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TABLE OF CONTENTS

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

COMMISSION FILE NUMBER 001-16785

American Spectrum Realty, Inc.
(Exact name of Registrant as specified in its charter)

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

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K o

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o    No ý

        As of June 30, 2004, the last business day of the Company's most recent completed second quarter, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $8,218,962. The aggregate market value was computed with reference to the price on the American Stock Exchange at which the voting stock was last sold as of such date. For this purpose, 533,365 shares of Common Stock (adjusted to give effect to one-for-four reverse stock split which became effective March 2, 2004) held by officers and directors are deemed to be held by affiliates but exclusion of shares held by any person should not be construed to indicate that such person is an affiliate of the Registrant for any other purpose.

        As of March 1, 2005, 1,510,286 shares of Common Stock ($.01 par value) were outstanding (adjusted to give effect to the one-for-four reverse stock split which became effective March 2, 2004).

DOCUMENTS INCORPORATED BY REFERENCE:

        Part III: Portions of the Registrant's definitive proxy statement to be issued in connection with the Registrant's annual stockholder's meeting to be held May 6, 2005, which will be filed on or before April 6, 2005.

TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS

General Description of Business

        American Spectrum Realty, Inc. ("ASR" or 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, 2004, held a .91% general partner interest and an 86.59% limited partnership interest. As of December 31, 2004, through its majority-owned subsidiary, the Operating Partnership, the Company owned and operated 25 properties, which consisted of 18 office buildings, four industrial properties, two shopping centers, and one apartment complex. The 25 properties are located in seven states.

        During 2004, the Company sold three properties, which consisted of one office building, one industrial property and a parcel of undeveloped land, and acquired two office buildings in Houston, Texas. During 2003, the Company sold eleven properties, which consisted of two apartment complexes, two office buildings, six industrial properties and one shopping center, and acquired four office buildings in Houston, Texas. During 2002, the Company sold two shopping center properties and one apartment property, and purchased three office properties in Houston, Texas. The property sales are part of the Company's strategy to sell its non-core property types—apartment and shopping center properties—and to sell its properties located in the Midwest and Carolina's, its non-core markets. The Company will focus primarily on office and industrial properties located in Texas, California and Arizona.

        The Company is the sole general partner of the Operating Partnership. As the sole general partner of the Operating Partnership, the Company generally has the exclusive power to manage and conduct the business of the Operating Partnership under its partnership agreement. The Company's interest as a limited partner in the Operating Partnership entitles it to share in any cash distributions from, and in profits and losses of, the Operating Partnership. If the Company receives any distributions from the Operating Partnership, it will, in turn, pay dividends to its common stockholders so that the amount of dividends paid on each share of common stock equals the amount of distributions paid on each limited partnership unit in the Operating Partnership ("OP Unit") to the extent permitted by law. Most of the properties are owned by the Operating Partnership through subsidiary limited partnerships or limited liability companies.

        Holders of the OP Units have the option to redeem their units and to receive, at the option of the Company, in exchange for each four OP Units (i) one share of Common Stock of the Company, or (ii) cash equal to the market value of one share of Common Stock of the Company at the date of conversion, but no fractional shares will be issued.

        Management continues to consider whether it is in the best interest of the Company to elect to be treated as a real estate investment trust (or REIT), as defined under the Internal Revenue Code of 1986, as amended. The Company currently operates in a manner that will permit it to elect REIT status; however, the Company may enter into transactions which will preclude it from electing REIT status in the future. In general, a REIT is a company that owns or provides financing for real estate and pays annual distributions to investors of at least 90% of its taxable income. A REIT typically is not subject to federal income taxation on its net income, provided applicable income tax requirements are satisfied. For the tax year 2004, the Company was taxed as a C corporation. It is anticipated that the Company will be taxed as a C corporation for the 2005 tax year.

Business Objectives and Strategy

        The Company's fundamental business objective is to maximize stockholder value. The Company intends to achieve its business objective through opportunistic investments and by executing its other operating strategies.

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        The Company's future growth will be focused on multi-tenant suburban office and industrial properties in the high growth markets of Texas, Arizona and California. Properties in non-core markets are expected to be sold and the net proceeds redeployed into funding future acquisitions in core markets and to pay for capital expenditures and reduce debt.

        Opportunities to Acquire Undervalued and Undermanaged Properties.    The Company believes it is positioned to invest in properties, either individually or in portfolios, at attractive prices, often at costs lower than replacement cost. This will be accomplished using the Company's knowledge of its core geographical markets and core property types, as well as its established capability to identify, and negotiate with, highly-motivated sellers, which include individuals as well as such institutions as banks, insurance companies and pension funds. The Company will not set a maximum target purchase price but rather it will tailor its acquisitions to under performing properties, which the Company believes are attractively priced due to relative physical or operating deficiencies. The Company believes that its real estate expertise will allow it to, when necessary, reposition, renovate or redevelop these properties to make them competitive in their local markets.

        Competitive Advantages.    The Company believes it has competitive advantages that will enable it to be selective with respect to real estate investment opportunities and allow it to successfully pursue its growth strategy. Based on its management's experience, the Company expects that its presence in geographically diverse markets will increase its exposure to opportunities for attractive acquisitions of various types of properties throughout its operating region and provide it with competitive advantages which enhance its ability to do so, including:

•

strong local market expertise;



•

long-standing relationships with tenants, real estate brokers, institutions and other owners of real estate in each local market;



•

fully integrated real estate operations which allow quick response to acquisition opportunities;



•

access to capital markets at competitive rates as a public company;



•

ability to acquire properties in exchange for ASR shares or OP Units which may make it a more attractive purchaser when compared to purchasers who are not similarly structured or are unable to make similar use of equity to purchase properties.

        Property Management Strategies.    The Company has procedures and expertise which permit it to manage effectively a variety of types of properties throughout the United States. The decentralized structure with strong local management enables it to operate efficiently. In seeking to maximize revenues, minimize costs and increase the value of the properties, the Company follows aggressive property management policies. Among the property management techniques emphasized are regular and comprehensive maintenance programs, regular and comprehensive financial analyses, the use of a master property and casualty insurance program, aggressive restructuring or conversion of tenant spaces and frequent appearances before property tax assessors, planning commissions and other local governmental bodies. The Company believes that its management of the properties will be a substantial factor in its ability to realize its objectives of maximizing earnings.

        Managing and Monitoring Investments.    The Company has actively managed the property portfolio and administered its investments. The Company will monitor issues including the financial advantages of property sales, minimization of real estate taxes, and insurance costs. Also, the Company will actively analyze diversification, review tenant financial statements to deal with potential problems quickly and will restructure investments in the case of underperforming and non-performing properties.

Competition

        The Company competes with other entities both to locate suitable properties for acquisition and to locate purchasers for its properties. While the markets in which it competes are highly fragmented with no

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dominant competitors, the Company faces substantial competition in both its leasing and property acquisition activities. There are numerous other similar types of properties located in close proximity to each of its properties. The amount of leasable space available in any market could have a material adverse effect on the Company's ability to rent space and on the rents charged. Competition for acquisition of existing properties from institutional investors and publicly traded REITs has increased substantially in the past several years. In many of the Company's markets, institutional investors and owners and developers of properties compete vigorously for the acquisition, development and leasing of space. Many of these competitors have greater resources and more experience than the Company.

Employees

        As of December 31, 2004, ASR employed 41 individuals, including on-site property management and maintenance personnel.

