UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





(Mark
One)


[X] ANNUAL REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For
the fiscal year ended December 31, 2007


or


[  ]
TRANSITION REPORT UNDER SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





Commission
File No. 0-28378














AmREIT


(Exact
name of registrant as specified in its charter)





Texas
              (State
      or other jurisdiction of incorporation or organization)
            76-0410050
              (I.R.S.
      Employer Identification No.)8
      Greenway Plaza, Suite 1000
              Houston,
      Texas
              (Address
      of principal executive offices)
            77046
              (Zip
      Code)





Registrant's
telephone number, including area code:  (713) 850-1400





Securities
registered pursuant to Section 12 (b) of the Exchange Act:





Title of Class
              Class
      A Common Shares
            Name of Exchange on Which
      Registered
              American
      Stock Exchange





Securities
registered under Section 12(g) of the Exchange Act:  None








Indicate
by check mark if the registrant is a well-known seasoned issuer (as defined in
Rule 405 of the Securities Act).


YES  ̈ NO x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


YES  ̈  NO x





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 x  NO  ̈





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.  x





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer (see definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act).


Large
Accelerated Filer  ̈   Accelerated
Filer  ̈   Non-Accelerated
Filer x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


YES  ̈  NO x





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the
common  equity was last sold as of June 30, 2007 was $44.5
million





The
number of common shares outstanding on
March14,
2008was6,152,440Class
A Common Shares,4,140,278,
Class C Common Shares, and11,001,091Class
D Common Shares.


DOCUMENTS
INCORPORATED BY REFERENCE





The
registrant incorporates by reference into Part III portions of its Proxy
Statement for the 2008 Annual Meeting of Shareholders.








TABLE OF
CONTENTS





Item
      No.
            
            Form10-K
              PagePART
      I1.
            Business
            21A.
            Risk
      Factors
            61B.
            Unresolved
      Staff Comments
            112.
            Properties
            113.
            Legal
      Proceedings
            164.
            Submission
      of Matters to a Vote of Security Holders
            16PART
      II5.
            Market
      for the Registrant’s Common Equity, Related Shareholder Matters and Issuer
      Purchases of Equity
              Securities
            176.
            Selected
      Financial Data
            187.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            197A.
            Quantitative
      and Qualitative Disclosures about Market Risk
            278.
            Consolidated
      Financial Statements and Supplementary Data
            279.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            279A.
            Controls
      and Procedures
            279B.
            Other
      Information
            26PART
      III10.
            Trust
      Managers, Executive Officers and Corporate Governance
            2811.
            Executive
      Compensation
            2812.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Shareholder Matters
            2813.
            Certain
      Relationships, Related Transactions and Trust Manager
      Independence
            2814.
            Principal
      Accountant Fees and Services
            28PART
      IV15.
            Exhibits
      and Financial Statement Schedules
            29






































FORWARD
–LOOKING STATEMENTS




Certain
statements constrained herein constitute forward-looking statements as such term
is defined in Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements are not guarantees of performance. They represent our intentions,
plans, expectations, and beliefs and are subject to numerous assumptions, risks
and uncertainties. Out future results, financial condition and business may
differ materially from those expressed in these forward looking statements. You
can find many of these statements by looking for words such as “approximates,”
“believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,”
“may” or other similar expressions in this Annual Report on Form 10-K, We also
note the following forward-looking statements: in the case of our developments
projects, the estimated completion date, estimated project costs and costs to
complete; and estimates of future capital expenditures, common and preferred
share dividends. Many of the factors that will determine the outcome of these
and our other forward-looking statements are beyond our ability to control or
predict. For further discussion of factors that could materially affect the
outcome of our forward-looking statements are beyond our ability to control or
predict. For further discussion of factors that could materially affect the
outcome of our forward-looking statements, see “Item 1A. Risk Factors” in this
annual report on Form 10-K





For these
statements, we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
You are cautioned not to place undue reliance on our forward-looking statements,
which speak only as of the date of this Annual Report on Form 10-K or the date
of any document incorporated by reference. All subsequent written and oral
forward-looking statements attributable to us or any person acting on our behalf
are expressly qualified in their entirety by the cautionary statements contained
or referred to in this section. We do not undertake any obligation to release
publicly any revisions to our forward-looking statements to reflect events or
circumstances occurring after the date of this Annual Report on From
10-K.




~1~




PART
I





Item 1.
Business





General





We are an
established real estate company that has elected to be taxed as a real estate
investment trust (“REIT”) for federal income tax purposes. Our business model is
similar to an institutional advisory company that is judged by its investor
partners on the returns we are able to deliver to reach specified long-term
results. Our primary objective is to build long-term shareholder value and
continue to build and enhance the net asset value (NAV) of AmREIT and its
advised funds.
 
 We seek
to create value and drive net operating income (NOI) growth on the properties
owned in our institutional-grade portfolio of Irreplaceable CornersTM and those
owned by a series of closed-end, merchant development funds. We also seek to
support a growing advisory business that raises capital through an extensive
independent broker dealer channel as well as through institutional joint venture
partners.
 
 The
institutional-grade portfolio of Irreplaceable Corners – premier retail
properties in high-traffic, highly-populated areas – are held for long-term
value and to provide a foundation to our funds from operations (FFO) through a
steady stream of rental income. Our advisory business, has a 24-year track
record of delivering returns to its investor partners through a series of
closed-end, merchant development funds, resulting in recurring income from
assets under management and in transactional income through profit participation
interests and real estate fees, including acquisition, development and leasing
fees.
 
 The
recurring-income nature of the institutional-grade portfolio of Irreplaceable
Corners and the advisory business can be complemented by the added growth
potential of our real estate development and operating business.  This
model seeks to provide value through offering an array of services to our
tenants and to the properties owned in both the institutional-grade portfolio of
Irreplaceable Corners and those owned by the closed-end, merchant development
funds as well as to third parties.


When we
listed on the AMEX in July 2002, our total assets had a book value of
approximately $48 million and equity within our advisory business totaled
approximately $15 million in equity assets under management.  As of
December 31, 2007:


·
            We
      owned a real estate portfolio consisting of 50 properties located in 15
      states that had a book value of approximately $344
  million;


·
            We
      directly managed, through our five actively managed merchant development
      funds, a total of $159 million in contributed capital and an additional
      $33.0 million in institutional capital under management;
    and


·
            We
      had over 1.3 million square feet of retail centers in various
      stages of development or in the pipeline for both our advisory business
      and for third parties.





Our
direct predecessor, American Asset Advisers Trust, Inc. (“AAA”), was formed as a
Maryland corporation in 1993. Prior to 1998, AAA was externally advised by
American Asset Advisors Corp. which was formed in 1985.  In June 1998,
AAA merged with its advisor and changed its name to AmREIT, Inc. In
December 2002, AmREIT, Inc. reorganized as a Texas real estate investment
trust and became AmREIT.





Our Class
A Common Shares are traded on the American Stock Exchange under the symbol
“AMY”.  Our headquarter offices are located at 8 Greenway Plaza, Suite
1000 Houston, Texas  77046, and we have a regional office located in
Dallas, TX.  Our telephone number is 713.850.1400 and we maintain an
internet site at www.amreit.com.





Our
Strategy





In 2002,
after almost 18 years as a private company, we listed our Class A Common Shares
on the American Stock Exchange and set a ten-year goal to build a business model
that would enable AmREIT to outperform our peers.  Although very few,
if any, of our peers are publicly-traded, we are all judged by our respective
partners for the long-term returns we are able to deliver.  We set out
to build a real estate company with the potential to create value year over year
regardless of the market cycle.  The result was two distinct companies
within one: a portfolio of premium shopping centers that we refer to as
Irreplaceable Corners and our advisory business, which manages our closed-end
merchant development funds.  Those two companies provide a measure of
stability due to the recurring income generated by the portfolio and the fees
generated from assets under management in the advisory business.  Our
real estate development and operating group, which is fee-driven and
transaction-oriented, supports and enhances the growth of each company, giving
us the flexibility to achieve our financial objectives over the long-term as we
navigate the changing real estate market cycles.


In market
cycles characterized by strong buyer demand, we place an emphasis on growing our
advisory business through actively managing a blend of value-added acquisition
redevelopment and development projects that generate both transactional fees and
recurring management fees. We also provide these real estate services to third
parties for a fee.  With this strategy comes increased volatility as
these businesses have a heavy transactional component. In market cycles where we
are able to capture a greater spread between cap rates and fixed-rate debt
terms, we grow our portfolio of Irreplaceable Corners which provide a steady and
dependable income stream by utilizing the acquisition, development and
re-development expertise of our real estate development and operating
business.





The
active management approach we use within our advisory group combines our
experience in acquisitions and merchant development and allows us to participate
in both declining and rising market cycles. This business was designed to
generate an additional source of recurring income for our shareholders based on
equity under management as well as a stream of profits and back-end interests as
the funds liquidate and preferred returns are met for investors.  We
believe that this is the hidden value behind our long-term growth. However,
short term, as we grow this side of the business, it creates a strain on
earnings and near term results.  Great people are at the heart of our
company, our strategy and our structure.  We have focused on growing a
team of professionals that display a high degree of character, that are
extremely competent, that are able to communicate clearly in good times and
challenging times, and that are contributing to our team-oriented
culture.  It is our people that are the backbone of our structure and
our ability to generate long-term shareholder value.


~2~


Our
Structure





Our
structure consists of two distinct companies: an institutional grade portfolio
of Irreplaceable Corners and our advisory business, each of which is supported
by our real estate development and operating group. This structure strives to
deliver long-term returns to our investor partners- Wall Street, independent
broker-dealers and institutional joint venture partners.


Portfolio
of Irreplaceable Corners


During
2005 and continuing through 2007, we acquired approximately 355,000 square feet
of shopping centers, representing over $143 million in assets and an average cap
rate of 6.8%.  We take a very hands-on approach to ownership, and
directly manage the operations and leasing at our properties.  Our
portfolio consists primarily of premier retail properties typically located on
“Main and Main” intersections in high-traffic, highly populated affluent
areas.  Because of their location and exposure as central gathering
places, these centers attract well established tenants and we believe they can
withstand the test of time, providing our shareholders a dependable rental
income stream.





As of
December 31, 2007, we owned a real estate portfolio consisting of 50 properties
located in 15 states.  Leased to national, regional and local tenants,
our shopping center properties are primarily located throughout
Texas.  Our single-tenant properties are located throughout the United
States and are generally leased to corporate tenants where the lease is the
direct obligation of the parent company, not just the local
operator.  Properties that we acquire are generally newly constructed
or recently constructed at the time of acquisition.  We believe the
locations of our properties, and the high barriers to entry at those locations
allow us to maximize leasing income through comparatively higher rental rates
and high occupancy rates.  As of December 31, 2007, the occupancy rate
at our operating properties was 98.1% based on leasable square footage compared
to 96.5% as of December 31, 2006.





We invest
in properties where we believe effective leasing and operating strategies,
combined with cost-effective expansion and renovation programs, can improve the
existing properties’ value while providing superior current economic
returns.  These fungible types of improvements allow us to place
grocery-anchored shopping centers, strip centers and lifestyle centers onto our
properties.  We believe that investment in and operation of commercial
retail real estate is a local business and we focus our investments in areas
where we have strong knowledge of the local markets.  The areas where
a majority of our properties are located are densely populated, suburban and
infill communities in and around Houston, Dallas and San Antonio, but we have
recently begun initiatives to explore new acquisition and development
opportunities in select markets throughout the Sunbelt regions that over time
could potentially expand our geographic reach.  Our expansion into
these markets would be contingent upon finding the right individuals who would
ensure that we have a strong knowledge of the local markets and maintain our
hands-on management philosophy.  Within the Sunbelt, we intend to
focus on markets we consider ‘gateways to the world economy,’ which share
demographic characteristics similar to that of Houston.  These markets
would feature large ports and/or international airports that make these cities
conduits of world economic expansion.





Our
shopping centers are primarily grocery-anchored, strip center, and lifestyle
properties whose tenants consist of national, regional and local
retailers.  Our typical grocery anchored shopping center is anchored
by an established major grocery store operator in the region such as
Kroger.  Our retail shopping centers are leased to national and
regional tenants such as GAP, Starbucks, Bank of America, and Verizon Wireless
as well as a mix of local and value retailers.  Lifestyle centers,
such as Uptown Park – Houston, are typically anchored by a combination of
national and regional restaurant tenants that provide customer traffic and
tenant draw for specialty tenants that support the local
consumer.  The balance of our retail properties are leased to national
drug stores, national restaurant chains, national value oriented retail stores
and other regional and local retailers.  The majority of our leases
are either leased or guaranteed by the parent company, not just the operator of
the individual location.  All of our shopping centers are located in
areas of substantial retail shopping traffic.  Our properties
generally attract tenants who provide basic staples and convenience items to
local customers.  We believe sales of these items are less sensitive
to fluctuations in the business cycle than higher priced retail items. No single
retail tenant represented more than 10% of total revenues for the year ended
December 31, 2007.





We own,
and may purchase in the future, fee simple retail properties (we own the land
and the building), ground lease properties (we own the land, but not the
building and receive rental income from the owner of the building) or leasehold
estate properties (we own the building, but not the land, and therefore are
obligated to make a ground lease payment to the owner of the
land).  We may also develop properties for our portfolio or enter into
joint ventures, partnerships or co-ownership for the development of retail
properties.





As of
December 31, 2007, two properties individually accounted for more than 10% of
the Company’s year-end consolidated total assets –Uptown Park in Houston, Texas
and MacArthur Park in Dallas, Texas accounted for 15% and 11%, respectively, of
total assets.  For the year ended December 31, 2007, the top three
tenants by rental income concentration were Kroger at 10.7%, IHOP at 6.9% and
CVS/pharmacy at 3.5%.  Consistent with our strategy of investing in
areas that we know well, 17 of our properties are located in the Houston
metropolitan area.  These properties represented 62% of our rental
income for the year ended December 31, 2007.  Houston is Texas’
largest city and the fourth largest city in the United States. See “Location of
Properties” in Item 2 for further discussion regarding Houston's
economy.


~3~


Advisory
Business
 The
primary goal of our advisory business is to grow assets under management,
primarily through the Independent Broker Dealer Network (IBD) and through
institutional joint venture relationships.  Through these assets under
management, we are able to generate current recurring fee income, long term
profit participation, and transactional revenues for real estate services
provided such as acquisition, development and leasing.  We break this
business down into two components, our securities operations and our merchant
development funds
 
 Securities Operations
- In an effort to vertically integrate our business model and better control the
inflows of capital into our Advisory business, we have a wholly owned Financial
Industry Regulatory Agency (FINRA) registered broker-dealer, AmREIT Securities
Company (ASC). For the
past 24 years, we have been raising capital for our funds and building
relationships in the financial planning and broker-dealer community, earning
fees and sharing in profits from those activities.  Historically, our
securities group has raised capital in two ways:  first, directly for
AmREIT through non-traded classes of common shares, and second, for our
actively-managed merchant development funds.


During
2007, our securities operation raised approximately $45 million for AmREIT
Monthly Income and Growth Fund IV, Ltd. (MIG IV), an affiliated merchant
development fund sponsored by one of our subsidiaries.  During 2006,
the securities operation raised approximately $60 million for AmREIT Monthly
Income and Growth Fund III, Ltd (MIG III).





During
the fourth quarter, the registration statement relating to REITPlus, Inc., a
$550 million non-traded REIT offering that will be advised by a wholly-owned
subsidiary of AmREIT, was declared effective by the SEC, allowing REITPlus to
begin offering its common stock through AmREIT's broker dealer network. By
advising REITPlus, we will earn recurring fees such as asset management and
property management fees, and transactional fees such as acquisition fees,
development fees and sales commissions. We will also participate in a 15%
promoted interest after the REITPlus stockholders receive their invested capital
plus a 7% preferred return.





During
the years ended December 31, 2007, 2006 and 2005, our securities operation
generated commission  revenues related to the sponsorship of our
merchant development funds of $4.8 million, $6.6 million and $1.2 million,
respectively.  The advisory group incurred commission expenses of $4.0
million, $5.7 million and $864,000 which were paid to non-affiliated
broker-dealers in conjunction with such capital-raising activities.





Merchant Development
Funds - The advisory business invests in and actively manages seven
merchant development funds which were formed to develop, own, manage, and add
value to properties with an average holding period of two to four
years.  We typically invest as both the general partner and as a
limited partner, and our advisory business sells interests in these funds to
retail investors.  We, as the general partner, manage the funds, and,
in return, receive management fees as well as potentially significant profit
participation interests as the funds enter liquidation.  However, we
strive to create a structure that aligns the interests of our shareholders with
those of our limited partners.  In this spirit, the funds are
structured so that the general partner receives a significant profit only after
the limited partners in the funds have received their targeted return which
links our success to that of the limited partners.   During the
years ended December 31, 2007, 2006 and 2005, we earned asset management fees of
$1.3 million, $823,000 and $495,000, respectively, which are recurring fees
earned over the life of the partnership.





As of
December 31, 2007, the advisory group directly managed, through its seven
actively managed merchant development funds, a total of $159 million in
contributed capital.  Two of the seven partnerships, AmREIT
Opportunity Fund, Ltd. (AOF) and AmREIT Income and Growth Fund, Ltd. (AIG),
entered into their liquidation phase in 2003 and 2007 respectively, and the
remaining five partnerships are scheduled to enter their liquidation phases in ,
2010, 2011, 2012, 2013, and 2016.  As these partnerships enter into
liquidation, we, acting as the general partner/advisor, expect to receive
economic benefit from our profit participation, after certain preferred returns
have been paid to the limited partners.  During the years ended
December 31, 2007, 2006 and 2005, AmREIT recognized approximately $401,000,
$414,000 and $0, respectively, related to its general partner interest in
AOF.  See Footnote 5 in the accompanying consolidated financial
statements for more information.  In accordance with GAAP, our
financial statements do not reflect any potential profit participation in our
merchant development funds as any such gains have not been
realized.  The income generated from our advisory business, both the
current return as well as the future benefits through back-end interests and
participations will be a key factor in our ability to grow FFO than our peers
over our ten year journey.  We also assign a portion of this back-end
interest to top management as contingent, long-term compensation.  See
“Deferred Compensation” in Note 2 to the Consolidated Financial
Statements.





Real
Estate Development and Operating Group


Our real
estate development and operating business, ARIC, is a fully integrated and
wholly-owned business consisting of brokers and real estate professionals that
provide development, acquisitions, brokerage, leasing, construction, general
contracting, asset and property management services to our portfolio of
properties, to our advisory business, and to third parties.  This
operating subsidiary, which is a taxable REIT subsidiary, is
transaction-oriented, is very active in the real estate market and has the
potential to generate significant earnings on an annual basis.  This
business can provide significant long-term growth; however due to its
transactional nature, its quarter to quarter results will fluctuate, and
therefore its contributions to our earnings will be volatile.


~4~





Having a
full complement of real estate professionals helps secure strong tenant
relationships for both our portfolio and the merchant development portfolios
managed by our advisory business.  We have a growing roster of leases
with well-known national and regional tenants, and of equal importance is that
we have affiliations with these tenants that extend across multiple
sites.  Not only does our real estate development and operating
business create value through relationships, but it also provides an additional
source of fee income and profits.  Through the development,
construction, management, leasing and brokerage services provided to our
advisory business, as well as to third parties, our real estate team continues
to generate fees and profits.  During the years ended December 31,
2007, 2006 and 2005, ARIC generated net real estate and asset management fees of
$6.5 million, $9.1 million, and $5.6 million, which represented 13%, 16%, and
17% of the Company’s total revenues, respectively.





Through
our real estate development activity, we are able to generate additional profits
through the selective development or acquisition and disposition of properties
within a short time period (12 to 18 months).  The majority of these
assets are listed as real estate assets held for sale on our consolidated
balance sheet.  At December 31, 2007 and 2006, assets held for sale
totaled approximately $22.4 million and $0, respectively.  For the
years ended December 31, 2007, 2006 and 2005, ARIC has generated gains on sales
of properties acquired for sale of $0, $382,000, and $3.2 million,
respectively.





Our
strategy and our structure, as discussed herein, are reviewed by our Board of
Trust Managers on a regular basis and may be modified or changed without a vote
of our shareholders.





Competition





All of
our properties are located in areas that include competing
properties.  The number of competitive properties in a particular area
could have a material adverse affect on both our ability to lease space at any
of our properties or at any newly developed or acquired properties and on the
rents charged.  We may be competing with owners, including, but not
limited to, other REITs, insurance companies and pension funds that have greater
resources than us.





Compliance
with Governmental Regulations





Under
various federal and state environmental laws and regulations, as an owner or
operator of real estate, we may be required to investigate and clean up certain
hazardous or toxic substances, asbestos-containing materials, or petroleum
product releases at our properties. We may also be held liable to a governmental
entity or to third parties for property damage and for investigation and cleanup
costs incurred by those parties in connection with the contamination. In
addition, some environmental laws create a lien on the contaminated site in
favor of the government for damages and costs it incurs in connection with the
contamination. The presence of contamination or the failure to remediate
contaminations at any of our properties may adversely affect our ability to sell
or lease the properties or to borrow using the properties as collateral. We
could also be liable under common law to third parties for damages and injuries
resulting from environmental contamination coming from our
properties.





All of
our properties will be acquired subject to satisfactory Phase I environmental
assessments, which generally involve the inspection of site conditions without
invasive testing such as sampling or analysis of soil, groundwater or other
media or conditions; or satisfactory Phase II environmental assessments, which
generally involve the testing of soil, groundwater or other media and
conditions. Our Board of Trust Managers may determine that we will acquire a
property in which a Phase I or Phase II environmental assessment indicates that
a problem exists and has not been resolved at the time the property is acquired,
provided that (A) the seller has (1) agreed in writing to indemnify us and/or
(2) established an escrow account with predetermined funds greater than the
estimated costs to remediate the problem; or (B) we have negotiated other
comparable arrangements, including, without limitation, a reduction in the
purchase price. We cannot be sure, however, that any seller will be able to pay
under an indemnity we obtain or that the amount in escrow will be sufficient to
pay all remediation costs. Further, we cannot be sure that all environmental
liabilities have been identified or that no prior owner, operator or current
occupant has created an environmental condition not known to us. Moreover, we
cannot be sure that (1) future laws, ordinances or regulations will not impose
any material environmental liability or (2) the current environmental condition
of our properties will not be affected by tenants and occupants of the
properties, by the condition of land or operations in the vicinity of the
properties (such as the presence of underground storage tanks), or by third
parties unrelated to us.





Employees


As of
December 31, 2007, AmREIT had 67 full-time employees, 1 part-time contract
personnel and 3 full-time dedicated brokers.





Financial
Information


Additional
financial information related to AmREIT is included in Item 8 “Consolidated
Financial Statements and Supplementary Data.”





Materials
Available on Our Website




Copies of
our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports, as well as
Reports on Forms 3, 4 and 5 regarding officers, trustees or 10% beneficial
owners of us, filed or furnished pursuant to Section 13(a), 15(d) or 16(a)
of the Securities Exchange Act of 1934 are available free of charge through
our website (www.amreit.com) as soon as reasonably practicable after they are
electronically filed with, or furnished to, the Securities and Exchange
Commission. We have also made available on our website copies of our Audit
Committee Charter, Compensation Committee Charter, Corporate Governance and
Nominating Committee Charter, Code of Business Conduct and Ethics and Corporate
Governance Guidelines. In the event of any changes to these charters or the code
or guidelines, changed copies will also be made available on our website. Copies
of these documents are also available directly from us free of charge. Our
website also includes other financial information about us, including certain
non-GAAP financial measures, none of which is a part of this annual report on
Form 10-K.





Item
1A.    Risk Factors





Risks Associated with an Investment
in AmREIT





We
are subject to conflicts of interest arising out of our relationships with our
merchant development funds.
 We
experience competition for acquisition properties. In evaluating property
acquisitions, certain properties may be appropriate for acquisition by either us
or one of our merchant development funds. Our shareholders do not have the
opportunity to evaluate the manner in which these conflicts of interest are
resolved. Generally, we evaluate each property, considering the investment
objectives, creditworthiness of the tenants, expected holding period of the
property, available capital and geographic and tenant concentration issues when
determining the allocation of properties among us and our merchant development
funds.


There are
competing demands on our management and board. Our management team and board are
not only responsible for us, but also for our merchant development funds, which
include entities that may invest in the same types of assets in which we may
invest. For this reason, the management team and trust managers divide their
management time and services among those funds and us, will not devote all of
their attention to us and could take actions that are more favorable to the
other entities than to us.


We may
invest along side our merchant development funds. We may also invest in joint
ventures, partnerships or limited liability companies for the purpose of owning
or developing retail real estate projects. In either event, we may be a general
partner and fiduciary for and owe certain duties to our other partners in such
ventures. The interests, investment objectives and expectations regarding timing
of dispositions may be different for the other partners than those of our
shareholders, and there are no assurances that your interests and investment
objectives will take priority.


We may,
from time to time, purchase one or more properties from our merchant development
funds. In such circumstances, we will work with the applicable merchant
development fund to ascertain, and we will pay, the market value of the
property. By our dealing directly with our merchant development funds in this
manner, generally no brokerage commissions will be paid; however, there can be
no assurance that the price we pay for any property will be equal to or less
than the price we would have been able to negotiate from an independent third
party. These property acquisitions from the merchant development funds will be
limited to properties that the merchant development funds
developed.


There
may be significant fluctuations in our quarterly or annual
results.


Our
quarterly and annual operating results will fluctuate based on a number of
factors, including, among others:


·
            The
      amount and timing of income generated by our advisory business as well as
      our real estate development and operating business;·
            The
      recognitions of gains or losses on property sales;·
            The
      volume and timing of our property acquisitions;·
            Interest
      rate changes;·
            The
      level of competition in our market; and·
            General
      economic conditions, especially those affecting the retail
      industries





As a
result of these factors, results for any quarter should not be relied upon as
being indicative of performance in future quarters. The market price of our
class A common shares could fluctuate with fluctuations in our quarterly or
annual results.


Our
class A common shares have limited liquidity.
 Our
class A common shares are currently traded on the American Stock Exchange.
Our class A common shares have been listed since July 2002, and as of
December 31, 2007, the average daily trading volume was approximately
9,886 shares based on a 90-day average.
As a result, the class A common shares currently have limited
liquidity.


~5~





The
conversion and conversion premium associated with the class C and class D common
shares may dilute the interest of the Class A common shares.
 At
December 31, 2007, there were 4,143,971 class C common shares outstanding and
11,045,763 class D common shares outstanding.


The class
C common shares were issued at $10.00 per share and have the ability to convert
into class A common shares based on 110% of original investment (i.e. $1,000 of
original investment converts into $1,100 of class A common shares) after a
seven-year lock out period from the date of issuance.  The shares were
issued between September 2003 and May 2004.  After three years and
beginning in August 2006, subject to the issuance date of the respective shares,
we have the right to force conversion of the shares into class A shares on a
one-for-one basis or to redeem the shares at a cash redemption price of $11.00
per share at the holder’s option.


The class
D common shares were issued at $10.00 per share and have the ability to convert
into class A common shares based on 107.7% of original investment (i.e. $1,000
of original investment converts into $1,077 of class A common shares) after a
seven-year lock out period from the date of issuance.  The shares were
issued between July 2004 and September 2005.  The class D common
shares are redeemable by the Company one year after issuance for 100% of
original investment plus the pro rata portion of the 7.7% conversion
premium.





The
economic impact of the conversion of these non-traded shares can be affected by
many factors, including the following:


·
            The
      price of our publicly traded class A common shares;·
            The
      multiple and valuation at which our class A common shares
      trade;·
            Our
      ability to grow earnings, net income and FFO as well as dividends;
      and·
            Our
      ability to redeem these shares based on access to the debt and equity
      markets as well as liquidity in our balance sheet based on asset
      sales





Distribution
payments in respect of our Class A common shares are subordinate to
payments on debt and other series of common shares.
 AmREIT
has paid distributions since its organization in 1993. Distributions to our
shareholders, however, are subordinate to the payment of our current debts and
obligations. If we have insufficient funds to pay our debts and obligations,
future distributions to shareholders will be suspended pending the payment of
such debts and obligations. Dividends may be paid on the class A common
shares only if all dividends then payable on the class C common shares have
been paid. As a result, the class A common shares are subordinate to the
class C common shares as to dividends.





