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 Condensed Financial Statements. The consolidated condensed financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the results of operations during the reporting period. Actual results could differ materially from those estimates. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated condensed financial statements:
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 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), 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 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.

RESULTS OF OPERATIONS
Discussion of the three months ended September 30, 2009 and 2008.
The following table shows a comparison of rental revenues and certain expenses
for the quarter ended:

                                 September 30,      September 30,             Variance
                                      2009               2008              $             %

Rental revenue                   $   8,498,000      $   9,082,000     $ (584,000 )      (6.4 %)
Operating expenses:
Property operating expenses          4,417,000          4,958,000       (541,000 )     (10.9 %)
General and administrative           1,002,000            854,000        148,000        17.3 %
Depreciation and amortization        3,773,000          3,686,000         87,000         2.4 %
Interest expense                     3,470,000          3,501,000        (31,000 )      (0.9 %)

Rental revenue. Rental revenue decreased $584,000, or 6.4%, for the three months ended September 30, 2009 in comparison to the three months ended September 30, 2008. The decrease was in large part attributable to a rise in rent concessions and a decrease in lease termination revenue. The decrease was also due to a decrease in occupancy. The rise in rent concessions and decrease in occupancy was partially attributable to Hurricane Ike, which affected the operations of the Company's Houston area properties in September 2008. The Company expects to recover the lost revenue from its insurance carrier. The weighted average occupancy of the Company's properties was 83% as of September 30, 2009 compared to 85% as of September 30, 2008.
Property operating expenses. Property operating expenses decreased by $541,000, or 10.9%, for the three months ended September 30, 2009 in comparison to the three months ended September 30, 2008. During the third quarter of 2008, the Company accrued a $500,000 liability for damages related to Hurricane Ike. The accrual represents the Company's aggregate insurance deductible related to this matter. The decrease was also attributable to a decrease in repair and maintenance expenses of $38,000 and utility costs of $31,000 incurred during the quarter ended September 30, 2009 when compared to the quarter ended September 30, 2008.
General and administrative. General and administrative costs increased by $148,000, or 17.3%, for the three months ended September 30, 2009 in comparison to the three months ended September 30, 2008. The increase was primarily due to an increase in consulting costs related to business development. The increase was also attributable to an increase in professional fees, principally legal and accounting.
Depreciation and amortization. Depreciation and amortization expense increased $87,000, or 2.4%, for the three months ended September 30, 2009 in comparison to the three months ended September 30, 2008. The increase was primarily due to the depreciation of additional capital improvements and the amortization of additional capitalized lease costs incurred in 2009 and 2008.
Interest expense. Interest expense decreased $31,000, or 0.9%, for the three months ended September 30, 2009 in comparison to the three months ended September 30, 2008. The decrease was attributable to a decrease in interest rates on several variable rate loans and an overall decrease in principal balances.
Income taxes. The Company recognized a deferred income tax benefit of $1,447,000 for the three months ended September 30, 2009, compared to $1,376,000 for the three months ended September 30, 2008. The increase in deferred income tax benefit for the three months ended September 30, 2009 corresponds to the increase in loss for the quarter, in comparison to the three months ended September 30, 2008.

Noncontrolling interests. The share of loss attributable to noncontrolling interests was $314,000 for the three months ended September 30, 2009, compared to $323,000 for the three months ended September 30, 2008. The noncontrolling interests include i) unit holders in the Operating Partnership (other than the Company) that currently hold an approximate 12% partnership interest in the Operating Partnership as limited partners and ii) a 49% interest in two of the Company's single purpose limited partnerships owned by a third party, each of which owns an income-producing property. The 49% interest was sold in September 30, 2009.
Discussion of the nine months ended September 30, 2009 and 2008.
The following table shows a comparison of rental revenues and certain expenses for the nine months ended:

                                  September 30,     September 30,            Variance
                                      2009              2008              $             %

