OVERVIEW

American Spectrum Realty, Inc. ("ASR" or, collectively, as a consolidated entity with its subsidiaries, the "Company") is a Maryland corporation established on August 8, 2000. The Company is a full-service real estate corporation, which owns, manages and operates income-producing properties. Substantially all of the Company's assets are held through an operating partnership (the "Operating Partnership") in which the Company, as of December 31, 2008, held an interest of 87.12% (consisting of the sole general partner interest a limited partnership interest). As of December 31, 2008, through its majority-owned subsidiary, the Operating Partnership, the Company owned and operated 29 properties, which consisted of 23 office buildings, five industrial properties and one retail property. The 29 properties are located in five states.

During 2008, the Company acquired a 178,000 square foot office property consisting of two adjacent buildings located in Houston, Texas. Also during 2008, the Company sold Columbia, one of the Company's non-core properties. Columbia is a 58,783 square foot retail center located in Columbia, South Carolina. During 2007, the Company acquired two industrial parks aggregating 448,000 square feet and a 28,000 square foot retail property. All three properties are located in Houston, Texas. No properties were sold during 2007. The property acquisitions are part of the Company's strategy to acquire value-added real estate in its core markets of Texas, California and Arizona.

In the accompanying financial statements, the results of operations for Columbia are shown in the section "Discontinued operations" and Columbia was classified as "Real estate held for sale" at December 31, 2007. The revenues and expenses reported for the periods presented exclude results from properties sold or classified as held for sale. The following discussion and analysis of the financial condition and results of operations of the Company

should be read in conjunction with the selected financial data in Item 6 and the consolidated financial statements of the Company, including the notes thereto, included in Item 15.

The Company's properties were 85% occupied at December 31, 2008 and December 31, 2007. The weighted average occupancy for 2008 was 86%, compared to 88% for 2007. 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 Realty Management, Inc., ("ASRM") a wholly-owned subsidiary of the Company, has started a third party management and leasing program. The program was initiated to generate additional income without the heavy capital cost for acquisitions. Currently, ASRM leases and manages approximately 1.2 million square feet of office, retail and industrial projects for third parties. ASRM plans to aggressively pursue third party management and leasing opportunities in the Company's core markets of California, Texas and Arizona.

The Company intends to continue to seek to acquire additional properties in core markets and further reduce its non-core assets while focusing on an aggressive leasing program during 2009.

CRITICAL ACCOUNTING POLICIES

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

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

Investment in Real Estate Assets

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

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

              Building and Improvements   5 to 40 years
              Tenant Improvements         Term of the related lease
              Furniture and Equipment     3 to 5 years

Allocation of Purchase Price of Acquired Assets

Upon acquisitions of real estate, the Company assesses the fair value of acquired tangible and intangible assets (including land, buildings, tenant improvements, above and below market leases, origination costs, acquired in-place leases, other identified intangible assets and assumed liabilities in accordance with SFAS No. 141, Business Combinations), and allocates the purchase price to the acquired assets and assumed liabilities. The Company also considers an allocation of purchase price of other acquired intangibles, including acquired in-place leases.

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

Sales of Real Estate Assets

Gains on property sales are accounted for in accordance with the provisions of SFAS No. 66, Accounting for Sales of Real Estate. Gains are recognized in full when real estate is sold, provided (i) the gain is determinable, that is, the collectibility of the sales price is reasonably assured or the amount that will not be collectible can be estimated, and (ii) the earnings process is virtually complete, that is, the Company is not obligated to perform significant activities after the sale to earn the gain. Losses on property sales are recognized immediately.

Income Taxes

Deferred tax assets and liabilities are determined based on temporary differences between income and expenses reported for financial reporting and tax reporting. The Company has assessed, using all available positive and negative evidence, the likelihood that the deferred tax assets will be recovered from future taxable income.

Under SFAS No. 109, Accounting for Income Taxes, an enterprise must use judgment in considering the relative impact of negative and positive evidence. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. The more negative evidence that exists (i) the more positive evidence is necessary and
(ii) the more difficult it is to support a conclusion that a valuation allowance is not needed for some portion, or all, of the deferred tax asset. Among the more significant types of evidence that the Company considered are: that future anticipated property sales will produce more than enough taxable income to realize the deferred tax asset; taxable income projections in future years; and whether the carryfoward period is so brief that it would limit realization of tax benefits. Based on the Company's evaluation of the evidence the Company has not provided a valuation allowance against its deferred tax assets for the year ended December 31, 2008.