Environmental Matters

        Various federal, state and local laws and regulations subject property owners and operators to liability for reporting, investigating, remediating, and monitoring of regulated hazardous substances released on or from a property. These laws and regulations often impose strict liability without regard to whether the owner or operator knew of, or actually caused, the release. The presence of, or the failure to properly report, investigate, remediate, or monitor hazardous substances could adversely affect the financial condition of the Company or the ability of the Company to operate the properties. In addition, these factors could hinder the Company's ability to borrow against the properties. The presence of hazardous substances on a property also could result in personal injury or similar claims by private plaintiffs. In addition, there are federal, state and local laws and regulations which impose requirements on the storage, use, management and disposal of regulated hazardous materials or substances. The failure to comply with those requirements could result in the imposition of liability, including penalties or fines, on the owner or operator of the properties. Future laws or regulations could also impose unanticipated material environmental liabilities on the Company in connection with any of the properties. The Company is aware that three of its properties may contain hazardous substances above reportable levels. The Company is currently evaluating this situation to determine an appropriate course of action.

        The Company may decide to acquire a property with known or suspected environmental contamination after it evaluates that business risk, the potential costs of investigation or remediation, and the potential costs to cure identified non-compliances with environmental laws or regulations. In connection with its acquisition of properties, the Company may seek to have the seller indemnify it against environmental conditions or non-compliances existing as of the date of purchase, and under appropriate circumstances, it may obtain environmental insurance. In some instances, the Company may become the assignee of or successor to the seller's indemnification rights arising from the seller's acquisition agreement for the property. Additionally, the Company may try to structure its leases for the property to require the tenant to assume all or some of the responsibility for environmental compliance and remediation, and to provide that material non-compliance with environmental laws or regulations will be deemed a default under the lease. However, there can be no assurances that, despite these efforts, liability will not be imposed on the Company under applicable federal, state, or local environmental laws or regulations relating to the properties.

Insurance

        The Company currently carries comprehensive liability, fire, terrorism, extended coverage and rental loss insurance covering all of its properties, with policy specifications and insured limits which the Company believes are adequate and appropriate under the circumstances. There are, however, types of losses that are not generally insured because they are either uninsurable or not economically feasible to insure. In addition, costs to carry all of the types of insurance above may not always be economically feasible.

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        Should an uninsured loss or a loss in excess of insured limits occur, the Company could lose its capital invested in the property, as well as the anticipated future revenues from the property and, in the case of debt which is with recourse to the Company, would remain obligated for any mortgage debt or other financial obligations related to the property. Any such loss would adversely affect the Company. Moreover, the Company will generally be liable for any unsatisfied obligations other than non-recourse obligations. The Company believes that its properties are adequately insured. No assurance can be given that material losses in excess of insurance proceeds will not occur in the future.

Capital Expenditures

        Capital expenditure requirements include both normal recurring capital expenditures, and tenant improvements and lease commissions relating to the leasing of space to new or renewing tenants. The Company has a history of acquiring properties which required renovation, repositioning or management changes to improve their performance and to enable them to compete effectively. The Company plans to continue to invest in these types of properties. These properties may require major capital expenditures or significant tenant improvements in order to maximize their cash flows.

Acquisitions

        On October 21, 2004, the Company acquired an office property in Houston, Texas, consisting of approximately 81,538 rentable square feet. The aggregate acquisition costs of approximately $5,900,000 included proceeds from a previously sold property, the assumption of existing debt and seller financing.

        On August 2, 2004, the Company acquired a 42,860 square foot office property in Houston, Texas, which is adjacent to an office property owned by the Company. The Company previously held the note on the property. Acquisition costs of approximately $2,084,000 included the settlement of the note, the issuance of 10,000 shares of restricted Common Stock and cash.

Dispositions

        On September 30, 2004, the Company sold Van Buren, a 16.65 acre parcel of undeveloped land located in Arizona, for $3,111,000.

        On August 24, 2004, the Company sold Parkade Center, a 220,684 square foot office property located in Missouri, for $4,127,000.

        On July 30, 2004, the Company sold Westlakes, a 95,370 square foot industrial property located in Texas, for $4,975,000.

        These three properties sold during 2004 produced net proceeds of approximately $4,316,000 of which $1,191,000 was used to assist the funding of an office property acquisition in a tax-deferred exchange. A net loss of $2,298,000 was incurred in connection with the transactions, which is reflected as discontinued operations in the consolidated statements of operations.

ITEM 2. PROPERTIES

The Location and Type of the Company's Properties

        The Company's 25 properties consist of 18 office, four industrial, two shopping center and one apartment complex located in four geographic regions in seven states. The following table sets forth the location, type and size of the properties (by rentable square feet and/or units) along with annualized net

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rent, rented square feet, occupancy, and rent per square foot as of December 31, 2004. All properties listed below are encumbered by debt.

(1)

Includes gross leasable area for leases that have been executed and have commenced as of December 31, 2004.

(2)

At December 31, 2004, Sorrento I was classified as "Real estate held for sale".

        For the year ended December 31, 2004, no tenant contributed 10% or more of the total rental revenue of the Company. A complete listing of properties owned by the Company at December 31, 2004, is included as part of Schedule III in Item 15.

Office Properties

        The Company owns 18 office properties with total rentable square footage of 1,396,461. The office properties range in size from 42,748 square feet to 208,589 square feet, and have remaining lease terms ranging from less than one to 10 years. The office leases generally require the tenant to reimburse the Company for increases in building operating costs over a base amount. Certain of the leases provide for rent increases that are either fixed or based on a consumer price index. As of December 31, 2004, the

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weighted average occupancy of the office properties was 88%. The weighted average base rent per square foot, calculated as total annualized base rents divided by gross leasable area actually occupied as of December 31, 2004, was $17.25 as of such date.

        The following table sets forth, for the periods specified, the number of expiring leases, the total rentable area subject to expiring leases, average occupancy represented by expiring leases, and total effective annual base rent represented by expiring leases.

OFFICE PROPERTIES
LEASE EXPIRATIONS

(1)

Annual base rent expiring during each period, divided by total annual base rent (both adjusted for contractual increases).

(2)

Includes leases that have initial terms of less than one year.

(3)

This figure is based on square footage actually occupied (which excludes vacant space), which accounts for the difference between this figure and total gross leasable area (which includes vacant space).

(4)

This figure is based on square footage actually occupied and incorporates contractual rent increases arising after 2004, and thus differs from annualized net rent in the preceding table, which is based on 2004 rents.

Industrial Properties

        The Company owns four industrial properties aggregating 358,804 square feet. The industrial properties are primarily designed for warehouse, distribution and light manufacturing and range in size from 43,036 square feet to 109,012 square feet. As of December 31, 2004, multiple tenants occupied two of the industrial properties, one of the properties was partially occupied by a single tenant, and one was unoccupied. The unoccupied property, Sorrento I, was classified as "Real estate held for sale" at December 31, 2004. Sorrento I was sold on March 1, 2005. As of December 31, 2004, the weighted average occupancy of the industrial properties held for investment was 77%. The weighted average base rent per square foot, calculated as total annualized base rents divided by gross leasable area actually occupied as of December 31, 2004, was $7.17 as of such date.

        The industrial properties have leases whose remaining terms range from less than one to six years. Most of the leases are industrial gross leases whereby the tenant pays as additional rent its pro rata share of common area maintenance and repair costs and its share of the increase in taxes and insurance over a base amount. Certain of these leases call for fixed or consumer-price-index-based rent increases. Some of the leases are triple net leases whereby the tenants are required to pay their pro rata share of the properties' operating costs, common area maintenance, property taxes, insurance and non-structural repairs.