The
economic performance and value of our shopping centers depend on many factors,
each of which could have an adverse impact on our cash flows and operating
results.
 The
economic performance and value of our properties can be affected by many
factors, including the following:


·
            Changes
      in the national, regional and local economic climate;·
            Local
      conditions such as an oversupply of space or a reduction in demand for
      retail real estate in the area;·
            The
      attractiveness of the properties to tenants;·
            Competition
      from other available space;·
            Our
      ability to provide adequate management services and to maintain our
      properties;·
            Increased
      operating costs, if these costs cannot be passed through to
      tenants;·
            The
      expense of periodically renovating, repairing and re-leasing
      spaces;·
            The
      financial condition of our tenants;·
            Fluctuations
      in interest rates;·
            Changes
      in taxation or zoning laws·
            Availability
      of financing on acceptable terms or at all; and·
            Potential
      liability under environmental or other laws or
  regulations.




The rents
we receive and occupancy levels at our properties may decline as a result of
adverse changes in any of these factors.  If our rental revenues
and/or occupancy levels decline, we will have less cash available to pay our
indebtedness and distribute to our shareholders.











~6~


Bankruptcy
or insolvency of tenants may decrease our revenues and available
cash.




From time
to time, some of our tenants have declared bankruptcy, and other tenants may
declare bankruptcy or become insolvent in the future. If a major tenant declares
bankruptcy or becomes insolvent, the rental property at which it leases space
may have lower revenues and operational difficulties. In the case of our
shopping centers, the bankruptcy or insolvency of a major tenant could cause us
to have difficulty leasing the remainder of the affected property. Our leases
generally do not contain restrictions designed to ensure the creditworthiness of
our tenants. As a result, the bankruptcy or insolvency of a major tenant could
result in a lower level of net income and funds available for the payment of our
indebtedness or for distribution to our shareholders.





Our
dependence on rental income may adversely affect our ability to meet our debt
obligations and make distributions to our shareholders.
 The
majority of our income is derived from rental income from our portfolio of
properties.  As a result, our performance depends on our ability to
collect rent from tenants.  Our income and therefore our ability to
make distributions would be negatively affected if a significant number of our
tenants, or any of our major tenants:


·
            Delay
      lease commencements;·
            Decline
      to extend or renew leases upon expiration;·
            Fail
      to make rental payments when due; or·
            Close
      stores or declare bankruptcy Any of
these actions could result in the termination of the tenant’s leases and the
loss of rental income attributable to the terminated leases.  Lease
terminations by an anchor tenant or a failure by that anchor tenant to occupy
the premises could also result in lease terminations or reductions in rent by
other tenants in the same shopping center under the terms of some
leases.  In addition, we cannot be sure that any tenant whose lease
expires will renew that lease or that we will be able to re-lease space on
economically advantageous terms.  The loss of rental revenues from a
number of our tenants and our inability to replace such tenants may adversely
affect our profitability and our ability to meet debt and other financial
obligations and make distributions to shareholders.





Tenant,
geographic or retail product concentrations in our real estate portfolio could
make us vulnerable to negative economic and other trends.
 There is
no limit on the number of properties that we may lease to a single tenant.
However, under investment guidelines established by our board, no single tenant
may represent more than 15% of our total annual revenue unless approved by our
board. Our board reviews our properties and potential investments in terms of
geographic and tenant diversification. Kroger, IHOP and CVS/pharmacy accounted
for 10.7%, 6.9% and 3.5%, respectively, of our total operating revenues for the
year ended December 31, 2007. There is a risk that any adverse developments
affecting either Kroger, IHOP or CVS/Pharmacy could materially adversely affect
our revenues (thereby affecting our ability to make distributions to
shareholders).


Approximately
62% of our rental income for the year ended December 31, 2007, is generated
from properties located in the Houston, Texas metropolitan area. Additionally,
approximately 98% of our rental income for the year was generated from
properties located throughout major metropolitan areas in the State of
Texas.  Therefore, we are vulnerable to economic downturns affecting
Houston and Texas, or any other metropolitan area where we might in the future
have a concentration of properties.


If in the
future properties we acquire result in or extend geographic or tenant
concentrations or concentration of product types, such acquisitions may increase
the risk that our financial condition will be adversely affected by the poor
judgment of a particular tenant’s management group, by poor performance of our
tenants’ brands, by a downturn in a particular market sub-segment or by market
disfavor with a certain product type.


Our
profitability and our ability to diversify our investments, both geographically
and by type of properties purchased, will be limited by the amount of capital at
our disposal. An economic downturn in one or more of the markets in which we
have invested could have an adverse effect on our financial condition and our
ability to make distributions.





We
may increase our leverage without shareholder approval.
 Our
bylaws provide that we will not incur recourse indebtedness if, after giving
effect to the incurrence thereof, aggregate recourse indebtedness, secured and
unsecured, would exceed fifty-five percent (55%) of our gross asset value on a
consolidated basis. However, our operating at the maximum amount of leverage
permitted by our bylaws could adversely affect our cash available for
distribution to our shareholders and could result in an increased risk of
default on our obligations. We intend to borrow funds through secured and/or
unsecured credit facilities to finance property investments in the future. These
borrowings may require lump sum payments of principal and interest at maturity.
Because of the significant cash requirements necessary to make these large
payments, our ability to make these payments
may depend upon our access to capital markets and/or ability to sell or
refinance properties for amounts sufficient to repay such loans. At such times,
our access to capital might be limited or non-existent and the timing for
disposing of properties may not be optimal, which could cause us to default on
our debt obligations and/or discontinue payment of dividends. In addition,
increased debt service may adversely affect cash flow and share
value.




At
December 31, 2007, AmREIT had outstanding debt totaling
$181.4 million, $150.9 million of which was fixed-rate secured
financing.


~7~


If
we cannot meet our REIT distribution requirements, we may have to borrow funds
or liquidate assets to maintain our REIT status.


REITs
generally must distribute 90% of their taxable income annually. In the event
that we do not have sufficient available cash to make these distributions, our
ability to acquire additional properties may be limited. Also, for the purposes
of determining taxable income, we may be required to include interest payments,
rent and other items we have not yet received and exclude payments attributable
to expenses that are deductible in a different taxable year. As a result, we
could have taxable income in excess of cash available for distribution. In such
event, we could be required to borrow funds or sell assets in order to make
sufficient distributions and maintain our REIT status.


Compliance or
failure to comply with the Americans with Disabilities Act or other safety
regulations and requirements could result in substantial
costs.


The
Americans with Disabilities Act generally requires that public buildings,
including our properties, be made accessible to disabled persons. Noncompliance
could result in the imposition of fines by the federal government or the award
of damages to private litigants.  To date, we have had no such claims
that have resulted in any material expense or liability. If, under the Americans
with Disabilities Act, we are required to make substantial alterations and
capital expenditures in one or more of our properties, including the removal of
access barriers, it could adversely affect our financial condition and results
of operations, as well as the amount of cash available for distribution to our
shareholders.




Our
properties are subject to various federal, state and local regulatory
requirements, such as state and local fire and life safety requirements. If we
fail to comply with these requirements, we could incur fines or private damage
awards. We do not know whether existing requirements will change or whether
compliance with future requirements will require significant unanticipated
expenditures that will affect our cash flow and results of
operations.




We
May Not Be Able to
Obtain Capital to Make Investments.


We depend
primarily on external financing to fund the growth of our business. This is
because one of the requirements of the Internal Revenue Code of 1986, as
amended, for a REIT is that it distribute 90% of its net taxable income,
excluding net capital gains, to its shareholders. There is a separate
requirement to distribute net capital gains or pay a corporate level tax in lieu
thereof. Our access to debt or equity financing depends on the willingness of
third parties to lend or make equity investments and on conditions in the
capital markets generally. We and other companies in the real estate industry
have experienced limited availability of financing from time to time. Although
we believe that we will be able to finance any investments we may wish to make
in the foreseeable future, new financing may not be available on acceptable
terms.




For
information about our available sources of funds, see “Management’s Discussion
and Analysis of Financial Condition and Results of Operations — Liquidity and
Capital Resources” and the notes to the consolidated financial statements in
this annual report on Form 10-K.


Covenants
in our debt instruments could adversely affect our financial condition and our
acquisitions and development activities.


The
mortgages on our properties contain customary covenants such as those that limit
our ability, without the prior consent of the lender, to further mortgage the
applicable property or to discontinue insurance coverage. Our unsecured credit
facilities, unsecured debt securities and other loans that we may obtain in the
future contain customary restrictions, requirements and other limitations on our
ability to incur indebtedness, including covenants that limit our ability to
incur debt based upon the level of our ratio of total debt to total assets, our
ratio of secured debt to total assets, our ratio of EBITDA to interest expense,
and fixed charges, and that require us to maintain a certain level of
unencumbered assets to unsecured debt. Our ability to borrow under these
facilities is subject to compliance with certain financial and other covenants.
In addition, failure to comply with our covenants could cause a default under
the applicable debt instrument, and we may then be required to repay such debt
with capital from other sources. Under those circumstances, other sources of
capital may not be available to us, or be available only on unattractive terms.
Additionally, our ability to satisfy current or prospective lenders’ insurance
requirements may be adversely affected if lenders generally insist upon greater
insurance coverage against acts of terrorism than is available to us in the
marketplace or on commercially reasonable terms.




~8~


We rely
on debt financing, including borrowings under our unsecured credit facilities,
issuances of unsecured debt securities and debt secured by individual
properties, to finance acquisitions and development activities and for working
capital. If we are unable to obtain debt financing from these or other sources,
or refinance existing indebtedness upon maturity, our financial condition and
results of operations would likely be adversely affected. If we breach covenants
in our debt agreements, the lenders can declare a default and, if the debt is
secured, can take possession of the property securing the defaulted
loan.








Risks Associated with an Investment
in Real Estate





Real
estate investments are relatively illiquid.
 Real
estate investments are relatively illiquid. Illiquidity limits the owner’s
ability to vary its portfolio promptly in response to changes in economic or
other conditions. In addition, federal income tax provisions applicable to REITs
may limit our ability to sell properties at a time which would be in the best
interest of our shareholders.





Our
properties are subject to general real estate operating risks.
 In
general, a downturn in the national or local economy, changes in zoning or tax
laws or the lack of availability of financing could adversely affect occupancy
or rental rates. In addition, increases in operating costs due to inflation and
other factors may not be offset by increased rents. If operating expenses
increase, the local rental market for properties similar to ours may limit the
extent to which rents may be increased to meet increased expenses without
decreasing occupancy rates. If any of the above occurs, our ability to make
distributions to shareholders could be adversely affected.





We
may construct improvements, the cost of which may not be
recoverable.
 We may on
occasion acquire properties and construct improvements or acquire properties
under contract for development. Investment in properties to be developed or
constructed is more risky than investments in fully developed and constructed
properties with operating histories. In connection with the acquisition of these
properties, we may advance, on an unsecured basis, a portion of the purchase
price in the form of cash, a conditional letter of credit and/or a promissory
note. We will be dependent upon the seller or lessee of the property under
construction to fulfill its obligations, including the return of advances and
the completion of construction. This party’s ability to carry out its
obligations may be affected by financial and other conditions which are beyond
our control.


If we
acquire construction properties, the general contractors and the subcontractors
may not be able to control the construction costs or build in conformity with
plans, specifications and timetables. The failure of a contractor to perform may
necessitate our commencing legal action to rescind the construction contract, to
compel performance or to rescind our purchase contract. These legal actions may
result in increased costs to us. Performance may also be affected or delayed by
conditions beyond the contractor’s control, such as building restrictions,
clearances and environmental impact studies imposed or caused by governmental
bodies, labor strikes, adverse weather, unavailability of materials or skilled
labor and by financial insolvency of the general contractor or any
subcontractors prior to completion of construction. These factors can result in
increased project costs and corresponding depletion of our working capital and
reserves and in the loss of permanent mortgage loan commitments relied upon as a
primary source for repayment of construction costs.


We may
make periodic progress payments to the general contractors of properties prior
to construction completion. By making these payments, we may incur substantial
additional risk, including the possibility that the developer or contractor
receiving these payments may not fully perform the construction obligations in
accordance with the terms of his agreement with us and that we may be unable to
enforce the contract or to recover the progress payments.





An
uninsured loss or a loss that exceeds the insurance policy limits on our
properties could subject us to lost capital or revenue on those
properties.
 Under the
terms and conditions of the leases currently in force on our properties, tenants
generally are required to indemnify and hold us harmless from liabilities
resulting from injury to persons, air, water, land or property, on or off the
premises, due to activities conducted on the properties, except for claims
arising from our negligence or intentional misconduct or that of our
agents. Tenants are generally required, at the tenant’s expense, to obtain
and keep in full force during the term of the lease, liability and property
damage insurance policies. We have obtained comprehensive liability, casualty,
property, flood and rental loss insurance policies on our properties. All of
these policies may involve substantial deductibles and certain exclusions. In
addition, we cannot assure the shareholders that the tenants will properly
maintain their insurance policies or have the ability to pay the deductibles.
Should a loss occur that is uninsured or in an amount exceeding the combined
aggregate limits for the policies noted above, or in the event of a loss that is
subject to a substantial deductible under an insurance policy, we could lose all
or part of our capital invested in, and anticipated revenue from, one or more of
the properties, which could have a material adverse effect on our operating
results and financial condition, as well as our ability to make distributions to
the shareholders.







~9~


We
will have no economic interest in leasehold estate
properties.
 We
currently own properties, and may acquire additional properties, in which we own
only the leasehold interest, and do not own or control the underlying land. With
respect to these leasehold estate properties, we will have no economic interest
in the land at the expiration of the lease, and therefore may lose the right to
the use of the properties at the end of the ground lease.





We
may invest in joint ventures.


·
            The
      joint venture partner may have economic or business interest or goals
      which are inconsistent with ours·
            The
      potential inability of our joint venture partner to
  perform·
            The
      joint venture partner may take actions contrary to our requests or
      instructions or contrary to our objectives or policies;
  and·
            The
      joint venture partners may not be able to agree on matters relating to the
      property they jointly own. Although each joint owner will have a right of
      first refusal to purchase the other owner’s interest, in the event a sale
      is desired, the joint owner may not have sufficient resources to exercise
      such right of first refusal.


We also
may participate with other investors, possibly including investment programs or
other entities affiliated with our management, in investments as
tenants-in-common or in some other joint venture arrangement. 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
un-resolvable dispute arises, to seek partition of the property, which partition
might decrease the value of each portion of the divided
property.





Our
properties may be subject to environmental liabilities.
 Under
various federal and state environmental laws and regulations, as an owner or
operator of real estate, we may be required to investigate and clean up certain
hazardous or toxic substances, asbestos-containing materials, or petroleum
product releases at our properties. We may also be held liable to a governmental
entity or to third parties for property damage and for investigation and cleanup
costs incurred by those parties in connection with the contamination. In
addition, some environmental laws create a lien in favor of the government on
the contaminated site for damages and costs the government incurs in connection
with the contamination. The presence of contamination or the failure to
remediate contaminations at any of our properties may adversely affect our
ability to sell or lease the properties or to borrow using the properties as
collateral. We could also be liable under common law to third parties for
damages and injuries resulting from environmental contamination coming from our
properties.


Certain
of our properties have had prior tenants such as gasoline stations and, as a
result, have existing underground storage tanks and/or other deposits that
currently or in the past contained hazardous or toxic substances. Other
properties have known asbestos containing materials. The existence of
underground storage tanks, asbestos containing materials or other hazardous
substances on or under our properties could have the consequences described
above. Also, we have not recently had environmental reports produced for many of
our older properties, and, as a result, many of the environmental reports
relating to our older properties are significantly outdated. In addition, we
have not obtained environmental reports for five of our older properties. These
properties could have environmental conditions with unknown
consequences.


All of
our future properties will be acquired subject to satisfactory Phase I
environmental assessments, which generally involve the inspection of site
conditions without invasive testing such as sampling or analysis of soil,
groundwater or other media or conditions; or satisfactory Phase II
environmental site assessments, which generally involve the testing of soil,
groundwater or other media and conditions. Our board may determine that we will
acquire a property in which a Phase I or Phase II environmental
assessment indicates that a problem exists and has not been resolved at the time
the property is acquired, provided that (A) the seller has (1) agreed
in writing to indemnify us and/or (2) established in escrow cash equal to a
predetermined amount greater than the estimated costs to remediate the problem;
or (B) we have negotiated other comparable arrangements, including, without
limitation, a reduction in the purchase price. We cannot be sure, however, that
any seller will be able to pay under an indemnity we obtain or that the amount
in escrow will be sufficient to pay all remediation costs. Further, we cannot be
sure that all environmental liabilities have been identified or that no prior
owner, operator or current occupant has created an environmental condition not
known to us. Moreover, we cannot be sure that (1) future laws, ordinances
or regulations will not impose any material environmental liability or
(2) the current environmental condition of our properties will not be
affected by tenants and occupants of the properties, by the condition of land or
operations in the vicinity of the properties (such as the presence of
underground storage tanks), or by third parties unrelated to us. Environmental
liabilities that we may incur could have an adverse effect on our financial
condition or results of operations.


We
depend upon our anchor tenants to attract shoppers.




We own
several regional malls and other shopping centers that are typically anchored by
well-known department stores and other tenants who generate shopping traffic at
the mall or shopping center. The value of our properties would be adversely
affected if tenants or anchors failed to meet their contractual obligations,
sought concessions in order to continue operations or ceased their operations.
If the sales
of stores operating in our properties were to decline significantly due to
economic conditions, closing of anchors or for other reasons, tenants may be
unable to pay their minimum rents or expense recovery charges. In the event of a
default by a tenant or anchor, we may experience delays and costs in enforcing
our rights as landlord.


~10~





Risks Associated with Federal Income
Taxation of AmREIT





Our
failure to qualify as a REIT for tax purposes would result in taxation of us as
a corporation and the reduction of funds available for shareholder
distribution.
 Although
we believe we are organized and are operating so as to qualify as a REIT, we may
not be able to continue to remain so qualified. In addition, REIT qualification
provisions under the tax laws may change. We are not aware, however, of any
currently pending tax legislation that would adversely affect our ability to
continue to qualify as a REIT.


For any
taxable year that we fail to qualify as a REIT, we will be subject to federal
income tax on our taxable income at corporate rates. In addition, unless
entitled to relief under certain statutory provisions, we also will be
disqualified from treatment as a REIT for the four taxable years following the
year during which qualification is lost. This treatment would reduce the net
earnings available for investment or distribution to shareholders because of the
additional tax liability for the year or years involved. In addition,
distributions no longer would qualify for the dividends paid deduction nor would
there be any requirement that such distributions be made. To the extent that
distributions to shareholders would have been made in anticipation of our
qualifying as a REIT, we
might be required to borrow funds or to liquidate certain of our investments to
pay the applicable tax.





We
may be liable for prohibited transaction tax and/or penalties.
 A
violation of the REIT provisions, even where it does not cause failure to
qualify as a REIT, may result in the imposition of substantial taxes, such as
the 100% tax that applies to net income from a prohibited transaction if we are
determined to be a dealer in real property. Because the question of whether that
type of violation occurs may depend on the facts and circumstances underlying a
given transaction, these violations could inadvertently occur. To reduce the
possibility of an inadvertent violation, the trust managers intend to rely on
the advice of legal counsel in situations where they perceive REIT provisions to
be inconclusive or ambiguous.





Changes
in the tax law may adversely affect our REIT status.
 The
discussions of the federal income tax considerations are based on current tax
laws. Changes in the tax laws could result in tax treatment that differs
materially and adversely from that described herein.





Item
1B.     Unresolved Staff Comments


None





Item
2.     Properties





General





At
December 31, 2007, we owned 50 properties located in 15 states. Reference is
made to the Schedule III - Consolidated Real Estate Owned and Accumulated
Depreciation filed with this Form 10-K for a listing of the properties and their
respective costs.





Since
1995, we have been developing and acquiring shopping centers in our advisory
business. During this time, we believe we have sharpened our ability to
recognize the ideal location of high-end shopping centers and single-tenant
properties that can create long-term value which we define as Irreplaceable
Corners.  Shopping centers represent 81% of annualized rental income
from properties owned as of December 31, 2007, with the balance being
single-tenant properties primarily leased by national tenants throughout the
United States.





Land - Our property sites, on
which our leased buildings sit, range from approximately 34,000 to 1.0 million
square feet, depending upon building size and local demographic factors. Our
sites are in highly-populated, high traffic corridors and have been reviewed for
traffic and demographic pattern and history.





Buildings- The buildings are
multi-tenant shopping centers and freestanding single-tenant properties located
at “Main and Main” locations throughout the United States. They are positioned
for good exposure to traffic flow and are constructed from various combinations
of stucco, steel, wood, brick and tile.  Shopping centers are
generally 14,000 square feet and greater, and single-tenant buildings range from
approximately 2,000 to 14,000 square feet. Buildings are suitable for possible
conversion to various uses, although modifications may be required prior to use
for other operations.





Leases- Primary lease terms range
from five to 25 years.  Generally, leases also provide for one to four
five-year renewal options.  Our retail properties are primarily leased
on a “net” basis whereby the tenants are responsible, either directly or through
landlord reimbursement, for the property taxes, insurance and operating costs
such as water, electric, landscaping, maintenance and
security.  Generally, leases provide for either percentage rents based
on sales in excess of certain amounts, periodic escalations or increases in the
annual rental rates or both.


~11~




Location
of Properties





Based in
Houston, our current focus is on property investments in Texas.  Of
our 50 properties, 24 are located in Texas, with 17 being located in the greater
Houston metropolitan statistical area.  These 17 properties
represented 62% of our rental income for the year ended December 31,
2007.  Our portfolio of assets tends to be located in areas we know
well, and where we can monitor them closely.  Because of our proximity
and deep knowledge of our markets, we believe we can deliver an extra degree of
hands-on management to our real estate investments.  We expect over
the long term we will outperform absentee landlords in these
markets.





Because
of our investments in the greater Houston area, and throughout Texas, the
Houston and Texas economy have a significant impact on our business and on the
viability of our properties.  Accordingly, management believes that
any downturn in the Houston, Dallas and  San Antonio economies could
adversely affect us; however, general retail and grocery anchored shopping
centers, which we primarily own, provide basic necessity-type items, and tend to
be less sensitive to macroeconomic downturns.





According
to the Greater Houston Partnership, Houston is the 4th most populous city
in the nation, trailing only New York, Los Angeles and Chicago.  
Houston is among the nation’s fastest-growing and most diverse metropolitan
areas and is growing faster than both the state of Texas and the nation. 
Since 2000, approximately 56% of Houston’s population growth has been from
net migration with 77% of that growth attributed to international
immigration.  Only 21 other nations other than the United States
have a Gross Domestic Product (GDP) exceeding Houston's Gross Area Product
(GAP).  Houston’s economic base has diversified, sharply decreasing its
dependence on upstream energy. Diversifying, or energy-independent, sectors
account for 76% of net job growth in the economic base since 1988.  Mining
represents the majority of oil and gas exploration and production and accounts
for 23%, or a fifth of Houston’s GAP, which has risen sharply in
reaction to higher energy prices and thinner worldwide surplus oil production
capacity than in previous years. The Houston MSA recorded 2.5 million
payroll jobs in July 2007 - more than the job counts of 29 states.  The
Port of Houston in 2005 ranked first among U.S. ports in volume of foreign
tonnage and is the world’s 10th largest port.










~12~


A listing
of our properties by property type and by location follows, including gross
leasable area (GLA), annualized base rent (ABR) and percent leased as of
December 31, 2007:


Grocery
      Anchored Shopping Centers
              City
              State
              
              GLA
              
              
              ABR
              
              
              %
      Leased1
              
              AmREIT
      C-Ranch LP
              Houston
              TX
              
              
              97,297
              
              
              $
              1,207,720
              
              
              
              98
              %2
              
              MacArthur
      Park
              Irving
              TX
              
              
              237,381
              
              
              
              3,827,651
              
              
              
              97
              %3
              
              Plaza
      in the Park
              Houston
              TX
              
              
              144,062
              
              
              
              2,678,998
              
              
              
              97
              %3
              
              Grocery
      Anchored Shopping Centers Total
              
              
              
              478,740
              
              
              $
              7,714,369Neighborhood
      Lifestyle & Community Shopping Center
              City
              State
              
              GLA
              
              
              ABR
              
              
              %
      Leased1
              
              Bakery
      Square
              Houston
              TX
              
              
              34,614
              
              
              $
              851,914
              
              
              
              100
              %2
              
              Courtyard
      on Post Oak
              Houston
              TX
              
              
              13,597
              
              
              
              477,361
              
              
              
              100
              %3
              
              Sugarland
      Plaza
              Sugarland
              TX
              
              
              16,750
              
              
              
              349,612
              
              
              
              100
              %4
              
              Terrace
      Shops
              Houston
              TX
              
              
              16,395
              
              
              
              482,278
              
              
              
              100
              %5
              
              Uptown
      Plaza (including CVS)
              Houston
              TX
              
              
              28,000
              
              
              
              1,237,769
              
              
              
              100
              %6
              
              Uptown
      Park
              Houston
              TX
              
              
              169,112
              
              
              
              5,179,689
              
              
              
              99
              %7
              
              Woodlands
      Plaza
              The
      Woodlands
              TX
              
              
              20,018
              
              
              
              373,317
              
              
              
              100
              %8
              
              Southbank
      - Riverwalk
              San
      Antonio
              TX
              
              
              46,673
              
              
              
              1,534,386
              
              
              
              100
              %9
              
              584
      N. Germantown Parkway
              Memphis
              TN
              
              
              15,000
              
              
              
              193,903
              
              
              
              75
              %10
              
              Uptown
      Plaza - Dallas
              Dallas
              TX
              
              
              33,840
              
              
              
              1,619,906
              
              
              
              100
              %10
              
              Community
      Shopping Centers Total
              
              
              
              
              393,999
              
              
              $
              12,300,134Single
      Tenant (Ground Leases) - Land
              City
              State
              
              GLA
              
              
              ABR
              
              
              %
      Leased1
              
              410-Blanco
      (Citibank)
              San
      Antonio
              TX
              
              
              4,439
              
              
              $
              159,979
              
              
              
              100
              %2
              
              Carlson
      Restaurants
              Hanover
              MD
              
              
              6,802
              
              
              
              141,674
              
              
              
              100
              %3
              
              Darden
              Peachtree
      City
              GA
              
              
              6,867
              
              
              
              79,366
              
              
              
              100
              %4
              
              CVS
      Corporation (Eckerds at Yorktown)
              Houston
              TX
              
              
              13,824
              
              
              
              327,167
              
              
              
              100
              %5
              
              Fontana
      Tract  - (land)
              Dallas
              TX
              
              
              0
              
              
              
              0
              
              
              
              100
              %6
              
              Washington
      Mutual
              Houston
              TX
              
              
              3,685
              
              
              
              98,155
              
              
              
              100
              %7
              
              Washington
      Mutual
              The
      Woodlands
              TX
              
              
              3,685
              
              
              
              63,996
              
              
              
              100
              %8
              
              Woodlands
      Ring Road - Ground Leases
              The
      Woodlands
              TX
              
              
              66,349
              
              
              
              667,641
              
              
              
              100
              %8
              
              Single
      Tenant (Ground Leases) Total
              
              
              
              
              105,651
              
              
              $
              1,537,978Single
      Tenant (Fee Simple)
              City
              State
              
              GLA
              
              
              ABR
              
              
              %
      Leased1
              
              AFC,
      Inc.
              Atlanta
              GA
              
              
              2,583
              
              
              $
              119,279
              
              
              
              100
              %2
              
              Advance
      Auto
              Aurora
              IL
              
              
              7,000
              
              
              Note
      (1) (2) (3) (4)
              
              
              
              0
              %3
              
              Advance
      Auto
              St.
      Louis
              MO
              
              
              7,000
              
              
              Note
      (1) (2) (3) (4)
              
              
              
              0
              %4
              
              Advance
      Auto (land)
              Washington
              MO
              
              
              0
              
              
              Note
      (1) (2) (3) (4)
              
              
              
              0
              %5
              
              McAlister's
      Deli
              Champaign
              IL
              
              
              7,000
              
              
              
              175,392
              
              
              
              100
              %6
              
              McAlister's
      Deli
              Peoria
              IL
              
              
              3,426
              
              
              
              151,491
              
              
              
              100
              %7
              
              Sunbelt
      Rental (2 acres of land)
              Champaign
              IL
              
              
              0
              
              
              Note
      (1) (2) (3)
              
              
              
              0
              %8
              
              Carlson
      Restaurants
              Houston
              TX
              
              
              8,500
              
              
              
              200,000
              
              
              
              100
              %9
              
              Golden
      Corral
              Houston
              TX
              
              
              12,000
              
              
              
              182,994
              
              
              
              100
              %10
              
              Golden
      Corral
              Humble
              TX
              
              
              12,000
              
              
              
              181,688
              
              
              
              100
              %11
              
              IHOP
      Corporation #1483
              Sugarland
              TX
              
              
              4,020
              
              
              
              189,660
              
              
              
              100
              %12
              
              IHOP
      Corporation #1737
              Centerville
              TX
              
              
              4,020
              
              
              
              163,380
              
              
              
              100
              %13
              
              IHOP
      Corporation #4462
              Memphis
              TX
              
              
              4,020
              
              
              
              179,376
              
              
              
              100
              %14
              
              IHOP
      Corporation #5318
              Topeka
              KS
              
              
              4,020
              
              
              
              158,892
              
              
              
              100
              %14
              
              Single
      Tenant (Fee Simple)
              
              
              
              
              75,589
              
              
              $
              1,702,152Single
      Tenant (Leasehold)
              City
              State
              
              
              GLA
              
              
              
              ABR
              
              
              
              %
      Leased15
              
              Single
      Tenant (Leasehold) Total (5)
              Various
              Various
              
              
              60,300
              
              
              $
              1,554,147
              
              
              
              100
              %Company
      Total Sq. Ft.
              
