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. In the accompanying financial statements, the results of operations for Columbia are shown in the section "Discontinued operations". Columbia was classified as "Real estate held for sale" at December 31, 2007. As such, 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 consolidated financial statements of the Company, including the notes thereto, included in Item 1.
The Company intends to continue to seek to acquire additional properties in its core markets of Texas, California and Arizona and further reduce its non-core assets while focusing on an aggressive leasing program during the remainder of 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 require 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 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.

RESULTS OF OPERATIONS
Discussion of the three months ended September 30, 2008 and 2007.
The following table shows a comparison of rental revenues and certain expenses
for the quarter ended:

                                 September 30,      September 30,             Variance
                                      2008               2007               $             %

Rental revenue                   $   9,082,000      $   7,745,000     $ 1,337,000       17.3 %
Operating expenses:
Property operating expenses          4,958,000          3,679,000       1,279,000       34.8 %
General and administrative             854,000            863,000          (9,000 )     (1.0 %)
Depreciation and amortization        3,686,000          3,407,000         279,000        8.2 %
Interest expense                     3,501,000          3,262,000         239,000        7.3 %

Rental revenue. Rental revenue increased $1,337,000, or 17.3%, for the three months ended September 30, 2008 in comparison to the three months ended September 30, 2007. This increase was in large part attributable to $838,000 in revenue generated from an office property acquired during the second quarter of 2008. Greater revenues from properties owned for the full three months ended September 30, 2008 and September 30, 2007 accounted for the remaining increase of $499,000. The increase in revenue from the properties owned for the full three months ended September 30, 2008 and September 30, 2007 was primarily due to increases in rental rates and lease termination revenue. The increase was partially offset by a decrease in occupancy. The weighted average occupancy of the Company's properties was 85% for the three months ended September 2008 compared to 88% for the three months ended September 30, 2007. Property operating expenses. Property operating expenses increased by $1,279,000, or 34.8%, for the three months ended September 30, 2008 in comparison to the three months ended September 30, 2007. The increase was partially due to operating expenses of $369,000 related to the acquired property mentioned above. Property operating expenses on properties owned for the full three months ended September 30, 2008 and 2007 accounted for the remaining increase. 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. The increase in property operating expenses was also in large part due to higher electricity rates incurred during the three months ended September 30, 2008. Further, janitorial costs and bad debt expense rose during the quarter. General and administrative. General and administrative costs decreased $9,000, or 1.0%, for the three months ended September 30, 2008 in comparison to the three months ended September 30, 2007. The increase was principally due to higher professional fees incurred during the third quarter of 2008, primarily audit and consulting costs.
Depreciation and amortization. Depreciation and amortization expense increased $279,000, or 8.2%, for the three months ended September 30, 2008 in comparison to the three months ended September 30, 2007.

The increase was principally attributable to depreciation and amortization of $295,000 related to the acquired properties mentioned above. 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 three months ended September 30, 2008 and 2007. Interest expense. Interest expense increased $239,000, or 7.3%, for the three months ended September 30, 2008 in comparison to the three months ended September 30, 2007. The increase was primarily due to interest expense of $425,000 attributable to the acquired property mentioned above. The increase was partially offset by a reduction in interest expense of $186,000 related to debt on other properties, including the payback of a $2,000,000 secured line of credit in the third quarter of 2007.
Loss on extinguishment of debt. In July 2007, the Company recorded a loss on early 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. The loss is included in other income in the consolidated statements of operations.
Income taxes. The Company recognized a deferred income tax benefit from continuing operations of $1,376,000 for the three months ended September 30, 2008, compared to $2,151,000 for the three months ended September 30, 2007. The decrease in deferred income tax benefit for the third quarter of 2008 corresponds to the decrease in loss from continuing operations for the third quarter of 2008, in comparison to the third quarter of 2007.
Minority interest. The share of loss from continuing operations for the three months ended September 30, 2008 for the holders of OP Units was $323,000, compared to a share of loss of $475,000 for the three months ended September 30, 2007. The minority interest represents the approximate 13% interest in the Operating Partnership not held by the Company.
Discussion of the nine months ended September 30, 2008 and 2007.
The following table shows a comparison of rental revenues and certain expenses for the nine months ended:

                                   September 30,     September 30,            Variance
                                       2008              2007               $            %

  Rental revenue                   $ 26,164,000      $ 22,746,000     $ 3,418,000       15.0 %
  Operating expenses:
  Property operating expenses        12,740,000         9,964,000       2,776,000       27.9 %
  General and administrative          2,735,000         2,545,000         190,000        7.5 %
  Depreciation and amortization      10,474,000         9,443,000       1,031,000       10.9 %
  Interest expense                    9,968,000         8,898,000       1,070,000       12.0 %