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        The following table sets forth, for the periods specified, the number of expiring leases, the total rentable area subject to expiring leases, average occupancy represented by expiring leases and total effective annual base rent represented by expiring leases.

INDUSTRIAL PROPERTIES
LEASE EXPIRATIONS

(1)

Annual base rent expiring during each period, divided by total annual base rent (both adjusted for contractual increases).

(2)

Includes leases that have initial terms of less than one year.

(3)

This figure is based on square footage actually occupied (which excludes vacant space), which accounts for the difference between this figure and total gross leasable area (which includes vacant space).

(4)

This figure is based on square footage actually leased and incorporates contractual rent increases arising after 2004, and thus differs from annualized net rent in the table under "The Location and Type of the Company's Properties", which is based on 2004 rents.

Shopping Center Properties

        The Company owns two shopping center properties with total rentable square footage of 164,625. The shopping center properties have remaining lease terms ranging from less than one to 16 years. The shopping center leases generally require the tenant to reimburse the Company for increases in certain building operating costs over a base amount. Certain of the leases provide for rent increases that are either fixed or based on a percentage of tenants' sales. As of December 31, 2004, the weighted average occupancy of the shopping center properties was 82%. The weighted average base rent per square foot, calculated as total annualized base rents divided by gross leasable area actually occupied as of December 31, 2004, was $5.99 as of such date.

        The following table sets forth, for the periods specified, the number of expiring leases, the total rentable area subject to expiring leases, average occupancy represented by expiring leases and total effective annual base rent represented by expiring leases.

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SHOPPING CENTER PROPERTIES
LEASE EXPIRATIONS

(1)

Annual base rent expiring during each period, divided by total annual base rent (both adjusted for contractual increases).

(2)

Includes leases that have initial terms of less than one year.

(3)

This figure is based on square footage actually occupied (which excludes vacant space), which accounts for the difference between this figure and total gross leasable area (which includes vacant space).

(4)

This figure is based on square footage actually occupied and incorporates contractual rent increases arising after 2004, and thus differs from annualized net rent in the table under "The Location and Type of the Company's Properties", which is based on 2004 rents.

Apartment Property

        The Company owns a 408-unit apartment property located in St. Louis, Missouri. All of the units are rented to residential tenants on either a month-to-month basis or for terms of one year or less. As of December 31, 2004, the apartment property was approximately 92% occupied. The weighted average base rent per square foot, calculated as total annualized base rents divided by gross leasable area actually occupied as of December 31, 2004, was $9.82 as of such date.

ITEM 3. LEGAL PROCEEDINGS

        The following is information concerning legal proceedings to which the Company or its subsidiaries is a party or of which any of their property is subject:

Lewis Matter

        On August 2, 2004, the Orange County Superior Court approved the final accounting in the Robert L. Lewis matter. This matter, initiated on or about September 27, 2001 by Robert L. Lewis, Madison Liquidity Investors 103 LLC and Madison Liquidity Investors 112 LLC, alleged claims against the Company and others for breach of fiduciary duty, breach of contract, intentional interference with prospective economic advantage, and intentional interference with contractual relations related to the Company's 2001 consolidation transaction (the "Consolidation"), although the Consolidation was disclosed in a Prospectus/Consent Solicitation filed with the Securities and Exchange Commission and was approved by a majority vote of the limited partners of the partnerships. In October 2003, counsel for the plaintiffs and counsel for the defendants executed a Memorandum of Understanding regarding a proposed settlement in this matter. By the terms of that Memorandum, the defendants agreed to pay a total of $6,500,000 to settle this action and all other claims known and unknown relating to the facts set forth in the plaintiff's complaints. The settlement of $6,500,000 was funded, in its entirety, by insurance coverage. In 2004, the Court approved the settlement as fair, adequate and reasonable and the defendants' insurers

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deposited $6,500,000 into an escrow account for the purposes of settlement. Subsequently, $1,640,000 was disbursed for attorney fees and expenses, while the remaining $4,860,000 was distributed to the plaintiffs.

Other Matters

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matters were submitted during the fourth quarter of 2004 to a vote of the holders of the Company's common stock, through the solicitation of proxies or otherwise.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Market Information

        The Company's Common Stock trades on the American Stock Exchange under the symbol AQQ. The following table sets forth the high and low closing prices per share (adjusted to give effect to the one-for-four reverse stock split of the Company's Common Stock which became effective March 2, 2004) of the Company's Common Stock for the periods indicated, as reported by the American Stock Exchange.

Company Purchases of Equity Securities

(1)

On October 11, 2004 the Company offered to purchase up to 250,000 shares at $8.25 per share to holders of fewer than 100 shares pursuant to an odd lot buy back program previously postponed. Shareholders with fewer than 100 shares as of October 8, 2004 were eligible to participate. The offer, which expired December 1, 2004, resulted in 63,327 odd lot shares validly tendered.

(2)

The Average Price Paid per Share has been adjusted to give effect to the one-for-four reverse stock split of the Company's Common Stock which became effective March 2, 2004.

Holders

        The approximate number of holders of the shares of the Company's Common Stock was 5,300 as of March 1, 2005.

Distributions

        No dividends were declared to holders of the Company's Common Stock in 2004 and 2003.

        In 2003, the Company's Board of Directors established a policy of meeting on or about the 45^th day after the end of each calendar quarter to consider the declaration and payment of a dividend.

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        Management continues to consider whether it is in the best interest of the Company to elect to be treated as a real estate investment trust (or REIT), as defined under the Internal Revenue Code of 1986, as amended. The Company currently operates in a manner that will permit it to elect REIT status; however, the Company may enter into transactions which will preclude it from electing REIT status in the future. In general, a REIT is a company that owns or provides financing for real estate and pays annual distributions to investors of at least 90% of its taxable income. A REIT typically is not subject to federal income taxation on its net income, provided applicable income tax requirements are satisfied. For the tax year 2004, the Company was taxed as a C corporation. It is anticipated that the Company will be taxed as a C corporation for the 2005 tax year.

Recent Sales of Unregistered Securities

        In August 2004, the Company issued 10,000 shares to the seller of an office property as part of the Company's consideration for the acquisition of the property. The shares, which are currently held in escrow, will be released in August 2005 so long as the property's largest tenant does not default on its lease agreement. The consideration for the shares amounted to $70,700 based on a value of $7.07 per share. In 2003, the Company issued 129,945 shares to two directors in connection with the cancellation of debt and issued 15,243 shares to John N. Galardi, a director and principal stockholder of the Company, for a purchase price of $250,000 (shares adjusted to give effect to the one-for-four reverse stock split). These issuances of Common Stock by the Company were exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) and Rule 506 of Regulation D promulgated thereunder.

        The following table provides information as of December 31, 2004 regarding the compensation plan under which equity securities of the Company are authorized for issuance:

        The share and per share data presented in the above table have been adjusted to give effect to the one-for-four reverse stock split which became effective March 2, 2004.

        See Note 16—Stock Option and Restricted Share Plans—in the Consolidated Financial Statements for information regarding the material features of the above plan.

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ITEM 6. SELECTED FINANCIAL DATA

        Set forth below is selected financial data for the Company. Consolidated balance sheet and operating data are presented as of and for each of the five years ended December 31. The selected financial data for the year ended 2000 reflects the balance sheet data and operating data for Sierra Pacific Pension Investors "84 ("SPPI84"), which is treated as having acquired the properties in the Consolidation for accounting purposes. For 2001, operating data includes the results of operations of SPPI84 for the entire year, and the acquired entities from October 20, 2001, through December 31, 2001. Prior year amounts have been reclassified to conform with current year presentation.