              
              
              
              1,114,279
              
              
              $
              24,808,780


___________________________


(1)           Under
Development (GLA represents proposed leasable square footage)


(2)           Held
for Sale


(3)           Held
in joint venture of which we are the managing 50% owner.


(4)           Advance Auto properties are located in
MO and IL.  Each of the properties has a proposed GLA of 7,000 square
feet.


(5)
            IHOP
      properties are located in NM, LA, TX, CA, TN, CO, VA, NY, OR, KS, and
      MO.  Each of the properties has a GLA of 4,020 square
      feet.  These properties are held by a consolidated subsidiary,
      75.0% of which is owned by us, 19.6% of which is owned by AmREIT Income
      & Growth Corporation, one of our merchant development funds, and the
      remainder of which is owned by unaffiliated third parties.  We
      have assigned to management approximately 50% of our back-end
      participation interest in this entity as part of our long-term incentive
      compensation program.  Accordingly, approximately half of the
      future net cash flows from such participation interest are owned by
      management.





~13~


The
rental income generated by our properties during 2007 by state/city is as
follows:




Held
      for Investment
              
              
              Held
      for SaleRental
              
              
              Rental
              
              
              Rental
              
              
              RentalState/City
              
              Income
              
              
              Concentration
              
              
              Income
              
              
              ConcentrationTexas
      - Houston
              
              $
              19,070,557
              
              
              
              62.3
              %
              
              $
              -
              
              
              
              0.0
              %Texas
      - Dallas
              
              $
              8,347,503
              
              
              
              27.2
              %
              
              $
              -
              
              
              
              0.0
              %Texas
      - San Antonio
              
              $
              2,435,737
              
              
              
              8.0
              %
              
              $
              -
              
              
              
              0.0
              %Texas
      - other
              
              $
              -
              
              
              
              0.0
              %
              
              $
              230,642
              
              
              
              11.2
              %Total
      Texas
              
              
              29,853,797
              
              
              
              97.5
              %
              
              
              230,642
              
              
              
              11.2
              %Tennessee
              
              $
              267,508
              
              
              
              0.9
              %
              
              $
              298,980
              
              
              
              14.6
              %Louisiana
              
              $
              -
              
              
              
              0.0
              %
              
              $
              214,487
              
              
              
              10.6
              %Kansas
              
              $
              158,913
              
              
              
              0.5
              %
              
              $
              97,026
              
              
              
              4.7
              %Illinois
              
              $
              -
              
              
              
              0.0
              %
              
              $
              155,924
              
              
              
              7.6
              %Missouri
              
              $
              -
              
              
              
              0.0
              %
              
              $
              113,308
              
              
              
              5.5
              %Colorado
              
              $
              -
              
              
              
              0.0
              %
              
              $
              107,371
              
              
              
              5.2
              %Georgia
              
              $
              198,739
              
              
              
              0.6
              %
              
              $
              -
              
              
              
              0.0
              %Oregon
              
              $
              -
              
              
              
              0.0
              %
              
              $
              179,588
              
              
              
              8.7
              %Virginia
              
              $
              -
              
              
              
              0.0
              %
              
              $
              173,088
              
              
              
              8.4
              %Utah
              
              $
              -
              
              
              
              0.0
              %
              
              $
              163,593
              
              
              
              8.0
              %Maryland
              
              $
              141,674
              
              
              
              0.5
              %
              
              $
              -
              
              
              
              0.0
              %New
      York
              
              $
              -
              
              
              
              0.0
              %
              
              $
              125,693
              
              
              
              6.1
              %California
              
              $
              -
              
              
              
              0.0
              %
              
              $
              112,344
              
              
              
              5.5
              %New
      Mexico
              
              $
              -
              
              
              
              0.0
              %
              
              $
              80,988
              
              
              
              3.9
              %Total
              
              
              30,620,631
              
              
              
              100.0
              %
              
              
              2,053,032
              
              
              
              100.0
              %
  ~14~
  Grocery-Anchored
Shopping Centers





Our
grocery-anchored shopping centers comprise 31% of our annualized rental income
from the properties owned as of December 31, 2007. These properties are designed
for maximum retail visibility and ease of access and parking for the
consumer.  All of our grocery-anchored centers are anchored by Kroger
and are supported by a mix of specialty national and regional tenants such as
Barnes & Noble, GAP and Starbucks.  They are leased in a manner
that provides a complementary array of services to support the local retail
consumer.  These properties are located in the Houston and Dallas
metropolitan areas and are typically located at an intersection guided by a
traffic light, with high visibility, significant daily traffic counts, and in
close proximity to neighborhoods and communities with household incomes above
those of the national average.  We are dependent upon the financial
viability of Kroger, and any downturn in Kroger’s operating results could
negatively impact our operating results.





All of
our grocery-anchored center leases provide for the monthly payment of base rent
plus reimbursement of operating expenses.  This monthly operating
expense payment is based on an estimate of the tenant’s pro rata share of
property taxes, insurance, utilities, maintenance and other common area
maintenance charges.  Annually these operating expenses are reconciled
with any overage being reimbursed to the tenants and any underpayment being
billed to the tenant.  Generally these are net lease terms and allow
the landlord to recover all of its operating expenses, with the exception of
expenses allocable to any vacant space.





Our
grocery-anchored shopping center leases range from 5 to 20 years and generally
include one or more five-year renewal options.  Annual rental income
from these leases ranges from $23,000 to $1.0 million per year.





Neighborhood,
Lifestyle and Community Shopping Centers





As of
December 31, 2007, we owned 10 shopping centers, excluding the grocery-anchored
centers discussed above, representing approximately 394,000 leasable square
feet.   Our shopping center properties are primarily
neighborhood, lifestyle and community centers, ranging from 14,000 to 170,000
square feet.  None of the centers have internal common areas, but
instead are designed for maximum retail visibility and ease of access and
parking for the consumer.  These properties have a mix of national,
regional and local tenants, leased in a manner to provide a complementary array
of services to support the local retail consumer.  All of our centers
are located in major metropolitan areas, are typically located at an
intersection guided by a traffic light, with high visibility, significant daily
traffic counts, and are in close proximity to neighborhoods and communities with
household incomes above those of the national average.





All of
our shopping center leases provide for the monthly payment of base rent plus
reimbursement of operating expenses. This monthly operating expense payment is
based on an estimate of the tenant’s pro rata share of property taxes,
insurance, utilities, maintenance and other common area maintenance
charges.  Annually these operating expenses are reconciled with any
overage being reimbursed to the tenants and any underpayment being billed to the
tenant.





Our
shopping center leases range from five to 20 years and generally include one or
more five-year renewal options.  Annual rental income from these
leases ranges from $12,000 to $440,000 per year and typically allow for rental
increases, or bumps, periodically through the life of the lease.





Single-tenant
Properties





As of
December 31, 2007, we owned 37 single-tenant properties, representing
approximately 242,000 leaseable square feet.  Our single-tenant leases
typically provide that the tenant bears responsibility for substantially all
property costs and expenses associated with ongoing maintenance and operation of
the property such as utilities, property taxes and insurance.  Some of
the leases require that we will be responsible for roof and structural
repairs.  In these instances, we normally require warranties and/or
guarantees from the related vendors, suppliers and/or contractors to mitigate
the potential costs of repairs during the primary term of the
lease.





Because
our leases are entered into with or guaranteed by the corporate, parent tenant,
they typically do not limit the Company’s recourse against the tenant and any
guarantor in the event of a default.  For this reason, these leases
are designated by us as “Credit Tenant Leases”, because they are supported by
the assets of the entire company, not just the individual store
location.





The
primary term of the single-tenant leases ranges from 10 to 25
years.  All of the leases also provide for one to four, five-year
renewal options. Annual rental income ranges from $65,000 to $574,000 per
year.





Land
to be Developed





As part
of our investment objectives, we will invest in land to be developed on
Irreplaceable Corners.  A typical investment in land to be developed
will result in a six to 12 month holding period, followed by the execution of a
ground lease with a national or regional retail tenant or
by the development of a single-tenant property or shopping center.  In
May 2007, we acquired an undeveloped 2-acres parcel in Champaign, IL which we
acquired for resale and is currently under development for a national tenant
that is in the rental equipment business. In December 2006, we acquired an
undeveloped 0.9 acre parcel contiguous to Uptown Plaza in Dallas which we
acquired with the intent to resell.






~15~




Property
Acquisitions and Dispositions





In May
2007, we acquired a 2-acre parcel of land in Champaign, IL that was acquired for
resale and is currently under development for a national tenant that is in the
rental equipment business. In February 2007, we acquired The Woodlands Mall Ring
Road property, which represents 66,000 square feet of gross leasable area in
Houston, Texas.  The property is ground-leased to five tenants,
including Bank of America, Circuit City and Landry’s
Seafood.   Additionally, during the nine months ended September
30, 2007, we sold one property acquired for resale for $1.4 million which
approximated our cost.





Property
Held for Sale





Discontinued
Operations includes properties sold during the period as well as the operations
of properties that are held for sale as of the end of the period.  The 2007
operating results reflect 19 properties included in held for sale as of
December 31, 2007, 17 of which represent properties owned by AAA CTL Notes and
which are treated as investments in direct financing leases for financial
reporting purposes.  We are also considering refinancing these 17
properties as an alternative to an outright sale.





Item 3. Legal
Proceedings





We are
not a party to any material pending legal proceedings.





Item 4. Submission of
Matters to a Vote of Security Holders





No
matters were submitted to a vote of shareholders during the fourth quarter of
the 2007 fiscal year.


~16~


PART
II





Item 5. Market for
Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities


As of
March 14, 2008, there were approximately 590 holders of record for 6,152,440 our
class A common shares outstanding on such date net of 482,050 shares held in
treasury. AmREIT’s class A common shares are listed on the American Stock
Exchange (“AMEX”) and traded under the symbol “AMY.”  The following
table sets forth for the calendar periods indicated high and low sale prices per
class A common share as reported on the AMEX and the dividends paid per share
for the two year period ended December 31, 2007.




Calendar Period
            
            High
            
            
            Low
            
            
            Dividends2007Fourth
      Quarter
            
            $
            8.40
            
            
            $
            6.56
            
            
            $
            .1242Third
      Quarter
            
            $
            8.91
            
            
            $
            6.66
            
            
            $
            .1242Second
      Quarter
            
            $
            9.00
            
            
            $
            7.90
            
            
            $
            .1242First
      Quarter
            
            $
            9.25
            
            
            $
            8.00
            
            
            $
            .12422006Fourth
      Quarter
            
            $
            8.65
            
            
            $
            7.25
            
            
            $
            .1242Third
      Quarter
            
            $
            7.46
            
            
            $
            6.85
            
            
            $
            .1242Second
      Quarter
            
            $
            7.60
            
            
            $
            6.95
            
            
            $
            .1242First
      Quarter
            
            $
            7.96
            
            
            $
            6.73
            
            
            $
            .1242





The payment of any future dividends
on our class A common shares is dependent upon applicable legal and contractual
restrictions, including the provisions of the class C common shares, as well as
our earnings and financial needs.





Class B Common Shares
— On December 20, 2007, we redeemed the remaining Class B common shares for
$10.4 million in cash based on the $10.18 per share redemption
price.  No class B common shares were outstanding as of December 31,
2007.





Class C Common Shares
— As
of March 14, 2008, there were approximately 1250 holders of record for
4,140,278 ofof the Company’s class C common shares.  The class
C common shares are not listed on an exchange and there is currently no
available trading market for the class C common shares. The class C common
shares have voting rights, together with all classes of common shares, as one
class of stock. The class C common shares were issued at $10.00 per share. They
receive a fixed 7.0% preferred annual dividend, paid in monthly installments,
and are convertible into the class A common shares after a 7-year lock out
period based on 110% of invested capital, at the holder’s option. After three
years and beginning in August 2006, subject to the issuance date of the
respective shares, we have the right to force conversion of the shares into
class A shares on a one-for-one basis or to redeem the shares at a cash
redemption price of $11.00 per share at the holder’s
option.  Currently, there is a class C dividend reinvestment program
that allows investors to reinvest their dividends into additional class C common
shares.  These reinvested shares are also convertible into the class A
common shares after the 7-year lock out period and receive the 10% conversion
premium upon conversion.  As of
March 14, 2008, 818 holders are participating in the dividend reinvestment
plan


Class D Common Shares
— As of
March 14, 2008, there were approximately 3374 holders of record for
11,001,091 As of
March 14, 2008, 2,274 holders are participating in the dividend reinvestment
plan.


InJune2007,
our Board of Trust Managers authorized a common share repurchase program as part
of our ongoing investment strategy. Under the terms of the program, we may
purchase up to a maximum value of $5 million of our common shares
of beneficial interest. Share repurchases may be made in the open market or in
privately negotiated transactions at the discretion of management and as market
conditions warrant.  We anticipate funding the repurchase of sharesprimarily through the proceeds received from general corporate funds as
well as through the use of our credit
facility.
  Repurchases of our
common shares of beneficial interest for the quarter ended December 31, 2007 are
as follows:
   Period
              (a)
                Total
                Number
                of
      Shares
                Purchased
              (b)
                Average
                Price
                Paid
      per
                Share
              (c)
                Total Number
      of
                Shares
      Purchased
                As Part of
      Publicly
                Announced
      Program
              (d)
                Maximum
      Dollar
                Value of Shares
      that
                May Yet be
      Purchased
                Under the
      ProgramOctober 1, 2007
      to December 31, 2007
              83,400
              $7.86
              83,400
              $3,661,780


~17~


Item 6.  Selected
Financial Data


The
following table sets forth selected consolidated financial data with respect to
AmREIT and should be read in conjunction with Item 7 - “Management’s Discussion
and Analysis of Financial Condition and Results of Operations;” the Consolidated
Financial Statements and accompanying Notes in Item 8 - “Financial Statements
and Supplementary Data” and the financial schedule included elsewhere in this
Form 10-K.


December
      31,
                
                
                December
      31,
                
                
                December
      31,
                
                
                December
      31,
                
                
                December
      31,2007
                
                
                2006
                
                
                2005
                
                
                2004
                
                
                2003Balance
      sheet data (at end of period)Real
      estate investments before accumulated depreciation
                
                $
                329,819
                
                
                $
                312,405
                
                
                $
                290,097
                
                
                $
                198,744
                
                
                $
                98,128Total
      assets
                
                
                343,757
                
                
                
                328,430
                
                
                
                314,971
                
                
                
                203,151
                
                
                
                101,327Notes
      payable
                
                
                168,560
                
                
                
                144,453
                
                
                
                114,687
                
                
                
                105,964
                
                
                
                48,485Notes
      payable held for sale
                
                
                12,811
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Shareholders'
      equity
                
                
                149,433
                
                
                
                169,050
                
                
                
                187,285
                
                
                
                88,370
                
                
                
                48,796Other
      dataFunds
      from operations, available to class A (1)
                
                
                1,896
                
                
                
                4,750
                
                
                
                3,644
                
                
                
                (2,003
                )
                
                
                607Operating
      DataRevenues
                
                
                49,601
                
                
                
                57,391
                
                
                
                31,837
                
                
                
                18,215
                
                
                
                8,366Expenses  (2)
                
                
                37,760
                
                
                
                45,628
                
                
                
                24,101
                
                
                
                18,460
                
                
                
                8,654Other
      expenses
                
                
                (7,092
                )
                
                
                (5,566
                )
                
                
                (4,878
                )
                
                
                (1,914
                )
                
                
                (1,053
                )Income
      from discontinued operations  (3)
                
                
                502
                
                
                
                984
                
                
                
                4,046
                
                
                
                920
                
                
                
                3,028Gain
      on sale of real estate acquired for resale
                
                
                -
                
                
                
                382
                
                
                
                3,222
                
                
                
                1,827
                
                
                
                312Net
      income
                
                $
                5,251
                
                
                $
                7,563
                
                
                $
                10,126
                
                
                $
                588
                
                
                $
                1,999Net
      income (loss) available to class A shareholders
                
                $
                (6,458
                )
                
                $
                (3,879
                )
                
                $
                881
                
                
                $
                (3,866
                )
                
                $
                56Net
      (loss) income per common share - basic and dilutedLoss
      before discontinued operations
                
                $
                (1.09
                )
                
                $
                (0.83
                )
                
                $
                (1.23
                )
                
                $
                (2.03
                )
                
                $
                (1.18
                )Income
      from discontinued operations
                
                
                0.08
                
                
                
                0.22
                
                
                
                1.40
                
                
                
                0.84
                
                
                
                1.20Net
      income (loss)
                
                $
                (1.01
                )
                
                $
                (0.61
                )
                
                $
                0.17
                
                
                $
                (1.19
                )
                
                $
                0.02Distributions
      per share - class A
                
                $
                0.50
                
                
                $
                0.50
                
                
                $
                0.50
                
                
                $
                0.48
                
                
                $
                0.45






(1)   We
have adopted the National Association of Real Estate Investment Trusts (NAREIT)
definition of FFO.  FFO is calculated as net income (computed in
accordance with generally accepted accounting principles) excluding gains or
losses from sales of depreciable operating property, depreciation and
amortization of real estate assets, and excluding results defined as
"extraordinary items" under generally accepted accounting
principles.  We consider FFO to be an appropriate supplemental measure
of operating performance because, by excluding gains or losses on dispositions
and excluding depreciation, FFO is a helpful tool that can assist in the
comparison of the operating performance of a company's real estate between
periods, or as compared to different companies.  FFO should not be
considered an alternative to cash flows from operating, investing and financing
activities in accordance with general accepted accounting principles and is not
necessarily indicative of cash available to meet cash needs.  Our
computation of FFO may differ from the methodology for calculating FFO utilized
by other equity REITs and, therefore, may not be comparable to such other REITS.
FFO is not defined by generally accepted accounting principles and should not be
considered an alternative to net income as an indication of our performance, or
of cash flows as a measure of liquidity.  Please see reconciliation of
Net Income to FFO in Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations."  For the year ended December 31,
2004, FFO includes an impairment charge of $2.4 million related to two single
tenant, non-core assets.  For the years ended December 31, 2004, and
2003, FFO includes deferred merger costs of $1.7 million and $915,000 resulting
from shares issued to our CEO from the sale of his advisory company to us in
June 1998.





(2)  Operating
expenses for the years ended December 31, 2004 and 2003 include a charge of $1.7
million, and $915,000, respectively, resulting from shares issued to our CEO as
deferred merger cost stemming from the sale of his advisory company to us in
June 1998.





(3)  Income
from discontinued operations in 2004 includes an impairment charge of $2.4
million, resulting from two asset impairments and corresponding write-downs of
value.







~18~





Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations





Executive
Overview





We are an
established real estate company that has elected to be taxed as a real estate
investment trust (“REIT”) for federal income tax purposes. Our business model is
similar to an institutional advisory company that is judged by its investor
partners on the returns we are able to deliver to reach specified long-term
results. Our primary objective is to build long-term shareholder value and
continue to build and enhance the net asset value (NAV) of AmREIT and its
advised funds.
 
 We seek
to create value and drive net operating income (NOI) growth on the properties
owned in our institutional-grade portfolio of Irreplaceable CornersTM and those
owned by a series of closed-end, merchant development funds. We also seek to
support a growing advisory business that raises capital through an extensive
independent broker dealer channel as well as through institutional joint venture
partners.


As of
December 31, 2007, we have over 1.3 million square feet of shopping
centers in various stages of development or in the pipeline for our advisory
group and for third parties. Since listing on the AMEX in July 2002, our total
assets have grown from a book value of approximately $48 million to
approximately $344 million, including 50 properties located in 15 states. Within
our asset advisory business we manage an additional $231 million in assets,
representing 25 properties, all in Texas, and equity under management within our
advisory business has grown from approximately $15 million to approximately $159
million and an additional $33 million in institutional capital under
management.





Portfolio
of Irreplaceable Corners


The
institutional-grade portfolio of Irreplaceable Corners – premier retail
properties in high-traffic, highly-populated areas – are held for long-term
value and to provide a foundation to our funds from operations (FFO) through a
steady stream of rental income. Our advisory business, has a 24-year track
record of delivering returns to its investor partners through a series of
closed-end, merchant development funds, resulting in recurring income from
assets under management and in transactional income through profit participation
interests and real estate fees, including acquisition, development and leasing
fees.


During
2005 and continuing through 2007, we acquired approximately 355,000 square feet
of multi-tenant shopping centers, representing approximately $143 million in
assets at an average cap rate of 6.8%.  We take a very hands-on
approach to ownership, and directly manage the operations and leasing at all of
our wholly-owned properties.





As of
December 31, 2007, we owned a real estate portfolio consisting of 50 properties
located in 15 states.  The areas where a majority of our properties
are located are densely populated, suburban communities in and around Houston,
Dallas and San Antonio. Within these broad markets, we target locations that we
believe have the best demographics and highest long term value.  We
refer to these properties as Irreplaceable Corners. Our criteria for an
Irreplaceable Corner includes:  high barriers to entry (typically
infill locations in established communities without significant raw land
available for development), significant population within a three mile radius
(typically in excess of 100,000 people), located on the hard corner of an
intersection guided by a traffic signal, ideal average household income in
excess of $80,000 per year, strong visibility and significant traffic counts
passing by the location (typically in excess of 30,000 cars per
day).  We believe that centers with these characteristics will provide
for consistent leasing demand and rents that increase at or above the rate of
inflation.   Additionally, these areas have barriers to entry for
competitors seeking to develop new properties due to the lack of available
land.





We will
continue to divest of properties which no longer meet our core criteria, and, to
the extent that we can do so accretively, replace them with high-quality
grocery-anchored, lifestyle, and multi-tenant shopping centers or the
development of single-tenant properties located on Irreplaceable
Corners.   Each potential acquisition is subjected to a rigorous
due diligence process that includes site inspections, financial underwriting,
credit analysis and market and demographic studies.  Therefore, there
can be no assurance that we will ultimately purchase any or all of these
projects.  Our acquisitions program is sensitive to changes in
interest rates.  As of December 31, 2007, 83% of our outstanding debt
had a long-term fixed interest rate with an average term of 6.7
years.  Our philosophy continues to be matching long-term leases with
long-term debt structures while keeping our debt to total assets ratio less than
55%.





Our
structure consists of two distinct companies: an institutional grade portfolio
of Irreplaceable Corners and our advisory business, each of which is supported
by our real estate development and operating group. This structure strives to
deliver long-term returns to our investor partners- Wall Street, independent
broker-dealers and institutional joint venture partners.
 
 Advisory  Business
 In
an effort to vertically integrate our business model and better control the
inflows of capital into our Advisory business, we have a wholly owned Financial
Industry Regulatory Agency (FINRA) registered broker-dealer, AmREIT Securities
Company (ASC). For the
past 24 years, we have been raising capital for our merchant development funds
and building relationships in the financial planning and broker-dealer
community, earning fees and sharing in profits from those
activities.  Historically, our advisory group has raised capital in
two ways:  first, directly for AmREIT through non-traded classes of
common shares, and second, for our actively managed merchant development
funds.





~19~


The
advisory business invests in and actively manages seven merchant development
partnership funds which were formed to





Real
Estate Development and Operating Group


Our real
estate development and operating business, ARIC, is a fully integrated and
wholly-owned business, consisting of brokers and real estate professionals that
provide development, acquisition, brokerage, leasing, construction, general
contracting, asset and property management services to our portfolio of
properties, to our advisory business, and to third parties.  This
operating subsidiary, which is a taxable REIT subsidiary, is
transaction-oriented, and has the potential to generate significant profits and
fees on an annual basis through its activity in the real estate
market.  This business can provide significant long-term and annual
growth; however, its quarter to quarter results will fluctuate, and therefore
its contributions to our quarterly earnings will be volatile.





Summary
of Critical Accounting Policies





Our
results of operations and financial condition, as reflected in the accompanying
consolidated financial statements and related footnotes, are subject to
management’s evaluation and interpretation of business conditions, retailer
performance, changing capital market conditions and other factors, which could
affect the ongoing viability of our tenants. Management believes the most
critical accounting policies in this regard are revenue recognition, the regular
evaluation of whether the value of a real estate asset has been impaired, the
allowance for uncollectible accounts and accounting for real estate
acquisitions. We evaluate our assumptions and estimates on an on-going basis. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable based on the circumstances.





Revenue Recognition —
We lease space to tenants under agreements with varying terms. The majority of
the leases are accounted for as operating leases with revenue being recognized
on a straight-line basis over the terms of the individual leases. Accrued rents
are included in tenant receivables. Revenue from tenant reimbursements of taxes,
maintenance expenses and insurance is recognized in the period the related
expense is recorded. Additionally, certain of the lease agreements contain
provisions that grant additional rents based on tenants’ sales volumes
(contingent or percentage rent). Percentage rents are recognized when the
tenants achieve the specified targets as defined in their lease agreements. The
terms of certain leases require that the building/improvement portion of the
lease be accounted for under the direct financing method which treats the
building as if we had sold it to the lessee and entered into a long-term
financing arrangement with such lessee. This accounting method is appropriate
when the lessee has all of the benefits and risks of property ownership that
they otherwise would if they owned the building versus leasing it from
us.





We have
been engaged to provide various real estate services, including development,
construction, construction management, property management, leasing and
brokerage. The fees for these services are recognized as services are provided
and are generally calculated as a percentage of revenues earned or to be earned
or of property cost, as appropriate. Revenues from fixed-price construction
contracts are recognized on the percentage-of-completion method, measured by the
physical completion of the structure. Revenues from cost-plus-percentage-fee
contracts are recognized on the basis of costs incurred during the period plus
the percentage fee earned on those costs. Construction management contracts are
recognized only to the extent of the fee revenue.





Construction
contract costs include all direct material and labor costs and any indirect
costs related to contract performance. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, and estimated
profitability, including those arising from any contract penalty provisions, and
final contract settlements may result in revisions to costs and income and are
recognized in the period in which the revisions are determined. Any profit
incentives are included in revenues when their realization is reasonably
assured. An amount equal to contract costs attributable to any claims is
included in revenues when realization is probable and the amount can be reliably
estimated.





Unbilled
construction receivables represent reimbursable costs and amounts earned under
contracts in progress as of the date of our balance sheet. Such amounts become
billable according to contract terms, which usually consider the passage of
time, achievement of certain milestones or completion of the project. Advance
billings represent billings to or collections from clients on contracts in
advance of revenues earned thereon. Unbilled construction receivables are
generally billed and collected within the 12 months following the date of our
balance sheet, and advance billings are generally earned within the 12 months
following the date of our balance sheet.





Securities
commission income is recognized as units of our merchant development funds are
sold through AmREIT Securities Company. Securities commission income is earned
as the services are performed and pursuant to the corresponding prospectus or
private offering memorandum. Generally, it includes a selling commission of
between 6.5% and 7.5%, a dealer manager fee of between 2.5% and 3.25% and
offering and organizational costs of 1.0% to 1.50%. The selling commission is
then paid out to the unaffiliated selling broker dealer and reflected as
securities commission expense.


~20~




Real Estate Valuation
— Land, buildings and improvements are recorded at cost. Expenditures related to
the development of real estate are carried at cost which includes capitalized
carrying charges, acquisition costs and development costs. Carrying charges,
primarily interest, real estate taxes and loan acquisition costs, and direct and
indirect development costs related to buildings under construction are
capitalized as part of construction in progress. The capitalization of such
costs ceases at the earlier of one year from the date of completion of major
construction or when the property, or any completed portion, becomes available
for occupancy. The Company capitalizes acquisition costs once the acquisition of
the property becomes probable. Prior to that time, the Company expenses these
costs as acquisition expenses. Depreciation is computed using the straight-line
method over an estimated useful life of up to 50 years for buildings, up to
20 years for site improvements and over the life of the respective leases
for tenant improvements. Leasehold estate properties, where the Company owns the
building and improvements but not the related ground, are amortized over the
life of the lease.





