American Spectrum Realty 10Q/A 2010 Q3 Quarterly report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

Amendment No. 1

(Mark One)

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

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

THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 001-16785

American Spectrum Realty, Inc.

(Exact name of Registrant as specified in its charter)

State of Maryland		52-2258674
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2401 Fountain View, Suite 510 Houston, Texas 77057		77057
(Address of principal executive offices)		(Zip Code)

(713) 706-6200

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

¨ Yes x No

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

EXPLANATORY NOTE

This Amendment No. 1 to the Quarterly Report on Form 10-Q of American Spectrum Realty, Inc. (“ASR” or, collectively, as a consolidated entity with its subsidiaries, the “Company”) for the three and nine months ended September 30, 2010 and September 30, 2009 is being filed to account for the Company’s January 2010 Evergreen transaction as the acquisition of a business and to consolidate several variable interest entities (“VIE”) in which the Company is the primary beneficiary.

As discussed in Note 14, “Restatement,” of the notes to the accompanying Consolidated Condensed Financial Statements in this Form 10-Q/A, the correction of this error from previously reported information for the three and nine months ended September 30, 2010 has resulted in a change in the Company’s Consolidated Condensed Financial Statements and related notes along with the related Management’s Discussion and Analysis of Financial Condition and Results of Operations discussion.

This amended Quarterly Report on Form 10-Q/A should be read in conjunction with our annual report on Form 10-K for the year ended December 31, 2009 and subsequent filings with the Securities and Exchange Commission (the “SEC”). In addition, in accordance with applicable SEC rules, this amended Quarterly Report on Form 10-Q/A includes updated certificates from our chief executive officer and chief financial officer as Exhibits 31.1, 31.2, 32.1 and 32.2.

TABLE OF CONTENTS

		Page No.
PART I	FINANCIAL INFORMATION

Item 1	Financial Statements	3
	Consolidated Condensed Balance Sheets at September 30, 2010 (unaudited) and December 31, 2009	3
	Consolidated Condensed Statements of Operations for the three and nine months ended September 30, 2010 and 2009 (unaudited)	4
	Consolidated Statement of Equity (Deficit) for the nine months ended September 30, 2010 (unaudited)	5
	Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2010 and 2009 (unaudited)	6
	Notes to Consolidated Condensed Financial Statements	7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 4T	Controls and Procedures	32

PART II	OTHER INFORMATION

Item 1	Legal Proceedings	33
Item 5	Exhibits	33

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMERICAN SPECTRUM REALTY, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(Dollars in thousands, except share amounts)

	September 30, 2010 (Restated)			December 31, 2009
	(Unaudited)			(Audited)
ASSETS
Real estate held for investment (includes $338,323 from consolidated VIE’s at Sept 30, 2010)	$	618,504		$	251,336
Accumulated depreciation (includes $4,068 from consolidated VIE’s at Sept 30, 2010)		(86,428	)		(72,404	)
Real estate held for investment, net (includes $334,255 from consolidated VIE’s at Sept 30, 2010)		532,076			178,932

Real estate held for sale		-			6,364
Cash and cash equivalents		1,013			462
Restricted cash (includes $2,908 from consolidated VIE’s at Sept 30, 2010)		3,900			992
Tenant and other receivables, net of allowance for doubtful accounts of $881 and $701, respectively (includes $515 from consolidated VIE’s at Sept 30, 2010)		1,738			891
Deferred rents receivable		2,138			1,883
Deferred tax asset		12,163			8,813
Purchased intangibles subject to amortization		12,725			-
Goodwill		4,003			-
Investment in management company		4,000			4,000
Investments in unconsolidated real estate assets from related parties		271			-
Notes receivable from related parties		2,400			-
Interest receivable from related parties		267			-
Accounts receivable from related parties		754			-
Account receivable from Evergreen		414			-
Prepaid and other assets, net (includes $5,860 from consolidated VIE’s at Sept 30, 2010)		18,681			12,749
Total Assets	$	596,543		$	215,086

LIABILITIES
Notes payable (includes $240,509 from consolidated VIE’s at Sept 30, 2010)	$	461,696		$	193,920
Liabilities related to real estate held for sale		-			6,091
Accounts payable (includes $4,315 from consolidated VIE’s at Sept 30, 2010)		12,723			5,070
Accounts payable to related parties		372			-
Liabilities related to insurance claims		1,323			1,474
Accrued and other liabilities (includes $1,168 from consolidated VIE’s at Sept 30, 2010)		12,176			9,520
Total Liabilities		488,290			216,075

Commitments and Contingencies (Note 13):

Non-controlling interest classified as temporary equity		-			3,962

EQUITY (DEFICIT)
American Spectrum Realty, Inc. stockholders’ (deficit) equity:
Preferred stock, $.01 par value; authorized, 25,000,000 shares; issued and outstanding, 55,172 and 55,172 shares, respectively		1			1
Common stock, $.01 par value; authorized, 100,000,000 shares; issued, 3,405,706 and 3,291,310 shares, respectively; outstanding, 2,934,294 and 2,819,898 shares, respectively		34			33
Additional paid-in capital		49,028			48,546
Accumulated deficit		(56,500	)		(52,472	)
Treasury stock, at cost, 471,412 shares, respectively		(3,095	)		(3,095	)
Total American Spectrum Realty, Inc. stockholders’ (deficit) equity		(10,532	)		(6,987	)
Non-controlling interests		118,785			2,036
Total Equity (Deficit)		108,253			(4,951	)
Total Liabilities and Equity (Deficit)	$	596,543		$	215,086

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

AMERICAN SPECTRUM REALTY, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

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

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
REVENUES:
Rental revenue	$	16,731		$	8,016		$	33,006		$	24,451
Third party management and leasing revenue		684			71			2,900			112
Interest and other income		140			10			167			37
Total revenues		17,555			8,097			36,073			24,600

EXPENSES:
Property operating expense		6,839			4,158			14,374			12,030
Corporate general and administrative		2,557			1,002			6,695			2,896
Depreciation and amortization		7,754			3,656			15,590			10,951
Interest expense		6,812			3,393			13,950			10,000
Total expenses		23,962			12,209			50,609			35,877

Loss from continuing operations before deferred income tax benefit		(6,407	)		(4,112	)		(14,536	)		(11,277	)

Deferred income tax benefit		1,802			1,458			4,873			3,996

Loss from continuing operations		(4,605	)		(2,654	)		(9,663	)		(7,281	)