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

        (Dollars in thousands, except for per share and per unit data)

(1)

The net loss and dividends per share data were based upon the weighted average shares of 1,551,189 for 2004, 1,483,675 for 2003, 1,381,860 for 2002 and 1,380,261 for 2001. The share and per share data have been adjusted to give effect to the one-for-four reverse stock split which became effective March 2, 2004.

(2)

The limited partner income per partnership unit was based upon the number of SPPI84 limited partnership units outstanding, 77,000 in 2000.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

        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 its Operating Partnership in which the Company, as of December 31, 2004, held a .91% general partner interest and an 86.59% limited partnership interest. As of December 31, 2004, through its majority-owned subsidiary, the Operating Partnership, the Company owned and operated 25 properties, which consisted of 18 office buildings, four industrial properties, two shopping centers, and one apartment complex. The 25 properties are located in seven states.

        During 2004, the Company sold three properties, which consisted of one office building, one industrial property and a parcel of undeveloped land, and acquired two office buildings in Houston, Texas. During 2003, the Company sold eleven properties, which consisted of two apartment complexes, two office buildings, six industrial properties and one shopping center, and acquired four office buildings in Houston, Texas. During 2002, the Company sold two shopping center properties and one apartment property, and purchased three office properties in Houston, Texas. The property sales are part of the Company's strategy to sell its non-core property types—apartment and shopping center properties—and to sell its properties located in the Midwest and Carolina's, its non-core markets. The Company will focus primarily on office and industrial properties located in Texas, California and Arizona.

        The properties owned by the Company were 86% occupied at December 31, 2004 and 83% occupied at December 31, 2003. Properties held for investment at December 31, 2004 and 2003 were 88% and 85% occupied, respectively. Properties held for investment considered stabilized, not undergoing major redevelopment, were 90% occupied at December 31, 2004 and 88% occupied at December 31, 2003 and properties under redevelopment were 77% occupied at December 31, 2004 compared to 64% at December 31, 2003. The Company continues to aggressively pursuing prospective tenants to further increase its occupancy, which should have the effect of improving operational results.

        In the accompanying financial statements, properties sold or held for sale are classified as "Real estate held for sale" as of December 31, 2004, and their results of operations for the three years ended December 31, 2004 are shown in the section "Discontinued operations". Therefore the revenues and expenses reported for the fiscal years ended December 31, 2002, 2003 and 2004 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 share data in this Item 7 has been adjusted to give effect to the one-for-four reverse stock split which became effective March 2, 2004.

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.

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        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.



•

Management continues to consider whether it is in the best interest of the Company to elect to be treated as a real estate investment trust (or REIT), as defined under the Internal Revenue Code of 1986, as amended. The Company currently operates in a manner that will permit it to elect REIT status; however, the Company may enter into transactions which may preclude it from electing REIT status in the future. In general, a REIT is a company that owns or provides financing for real estate and pays annual distributions to investors of at least 90% of its taxable income. A REIT typically is not subject to federal income taxation on its net income, provided applicable income tax requirements are satisfied. For the tax year 2004, the Company was taxed as a C corporation. It is anticipated that the Company will be taxed as a C corporation for the 2005 tax year.

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RESULTS OF OPERATIONS

Comparison of the year ended December 31, 2004 to the year ended December 31, 2003

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

        Rental revenue.    The increase of $3,106,000, or 13.0%, was attributable to (i) $2,273,000 in revenue generated from six office properties acquired in May 2003 through October 2004, (ii) higher revenues of $637,000 for properties owned on December 31, 2004 and 2003 ("Same Properties") and (iii) a $196,000 payment received from the owner of a neighboring property for past use of common parking areas. The increase in Same Properties revenue was primarily attributable to the Company's office properties, particularly to an office property located in San Diego, California in which, as a result of aggressive lease up efforts, occupancy rose to 76% at December 31, 2004 from 35% at December 31, 2003. Rental revenue from the six acquired office properties was included in the Company's results since their respective dates of acquisition. The weighted average occupancy of properties held for investment increased to 88% at December 31, 2004 from 85% at December 31, 2003.

        Property operating expenses.    The increase of $1,224,000, or 13.1%, was due to the expenses of $1,271,000 related to the six acquired office properties mentioned above, offset in part by a reduction in operating expenses for other properties owned by the Company due to the continued monitoring and controlling of expenses.

        General and administrative.    The decrease of $2,363,000 was in large part due to a decrease in compensation expense of $1,335,000, primarily due to the closure of the Company's offices in New York and San Diego and the downsizing of its administrative staff, especially in the St. Louis and California offices. The closure of these offices and the downsizing resulted in a decrease in other administrative costs of approximately $400,000. Further, professional fees decreased approximately $500,000 due to the settlement of two major lawsuits in 2003 and the hiring of in-house legal counsel. Both of these factors contributed to the reduced fees for outside legal services incurred during 2004 compared to 2003.

        Depreciation and amortization.    The increase of $1,792,000 was related to depreciation of capital improvements and amortization of capitalized lease costs incurred in 2004 and 2003 and also the depreciation related to the six acquired properties mentioned above. During 2004 and 2003, the Company incurred approximately $8,295,000 in capital improvements, primarily for renovations and tenant improvements, and $2,380,000 in capitalized lease costs. The tenant improvement and leasing costs corresponded with the Company's increased occupancy.

        Interest expense.    The increase of $1,857,000 was primarily due to (i) the interest expense associated with the six acquired properties mentioned of approximately $700,000, (ii) higher interest expense and fees on increased debt on three of its properties of approximately $800,000, and (iii) the Company recording additional interest of approximately $350,000 at the default rate on debt related to one of its shopping center properties.

        In July 2004, the Company refinanced a $5,330,000 loan on Northwest Corporate Center, one of its office properties, with a new loan agreement in the amount of $5,750,000. The new loan bears interest at a fixed rate of 6.26% per annum and matures in August 2014. In May 2004, the Company refinanced a $3,132,000 loan on Mira Mesa, one of its office properties, with a new one-year loan agreement in the

17

amount of $7,500,000 bearing interest at 7.95%. In December 2003, the Company refinanced a $3,000,000 loan on San Felipe, one of its office properties, with a one-year loan in the amount of $5,350,000 bearing interest at 7.95%. In August 2004, the loan was refinanced again with a new loan in the amount of $5,500,000. The new loan bears interest at a fixed rate of 5.65% per annum and matures in August 2014.

        In July 2002, the lender under a loan agreement related to the South Carolina shopping center properties notified the Company it was technically in default under its loan agreement for non-compliance with certain covenants, including covenants requiring improvements to shopping center properties. Thereafter, the lender notified the Company that it was in default for failure to pay a matured portion of the loan, which matured in November 2002. In early 2003, the lender sold the loan to the major tenant in two of the shopping centers. In December 2003, the Company sold one of the shopping center properties and repaid $3,935,000, which included the pay-off of the matured portion of the loan. As of December 31, 2004, the remaining balance of the loan was approximately $2,756,000. The Company continues to discuss the non-compliance matter with the new lender. The new lender has not accelerated the loan.

        Income taxes.    The Company recognized a deferred income tax benefit of $2,222,000 for 2004 compared to a deferred income tax expense of $278,000 for 2003, primarily due to an increase in taxable losses for 2004.