Management
reviews its properties for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets, including accrued
rental income, may not be recoverable through operations. Management determines
whether an impairment in value occurred by comparing the estimated future cash
flows (undiscounted and without interest charges), including the residual value
of the property, with the carrying value of the individual property. If
impairment is indicated, a loss will be recorded for the amount by which the
carrying value of the asset exceeds its fair value.





Valuation of
Receivables — An allowance for the uncollectible portion of tenant
receivables and accounts receivable is determined based upon an analysis of
balances outstanding, historical payment history, tenant credit worthiness,
additional guarantees and other economic trends. Balances outstanding include
base rents, tenant reimbursements and receivables attributed to the accrual of
straight line rents. Additionally, estimates of the expected recovery of
pre-petition and post-petition claims with respect to tenants in bankruptcy are
considered in assessing the collectibility of the related
receivables.





Real Estate
Acquisitions — We account for real estate acquisitions pursuant to
Statement of Financial Accounting Standards No. 141, Business Combinations(“SFAS
No. 141”). Accordingly, we allocate the purchase price of the acquired
properties to land, building and improvements, identifiable intangible assets
and to the acquired liabilities based on their respective fair values.
Identifiable intangibles include amounts allocated to acquired out-of-market
leases, the value of in-place leases and customer relationships, if any. We
determine fair value based on estimated cash flow projections that utilize
appropriate discount and capitalization rates and available market information.
Estimates of future cash flows are based on a number of factors including the
historical operating results, known trends and specific market and economic
conditions that may affect the property. Factors considered by management in our
analysis of determining the as-if-vacant property value include an estimate of
carrying costs during the expected lease-up periods considering market
conditions, and costs to execute similar leases. In estimating carrying costs,
management includes real estate taxes, insurance and estimates of lost rentals
at market rates during the expected lease-up periods, tenant demand and other
economic conditions. Management also estimates costs to execute
similar leases including leasing commissions, tenant improvements, legal and
other related expenses. Intangibles related to out-of-market leases and in-place
lease value are recorded as acquired lease intangibles and are amortized as an
adjustment to rental revenue or amortization expense, as appropriate, over the
remaining terms of the underlying leases. Premiums or discounts on acquired
out-of-market debt are amortized to interest expense over the remaining term of
such debt.


~21~








Recently
Issued Accounting Pronouncements





In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
141 (Revised 2007),Business Combinations” (SFAS
No. 141R).  SFAS
No. 141R will change the accounting for business combinations. Under SFAS
No141R, an acquiring entity will be required to recognize all the assets
acquired and liabilities assumed in a transaction at the acquisition-date fair
value with limited exceptions.  SFAS No. 141R applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008.  We are currently evaluating the potential impact of SFAS No.
141R on our financial position and results of operations beginning for fiscal
year 2009.
 
 In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51 (SFAS
No. 160). SFAS No. 160 establishes accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. SFAS No. 160 is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. SFAS No. 160 requires retroactive adoption of
the presentation and disclosure requirements for existing minority interests.
All other requirements of SFAS No. 160 shall be applied prospectively. We
are currently evaluating the potential impact of the adoption of SFAS No.
160 on our consolidated financial statements.
 
 In
February 2007 the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. SFAS No. 159 expands opportunities to
use fair value measurement in financial reporting and permits entities to choose
to measure many financial instruments and certain other items at fair value.
This Statement is effective for fiscal years beginning after November 15, 2007.
We currently do not plan to measure any eligible financial assets and
liabilities at fair value under the provisions of SFAS No. 159.
 
 In
September 2006, FASB issued SFAS No. 157, Fair Value Measurements (SFAS
No. 157).  SFAS No. 157 defines fair value, establishes a framework
for measuring fair value and requires enhanced disclosures about fair value
measurements.  SFAS No. 157 requires companies to disclose the fair
value if it’s financial instruments according to a fair value
hierarchy.  Additionally, companies are required to provide certain
disclosures regarding instruments within the hierarchy, including a
reconciliation of the beginning and ending balances for each major category of
assets and liabilities.  SAFS No. 157 is effective for our fiscal year
beginning January 1, 2008.  The adoption of SFAS No. 157 is not
expected to have a material effect on our results of operations or financial
position


Liquidity
and Capital Resources





At
December 31, 2007 and December 31, 2006, our cash and cash equivalents totaled
$1.2 million and $3.4 million, respectively. Cash flows provided by
(used in) operating activities, investing activities and financing activities
for the three years ended December 31, 2007, are as follows (in
thousands):





2007
            
            
            2006
            
            
            2005Operating
      activities
            
            $
            10,950
            
            
            $
            18,147
            
            
            $
            14,869Investing
      activities
            
            $
            (23,965
            )
            
            $
            (23,980
            )
            
            $
            (108,100
            )Financing
      activities
            
            $
            10,821
            
            
            $
            3,333
            
            
            $
            96,186








Cash
flows from operating activities and financing activities have been the principal
sources of capital to fund our ongoing operations and dividends. Our cash on
hand, internally-generated cash flow, borrowings under our existing credit
facilities, issuance of equity securities, as well as the placement of secured
debt and other equity alternatives, are expected to provide the necessary
capital to maintain and operate our properties as well as execute our growth
strategies.





Additionally,
as part of our investment strategy, we constantly evaluate our property
portfolio, systematically selling off any non-core or underperforming assets,
and replacing them with Irreplaceable Corners and other core assets. We
anticipate that we will continue to sell the underperforming assets and deploy
the capital generated into high-quality income-producing retail real estate
assets. Since January 2004, we have executed this strategy through the
acquisition of $143 million of shopping centers, consisting primarily of
four premier properties with approximately 289,000 square feet. We completed our
acquisition of Uptown Park, a 169,000 square foot multi-tenant shopping center,
in June 2005, our acquisition of The South Bank, a 47,000 square foot
multi-tenant retail center located on the San Antonio Riverwalk, in
September 2005, our acquisition in December 2005 of 39,000 square feet of
multi-tenant retail projects located adjacent to our MacArthur Park Shopping
Center in Las Colinas, an affluent residential and business community in Dallas,
Texas and our acquisition of Uptown Plaza in Dallas, a 34,000 square foot
multi-tenant retail complex located at the corner of McKinney Avenue and Pearl
Street near downtown Dallas.


~22~





Cash
provided by operating activities as reported in the Consolidated Statements of
Cash Flows decreased by $7.2 million for 2007 when compared to 2006. This net
decrease is primarily attributable to a $7.6 million decrease in working capital
cash flow during the period.  This working capital decrease was due
primarily to a $6.2 million net decrease in cash flows from related party
receivables which was driven by a number of factors – (1) an $2.5 million
increase during 2006 in working capital cash flows as a result of improved
collection efforts on 2005 related party receivables generated by our
construction business which commenced operations during 2005, (2) $1.1 million
of organization and offering costs incurred on behalf of REITPlus, Inc. which is
currently in the pre-operating stage (these costs are anticipated to be
reimbursed by the fund in the first quarter of 2008) and (3) $2.0 million
increase due to timing of construction billings related to a property
redevelopment that took place in the fourth quarter of 2007. In addition to the
$7.6 million working capital deficit, we had a reduction in net income of $2.3
million as further addressed below in ‘Results of Operations’.  This
$9.9 million in cash flow decreases was partially offset by a $2.5 million net
increase in cash flow from our activities related to real estate acquired for
resale.  During 2006, we had net cash outflows from these activities
of $1.1 million as compared to net cash inflows of $1.4 million during
2007.  In 2006, we invested $3.3 million in real estate held for
resale and sold four properties for aggregate proceeds of $2.2
million.  In 2007, we made no investments in such real estate and sold
one property for aggregate proceeds of $1.4 million.





Net cash
used in investing activities as reported in the Consolidated Statements of Cash
Flows was $24.0 million for both 2007 and 2006.  We had a $13.9
million decrease in cash usage related to property acquisitions during 2007
which was substantially offset by an increase in investments of $8.2 million,
coupled with a $4.5 million reduction in proceeds from the sale of investment
property.  On the property acquisition side, in February 2007, we
acquired The Woodlands Mall Ring Road property, which represents 66,000 square
feet of gross leasable area in Houston, Texas.  The property has been
ground-leased to five tenants, including NationsBank, Circuit City and Landry’s
Seafood.  In March 2006, we acquired Uptown Plaza in Dallas, a 34,000
square foot multi-tenant retail complex located near downtown
Dallas.  With respect to investments made during 2007, we acquired a
30% interest in AmREIT Woodlake LP., which purchased Woodlake Square Shopping
Center, a 205,000 square foot Randall’s-anchored shopping center on the
northeast corner of Westheimer and Gessner in Houston, Texas.  We also
acquired a 30% interest in AmREIT Westheimer Gessner LP which purchased the
Borders Books site, an 82,000 square foot center adjacent to the Woodlake Square
Shopping Center, at the southeast corner of Westheimer and
Gessner.  We made no such investments in 2006.  With respect
to the decrease in proceeds from sales of investment property, we did not have
any such sales in 2007, whereas in 2006, we sold two properties held for
investment, generating proceeds of $4.5 million.





Cash
flows provided by financing activities increased from $3.3 million during the
2006 period to $10.8 million during the 2007 period. This $7.5 million
increase was primarily attributable to net proceeds from notes payable of $7.2
million which was comprised of a $22.2 million increase in proceeds from notes
payable during the period, offset by $15.0 million increase in payments of notes
payable.  During 2006, net proceeds from notes payable were $30.0
million (driven primarily by the $20.0 million financing of The South Bank and
the $9.2 million draw-down on our credit facility related to our repurchase of
approximately 48% of the Class B common shares in December 2006) versus net
proceeds from notes payable of $37.2 million during the 2007 period (driven
primarily by the $19.9 million in proceeds from the financing of Uptown Dallas,
the $10.4 million in financing required to redeem the remainder of the Class B
common shares in December 2007 and the $8.0 required to finance our two
real estate investments described above).  Additionally, we had a $1.3
million reduction in share repurchase activity under our share repurchase
program.





We have
an unsecured credit facility in place which is being used to provide funds for
the acquisition of properties and working capital. The
credit facility matures in October 2009 and provides that we may borrow up to
$70 million subject to the value of unencumbered assets.  Effective
October 2007, we renewed our credit facility on terms which provided us with an
increased borrowing base at reduced borrowing costs. Conditions substantially
the same as the previous facility.  The credit facility contains
covenants which, among other restrictions, require us to maintain a minimum net
worth, a maximum leverage ratio, maximum tenant concentration ratios, specified
interest coverage and fixed charge coverage ratios and allow the lender to
approve all distributions. For the year ended December 31, 2007, we violated two
covenants per the terms of the credit facility.  Our lender
has waived both events of non-compliance as of December 31,
2007.  We were in compliance with all other covenants as of December
31, 2007.  The credit facility’s annual interest rate varies depending
upon our debt to asset ratio, from LIBOR plus a spread of 1.0% to LIBOR plus a
spread of 1.85%.  As of December 31, 2007, the interest rate was LIBOR
plus 1.00%.  As of December 31, 2007 and 2006, there was $30.4 million
and $11.9 outstanding on the credit facility, respectively.  As of
December 31, 2007, we have approximately $37.6 million available under our line
of credit, subject to the covenant provisions discussed above.  In
addition to the credit facility, we utilize various permanent mortgage financing
and other debt instruments.


~23~








Contractual
Obligations





As of
December 31, 2007, we had the following contractual debt obligations (see also
Note 7 of the Consolidated Financial Statements for further discussion regarding
the specific terms of our debt):





2008
            
            
            2009
            
            
            2010
            
            
            2011
            
            
            2012
            
            
            Thereafter
            
            
            TotalUnsecured
      debt:Revolving
      credit facility*
            
            $
            -
            
            
            $
            30,439
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            30,439Secured
      debt**
            
            
            14,269
            
            
            
            918
            
            
            
            982
            
            
            
            4,062
            
            
            
            26,332
            
            
            
            91,558
            
            
            
            138,121Secured
      Debt Held for Sale
            
            
            491
            
            
            
            531
            
            
            
            574
            
            
            
            620
            
            
            
            10,595
            
            
            
            -
            
            
            
            12,811Interest*
            
            
            9,596
            
            
            
            6,868
            
            
            
            6,775
            
            
            
            6,543
            
            
            
            5,730
            
            
            
            26,532
            
            
            
            62,044Non-cancelable
      operatinglease
      payments
            
            
            320
            
            
            
            205
            
            
            
            23
            
            
            
            23
            
            
            
            -
            
            
            
            -
            
            
            
            571Total
      contractual  obligations
            
            $
            24,676
            
            
            $
            38,961
            
            
            $
            8,354
            
            
            $
            11,248
            
            
            $
            32,376
            
            
            $
            128,371
            
            
            $
            243,986





*
Interest expense includes our interest obligations on our revolving credit
facility as well as on our fixed-rate loans.  Our revolving credit
facility is a variable-rate debt instrument, and the outstanding balance tends
to fluctuate throughout the year based on our liquidity needs.  This
table assumes that the balance outstanding ($30.4 million) and the interest rate
as of December 31, 2007 (6.1%) remain constant through maturity.


**
Secured debt as shown above is $639,000 less than total secured debt as reported
in the accompanying balance sheet due to the premium recorded on above-market
debt assumed in conjunction with certain of our property
acquisitions.





During
2007, we paid dividends to our shareholders of $14.9 million, compared with
$14.6 million in 2006.  The class A, C and D shareholders receive
monthly dividends and the class B shareholders receive quarterly
dividends.  All dividends are declared on a quarterly
basis.  The dividends by class follow (in thousands):





Class A
            
            
            Class B
            
            
            Class C
            
            
            Class D2007Fourth
      Quarter
            
            $
            785
            
            
            $
            1,097
            *
            
            $
            721
            
            
            $
            1,783Third
      Quarter
            
            $
            793
            
            
            $
            191
            
            
            $
            720
            
            
            $
            1,783Second
      Quarter
            
            $
            796
            
            
            $
            192
            
            
            $
            726
            
            
            $
            1,791First
      Quarter
            
            $
            785
            
            
            $
            194
            
            
            $
            725
            
            
            $
            1,7862006Fourth
      Quarter
            
            $
            776
            
            
            $
            200
            
            
            $
            723
            
            
            $
            1,790Third
      Quarter
            
            $
            782
            
            
            $
            385
            
            
            $
            724
            
            
            $
            1,799Second
      Quarter
            
            $
            788
            
            
            $
            390
            
            
            $
            726
            
            
            $
            1,798First
      Quarter
            
            $
            789
            
            
            $
            390
            
            
            $
            722
            
            
            $
            1,794





*-
Includes a $933,000 redemption premium associated with the redemption of the
remaining Class B Shares in December 2007.





Until we
acquire properties, we use our funds to pay down outstanding debt under the
credit facility.  Thereafter, any excess cash is provided first to our
affiliates in the form of short-term bridge financing for development or
acquisition of properties and then is invested in short-term investments or
overnight funds.   This investment strategy allows us to manage
our interest costs and provides us with the liquidity to acquire properties at
such time as those suitable for acquisition are located.




Inflation
has had very little effect on our income from operations.  We expect
that increases in store sales volume due to inflation as well as increases in
the Consumer Price Index, may contribute to capital appreciation of our
properties.  These factors, however, also may have an adverse impact
on the operating margins of the tenants of the properties.




Results
of Operations


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





Total
revenues decreased by $7.8 million or 14% in 2007 as compared to 2006 ($49.6
million in 2007 versus $57.4 million in 2006).  Rental revenues
increased by $2.4 million, or 9%, in 2007 as compared to 2006 ($30.6 million in
2007 versus $28.2 million in 2006).  This increase is attributable to
the acquisition of Uptown Dallas in March 2006 and the Woodlands ground leases
in February 2007.  In addition, in the first quarter of 2006 we
recorded a reduction to rental revenues of $457,000 as a result of a favorable
property tax protest on one of our properties.  This reduction was
offset by a corresponding reduction in property expense during
2006.


~24~








AmREIT
Construction Company (“ACC”), a wholly owned subsidiary of ARIC, generated
revenues of $7.6 million during 2007, compared to $13.5 million in
2006.  Such revenues have been recognized under the
percentage-of-completion method of accounting.  This reduction in
revenues is primarily attributable to reduced related party work.  A
significant related party contract that generated $5.3 million revenues during
2006 was completed in the fourth quarter of 2006.





Real
estate fee income decreased approximately $3.1 million to $5.2 million, or 37%,
primarily as a result of decreased acquisition fees earned on property
transactions within our merchant development funds.  During 2007, we
acquired three properties with a total gross lease-able area of approximately
288,000 square feet within our merchant development funds compared to eight
properties in 2006 with a total gross lease-able area of approximately 1.0
million square feet.





Securities
commission revenue decreased by $1.7 million to $4.8 million or 27% in 2007 as
compared to 2006. This decrease in commission revenue was driven by the
capital-raising activities of our advisory business.  During 2007, we
raised $45 million in capital for one of our merchant development funds, AmREIT
Monthly Income and Growth Fund IV, L.P. (MIG IV), versus $60 million in capital
that we raised for AmREIT Monthly Income and Growth Fund III, LP (MIG III)
during 2006.  This decrease in commission income was partially offset
by a corresponding decrease in commission expense paid to other third party
broker-dealer firms. As we raise capital for our affiliated merchant development
partnerships, we earn a securities commission of approximately 11% of the money
raised. These commission revenues are then offset by commission payments to
non-affiliated broker-dealers of between 8% and 9%.





Expenses


Total
operating expenses decreased by $7.9 million, or 17%, from $45.7 million in 2006
to $37.8 million in 2007. This decrease was primarily attributable to decreases
in construction costs, securities commissions, depreciation and amortization and
real estate commissions.


ACC
recognized $6.9 million in construction costs during 2007, compared to $12.3
million in 2006.  This reduction in construction costs is consistent
with the reduction in revenues described above.





Securities
commission expense decreased by $1.7 million or 30% from $5.7 million in 2006 to
$4.0 million in 2007. This decrease is attributable to decreased capital-raising
activity through ASC during 2007 as discussed in “Revenues”above.





Depreciation
and amortization decreased by $927,000, or 11%, to $7.8 million in 2007 compared
to $8.7 million in 2006. The decrease in depreciation and amortization is
attributable to capitalized leasing costs that became fully amortized upon
expiration of the related leases in 2006 as well as in 2007.  This
decrease was partially offset by increased depreciation and amortization during
2007 related to Uptown Dallas which was acquired in March 2006.





Other


Interest
expense increased by $1.7 million, or 25%, from $7.0 million in 2006 to $8.7
million in 2007. The increase in interest expense is primarily attributable to
the Woodlands Ground lease acquisition in January 2007, as well as additional
draw-downs on our line of credit related to the tender of the Class B
shares.





Income
from merchant development funds and other affiliates decreased by $814,000, or
84%, to $153,000 in 2007.  The decrease is mainly due to a $465,000
decrease in income associated with our 25% limited partner interest in West Road
Plaza, which was sold during 2006.  Additionally, in 2007 we
recognized $185,000 in losses related to our 30% limited partner interest in
Woodlake Square.





Income
from discontinued operations decreased by $864,000, or 63%, to $502,000 in 2007.
The decrease is primarily attributed to $667,000 of gains related to properties
sold in 2006.


Results
of Operations


Comparison
of the year ended December 31, 2006 to the year ended December 31,
2005




Total
revenues increased by $25.6 million or 80% in 2006 as compared to 2005 ($57.4
million in 2006 versus $31.8 million in 2005).  Rental revenues
increased by $7.9 million, or 39%, in 2006 as compared to 2005 ($28.2 million in
2006 versus $20.4 million in 2005). This increase is attributable to the
acquisitions during 2005 of Uptown Park, South Bank and MacArthur Park pad
sites, as well as the acquisition of Uptown Dallas in March
2006.
  During
the first quarter of 2005, ACC was formed to provide construction services to
third parties as well as to our merchant development funds. ACC began executing
on contracts during the quarter ended June 30, 2005.  ACC generated
revenues of $13.5 million during 2006, compared to $4.7 million in
2005.  Such revenues have been recognized under the
percentage-of-completion method of accounting.





Real
estate fee income increased approximately $3.2 million to$8.3, or 64%, primarily
as a result of increased acquisition and development fees earned on property
transactions within our merchant development funds.  During 2006, we
acquired eight properties with a total gross lease-able
area of approximately 1.0 million square feet within our merchant development
funds compared to five properties in 2005 with a total gross lease-able area of
approximately 300 thousand square feet.


~25~





Securities
commission revenue increased by $5.4 million to $6.6 million or 464% in 2006 as
compared to 2005. This increase in commission revenue was driven by the
capital-raising activities of our advisory business related to one of our
merchant development funds, AmREIT Monthly Income and Growth Fund III, L.P. (MIG
III).  During 2006, we raised approximately $60 million through MIG
III, while in 2005, we raised $11.2 million.  We closed the MIG III
offering to investors effective October 31, 2006.  This increase in
commission income was partially offset by a corresponding increase in commission
expense paid to other third party broker-dealer firms. As we raise capital for
our affiliated merchant development partnerships, we earn a securities
commission of approximately 11% of the money raised. These commission revenues
are then offset by commission payments to non-affiliated broker-dealers of
between 8% and 9%.





Expenses


Total
operating expenses increased by $21.5 million, or 89%, from $24.1 million in
2005 to $45.6 million in 2006. This increase was primarily attributable to
increases in construction costs, securities commissions, property expenses,
depreciation and amortization and general and administrative
expenses.





As
discussed above in “Revenues,”ACC was formed in the first quarter of 2005 to provide construction
services and began executing on contracts during the quarter ended June 30,
2005. ACC recognized $12.3 million in construction costs during 2006, compared
to $4.3 million in 2005.





Property
expense increased $2.1 million or 44% in 2006 as compared to 2005 ($7.0 million
in 2006 versus $4.9 million in 2005) primarily as a result of the acquisitions
of the properties discussed in “Revenues”
above.





General
and administrative expense increased by $3.1 million, or 49%, during 2006 to
$9.3 million compared to $6.2 million in 2005. This increase is primarily due to
increases in personnel. We increased our total number of employees during 2006
in order to appropriately match our resources with the growth in our portfolio
as well as in our real estate operating and development activities.





Securities
commission expense increased by $4.9 million or 563% from $1.0 million in 2005
to $5.7 million in 2006. This increase is attributable to increased
capital-raising activity through ASC during 2006 as discussed in “Revenues”above.





Depreciation
and amortization increased by $2.7 million, or 45%, to $8.7 million in 2006
compared to $6.0 million in 2005. The increased depreciation and amortization is
attributable to the significant property acquisitions made during 2005 and 2006
as discussed in “Revenues”
above.





Other


Interest
and other income decreased by $720,000 from $705,000 million in 2005 to $1.4
million in 2006 primarily as a result of an increase in interest earned on
short-term bridge loans made to affiliates related to their acquisition or
development of properties.





Interest
expense increased by $1.7 million, or 32%, from $5.2 million in 2005 to $7.0
million in 2006. The increase in interest expense is primarily attributable to
having a full year of interest in 2006 related to our placement of $49.0 million
in debt in connection with our June 2005 Uptown Park
acquisition.




Income
from merchant development funds and other affiliates increased by $806, 000, or
501%, to $967,000 in 2006 from $161,000 in 2005. During 2006, we realized an
increase of $414,000 of back-end profit participation from our general partner
interest in AOF, one of our merchant development funds which is currently in
liquidation. We also recognized additional income from affiliates related to our
25% limited partner in West Road Plaza, which was sold during
2006.




Income
from discontinued operations decreased by $5.9 million, or 81%, to $1.4 million
in 2006. The decrease is primarily attributed to $6.6 million of gains related
to properties sold in 2005.


Funds
From Operations





We
consider FFO to be an appropriate measure of the operating performance of an
equity REIT.  NAREIT defines FFO as net income (loss) computed in
accordance with GAAP, excluding gains or losses from sales of property, plus
real estate related depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures.  In addition, NAREIT
recommends that extraordinary items not be considered in arriving at FFO. We
calculate our FFO in accordance with this definition.  Most industry
analysts and equity REITs, including us, consider FFO to be an appropriate
supplemental measure of operating performance because, by excluding gains or
losses on dispositions and excluding depreciation, FFO is a helpful tool that
can assist in the comparison of the operating performance of a company’s real
estate between periods, or as compared to different
companies.  Management uses FFO as a supplemental measure to conduct
and evaluate our business because there are certain limitations associated with
using GAAP net income by itself as the primary measure of our operating performance.  Historical
cost accounting for real estate assets in accordance with GAAP implicitly
assumes that the value of real estate assets diminishes predictably over
time.  Since real estate values instead have historically risen or
fallen with market conditions, management believes that the presentation of
operating results for real estate companies that uses historical cost accounting
is insufficient by itself.  There can be no assurance that FFO
presented by us is comparable to similarly titled measures of other
REITs.  FFO should not be considered as an alternative to net income
or other measurements under GAAP as an indicator of our operating performance or
to cash flows from operating, investing or financing activities as a measure of
liquidity.


~26~




Below is
the calculation of FFO and the reconciliation to net income, which we believe is
the most comparable GAAP financial measure to FFO, in thousands:




2007
            
            
            2006
            
            
            2005Income
      – before discontinued operations
            
            $
            4,749
            
            
            $
            6,197
            
            
            $
            2,858Income  –
      from discontinued operations
            
            
            502
            
            
            
            1,366
            
            
            
            7,268Plus
      depreciation of real estate assets – from operations
            
            
            7,848
            
            
            
            8,760
            
            
            
            5,933Plus
      depreciation of real estate assets – fromdiscontinued
      operations
            
            
            30
            
            
            
            21
            
            
            
            130Adjustments
      for nonconsolidated affiliates
            
            
            476
            
            
            
            133
            
            
            
            100Less
      gain on sale of real estate assets acquiredfor
      investment
            
            
            -
            
            
            
            (285
            )
            
            
            (3,400
            )Less
      class B, C & D distributions
            
            
            (11,709
            )
            
            
            (11,442
            )
            
            
            (9,245
            )Total
      Funds From Operations available to class Ashareholders
            
            $
            1,896
            
            
            $
            4,750
            
            
            $
            3,644





Item
7A.  Quantitative and Qualitative Disclosures about Market
Risk





We are
exposed to interest-rate changes primarily related to the variable interest rate
on our credit facility and related to the refinancing of long-term debt which
currently contains fixed interest rates.    To achieve these
objectives, we borrow primarily at fixed interest rates.  We currently
do not use interest-rate swaps or any other derivative financial instruments as
part of our interest-rate risk management approach.





As of
December 31, 2007, the carrying value of our debt obligations associated with
assets held for investment was $168.6 million, $138.1 million of which
represented fixed rate obligations with an estimated fair value of
$139.1 million. As of December 31, 2006, the carrying value of our
total debt obligations was $144.5 million, $132.5 million of which
represented fixed-rate obligations with an estimated fair value of
$132.9 million. As of December 31, 2007, the carrying value of our debt
obligations associated with assets held for sale was $12.8 million, all of
which represented fixed rate obligations with an estimated fair value of
$13.6 million. The remaining $30.4 million of our debt obligations have a
variable interest rate.  Such debt has market-based terms, and its
carrying value is therefore representative of its fair value as of December 31,
2007.  In the event interest rates on variable rate debt were to
increase 100 basis points, annual net income, FFO and future cash flows would
decrease by $304,000 based on the variable-rate debt outstanding at December 31,
2007.


The
discussion above considers only those exposures that exist as of December 31,
2007.  It, therefore, does not consider any exposures or positions
that could arise after that date.  As a result, the ultimate impact to
us of interest-rate fluctuations will depend upon the exposures that arise
during the period, any hedging strategies in place at that time and actual
interest rates.





Item
8.   Consolidated Financial Statements and Supplementary
Data





(a)
            (1)
            Financial
      Statements


Report of
Independent Registered Public Accounting Firm


Consolidated
Balance Sheets as of December 31, 2007 and 2006


Consolidated
Statements of Operations for the Years Ended December 31, 2007, 2006 and
2005


Consolidated
Statements of Shareholders' Equity for the Years Ended December 31, 2007, 2006
and 2005


Consolidated
Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and
2005


Notes to
Consolidated Financial Statements





(2)
            Financial
      Statement Schedule (unaudited)





Schedule III -
Consolidated Real Estate Owned and Accumulated Depreciation





~27~


Item
9.   Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure


None.





Item
9A.   Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





Under the
supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, management has evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule
13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934) as of December
31, 2007.  Based on that evaluation, our CEO and CFO concluded that
our disclosure controls and procedures were effective as of December 31,
2007.





Management’s
Report on Internal Control over Financial Reporting





AmREIT
and its subsidiaries maintain a system of internal control over financial
reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act, which is a process designed under the supervision of the AmREIT's
principal executive officer and principal financial officer and effected by
AmREIT's board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.