RESULTS OF OPERATIONS

Comparison of the year ended December 31, 2008 to the year ended December 31, 2007

The following table shows a comparison of rental revenues and certain expenses:

                                                                            Variance
                                       2008             2007              $            %

   Rental revenue                  $ 34,870,000     $ 30,300,000       4,570,000       15.1 %
   Operating expenses:
   Property operating expenses       17,028,000       13,681,000       3,347,000       24.5 %
   General and administrative         3,790,000        3,470,000         320,000        9.2 %
   Depreciation and amortization     14,308,000       13,204,000       1,104,000        8.4 %
   Interest expense                  13,464,000       12,087,000       1,377,000       11.4 %

Rental revenue. Rental revenue increased $4,570,000, or 15.1%, for the year ended December 31, 2008 in comparison to the year ended December 31, 2007. This increase was attributable to $2,924,000 in revenue generated from one office property acquired during the second quarter of 2008 and one retail property and two industrial properties acquired during the second quarter of 2007. The increase was also attributable to $1,647,000 in greater revenues from properties owned for the full years ended December 31, 2008 and December 31, 2007. The increase in revenue from properties owned for the full years ended December 31, 2008 and December 31, 2007 was primarily due to increases in rental rates, escalation revenue and lease termination revenue. The increase was partially offset by a decrease in occupancy, which on a weighted average basis decreased from 88% for the year ended December 31, 2007 to 86% for the year ended 2008. As of December 31, 2008 and 2007, the Company's

properties were 85% occupied. Rental revenue from the four properties acquired in 2007 and 2008 is included in the Company's results from their respective dates of acquisition.

Property operating expenses. The increase of $3,347,000, or 24.5%, was in large part attributable to additional operating expenses of $1,426,000 related to the four acquired properties mentioned above. Properties owned for the full years ended December 31, 2008 and 2007 accounted for the remaining increase of $1,921,000. In 2008, the Company accrued $500,000 for property damage related to Hurricane Ike. The accrual represents the Company's aggregate insurance deductible related to this matter. The increase in property operating expenses was also due to higher electricity rates and bad debt expense incurred during the year ended December 31, 2008. Furthermore, real estate taxes rose as a result of an increase in the assessed value of several of the Company's properties. The Company also experienced an increase in maintenance and repair costs for the year ended December 31, 2008 when compared to the year ended December 31, 2007.

General and administrative. General and administrative costs increased $320,000, or 9.2%, for the year ended December 2008 in comparison to the year ended December 31, 2007. The increase was partially due to professional fees incurred during the year ended December 31, 2008 related to a potential investment opportunity and due to an increase in other professional fees. The increase was also due to the moving of the corporate headquarters during the fourth quarter of 2008. An increase in compensation costs for the year ended December 31, 2008 in comparison to the year ended December 31, 2007 also attributed to the increase.

Depreciation and amortization. Depreciation and amortization expense increased $1,104,000, or 8.4%, for the year ended December 31, 2008 in comparison to the year ended December 31, 2007. The increase was primarily attributable to depreciation and amortization of $1,393,000 related to the four properties acquired in 2007 and 2008. The increase was partially offset by a reduction in depreciation and amortization attributable to fully depreciated tenant improvements and amortized lease costs associated with properties owned for the full year ended December 31, 2008 and 2007.

Interest expense. Interest expense increased $1,377,000, or 11.4%, for the year ended December 31, 2008 in comparison to the year ended December 31, 2007. The increase was in large part attributable to interest expense associated with the four properties acquired during 2007 and 2008, which accounted for $1,460,000 of the increase. The increase was partially offset by a reduction in interest expense of $83,000 related to debt on other properties, including the payback of a $2,000,000 secured line of credit in the third quarter of 2007.

Income taxes. The Company recognized a deferred income tax benefit from continuing operations of $5,160,000 for the year ended December 31, 2008, compared to $4,318,000 for the year ended December 31, 2007. The increase in deferred income tax benefit for the year ended December 31, 2008 corresponds to the increase in loss from continuing operations for the year ended December 31, 2008, in comparison to the year ended December 31, 2007.

Minority interest. The share of loss from continuing operations for the year ended December 31, 2008 for the holders of OP Units was $1,077,000 compared to $1,073,000 for the year ended December 31, 2007. The 2008 loss represents an average of 12.9% limited partner interest in the Operating Partnership not held by the Company during 2008. The 2007 loss represents an average of 13.0% limited partner interest in the Operating Partnership not held by the Company during 2007.

Loss on extinguishment of debt. During 2007, the Company recorded a loss on extinguishment of debt of $2,413,000 in connection with the loan refinance on 7700 Irvine Center, an office property located in Irvine, California. The loss consisted of a prepayment penalty of $3,536,000, partially offset by the write-off of unamortized loan premium of $1,123,000.

