in 2002.
 
 Ron F.
Bearden has served as a director of the Company since the acquisition by the
Company of Sterling FBO Holdings in September 2002 and served as Chairman,
President and Chief Executive Officer of the Company from the acquisition of
Sterling FBO Holdings until January 13, 2004. From 1998 to February 2004, Mr.
Bearden also served as President of Sterling REIT, Inc., a real estate
investment and development company. For more than five years, Mr. Bearden has
served as the principal officer of R.F. Bearden Associates, a management
consulting firm. Since December 2003, Mr. Bearden has served as a principal of
Old Capital Partners, L.P., a commercial real estate lender.
 
 *Term
of Office*
 
 The
directors named above will serve until the next annual meeting of the Company's
shareholders. Officers will hold their positions at the pleasure of the Board of
Directors, absent any employment agreement.
 
 *Committees
of the Board*
 
 The
Company does not presently maintain an audit committee, a compensation
committee, a nominating committee or any other committees of the board of
directors. Similarly, the Company does not have an "audit committee financial
expert".
 
 At such
time as the Board determines that the size and scope of the Company’s operations
and its available financial resources warrant such, the Company expects to seek
to add independent directors and to form committees to perform the functions of
an audit committee, compensation committee and nominating
committee.
 
 *Code
of Ethics*
 
 The Board
of Directors has adopted a Code of Business Ethics covering all of its officers,
directors and employees. The Company requires all employees to adhere to the
Code of Business Ethics in addressing legal and ethical issues encountered in
conducting their work. The Code of Business Ethics requires that the Company’s
employees avoid conflicts of interest, comply with all laws and other legal
requirements, conduct business in an honest and ethical manner and otherwise act
with integrity and in the Company's best interest.
 
 The Board
of Directors has also adopted a separate Code of Business Ethics for the CEO and
Senior Financial Officers. This Code of Ethics supplements its general Code of
Business Ethics and is intended to promote honest and ethical conduct, full and
accurate reporting, and compliance with laws as well as other
matters.
 
 The Code
of Business Ethics for the CEO and Senior Financial Officers was filed as an
exhibit to the Company’s Annual Report on Form 10-KSB for the year ended
December 31, 2003 and is available for review at the SEC's web site at
www.sec.gov.
 
 *Section
16(a) Beneficial Ownership Reporting Compliance*
 
 Section
16(a) of the Securities Exchange Act of 1934 requires the Company’s directors,
executive officers and persons who own beneficially more than ten percent of the
Company’s common stock, to file reports of ownership and changes of ownership
with the SEC. Based solely on the reports received by the company and on written
representations from certain reporting persons, the Company believes that the
directors, executive officers and greater than ten percent beneficial owners
have complied with all applicable filing requirements.
 
 **ITEM 10. EXECUTIVE COMPENSATION**
 
 The
following table provides information about the compensation received during the
last three fiscal years to the Company’s “named executive officers”. None of the
Company’s other employees received greater than $100,000 in salary and bonus
during the last three fiscal years.
 
 **Summary
Compensation Table**
 
 **Annual
      Compensation**
    
    **Long-Term**
      **Compensation****Name
      and****Principal
      Position**
    
    **Year**
    
    **Salary**
      **($)**
    
    **Bonus**
      **($)**
    
    **Other**
      **($)**
    
    **Stock**
      **Options**Thomas
      Mathew,President(3)
    
    
    2004
    
    $
    180,000
    
    
    --
    
    
    --
    
    
    --2003
    
    $
    174,000
    
    
    --
    
    
    --
    
    
    --2002
    
    $
    7,500
    
    
    --
    
    
    --
    
    
    --Ron
      F. Bearden,Former
      President(3)
    
    
    2003
    
    $
    117,500
    
    
    --
    
    
    --
    
    
    --2002
    
    $
    46,323(1)
    
    
    --
    
    $
    173,754(2)
    