Discontinued operations:
Income from operations		-			29			173			172
Gain on sale of discontinued operations		-			-			4,315			-
Income tax expense		-			(11	)		(1,641	)		(63	)
Income from discontinued operations		-			18			2,847			109

Net loss, including noncontrolling interests	$	(4,605	)	$	(2,636	)	$	(6,816	)	$	(7,172	)

Plus: Net loss attributable to noncontrolling interests		2,333			314			2,788			856

Net loss attributable to American Spectrum Realty, Inc.		(2,272	)		(2,322	)		(4,028	)		(6,316	)

Preferred stock dividends		(60	)		(60	)		(180	)		(180	)

Net loss attributable to American Spectrum Realty, Inc. common stockholders	$	(2,332	)	$	(2,382	)	$	(4,208	)	$	(6,496	)

Basic and diluted per share data:
Loss from continuing operations attributable to American Spectrum Realty, Inc. common stockholders	$	(0.77	)	$	(0.83	)	$	(2.05	)	$	(2.28	)
Income from discontinued operations attributable to American Spectrum Realty, Inc. common stockholders		-			0.01			0.69			0.03
Net loss attributable to American Spectrum Realty, Inc. common stockholders	$	(0.77	)	$	(0.82	)	$	(1.36	)	$	(2.25	)

Basic and diluted weighted average shares used		2,934,294			2,818,898			2,906,317			2,812,048

Amounts attributable to American Spectrum Realty, Inc. common stockholders:
Loss from continuing operations	$	(2,272	)	$	(2,338	)	$	(6,039	)	$	(6,413	)
Income from discontinuing operations	$	-		$	55		$	2,011		$	97
Net loss	$	(2,332	)	$	(2,382	)	$	(3,372	)	$	(6,496	)

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

AMERICAN SPECTRUM REALTY INC.

CONSOLIDATED STATEMENT OF EQUITY (DEFICIT)

(In thousands, except share amounts)

	Preferred Shares		Common Shares		Non- controlling Interests			Pre- ferred Stock		Common Stock		Additional Paid-In Capital			Accum- ulated Deficit			Treasury Stock			Total Equity (Deficit)
Balance, December 31, 2009 (audited)		55,172		1,645,655	$	2,036		$	1	$	16	$	48,563		$	(52,472	)	$	(3,095	)	$	(4,951	)
Issuance of one-for-one stock split				1,645,655							18		(18	)		-			-			-
Issuance of common stock				11,500		-			-		-		-			-			-			-
Conversion of operating partnership units to common stock				102,896		(211	)		-		-		211			-			-			-
Consolidation of VIE’s						100,303																100,303
Issuance of operating partnership units				-		13,645			-		-		-			-			-			13,645
Non-controlling interests in acquired properties						6,232			-		-		-			-			-			6,232
Acquisition of non- controlling interest in the operating partnership						(20	)		-		-		-			-			-			(20	)
Reclassification of non-controlling interest from Temporary equity						3,962			-		-		-			-			-			3,962
Reclassification of non-controlling interest to additional paid-in capital						(370	)		-		-		370			-			-			-
Repurchase of non-controlling interest in consolidated partnership						(1,785	)		-		-		-			-			-			(1,785	)
Distributions to non-controlling interests						(2,219	)		-		-		-			-			-			(2,219	)
Non-controlling interests share of loss						(2,788	)		-		-		-			-			-			(2,788	)
Preferred stock dividends						-			-		-		(180	)		-			-			(180	)
Stock-based compensation						-			-		-		82			-			-			82
Net loss						-			-		-		-			(4,028	)		-			(4,028	)
Balance, September 30, 2010 (unaudited)		55,172		3,405,706	$	118,785		$	1	$	34	$	49,028		$	(56,500	)	$	(3,095	)	$	108,253

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

AMERICAN SPECTRUM REALTY, INC

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Nine Months Ended September 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(6,816	)	$	(7,172	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		15,590			11,292
Gain on sale of real estate asset		(4,315	)		-
Income tax benefit		(3,232	)		(3,933	)
Deferred rental income		(253	)		(330	)
Stock-based compensation expense		82			69
Amortization of note payable premium, included in interest expense		-			(19	)
Changes in operating assets and liabilities:
Increase in tenant and other receivables		(208	)		(132	)
Increase in related party receivables		(556	)		-
Increase in accounts payable		3,824			1,611
Increase in accounts payable to related parties		372			-
Decrease in prepaid and other assets		(650	)		(516	)
Increase (decrease) in accrued and other liabilities		(373	)		(1,448	)
Change in restricted cash		406			-
Net cash provided by (used in) operating activities:		3,871			(578	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds received from sale of real estate asset		10,166			-
Capital improvements to real estate assets		(3,281	)		(1,785	)
Real estate acquisitions		(317	)		-
Investments in unconsolidated real estate assets		(82	)		-
Proceeds received related to insurance claims		-			2,700
Payments for damages related to insurance claims		(151	)		(1,741	)
Net cash provided by (used in) investing activities:		6,335			(826	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from borrowings		5,180			3,105
Repayment of borrowings – property sales		(5,067	)		-
Repayment of borrowings – refinances		-			(1,474	)
Repayment of borrowings – other		(1,260	)		(2,050	)
Repayment of borrowings – scheduled payments		(4,268	)		(2,215	)
Repurchase of preferred partnership interest		(1,785	)		-
Proceeds from partial sale of consolidated partnership interests		-			4,000
Acquisition of non-controlling interests in the operating partnership		(20	)		-
Dividend payments to preferred stockholders		(225	)		(80	)
Distributions to non-controlling interests		(2,210	)		-
Net cash (used in) provided by financing activities:		(9,655	)		1,286

Increase (decrease) in cash and cash equivalents		551			(118	)

Cash and cash equivalents, beginning of period		462			2,092

Cash and cash equivalents, end of period	$	1,013		$	1,974

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

Conversion of operating partnership units to common stock	$	211		$	314
Issuance of operating partnership units in connection with Evergreen acquisition		8,000			-
Issuance of operating partnership units in connection with notes receivable and account receivable acquisition		3,081			-
Issuance of operating partnership units in connection with real estate acquisitions		2,586			-
Issuance of operating partnership units in connection with investment in unconsolidated real estate asset		28			-
Debt assumed in connection with real estate acquisition		6,297			-
Conversion of accounts payable to notes payable		498			-
Financing in connection with investment in unconsolidated real estate asset		33			-
Financing in connection with Evergreen acquisition		9,500			-

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest	$	12,705		$	6,797
Cash paid for income taxes		279			60

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

AMERICAN SPECTRUM REALTY, INC.