AmREIT's
internal control over financial reporting includes those policies and procedures
that:


- Pertain
to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of AmREIT's assets;


- Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of AmREIT are being
made only in accordance with authorizations of management and trust managers of
AmREIT; and


- Provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of AmREIT's assets that could have a material
effect on the financial statements.





AmREIT's
management has responsibility for establishing and maintaining adequate internal
control over financial reporting for AmREIT. Management, with the participation
of AmREIT's Chief Executive Officer and Chief Financial Officer, conducted an
evaluation of the effectiveness of AmREIT's internal control over financial
reporting as of December 31, 2007 based on the framework in  Internal
Control—Integrated Framework  issued by the Committee of Sponsoring
Organizations of the Treadway Commission.





Based on
their evaluation of AmREIT's internal control over financial reporting, AmREIT's
management along with the Chief Executive and Chief Financial Officers believe
that the AmREIT's internal control over financial reporting is effective as of
December 31, 2007.





Changes
in Internal Controls





There has
been no change to our internal control over financial reporting during the
quarter ended December 31, 2007 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.





Item
9B.   Other Information


Not
applicable


~28~


PART
III





Item 10. Trust Managers,
Executive Officers and Corporate Governance





Information
with respect to this Item is incorporated by reference from our Proxy Statement,
relating to our annual meeting of shareholders to be held on June 3,
2008.





Item
11.   Executive Compensation





Information
with respect to this Item is incorporated by reference from our Proxy Statement,
relating to our annual meeting of shareholders to be held on June 3,
2008.





Item 12. Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder
Matters





We are
authorized to grant stock options up to an aggregate of 1,288,739 shares of
common stock outstanding at any time as incentive stock options (intended to
qualify under Section 422 of the Code) or as options that are not intended to
qualify as incentive stock options. All of our equity compensation plans were
approved by security holders.  Information regarding our equity
compensation plans was as follows as of December 31, 2007:





(a)
            (b)
            (c)Plan
              Category
            Number
      of securities to be issued upon exercise of outstanding
      options
            Weighted
      average exercise price of outstanding
      options
            Number
      of securities remaining available for future issuances under equity
      compensation plans (excluding
      securities reflected in column
      (a))Equity
      compensation plans approved by security holders.
            —
            —
            1,288,739Equity
      compensation plans not approved by security holders.
            —
            —
            —TOTAL
            
            
            1,288,739





Information
relating to the security ownership of certain beneficial owners and management
is incorporated by reference from our proxy statements, relating to our annual
meeting of shareholders to be held on June 3, 2008.





Item 13. Certain
Relationships, Related Transactions and Trust Manager
Independence





Information
with respect to this Item is incorporated by reference from our Proxy Statement,
relating to our annual meeting of shareholders to be held on June 3,
2008.





Item 14. Principal
Accountant Fees and Services





Information
with respect to this Item is incorporated by reference from our Proxy Statement,
relating to our annual meeting of shareholders to be held on June 3,
2008.










PART
IV





Item 15. Exhibits, Financial
Statements and Schedules







(a)
            (1)
            Financial
      StatmentsReport of
      Independent Registered Public Accounting FirmConsolidated
      Balance Sheets as of December 31, 2007 and 2006Consolidated
      Statements of Operations for the Years Ended December 31, 2007, 2006 and
      2005Consolidated
      Statements of Shareholders’ Equity for the Years Ended December 31, 2007,
      2006 and2005Consolidated
      Statments of Cash Flows for the Years Ended December 31, 2007, 2006 and
      2005Notes to
      Consolidated Financial Statements(2)
            Financial Statement
      Schedule (unaudited)Schedule III -
      Consolidated Real Estate Owned and Accumulated Depreciation







(b)                  Exhibits





3.1
            Amended
      and Restated Declaration of Trust  (included as Exhibit 3.1 of
      the Exhibits to the Company’s Annual Report on Form 10-KSB for the year
      ended December 31, 2002, and incorporated herein by
      reference).





3.2
            By-Laws,
      dated December 22, 2002  (included as Exhibit 3.1 of the
      Exhibits to the Company’s Annual Report on Form 10-KSB for the year ended
      December 31, 2002, and incorporated herein by
  reference).





10.2
            Amended
      and Restated Revolving Credit Agreement, effective December 8, 2003, by
      and among AmREIT and Wells Fargo Bank, as the Agent, relating to a
      $30,000,000 loan (included as Exhibit 10.4 of the Exhibits to the
      Company’s Annual Report on Form 10-KSB for  the year ended
      December 31, 2003 and incorporated herein by
  reference).





10.3
            Eighth
      Modification Agreement, effective November 4, 2005 by and between AmREIT
      and Wells Fargo Bank, relating to
      a                  $40,000,000
      loan and modifying the September 4, 2003 Revolving Credit Agreement
      (included as Exhibit 10.3 of
      the          Exhibits to
      the Company’s Annual Report on Form 10-K for the year ended
      December 31, 2005 and incorporated herein by
    reference).





10.4*
            Revolving
      Credit Agreement, dated effective as of October 30, 2007 by and between
      AmREIT as borrower and Wells Fargo Bank.




21.1*
            Subsidiaries
      of the Company




31.1
      *
            Certification
      pursuant to Rule 13a-14(a) of Chief Executive Officer dated December 31,
      2006.





31.2
      *
            Certification
      pursuant to Rule 13a-14(a) of Chief Financial Officer dated December 31,
      2006.





32.1
      **
            Chief
      Executive Officer certification pursuant to 18 U.S.C.  Section
      1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.





32.2
      **
            Chief
      Financial Officer certification pursuant to 18 U.S.C.  Section
      1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.





* Filed
herewith


**
Furnished herewith





Items 5,
6, 7, 7A and 8 of Part II and Item 15 of Part IV of this Form 10-K contain the
financial statements, financial statement schedule and other financial
information.  No Annual Report or proxy material has yet been provided
to security holders with respect to 2007.








SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf on
the 19th of March 2007 by the undersigned, thereunto duly
authorized.





AmREIT/s/
      H. Kerr TaylorH.
      Kerr Taylor, President and Chief Executive
  Officer








Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.








/s/
      H. Kerr Taylor
            March
      26, 2008H.
      KERR TAYLORPresident,
      Chairman of the Board, Chief ExecutiveOfficer
      and Director (Principal Executive Officer)/s/
      Robert S. Cartwright, Jr.
            March
      26, 2008ROBERT
      S. CARTWRIGHT, JR., Trust Manager/s/
      G. Steven Dawson
            March
      26, 2008G.
      STEVEN DAWSON, Trust Manager/s/
      Philip W. Taggart
            March
      26, 2008PHILIP
      W. TAGGART, Trust Manager/s/
      H.L. Rush, Jr.
            March
      26, 2008H.L.
      RUSH, JR., Trust Manager/s/
      Brett P. Treadwell
            March
      26, 2008BRETT
      P. TREADWELL, Managing Vice President – Finance(Principal
      Accounting Officer)













~29~


AmREIT
AND SUBSIDIARIES


INDEX
TO FINANCIAL STATEMENTS





PageFINANCIAL
      STATEMENTS:Report
      of Independent Registered Public Accounting Firm
            F-2Consolidated
      Balance Sheets as of December 31, 2007 and 2006
            F-3Consolidated
      Statements of Operations for the years ended
              December
      31, 2007, 2006 and 2005
            F-4Consolidated
      Statements of Shareholders' Equity
              for
      the years ended December 31, 2007, 2006 and 2005
            F-5Consolidated
      Statements of Cash Flows for the years ended
              December
      31, 2007, 2006 and 2005
            F-6Notes
      to Consolidated Financial Statements
            F-7
      to F-29FINANCIAL
      STATEMENT SCHEDULE:
              Schedule
      III - Consolidated Real Estate Owned and Accumulated
              Depreciation
      for the year ended December 31, 2007
            S-1





All other
financial statement schedules are omitted as the required information is either
inapplicable or is included in the financial statements or related
notes.







F-1


Report
of Independent Registered Public Accounting Firm








The Board
of Trust Managers and Shareholders


AmREIT:





We have
audited the accompanying consolidated balance sheets of AmREIT and subsidiaries
(“the Company”) as of December 31, 2007 and 2006, and the related consolidated
statements of operations, shareholders’ equity and cash flows for each of the
years in the three-year period ended December 31, 2007.  In connection
with our audit of the consolidated financial statements, we have also audited
the related financial statement schedule.  These consolidated
financial statements and the financial statement schedule are the responsibility
of the Company’s management.  Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule 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 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 Company’s internal control
over financial reporting.  As such, we express no such
opinion.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.  We
believe that our audits provide a reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of AmREIT and subsidiaries as
of December 31, 2007 and 2006, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2007, in conformity with U.S. generally accepted accounting principles.Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.








KPMG
LLP








Houston,
Texas


March 26,
2008







F-2




AmREIT
AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 December
31, 2007 and December 31, 2006
 (in
thousands, except share data)
 
 
 December
      31,
              
              
              December
      31,2007
              
              
              2006ASSETSReal
      estate investments at cost:Land
              
              $
              130,563
              
              
              $
              124,751Buildings
              
              
              141,045
              
              
              
              140,487Tenant
      improvements
              
              
              10,105
              
              
              
              9,296281,713
              
              
              
              274,534Less
      accumulated depreciation and amortization
              
              
              (15,626
              )
              
              
              (10,628
              )266,087
              
              
              
              263,906Real
      estate held for sale and Investment in direct financing leases held for
      sale, net
              
              
              22,438
              
              
              
              -Net
      investment in direct financing leases held for investment
              
              
              2,058
              
              
              
              19,204Intangible
      lease cost, net
              
              
              13,096
              
              
              
              16,016Investment
      in merchant development funds and other affiliates
              
              
              10,514
              
              
              
              2,651Net
      real estate investments
              
              
              314,193
              
              
              
              301,777Cash
      and cash equivalents
              
              
              1,221
              
              
              
              3,415Tenant
      receivables, net
              
              
              4,398
              
              
              
              4,330Accounts
      receivable, net
              
              
              1,251
              
              
              
              1,772Accounts
      receivable - related party
              
              
              5,386
              
              
              
              1,665Notes
      receivable - related party
              
              
              10,442
              
              
              
              10,104Deferred
      costs
              
              
              2,472
              
              
              
              2,045Other
      assets
              
              
              4,394
              
              
              
              3,322TOTAL
      ASSETS
              
              $
              343,757
              
              
              $
              328,430LIABILITIES
      AND SHAREHOLDERS' EQUITYLiabilities:Notes
      payable
              
              $
              168,560
              
              
              $
              144,453Notes
      payable, held for sale
              
              
              12,811
              
              
              
              -Accounts
      payable and other liabilities
              
              
              7,699
              
              
              
              9,162Below
      market leases, net
              
              
              3,401
              
              
              
              3,960Security
      deposits
              
              
              674
              
              
              
              668TOTAL
      LIABILITIES
              
              
              193,145
              
              
              
              158,243Minority
      interest
              
              
              1,179
              
              
              
              1,137Shareholders'
      equity:Preferred
      shares, $.01 par value, 10,000,000 shares authorized, none
      issued
              
              
              -
              
              
              
              -Class
      A Common shares, $.01 par value, 50,000,000 shares authorized, 6,626,559
      and 6,549,950 shares issued, respectively
              
              
              66
              
              
              
              65Class
      B Common shares, $.01 par value, 3,000,000 shares authorized, 0 and
      1,080,180 shares issued and outstanding, respectively
              
              
              -
              
              
              
              11Class
      C Common shares, $.01 par value, 4,400,000 shares authorized, 4,143,971
      and 4,145,531 shares issued and outstanding, respectively
              
              
              41
              
              
              
              41Class
      D Common shares, $.01 par value, 17,000,000 shares authorized, 11,045,763
      and 11,039,803 shares issued and outstanding, respectively
              
              
              110
              
              
              
              110Capital
      in excess of par value
              
              
              185,165
              
              
              
              194,696Accumulated
      distributions in excess of earnings
              
              
              (33,365
              )
              
              
              (23,749
              )Cost
      of treasury shares, 337,308 and 292,238 Class A shares,
      respectively
              
              
              (2,584
              )
              
              
              (2,124
              )TOTAL
      SHAREHOLDERS' EQUITY
              
              
              149,433
              
              
              
              169,050TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
              
              $
              343,757
              
              
              $
              328,430


See Notes to Consolidated Financial Statements. F-3
 CONSOLIDATED STATEMENTS OF OPERATIONSFor the years ended December 31, 2007, 2006 and 2005(in thousands, except per share data)Year to date ended December 31,200720062005Revenues:Rental income from operating leases$30,381$27,999$20,132Earned income from direct financing leases239238238Real estate fee income1,1961,334485Real estate fee income - related party4,0466,9834,588Construction revenues1,7453,0252,302Construction revenues - related party5,90010,4352,434Securities commission income - related party4,8056,5541,163Asset management fee income - related party1,289823495Total revenues49,60157,39131,837Expenses:General and administrative9,2529,2976,230Property expense7,6016,9864,848Construction costs6,90612,2904,283Legal and professional1,7451,5461,849Real estate commissions4591,042-Securities commissions3,9895,732864Depreciation and amortization7,8088,7356,027Total expenses37,76045,62824,101Operating income11,84111,7637,736Other income (expense):Interest and other income - related party1,1421,425705Income from merchant development funds and other affiliates153967161Tax benefit (expense) for taxable REIT subsidiary263(1,066)(521)Interest expense(8,694)(6,954)(5,262)Minority interest in income of consolidated joint ventures446239Income before discontinued operations4,7496,1972,858Income from discontinued operations, net of taxes5029844,046Gain on sales of real estate acquired for resale, net of taxes-3823,222Income from discontinued operations5021,3667,268Net income5,2517,56310,126Distributions paid to class B, C and D shareholders(11,709)(11,442)(9,245)Net income (loss) available to class A shareholders$(6,458)$(3,879)$881Net loss per class A common share - basic and dilutedLoss before discontinued operations$(1.09)$(0.83)$(1.23)Income from discontinued operations$0.08$0.22$1.40Net (loss) income$(1.01)$(0.61)$0.17Weighted average class A common shares used to compute net loss per share, basic and diluted6,3586,3005,205


F-4





AmREIT
AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
 For
the years ended December 31, 2007, 2006 and 2005
 (in
thousands, except share data)
 
 
 Common
      Shares
                Amount
              
              
              Capital
      in
                excess
      of
                par value
              
              
              Accumulated
                distributions
                in
      excess of
                earnings
              
              
              Cost
      of
                treasury
                shares
              
              
              TotalBalance
      at December 31, 2004
              
              $
              119
              
              
              $
              103,344
              
              
              $
              (15,038
              )
              
              $
              (55
              )
              
              $
              88,370Net
      income
              
              
              -
              
              
              
              -
              
              
              
              10,126
              
              
              
              -
              
              
              
              10,126Issuance
      of common shares, Class A
              
              
              30
              
              
              
              21,630
              
              
              
              -
              
              
              
              57
              
              
              
              21,717Issuance
      of restricted shares, Class A
              
              
              -
              
              
              
              (1,248
              )
              
              
              -
              
              
              
              117
              
              
              
              (1,131
              )Amortization
      of deferred compensation
              
              
              -
              
              
              
              490
              
              
              
              -
              
              
              
              (667
              )
              
              
              (177
              )Issuance
      of common shares, Class C
              
              
              -
              
              
              
              1,646
              
              
              
              -
              
              
              
              -
              
              
              
              1,646Retirement
      of common shares, Class C
              
              
              -
              
              
              
              (1,377
              )
              
              
              -
              
              
              
              -
              
              
              
              (1,377
              )Issuance
      of common shares, Class D
              
              
              89
              
              
              
              80,250
              
              
              
              -
              
              
              
              -
              
              
              
              80,339Retirement
      of common shares, Class D
              
              
              -
              
              
              
              (404
              )
              
              
              -
              
              
              
              -
              
              
              
              (404
              )Distributions
              
              
              -
              
              
              
              -
              
              
              
              (11,824
              )
              
              
              -
              
              
              
              (11,824
              )Balance
      at December 31, 2005
              
              $
              238
              
              
              $
              204,331
              
              
              $
              (16,736
              )
              
              $
              (548
              )
              
              $
              187,285Net
      income
              
              
              -
              
              
              
              -
              
              
              
              7,563
              
              
              
              -
              
              
              
              7,563Deferred
      compensation issuance of restricted shares, Class A
              
              
              -
              
              
              
              (987
              )
              
              
              -
              
              
              
              1,264
              
              
              
              277Repurchase
      of common shares, Class A
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,840
              )
              
              
              (2,840
              )Repurchase
      of common shares, Class B
              
              
              (11
              )
              
              
              (9,220
              )
              
              
              -
              
              
              
              -
              
              
              
              (9,231
              )Amortization
      of deferred compensation
              
              
              -
              
              
              
              556
              
              
              
              -
              
              
              
              -
              
              
              
              556Issuance
      of common shares, Class C
              
              
              2
              
              
              
              1,726
              
              
              
              -
              
              
              
              -
              
              
              
              1,728Retirement
      of common shares, Class C
              
              
              (2
              )
              
              
              (1,506
              )
              
              
              -
              
              
              
              -
              
              
              
              (1,508
              )Issuance
      of common shares, Class D
              
              
              5
              
              
              
              4,554
              
              
              
              -
              
              
              
              -
              
              
              
              4,559Retirement
      of common shares, Class D
              
              
              (5
              )
              
              
              (4,758
              )
              
              
              -
              
              
              
              -
              
              
              
              (4,763
              )Distributions
              
              
              -
              
              
              
              -
              
              
              
              (14,576
              )
              
              
              -
              
              
              
              (14,576
              )Balance
      at December 31, 2006
              
              $
              227
              
              
              $
              194,696
              
              
              $
              (23,749
              )
              
              $
              (2,124
              )
              
              $
              169,050Net
      income
              
              
              -
              
              
              
              -
              
              
              
              5,251
              
              
              
              -
              
              
              
              5,251Deferred
      compensation issuance of restricted shares, Class A
              
              
              -
              
              
              
              (749
              )
              
              
              -
              
              
              
              837
              
              
              
              88Issuance
      of common shares, Class A
              
              
              1
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1Repurchase
      of common shares, Class A
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,297
              )
              
              
              (1,297
              )Repurchase
      of common shares, Class B
              
              
              (11
              )
              
              
              (9,274
              )
              
              
              -
              
              
              
              -
              
              
              
              (9,285
              )Amortization
      of deferred compensation
              
              
              -
              
              
              
              739
              
              
              
              -
              
              
              
              -
              
              
              
              739Issuance
      of common shares, Class C
              
              
              2
              
              
              
              1,721
              
              
              
              -
              
              
              
              -
              
              
              
              1,723Retirement
      of common shares, Class C
              
              
              (2
              )
              
              
              (1,754
              )
              
              
              -
              
              
              
              -
              
              
              
              (1,756
              )Issuance
      of common shares, Class D
              
              
              5
              
              
              
              4,412
              
              
              
              -
              
              
              
              -
              
              
              
              4,417Retirement
      of common shares, Class D
              
              
              (5
              )
              
              
              (4,626
              )
              
              
              -
              
              
              
              -
              
              
              
              (4,631
              )Distributions
              
              
              -
              
              
              
              -
              
              
              
              (14,867
              )
              
              
              -
              
              
              
              (14,867
              )Balance
      at December 31, 2007
              
              $
              217
              
              
              $
              185,165
              
              
              $
              (33,365
              )
              
              $
              (2,584
              )
              
              $
              149,433







F-5


AmREIT
AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (in
thousands, except share data)
 (unaudited)
 
 Year
      Ended December 31,2007
                
                
                2006
                
                
                2005Cash
      flows from operating activities:Net
      income
                
                $
                5,251
                
                
                $
                7,563
                
                
                $
                10,126Adjustments
      to reconcile net income to net cash provided by operating
      activities:Investment
      in real estate acquired for resale
                
                
                -
                
                
                
                (3,331
                )
                
                
                (3,399
                )Proceeds
      from sales of real estate acquired for resale
                
                
                1,399
                
                
                
                2,190
                
                
                
                11,497Gain
      on sales of real estate acquired for resale
                
                
                -
                
                
                
                (382
                )
                
                
                (3,223
                )Gain
      on sales of real estate acquired for investment
                
                
                -
                
                
                
                (285
                )
                
                
                (3,400
                )Debt
      prepayment penalty
                
                
                -
                
                
                
                -
                
                
                
                109Income
      from merchant development funds and other affiliates
                
                
                (153
                )
                
                
                (967
                )
                
                
                (161
                )Cash
      receipts related to deferred related party fees
                
                
                851
                
                
                
                -
                
                
                
                422Depreciation
      and amortization
                
                
                7,746
                
                
                
                8,824
                
                
                
                5,777Amortization
      of deferred compensation
                
                
                739
                
                
                
                556
                
                
                
                490Minority
      interest in income of consolidated joint ventures
                
                
                139
                
                
                
                56
                
                
                
                838Distributions
      from merchant development funds and other affiliates
                
                
                467
                
                
                
                1,857
                
                
                
                159Increase
      in tenant receivables
                
                
                (68
                )
                
                
                (1,198
                )
                
                
                (1,844
                )(Increase)
      decrease in accounts receivable
                
                
                521
                
                
                
                35
                
                
                
                (1,770
                )(Increase)
      decrease in accounts receivable - related party
                
                
                (3,721
                )
                
                
                2,493
                
                
                
                (3,073
                )Cash
      receipts from direct financing leases more than income
      recognized
                
                
                112
                
                
                
                8
                
                
                
                7Increase
      in other assets
                
                
                (962
                )
                
                
                (296
                )
                
                
                (1,368
                )(Increase)
      decrease in accounts payable and other liabilities
                
                
                (1,377
                )
                
                
                1,002
                
                
                
                3,402Increase
      in security deposits
                
                
                6
                
                
                
                22
                
                
                
                280Net
      cash provided by operating activities
                
                
                10,950
                
                
                
                18,147
                
                
                
                14,869Cash
      flows from investing activities:Improvements
      to real estate
                
                
                (3,735
                )
                
                
                (4,026
                )
                
                
                (1,784
                )Acquisition
      of investment properties
                
                
                (10,610
                )
                
                
                (24,518
                )
                
                
                (110,640
                )Notes
      receivable (advances) collections
                
                
                -
                
                
                
                -
                
                
                
                (20
                )Loans
      to affiliates
                
                
                (6,423
                )
                
                
                (22,069
                )
                
                
                (11,232
                )Payments
      from affiliates
                
                
                6,085
                
                
                
                23,197
                
                
                
                -Additions
      to furniture, fixtures and equipment
                
                
                (75
                )
                
                
                (128
                )
                
                
                (162
                )Investment
      in merchant development funds and other affiliates
                
                
                (9,263
                )
                
                
                (1,055
                )
                
                
                (929
                )Distributions
      from merchant development funds and other affiliates
                
                
                235
                
                
                
                137
                
                
                
                79Proceeds
      from sale of investment property
                
                
                -
                
                
                
                4,466
                
                
                
                16,603(Decrease)
      Increase in preacquisition costs
                
                
                (179
                )
                
                
                16
                
                
                
                (15
                )Net
      cash used in investing activities
                
                
                (23,965
                )
                
                
                (23,980
                )
                
                
                (108,100
                )Cash
      flows from financing activities:Proceeds
      from notes payable
                
                
                104,811
                
                
                
                82,650
                
                
                
                52,386Payments
      of notes payable
                
                
                (67,658
                )
                
                
                (52,652
                )
                
                
                (43,436
                )Increase
      in deferred costs
                
                
                (542
                )
                
                
                (130
                )
                
                
                (219
                )Purchase
      of treasury shares
                
                
                (1,297
                )
                
                
                (2,610
                )
                
                
                (582
                )Issuance
      of common shares
                
                
                -
                
                
                
                -
                
                
                
                108,976Retirement
      of common shares
                
                
                (15,669
                )
                
                
                (15,502
                )
                
                
                (1,781
                )Issuance
      costs
                
                
                (12
                )
                
                
                (82
                )
                
                
                (11,424
                )Common
      dividends paid
                
                
                (8,715
                )
                
                
                (8,246
                )
                
                
                (6,961
                )Distributions
      to minority interests
                
                
                (97
                )
                
                
                (95
                )
                
                
                (773
                )Net
      cash provided by financing activities
                
                
                10,821
                
                
                
                3,333
                
                
                
                96,186Net
      increase (decrease) in cash and cash equivalents
                
                
                (2,194
                )
                
                
                (2,500
                )
                
                
                2,955Cash
      and cash equivalents, beginning of period
                
                
                3,415
                
                
                
                5,915
                
                
                
                2,960Cash
      and cash equivalents, end of period
                
                $
                1,221
                
                
                $
                3,415
                
                
                $
                5,915Supplemental
      schedule of cash flow information:Cash
      paid during the year for:Interest
                
                $
                9,708
                
                
                $
                7,861
                
                
                $
                6,506Income
      taxes
                
                
                867
                
                
                
                945
                
                
                
                707
 
 Supplemental
schedule of noncash investing and financing activities
 
 During
2007, 2006 and 2005, 49,000, 70,000, and 98,000 Class B common shares,
respectively were converted to Class A common shares. Additionally, during 2007,
2006 and 2005, we issued Class C common and D common shares with a value of $6.2
million, $6.3 million, and $4.9 million respectively, in satisfaction of
dividends through the dividend reinvestment program.
  In
2007, we issued 131,000 restricted shares to employees and trust managers as
part of their compensation arrangements.  The restricted shares vest
over a four and three year period, respectively. We recorded $1.1 million in
deferred compensation related to the issuance of the restricted
shares.
  In
2006, the Company issued 103,000 restricted shares to employees and trust
managers as part of their compensation arrangements.  The restricted
shares vest over a four and three year period, respectively. We recorded
$725,000 in deferred compensation related to the issuance of the restricted
shares.
   See
Notes to Consolidated Financial Statements.




F-6




AmREIT
AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2007, 2006 and 2005





1.
DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS





We are an
established real estate company that has elected to be taxed as a real estate
investment trust (“REIT”) for federal income tax purposes. Our business model is
similar to an institutional advisory company that is judged by its investor
partners on the returns we are able to deliver to reach specified long-term
results. Our primary objective is to build long-term shareholder value and
continue to build and enhance the net asset value (NAV) of AmREIT and its
advised funds.
 
 We seek
to create value and drive net operating income (NOI) growth on the properties
owned in our institutional-grade portfolio of Irreplaceable CornersTM and those
owned by a series of closed-end, merchant development funds. We also seek to
support a growing advisory business that raises capital through an extensive
independent broker dealer channel as well as through institutional joint venture
partners.


AmREIT’s
direct predecessor, American Asset Advisers Trust, Inc. (“AAA”), was formed as a
Maryland corporation in 1993. Prior to 1998, AAA was externally advised by
American Asset Advisors Corp. which was formed in 1985.  In June 1998,
AAA merged with its advisor and changed its name to AmREIT, Inc. In
December 2002, AmREIT, Inc. reorganized as a Texas real estate investment
trust and became AmREIT.





2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





BASIS OF
PRESENTATION





Our
financial records are maintained on the accrual basis of accounting whereby
revenues are recognized when earned and expenses are recorded when
incurred.  The consolidated financial statements include our accounts
as well as the accounts of any wholly- or majority-owned subsidiaries in which
we have a controlling financial interest.  Investments in joint
ventures and partnerships where we have the ability to exercise significant
influence but do not exercise financial and operating control, are accounted for
using the equity method, unless such entities qualify as variable interest
entities, and this are considered for consildation under applicable accounting
literature related to consolidation.  All significant inter-company
accounts and transactions have been eliminated in consolidation.





REVENUE
RECOGNITION





We lease
space to tenants under agreements with varying terms. The majority of the leases
are accounted for as operating leases with revenue being recognized on a
straight-line basis over the terms of the individual leases. Accrued rents are
included in tenant receivables. Revenue from tenant reimbursements of taxes,
maintenance expenses and insurance is recognized in the period the related
expense is recorded. Additionally, certain of the lease agreements contain
provisions that grant additional rents based on tenants’ sales volumes
(contingent or percentage rent). Percentage rents are recognized when the
tenants achieve the specified targets as defined in their lease agreements.
During the years ended December 31, 2007, 2006 and 2005, we recognized
percentage rents of $669,000, $760,000, and $154,000,
respectively.  We recognize lease termination fees in the period that
the lease is terminated and collection of the fees is reasonably
assured.  During the three years in the period ended December 31,
2007, we recognized lease termination fees of $266,000, $700,000, and $0,
respectively, which have been included in rental income from operating
leases.  The terms of certain leases require that the
building/improvement portion of the lease be accounted for under the direct
financing method which treats the building as if we had sold it to the lessee
and entered into a long-term financing arrangement with such lessee. This
accounting method is appropriate when the lessee has all of the benefits and
risks of property ownership that they otherwise would if they owned the building
versus leasing it from us.