    
    --
 
 (1)  Salary
shown as paid or accrued for services of Mr. Bearden during 2002 consisted of
amounts paid to R.F. Bearden Associates, Inc. for services in connection with
the Exchange.
 (2)
    Other
      compensation paid consisted of the market value of 3,000,000 shares of
      common stock issued in conjunction with services provided through R.F.
      Bearden Associates, Inc. relating to the formation of Sterling FBO
      Holdings and related services. Such shares were issued 1,500,000 to R.F.
      Bearden Associates, Inc. and 1,500,000 to Old Capitol
  Corp.
 (3)
    Mr.
      Bearden’s service as President and CEO ended in January 2004 at which time
      Mr. Mathew was appointed President and CEO.
 
 The
Company currently pays no compensation for service of directors. The Company may
consider payment of certain amounts to attract the services of independent
directors.
 
 The
Company expects to enter into employment agreements with key employees, to
implement comprehensive compensation arrangements with its officers and to adopt
benefit plans in the future at the discretion of the Board of Directors to
attract and retain officers and key employees
 ****
 **ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS**
 
 As of
April 6, 2005, 28,335,061 shares of common stock were outstanding. The following
table sets forth, as of such date, information with respect to shares
beneficially owned by:
 
 §
    each
      person who is known by the Company to be the beneficial owner of more than
      5% of its outstanding shares of common
stock;
 §
    each
      of the Company’s directors;
 §
    each
      of the Company’s named executive officers; and
 §
    all
      of the Company’s directors and executive officers as a
    group.
 
 Beneficial
ownership has been determined in accordance with Rule 13d-3 of the Exchange Act.
Under this rule, shares may be deemed to be beneficially owned by more than one
person (if, for example, persons share the power to vote or the power to dispose
of the shares). In addition, shares are deemed to be beneficially owned by a
person if the person has the right to acquire shares (for example, upon exercise
of an option) within 60 days of the date of this table. In computing the
percentage ownership of any person, the amount of shares includes the amount of
shares beneficially owned by the person by reason of these acquisition rights.
As a result, the percentage of outstanding shares of any person does not
necessarily reflect the person’s actual voting power.
 
 To the
Company’s knowledge, except as indicated in the footnotes to this table and
pursuant to applicable community property laws, the persons named in the table
have sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by them. Unless otherwise indicated, the business
address of the individuals listed is 1600 Airport Freeway, Suite 370, Bedford,
Texas 76022.
 
 ****
      **Name
      and Address of****Beneficial
      Owner**
    ****
      ****
      **Number
      of****Shares**
      **Beneficially****Owned**
    **Percentage
      of**
      **Outstanding
      Shares**Lloyd
      Shoppa
    457,500
    1.6%Thomas
      Mathew(1)
    8,788,422
    31.0%Ron
      F. Bearden(2)
    1,500,000
    5.3%All
      Executive Officers andDirectors
      as a group (3 persons)
    10,745,922
    37.9%Hugo
      Verhaghe(3)
    6,812,088
    24.0%Charles
      Glace(4)
    3,484,550
    12.3%Lucky
      Srinivasan(5)
    2,500,000
    8.8%
 ______________________
 
 (1)  All
shares are held of record by Mathew Investment Partnership whose address is 7401
Windswept Trail, Colleyville, Texas 76034.
 (2)  All
shares are held of record by R.F. Bearden Associates, Inc. The sole shareholder
of R.F. Bearden Associates, Inc. is Rebecca Bearden who is married to Ron F.
Bearden, a former director of the Company. Ron F. Bearden disclaims beneficial
ownership of all shares held by R.F. Bearden Associates, Inc., whose address is
5051 Westheimer, Suite 700, Houston, Texas 77056.
 (3)  All
shares are held of record by Geld Fund II LC whose address is 7705 Debbie Dr.,
Leander, Texas 78641.
 (4)  All
shares are held of record by Chasco Investments, Inc., whose address is PO Box
1057, Round Rock, Texas 78680.
 (5)  All
shares are held of record by E Corp., whose address is 11526 Echo Woods Street,
Houston, Texas 77024. Lucky Srinivasan holds voting and investment power with
respect to the shares.
 