 Rental revenue                   $ 25,880,000      $ 26,164,000     $ (284,000 )     (10.9 %)
 Operating expenses:
 Property operating expenses        12,681,000        12,740,000        (59,000 )      (0.5 %)
 General and administrative          2,896,000         2,735,000        162,000         5.9 %
 Depreciation and amortization      11,292,000        10,474,000        818,000         7.8 %
 Interest expense                   10,265,000         9,968,000        297,000         3.0 %

Rental revenue. Rental revenue decreased by $284,000, or 10.9%, for the nine months ended September 30, 2009 in comparison to the nine months ended September 30, 2008. Rental revenue attributable to properties owned for the full nine months ended September 30, 2009 and September 30, 2008 decreased by $1,194,000. The decrease was in large part due attributable to a rise in rent concessions and a decrease in lease termination revenue. The decrease was also due to a decrease in occupancy. The rise in rent concessions and decrease in occupancy was partially attributable to Hurricane Ike, which affected the operations of the Company's Houston area properties in September 2008. The Company expects to recover the lost revenue from its insurance carrier. Occupancy, on a weighted average basis, decreased from 85% at September 30, 2008 to 83% at September 30, 2009. The decrease in rental revenue from properties owned for the full nine months ended September 30, 2009 and September 30, 2008 was partially offset by rental revenue of $910,000 generated from the office property acquired in April 2008.
Property operating expenses. Property operating expenses were relatively unchanged decreasing by $59,000, or 0.5%, for the nine months ended September 30, 2009 in comparison to the nine months ended September 30, 2008. During the third quarter of 2008, the Company accrued a $500,000 liability for damages related to Hurricane Ike. The accrual represents the Company's insurance aggregate insurance deductible related to this matter. Repair and maintenance costs also decreased during the third quarter of 2009. The decrease was mostly offset by an increase in property operating expenses of $627,000 attributable to the office property acquired in 2008.
General and administrative. General and administrative costs increased $162,000, or 5.9%, for the nine months ended September 30, 2009 in comparison to the nine months ended September 30, 2008. The increase was principally due to $340,000 increase in consulting cost related to business development. The increase was partially offset by a decrease in corporate staffing costs and IT related expenditures.
Depreciation and amortization. Depreciation and amortization expense increased $818,000, or 7.8%, for the nine months ended September 30, 2009 in comparison to the nine months ended September 30, 2008. The increase was principally attributable to additional depreciation and amortization of $335,000 related to the acquisition of the office property in 2008. The remainder of the increase was due to the depreciation of additional capital improvements and the amortization of capitalized lease costs associated with properties owned for the full nine months ended September 30, 2009 and September 30, 2008. Interest expense. Interest expense increased $297,000, or 3.0%, for the nine months ended September 30, 2009 in comparison to the nine months ended September 30, 2008. The increase was primarily due to additional interest expense of $437,000 attributable to the office property acquired in 2008. The increase was partially offset by a reduction in interest expense of $176,000 related to other debt. The decrease in

interest expense related to other debt was due to a decrease in interest rates on several variable rate loans and an overall decrease in principal balances. Income taxes. The Company recognized a deferred income tax benefit from continuing operations of $3,933,000 for the nine months ended September 30, 2009, compared to $3,389,000 for the nine months ended September 30, 2008. The increase in deferred income tax benefit for the nine months ended September 30, 2009 corresponds to the increase in loss from continuing operations for the period, in comparison to the nine months ended September 30, 2008. Noncontrolling interests. The share of loss attributable to noncontrolling interests was $856,000, for the nine months ended September 30, 2009, compared to $706,000 for the nine months ended September 30, 2008. The noncontrolling interests represent i) unit holders in the Operating Partnership (other than the Company) that currently hold an approximate 12% partnership interest in the Operating Partnership as limited partners and ii) a 49% interest in two of the Company's single purpose limited partnerships owned by a third party, each of which owns an income-producing property. The 49% interest was sold during in September 30, 2009.
Discontinued operations. The Company recorded income from discontinued operations of $725,000 for the nine months ended September 30, 2008. The income for the nine months ended September 30, 2008 includes the operating results and gain on sale of Columbia, a 58,783 square foot retail center located in Columbia, South Carolina, which was sold in March 2008. The Company had no income or loss from discontinued operations for the nine months ended September 30, 2009.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 2009, the Company derived cash primarily from the collection of rents, borrowings, proceeds from the partial sale of consolidated partnership interests and insurance claim proceeds related to Hurricane Ike and a fire at one of its Houston area properties. Major uses of cash included payments for capital improvements to real estate assets, primarily for tenant improvements, payment of operational expenses, payment for damages related to the hurricane and fire, repayment of borrowings and scheduled principal and interest payments on borrowings.
The Company reported a net loss attributable to American Spectrum Realty, Inc. of $6,316,000 for the nine months ended September 30, 2009 compared to a net loss attributable to American Spectrum Realty, Inc. of $4,771,000 for the nine months ended September 30, 2008. These results include the following non-cash items:

                                                       Nine Months Ended
                                                         September 30,
                                                       2009         2008
            Non-Cash Items:
            Depreciation and amortization expense   $ 11,292     $ 10,497
            Income tax benefit                        (3,933 )     (2,968 )
            Deferred rental income                      (330 )       (298 )
            Noncontrolling interests                    (856 )       (706 )
            Stock-based compensation expense              69           50
            Amortization of loan premium                 (19 )        (34 )

Net cash used in operating activities amounted to $578,000 for the nine months ended September 30, 2009. The net cash represented $93,000 generated by property operations and by an increase in net operating assets and liabilities of $485,000. Net cash provided by operating activities amounted to $507,000 for the nine months ended September 30, 2008. The net cash provided by operating activities included $629,000 generated by property operations, partially offset by an increase in net operating assets and liabilities of $122,000. 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 investing activities amounted to $17,322,000 for the nine months ended September 30, 2008. Cash of $17,250,000 was used to acquire one office property and $3,086,000 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 period. Net cash provided by financing activities amounted to $1,286,000 for the nine months ended September 30, 2009, which included the repayment of borrowings of $3,524,000 and scheduled principal payments on debt of $2,215,000. This amount was partially offset by new borrowings of $3,105,000. Net cash provided by financing activities amounted to $17,388,000 for the nine months ended September 30, 2008, which included $16,950,000 in new borrowings related to the acquisition of an office property, $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 $1,250,000 and other principal repayments of $150,000.
The current credit crisis, related turmoil in the global financial system and the recent downturn in the United States economy are impacting the Company's liquidity and capital resources. The continuation of the credit crisis and/or economic downturn could adversely affect the Company's business in a number of ways, including effects on its ability to met its financial obligations, obtain new mortgages, to refinance current debt and to sell properties.
In general, the Company expects to meet its short-term liquidity requirements for normal operating expenses from cash generated by operations. In addition, the Company anticipates generating proceeds from borrowing activities, property sales and/or equity offerings to provide funds for payments of certain accounts payables, consisting primarily of tenant improvements and capital improvements on properties. As of September 30, 2009, amounts in accounts payable over 90 days totaled $2,690,000. Also, the Company expects to incur capital costs related to leasing space and making improvements to properties provided the estimated leasing of space is completed. The Company anticipates meeting these obligations with the use of funds held in escrow by lenders, proceeds from property sales and borrowing activities. There can be no assurance, however, that these activities will occur. If these activities do no occur, the Company will not have sufficient cash to meet its obligations.
The Company has loans totaling $28,951,000, maturing over the next twelve months. One of these loans, with a balance of $17,170,000 as of September 30, 2009, contains two one-year extension options. The extension options are contingent upon satisfaction of certain terms and conditions required by the lender. Because of uncertainties with 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.
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, 2009 and 2008 (in thousands):

                                                                   Nine Months Ended          Nine Months Ended
                                                                  September 30, 2009         September 30, 2008
Net loss attributable to the Company                              $            (6,316 )      $            (4,771 )
Depreciation and amortization from discontinued operations                          -                         23
Net income from discontinued operations                                             -                       (725 )
Deferred income tax benefit                                                    (3,933 )                   (3,389 )
Net loss attributable to noncontrolling interests                                (856 )                     (706 )
Depreciation and amortization                                                  11,292                     10,474

FFO                                                               $               187        $               906

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 . . .