        Minority interest.    The share of loss for the year ended December 31, 2004 for the holders of OP Units was $1,299,000 compared to $2,124,000 for the year ended December 31, 2003. The 2004 loss represents an average of 12.5% limited partner interest in the Operating Partnership not held by the Company during 2004. The 2003 loss represents the 12.9% limited partner interest in the Operating Partnership not held by the Company during 2003.

        Loss on extinguishment of debt.    During 2004, the Company recorded a net loss on early extinguishment of debt of $729,000. The net loss consisted of (i) a prepayment penalty of $687,000, which was offset in part by the write-off of an unamortized loan premium of $74,000, in connection with the refinance of Mira Mesa, (ii) a prepayment penalty of $120,000 and the write-off of unamortized loan costs of $94,000 in connection with the 2004 refinance of San Felipe, and (iii) a $98,000 gain related to the purchase of interests of former limited partners of Fund II in the $8,800,000 promissory note related to the settlement of the Teachout litigation (See Litigation Settlement in 2002-2003 Comparison). The Company purchased 2,347 of the 86,653 interests outstanding at $60 per unit, which reduced its debt obligation related to the settlement $238,338. See Note 9-Notes Payable, Litigation Settlement-of the Notes to Consolidated Financial Statements. During 2003, in connection with the 2003 refinance of San Felipe, the Company recorded a loss on early extinguishments of debt of $145,000 related to the write-off of an unamortized loan discount and prepayment penalty.

        The net loss on early extinguishment of debt is included in other income in the consolidated statements of operations.

        Discontinued operations.    The Company recorded a loss from operations of discontinued operations of $295,000 during 2004 related to the three properties sold and one property classified as held for sale as of December 31, 2004. The Company recorded a loss from operations of discontinued operations of $1,762,000 during 2003 related to the fourteen properties sold in 2003 and 2004 and one property classified as held for sale as of December 31, 2004. See Note 5—Discontinued Operations—of the Notes to Consolidated Financial Statements.

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        The net loss from discontinued operations before net (loss) gain on sale, impairment of real estate assets and income tax benefit is summarized below.

        Gain on sale of discontinued operations.    The Company sold three properties—one office building, one industrial property and a parcel of undeveloped land—during 2004 for an aggregate sales price of $12,214,000. Losses totaling $2,597,000 were recorded on the sale of the office building and the parcel of undeveloped land. The sale of the industrial property generated a gain of $299,000. The Company sold eleven properties during 2003 for an aggregate sales price of $61,162,000 and recognized a net gain of $2,540,000, after taking into consideration an impairment charge totaling $7,500,000 relating to four of the eleven properties. The impairment charges were based on the anticipated sales prices less costs to sell as compared to the carrying value of the assets. An income tax benefit on discontinued operations of $985,000 was recorded during the year ended December 31, 2004 compared to $1,656,000 during the year ended December 31, 2003.

Comparison of the year ended December 31, 2003 to the year ended December 31, 2002

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

        Rental revenue.    The reduction of 3.6% was primarily the result of a decrease in occupancy, particularly in certain properties located in San Diego, California due to the expiration of leases of three major tenants. This reduction was offset in part by revenue related to acquired properties. For 2003, revenue included results from seven office properties acquired during 2002 and 2003. The office properties were acquired in the following months: one in each of November 2003, October 2003, July 2003, May 2003 and August 2002; and two in May 2002. Rental revenue from the acquired properties was included in the Company's results since their respective dates of acquisition.

        The weighted average occupancy of properties held for investment was 86% at December 31, 2002 and 85% at December 31, 2003. Occupancy increased to 85% at the end of the fourth quarter of 2003 from 80% at September 30, 2003 and 79% at June 30, 2003.

        Property operating expenses.    The increase of $167,000 was primarily due to property operating expenses of $1,158,000 related to the above mentioned property acquisitions, partially offset by a decrease in expenses for existing properties of $991,000 due to expense control measures put in place during the past year and, to a lesser extent, a reduction in bad debt expense. In addition to investigating alternative sources for the services it purchases, the Company continues to monitor and control expenses.

        General and administrative.    This decrease of 20.8% was due to (i) a reduction of compensation expense in 2003 due to downsizing of staff and lower compensation expense related to common stock grants, (ii) the inclusion of non recurring expenses related to the Company's 2001 consolidation

19

transaction, (iii) lower professional fees, especially for legal services, and (iv) expense control measures put in place during the past year. During 2003, the Company recorded an aggregate charge of $142,000 consisting of severance payments to the administrative support related to the closure of its administrative offices in St. Louis, Missouri and New York, New York and a $200,000 charge related to a severance agreement with an officer of the Company. The charges were included in general and administrative expenses. The New York office was closed in October 2003.

        Depreciation and amortization.    The increase of $939,000 was due to the acquisition of the seven properties previously mentioned and, to a lesser extent, depreciation of improvements and amortization of capitalized lease costs incurred during 2002 and 2003 for the existing properties.

        Interest expense.    The increase of $533,000 was primarily due to interest associated with the seven new properties acquired and an accrued loan guarantee fee, offset in part by reduced interest on an outstanding payable due to a settlement agreement and the conversion of debt to common stock. The loan guarantee fee, which is payable to two of the Company's directors and a company they are affiliated with, is in consideration of their guarantees of certain indebtedness of the Company as of December 31, 2003. The Company agreed to pay the annual guarantee fee equal to between .25% and .75% (depending on the nature of the guarantee) of the outstanding balance as of December 31 of the guaranteed obligations. The guarantee fee is to be paid for a maximum of 3 years on any particular obligation.

        Litigation settlement.    During 2002, the Company accrued a litigation settlement expense of $1,200,000 associated with the settlement of the Teachout litigation which represents the Company's agreement to pay legal fees to plaintiff's counsel. Under the settlement, the Company reaffirmed its previously announced obligation to pay the former limited partners of Fund II, or their assignees or transferees, the loans which were made and called by the former general partner of Fund II as part of the Consolidation. Pursuant to the settlement, the Company established a definitive repayment plan and secured the repayment obligation with a second deed of trust on an office building owned by the Company. The repayment plan consists of a promissory note in the amount of $8,800,000 (the amount of such loans, plus interest as of December 31, 2002), which shall accrue interest at 6% per annum. Interest-only payments, which are payable quarterly, commenced June 2, 2002. The note may be prepaid in whole or in part at any time without penalty.

        Impairment of real estate assets held for investment.    During 2002 the Company recorded impairment charges related to properties held for investment totaling $1,403,000 on the Company's two remaining shopping center properties located in South Carolina. The impairment was based on an estimated decrease in the fair market value of the properties. No impairment charges were recorded during 2003 related to properties held for investment.

        Net loss on sale of real estate assets.    The Company recorded a $47,000 net loss on sales of real estate assets during 2002. The Company recorded a $348,000 loss attributable to the sale of Beach & Lampson, a shopping center property sold in April 2002. This loss was partially offset by the recognition of a $232,000 deferred gain associated with the sale of the Tower Industrial property and a $69,000 gain as a result of compensation for a strip of land condemned for highway purposes at one of its office properties.

        Net gain (loss) on extinguishment of debt.    During 2003, in connection with the refinance of an office property in Houston, Texas, the Company recorded a loss on early extinguishment of debt of $145,000 related to the write-off of an unamortized loan discount and a prepayment penalty. During 2002, in connection with the refinance of an industrial property in Houston, Texas, the Company recorded a gain on early extinguishment of debt of $131,000 related to the write-off of an unamortized loan premium.