Rental revenue. Rental revenue increased $3,418,000, or 15.0%, for the nine months ended September 30, 2008 in comparison to the nine months ended September 30, 2007. This increase was primarily attributable to $2,096,000 in revenue generated from one office property acquired during the second quarter of 2008 and two retail properties and one industrial property acquired during the second quarter of 2007. Greater revenues from properties owned for the full nine months ended September 30, 2008 and September 30, 2007 accounted for the remaining increase of $1,322,000. The increase in revenue from the properties owned for the full nine months ended September 30, 2008 and September 30, 2007 was primarily due to increases in rental rates and a reduction in rent concessions. The increase was also attributable to higher lease termination revenue. The increase was partially offset by a decrease in occupancy, which on a weighted average basis decreased from 89% for the nine months ended September 30, 2007 to 86% for the nine months ended September 30, 2008. Property operating expenses. Property operating expenses increased by $2,776,000, or 27.9%, for the nine months ended September 30, 2008 in comparison to the nine months ended September 30, 2007. The increase was partially due to operating expenses of $1,107,000 related to the four acquired properties mentioned above. Property operating expenses on properties owned for the full nine months ended September 30, 2008 and 2007 accounted for the remaining increase of $1,669,000. During the nine months

ended September 30, 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. The increase in operating expenses was also attributable to higher electricity rates, maintenance and repair costs and bad debt expense incurred during the nine months ended September 30, 2008. Furthermore, real estate taxes rose as a result of an increase in the assessed value of several of the Company's properties. General and administrative. General and administrative costs increased $190,000, or 7.5%, for the nine months ended September 30, 2008 in comparison to the nine months ended September 30, 2007. The increase was partially due to professional fees incurred during the nine months ended September 30, 2008 related to a potential investment opportunity. The increase was also attributable to an increase in other professional fees, primarily audit and consulting. Compensation costs were also increased for the nine months ended September 30, 2008 when compared to the nine months ended September 30, 2007.
Depreciation and amortization. Depreciation and amortization expense increased $1,031,000, or 10.9%, for the nine months ended September 30, 2008 in comparison to the nine months ended September 30, 2007. The increase was principally attributable to depreciation and amortization of $1,090,000 related to the acquired properties mentioned above. 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 nine months ended September 30, 2008 and 2007.
Interest expense. Interest expense increased $1,070,000, or 12.0%, for the nine months ended September 30, 2008 in comparison to the nine months ended September 30, 2007. The increase was primarily due to interest expense associated with the acquired properties mentioned above of $1,041,000. The remaining increase of $29,000 was attributable to properties owned for the full nine months ended September 30, 2008 and 2007.
Loss on extinguishment of debt. In July 2007, the Company recorded a loss on early 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. The loss is included in other income in the consolidated statements of operations.
Income taxes. The Company recognized a deferred income tax benefit from continuing operations of $3,389,000 for the nine months ended September 30, 2008, compared to $3,935,000 for the nine months ended September 30, 2007. The decrease in deferred income tax benefit for the nine months ended September 30, 2008 corresponds to the decrease in loss from continuing operations for the nine months ended September 30 2008, in comparison to the nine months ended September 30, 2007.
Minority interest. The share of loss from continuing operations for the nine months ended September 30, 2008 for the holders of OP Units was $800,000, compared to a share of loss of $842,000 for the nine months ended September 30, 2007. The minority interest represents the approximate 13% interest in the Operating Partnership not held by the Company.
Discontinued operations. The Company recorded income from discontinued operations of $631,000 for the nine months ended September 30, 2008 compared to a loss of $14,000 for the nine months ended September 30, 2007. The income for the nine months ended September 30, 2008 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 nine months ended September 30, 2007 represents Columbia's results of operations for the period.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 2008, the Company derived cash primarily from the collection of rents, proceeds from borrowings, the sale of a property and the release of restricted cash. 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.

The Company reported a net loss of $4,771,000 for the nine months ended September 30, 2008 compared to a net loss of $5,642,000 for the nine months ended September 30, 2007. These results include the following non-cash items:

                                                       Nine Months Ended
                                                         September 30,
                                                       2008         2007
            Non-Cash Items:
            Depreciation and amortization expense   $ 10,497     $  9,542
            Income tax benefit                        (2,968 )     (4,047 )
            Deferred rental income                      (298 )       (236 )
            Minority interest                           (706 )       (844 )
            Stock-based compensation expense              50           36
            Amortization of loan premiums                (34 )       (262 )

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 provided by operating activities amounted to $778,000 for the nine months ended September 30, 2007. The net cash provided by operating activities included $960,000 generated by property operations partially offset by an increase in net operating assets and liabilities of $182,000.
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 used in investing activities amounted to $29,184,000 for the nine months ended September 30, 2007. Cash of $26,140,000 was used to acquire two retail properties and an industrial property. In addition, cash of $3,044,000 was used for capital expenditures, primarily tenant improvements.
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. Net cash provided by financing activities amounted to $28,926,000 for the nine months ended September 30, 2007. Proceeds from borrowings totaled $53,566,000, 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 $3,268,000 for the nine months ended September 30, 2007. The current credit crisis and related turmoil in the global financial system may have an impact on the Company's liquidity and capital resources. The continuation of the credit crisis or a downturn in the United States or global 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. 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 $10,580,000, maturing over the next twelve months. 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 has a $2,000,000 line of credit available if needed. The entire line was available to the Company as of September 30, 2008. The line of credit expires in April 2009. The line can be extended from time to time if mutually agreed upon by the lender and the Company.
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.
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; 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 acquired in the 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 global financial crisis; 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.