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, 2007, held the sole general partner interest of .98% and a limited partnership interest totaling 86.08%. As of December 31, 2007, through its majority-owned subsidiary, the Operating Partnership, the Company owned and operated 29 properties, which consisted of 22 office buildings, four industrial properties, and three retail properties. The 29 properties are located in six states.

During 2007, the Company acquired a 400,000 square foot industrial park and two retail properties aggregating 76,000 square feet. All three properties are located in Houston, Texas. The industrial park includes 12 acres of land on which the Company anticipates developing an additional 100,000 square feet of multi-tenant industrial space. No properties were sold during 2007. During 2006, the Company purchased six office properties located in Houston, Texas and one office property located in Victoria, Texas. Three properties were sold during 2006, which consisted of an industrial property located in San Diego, California, an office building located in San Diego, California and an office building located in Palatine, Illinois. The property acquisitions are part of the Company's strategy to acquire multi-tenant value-added properties located in its core markets of Texas, California and Arizona.

The Company's properties were 86% occupied at December 31, 2007 compared to 90% at December 31, 2006. The weighted average occupancy for 2007 and 2006 was 88% for both years. The Company continues to aggressively pursue prospective tenants to increase its occupancy, which if successful, should have the effect of improving operational results.

As of December 31, 2007, Columbia Northeast, a 58,783 square foot retail property located in South Carolina, was classified as "Real estate held for sale". The property was sold on February 28, 2008.

In the accompanying financial statements, the results of operations of the property classified as "Real estate held for sale" and the three properties sold during 2006 are shown in the section "Discontinued operations". No properties were sold during 2007. Therefore the revenues and expenses reported for the fiscal years ended December 31, 2006 and 2007 reflect results from properties currently held for investment by the Company. 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 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 2008.

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:

• Certain leases provide for tenant occupancy during periods for which no rent is due or where minimum rent payments increase during the term of the lease. The Company records rental income for the full term of each lease on a straight-line basis. Accordingly, a receivable, if deemed collectible, is recorded from tenants equal to the excess of the amount that would have been collected on a straight-line basis over the amount collected and currently due (Deferred Rent Receivable). When a property is acquired, the term of existing leases is considered to commence as of the acquisition date for purposes of this calculation.

• Many of the Company's leases provide for Common Area Maintenance ("CAM")/Escalations ("ESC") as the additional tenant revenue amounts due to the Company in addition to base rent. CAM/ESC represents increases in certain property operating expenses (as defined in each respective lease agreement) over the actual operating expense of the property in the base year. The base year is stated in the lease agreement; typically, the year in which the lease commenced. Generally, each tenant is responsible for his prorated share of increases in operating expenses. Tenants are billed an estimated CAM/ESC charge based on the budgeted operating expenses for the year. Within 90 days after the end of each fiscal year, a reconciliation and true up billing of CAM/ESC charges is performed based on actual operating expenses.

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

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

RESULTS OF OPERATIONS

Comparison of the year ended December 31, 2007 to the year ended December 31, 2006

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

                                                                            Variance
                                       2007             2006              $            %

   Rental revenue                  $ 30,300,000     $ 25,200,000       5,100,000       20.2 %
   Operating expenses:
   Property operating expenses       13,681,000       11,826,000       1,855,000       15.7 %
   General and administrative         3,470,000        3,468,000           2,000        .06 %
   Depreciation and amortization     13,204,000       10,870,000       2,334,000       21.5 %
   Interest expense                  12,087,000        9,668,000       2,419,000       25.0 %

Rental revenue. Rental revenue increased $5,100,000, or 20.2%, for the year ended December 31, 2007 in comparison to the year ended December 31, 2006. This increase was attributable to $3,729,000 in revenue generated from the two retail properties and one industrial property acquired during 2007 and from seven office properties acquired during 2006. The increase was also attributable to $1,371,000 in greater revenues from properties owned for the full years ended December 31, 2007 and December 31, 2006. The increase in revenue from properties owned for the full years ended December 31, 2007 and December 31, 2006 was primarily due to an increase in rental rates. Increases in lease buy-out revenue of approximately $275,000 and tenant security deposit forfeitures of approximately $100,000 also attributed to the rise in rental revenue. Occupancy, on a weighted average basis, remained relatively unchanged for 2007 in comparison to 2006. The weighted average occupancy for both years was 88%. As of December 31, 2007, the Company's properties were 86% occupied. Rental revenue from the ten properties acquired in 2006 and 2007 is included in the Company's results from their respective dates of acquisition.