 **ITEM
12.****CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS**
 
 The
Company and its subsidiary, Sterling FBO, have, from time to time, entered into
transactions with various entities controlled by the Company's current or former
principal shareholders and/or by Ron F. Bearden. The principal shareholders of
the Company include Chasco Investments, Inc., Geld Fund II, LLC, AM Pacific
Group and Mathew Investment Partnership. Sterling REIT, Inc. was a principal
shareholder of the Company prior to the foreclosure and cancellation of shares
held by Sterling REIT. Those entities may be deemed to be controlled by Hugo
Verhaeghe, Charles Glace, Thomas Mathew and Lucky Srinivasan.
 
 All of
the Company assets owned and operated during 2003 were acquired through the
acquisition of various entities previously controlled by the referenced
principal shareholders. Those acquisitions included the acquisition by the
Company, pursuant to the Exchange, in September 2002 of Sterling FBO, including
the four state leased properties, for 5,638,334 shares of common stock. As a
result of the Exchange, each of the referenced shareholders became shareholders
of the Company.
 
 Following
the Exchange, and pursuant to acquisitions planned to occur before the Exchange
but which were deferred until following the Exchange, during 2002, the Company
acquired the following interests in entities and/or properties from
shareholders:
 
 -
    In
      October 2002, the Company acquired a 99% limited partnership interest in
      Commodore Plaza, Ltd. in exchange for 2,000,000 shares of common stock.
      Commodore Plaza, Ltd. was acquired from Hugo Verhaeghe, Charles Glace,
      Thomas Mathew and Sterling REIT, Inc.
 
 -
    In
      October 2002, the Company acquired a 100% ownership interest in both
      Greeley FBO, L.L.C. and Sterling Austin Aero, L.P. in exchange for
      3,143,334 shares of common stock and 2,166,666 shares of common stock,
      respectively. Both Greeley FBO and Sterling Austin Aero were acquired from
      Geld Fund II, LLC, Chasco Investments, Inc., Mathew Investment Partnership
      and Sterling REIT, Inc.
 
 -
    In
      November 2002, the Company acquired a 100% ownership interest in Casper
      Jet Center, L.L.C., Austin Aero FBO, Ltd., and Sterling-Ft. Worth Jet
      Center, Ltd. The Company issued an aggregate of 3,723,894 shares of common
      stock to acquire Casper Jet Center, L.L.C., 4,355,554 shares of common
      stock to acquire Austin Aero FBO, Ltd., and 1,153,333 shares of common
      stock to acquire Sterling-Ft. Worth Jet Center, Ltd. Both Casper Jet
      Center, L.L.C. and Austin Aero FBO, Ltd. were acquired from Mathew
      Investment Partnership and Sterling, REIT, Inc. Sterling-Ft. Worth Jet
      Center, Ltd. was acquired from Mathew Investment Partnership, Sterling,
      REIT, Inc., and Geld Fund II, LLC.
 
 -
    In
      December 2002, the Company acquired 100% of the outstanding shares of
      common stock of Ft. Worth Jet Center, Inc. in exchange for 8,223,953
      shares of common stock. Ft. Worth Jet Center, Inc. was acquired from
      Mathew Investment Partnership, Sterling, REIT, Inc, and Geld Fund II,
      LLC.
 
 Prior to
the Company's acquisition of each of the referenced entities, Sterling REIT
served as general partner or managing member of each of the entities. Ron F.
Bearden served as President of both the Company and Sterling REIT during 2002.
Prior to the Company's acquisition of the entities, Sterling REIT periodically
received management and other fees in conjunction with, and from, those entities
and received advances from and made advances to those entities. Net advances to
Sterling REIT by the Company, including entities acquired by the Company,
totaled $686,142 at December 31, 2002 and $1,693,151 at December 31, 2003.
Subsequently, in 2004, pursuant to the terms of a Settlement Agreement, Sterling
REIT pledged substantially all of its assets to the Company to secure repayment
of amounts advanced by the Company. Based on an evaluation by management, all
advances made to Sterling REIT at December 31, 2002 and 2003, respectively were
determined to be uncollectible.
 