F-7





We have
been engaged to provide various real estate services, including development,
construction, construction management, property management, leasing and
brokerage. The fees for these services are recognized as services are provided
and are generally calculated as a percentage of revenues earned or to be earned
or of property cost, as appropriate. Revenues from fixed-price construction
contracts are recognized on the percentage-of-completion method, measured by the
physical completion of the structure. Revenues from cost-plus-percentage-fee
contracts are recognized on the basis of costs incurred during the period plus
the percentage fee earned on those costs. Construction management contracts are
recognized only to the extent of the fee revenue.





Construction
contract costs include all direct material and labor costs and any indirect
costs related to contract performance. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, and estimated
profitability, including those arising from any contract penalty provisions, and
final contract settlements may result in revisions to costs and income and are
recognized in the period in which the revisions are determined. Any profit
incentives are included in revenues when their realization is reasonably
assured. An amount equal to contract costs attributable to any claims is
included in revenues when realization is probable and the amount can be reliably
estimated.





Unbilled
construction receivables represent reimbursable costs and amounts earned under
contracts in progress as of the date of our balance sheet.  Such
amounts become billable according to contract terms, which usually consider the
passage of time, achievement of certain milestones or completion of the
project.  Advance billings represent billings to or collections from
clients on contracts in advance of revenues earned thereon.  Unbilled
construction receivables are generally billed and collected within the twelve
months following the date of our balance sheet, and advance billings are
generally earned within the twelve months following the date of our balance
sheet.  As of December 31, 2007, $4,000 of unbilled receivables has
been included in “Accounts receivable” and $85,000 of unbilled receivables due
from related parties has been included in “Accounts receivable – related
party”.  At December 31, 2006, $126,000 of unbilled receivables
has been included in “Accounts receivable” and $14,000 of unbilled receivables
due from related parties has been included in “Accounts receivable – related
party”. We had advance billings of $6,000 and $44,000 as of December 31, 2007
and December 31, 2006, respectively.





Securities
commission income is recognized as units of our merchant development funds are
sold through our wholly-owned subsidiary, AmREIT Securities Company (ASC).
Securities commission income is earned as the services are performed and
pursuant to the corresponding prospectus or private offering memorandum.
Generally, it includes a selling commission of between 6.5% and 7.5%, a dealer
manager fee of between 2.5% and 3.25% and offering and organizational costs of
1.0% to 1.50%. The selling commission is then paid out to the unaffiliated
selling broker dealer and reflected as securities commission
expense.





REAL
ESTATE INVESTMENTS





Development
Properties – Land, buildings and improvements are recorded at
cost.  Expenditures related to the development of real estate are
carried at cost which includes capitalized carrying charges, acquisition costs
and development costs.  Carrying charges, primarily interest, real
estate taxes and loan acquisition costs, and direct and indirect development
costs related to buildings under construction, are capitalized as part of
construction in progress.  The capitalization of such costs ceases at
the earlier of one year from the date of completion of major construction or
when the property, or any completed portion, becomes available for
occupancy.  The Company capitalizes acquisition costs once the
acquisition of the property becomes probable.  Prior to that time, we
expense these costs as acquisition expense.  During the years ended
December 31, 2007, 2006 and 2005, interest and taxes in the amount of $46,000,
$57,000, and, $188,000, respectively were capitalized on properties under
development.





Acquired Properties and
Acquired Lease Intangibles – We account for real estate acquisitions
pursuant to Statement of Financial Accounting Standards No. 141, Business Combinations (“SFAS
No. 141”).Accordingly, we allocate the purchase price of the
acquired properties to land, building and improvements, identifiable intangible
assets and to the acquired liabilities based on their respective fair
values.  Identifiable intangibles include amounts allocated to
acquired out-of-market leases, the value of in-place leases and customer
relationship value, if any.  We determine fair value based on
estimated cash flow projections that utilize appropriate discount and
capitalization rates and available market information.  Estimates of
future cash flows are based on a number of factors including the historical
operating results, known trends and specific market and economic conditions that
may affect the property.  Factors considered by management in our
analysis of determining the as-if-vacant property value include an estimate of
carrying costs during the expected lease-up periods considering market
conditions, and costs to execute similar leases.


F-8


In
estimating carrying costs, management includes real estate taxes, insurance and
estimates of lost rentals at market rates during the expected lease-up periods,
tenant demand and other economic conditions.  Management also
estimates costs to execute similar leases including leasing commissions, tenant
improvements, legal and other related expenses.  Intangibles related
to out-of-market leases and in-place lease value are recorded as acquired lease
intangibles and are amortized as an adjustment to rental revenue or amortization
expense, as appropriate, over the remaining terms of the underlying
leases.  Premiums or discounts on acquired out-of-market debt are
amortized to interest expense over the remaining term of such debt.





Depreciation -
Depreciation is computed using the straight-line method over an estimated useful
life of up to 50 years for buildings, up to 20 years for site improvements and
over the term of lease for tenant improvements.  Leasehold estate
properties, where we own the building and improvements but not the related
ground, are amortized over the life of the lease.





Properties Held for
Sale - Properties are classified as held for sale if we have decided to
market the property for immediate sale in its present condition with the belief
that the sale will be completed within one year.  Operating properties
held for sale are carried at the lower of cost or fair value less cost to
sell.  Depreciation and amortization are suspended during the held for
sale period.  At December 31, 2007, we owned 19 properties with a
carrying value of $22.4 million which were classified as real estate held for
sale.  At December 31, 2006, we did not have any properties that met
the criteria for classification as real estate held for sale.





Our
properties generally have operations and cash flows that can be clearly
distinguished from the rest of the Company.  The operations and gains
on sales reported in discontinued operations include those properties that have
been sold or are held for sale and for which operations and cash flows have been
clearly distinguished.  The operations of these properties have been
eliminated from ongoing operations, and we will not have continuing involvement
after disposition.  Prior period operating activity related to such
properties has been reclassified as discontinued operations in the accompanying
statements of operations.




Impairment – We
review our properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets, including accrued rental
income, may not be recoverable through operations.  We determine
whether an impairment in value occurred by comparing the estimated future cash
flows (undiscounted and without interest charges), including the residual value
of the property, with the carrying value of the individual
property.  If impairment is indicated, a loss will be recorded for the
amount by which the carrying value of the asset exceeds its fair value. 
No
impairment charges were recognized for the three years ended December 31,
2007.





RECEIVABLES
AND ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS





Tenant receivables -
Included in tenant receivables are base rents, tenant reimbursements and
receivables attributable to recording rents on a straight-line
basis.  An allowance for the uncollectible portion of accrued rents
and accounts receivable is determined based upon customer credit-worthiness
(including expected recovery of our claim with respect to any tenants in
bankruptcy), historical bad debt levels, and current economic trends. As of both December 31,
2007 and 2006, we had an allowance for uncollectible accounts of $157,000
related to our tenant receivables.  During 2007, 2006 and 2005, we
recorded bad debt expense in the amount of $55,000,$236,000and $163,000,
respectively, related to tenant receivables that we specifically identified as
potentially uncollectible based on our assessment of the tenant’s
credit-worthiness.  We recovered $97,000 in 2005 and had no recoveries
of bad debt in 2006 or 2007 related to tenant receivables. Bad debt expenses and
any related recoveries are included in general and administrative
expense.





Accounts receivable –
Included in accounts receivable are amounts due from clients of our construction
services business and various other receivables.  As of December 31,
2007 and 2006, we had an allowance for uncollectible accounts of $264,000
related to our accounts receivable.  During 2005, we recorded bad debt
expense in the amount of $264,000 related to amounts due to us as reimbursement
from a vendor for obligations that we paid on such vendor’s
behalf.  We believe such amounts to be potentially uncollectible based
on our assessment of the vendor’s credit-worthiness and other
considerations.  We have recorded no other bad debt expense related to
accounts receivable during the three years in the period ended December 31,
2007.  Bad debt expense and any related recoveries are included in
general and administrative expense.





Notes receivable – related
party – Included in related party notes receivable are loans made to our
affiliated merchant development funds as part of our treasury management
function whereby we place excess cash in short term bridge loans for these
affiliates related to the acquisition or development of
properties.  We typically provide such financing to our affiliates as
a way of efficiently deploying our excess cash and earning a higher return than
we would in other short term investments or overnight funds.  In most
cases, the funds have a construction lender in place, and we simply step in and
provide financing on the same terms as the third party lender.  In so
doing, we are able to access these funds as needed by having our affiliate then
draw down on their construction loans.  These loans are unsecured,
bear interest at the prime rate and are due upon demand.


F-9




DEFERRED
COSTS





Deferred
costs include deferred leasing costs and deferred loan costs, net of
amortization.  Deferred loan costs are incurred in obtaining financing
and are amortized using a method that approximates the effective interest
method to interest expense over the term of the debt agreements. Deferred
leasing costs consist of external commissions associated with leasing our
properties and are amortized to expense over the lease
term.  Accumulated amortization related to deferred loan costs as of
December 31, 2007 and 2006 totaled $627,000 and $421,000,
respectively.  Accumulated amortization related to leasing costs as of
December 31, 2007 and 2006 totaled $450,000 and $264,000,
respectively.





DEFERRED
COMPENSATION





Our
deferred compensation and long term incentive plan is designed to attract and
retain the services of our trust managers and employees that we consider
essential to our long-term growth and success. As such, it is designed to
provide them with the opportunity to own shares, in the form of restricted
shares, in us, and provide key employees the opportunity to participate in the
success of our affiliated actively managed merchant development funds through
the economic participation in our general partner companies. All long term
compensation awards are designed to vest over a period of three to seven years
and promote retention of our team.





Restricted Share
Issuances - Deferred compensation includes grants of restricted shares to
our trust managers and employees as a form of long-term compensation. The share
grants vest over a period of three to seven years.  We determine the
fair value of


the
restricted shares as the number of shares awarded multiplied by the closing
price per share of our class A common shares on the grant date. We amortize such
fair value ratably over the vesting periods of the respective
awards.





The
following table presents restricted share activity during the years ended
December 31, 2007 and 2006:








2007
            
            
            2006Non-Vested
      Shares
            
            
            Weighted Average
      grant date fair value
            
            
            Non-Vested
      Shares
            
            
            Weighted Average
      grant date fair valueBeginning of
      Period
            
            355,599
            
            
            $
            7.31
            
            
            
            253,002
            
            
            $
            7.49Granted
            
            
            131,334
            
            
            
            8.51
            
            
            
            166,266
            
            
            
            7.01Vested
            
            
            (50,758
            )
            
            
            7.36
            
            
            
            (32,777
            )
            
            
            7.27Forfeited
            
            
            (25,345
            )
            
            
            7.53
            
            
            
            (30,892
            )
            
            
            7.23End of
      Period
            
            
            410,830
            
            
            
            7.67
            
            
            
            355,599
            
            
            
            7.31






The
weighted-average grant date fair value of restricted shares issued during the
years ended December 31, 2007 and 2006 was $8.51 per share and $7.01 per share,
respectively.  The total fair value of shares vested during the years
ended December 31, 2007 and 2006 was $374,000 and $238,000
respectively.  Total compensation cost recognized related to
restricted shares during the three years in  the period ended December
31, 2007 was $739,000, $556,000 and $502,000, respectively.  As of
December 31, 2007, total unrecognized compensation cost related to restricted
shares was $2.1 million, and the weighted average period over which we expect
this cost to be recognized is 3.7 years.





General Partner Profit
Participation Interests - We have assigned up to 45% of the residual
economic interest in certain of our merchant development funds to certain of our
key employees. This economic interest is received, as, if and when we receive
economic benefit from our profit participation, after certain preferred returns
have been paid to the partnership’s limited partners. This assignment of
economic interest generally vests over a period of five to seven years. This
allows us to align the interest of our employees with the interest of our
shareholders. Because any future profits and earnings from the retail limited
partnerships cannot be reasonably predicted or estimated, and any employee
benefit is contingent upon the benefit received by the general partner of the
retail limited partnerships, we recognize expense associated with the assignment
of economic interest in our retail limited partnerships as we recognize the
corresponding income from the associated merchant development
funds.


F-10


No
portion of the economic interest in the merchant development funds that have
provided profit participation to us to date have been assigned to employees.
Therefore, no compensation expense has been recorded to date.





Tax-Deferred Retirement Plan
(401k) - We maintain a defined contribution 401k retirement plan for our
employees. This plan is available for all employees immediately upon
employment.  The plan allows for contributions to be either invested
in an array of large, mid and small cap mutual funds or directly into class A
common shares. Employee contributions invested in our stock are limited to 50%
of the employee’s contributions. We match 50% of the employee’s contribution, up
to a maximum employee contribution of 4%. None of the employer contribution can
be matched in our stock.  As of December 31, 2007, 2006 and 2005,
there were 65, 40 and 41 participants enrolled in the plan.  Employer
contributions to the plan were $101,000, $99,000 and $72,000, for the three
years in the period ended December 31, 2007.





Stock Options - We
are authorized to grant options on up to an aggregate of 1,288,739 shares of our
class A common shares as either incentive or non-qualified share options, up to
an aggregate of 6.0% of the total voting shares outstanding.  As of
December 31, 2007 and December 31, 2006, none of these options have been
granted.





FEDERAL
INCOME TAXES





We
account for federal and state income taxes under the asset and liability
method.
 
 Federal – We have
elected to be taxed as a REIT under the Internal Revenue Code of 1986, and are,
therefore, not subject to Federal income taxes to the extent of dividends paid,
provided we meets all conditions specified by the Internal Revenue Code for
retaining our REIT status, including the requirement that at least 90% of our
real estate investment trust taxable income be distributed to
shareholders.
 
 Our real
estate development and operating business, AmREIT Realty Investment Corporation
and subsidiaries (“ARIC”), is a fully integrated and wholly-owned business
consisting of brokers and real estate professionals that provide development,
acquisition, brokerage, leasing, construction, asset and property management
services to our publicly traded portfolio and merchant development funds as well
as to third parties. ARIC and our wholly-owned corporations that serve as the
general partners of our merchant development funds are treated for Federal
income tax purposes as taxable REIT subsidiaries (collectively, the “Taxable
REIT Subsidiaries”).
 
 State – In May 2006,
the State of Texas adopted House Bill 3, which modified the state’s franchise
tax structure, replacing the previous tax based on capital or earned surplus
with one based on margin (often referred to as the “Texas Margin Tax”) effective
with franchise tax reports filed on or after January 1, 2008. The Texas Margin
Tax is computed by applying the applicable tax rate (1% for us) to the profit
margin, which, generally, will be determined for us as total revenue less a 30%
standard deduction.  Although House Bill 3 states that the Texas
Margin Tax is not an income tax, SFAS No. 109, Accounting for Income Taxes,applies to the Texas Margin Tax.  We have recorded a margin tax
provision of $279,000 and $0 for the Texas Margin Tax for the year ended
December 31, 2007 and December 31, 2006, respectively.
  EARNINGS
PER SHARE





Basic
earnings per share has been computed by dividing net income (loss) available to
Class A common shareholders by the weighted average number of class A common
shares outstanding.  Diluted earnings per share has been computed by
dividing net income (as adjusted as appropriate) by the weighted average number
of common shares outstanding plus the weighted average number of dilutive
potential common shares.  Diluted earnings per share information is
not applicable due to the anti-dilutive nature of the common class C and class D
shares which represent 19.4 million, 24.7 million and 22.2
million  potential common shares for the years ended December 31,
2007, 2006 and 2005, respectively.





The
following table presents information necessary to calculate basic and diluted
earnings per share for the periods indicated:





For the Years Ended December
      31,2007
            
            
            2006
            
            
            2005(Loss)
      earnings to class A common shareholders
              (in
      thousands) *
            
            $
            (6,458
            )
            
            $
            (3,879
            )
            
            $
            881Weighted
      average class A common shares outstanding
              (in
      thousands)
            
            
            6,358
            
            
            
            6,300
            
            
            
            5,205Basic
      and diluted (loss)/earnings per share *
            
            $
            (1.01
            )
            
            $
            (0.61
            )
            
            $
            0.17





F-11


USE OF
ESTIMATES





The preparation of consolidated
financial statements in conformity with U.S. generally accepted accounting
principles 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 consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.





FAIR
VALUE OF FINANCIAL INSTRUMENTS





Our
consolidated financial instruments consist primarily of cash, cash equivalents,
tenant receivables, accounts receivable, notes receivable, accounts payable and
other liabilities and notes payable. The carrying value of cash, cash
equivalents, tenant receivables, accounts receivable, notes receivable, accounts
payable and other liabilities are representative of their respective fair values
due to the short-term maturity of these instruments. Our revolving line of
credit has market-based terms, including a variable interest rate. Accordingly,
the carrying value of the line of credit is representative of its fair
value.





As of
December 31, 2007, the carrying value of our debt obligations associated with
assets held for investment was $168.6 million, $138.1 million of which
represented fixed rate obligations with  an estimated fair value of
$139.1 million. As of December 31, 2006, the carrying value of our total
debt obligations was $144.5 million, $132.5 million of which represented
fixed-rate obligations with an estimated fair value of
$132.9 million.





As of
December 31, 2007, the carrying value of our debt obligations associated with
assets held for sale was $12.8 million, all of which represented fixed rate
obligations with an estimated fair value of $13.6 million.





CONSOLIDATION
OF VARIABLE INTEREST ENTITIES





In
December 2003, the FASB reissued Interpretation No. 46 (“FIN 46R”), Consolidation of Variable Interest
Entities,as revised.  FIN 46R addresses how a business
enterprise should evaluate whether it has a controlling financial interest in an
entity through means other than voting rights.  FIN 46R requires a
variable interest entity to be consolidated by a company that is subject to a
majority of the risk of loss from the variable interest entity’s activities or
entitled to receive a majority of the entity’s residual returns or
both.  Disclosures are also required about variable interest entities
in which a company has a significant variable interest but that it is not
required to consolidate.





As of
December 31, 2007, we are an investor in and the primary beneficiary of one
entity that qualifies as a variable interest entity pursuant to FIN
46R.  This entity was established to develop, own, manage, and hold
property for investment and comprises $6.7 million of our total consolidated
assets at period end.  This entity had no debt outstanding at period
end.





NEW
ACCOUNTING STANDARDS





In
December 2007, the FASB issued SFAS No. 141 (Revised 2007),“Business Combinations”
(SFAS No. 141R).
 SFAS No. 141R will change the accounting for business combinations. Under
FAS 141R, an acquiring entity will be required to recognize all the assets
acquired and liabilities assumed in a transaction at the acquisition-date fair
value with limited exceptions.  SFAS No. 141R applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008.  We are currently evaluating the potential impact of SFAS No.
141R on our financial position and results of operations beginning for fiscal
year 2009.





In
December 2007, the FASB issued SFAS
No. 160, Noncontrolling
Interests in Consolidated Financial Statements—an amendment of ARB
No. 51 (SFAS No. 160).SFAS No. 160
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS No. 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008. SFAS No. 160 requires retroactive adoption of the
presentation and disclosure requirements for existing minority
interests. All other requirements of SFAS No. 160 shall be applied
prospectively. We are currently evaluating the potential impact of the adoption
of SFAS No. 160 on our consolidated financial statements.


F-12





In
February 2007 the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. SFAS No. 159 expands opportunities to
use fair value measurement in financial reporting and permits entities to choose
to measure many financial instruments and certain other items at fair value.
This Statement is effective for fiscal years beginning after November 15, 2007.
We currently do not plan to measure any eligible financial assets and
liabilities at fair value under the provisions of SFAS No. 159.





In
September 2006, FASB issued SFAS No. 157, Fair Value Measurements (SFAS No.
157).  SFAS No. 157 defines fair value, establishes a framework for
measuring fair value and requires enhanced disclosures about fair value
measurements.  SFAS No. 157 requires companies to disclose the fair
value if its financial instruments according to a fair value
hierarchy.  Additionally,


companies
are required to provide certain disclosures regarding instruments within the
hierarchy, including a reconciliation of the beginning and ending balances for
each major category of assets and liabilities.  SAFS No. 157 is
effective for our fiscal year beginning January 1, 2008.  The adoption
of SFAS No. 157 is not expected to have a material effect on our results of
operations or financial position.





DISCONTINUED
OPERATIONS





The
following is a summary of our discontinued operations (in thousands, except for
per share data):




2007
                
                
                2006
                
                
                2005Rental
      revenue and earned income from DFL
                
                $
                2,053
                
                
                $
                2,003
                
                
                $
                3,949Interest
      and other income
                
                
                -
                
                
                
                -
                
                
                
                146Gain
      on sale of real estate held for resale
                
                
                -
                
                
                
                382
                
                
                
                3,222Gain
      on sale of real estate held for investment
                
                
                -
                
                
                
                285
                
                
                
                3,400Total
      revenues
                
                
                2,053
                
                
                
                2,670
                
                
                
                10,717Property
      expense
                
                
                (3
                )
                
                
                (31
                )
                
                
                395General
      and administrative
                
                
                10
                
                
                
                18
                
                
                
                266Legal
      and professional
                
                
                47
                
                
                
                51
                
                
                
                12Depreciation
      and amortization
                
                
                30
                
                
                
                22
                
                
                
                130Income
      tax expense (benefit)
                
                
                19
                
                
                
                (12
                )
                
                
                329Interest
      expense
                
                
                1,263
                
                
                
                1,136
                
                
                
                1,332Minority
      interest
                
                
                185
                
                
                
                120
                
                
                
                876Debt
      prepayment penalty
                
                
                -
                
                
                
                -
                
                
                
                109Total
      expenses
                
                
                1,551
                
                
                
                1,304
                
                
                
                3,449Income
      from discontinued operations
                
                
                502
                
                
                
                1,366
                
                
                
                7,268Basic
      and diluted income from discontinued  operations per class A
      common share
                
                $
                0.08
                
                
                $
                0.22
                
                
                $
                1.40






F-13




Included in discontinued operationsis the operating activity related to 19 of our
properties that have either been sold or that are held for sale.  Our AAA
CTL Portfolio comprises 17 of these properties.  Each of these 17
properties were treated as investments in direct financing leases for financial
reporting purposes.  See Note 5 for futher discussion of AAA
CTL.








STOCK
ISSUANCE COSTS





Issuance
costs incurred in the raising of capital through the sale of common shares are
treated as a reduction of shareholders’ equity.


CASH AND
CASH EQUIVALENTS





For
purposes of the consolidated statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents. Cash and cash equivalents consist of
demand deposits at commercial banks and money market funds.





RECLASSIFICATIONS





Certain
amounts in the prior year consolidated financial statements have been
reclassified to conform to the presentation used in the current year
consolidated financial statement.








3.
OPERATING LEASES





Our
operating leases range from one to twenty-five years and generally include one
or more five year renewal options.  A summary of minimum future base
rentals to be received, exclusive of any renewals, under non-cancelable
operating leases in existence at December 31, 2007 is as follows (in
thousands):








2008
            
            $
            23,8382009
            
            
            22,9752010
            
            
            19,5842011
            
            
            15,9732012
            
            
            13,927Thereafter
            
            
            98,795$
            195,092







4.
NET INVESTMENT IN DIRECT FINANCING LEASES





The
Company’s net investment in its direct financing leases at December 31, 2007 and
2006 included (in thousands):




Associated
      with Assets
              
              
              Associated
      with AssetsHeld
      for Investment
              
              
              Held
      For Sale2007
              
              
              2006
              
              
              2007
              
              
              2006Minimum
      lease payments receivable
              $
              4,517
              
              $
              44,797
              
              $
              38,142
              
              $
              -Unguaranteed
      Residual Value
              701
              
              
              1,763
              
              
              802
              
              
              -Less:
      Unearned Income
              
              (3,160)
              
              
              (27,356)
              
              
              (21,909)
              
              
              -$
              2,058
              
              $
              19,204
              
              $
              17,035
              
              $
              -
  A summary
of minimum future rentals, exclusive of any renewals, under the non-cancelable
direct financing leases in existence at December 31, 2007 is as follows (in
thousands):




Associated
      with AssetsHeld for Investment
              
              
              Associated
      with AssetsHeld for Sale2008
              
              
              229
              
              
              
              1,9882009
              
              
              241
              
              
              
              1,9882010
              
              
              252
              
              
              
              1,9882011
              
              
              252
              
              
              
              1,9892012
              
              
              252
              
              
              
              2,0992013-thereafter
              
              
              3,291
              
              
              
              28,0904,517
              
              
              
              38,142





F-14


5.INVESTMENTS IN MERCHANT DEVELOPMENT FUNDS AND OTHER
AFFILIATES





AAA
CTL Notes, Ltd.


AAA CTL
Notes I Corporation (“AAA Corp”), our wholly-owned subsidiary, invested as a
general partner and limited partner in AAA CTL Notes, Ltd.
(“AAA”).  AAA is a majority-owned subsidiary through which we
purchased 15 IHOP leasehold estate properties and two IHOP fee simple
properties.  We have consolidated AAA in our financial
statements.  Certain members of our management team have been assigned
a 51% aggregate residual interest in the income and cash flow of AAA’s general
partner.  Net sales proceeds from the liquidation of AAA will be
allocated to the limited partners and to the general partner pursuant to the AAA
limited partnership agreement.





During
the third quarter of 2007, we elected to hold the AAA assets for
sale.





Merchant Development
Funds


As of
December 31, 2007, we owned, through wholly-owned subsidiaries, interests in six
limited partnerships which are accounted for under the equity method as we
exercise significant influence over, but do not control, the investee. In each
of the partnerships, the limited partners have the right, with or without cause,
to remove and replace the general partner by a vote of the limited partners
owning a majority of the outstanding units. These merchant development funds
were formed to develop, own, manage and add value to properties with an average
holding period of two to four years. Our interests in these merchant development
funds range from 2.1% to 10.5%.  See Note 11 regarding transactions we
have entered into with our merchant development funds.





AmREIT Opportunity Fund
(“AOF”) — AmREIT Opportunity Corporation (“AOC”), our wholly-owned
subsidiary, invested $250,000 as a limited partner and $1,000 as a general
partner in AOF. We currently own a 10.5% limited partner interest in AOF.
Liquidation of AOF commenced in July 2002, and, as of December 31, 2007, AOF has
an interest in one property. As the general partner, AOC receives a promoted
interest in cash flow and any profits after certain preferred returns are
achieved for its limited partners.





AmREIT Income & Growth
Fund, Ltd. (“AIG”) — AmREIT Income & Growth Corporation (“AIGC”), our
wholly-owned subsidiary, invested $200,000 as a limited partner and $1,000 as a
general partner in AIG. We currently own an approximate 2.0% limited partner
interest in AIG.  Certain members of our management team have been
assigned a 49% aggregate residual interest in the income and cash flow of
AIGC.  Pursuant to the AIG limited partnership agreement, net sales
proceeds from its liquidation (expected in 2008) will be allocated to the
limited partners, and to the general partner (AIGC) as, if and when the annual
return thresholds have been achieved by the limited partners.





AmREIT Monthly Income &
Growth Fund (“MIG”) — AmREIT Monthly Income & Growth Corporation, our
wholly-owned subsidiary, invested $200,000 as a limited partner and $1,000 as a
general partner in MIG. We currently own an approximate 1.3% limited partner
interest in MIG.





AmREIT Monthly Income &
Growth Fund II (“MIG II”) — AmREIT Monthly Income & Growth II
Corporation, our wholly- owned subsidiary, invested $400,000 as a limited
partner and $1,000 as a general partner in MIG II. We currently own an
approximate 1.6% limited partner interest in MIG II.





AmREIT Monthly Income &
Growth Fund III (“MIG III”)—AmREIT
Monthly Income & Growth III Corporation (“MIGC III”), our wholly-owned
subsidiary, invested $800,000 as a limited partner and $1,000 as a general
partner in MIG III. MIG III








began
raising money in June 2005.  The offering was closed in October
2006, and the capital raised was approximately $71 million.  Our
$800,000 investment represents a 1.1% limited partner interest in MIG III.Certain
members of our management team have been assigned a 28.5% aggregate residual
interest in the income and cash flow of MIGC III.  Pursuant to the MIG
III limited partnership agreement, net sales proceeds from its liquidation
(expected in 2012) will be allocated to the limited partners, and to the general
partner (MIGC III) as, if and when the annual return thresholds have been
achieved by the limited partners.