Notes to Consolidated Condensed Financial Statements

NOTE 1. DESCRIPTION OF BUSINESS

American Spectrum Realty, Inc. (“ASR” or, collectively, as a consolidated entity with its subsidiaries, the “Company”) is a Maryland corporation established on August 8, 2000. The Company is a full-service real estate corporation, which owns, manages and operates income-producing properties. Substantially all of the Company’s assets are held through an operating partnership (the “Operating Partnership”) in which the Company, as of September 30, 2010, held an interest of 65.13% (consisting of the sole general partner interest and a limited partnership interest). In January 2010, in connection with the Evergreen acquisition discussed below, the Operating Partnership issued 1,600,000 operating partnership units, which reduced the Company’s interest in the Operating Partnership from 88.39% at December 31, 2009 to 70.75% at January 31, 2010. The number of operating partnership units issued in connection with the Evergreen acquisition is subject to adjustment as of December 31, 2010 (Also see Note 3).

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

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

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

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

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

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

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

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

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

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

BUSINESS COMBINATIONS

The Company applies the provisions of FASB ASC Topic 805 to all transactions or events in which an entity obtains control of one or more businesses, including those effected without the transfer of consideration, for example, by contract or through a lapse of minority veto rights. These provisions require the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction (whether a full or partial acquisition); establish the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and require expensing of most transaction and restructuring costs. The Company determines whether acquisitions should be accounted for as a business combination. This policy applies to all transactions or events in which an entity obtains control of one or more businesses, including those effected without the transfer of consideration, for example, by contract or through a lapse of minority veto rights.

The Company determines and allocates the purchase price of an acquired company to the tangible and intangible assets acquired and liabilities assumed as of the business combination date. The purchase price allocation process requires us to use significant estimates and assumptions, including fair value estimates, as of the business combination date. We utilize third-party valuation companies to help us determine certain fair value estimates used for assets and liabilities.

Additionally, the purchase price of the applicable property is allocated to the above or below market value of in-place leases and the value of in-place leases and related tenant relationships. The value allocable to the above or below market component of the acquired in-place leases is determined based upon the present value (using a discount rate which reflects the risks associated with the acquired leases) of the difference between (i) the contractual amounts to be paid pursuant to the lease over its remaining term, and (ii) our estimate of the amounts that would be paid using fair market rates over the remaining term of the lease. The amounts allocated to below market lease values are included in accrued and other liabilities in the accompanying consolidated balance sheets and are amortized to rental income over the remaining non-cancelable lease term plus any below market renewal options of the acquired leases with each property.

While we use our best estimates and assumptions as a part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the business combination date, our estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the purchase price allocation period, which is generally one year from the business combination date, we record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill.

VARIABLE INTEREST ENTITIES

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

Upon de-consolidation of a VIE, we will disclose the following:

the amount of any gain or loss recognized as the result of removal of the VIE’s assets, liabilities, and equity from our balance sheet;

the portion of any gain or loss related to the re-measurement to fair value of any retained investment in the VIE being derecognized;

the financial statement line item where the gain or loss relating to de-consolidation of the VIE is de-consolidated;

the nature of our continued involvement (if any) with the former VIE or the entity acquiring the VIE after de-consolidation, and;

whether the de-consolidation transaction occurs with a related party or if the transaction will cause the VIE to be a related party after de-consolidation.

NOTES RECEIVABLE

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

NEW ACCOUNTING PRONOUNCEMENTS

In June 2009, the FASB issued changes to the accounting for variable interest entities. These changes require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity; to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity; to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity; to add an additional reconsideration event for determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance; and to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. These changes become effective for the Company on January 1, 2010. The adoption of this guidance had an impact on the Company’s consolidated financial statements, see Note 4. “Variable Interest Entities” for details regarding the impact of adoption.

NOTE 3. ACQUISITION AND DISPOSITION ACTIVITIES

Acquisition of Property Management and Asset Management Contracts

In January 2010, the Company acquired the property management and asset management contracts held by Evergreen Realty Group, LLC and affiliates ("Evergreen") for a total of approximately 80 separate properties, pending receipt of all required approvals for the acquisition; until such approvals are received, the Company is managing the properties and assets under subcontract from Evergreen. The Company also acquired from Evergreen (i) Evergreen's interest as the manager of limited liability companies which have invested in 27 of the managed properties (in eight of which it has also acquired an equity interest); (ii) Evergreen's interest as the general partner of limited partnerships which have invested in four of the managed properties (in none of which it acquired an equity interest), and (iii) direct tenant-in-common interests in two properties. The Evergreen-managed properties consist of 5,051,240 square feet of office and industrial properties, 2,934 multi-family units, 12,098 self storage units consisting of 1,793,881 square feet, 3,206 student housing units consisting of 9,107 beds and nine assisting living facilities consisting of 776 beds. The purchase price is subject to adjustment after December 31, 2010, based on the revenues generated by the property management and asset management contracts during 2010 and certain costs incurred. See Note 14. “Restatement” for additional information regarding the Evergreen acquisition.

The Company focuses on acquisition candidates that build upon its national property management portfolio. The acquisition of the Evergreen property management and property management contracts significantly increased the Company’s third party management presence in the continental United States. The allocation of the purchase price for these assets is as follows:

	Remaining	Fair
Asset Class	Useful Life	Value
		(in thousands)
Tangible Assets:
Fractional Real Estate Interests	Various	$	375
Furniture, fixtures and equipment	Various		148
Total tangible assets acquired			523

Intangible Assests:
Property management contracts	12		13,474
Goodwill, including assembled workforce	-		4,003
Total intangible assets acquired			17,477

Total purchase price		$	18,000

The goodwill identified as part of the acquisition relates to the value the Company believes it gained from the synergies of having a management presence in approximately 22 states. The Company believes these synergies will afford it the opportunity to actively pursue its policy of growing its portfolio of owned properties through opportunistic investments in well-located properties where cost effective enhancements combined with effective leasing and management strategies, can improve the long term values and economic returns of those properties. The Company also believes the goodwill acquired will allow it to expand its third party management and transaction revenues. The Company expects the entire amount of goodwill to be deductible for tax purposes over the tax amortization period of 15 years.