Property operating expenses. The increase of $1,855,000, or 15.7%, was primarily due to additional operating expenses of $1,887,000 related to the ten acquired properties mentioned above. This increase was offset in part by a decrease in operating expenses of $32,000 from properties owned for the full years ended December 31, 2007 and 2006. This decrease was primarily due to a decrease in electricity rates. The decrease was also attributable to a reduction in bad debt expense incurred during the year ended December 31, 2007 in comparison to the year ended December 31, 2006.

General and administrative. General and administrative costs remaining virtually unchanged for the year ended December 2007 in comparison to the year ended December 31, 2006, increasing $2,000 or .06%. Increases in compensation costs, state franchise fees and other tax expenses during 2007 was offset in large part by a decrease in professional fees, principally legal. During 2006, legal costs of $150,000 were incurred due to the settlement of the Warren F. Ryan litigation matter. In addition, $148,000 was recognized in 2006 related to an obligation to reimburse John N. Galardi, a director and principal shareholder, for legal fees paid by him in prior years. These fees were incurred in connection with Mr. Galardi's defense of a litigation matter in which he was named as a defendant by reason of his association with the Company.

Depreciation and amortization. Depreciation and amortization expense increased $2,334,000, or 21.5%, for the year ended December 31, 2007 in comparison to the year ended December 31, 2006. The increase was primarily attributable to depreciation and amortization of $1,531,000 related to the ten properties acquired in 2006 and 2007. The increase was also due to the depreciation of additional capital improvements and amortization of capitalized lease costs. During 2007 and 2006, the Company incurred $4,449,000 and $4,933,000, respectively, in capital improvements on its properties, primarily for renovations and tenant improvements.

Interest expense. Interest expense increased $2,419,000, or 25.0%, for the year ended December 31, 2007 in comparison to the year ended December 31, 2006. The increase was in large part attributable to interest expense associated with the ten properties acquired during 2006 and 2007, which accounted for $2,106,000 of the increase. Two corporate bank loans totaling $2,000,000 and a $2,000,000 line of credit, both funded during 2007, also attributed to the increase in interest expense. The increase was also due to the write-off of a loan premium on one of the Company's loans refinanced in July 2007, which accounted for $167,000 of the increase in interest expense. The loan premium, which had an unamortized balance of $1,123,000 at the time of the refinance, was amortized as an offset to interest expense during 2006 and during the first six months of 2007. The unamortized balance is included as a component of the Company's loss on extinguishment of debt on its consolidated statement of operations for the year ended December 31, 2007

Income taxes. The Company recorded a deferred income tax benefit from continuing operations of $4,318,000 for the year ended December 31, 2007 compared to a deferred income tax benefit of $4,047,000 from continuing operations for the year ended December 31, 2006. The increase was primarily due to an increase in taxable losses on continuing operations for the year ended December 31, 2007 in comparison to the year ended December 31, 2006.

Minority interest. The share of loss from continuing operations for the year ended December 31, 2007 for the holders of OP Units was $1,306,000 compared to $887,000 for the year ended December 31, 2006. The 2007 loss represents an average of 13.0% limited partner interest in the Operating Partnership not held by the Company during

2007. The 2006 loss represents an average of 13.4% limited partner interest in the Operating Partnership not held by the Company during 2006.

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. During 2006, in connection with loan refinances on 12000 Westheimer and 2470 Gray Falls, the Company recorded a loss on extinguishment of debt of $567,000, which consisted of a prepayment penalty of $474,000 and the write-off of unamortized loan costs of $93,000.