AmREIT Monthly Income &
Growth Fund IV (“MIG IV”) - AmREIT Monthly Income & Growth IV
Corporation (“MIGC


F-15


IV”), our
wholly-owned subsidiary, invested $800,000 as a limited partner and $1,000 as a
general partner in MIG IV.  MIG IV began raising money in November
2006, and, as of December 31, 2007, had raised approximately $45
million.  We expect our limited partnership interest at completion of
the offering to be between 0.8% and 2.0%.  Certain members of our
management team have been assigned a 28.5% aggregate residual interest in the
income and cash flow of MIGC IV.  Pursuant to the MIG IV limited
partnership agreement, net sales proceeds from its liquidation (expected in
2013) will be allocated to the limited partners, and to the general partner
(MIGC IV) as, if and when the annual return thresholds have been achieved by the
limited partners





REITPlus, Inc.-
During the fourth quarter, a registration statement relating to REITPlus, Inc.
(“REITPlus”), a $550 million non-traded REIT offering that will be advised by
one of our wholly-owned subsidiaries, was declared effective by the SEC,
allowing REITPlus to begin offering its common stock through our securities
operation’s broker dealer network. We will operate substantially all of our
operations through REITPlus Operating Partnership, LP (“REITPlus OP”) which will
own substantially all of the properties acquired on REITPlus’s
behalf.  On May 16, 2007, we purchased 100 shares of common stock of
REITPlus for total cash consideration of $1,000 and were admitted as the initial
shareholder.  Additionally, on May 16, 2007, we made an initial
limited partner contribution of $1 million to REITPlus OP.








We will
serve as the advisor to REITPlus and will therefore earn recurring fees such as
asset management and property management fees, and transactional fees such as
acquisition fees, development fees and sales commissions. We will also
participate in a 15% promoted interest after the REITPlus stockholders receive
their invested capital plus a 7% preferred return.  In our capacity as
advisor to REITPlus, we have paid organization and offering costs of $1.1
million on its behalf.  Once REITPlus meets its minimum subscription
threshold, such costs will be reimbursed to us.  We have recorded
these costs as a receivable in the accompanying financial statements and expect
reimbursement for them in the first quarter of 2008.










F-16





The
following table sets forth certain financial information for the AIG, MIG, MIG
II, MIG III and MIG IV merchant development funds (AOF is not included as it is
currently in liquidation):






Sharing
      Ratios*Merchant
                Development
                Fund
              
              Capital
                under
                Management
              
              LP
                Interest
              
              
              GP
                Interest
              
              Scheduled
                Liquidation
              
              LP
              
              
              GP
              
              
              LP
                PreferenceAIG
              
              $
              3
              
              million
              
              
              2.0%
              
              
              
              1.0%
              
              2008
              
              
              99
              %
              
              
              1
              %
              
              
              8
              %90
              %
              
              
              10
              %
              
              
              10
              %80
              %
              
              
              20
              %
              
              
              12
              %70
              %
              
              
              30
              %
              
              
              15
              %0
              %
              
              
              100
              %
              
              40%
      Catch Up60
              %
              
              
              40
              %
              
              ThereafterMIG
              
              $
              15
              
              million
              
              
              1.3%
              
              
              
              1.0%
              
              2010
              
              
              99
              %
              
              
              1
              %
              
              
              8
              %90
              %
              
              
              10
              %
              
              
              10
              %80
              %
              
              
              20
              %
              
              
              12
              %0
              %
              
              
              100
              %
              
              40%
      Catch Up60
              %
              
              
              40
              %
              
              ThereafterMIG
      II
              
              $
              25
              
              million
              
              
              1.6%
              
              
              
              1.0%
              
              2011
              
              
              99
              %
              
              
              1
              %
              
              
              8
              %85
              %
              
              
              15
              %
              
              
              12
              %0
              %
              
              
              100
              %
              
              40%
      Catch Up60
              %
              
              
              40
              %
              
              ThereafterMIG
      III
              
              $
              71
              
              million
              
              
              1.1%
              
              
              
              1.0%
              
              2012
              
              
              99
              %
              
              
              1
              %
              
              
              10
              %0
              %
              
              
              100
              %
              
              40%
      Catch Up60
              %
              
              
              40
              %
              
              ThereafterMIG
      IV
              
              $
              45
              
              million
              
              
              1.8%
              
              
              
              1.0%
              
              2013
              
              
              99
              %
              
              
              1
              %
              
              
              8.5
              %0
              %
              
              
              100
              %
              
              40%
      Catch Up60
              %
              
              
              40
              %
              
              ThereafterREITPlus**
              
              
              -
              
              million
              
              NA
              
              
              NA
              
              2014
              
              
              99
              %
              
              
              1
              %
              
              
              7
              %85
              %
              
              
              15
              %
              
              Thereafter
 
  *
Illustrating the Sharing Ratios and LP Preference provisions using AIG as an
example, the LPs share in 99% of the cash distributions until they receive an 8%
preferred return.  The LPs share in 90% of the cash distributions
until they receive a 10% preferred return and so on.
 
 **
REITPlus commenced capital raising in the first quarter of 2008.
  Other
Affiliates
 
 Other
than the merchant development funds, we have an investment in two entities that
are accounted for under the equity method since we exercise significant
influence over such investees. We invested $3.4 million in Woodlake Square,
LP, and we have a 30% limited partner interest in the partnership. Woodlake
Square was formed in 2007 to acquire, lease and manage Woodlake Square, a
shopping center located on the west side of Houston, TX at the intersection
of  Westheimer and Gessner.  Also, we invested
$3.8 million in Borders, LP, and we have a 30% limited partner interest in
the partnership. Borders was formed in 2007 to acquire, lease and manage Borders
Shopping Center, a shopping center located on the west side of Houston, TX at
the intersection of  Westheimer and Gessner.


F-17


Combined
condensed financial information for the merchant development funds and other
affiliates (at 100%) is summarized as follows:






As of December 31,Combined Balance Sheets
      (in thousands)
              
              2007
              
              
              2006AssetsProperty,
      net
              
              $
              155,699
              
              
              $
              149,929Cash
              
              
              28,208
              
              
              
              34,221Notes
      receivable
              
              
              10,497
              
              
              
              18,608Other
      assets
              
              
              35,825
              
              
              
              24,453Total
      Assets
              
              
              230,229
              
              
              
              227,211Liabilities
      and partners' capital:Notes
      payable (1)
              
              
              106,291
              
              
              
              122,979Other
      liabilities
              
              
              9,664
              
              
              
              1,168Partners
      capital
              
              
              114,274
              
              
              
              103,064Total
      Liabilities and Partners' Capital
              
              $
              230,229
              
              
              $
              227,211AmREIT
      share of Partners' Capital
              
              $
              10,514
              
              
              $
              2,651
 
 Years ended December 31,Combined Statement of
      Operations (in thousands)
              
              2007
              
              
              2006
              
              
              2005RevenueTotal
      Revenue
              
              
              15,173
              
              
              
              14,248
              
              
              
              7,836ExpenseInterest
              
              
              5,135
              
              
              
              3,196
              
              
              
              1,849Depreciation
      and amortization
              
              
              4,570
              
              
              
              2,757
              
              
              
              996Other
              
              
              8,779
              
              
              
              3,722
              
              
              
              2,306Total
      Expense
              
              
              18,484
              
              
              
              9,675
              
              
              
              5,151Net
      (loss) income
              
              $
              (3,311
              )
              
              $
              4,573
              
              
              $
              2,685AmREIT
      share of Net (loss) income
              
              $
              153
              
              
              $
              967
              
              
              $
              161
 
 (1)  Includes
$10.5 million and $10.1 million payable to us as of December 31, 2007 and 2006,
respectively.


6. 
ACQUIRED LEASE INTANGIBLES





In
accordance with SFAS No. 141, we have identified and recorded the value of
intangibles at the property acquisition date.  Such intangibles
include the value of in-place leases and out-of-market
leases.  Acquired lease intangible assets (in-place leases and
above-market leases) are amortized over the leases’ remaining terms, which range
from 1 month to 20 years. The amortization of above-market leases is recorded as
a reduction of rental income and the amortization of in-place leases is recorded
to amortization expense.  The amortization expense related to in-place
leases was $2.3 million, $2.7 million and $2.0 million during 2007, 2006 and
2005, respectively.  The amortization of above-market leases, which
was recorded as a reduction of rental income, was $382,000, $487,000 and
$337,000 during 2007, 2006 and 2005, respectively.














F-18





In-place
and above-market lease amounts and their respective accumulated amortization are
as follows (in thousands):





December
      31, 2007
              
              
              December
      31, 2006In-Place
      leases
              
              
              
              
              Above-market
      leases
              
              
              In-Place
      leases
              
              
              
              
              Above-market
      leasesCost
              
              $
              19,052
              
              
              
              
              $
              2,025
              
              
              $
              19,408
              
              
              
              
              $
              2,146Accumulated
      amortization
              
              
              (6,910
              )
              
              
              
              
              (1,071
              )
              
              
              (4,728
              )
              
              
              
              
              (810
              )Intangible
      lease cost, net
              
              $
              12,142
              
              
              
              
              $
              954
              
              
              $
              14,680
              
              
              
              
              $
              1,336


Acquired
lease intangible liabilities (below-market leases) are net of previously
accreted minimum rent of $1.6 million and $1.1 million at December 31, 2007 and
2006, respectively and are accreted over the leases’ remaining terms, which
range from 1 month to 20 years.  Accretion of below-market leases was
$546,000, $526,000 and $495,000 during 2007, 2006


and 2005,
respectively.  Such accretion is recorded as an increase to rental
income.





The
estimated aggregate amortization amounts from acquired lease intangibles for
each of the next five years are as follows (in thousands):








Year
      Ending December 31,
              
              Amortization
      Expense (in-place lease value)
              
              
              Rental
      Income (out-of-market leases)2008
              
              $
              2,165
              
              
              $
              1732009
              
              
              2,040
              
              
              
              1802010
              
              
              1,562
              
              
              
              3172011
              
              
              1,211
              
              
              
              2902012
              
              
              946
              
              
              
              294$
              7,924
              
              
              $
              1,254





7.
NOTES PAYABLE





The
Company’s outstanding debt at December 31, 2007 and 2006 consists of the
following (in thousands):


2007
              
              
              2006Notes
      Payable, Held for InvestmentFixed rate mortgage
      loans
              
              
              138,121
              
              
              
              132,524Variable-rate
      unsecured line of credit
              
              
              30,439
              
              
              
              11,929Total
              
              
              168,560
              
              
              
              144,453Notes
      Payable, Held for SaleFixed
      rate mortgage loans
              
              
              12,811
              
              
              
              -Total
              
              
              12,811
              
              
              
              -




F-19







We have
an unsecured credit facility in place which is being used to provide funds for
the acquisition of properties and working capital. The credit facility matures
in October 2009 and provides that we may borrow up to $70 million subject to the
value of unencumbered assets.  Effective October 2007, we renewed our
credit facility on terms and conditions substantially the same as the previous
facility.  The credit facility contains covenants which, among other
restrictions, require us to maintain a minimum net worth, a maximum leverage
ratio, maximum tenant concentration ratios, specified interest coverage and
fixed charge coverage ratios and allow the lender to approve all
distributions.  For the year ended December 31, 2007, we violated two
covenants per terms of the credit facility.  Our lender has waived
both events of non-compliance as of December 31, 2007.  We are in
compliance with all other covenants as of December 31, 2007.  The credit
facility’s annual interest rate varies depending upon our debt to asset ratio,
from LIBOR plus a spread of 1.0% to LIBOR plus a spread of 1.85%.  As
of December 31, 2007, the interest rate was LIBOR plus 1.00%.  As of
December 31, 2007 and 2006, there was $30.4 million and $11.9 outstanding on the
credit facility, respectively.  As of December 31, 2007, we have
approximately $37.6 million available under our line of credit, subject to the
covenant provisions discussed above.  In addition to the credit
facility, we utilize various permanent mortgage financing and other debt
instruments.





As of
December 31, 2007, the weighted average interest rate on our fixed-rate debt is
5.78%, and the weighted average remaining life of such debt is 6.74 years. We
added fixed-rate debt of $19.9 million during the year ended December 31, 2007
We added fixed-rate debt of $20.0 million during the year ended December 31,
2006.  In conjunction with the acquisition of Uptown Park during 2005,
we added $49.0 million in fixed-rate debt.  All other acquisitions
have been funded by cash on hand at the date of the acquisition or through the
Credit Facility.





As of
December 31, 2007, scheduled principal repayments on notes payable and the
Credit Facility were as follows (in thousands):




Associated
      with Assets
              
              
              Associated
      with AssetsHeld
      for Investment
              
              
              Held
      for SaleScheduled
      Payments by Year
              
              Scheduled
      Principal
                Payments
              
              
              Term-Loan
                Maturities
              
              
              Total
      Payments
              
              
              Scheduled
      Principal
                Payments
              
              
              Term-Loan
                Maturities
              
              
              Total
      Payments2008
              
              $
              859
              
              
              
              13,410
              
              
              
              14,269
              
              
              $
              491
              
              
              
              -
              
              
              
              4912009
              
              
              31,357
              
              
              
              -
              
              
              
              31,357
              
              
              
              531
              
              
              
              -
              
              
              
              5312010
              
              
              982
              
              
              
              -
              
              
              
              982
              
              
              
              574
              
              
              
              -
              
              
              
              5742011
              
              
              987
              
              
              
              3,075
              
              
              
              4,062
              
              
              
              620
              
              
              
              -
              
              
              
              6202012
              
              
              979
              
              
              
              25,353
              
              
              
              26,332
              
              
              
              314
              
              
              
              10,281
              
              
              
              10,595Beyond
      five years
              
              
              2,019
              
              
              
              88,900
              
              
              
              90,919
              
              
              
              -
              
              
              
              -
              
              
              
              -Unamortized
      debt premiums
              
              
              -
              
              
              
              639
              
              
              
              639
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              $
              37,183
              
              
              $
              131,377
              
              
              $
              168,560
              
              
              $
              2,530
              
              
              $
              10,281
              
              
              $
              12,811


8.
CONCENTRATIONS





As of
December 31, 2007, two properties individually accounted for more than 10% of
our consolidated total assets – Uptown Park in Houston, Texas and MacArthur Park
in Dallas, Texas accounted for 15% and 11%, respectively of total
assets.  Consistent with our strategy of investing in areas that we
know well, 17 of our properties are located in the Houston metropolitan
area.  These Houston properties represent 62% of our rental income for
the year ended December 31, 2007.  Houston is Texas’ largest city and
the fourth largest city in the United States.







F-20








2007
              
              
              2006
              
              
              2005Kroger
              
              
              3,512
              
              
              
              2,801
              
              
              
              2,899IHOP
      Corporation
              
              
              2,246
              
              
              
              2,249
              
              
              
              2,249CVS
              
              
              1,143
              
              
              
              1,046
              
              
              
              1,060Landry's
      Restaurant, Inc.
              
              
              1,077
              
              
              
              872
              
              
              
              445Linens'
      N things
              
              
              919
              
              
              
              624
              
              
              
              716Hard
      Rock Café
              
              
              704
              
              
              
              569
              
              
              
              142Paesanos
              
              
              611
              
              
              
              525
              
              
              
              129Champps
      Americana
              
              
              567
              
              
              
              547
              
              
              
              333Starbucks
              
              
              516
              
              
              
              465
              
              
              
              211McCormick
      & Schmick's
              
              
              465
              
              
              
              450
              
              
              
              26611,760
              
              
              
              10,148
              
              
              
              8,450





9.
FEDERAL INCOME TAXES





Non-taxable
Operations - We qualify as a REIT under the provisions of the Internal Revenue
Code, and therefore, no tax is imposed on us for our taxable income distributed
to shareholders.  To maintain out REIT status, we must distribute at
least 90% of our ordinary taxable income to our shareholders and meet certain
income source and investment restriction requirements.  Our
shareholders must report their share of income distributed in the form of
dividends.  At
December 31, 2007 the net book and tax bases of real estate assets were
$271.1million and $281.7 million, respectively.  At December 31, 2006
the net book and tax bases of real estate assets were $267.7 million and $276.0
million, respectively.




Taxable
Operations - Income tax (benefit) expense is attributable to the operations of
our taxable REIT subsidiaries and consists of the following for the years ended
December 31, 2007, 2006 and 2005 which is included in income tax (benefit)
expense or in discontinued operations as appropriate ($ in
thousands):




2007
                
                
                2006
                
                
                2005Current-
      Federal
                
                $
                (267
                )
                
                $
                692
                
                
                $
                1,006Current-
      State
                
                $
                328
                
                
                $
                191
                
                
                $
                131Deferred-Federal
                
                
                (305
                )
                
                
                171
                
                
                
                (287
                )Total
      income tax expense (benefit)
                
                $
                (244
                )
                
                $
                1,054
                
                
                $
                850


The
effective tax rate approximates the statutory tax rate of 34% as no significant
permanent differences exist between book and taxable income of the Taxable REIT
Subsidiaries.  Additionally, the Taxable REIT Subsidiaries had a net
deferred tax asset of $430,000 and $129,000 at December 31, 2007 and 2006,
respectively.  The deferred tax assets relate to income received from
transactions with our merchant development funds, a portion of which has been
deferred for financial reporting purposes pursuant to generally accepted
accounting principles.  However, all of such income will be subject to
tax.  Our deferred tax liabilities were established to record the tax
effect of the differences between the book and tax bases of certain real estate
assets of our real estate development and operating and our asset advisory
businesses.  No valuation allowance was provided on the net deferred
tax assets as of December 31, 2007 and 2006 as we believe that it is more likely
than not that the future benefits associated with these deferred tax assets will
be realized.




In May
2006, the State of Texas adopted House Bill 3, which modified the state’s
franchise tax structure, replacing the previous tax based on capital or earned
surplus with one based on margin (often referred to as the “Texas Margin Tax”)
effective with franchise tax reports filed on or after January 1, 2008. The
Texas Margin Tax is computed by applying the applicable tax rate (1% for us) to
the profit margin, which, generally, will be determined for us as total revenue
less a 30% standard deduction.  Although House Bill 3 states that the
Texas Margin Tax is not an income tax, SFAS No. 109, Accounting for Income
Taxes, applies to the Texas Margin Tax.




F-21




10.  SHAREHOLDERS’
EQUITY AND MINORITY INTEREST





Class A Common Shares
— Our class A common shares are listed on the American Stock Exchange (“AMEX”)
and traded under the symbol “AMY.” As of December 31, 2007, there were 6,289,251
of our class A common shares outstanding, net of


337,308
shares held in treasury. During June 2005, we completed an underwritten offering
of our class A common shares. We issued 2.76 million shares, including the
underwriter’s 360,000 share over-allotment, at $8.10 per share in such offering.
The offering proceeds were used to fund the acquisition of the Uptown Park
shopping center. Our payment of any future dividends to our class A common
shareholders is dependent upon applicable legal and contractual restrictions,
including the provisions of the class C common shares, as well as our earnings
and financial needs.





Class B Common Shares
— As, of December 31,2007 none of the Class B Shares were outstanding. In
December 2006, we completed a tender offer for approximately 48% of our class B
common shares.  Where we repurchased 998,000 shares at $9.25 per share
for a total purchase price of $9.2 million. We redeemed the remaining 1 million
outstanding shares as of December 2007 at $10.18 per share for $10.4 million in
cash.





Class C Common Shares
— The class C common shares are not listed on an exchange and there is currently
no available trading market for the class C common shares. The class C common
shares have voting rights, together with all classes of common shares, as one
class of stock. The class C common shares were issued at $10.00 per share. They
receive a fixed 7.0% preferred annual dividend, paid in monthly installments,
and are convertible into the class A common shares after a 7-year lock out
period based on 110% of invested capital, at the holder’s option. After three
years and beginning in August 2006, subject to the issuance date of the
respective shares, we have the right to force conversion of the shares into
class A shares on a one-for-one basis or
to redeem the shares at a cash redemption price of $11.00 per share at the
holder’s option. As of December 31, 2007, there were 4,143,971 of our class C
common shares outstanding.  Currently, there is a class C dividend
reinvestment program that allows investors to reinvest their dividends into
additional class C common shares.  These reinvested shares are also
convertible into the class A common shares after the 7-year lock out period and
receive the 10% conversion premium upon conversion.





Class D Common Shares
— The class D common shares are not listed on an exchange and there is currently
no available trading market for the class D common shares. The class D common
shares have voting rights, together with all classes of common shares, as one
class of stock. The class D common shares were issued at $10.00 per share. They
receive a fixed 6.5% annual dividend, paid in monthly installments, subject to
payment of dividends then payable to class B and class C common shares. The
class D common shares are convertible into the class A common shares at a 7.7%
premium on original capital after a 7-year lock out period, at the holder’s
option. After one year and beginning in July 2005, subject to the issuance date
of the respective shares, we have the right to force conversion of the shares
into class A shares at the 7.7% conversion premium or to redeem the shares at a
cash price of $10.00. In either case, the conversion premium will be pro rated
based on the number of years the shares are outstanding. As of December 31,
2007, there were 11,045,763 of our class D common shares
outstanding.  Currently, there is a class D dividend reinvestment
program that allows investors to reinvest their dividends into additional class
D common shares.  These reinvested shares are also convertible into
the class A common shares after the 7-year lock out period and receive the 7.7%
conversion premium upon conversion.





Minority Interest —
Minority interest represents a third-party interest in entities that we
consolidate as a result of our controlling financial interest in such
investees.





11.           RELATED
PARTY TRANSACTIONS





See Note
5 regarding investments in merchant development funds and other affiliates and
Note 1 regarding notes receivable from affiliates.





We earn
real estate fee income by providing property acquisition, leasing, property
management, construction and construction management services to our merchant
development funds.  We own 100% of the stock of the companies that
serve as the general partner for the funds.  Real estate fee income of
$4.0 million, $7.0 million and $4.6 million were paid by the funds to the
Company for 2007, 2006, and 2005, respectively.  Additionally,
construction revenues of $5.9 million, $10.4 million and $2.4 million were
earned from the merchant development funds during 2007, 2006 and 2005,
respectively.  The Company earns asset management
fees from the funds for providing accounting related services, investor
relations, facilitating the deployment of capital, and other services provided
in conjunction with operating
the fund.  Asset management fees of $1.3 million, $823,000 and
$495,000 were paid by the funds to us for 2007, 2006 and 2005,
respectively.  Additionally,
during the year ended December 31, 2007 and December 31, 2006 we were reimbursed
by the merchant development funds $547,000 and $0, respectively for
reimbursements of administrative costs and for organization and offering costs
incurred on behalf of those funds.


F-22








Accounts
receivable-related partyof$5.4
million isprimarily
attributable to several items.  We had$2.0
millionof
construction billings receivable from one of our affiliated entitiesrelated
to a property redevelopment that took place in the fourth quarter of 2007.Additionally,
we have incurred$1
millionof
organization and offering costs on behalf ofREITPlus,
which will be reimbursed
to usonceREITPlusachieves
it minimum offering threshold..
See Note 5 for furtherdiscussion
of REITPlus.We
also had$700,000
receivable froman
affiliated entity related to our up-front funding ofearnest
moniesassociated
witha
propertyacquisition.




As a sponsor
of real estate investment opportunities to the NASD financial planning
broker-dealer community, we maintain an indirect 1% general partner interest in
the investment funds that we sponsor.  The funds are typically
structured such that the limited partners receive 99% of the available cash flow
until 100% of their original invested capital has been returned and a preferred
return has been met.  Once this has happened, then the general partner
begins sharing in the available cash flow at various promoted
levels.  We also may assign a portion of this general partner interest
in these investment funds to our employees as long term, contingent
compensation.  We believe that this assignment will align the interest
of management with that of the shareholders, while atthe same time
allowing for a competitive compensation structure in order to attract and retain
key management positions without increasing the overhead burden.





12.
REAL ESTATE ACQUISITIONS AND DISPOSITIONS





2007


In May
2007, we acquired a 2-acre parcel of land in Champaign, IL that was acquired for
resale and is currently under development for a national tenant that is in the
rental equipment business.  In February 2007, we acquired The
Woodlands Mall Ring Road property, which represents 66,000 square feet of gross
leasable area in Houston, Texas.  The property is ground-leased to
five tenants, including Bank of America, Circuit City and Landry’s Seafood.
 The acquisitions were accounted for as purchases and the results of their
operations are included in the consolidated financial statements from the
respective dates of acquisition.Additionally, during
2007, we sold one property acquired for resale for $1.4 million which
approximated our cost.





2006


During
2006, we invested approximately $28 million through the acquisition of two
properties and generated proceeds of $6.7 million from the sale of four
properties.  The acquisitions were accounted for as purchases and the
results of their operations are included in the consolidated financial
statements from the respective dates of acquisition.





On March
30, 2006, we acquired Uptown Plaza in Dallas, a 34,000 square foot multi-tenant
retail complex which was developed in 2005. The center’s tenants include, among
others, Pei-Wei, Grotto and Century Bank. Uptown Plaza is located at the corner
of McKinney and Pearl Street in an infill location with high barriers to entry
and the property services the surrounding affluent residential and downtown
areas. The property was acquired for cash which was substantially funded by
proceeds from our credit facility.  In December 2006, we acquired an
undeveloped 0.9 acre piece of property contiguous to Uptown Plaza in Dallas
which we intend to sell.  This property is classified as held for sale
in the accompanying balance sheet as of December 31, 2006.





Additionally,
during the quarter ended March 31, 2006, we sold two properties which were
recorded as real estate held for sale at December 31, 2005.  These
sales generated aggregate proceeds of $3.6 million which approximated the
properties’ carrying values. Additionally, we sold one of our properties that
was held for investment for proceeds of $2.0 million, which generated a $285,000
gain during the quarter ended June 30, 2006.





2005


During
2005, we invested over $110 million through the acquisition of three
properties.  The acquisitions were accounted for as purchases and the
results of their operations are included in the consolidated financial
statements from the respective dates of acquisition.Additionally, we sold
ten single-tenant non-core properties for $16.6 million in cash to unrelated
third parties resulting in gains of $3.4 million.  We also completed
the sale of six single-tenant retail properties that were acquired for resale
for a total of approximately $11.5 million in cash.  On December 15,
2005, we utilized the net proceeds from the disposition of our non-core
properties to acquire a 39,000 square foot multi-tenant retail project located
adjacent to the MacArthur Park Shopping
Center in Las Colinas, an affluent residential and business community in Dallas,
Texas.  We purchased the MacArthur Park Shopping Center on December
27, 2004.


F-23





On
September 30, 2005, we acquired for cash The South Bank, a 47,000 multi-tenant
retail center located on the San Antonio Riverwalk in San Antonio, Texas. The
property is located at the corner of a major downtown intersection and is
accessible from both the river and street levels.  Tenants on the
Property include, among others, Hard Rock Café, Starbucks, Ben & Jerry’s, Harley-Davidson
and The County Line.  The property was funded with cash and the
placement of long-term fixed-rate debt. The cash portion of the purchase
consideration was substantially funded by the net proceeds from the secondary
offering of our class A common shares as discussed above. The debt has a term of
10 years and is payable interest-only to maturity at a fixed interest rate of
5.91% with the entire principal amount due in 2016.





On June
1, 2005, we acquired Uptown Park, a 169,000 square foot multi-tenant shopping
center located on approximately 16.85 acres of land. The property is located on
the northwest corner of Loop 610 and Post Oak Boulevard in Houston, Texas in the
heart of the Uptown Houston area. The property was developed in two phases —
phase one consists of approximately 147,000 square feet that was constructed in
1999, and construction was recently completed on phase two which consists of
approximately 22,000 square feet. The property was funded with cash and the
placement of long-term fixed-rate debt. The cash portion of the purchase
consideration was substantially funded by the net proceeds from the secondary
offering of our class A common shares as discussed above. The debt has a term of
10 years and is payable interest-only to maturity at a fixed interest rate of
5.37% with the entire principal amount due in 2015.





13.
COMMITMENTS





In March
of 2004, we signed a new lease agreement for our office facilities which expires
August 31, 2009.  In addition, we lease various office
equipment.  Rental expense for the years ended December 31, 2007, 2006
and 2005 was $316,000, $334,000 and $233,000, respectively.





A summary
of future minimum lease payments for the office lease and equipment follows (in
thousands):





2008
              
              $
              3202009
              
              
              2052010
              
              
              232011
              
              
              232012
              
              
              -2013
      & thereafter
              
              
              -Total
              
              $
              571
   14.
SEGMENT REPORTING





The
operating segments presented are the segments of AmREIT for which separate
financial information is available, and revenue and operating performance is
evaluated regularly by senior management in deciding how to allocate resources
and in assessing performance.





AmREIT
evaluates the performance of its operating segments primarily on
revenue.  Because the real estate development and operating segment
and securities and merchant development fund segments are both revenue and fee
intensive, management considers revenue the primary indicator in allocating
resources and evaluating performance.





The
portfolio segment consists of our portfolio of single and multi-tenant shopping
center projects.  At December 31, 2007, this segment consists of 50
properties located in 15 states.   Expenses for this segment
include depreciation, interest, minority interest, legal cost directly related
to the portfolio of properties and property level expenses.  The
consolidated assets of AmREIT are substantially all in this
segment.  Additionally, substantially all of the increase in total
assets during the year ended December 31, 2007 occurred within the portfolio
segment.