        Income taxes.    The Company recognized a deferred income tax expense of $278,000 for 2003 and a deferred income tax benefit $5,591,000 for 2002. In 2002, management reevaluated an earlier decision and determined that it may sell certain of the Company's real estate assets outside of tax-deferred exchanges. If the Company elects REIT status, during the 10-year period following such election, the Company will be subject to an entity level tax on the income it recognizes upon the sale of assets contributed by certain

20

partnerships that it held before electing REIT status in an amount up to the amount of the built-in gains at the time the Company becomes a REIT. The potential tax related to this built-in gain for book purposes was approximately $13,165,000. Therefore, in 2002, the Company recognized a deferred tax liability for this potential tax and recorded this liability as a charge to equity. In addition, based on the current strategic plans of the Company, management has determined that it was more likely than not that future taxable income, primarily from the gain on the sale of real estate assets, would be sufficient to enable the Company to realize all of its deferred tax assets which is primarily the tax benefit of net operating loss carryforwards. Therefore, as of December 31, 2002 and 2003, no valuation allowance was recorded and the valuation allowance previously recorded in 2001 was reversed in 2002. The tax effect of the impairments recorded, the reversal of the previously recorded allowance, and the tax benefits of the current year tax assets have been recorded in the statement of operations as an income tax benefit.

        Minority interest.    The share of loss for the year ended December 31, 2003 of the holders of OP Units was $2,124,000 compared to $935,000 for the year ended December 31, 2002. The 2003 loss represents an average of 12.9% limited partner interest in the Operating Partnership not held by the Company during 2003. The 2002 loss represents the 11.6% limited partner interest in the Operating Partnership not held by the Company during 2002.

        Discontinued operations.    The Company recorded a net loss from the operations of discontinued operations of $1,762,000 for the year ended December 31, 2003 compared to a net loss of $250,000 for the year ended December 31, 2002. The discontinued operations represent results from the fifteen properties sold or held for sale in 2003 compared to the seventeen properties sold or held for sale in 2002. See Note 4—Discontinued Operations—of the Notes to Consolidated Financial Statements.

        The net loss from discontinued operations before net gain on sale, impairment of real estate assets and income tax benefit is summarized below.

        Gain on sale of discontinued operations, impairment of real estate assets and income tax benefit.    The Company sold eleven properties (six industrial properties, two office properties, two apartment properties and one shopping center property) during the year ended December 31, 2003 for an aggregate sales price of $61,162,000 and recognized a net gain on sale of $2,540,000, after taking into consideration an impairment charge totaling $7,500,000 recorded during 2003 related to four of the eleven properties sold. The four properties consisted of two office and two industrial properties. The impairment was based on the anticipated sales price less cost to sell as compared to the carrying value of the assets. The sale of the eleven properties generated net proceeds of approximately $12,080,000, of which $560,000 was used to assist the funding of an office property acquisition in a tax-deferred exchange. The Company recorded a gain on sale of discontinued operations $1,127,000 for the year ended December 31, 2002 related to the sale of two properties (one shopping center property and one apartment property). These two properties were sold for an aggregate sales price of $12,100,000. During 2002, the Company recorded an impairment charge of $3,343,000 related to three of the properties sold in 2003 and 2004. Income tax benefits on discontinued operations of $1,656,000 and $1,492,000 were recorded during the years ended December 31, 2003 and 2002, respectively.

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LIQUIDITY AND CAPITAL RESOURCES

        During 2004, the Company derived cash from collection of rents, sale of an industrial property (although three properties were sold, proceeds from one property sale were used in a tax-deferred exchange and the other sale did not generate cash proceeds), and proceeds from refinancing of debt on an office property in California (although four properties were refinanced, only one generated cash proceeds). Major uses of cash included payment for capital improvements to real estate assets, primarily for tenant improvements, payment of operational expenses, repayment of borrowings, purchase of an office building in Houston, Texas, and repurchase of common stock.

        The Company reported a net loss of $9,107,000 for the year ended December 31, 2004 compared to a net loss of $14,348,000 for the year ended December 31, 2003. These results include the following non-cash items:

        Net cash provided by investing activities for the year ended December 31, 2004 amounted to $5,540,000. This amount was primarily attributable to proceeds of $10,166,000 received from the sale of three properties during the period, partially offset by funds used for capital improvements (primarily tenant improvements) for the year ended December 31, 2004 amounting to $4,516,000. Net cash provided by investing activities of $27,518,000 during 2003 consisted of $40,179,000 in proceeds generated from property sales, partially offset by (i) funding of capital expenditures of $3,779,000, primarily for tenant build-outs, (ii) acquisition of properties of $7,174,000 and (iii) acquisition of a note receivable secured by a property adjacent to a property owned by the Company of $1,730,000. Net cash used in investing activities of $3,566,000 for 2002 consisted of (i) $4,407,000 paid for capital expenditures, which in large part were related to major renovations on an apartment property (which was sold in September 2003) and (ii) $268,000 paid as part of the consideration for a property acquisition, offset by $1,109,000 in proceeds received from the sales of real estate assets.

        Net cash used by financing activities amounted to $5,260,000 for the year ended December 31, 2004. Net funds provided from borrowings totaled $21,009,000, which consisted of $19,976,000 to refinance debt on four properties and $1,133,000 from other borrowings, as discussed below. Scheduled principal payments for the year ended December 31, 2004 amounted to $2,849,000. Net cash used in financing activities amounted to $21,901,000 during 2003. Repayments of borrowings of $36,937,000 during 2003 consisted of scheduled principal payments of $3,468,000, payment of refinanced loans of $4,300,000, and repayment of loans in connection with the sale of properties of $29,169,000. Proceeds from borrowings in 2003, which totaled $15,793,000, consisted of (i) $8,215,000 to fund the acquisition of two properties and the note receivable referred to above, (ii) $6,690,000 to refinance debt on two properties, (iii) $858,000 to

22

fund insurance premiums and service fees and (iv) $30,000 from an affiliate of a related party which completed the funding of an $830,000 loan on Valencia (an industrial property located in Arizona sold in April 2003) entered into in December of 2002. The mortgage of $830,000 was repaid in conjunction with the sale of the property in April 2003. In addition, funds were used to pay amounts due related to the Teachout settlement of $250,000, to acquire units in the Operating Partnership for $223,000, to pay off notes to former limited partners of $237,000 and to purchase shares of common stock of the Company for $297,000 pursuant to a stock repurchase plan (see Note 16). Also, John N. Galardi, a director and principal stockholder of the Company, purchased 15,243 shares of the Company's common stock for $250,000 in May 2003. Net cash provided by financing activities amounted to $1,624,000 during 2002. Proceeds received from borrowings during 2002 totaled $24,382,000, which was primarily received from refinancing of existing debt. Repayment of borrowings during 2002, which amounted to $17,563,000, was primarily for repayment of the refinanced debt and $3,865,000 for scheduled principal payments. Note payments to former limited partners totaling $2,055,000 and distributions totaling $3,134,000 were also made during 2002.

        In December 2004, the Company received a $532,000 loan from John N. Galardi. The note bears interest at a fixed interest rate of 12% per annum and matures in December 2005.

        In October 2004, in connection with the acquisition of an office property in Houston, Texas, the Company assumed a loan in the amount of $4,384,000. The loan bears interest at a fixed rate of 5.93% per annum and matures in June 2014. The Company also entered into an agreement that provided for seller financing of $316,000, bearing interest at a fixed rate of 5.93% per annum and maturing in June 2014.