Discontinued operations. The Company recorded a loss from discontinued operations of $16,000 for the year ended December 31, 2007. The loss represents the operating results of a property classified as "Real estate held for sale at December 31, 2007. The Company recorded income from discontinued operations of $11,870,000 for the year ended December 31, 2006. Income from discontinued operations included the operating results of the property classified as "Real estate held for sale" and the operating results and gain on sale of the three properties sold during 2006. See Note 4 - Discontinued Operations - of the Notes to Consolidated Financial Statements.

The (loss) income from discontinued operations is summarized below (dollars in thousands).

                                                           Year Ended               Year Ended
                                                        December 31, 2007        December 31, 2006

Rental revenue                                         $               360      $               727
Total expenses                                                        (390 )                   (887 )
Gain on extinguishment of debt                                           -                    1,849

(Loss) income from discontinued operations before
gain on sale and share of minority interest                            (30 )                  1,689

Gain on sale of discontinued operations                                  -                   22,349
Income tax benefit (expense)                                            12                  (10,344 )
Minority interest from discontinued operations                           2                   (1,824 )

(Loss) income from discontinued operations             $               (16 )    $            11,870

LIQUIDITY AND CAPITAL RESOURCES

During 2007, the Company derived cash primarily from the collection of rents and net proceeds from borrowings and refinancing activities. Major uses of cash included the acquisitions of three properties, payments for capital improvements to real estate assets, primarily for tenant improvements, payment of operational expenses and scheduled principal payments on borrowings.

During the years ended December 31, 2007 and 2006 the Company reported net
(loss) income of ($8,774,000) and $6,106,000, respectively. These results include the following non-cash items:

                                                  Years Ended December 31,
                                                   2007               2006

       Non-Cash Items:
       Depreciation and amortization           $     13,339       $     11,094
       Loss (gain) on extinguishment of debt          2,413             (1,282 )
       Stock-based compensation expense                  49                 51
       Minority interest                             (1,308 )              937
       Deferred income taxes                         (4,330 )            6,297
       Deferred rental income                           (65 )             (291 )
       Amortization of loan premiums                   (273 )             (440 )

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 provided by operating activities amounted to $97,000 for the year ended December 31, 2006. Net income generated from operations of $123,000 was partially offset by a net change in operating assets and liabilities of $26,000.

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 two retail properties and an industrial property. In addition, cash of $4,449,000 was used for capital expenditures, primarily tenant improvements. Net cash provided by investing activities for the year ended December 31, 2006 amounted to $31,230,000. This amount was due to proceeds of $36,163,000 received from the sale of three properties during 2006, offset by funds used for capital improvements of $4,933,000.

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. Net cash used by financing activities amounted to $30,461,000 for the year ended December 31, 2006. These uses included: i) repayments of borrowings on property sales of $26,165,000, ii) a principal pay-down of $4,877,000 on the Company's note payable to the former limited partners of Sierra Pacific Development Fund II, LP, iii) scheduled principal payments of $1,717,000 and iv) repurchases of common stock of $395,000. These amounts were offset by net proceeds provided by loan refinances of $2,650,000.

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. 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, and proceeds from future sales and refinancing activities.

The Company has a short-term bank note of $1,500,000 and a mortgage note of $1,951,000 maturing during 2008. The Company intends to repay the notes with proceeds from anticipated refinancing activities or property sales. Should the anticipated refinancing activities or property sales not happen, the Company intends to seek maturity extensions. Additionally, the Company has restricted cash of $3,565,000 on deposit with the lender for its 7700 Irvine Center property, which would be released upon the completion of certain lease-up terms and conditions at the property. The Company anticipates meeting the lease-up terms and conditions during the second quarter of 2008. The Company also has a $2,000,000 line of credit available. The entire line was available to the Company as of December 31, 2007.

At December 31, 2007, the Company became non-compliant 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.

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.