F-24


Our real
estate development and operating business is a fully integrated and wholly-owned
business consisting of brokers and


Asset
      Advisory Group2007
      (in thousands)
              
              Portfolio
              
              
              Real
      Estate
                Development
                &
      Operating
                Company
              
              
              Securities
                Operations
              
              
              Merchant
                Development
                Funds
              
              
              TotalRental
      income
              
              
              30,620
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              30,620Securities
      commission income
              
              
              -
              
              
              
              -
              
              
              
              4,805
              
              
              
              -
              
              
              
              4,805Real
      estate fee income
              
              
              -
              
              
              
              5,242
              
              
              
              -
              
              
              
              -
              
              
              
              5,242Construction
      revenues
              
              
              -
              
              
              
              7,645
              
              
              
              -
              
              
              
              -
              
              
              
              7,645Other
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,289
              
              
              
              1,289Total
      revenue
              
              
              30,620
              
              
              
              12,887
              
              
              
              4,805
              
              
              
              1,289
              
              
              
              49,601General
      and administrative
              
              
              1,395
              
              
              
              5,737
              
              
              
              2,010
              
              
              
              110
              
              
              
              9,252Property
      expense
              
              
              7,503
              
              
              
              97
              
              
              
              1
              
              
              
              -
              
              
              
              7,601Construction
      costs
              
              
              -
              
              
              
              6,906
              
              
              
              -
              
              
              
              -
              
              
              
              6,906Legal
      and professional
              
              
              1,369
              
              
              
              196
              
              
              
              149
              
              
              
              31
              
              
              
              1,745Real
      estate commissions
              
              
              -
              
              
              
              459
              
              
              
              -
              
              
              
              -
              
              
              
              459Securities
      commissions
              
              
              -
              
              
              
              -
              
              
              
              3,989
              
              
              
              -
              
              
              
              3,989Depreciation
      and amortization
              
              
              7,808
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              7,808Total
      expenses
              
              
              18,075
              
              
              
              13,395
              
              
              
              6,149
              
              
              
              141
              
              
              
              37,760Interest
      expense
              
              
              (7,965
              )
              
              
              (680
              )
              
              
              (49
              )
              
              
              -
              
              
              
              (8,694
              )Other
      income/ (expense)
              
              
              602
              
              
              
              688
              
              
              
              111
              
              
              
              201
              
              
              
              1,602Income
      from discontinued operations
              
              
              484
              
              
              
              18
              
              
              
              -
              
              
              
              -
              
              
              
              502Net
      income (loss)
              
              
              5,666
              
              
              
              (482
              )
              
              
              (1,282
              )
              
              
              1,349
              
              
              
              5,251





F-25


Asset
      Advisory Group2006
      (in thousands)
                
                Portfolio
                
                
                Real
      Estate Development & Operating Company
                
                
                Securities
      Operations
                
                
                Merchant
      Development Funds
                
                
                TotalRental
      income
                
                
                28,237
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                28,237Securities
      commission income
                
                
                -
                
                
                
                -
                
                
                
                6,554
                
                
                
                -
                
                
                
                6,554Real
      estate fee income
                
                
                -
                
                
                
                8,317
                
                
                
                -
                
                
                
                -
                
                
                
                8,317Construction
      revenues
                
                
                -
                
                
                
                13,460
                
                
                
                -
                
                
                
                -
                
                
                
                13,460Other
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                823
                
                
                
                823Total
      revenue
                
                
                28,237
                
                
                
                21,777
                
                
                
                6,554
                
                
                
                823
                
                
                
                57,391General
      and administrative
                
                
                1,662
                
                
                
                5,186
                
                
                
                2,289
                
                
                
                160
                
                
                
                9,297Property
      expense
                
                
                6,905
                
                
                
                58
                
                
                
                23
                
                
                
                -
                
                
                
                6,986Construction
      costs
                
                
                -
                
                
                
                12,290
                
                
                
                -
                
                
                
                -
                
                
                
                12,290Legal
      and professional
                
                
                1,235
                
                
                
                241
                
                
                
                70
                
                
                
                -
                
                
                
                1,546Real
      estate commissions
                
                
                -
                
                
                
                1,042
                
                
                
                -
                
                
                
                -
                
                
                
                1,042Securities
      commissions
                
                
                -
                
                
                
                -
                
                
                
                5,732
                
                
                
                -
                
                
                
                5,732Depreciation
      and amortization
                
                
                8,735
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                8,735Total
      expenses
                
                
                18,537
                
                
                
                18,817
                
                
                
                8,114
                
                
                
                160
                
                
                
                45,628Interest
      expense
                
                
                (6,426
                )
                
                
                (294
                )
                
                
                (234
                )
                
                
                -
                
                
                
                (6,954
                )Other
      income/ (expense)
                
                
                1,154
                
                
                
                (518
                )
                
                
                607
                
                
                
                145
                
                
                
                1,388Income
      from discontinued operations
                
                
                874
                
                
                
                492
                
                
                
                -
                
                
                
                -
                
                
                
                1,366Net
      income (loss)
                
                
                5,302
                
                
                
                2,640
                
                
                
                (1,187
                )
                
                
                808
                
                
                
                7,563


F-26


Asset
      Advisory Group2005
      (in thousands)
                
                Portfolio
                
                
                Real
      Estate Development & Operating Company
                
                
                Securities
      Operations
                
                
                Merchant
      Development Funds
                
                
                Eliminations
                
                
                TotalRental
      income
                
                
                20,370
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                20,370Securities
      commission income
                
                
                -
                
                
                
                -
                
                
                
                10,350
                
                
                
                -
                
                
                
                (9,187
                )
                
                
                1,163Real
      estate fee income
                
                
                -
                
                
                
                9,809
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                9,809Other
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                495
                
                
                
                -
                
                
                
                495Total
      revenue
                
                
                20,370
                
                
                
                9,809
                
                
                
                10,350
                
                
                
                495
                
                
                
                (9,187
                )
                
                
                31,837General
      and administrative
                
                
                1,627
                
                
                
                3,523
                
                
                
                2,949
                
                
                
                254
                
                
                
                (2,123
                )
                
                
                6,230Property
      expense
                
                
                4,771
                
                
                
                77
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4,848Construction
      costs
                
                
                -
                
                
                
                4,283
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4,283Legal
      and Professional
                
                
                1,202
                
                
                
                535
                
                
                
                112
                
                
                
                -
                
                
                
                -
                
                
                
                1,849Real
      estate commissions
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Securities
      commissions
                
                
                -
                
                
                
                -
                
                
                
                7,928
                
                
                
                -
                
                
                
                (7,064
                )
                
                
                864Depreciation
      and amortization
                
                
                6,027
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                6,027Total
      expenses
                
                
                13,627
                
                
                
                8,418
                
                
                
                10,989
                
                
                
                254
                
                
                
                (9,187
                )
                
                
                24,101Interest
      expense
                
                
                (4,685
                )
                
                
                (552
                )
                
                
                (25
                )
                
                
                -
                
                
                
                -
                
                
                
                (5,262
                )Other
      income/ (expense)
                
                
                (908
                )
                
                
                1,319
                
                
                
                (77
                )
                
                
                50
                
                
                
                -
                
                
                
                384Income
      from discontinued operations
                
                
                6,795
                
                
                
                473
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                7,268Net
      income (loss)
                
                
                7,945
                
                
                
                2,631
                
                
                
                (741
                )
                
                
                291
                
                
                
                -
                
                
                
                10,126


F-27








15.
SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)





Presented
below is a summary of the consolidated quarterly financial data for the years
ended December 31, 2007 and 2006 (amounts in thousands, except per share
data):




First
      Quarter
              
              
              Second
      Quarter
              
              
              Third
      Quarter
              
              
              Fourth
      Quarter2007:
              
              1st Quarter
              
              
              2nd Quarter
              
              
              3rd Quarter
              
              
              4th QuarterRevenues
      as reported
              
              $
              11,246
              
              
              $
              11,460
              
              
              $
              12,794
              
              
              $
              15,048Reclassified
      to discontinued operations
              
              
              (474
              )
              
              
              (470
              )
              
              
              (3
              )
              
              
              -Adjusted
      Revenues
              
              
              10,772
              
              
              
              10,990
              
              
              
              12,791
              
              
              
              15,048Net
      (loss) income available to class A shareholders
              
              
              (1,702
              )
              
              
              (1,101
              )
              
              
              (2,005
              )
              
              
              (1,650
              )Net
      (loss) income per class A share: basic and diluted
              
              
              (0.27
              )
              
              
              (0.25
              )
              
              
              (0.11
              )
              
              
              (0.38
              )2006:
              
              1st Quarter
              
              
              2nd Quarter
              
              
              3rd Quarter
              
              
              4th QuarterRevenues
      as reported
              
              $
              11,588
              
              
              $
              13,260
              
              
              $
              14,077
              
              
              $
              20,663Reclassified
      to discontinued operations
              
              
              (494
              )
              
              
              (475
              )
              
              
              (492
              )
              
              
              (501
              )Reclassified
      to other income (1)
              
              
              (235
              )
              
              
              -
              
              
              
              -
              
              
              
              -Adjusted
      Revenues
              
              
              10,859
              
              
              
              12,785
              
              
              
              13,585
              
              
              
              20,162Net
      (loss) income available to class A shareholders
              
              
              (1,813
              )
              
              
              (1,661
              )
              
              
              (1,352
              )
              
              
              947Net
      (loss) income per class A share: basic and diluted
              
              
              (0.28
              )
              
              
              (0.26
              )
              
              
              (0.22
              )
              
              
              0.15


(1)
During 2006, we reclassified interest income from Revenues to Other Income in
the accompanying consolidated statements of operations.  We made
similar reclassifications to prior periods in order to conform to the current
year presentation.













F-28


AmREIT
      and subsidiariesSCHEDULE
      III - Consolidated Real Estate Owned and Accumulated
      Depreciation
              For
      the year ended December 31, 2007Initial
      Cost
            
            
            
            
            
            Total
      CostProperty
      Description
            
            Building
      and Improvements
            
            
            Land
            
            
            Investment
      in Direct Financing Lease
            
            
            Cost
      Capitalized Subsequent to Acquisition (Note A)
            
            
            Building
      and Improvements
            
            
            Land
            
            
            Real
      Estate Held for Sale
            
            
            Investment
      in Direct Financing Lease
            
            
            Direct
      Financing Lease Held for Sale
            
            
            Total
            
            
            Accumulated
      Depreciation
            
            
            Date
      Acquired
            
            
            EncumbrancesSHOPPING
      CENTERSBakery
      Square, Texas
            
            
            4,806,518
            
            
            
            4,325,612
            
            
            
            -
            
            
            
            3,370
            
            
            
            4,800,014
            
            
            
            4,335,486
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            9,135,500
            
            
            
            523,213
            
            
            
            07-21-04
            
            
            
            3,703,583Cinco
      Ranch, Texas
            
            
            11,558,491
            
            
            
            2,666,534
            
            
            
            -
            
            
            
            839
            
            
            
            11,557,638
            
            
            
            2,668,226
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            14,225,864
            
            
            
            1,258,528
            
            
            
            07-01-04
            
            
            
            8,158,280Courtyard
      Square, Texas
            
            
            1,777,161
            
            
            
            4,133,641
            
            
            
            -
            
            
            
            24,400
            
            
            
            1,784,450
            
            
            
            4,150,752
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            5,935,202
            
            
            
            223,142
            
            
            
            06-15-04
            
            
            
            -Lake
      Woodlands Plaza, Texas
            
            
            2,385,103
            
            
            
            1,366,452
            
            
            
            -
            
            
            
            1,028,445
            
            
            
            3,410,936
            
            
            
            1,369,064
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,780,000
            
            
            
            934,898
            
            
            
            06-03-98
            
            
            
            -McArthur
      Park Pads, Texas
            
            
            5,853,816
            
            
            
            6,946,048
            
            
            
            -
            
            
            
            38,397
            
            
            
            5,892,212
            
            
            
            6,946,049
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            12,838,261
            
            
            
            573,772
            
            
            
            12-15-05
            
            
            
            -McArthur
      Park, Texas
            
            
            26,445,219
            
            
            
            8,637,580
            
            
            
            -
            
            
            
            87,329
            
            
            
            26,532,548
            
            
            
            8,637,580
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            35,170,128
            
            
            
            2,679,739
            
            
            
            12-27-04
            
            
            
            13,410,000Plaza
      in the Park, Texas
            
            
            17,375,782
            
            
            
            13,257,976
            
            
            
            -
            
            
            
            264,421
            
            
            
            17,636,387
            
            
            
            13,261,792
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            30,898,179
            
            
            
            1,916,411
            
            
            
            07-01-04
            
            
            
            17,242,788Riverwalk,
      Texas
            
            
            17,148,688
            
            
            
            7,979,779
            
            
            
            -
            
            
            
            196,154
            
            
            
            17,335,653
            
            
            
            7,988,968
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            25,324,621
            
            
            
            1,157,834
            
            
            
            09-30-05
            
            
            
            20,000,000Sugar
      Land Plaza, Texas
            
            
            3,016,816
            
            
            
            1,280,043
            
            
            
            -
            
            
            
            -
            
            
            
            3,016,816
            
            
            
            1,280,043
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,296,859
            
            
            
            759,601
            
            
            
            07-01-98
            
            
            
            2,257,908Terrace
      Shops, Texas
            
            
            2,544,592
            
            
            
            2,212,278
            
            
            
            -
            
            
            
            83,054
            
            
            
            2,627,646
            
            
            
            2,212,278
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,839,924
            
            
            
            280,553
            
            
            
            12-15-03
            
            
            
            2,699,065Uptown
      Park, Texas
            
            
            27,060,070
            
            
            
            36,976,809
            
            
            
            -
            
            
            
            1,575,057
            
            
            
            28,746,835
            
            
            
            36,865,101
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            65,611,936
            
            
            
            2,978,400
            
            
            
            06-01-05
            
            
            
            49,000,000Uptown
      Plaza Dallas, Texas
            
            
            14,129,798
            
            
            
            9,295,665
            
            
            
            -
            
            
            
            10,482
            
            
            
            14,139,718
            
            
            
            9,296,227
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            23,435,945
            
            
            
            886,436
            
            
            
            03-30-06
            
            
            
            19,900,000Uptown
      Plaza, Texas
            
            
            4,887,774
            
            
            
            7,796,383
            
            
            
            -
            
            
            
            168,773
            
            
            
            5,056,547
            
            
            
            7,796,383
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            12,852,930
            
            
            
            550,779
            
            
            
            12-10-03
            
            
            
            -Total
      Shopping Centers
            
            
            138,989,828
            
            
            
            106,874,800
            
            
            
            -
            
            
            
            3,480,721
            
            
            
            142,537,400
            
            
            
            106,807,949
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            249,345,349
            
            
            
            14,723,306
            
            
            
            
            
            
            
            136,371,624SINGLE
      TENANT410
      and Blanco, Texas
            
            
            -
            
            
            
            1,318,418
            
            
            
            -
            
            
            
            165,742
            
            
            
            50,943
            
            
            
            1,433,217
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,484,160
            
            
            
            6,298
            
            
            
            12-17-04
            
            
            
            -Advance
      Auto, Illinois
            
            
            -
            
            
            
            552,258
            
            
            
            -
            
            
            
            220,502
            
            
            
            145,454
            
            
            
            627,306
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            772,760
            
            
            
            n/a
            
            
            
            06-03-04
            
            
            
            -Advance
      Auto, Missouri
            
            
            -
            
            
            
            361,187
            
            
            
            -
            
            
            
            12,574
            
            
            
            
            
            
            
            373,761
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            373,761
            
            
            
            n/a
            
            
            
            02-13-04
            
            
            
            -Advance
      Auto, Missouri
            
            
            -
            
            
            
            352,508
            
            
            
            -
            
            
            
            102,616
            
            
            
            102,616
            
            
            
            352,508
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            455,124
            
            
            
            n/a
            
            
            
            09-24-04
            
            
            
            -Baptist
      Memorial Health, Tennessee
            
            
            1,455,429
            
            
            
            623,755
            
            
            
            -
            
            
            
            589,645
            
            
            
            2,044,823
            
            
            
            624,006
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,668,829
            
            
            
            248,036
            
            
            
            07-23-02
            
            
            
            -CVS
      Pharmacy, Texas
            
            
            -
            
            
            
            2,665,332
            
            
            
            -
            
            
            
            23,664
            
            
            
            -
            
            
            
            2,688,996
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,688,996
            
            
            
            n/a
            
            
            
            01-10-03
            
            
            
            -Fontana
      Tract, Texas
            
            
            -
            
            
            
            2,700,000
            
            
            
            -
            
            
            
            45,759
            
            
            
            -
            
            
            
            -
            
            
            
            2,745,759
            
            
            
            -
            
            
            
            -
            
            
            
            2,745,759
            
            
            
            n/a
            
            
            
            12-11-06
            
            
            
            -Golden
      Corral, Texas
            
            
            1,093,139
            
            
            
            718,702
            
            
            
            -
            
            
            
            10,926
            
            
            
            1,099,818
            
            
            
            722,949
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,822,767
            
            
            
            153,928
            
            
            
            07-23-02
            
            
            
            -Golden
      Corral, Texas
            
            
            1,290,347
            
            
            
            553,006
            
            
            
            -
            
            
            
            10,719
            
            
            
            1,297,850
            
            
            
            556,222
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,854,072
            
            
            
            181,644
            
            
            
            07-23-02
            
            
            
            -IHOP,
      California
            
            
            -
            
            
            
            -
            
            
            
            987,204
            
            
            
            33,594
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,020,798
            
            
            
            1,020,798
            
            
            Note
      B
            
            
            
            08-23-02
            
            
            
            645,509IHOP,
      Colorado
            
            
            -
            
            
            
            -
            
            
            
            1,104,574
            
            
            
            (44,309
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,060,265
            
            
            
            1,060,265
            
            
            Note
      B
            
            
            
            08-23-02
            
            
            
            723,996IHOP,
      Kansas
            
            
            
            
            
            
            450,984
            
            
            
            958,975
            
            
            
            67,812
            
            
            
            -
            
            
            
            450,984
            
            
            
            -
            
            
            
            1,026,787
            
            
            
            -
            
            
            
            1,477,771
            
            
            
            n/a
            
            
            
            09-30-99
            
            
            
            -IHOP,
      Kansas
            
            
            -
            
            
            
            -
            
            
            
            876,324
            
            
            
            18,241
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            894,565
            
            
            
            894,565
            
            
            Note
      B
            
            
            
            04-16-02
            
            
            
            641,517IHOP,
      Louisiana
            
            
            -
            
            
            
            -
            
            
            
            1,464,105
            
            
            
            (156,211
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,307,894
            
            
            
            1,307,894
            
            
            Note
      B
            
            
            
            04-23-02
            
            
            
            1,068,693IHOP,
      Louisiana
            
            
            
            
            
            
            
            
            
            
            850,110
            
            
            
            9,322
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            859,432
            
            
            
            859,432
            
            
            Note
      B
            
            
            
            07-18-02
            
            
            
            618,654IHOP,
      Missouri
            
            
            -
            
            
            
            -
            
            
            
            1,203,723
            
            
            
            (70,956
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,132,767
            
            
            
            1,132,767
            
            
            Note
      B
            
            
            
            05-17-02
            
            
            
            883,320IHOP,
      New Mexico
            
            
            -
            
            
            
            -
            
            
            
            884,965
            
            
            
            (60,901
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            824,064
            
            
            
            824,064
            
            
            Note
      B
            
            
            
            04-23-02
            
            
            
            646,710IHOP,
      New York
            
            
            -
            
            
            
            -
            
            
            
            1,125,356
            
            
            
            29,896
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,155,252
            
            
            
            1,155,252
            
            
            Note
      B
            
            
            
            04-16-02
            
            
            
            812,499IHOP,
      Oregon
            
            
            -
            
            
            
            -
            
            
            
            1,036,506
            
            
            
            19,095
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,055,601
            
            
            
            1,055,601
            
            
            Note
      B
            
            
            
            04-16-02
            
            
            
            757,881IHOP,
      Oregon
            
            
            -
            
            
            
            -
            
            
            
            730,472
            
            
            
            (59,146
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            671,326
            
            
            
            671,326
            
            
            Note
      B
            
            
            
            05-17-02
            
            
            
            532,112IHOP,
      Tennessee
            
            
            -
            
            
            
            469,502
            
            
            
            1,074,438
            
            
            
            73,439
            
            
            
            -
            
            
            
            -
            
            
            
            469,502
            
            
            
            -
            
            
            
            1,147,877
            
            
            
            1,617,379
            
            
            
            n/a
            
            
            
            07-26-02
            
            
            
            1,158,955IHOP,
      Tennessee
            
            
            
            
            
            
            
            
            
            
            1,050,313
            
            
            
            35,097
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,085,410
            
            
            
            1,085,410
            
            
            Note
      B
            
            
            
            08-23-02
            
            
            
            672,690IHOP,
      Texas
            
            
            
            
            
            
            740,882
            
            
            
            962,752
            
            
            
            68,109
            
            
            
            -
            
            
            
            740,882
            
            
            
            -
            
            
            
            1,030,861
            
            
            
            -
            
            
            
            1,771,743
            
            
            
            n/a
            
            
            
            09-22-99
            
            
            
            1,110,261IHOP,
      Texas
            
            
            
            
            
            
            
            
            
            
            886,212
            
            
            
            26,699
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            912,911
            
            
            
            912,911
            
            
            Note
      B
            
            
            
            04-16-02
            
            
            
            650,000IHOP,
      Texas
            
            
            
            
            
            
            
            
            
            
            1,144,152
            
            
            
            39,013
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,183,165
            
            
            
            1,183,165
            
            
            Note
      B
            
            
            
            08-23-02
            
            
            
            774,781IHOP,
      Utah
            
            
            
            
            
            
            457,493
            
            
            
            1,067,483
            
            
            
            52,178
            
            
            
            -
            
            
            
            -
            
            
            
            457,493
            
            
            
            -
            
            
            
            1,119,661
            
            
            
            1,577,154
            
            
            
            n/a
            
            
            
            07-25-02
            
            
            
            1,072,380IHOP,
      Virginia
            
            
            
            
            
            
            
            
            
            
            741,991
            
            
            
            11,713
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            753,704
            
            
            
            753,704
            
            
            Note
      B
            
            
            
            04-23-02
            
            
            
            538,489IHOP,
      Virginia
            
            
            
            
            
            
            -
            
            
            
            839,240
            
            
            
            11,185
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            850,425
            
            
            
            850,425
            
            
            Note
      B
            
            
            
            06-21-02
            
            
            
            612,788McAlister
      Deli, Illinois
            
            
            -
            
            
            
            550,425
            
            
            
            -
            
            
            
            1,179,350
            
            
            
            -
            
            
            
            -
            
            
            
            1,729,775
            
            
            
            -
            
            
            
            -
            
            
            
            1,729,775
            
            
            
            n/a
            
            
            
            07-19-06
            
            
            
            -McAlister
      Deli, Illinois
            
            
            
            
            
            
            1,051,862
            
            
            
            
            
            
            
            
            
            
            
            119,586
            
            
            
            1,060,861
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,180,447
            
            
            
            n/a
            
            
            
            11-30-07
            
            
            
            -Popeye's,
      Georgia
            
            
            778,772
            
            
            
            333,758
            
            
            
            -
            
            
            
            (1
            )
            
            
            778,771
            
            
            
            333,758
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,112,529
            
            
            
            108,995
            
            
            
            07-23-02
            
            
            
            -Smokey
      Bones, Georgia
            
            
            
            
            
            
            773,800
            
            
            
            -
            
            
            
            (60,414
            )
            
            
            -
            
            
            
            713,386
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            713,386
            
            
            
            n/a
            
            
            
            12-18-98
            
            
            
            -Sunbelt
      Rental, Illinois
            
            
            
            
            
            
            402,080
            
            
            
            
            
            
            
            1,524,103
            
            
            
            1,519,046
            
            
            
            407,137
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,926,183
            
            
            
            n/a
            
            
            
            05-23-07TGI
      Friday's, Maryland
            
            
            -
            
            
            
            1,473,613
            
            
            
            -
            
            
            
            860
            
            
            
            -
            
            
            
            1,474,473
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,474,473
            
            
            
            n/a
            
            
            
            09-16-03
            
            
            
            -TGI
      Friday's, Texas
            
            
            1,425,843
            
            
            
            611,075
            
            
            
            -
            
            
            
            39,894
            
            
            
            1,453,769
            
            
            
            623,043
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,076,812
            
            
            
            203,464
            
            
            
            07-23-02
            
            
            
            -Washington
      Mutual, Texas
            
            
            -
            
            
            
            562,846
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            562,846
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            562,846
            
            
            
            n/a
            
            
            
            09-23-96
            
            
            
            -Washington
      Mutual, Texas
            
            
            -
            
            
            
            851,974
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            851,974
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            851,974
            
            
            
            n/a
            
            
            
            12-11-96
            
            
            
            -Woodlands
      Ring Road, Texas
            
            
            
            
            
            
            8,957,570
            
            
            
            
            
            
            
            198,840
            
            
            
            -
            
            
            
            9,156,410
            
            
            
            
            
            
            
            
            
            
            
            -
            
            
            
            9,156,410
            
            
            
            n/a
            
            
            
            02-01-07Total
      Single Tenant
            
            
            6,043,530
            
            
            
            27,533,030
            
            
            
            18,988,895
            
            
            
            4,168,650
            
            
            
            8,612,676
            
            
            
            23,754,719
            
            
            
            5,402,529
            
            
            
            2,057,648
            
            
            
            17,035,117
            
            
            
            56,862,689
            
            
            
            902,365
            
            
            
            
            
            
            
            13,921,235Total
            
            $
            145,033,358
            
            
            $
            134,407,830
            
            
            $
            18,988,895
            
            
            $
            7,649,371
            
            
            $
            151,150,076
            
            
            $
            130,562,668
            
            
            $
            5,402,529
            
            
            $
            2,057,648
            
            
            $
            17,035,117
            
            
            $
            306,208,038
            
            
            $
            15,625,671
            
            
            
            
            
            
            $
            150,292,859





Note A -
The negative balance for costs capitalized subsequent to acquisition could be
the result of out-parcels sold, tenant activity or reductions in our investments
in properties accounted for as direct financing leases.





Note B
-  The portion of the lease relating to the building of this property
has been recorded as a direct financing lease for financial reporting
purposes.  Consequently, depreciation is not applicable.





Note C -
As of December 31, 2007, the aggregate book basis of our properties approximated
the aggregate tax basis.





Activity
within real estate and accumulated depreciation during the three years in the
period ended December 31, 2006 is as follows:






AccumulatedCost
              
              
              DepreciationBalance
      at December 31, 2003
              
              $
              72,243,267
              
              
              $
              2,520,633Acquisitions
      / additions
              
              
              104,136,245
              
              
              
              -Disposals
              
              
              (7,682,772
              )
              
              
              (478,806
              )Impairment
              
              
              (1,300,000
              )
              
              
              -Transfer
      to held for sale
              
              
              (478,806
              )
              
              
              -Depreciation
      expense
              
              
              -
              
              
              
              1,519,667Balance
      at December 31, 2004
              
              
              166,917,934
              
              
              $
              3,561,494Acquisitions
      / additions
              
              
              106,619,151
              
              
              
              -Disposals
              
              
              (21,444,663
              )
              
              
              (1,352,195
              )Impairment
              
              
              -
              
              
              
              -Transfer
      to held for sale
              
              
              (1,279,852
              )
              
              
              -Depreciation
      expense
              
              
              -
              
              
              
              3,734,200Balance
      at December 31, 2005
              
              
              250,812,570
              
              
              $
              5,943,499Acquisitions
      / additions
              
              
              31,929,242
              
              
              
              -Disposals
              
              
              (8,207,968
              )
              
              
              (331,253
              )Impairment
              
              
              -
              
              
              
              -Transfer
      to held for sale
              
              
              
              
              
              
              -Depreciation
      expense
              
              
              -
              
              
              
              5,016,230Balance
      at December 31, 2006
              
              $
              274,533,844
              
              
              $
              10,628,476Acquisitions
      / additions
              
              
              14,214,097
              
              
              
              -Disposals
              
              
              (1,550,237
              )
              
              
              (80,346
              )Impairment
              
              
              -
              
              
              
              -Transfer
      to held for sale
              
              
              (5,484,748
              )
              
              
              -Depreciation
      expense
              
              
              -
              
              
              
              5,077,541Balance
      at December 31, 2007
              
              $
              281,712,956
              
              
              $
              15,625,671


S-1