The consideration paid for the acquisition of the Evergreen property management and asset management contracts is as follows:

	Fair
Consideration	Value
	(in thousands)
Promissory Note	$	9,500
Issuance of 1.6 million operating partnership units		8,000
Assumption of debt		500
Total consideration	$	18,000

The Company completed the Evergreen acquisition by assuming $0.5 million of Evergreen payables, issuing 1.6 million OP units with redemption terms that are different from the Company's other OP Units (the "Evergreen OP Units") and issuing a $9.5 million promissory note. The promissory note is an obligation of American Spectrum Realty Management, LLC, a subsidiary, which matures on December 31, 2019 and bears an annual interest rate of 5.0%.

The Evergreen purchase price was based on a multiple of the estimated revenues generated by the property management and asset management contracts during 2010 less certain costs incurred. This purchase price is subject to a true-up adjustment based on actual results through December 31, 2010. In addition, Evergreen has the option to exchange the Evergreen OP units for common stock or cash (at the election of the Company) at any time after June 30, 2011 at a rate that would convert the total proceeds to equal $8.0 million using the common stock price or the net asset value per share of the Company, whichever is higher, at December 31, 2010.

The following unaudited pro forma statement of operations for the three and nine months ended September 30, 2010 has been prepared to give effect to the acquisition of assets and management contracts with the corresponding consolidation of VIE’s, as described in Note 4 - Variable Interest Entities, assuming that these events occurred on January 1, 2010. The pro forma statement of income is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have been obtained had this transaction actually occurred at the beginning of the period presented, nor do they intend to be a projection of future results of operations. Reliable information to provide pro forma financial disclosure on the Evergreen acquisition for the three and nine months ended September 30, 2009 is currently unavailable and impracticable to prepare. Therefore, such pro forma financial information has not been included.

The pro forma information is based on estimates and assumptions that have been made solely for purposes of developing such pro forma information, including without limitations, purchase accounting adjustments. The pro forma financial information presented below also includes depreciation and amortization based on the valuation of Evergreen’s tangible and intangible assets resulting from the acquisition plus consolidation of the VIE’s as if such consolidation had occurred as of January 1, 2010. The pro forma financial information does not include any synergies or operating cost reductions that may be achieved from the combined operations.

Pro forma statement of operations

(in thousands,unaudited)

	Three Months Ended			Nine Months Ended
	Sept 30, 2010			Sept 30, 2010

Total Revenue	$	17,555		$	44,634
Total Expenses		(23,962	)		(60,455	)

Net Income before Non-controlling Interest & Tax		(6,407	)		(15,821	)

Discontinued Operations		-			2,847
Deferred Tax Benefit		1,802			4,913
Non-Controlling Interest		2,333			3,933
Proforma net income	$	(2,272	)	$	(4,128	)

The accompanying financial statements include the operations of Evergreen and the consolidated VIE’s from the acquisition date and consolidation date in accordance with the Company’s business combination and VIE policies. A summary of the effect on operations follows:

Evergreen component of the consolidated statement of operations

(in thousands, unaudited)

	Three Months Ended			Nine Months Ended
	Sept 30, 2010			Sept 30, 2010

Total Revenue	$	9,297		$	11,661
Total Expenses		(10,935	)		(13,950	)

Net Loss before Noncontrolling Interest & Tax		(1,638	)		(2,289	)

Deferred Tax Benefit		281			537
Non-Controlling Interest		1,047			1,145
Evergreen component of net loss	$	(310	)	$	(607	)

Amortization expense for the three and nine months ended September 30, 2010 was $0.3 and $0.8 million, respectively. Amortization expense will be $1.2 million per year for the next five years ending December 31.

Property Acquisitions

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

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

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

Property Dispositions

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

See Note 4. “Variable Interest Entities” for additional information on the consolidated VIE’s.

NOTE 4. VARIABLE INTEREST ENTITIES

The Company has identified multiple variable interest entities where it is the primary beneficiary for accounting purposes since (a) the Company has the power to direct the activities that most significantly impact the entity’s economic performance such as; sign and enter into leases; set, distribute and implement the capital budgets, or authority to refinance or sell the property within contractually defined limits, and (b) the ability to receive fees that are significant to the property and a track record of funding any deficit cash flows. As a result, these entities were consolidated in the condensed consolidated financial statements, after eliminating intercompany transactions, and presenting the interests that are not owned by the Company as non-controlling interests in the condensed consolidated balance sheets.

The entities being consolidated include one self storage property, two multifamily properties, four student living properties, and nine commercial properties. The entities are generally self-financed through cash flows from property operations.

The Company owns an insignificant interest in the VIE’s, and therefore, substantially all operations are included in the net income (loss) attributable to non-controlling interests.

The carrying amounts associated with these entities, after eliminating the effect of intercompany transactions, were as follows (in thousands):

VIE Amounts	September 30, 2010 (unaudited)
Assets
Restricted Cash	$	2,908
Receivables		515
Fixed Assets, net of depreciation		334,255
Other Assets		5,860
Total assets	$	343,538

Liabilities
Accounts Payable	$	4,315
Notes Payable		240,509
Other Liabilities		1,168
Total Liabilities	$	245,992

VIE net carrying value	$	97,546

At September 30, 2010, the liabilities in the above table are solely the obligations of the VIE’s and are not guaranteed by the Company. The Company does not have the ability to leverage the assets of the above identified VIE’s for the purpose of providing cash to the Company. The debt is solely secured by the properties of the VIE’s.

During the nine months ended September 30, 2010, the Company provided short-term advances of approximately $300,000 in cash to four properties that have been consolidated, all of which has been repaid. We do not believe we have significant exposure to losses related to the VIE’s.

See Note 3. “Acquisition and Disposition Activities” for additional information on the business combination.

NOTE 5. INVESTMENTS IN UNCONSOLIDATED REAL ESTATE ASSETS

During 2010, the Company acquired ownership interests in Evergreen Realty REIT I, Inc and the shareholders then elected to change the name to American Spectrum REIT I, Inc. (“ASRI”) for a total purchase price of $77,000. The Company also acquired fractional interests in other real estate assets of $129,000. These acquisitions were funded by the issuance of OP Units, note payables and cash.

NOTE 6. ACQUISITION OF NOTES RECEIVABLE AND ACCOUNT RECEIVABLE

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

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

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

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

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

NOTE 7. DISCONTINUED OPERATIONS

Real estate assets held for sale.