        In October 2004, the Company refinanced a $1,176,000 loan on 888 Sam Houston Parkway, one of its office properties, and entered into a revolving credit promissory note in the amount of $2,250,000, of which $1,226,000 has been drawn to cover the repayment of existing debt and financing costs. The availability on the note as of December 31, 2004 was $1,024,000. The note bears interest at prime plus 1% per annum and matures in November 2006.

        In August 2004, the Company refinanced a $5,350,000 loan on San Felipe, one of its office properties with a new loan agreement in the amount of $5,500,000. The new loan bears interest at a fixed rate of 5.65% per annum and matures in August 2014. The Company funded closing costs of approximately $178,000 and escrowed $327,000 for future capital expenditures, real estate taxes and insurance related to the August 2004 refinance. Net proceeds of $2,059,000 were received in December 2003 related to the December 2003 refinance of the original $3,000,000 loan on the property.

        In July 2004, the Company refinanced a $5,330,000 loan on Northwest Corporate Center, one of its office properties, with a new loan agreement in the amount of $5,750,000. The new loan bears interest at a fixed rate of 6.26% per annum and matures in August 2014. No proceeds were received directly as a result of the refinance, however $350,000 is being held in escrow by the lender to assist the funding of future capital expenditures at the property.

        In May 2004, the Company refinanced a $3,132,000 loan on Mira Mesa, one of its office properties, with a new one-year loan agreement in the amount of $7,500,000. The new loan, which contains two six-month extension options, bears interest at a fixed rate of 7.95% per annum. Net proceeds of $3,440,000 were received as a result of the refinance.

        In May 2004, the Company financed insurance premiums of $373,000 on its properties and agreed to pay a service fee of $85,000 over one year. The insurance premium note was paid in full in February 2005. The Company financed an additional insurance premium during 2004 of $133,000, with scheduled payments through June 2005.

        In 2002, the lender under a loan agreement related to the South Carolina shopping center properties notified the Company it was technically in default under its loan agreement for non-compliance with certain covenants, including covenants requiring improvements to shopping center properties. Thereafter, the lender notified the Company that it was in default for failure to pay a matured portion of the loan, which matured in November 2002. In early 2003, the lender sold the loan to the major tenant in two of the

23

shopping centers. In December 2003, the Company sold one of the shopping center properties and repaid $3,935,000, which included the pay-off of the matured portion of the loan. As of December 31, 2004, the remaining balance of the loan was approximately $2,756,000. The Company continues to discuss the non-compliance matter with the new lender. The new lender has not accelerated the loan.

        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 and cash currently held. In addition, the Company anticipates capital costs to be incurred related to re-leasing space and improvements to properties, state income taxes and other fees for professional services. The funds to meet these obligations will be obtained from proceeds of the sale of assets, refinancing activity and the use of lender held funds. Based on current analysis, the Company believes that the cash generated by these anticipated activities will be adequate to meet these obligations. There can be no assurance, however, that these activities will occur and that substantial cash will be generated. If these activities do not occur, the Company will not have sufficient cash to meet its obligations if all leasing projections are met.

        In addition, as of December 31, 2004, the Company has substantial debt becoming due in 2005 and 2006. Based on the Company's historical losses and current debt level, there can be no assurances as to the Company's ability to obtain funds necessary for the refinancing of these maturing debts. If refinancing transactions are not consummated, the Company will seek extensions and/or modifications from the existing lenders. If these refinancings do not occur, the Company will not have sufficient cash to meet its obligations.

CONTRACTUAL OBLIGATIONS

        The following table aggregates the Company's contractual obligations as of December 31, 2004 (dollars in thousands):

(1)

See Note 8—Notes Payable. These amounts do not include interest associated with the debt.

(2)

Represents obligations related to the settlement of the Teachout litigation.

(3)

Represents commitments for tenant improvements and lease commissions related to the leasing of space to new or renewing tenants.

(4)

Represents employment agreement commitments for officers of the Company.

INFLATION

        Substantially all of the leases at the industrial and shopping 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 apartment property generally provide for an initial term of one month to one year and allow for rent adjustments at the time of renewal. 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.

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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 Consolidation; 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.

RISK FACTORS

The Company's high level of debt increases its risk of default and may have a negative impact on the results of operations. This could adversely affect the Company's ability to make distributions and the market price of its Common Stock.

        The Company's high level of debt increases the Company's risk of default on its obligations and adversely affects the Company's funds from operations and its ability to make distributions to its stockholders. Further, due to the high level of debt, the Company may be restricted in its ability to refinance some or all of its indebtedness and the terms of any new or refinanced debt may not be as favorable as those of some of its existing indebtedness. The Company has a higher ratio of indebtedness to assets than many REITs. This could adversely affect the market price for the Company's Common Stock.

The Company will need to refinance mortgage loans and sell properties to meet its obligations.

        The Company expects to require substantial cash to meet its operating requirements, including budgeted capital expenditures if the leasing projections are met. To meet these obligations, the Company will be required to refinance mortgage indebtedness and/or sell certain assets to provide cash. The Company cannot provide assurance that it will be successful in refinancing the mortgage indebtedness and that it will have sufficient cash to meet its obligations. In addition to fulfill the Company's growth strategy, the Company may be required to raise additional cash through debt or equity financing.

There are risks inherent in the Company's acquisition and development strategy. The Company may not make profitable investments.

        The Company plans to pursue its growth strategy through the acquisition and development of additional properties. The Company does not know that this strategy will succeed. The Company may have difficulty finding new properties, negotiating with new or existing tenants or securing acceptable financing. In addition, investing in additional properties is subject to many risks. Also, the Company's acquisition strategy of investing in under-valued assets subjects the Company to increased risks. The Company may not succeed in turning around these properties. The Company may not make a profit on these investments.

The Company has a history of losses. The Company cannot assure the stockholders that it will become profitable in the future.

        The Company has incurred losses in each of the three years ended December 31, 2004. The Company cannot assure the stockholders that it will not continue to have losses after depreciation and amortization under generally accepted accounting principles.

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Real property investments entail risk. The Company's properties may not be profitable, may not result in distributions and/or may depreciate.

        Properties acquired by the Company: (i) may not operate at a profit; (ii) may not perform to the Company's expectations; (iii) may not appreciate in value; (iv) may depreciate in value; (v) may not ever be sold at a profit; and/or (vi) may not result in dividends. The marketability and value of any properties will depend upon many factors beyond the Company's control, including but not limited to general economic conditions, zoning laws, tax laws and the availability of financing.

The Company may not be able to enter into favorable leases upon the expiration of current leases and on current vacant space.

        Over the next three years, approximately 57% of the square footage of the Company's total rentable square footage of industrial, office and shopping center properties will expire. In addition, 14% of the Company's total rentable square footage was vacant as of December 31, 2004 (2% of which includes Sorrento I, a vacant property classified as held for sale which was subsequently sold on March 1, 2005). The Company may be unable to enter into leases for all or a portion of this space. If the Company enters into leases, the Company may not do so at comparable lease rates, without incurring additional expenses. If the Company is unsuccessful in leasing the space, or cannot re-lease the space at current rental rates or higher rental rates, it could reduce the distributions to shareholders and adversely affect the market price of the Company's Common Stock.

The Company may invest in joint ventures, which adds another layer of risk to its business.

        The Company may acquire properties through joint ventures, which could subject the Company to certain risks that may not otherwise be present if investments were made directly by the Company. These risks include: (i) the potential that the Company's joint venture partner may not perform; (ii) the joint venture partner may have economic or business interests or goals which are inconsistent with or adverse to those of the Company; (iii) the joint venture partner may take actions contrary to the requests or instructions of the Company or contrary to the Company's objectives or policies; and (iv) the joint venturers may not be able to agree on matters relating to the property they jointly own.