 At
December 31, 2004, due from affiliates totaled $65,289 representing amounts owed
to the Company by Sterling REIT. The amounts due from Sterling REIT at December
31, 2004, represent rents previously collected by Sterling REIT and belonging to
the Company and amounts advanced by the Company to Sterling REIT to facilitate
the sale by Sterling REIT of various properties with the agreement that Sterling
REIT will repay all amounts owed to the Company from the proceeds of the sale of
the properties.  This anount was paid in full in 2005.
  
  **ITEM
13.****EXHIBITS**
 
 Exhibit
      Number
    Description
      of Exhibit2.1
    Exchange
      Agreement dated June 1, 2002, by and among BlueStar Leasing, Inc. and
      Sterling FBO Holdings, Inc.(incorporated
      by reference to the respective exhibits filed with Registrant's Current
      Report on Form 8-K dated September 30, 2002)2.2
    Amendment
      to Exchange Agreement dated September 25, 2002 (incorporated
      by reference to the respective exhibits filed with Registrant's Current
      Report on Form 8-K dated September 30, 2002)2.3
    Exchange
      Agreement dated December 30, 2002, by and among BlueStar Leasing, Inc.,
      Sterling FBO Holdings, Inc. and Ft. Worth Jet Center, Inc. Incorporated by
      reference to the respective exhibits filed with Registrant's Current
      Report on Form 8-K dated December 30, 2002)2.4
    Austin
      Aero FBO, Ltd. Asset Purchase Agreement, dated December 31, 2002, by and
      between Trajen Flight Support, LP, Austin Aero FBO, Limited and
      Sterling-Austin Aero L.P. (incorporated by reference to the respective
      exhibits filed with the Registrant's Current Report on Form 8-K dated
      February 27, 2003)2.5
    Asset
      Purchase Agreement, dated February 26, 2003, by and between Trajen Flight
      Support, LP, Sterling FBO Holdings, Inc., Greeley FBO, L.L.C., Casper Jet
      Center, L.L.C., Fort Worth Jet Center, Inc., and Sterling-Fort Worth JC,
      LP. (incorporated by reference to the respective exhibits filed with the
      Registrant's Current Report on Form 8-K dated February 27,
      2003.)3.1
    Articles
      of Incorporation (incorporated by reference to the respective exhibits
      filed with Registrant's Registration Statement on Form 10-SB filed October
      10, 2001.)3.2
    Bylaws
      (incorporated by reference to the respective exhibits filed with
      Registrant's Registration Statement on Form 10-SB filed October 10,
      2001.)10.1
    Settlement
      Agreement, dated January 14, 2004, between Sterling Equity Holdings, Inc.
      and Sterling REIT, Inc. (incorporated by reference to the respective
      exhibits filed with the Registrant's Current Report on Form 8-K dated
      January 13, 2004.)10.2
    Promissory
      Note, dated January 14, 2004, from Sterling REIT, Inc. to Sterling Equity
      Holdings, Inc. (incorporated by reference to the respective exhibits filed
      with the Registrant's Current Report on Form 8-K dated January 13,
      2004.)10.3
    Pledge
      Agreement, dated January 14, 2004, from Sterling REIT, Inc. to Sterling
      Equity Holdings, Inc. (incorporated by reference to the respective
      exhibits filed with the Registrant's Current Report on Form 8-K dated
      January 13, 2004.)10.4
    Security
      Agreement, dated January 14, 2004, from Sterling REIT, Inc. in favor of
      Sterling Equity Holdings, Inc. (incorporated by reference to the
      respective exhibits filed with the Registrant's Current Report on Form 8-K
      dated January 13, 2004.)10.5
    Commercial
      Earnest Money Contract, dated February 24, 2004, for 4719-4735 South
      Congress (Incorporated by reference to the respective exhibits filed with
      the Registrant’s Current Report on Form 8-K dated December 15,
      2004)10.6
    Amendment
      to Commercial Earnest Money Contract, dated June 18, 2004, for 4719-4735
      South Congress (Incorporated by reference to the respective exhibits filed
      with the Registrant’s Current Report on Form 8-K dated December 15,
      2004)10.7
    Second
      Amendment to Commercial Earnest Money Contract, dated November 5, 2004,
      for 4719-4735 South Congress (Incorporated by reference to the respective
      exhibits filed with the Registrant’s Current Report on Form 8-K dated
      December 15, 2004)14.1
    Code
      of Ethics for CEO and Senior Financial Officers (incorporated by reference
      to Exhibit 14.1 to Registrant’s Form 10-KSB dated October 8,
      2004.)21.1
    List
      of subsidiaries (incorporated by reference to the respective exhibits
      filed with the Registrant's Annual Report on Form 10-KSB for the year
      ended December 31, 2002.)31.1*
    Section
      302 Certifications32.1*
    Section
      906 Certifications
 