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

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

Condensed Consolidated Balance Sheet	December 31, 2009 (audited)
Real estate	$	5,847
Other		517
Real estate assets held for sale	$	6,364

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

Net income from discontinued operations.

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

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

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

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

NOTE 8. NOTES PAYABLE

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

		September 30, 2010					December 31, 2009
Property (unless otherwise noted)	Maturity Date	Principal Balance		Interest Rate			Principal Balance		Interest Rate
Fixed Rate
Pacific Spectrum (1)	6/10/2010		5,192		8.02	%		5,248		8.02	%
Northwest Spectrum	12/3/2010		750		8.75	%		750		8.75	%
Corporate-Unsecured (2)	2/19/2011		1,134		3.40	%		-		-
Fountain View Place (3)	4/29/2011		1,065		10.00	%		1,423		10.00	%
Corporate-Secured (4)	5/12/2011		950		8.75	%		-		-
Sabo Road (5)	7/31/2011		1,989		7.42	%		-		-
Bristol Bay	8/1/2011		6,820		7.58	%		6,899		7.58	%
Technology	8/1/2011		7,091		7.44	%		7,131		7.44	%
Corporate – Secured (6)	9/21/2011		890		8.75	%		890		8.75	%
Creekside	12/1/2011		5,744		7.17	%		5,814		7.17	%
Corporate-Unsecured (7)	5/1/2012		48		4.00	%		-		-
16350 Park Ten Place	5/11/2012		4,419		7.45	%		4,466		7.45	%
16360 Park Ten Place	5/11/2012		3,463		7.45	%		3,499		7.45	%
2855 Mangum	5/11/2012		2,551		7.45	%		2,575		7.45	%
2855 Mangum	5/11/2012		1,390		6.00	%		1,422		6.00	%
6430 Richmond Atrium	5/11/2012		2,141		7.45	%		2,161		7.45	%
Corporate-Unsecured (8)	5/31/2012		1,000		9.50	%		500		11.00	%
Southwest Pointe	6/1/2012		2,685		7.33	%		2,710		7.33	%
Corporate-Secured (9)	6/15/2012		992		4.50	%		992		4.50	%
Corporate-Unsecured (7)	6/30/2012		60		0.00	%		-		-
16350 Park Ten Place	8/11/2012		486		7.45	%		492		7.45	%
16360 Park Ten Place	8/11/2012		381		7.45	%		386		7.45	%
Corporate – Secured (10)	2/1/2013		1,746		5.50	%		1,950		7.50	%
Corporate-Secured (4)	3/5/2013		905		8.75	%		-		-
11500 Northwest Freeway	6/1/2014		4,025		5.93	%		4,079		5.93	%
11500 Northwest Freeway	6/1/2014		291		5.93	%		295		5.93	%
Morenci	7/1/2014		1,640		7.25	%		1,689		7.25	%
Northwest Corporate Center	8/1/2014		5,312		6.26	%		5,370		6.26	%
14741 Yorktown	9/1/2014		8,573		5.32	%		8,600		5.32	%
8100 Washington	2/22/2015		2,171		5.59	%		2,196		5.59	%
8300 Bissonnet	5/1/2015		4,484		5.51	%		4,527		5.51	%
Corporate-Unsecured (7)	6/1/2015		292		5.00	%		-		-
Corporate-Unsecured (7)	6/1/2015		55		5.00	%		-		-
1501 Mockingbird	7/1/2015		3,206		5.28	%		3,239		5.28	%
2620-2630 Fountain View (11)	7/31/2015		5,350		7.00	%		-		-
5450 Northwest Central	9/1/2015		2,597		5.38	%		2,631		5.38	%
800/888 Sam Houston Parkway	12/29/2015		4,552		6.25	%		4,638		6.25	%
2401 Fountain View	3/1/2016		11,999		5.82	%		12,139		5.82	%
Campus Court (5)	4/25/2016		4,765		5.78	%		-		-
12000 Westheimer/2470 Gray Falls	1/1/2017		7,301		5.70	%		7,350		5.70	%
6420 Richmond Atrium	6/5/2017		6,311		5.87	%		6,364		5.87	%
7700 Irvine Center	8/1/2017		45,000		5.99	%		45,000		5.99	%
Loop 1604 (5)	9/11/2017		4,357		6.70	%		-		-
Fountain View Place	4/29/2018		12,403		6.50	%		12,521		6.50	%
Corporate-Secured (12)	12/31/2019		9,440		5.00	%		-		-
	Subtotal	$	198,016				$	169,946
Variable Rate
Beltway Industrial (1)	5/9/2010		17,170		7.00	%		17,170		7.00	%
Corporate – Unsecured (8)			-		-			500		6.00	%
Northwest Spectrum	4/19/2012		2,856		2.90	%		3,013		2.90	%
Windrose Plaza	4/19/2012		2,645		2.90	%		2,791		2.90	%
Corporate – Unsecured	12/12/2013		500		6.00	%		500		6.00	%
	Subtotal	$	23,171				$	23,974
ASR Notes Payable	Total	$	221,187				$	193,920
VIE Notes Payable – See Note 4			240,509					-
Balance Sheet Notes Payable	Total	$	461,696				$	193,920

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

NOTE 9. NONCONTROLLING INTERESTS

Unit Holders in the Operating Partnership

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

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

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

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

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

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

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

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

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

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

Third Party Interests in Properties

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

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

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

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

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

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

Variable Interest Entities

The Company also has VIE’s where it is the primary beneficiary for accounting purposes. The Company owns an insignificant interest in the VIE’s, and therefore, substantially all operations are included in the net income (loss) attributable to non-controlling interests. See Note 4. “Variable Interest Entities”.

The following represents the effects of changes in the Company’s equity related to non-controlling interests for the three and nine months ended September 30, 2010 (dollars in thousands):

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

The following represents the effects of changes in the Company’s equity related to non-controlling interests for the three and nine months ended September 30, 2009 (dollars in thousands):

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

NOTE 10. STOCK-BASED COMPENSATION

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

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

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

Stock Options

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

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

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

Exercisable as of September 30, 2010		58,750	$	11.97	$	248,538

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

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

Restricted Stock

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

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

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

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

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

NOTE 11. RELATED PARTY TRANSACTIONS

The following transactions are related party transactions which may include amounts that were eliminated in the consolidation of VIE’s and controlled entities.