        The Company also may participate with other investors, including possibly investment programs or other entities affiliated with management, in investments as tenants-in-common or in some other joint ownership or venture. The risks of such joint ownership may be similar to those mentioned above for joint ventures and, in the case of a tenancy-in-common, each co-tenant normally has the right, if an unresolvable dispute arises, to seek partition of the property, which partition might decrease the value of each portion of the divided property.

The Company could incur unforeseen environmental liabilities.

        Various federal, state and local laws and regulations subject property owners and operators to liability for reporting, investigating, remediating, and monitoring regulated hazardous substances released on or from a property. These laws and regulations often impose strict liability without regard to whether the owner or operator knew of, or actually caused, the release. The presence of, or the failure to properly report, investigate, remediate, or monitor hazardous substances could adversely affect the financial condition of the Company or the ability of the Company to operate the properties. In addition, these factors could hinder the Company's ability to borrow against the properties. The presence of hazardous substances on a property also could result in personal injury or similar claims by private plaintiffs. In addition, there are federal, state and local laws and regulations which impose requirements on the storage, use, management and disposal of regulated hazardous materials or substances. The failure to comply with those requirements could result in the imposition of liability, including penalties or fines, on the owner or operator of the properties. Future laws or regulations could also impose unanticipated material environmental liabilities on the Company in connection with any of the properties. The costs of complying with these environmental laws and regulations for the Company's properties could adversely affect the Company's operating costs and, if contamination is present, the value of those properties.

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The Company faces intense competition in all of its markets.

        Numerous properties compete with the Company's properties in attracting tenants to lease space. Additional properties may be built in the markets in which the Company's properties are located. The number and quality of competitive properties in a particular area will have a material effect on the Company's ability to lease space at existing properties or at newly acquired properties and on the rents charged. Some of these competing properties may be newer or better located than the Company's properties. There are a significant number of buyers of properties, including institutional investors and publicly traded REITs. Many of these competitors have significantly greater financial resources and experience than the Company. This has resulted in increased competition in acquiring attractive properties. This competition can adversely affect the Company's ability to acquire properties and increase its distributions.

The Company may never elect REIT status.

        The Company is not required to make a REIT election and the Board of Directors may determine not to make a REIT election. The Company is currently taxed as a C corporation and subject to a corporate income tax. Distributions to stockholders are also subject to tax. If the Company qualifies as a REIT, it will cease to be taxed as a C corporation. If the Company does not elect REIT status, the Company will pay federal and possibly state income taxes on its taxable income. The Company could fail to qualify as a REIT if it fails to meet certain asset, distribution and share ownership tests. The Company has taken and expects to continue to take certain actions in order to retain its ability to qualify as a REIT. Maintaining this status could adversely affect the Company's ability to pursue its business objectives by precluding certain uses of cash which otherwise might be preferable. Likewise, if the Company chooses to disregard these actions in favor of pursuing certain business objectives, such action could preclude the Company's ability to qualify as a REIT in the future. There can be no assurance that the Company will qualify as a REIT or will choose to make such election if it does qualify.

If the Company elects REIT status, it may incur additional taxes at the time of such election.

        A REIT is subject to an entity level tax for a ten-year period on the sale of property with a fair market value in excess of basis it held before electing REIT status. If the Company elects REIT status, during the 10-year period following such election, the Company will be subject to an entity level tax on the income it recognizes upon the sale of assets including all the assets transferred to it as part of the consolidation it held before electing REIT status in an amount up to the amount of the built-in gains at the time the Company becomes a REIT.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

INTEREST RATES

        The Company's primary market risk exposure is to changes in interest rates obtainable on its secured and unsecured borrowings.

        It is the Company's policy to manage its exposure to fluctuations in market interest rates for its borrowings through the use of fixed rate debt instruments to the extent that reasonably favorable rates are obtainable with such arrangements. In order to maximize financial flexibility when selling properties and minimize potential prepayment penalties on fixed rate loans, the Company has also entered into variable rate debt arrangements.

        The Company had no swap contracts at December 31, 2004. As of December 31, 2003, the Company had interest rate swap contracts in notional amounts of approximately $9,600,000 on properties that were sold or refinanced in 2004. The interest rate swap contracts were reflected at fair value on the Company's balance sheet in accrued and other liabilities and the changes in the fair value of the hedge were recognized as adjustments to interest expense. During the years ended December 31, 2004 and 2003, the Company recorded a benefit of $65,000 and a charge of $162,000, respectively, attributable to changes in the fair value of its derivatives financial instruments.

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        At December 31, 2004, the Company's total indebtedness included fixed-rate debt of approximately $153,935,000 and floating-rate indebtedness of approximately $5,165,000. The Company continually reviews the portfolio's interest rate exposure in an effort to minimize the risk of interest rate fluctuations. The Company does 1not have any other material market-sensitive financial instruments.

        The table below provides information about the Company's financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. Weighted average variable rates are based on rates in effect at the reporting date.

        The Company believes that the fair values of such instruments approximate carrying value at December 31, 2004.

        A change of 1.00% in the index rate to which the Company's variable rate debt is tied would change the annual interest incurred by the Company by $51,654, or $.03 per share, based upon the balances outstanding on variable rate instruments and the weighted average number of common shares outstanding at December 31, 2004.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The response to this item is submitted as a separate section of this Form 10-K. See Item 15.—Exhibits, Financial Statement Schedules And Reports On Form 8-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        None.

ITEM 9A. CONTROLS AND PROCEDURES

        Since December 31, 2004, management, including the Company's Chief Executive Officer and Acting Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures. Based on such evaluation, as of December 31, 2004, the Chief Executive Officer and Acting Chief Financial Officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.

        There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of the evaluation referred to above.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The information required by Item 10 is incorporated by reference from the Company's definitive proxy statement to be filed on or before April 6, 2005 for its annual stockholder's meeting to be held May 6, 2005.

ITEM 11. EXECUTIVE COMPENSATION

        The information required by Item 11 is incorporated by reference from the Company's definitive proxy statement to be filed on or before April 6, 2005 for its annual stockholder's meeting to be held May 6, 2005.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

        The information required by Item 12 is incorporated by reference from the Company's definitive proxy statement to be filed on or before April 6, 2005 for its annual stockholder's meeting to be held May 6, 2005.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information required by Item 13 is incorporated by reference from the Company's definitive proxy statement to be filed on or before April 6, 2005 for its annual stockholder's meeting to be held May 6, 2005.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

        The information required by Item 14 is incorporated by reference from the Company's definitive proxy statement to be filed on or before April 6, 2005 for its annual stockholder's meeting to be held May 6, 2005.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

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Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
American Spectrum Realty, Inc.
Houston, Texas

        We have audited the accompanying consolidated balance sheets of American Spectrum Realty, Inc. as of December 31, 2004 and 2003 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2004. We have also audited the schedules listed in the accompanying index. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedules are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedules, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. We believe that our audits provide a reasonable basis for our opinion.

        As more fully described in Note 19, the Company needs to sell assets to fund the cash requirements for other than normal property operations and refinance or extend debt as it matures.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Spectrum Realty, Inc. at December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

        Also, in our opinion, the schedules present fairly, in all material respects, the information set forth therein.

/s/ BDO Seidman, LLP

Dallas, Texas
February 25, 2005

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AMERICAN SPECTRUM REALTY, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

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

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AMERICAN SPECTRUM REALTY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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