 *  Filed
herewith
 
 **ITEM
14.****PRINCIPAL
ACCOUNTANT FEES AND SERVICES**
 
 *Fees
Paid to Independent Public Accountants*
 
 The
following table presents fees for professional audit services rendered by Thomas
Leger & Co., L.L.P. for the audit of the Company's annual financial
statements for the years ended December 31, 2004 and December 31, 2003 and fees
billed for other services rendered by Thomas Leger & Co., L.L.P. during
those periods.
 
 Fiscal
      2004
    
    Fiscal
      2003Audit
      fees (1)
    
    $
    93,820
    
    $
    110,045Audit
      related fees
    
    
    --
    
    
    --Tax
      fees
    
    
    22,112
    
    
    5,925All
      other fees
    
    
    --
    
    
    --Total
    
    $
    115,932
    
    $
    115,970
 
 (1)  Audit
Fees consist of fees billed for professional services rendered for the audit of
the Company's consolidated annual financial statements and review of the interim
consolidated financial statements included in quarterly reports and services
that are normally provided by Thomas Leger &Co., L.L.P. in connection with
statutory and regulatory filings or engagements.
 
 *Policy
on Pre-Approval of Audit and Non-Audit Services of Independent
Auditor*
 
 At such
time, if ever, as the Company forms an audit committee, the Company intends that
the audit committee will establish a specific policy relating to pre-approval of
all audit and non-audit services provided by the Company’s independent auditors.
As the Company does not presently maintain an audit committee, no such policy
has been adopted to date.
  
  **SIGNATURES**
  
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized
 
 ****
 **STERLING EQUITY HOLDINGS, INC.**
 
 By: /s/
Thomas Mathew ___________
 Thomas
Mathew, President
 
 Date: April 12, 2005
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
 
 Signature     Title    Date
 
 
 /s/
Lloyd Shoppa   Chairman
of the Board   April 12,
2005
 Lloyd
Shoppa
 
 
 /s/
Thomas Mathew    President
and Director   April 12
2005
 Thomas
Mathew     (Principal
Executive Officer and
 Principal Financial and
Accounting Officer)
 
 
 