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

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

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

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

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

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

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

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

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

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

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

NOTE 12. PREFERRED STOCK

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

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

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

NOTE 13. COMMITMENTS AND CONTINGENCIES

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

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

NOTE 14. RESTATEMENT (UNAUDITED)

In connection with reviewing the January 2010 Evergreen transaction, the Company has determined that it should correct an error and account for the transaction as the acquisition of a business and several VIE’s in which the Company is the primarily beneficiary should have been consolidated as of, and for quarter ended September 30, 2010. See Note 3. “Acquisition and Disposition Activities” for information on the Evergreen transaction and Note 4. “Variable Interest Entities” for information on the VIE’s.

The following tables summarize the impact of the restatement discussed above on the previously issued Consolidated Condensed Financial Statements as of, and for quarter ended September 30, 2010 (dollars in thousands except per share data):

	As Previously Reported			Adjustment			Restated
Statement of Operations for the Three Months Ended Sept 30, 2010

Rental revenue	$	8,307		$	8,424		$	16,731
Third party management and transaction revenue		973			(289	)		684
Interest and other income		140			-			140
Total revenues		9,420			8,135			17,555

Property operating expense		4,703			2,136			6,839
Corporate general and administrative		2,557			-			2,557
Depreciation and amortization		3,608			4,146			7,754
Interest expense		3,494			3,318			6,812
Total expenses		14,362			9,600			23,962

Loss before deferred income tax benefit		(4,942	)		(1,465	)		(6,407	)

Deferred income tax benefit		1,697			105			1,802

Net loss, including non-controlling interests		(3,245	)		(1,360	)		(4,605	)

Net loss attributable to non-controlling interests		1,092			1,241			2,333

Net loss attributable to American Spectrum Realty, Inc.		(2,153	)		(119	)		(2,272	)

Preferred stock dividend		(60	)		-			(60	)

Net loss attributable to American Spectrum Realty, Inc. common Stockholders		(2,213	)		(119	)		(2,332	)

Basic and diluted earnings per share attributable to American Spectrum Realty, Inc. common stockholders	$	(0.73	)		(.04	)	$	(0.77	)

Statement of Operations for the Nine Months Ended Sept 30, 2010

Rental revenue	$	24,093		$	8,913		$	33,006
Third party management and transaction revenue		3,208			(308	)		2,900
Interest and other income		167			-			167
Total revenues		27,468			8,605			36,073

Property operating expense		12,241			2,133			14,374
Corporate general and administrative		6,695			-			6,695
Depreciation and amortization		10,757			4,833			15,590
Interest expense		10,418			3,532			13,950
Total expenses		40,111			10,498			50,609

Loss from continuing operations before deferred tax benefit		(12,643	)		(1,893	)		(14,536	)

Deferred income tax benefit		4,593			280			4,873

Loss from continuing operations		(8,050	)		(1,613	)		(9,663	)

Income from discontinued operations		2,847			-			2,847

Net loss, including non-controlling interests		(5,203	)		(1,613	)		(6,816	)

Net loss attributable to non-controlling interests		1,504			1,284			2,788

Net loss attributable to American Spectrum Realty, Inc.		(3,699	)		(329	)		(4,028	)

Preferred stock dividend		(180	)		-			(180	)

Net loss attributable to American Spectrum Realty, Inc. common Stockholders		(3,879	)		(329	)		(4,208	)

Basic and diluted per share data:
Loss from continuing operations attributable to American Spectrum Realty, Inc. common stockholders		(1.96	)		(0.09	)		(2.05	)
Income from discontinued operations attributable to American Spectrum Realty, Inc. common stockholders		.69			-			.69
Net loss attributable to American Spectrum Realty, Inc. common stockholders	$	(1.27	)		(.09	)	$	(1.36	)

Balance Sheet as of September 30, 2010

Real estate held for investment	$	280,033		$	338,471		$	618,504
Accumulated depreciation		(82,344	)		(4,084	)		(86,428	)
Cash and cash equivalents		1,013			-			1,013
Restricted cash		992			2,908			3,900
Tenant and other receivables, net of allowance for doubtful accounts		1,223			515			1,738
Deferred rents receivable		2,138			-			2,138
Deferred tax asset		11,883			280			12,163
Investment in management company		4,000			-			4,000
Investments in unconsolidated real estate assets from related parties		142			129			271
Purchased intangibles subject to amortization		18,000			(5,275	)		12,725
Goodwill		-			4,003			4,003
Notes receivable from related party		2,400			-			2,400
Interest receivable from related parties		267			-			267
Accounts receivable from related parties		754			-			754
Accounts receivable from Evergreen		414			-			414
Prepaid and other assets, net		12,821			5,860			18,681
Total Assets		253,736			342,807			596,543

Notes payable		221,187			240,509			461,696
Accounts payable		8,408			4,315			12,723
Accounts payable to related parties		372			-			372
Liabilities related to insurance claims		1,323			-			1,323
Accrued and other liabilities		11,008			1,168			12,176
Total Liabilities		242,298			245,992			488,290

Equity:
Preferred stock		1			-			1
Common stock		34			-			34
Additional paid-in capital		49,028			-			49,028
Accumulated deficit		(56,171	)		(329	)		(56,500	)
Treasury stock		(3,095	)		-			(3,095	)
American Spectrum Realty, Inc. stockholders’ equity (deficit)		(10,203	)		(329	)		(10,532	)
Non-controlling interests		21,641			97,144			118,785
Total Equity		11,438			96,815			108,253
Total Liabilities and Equity	$	253,736			342,807		$	596,543

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

OVERVIEW

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

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

During the nine months ended September 30, 2010, the Company consolidated multiple VIE’s in which it was determined to be the primary beneficiary. The entities being consolidated own 16 income-producing properties, consisting of one self storage property, two multifamily properties, four student living properties, and nine commercial properties. The entities are generally self-financed through cash flows from property operations. The Company owns an insignificant interest in the VIE’s, and therefore, substantially all operations are included in the net income (loss) attributable to non-controlling interests. (Also see Note 4 of the Company’s Accompanying Consolidated Financial Statements).

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

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

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

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

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

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

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

CRITICAL ACCOUNTING POLICIES

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

Business Combinations

The Company determines and allocates the purchase price of an acquired company to the tangible and intangible assets acquired and liabilities assumed as of the business combination date. The purchase price allocation process requires us to use significant estimates and assumptions, including fair value estimates, as of the business combination date. The Company utilizes third-party valuation companies to help determine certain fair value estimates used for assets and liabilities.