Discontinued operations. The Company recorded income from discontinued operations of $631,000 for the year months ended December 31, 2008, compared to a loss of $16,000 for the year ended December 31, 2007. The income for the year ended December 31, 2007 includes the operating results and gain on sale of Columbia. Columbia, a 58,783 square foot retail center located in Columbia, South Carolina, was sold in March 2008. The loss for the year ended December 31, 2007 represents Columbia's results of operations for the period.

LIQUIDITY AND CAPITAL RESOURCES

During 2008, the Company derived cash primarily from the collection of rents, proceeds from borrowings, the sale of a property, the release of restricted cash and proceeds from the issuance of preferred stock. Major uses of cash included the acquisition of one property, payments for capital improvements to real estate assets, primarily for tenant improvements, payment of operational expenses, repayment of borrowings and scheduled principal and interest payments on borrowings.

During the years ended December 31, 2008 and 2007, the Company reported net losses of $6,643,000 and $8,774,000, respectively. These results include the following non-cash items:

                                                Years Ended December 31,
                                                 2008               2007

          Non-Cash Items:
          Depreciation and amortization      $     14,331       $     13,339
          Loss on extinguishment of debt                -              2,413
          Stock-based compensation expense             70                 49
          Minority interest                          (979 )           (1,308 )
          Deferred income taxes                    (4,775 )           (4,330 )
          Deferred rental income                     (280 )              (65 )
          Amortization of loan premiums               (46 )             (273 )

Net cash provided by operating activities amounted to $1,015,000 for the year ended December 31, 2008. The net cash provided by operating activities included $537,000 generated by property operations and net change in operating assets and liabilities of $478,000. Net cash provided by operating activities amounted to $2,236,000 for the year ended December 31, 2007. The net cash provided by operating activities included $1,051,000 generated by property operations and net change in operating assets and liabilities of $1,185,000.

Net cash used in investing activities amounted to $18,150,000 for the year ended December 31, 2008. Cash of $17,250,000 was used to acquire one office property. In addition, cash of $3,914,000 was used for capital expenditures, primarily tenant improvements. This amount was reduced by proceeds of $3,014,000 received from the sale of Columbia during the year. Net cash used in investing activities amounted to $30,589,000 for the year ended December 31, 2007. Cash of $26,140,000 was used to acquire a retail property and two industrial properties. In addition, cash of $4,449,000 was used for capital expenditures, primarily tenant improvements.

Net cash provided by financing activities amounted to $18,380,000 for the year ended December 31, 2008, which included $16,950,000 in new borrowings related to the acquisition of an office property, $1,600,000 from the issuance of preferred stock, $470,000 from other borrowings and $3,565,000 from the release of restricted cash. This amount was reduced by the repayment of borrowings on the sale of Columbia of $2,218,000, scheduled principal payments of $1,707,000 and other principal repayments of $300,000. Net cash provided by financing activities amounted to $28,034,000 for the year ended December 31, 2007. Proceeds from borrowings totaled $53,560,000, which included a new loan on an office property located in Irvine, California and a new loan on an office property located in Houston, Texas. Other borrowings of $23,422,000 were obtained primarily to assist with the acquisition costs associated with three properties acquired during 2007. Repayment of borrowings related to refinances amounted to $44,523,000 and scheduled principal payments amounted to $4,154,000 for the year ended December 31, 2007.

The current credit crisis, related turmoil in the global financial system and the recent downturn in the United States economy may have an impact on the Company's liquidity and capital resources. The continuation of the credit crisis and/or the downturn economy could adversely affect the Company's business in a number of ways, including effects on its ability to obtain new mortgages, to refinance current debt and to sell properties.

The Company expects to meet its short-term liquidity requirements for normal property operating expenses and general and administrative expenses from cash generated by operations. The Company may also utilize the proceeds received from the issuance of preferred stock as working capital. In addition, the Company expects to

incur capital costs related to leasing space and making improvements to properties provided the estimated leasing of space is completed. The Company anticipates meeting these obligations with cash currently held, the use of funds held in escrow by lenders, proceeds from the sale of properties and refinancing activities. 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 if all leasing projections are met.

The Company has loans totaling $12,080,000, maturing during 2009. One of the loans, with a balance of $2,500,000, contains an option to extend maturity for two six-month terms. Because of uncertainties with the current credit crisis, the Company's current debt level and 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 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 take any action with respect to this 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.

INFLATION

Substantially all of the leases at the industrial and retail center 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-K 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; the fact that the Company's predecessors have had a history of losses in the past; unforeseen liabilities which could arise as a result of the prior operations of companies or properties acquired in the Company's 2001 consolidation transaction; 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 economic downturn; changes in federal and local laws and regulations; increased competitive pressures; and other factors, including the factors set forth below, as well as factors set forth elsewhere in this Report on Form 10-K.