 /s/
Ron F. Bearden    Director     April 12,
2005
 Ron F.
Bearden
 
  
  **INDEX
TO EXHIBITS**
 
 Exhibit
      Number
    Description
      of Exhibit2.1
    Exchange
      Agreement dated June 1, 2002, by and among BlueStar Leasing, Inc. and
      Sterling FBO Holdings, Inc.(incorporated
      by reference to the respective exhibits filed with Registrant's Current
      Report on Form 8-K dated September 30, 2002)2.2
    Amendment
      to Exchange Agreement dated September 25, 2002 (incorporated
      by reference to the respective exhibits filed with Registrant's Current
      Report on Form 8-K dated September 30, 2002)2.3
    Exchange
      Agreement dated December 30, 2002, by and among BlueStar Leasing, Inc.,
      Sterling FBO Holdings, Inc. and Ft. Worth Jet Center, Inc. Incorporated by
      reference to the respective exhibits filed with Registrant's Current
      Report on Form 8-K dated December 30, 2002)2.4
    Austin
      Aero FBO, Ltd. Asset Purchase Agreement, dated December 31, 2002, by and
      between Trajen Flight Support, LP, Austin Aero FBO, Limited and
      Sterling-Austin Aero L.P. (incorporated by reference to the respective
      exhibits filed with the Registrant's Current Report on Form 8-K dated
      February 27, 2003)2.5
    Asset
      Purchase Agreement, dated February 26, 2003, by and between Trajen Flight
      Support, LP, Sterling FBO Holdings, Inc., Greeley FBO, L.L.C., Casper Jet
      Center, L.L.C., Fort Worth Jet Center, Inc., and Sterling-Fort Worth JC,
      LP. (incorporated by reference to the respective exhibits filed with the
      Registrant's Current Report on Form 8-K dated February 27,
      2003.)3.1
    Articles
      of Incorporation (incorporated by reference to the respective exhibits
      filed with Registrant's Registration Statement on Form 10-SB filed October
      10, 2001.)3.2
    Bylaws
      (incorporated by reference to the respective exhibits filed with
      Registrant's Registration Statement on Form 10-SB filed October 10,
      2001.)10.1
    Settlement
      Agreement, dated January 14, 2004, between Sterling Equity Holdings, Inc.
      and Sterling REIT, Inc. (incorporated by reference to the respective
      exhibits filed with the Registrant's Current Report on Form 8-K dated
      January 13, 2004.)10.2
    Promissory
      Note, dated January 14, 2004, from Sterling REIT, Inc. to Sterling Equity
      Holdings, Inc. (incorporated by reference to the respective exhibits filed
      with the Registrant's Current Report on Form 8-K dated January 13,
      2004.)10.3
    Pledge
      Agreement, dated January 14, 2004, from Sterling REIT, Inc. to Sterling
      Equity Holdings, Inc. (incorporated by reference to the respective
      exhibits filed with the Registrant's Current Report on Form 8-K dated
      January 13, 2004.)10.4
    Security
      Agreement, dated January 14, 2004, from Sterling REIT, Inc. in favor of
      Sterling Equity Holdings, Inc. (incorporated by reference to the
      respective exhibits filed with the Registrant's Current Report on Form 8-K
      dated January 13, 2004.)10.5
    Commercial
      Earnest Money Contract, dated February 24, 2004, for 4719-4735 South
      Congress (Incorporated by reference to the respective exhibits filed with
      the Registrant’s Current Report on Form 8-K dated December 15,
      2004)10.6
    Amendment
      to Commercial Earnest Money Contract, dated June 18, 2004, for 4719-4735
      South Congress (Incorporated by reference to the respective exhibits filed
      with the Registrant’s Current Report on Form 8-K dated December 15,
      2004)10.7
    Second
      Amendment to Commercial Earnest Money Contract, dated November 5, 2004,
      for 4719-4735 South Congress (Incorporated by reference to the respective
      exhibits filed with the Registrant’s Current Report on Form 8-K dated
      December 15, 2004)14.1
    Code
      of Ethics for CEO and Senior Financial Officers (incorporated by reference
      to Exhibit 14.1 to Registrant’s Form 10-KSB dated October 8,
      2004.)21.1
    List
      of subsidiaries (incorporated by reference to the respective exhibits
      filed with the Registrant's Annual Report on Form 10-KSB for the year
      ended December 31, 2002.)31.1*
    Section
      302 Certifications32.1*
    Section
      906 Certifications
 
  *  Filed
herewith