Variable Interest Entity Accounting

The Company has relationships with many different types of entities; some of those entities are Variable Interest Entities (VIEs). We consolidate any VIE for which we are the primary beneficiary. We analyze our variable interests, including equity investments, guarantees, management agreements and advances, to determine if an entity in which we have a variable interest is a VIE. Our analysis includes both quantitative and qualitative reviews. We base our quantitative analysis on the estimated future cash flows of the entity, and our qualitative analysis on the design of the entity, its organizational structure including decision-making ability and relevant financial agreements. All of these factors are highly subjective and require significant judgment on the part of management.

Upon de-consolidation of a VIE, we will disclose the following:

the amount of any gain or loss recognized as the result of removal of the VIE’s assets, liabilities, and equity from our balance sheet;

the portion of any gain or loss related to the re-measurement to fair value of any retained investment in the VIE being derecognized;

the financial statement line item where the gain or loss relating to de-consolidation of the VIE is de-consolidated;

the nature of our continued involvement (if any) with the former VIE or the entity acquiring the VIE after de-consolidation, and;

whether the de-consolidation transaction occurs with a related party or if the transaction will cause the VIE to be a related party after de-consolidation.

Impairment of Intangible Assets

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

Notes Receivable

RESULTS OF OPERATIONS

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

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

	September 30,		September 30,		Variance
	2010		2009		$		%
	(restated)
Rental revenue	$	16,731,000	$	8,016,000	$	8,715,000		108.7	%
Third party management and leasing revenue		684,000		71,000		613,000		863.4	%
Operating expenses:
Property operating expenses		6,839,000		4,158,000		2,681,000		64.5	%
General and administrative		2,557,000		1,002,000		1,555,000		155.2	%
Depreciation and amortization		7,754,000		3,656,000		4,098,000		112.1	%
Interest expense		6,812,000		3,393,000		3,419,000		100.8	%

Rental revenue. Rental revenue increased $8,715,000, or 108.7%, for the three months ended September 30, 2010 in comparison to the three months ended September 30, 2009. The increase was primarily due to the consolidation of VIE’s, which accounted for $8,424,000 of the increase. Rental revenue for the Company’s owned properties increased $291,000. This increase was principally due to $660,000 in revenue generated from Fountain View Plaza, Sabo Road and Loop 1604, which were acquired in 2010. The increase was in large part offset by an increase in rent concessions and by a decrease in occupancy from properties owned for the full three months ended September 30, 2010 and September 30, 2009. Occupancy, on a weighted average basis, was 83% for the third quarter 2009 compared to 82% for the third quarter 2010.

Third party management and leasing revenue. Third party management and leasing revenue increased by $613,000 for the three months ended September 30, 2010, compared to the three months ended September 30, 2009. The increase was primarily due to revenues generated as a result of the January 2010 acquisition of property management and asset management contracts from Evergreen.

Property operating expenses. Property operating expenses increased by $2,681,000, or 64.5%, for the three months ended September 30, 2010 in comparison to the three months ended September 30, 2009. The increase was primarily due to the consolidation of VIE’s, which accounted for $2,136,000 of the increase. Property operating expenses for the Company’s owned properties increased by $545,000. This increase was primarily due to $452,000 attributable to the three acquired properties mentioned above. This increase was also due an increase in property maintenance costs and an increase in property general and administrative costs incurred during the quarter from properties owned for the full three months ended September 30, 2010 and September 30, 2009.

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

Depreciation and amortization. Depreciation and amortization expense increased $4,098,000, or 112.1%, for the three months ended September 30, 2010 in comparison to the three months ended September 30, 2009. The increase was primarily due to the consolidation of VIE’s, which accounted for $3,859,000 of the increase. The increase was also due to the amortization of intangibles acquired in the Evergreen transaction.

Interest expense. Interest expense increased $3,419,000, or 100.8%, for the three months ended September 30, 2010 in comparison to the three months ended September 30, 2009. The increase was primarily attributable to the consolidation of VIE’s, which accounted for $3,318,000 of the increase. The increase was also attributable to $9,500,000 new loan associated with the Evergreen acquisition. Interest expense related to the new loan amounted to $118,000 during the third quarter of 2010. Additionally, interest expense related to the three properties acquired in 2010 accounted for $237,000 of the increase. The increase was partially offset by a decrease in interest expense attributable to the pay-off and/or pay-down of other debt.

Income taxes. The Company recognized a deferred income tax benefit from continuing operations of $1,802,000 for the three months ended September 30, 2010, compared to $1,458,000 for the three months ended September 30, 2009. The increase in deferred income tax benefit for the three months ended September 30, 2010 corresponds to the increase in loss from continuing operations for three months ended September 30, 2010, in comparison to the three months ended September 30, 2009. The Company has an effective tax rate of 36.5% for 2010. Management believes that its deferred tax asset balance as of September 30, 2010 is realizable.

Non-controlling interests. The share of loss attributable to non-controlling interests was $2,333,000 for the three months ended September 30, 2010, compared to $314,000 for the three months ended September 30, 2009. The non-controlling interests represent (i) unit holders in the Operating Partnership (other than the Company) that held, as of September 30, 2010 and September 30, 2009, a respective 35% and 12% partnership interest in the Operating Partnership as limited partners, (ii) third party limited partnership interests in certain single purpose consolidated partnerships of the Company and (iii) variable interest entities.

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

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

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

	September 30,		September 30,		Variance
	2010		2009		$		%
	(restated)
Rental revenue	$	33,006,000	$	24,451,000	$	8,555,000		35.0	%
Third party management and leasing Revenue		2,900,000		112,000		2,788,000		2,489.3	%
Operating expenses:
Property operating expenses		14,374,000		12,030,000		2,344,000		19.5	%
General and administrative		6,695,000		2,896,000		3,799,000		131.2	%
Depreciation and amortization		15,590,000		10,951,000		4,639,000		42.4	%
Interest expense		13,950,000		10,000,000		3,950,000		39.5	%

Rental revenue. Rental revenue increased $8,555,000, or 35.0% for the nine months ended September 30, 2010 in comparison to the nine months ended September 30, 2009. The increase was primarily due to the consolidation of VIE’s which accounted for an increase of $8,913,000. Rental revenue for the Company’s owned properties decreased by $358,000. This decrease was in large part due to an increase in rent concessions. The decrease was also attributable to a decrease in occupancy and a decrease in common area maintenance fees from properties owned for the full nine months ended September 30, 2010 and September 30, 2009. Occupancy, on a weighted average basis decreased from 83% for the nine months ended September 30, 2009 to 82% for the nine months ended September 30, 2010. The decrease in rental revenue was partially offset by $695,000 in revenue generated from Fountain View Plaza, Sabo Road and Loop 1604, which were acquired in 2010.

Third party management and leasing revenue. Third party management and leasing revenue increased by $2,788,000 for the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009. The increase was due to an increase in third party management and leasing revenues attributable to the Company’s third party management and leasing contracts.

Property operating expenses. Property operating expenses increased by $2,344,000, or 19.5%, for the nine months ended September 30, 2010 in comparison to the nine months ended September 30, 2009. The increase was primarily attributable to the consolidation of VIE’s which accounted for $2,133,000 of the increase. Property operating expenses for the Company’s owned properties increased by $211,000. This increase was primarily due to $475,000 attributable to the three acquired properties mentioned above. The increase was partially offset by a decrease in property taxes attributable to a decrease in the assessed values of several of the Company’s properties. The decrease was also due to lower property maintenance costs incurred during the period for properties owned for the full three months ended September 30, 2010 and September 30, 2009.

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

Depreciation and amortization. Depreciation and amortization expense increased $4,639,000, or 42.4%, for the nine months ended September 30, 2010 in comparison to the nine months ended September 30, 2009. The increase was primarily attributable the consolidation of VIE’s which accounted an increase of $4,068,000. The increase was also due to the amortization of intangibles acquired in the Evergreen transaction.

Interest expense. Interest expense increased $3,950,000, or 39.5%, for the nine months ended September 30, 2010 in comparison to the nine months ended September 30, 2009. The increase was primarily attributable to the consolidation of VIE’s which accounted for $3,532,000 of the increase. The increase was also attributable to an increase in debt, including the $9,500,000 new loan associated with the Evergreen acquisition. Interest expense related to the new loan amounted to $334,000 during the nine months ended September 30, 2010. The increase was also due to interest expense related to the three properties acquired in 2010, which accounted for $237,000 of the increase. The increase was partially offset by a decrease in interest expense attributable to the pay-off and/or pay-down of other debt.

Income taxes. The Company recognized a deferred income tax benefit from continuing operations of $4,873,000 for the nine months ended September 30, 2010, compared to $3,996,000 for the nine months ended September 30, 2009. The increase in deferred income tax benefit for the nine months ended September 30, 2010 corresponds to the increase in loss from continuing operations for nine months ended September 30, 2010, in comparison to the nine months ended September 30, 2009. The Company has an effective tax rate of 36.5% for 2010. Management believes that its deferred tax asset balance as of September 30, 2010 is realizable.

Non-controlling interests. The share of loss attributable to non-controlling interests was $2,788,000 for the nine months ended September 30, 2010, compared to $856,000 for the nine months ended September 30, 2009. The non-controlling interests represent (i) unit holders in the Operating Partnership (other than the Company) that held, as of September 30, 2010 and September 30, 2009, a respective 35% and 12% partnership interest in the Operating Partnership as limited partners, (ii) third party limited partnership interests in certain single purpose consolidated partnerships of the Company and (iii) variable interest entities.

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

LIQUIDITY AND CAPITAL RESOURCES

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

Net cash provided by operating activities amounted to $3,871,000 for the nine months ended September 30, 2010, of which $1,089,000 was attributable to operating activities of the Company’s owned properties and $2,782,000 was attributable to operating activities of VIE’s. The net cash provided by operating activities represented $1,056,000 generated by property operations and a net change in operating assets and liabilities of $2,815,000. The net cash provided by operating activities for the nine months ended September 30, 2010 included (i) an increase in accounts payable of $3,824,000, of which $3,290,000 was attributable to the Company’s owned properties and $534,000 was attributable to VIE’s and (ii) depreciation and amortization expense of $15,590,000, of which $11,522,000 was attributable to the Company’s owned properties and $4,068,000 was attributable to VIE’s. Net cash used in operating activities amounted to $578,000 for the nine months ended September 30, 2009. The net cash represented $93,000 used in property operations and a net change in operating assets and liabilities of $485,000.

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

Net cash used in financing activities amounted to $9,655,000 for the nine months ended September 30, 2010. This amount was primarily comprised of debt repayment on the sale of 5850 San Felipe of $5,067,000, the repayment of borrowings of $1,260,000, scheduled principal payments on debt of $4,268,000, of which $907,000 was related to VIE’s, repurchase of preferred partnership interest of $1,785,000, dividend payments to preferred stockholders of $225,000 and distributions to non-controlling interests of $2,210,000, of which $1,875,000 was related to VIE’s. This amount was partially offset by new borrowings of $5,180,000. Net cash provided by financing activities amounted to $1,286,000 for the nine months ended September 30, 2009. This amount consisted of new borrowings of $3,105,000 and proceeds from the sale of consolidated partnership interests of $4,000,000. The amount was partially offset by repayment of borrowings of $3,524,000 and scheduled principal payments on debt of $2,215,000.

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

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

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

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

FUNDS FROM OPERATIONS

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

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

	Nine Months Ended September 30, 2010			Nine Months Ended September 30, 2009
	(restated)
Net loss attributable to the Company	$	(4,028	)	$	(6,316	)
Depreciation and amortization from discontinued operations		8			341
Gain from sale of discontinued operations		(4,315	)		-
Deferred income tax benefit		(3,232	)		(3,933	)
Depreciation and amortization attributable to the Company’s owned properties		11,522			10,951
FFO	$	(45	)	$	1,043

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

INFLATION

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

FORWARD-LOOKING STATEMENTS

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

ITEM 4T. CONTROLS AND PROCEDURE

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

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 5. EXHIBITS

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

SIGNATURES

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

AMERICAN SPECTRUM REALTY, INC.

Date: May 23, 2011	By:	/s/ William J. Carden
		William J. Carden
		Chairman of the Board, President and,
		Chief Executive Officer
		(Principal Executive Officer)

Date: May 23, 2011	By:	/s/ G. Anthony Eppolito
		G. Anthony Eppolito
		Vice President, Chief Financial Officer,
		(Principal Financial Officer and Accounting Officer),
		Treasurer and Secretary

EXHIBIT INDEX

Exhibit No.		Exhibit Title

31.1		Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of CEO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of CFO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

American Spectrum Realty (AQQ) Inactive 10-Q/A2010 Q3 Quarterly report (amended)