**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, 2006**
 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**
 
 **Section
          12 (b) of the Act:**
 **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
 
 State
          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, or the average bid and asked price of such common equity as
          of June
          30, 2006: $34.3 million
  
  Indicate
          the number of shares outstanding of each of the registrant’s classes of common
          stock, as of the latest practicable date: 6,401,467 Class A Common Shares,
          1,050,442 Class B Common Shares, 4,154,129 Class C Common Shares, and 11,023,040
          Class D Common Shares as of March 27, 2007.
 
 **DOCUMENTS
          INCORPORATED BY REFERENCE**
 
 The
          registrant incorporates by reference into Part III portions of its Proxy
          Statement for the 2007 Annual Meeting of Shareholders.
  -3-
  
 **TABLE
          OF CONTENTS**
 
 Item
                    No.
                
                Form
                    10-K
                  Report
                    PagePART
                    I1.
                Business
                51A.
                Risk
                    Factors
                91B.
                Unresolved
                    Staff
                    Comments
                142.
                Properties
                153.
                Legal
                    Proceedings
                194.
                Submission
                    of Matters to a Vote of
                    Security Holders
                19PART
                    II5.
                Market
                    for the Registrant’s Common Equity,
                    Related Stockholder Matters and Issuer Purchases of Equity
                    Securities
                206.
                Selected
                    Financial
                    Data
                217.
                Management’s
                    Discussion and Analysis of
                    Financial Condition and Results of Operations
                227A.
                Quantitative
                    and Qualitative Disclosures
                    about Market Risk
                318.
                Consolidated
                    Financial Statements and
                    Supplementary Data
                319.
                Changes
                    in and Disagreements with
                    Accountants on Accounting and Financial Disclosure
                319A.
                Controls
                    and
                    Procedures
                319B.
                Other
                    Information
                31PART
                    III10.
                Trust
                    Managers, Executive Officers and Corporate
                    Governance
                3211.
                Executive
                    Compensation
                3212.
                Security
                    Ownership of Certain Beneficial Owners
                    and Management and Related Stockholder Matters
                3213.
                Certain
                    Relationships, Related Transactions
                    and Trust Manager Independence
                3214.
                Principal
                    Accountant Fees and
                    Services
                32PART
                    IV15.
                Exhibits
                    and Financial Statement
                    Schedules
                33
 
  -4-
 Table
              of Contents
  **PART
          I**
 
 **Item
          1. Business**
 
 **General**
 
 We
          are an
          established real estate company that, at our core, are value creators who
          have
          delivered results to our investors for 22 years. We have elected to be
          taxed as
          a real estate investment trust (“REIT”) for federal income tax purposes. Our
          mission is to build a real estate business with complementary operations
          that
          reduce our sensitivity to changing market cycles.
 
 We
          view
          the Company as having two distinct companies in one: *our
          institutional-grade portfolio of Irreplaceable Corners* -
          premier retail properties in high-traffic, highly populated areas - which
          are
          held for long-term value and provide a foundation to our funds from operations
          (FFO) growth through a steady stream of rental income; and our *advisory/sponsorship business* that
          broadens our access to capital and raises equity for a series of merchant
          development funds, resulting in recurring income from assets under management.
          We are able to add more of a growth component to the recurring-income nature
          of
          each company as well as provide earnings potential from multiple sources
          with
          our *real
          estate development and operating business* ,
          which
          seeks to provide value through offering an array of services to our tenants
          and
          properties, to our advisory/sponsorship business portfolios and to third
          parties.
 
 When
          we
          listed on the AMEX in July 2002, our total assets had a book value of $48
          million and equity under management within our advisory/sponsorship business
          totaled $15 million. As of December 31, 2006, we owned a real estate portfolio
          consisting of 49 properties located in 15 states that had a book value
          of $328
          million; directly managed, through our five actively managed merchant
          development funds, a total of $121 million in contributed capital; and
          had over
          600,000 square feet of retail centers in various stages of development
          or in the
          pipeline for both our advisory/sponsorship 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 offices are located at 8 Greenway Plaza, Suite 1000 Houston, Texas
          77046. Our telephone number is 713.850.1400 and we maintain an internet
          site at
          www.amreit.com.
 
 **Our
          Strategy**
 
 In
          2002,
          after 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 its peers. 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/sponsorship business, which manages our merchant development funds.
          Those two businesses 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/sponsorship business. Our real estate development and operating
          business, 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/sponsorship 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. We believe that the income
          generated
          by our advisory/sponsorship and our real estate development and operating
          businesses will allow us to continue to grow earnings at a faster pace
          than the
          broader REIT market. With this strategy comes increased volatility as these
          businesses have a heavy transactional component. From quarter to quarter,
          our
          earnings will fluctuate, but on an annual basis, and over the long term,
          we
          believe we are poised to produce consistent growth in earnings.
 
 In
          market
          cycles where we are able to capture a greater spread between cap rates
          and
          fixed-rate debt terms, we place an emphasis on growing 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/sponsorship group
          combines
          our expertise 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.
  -5-
 Table
              of Contents
  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.
 
 **Our
          Structure**
 
 Our
          structure consists of two distinct companies, representing three synergistic
          businesses that should allow us to create value year over year in any market
          cycle: A real estate development and operating business, an asset advisory
          business and an institutional grade portfolio of Irreplaceable Corners.
 
 *Portfolio
          of Irreplaceable Corners*
 During
          2005 and continuing through 2006, we acquired approximately 289,000 square
          feet
          of shopping centers, representing over $134 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, 2006, we owned a real estate portfolio consisting of 49 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,
          2006, the occupancy rate at our operating properties was 96.5% based on
          leasable
          square footage compared to 96.4% as of December 31, 2005.
 
 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 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 5% of
          total
          revenues for the year ended December 31, 2006.
 
 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, 2006, 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 20% and 15% respectively
          of
          total assets. For the year ended December 31, 2006, the top three tenants
          by
          rental income concentration were Kroger at 9.2%, IHOP at 7.4% 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 59% of our rental income for the year ended December
          31,
          2006. 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.
 
 -6-
 Table
              of Contents
  *Advisory/Sponsorship
          Business*
 Our
          advisory/sponsorship business broadens the Company’s avenues to raise capital
          and consists of our in-house securities group which raises equity for a
          series
          of merchant development partnership funds.
 
 Securities
          Operations - The
          part of our business model and operating strategy that distinguishes us
          from
          other publicly-traded REITs is our securities operation, or AmREIT Securities
          Company (ASC), a National Association of Securities Dealers (NASD) registered
          broker-dealer which is a wholly-owned subsidiary of AmREIT Realty Investment
          Corporation (ARIC). For the past 22 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
          2006, our securities operation raised approximately $60 million for AmREIT
          Monthly Income and Growth Fund III, Ltd. (MIG III), an affiliated merchant
          development fund sponsored by one of our subsidiaries. During 2005, the
          advisory
          group raised approximately $11.2 million for MIG III and approximately
          $89
          million through our Class D Common Share offering. The Class D offering
          was a
          $150 million publicly-registered offering through which we raised a total
          of
          $110 million before terminating the offering in September 2005.
 
 During
          the years ended December 31, 2006, 2005 and 2004, our securities operation
          generated commission revenues related to the sponsorship of our merchant
          development funds of $6.6 million, $1.2 million and $2.7 million, respectively.
          The advisory group incurred commission expenses of $5.8 million, $1.0 million
          and $2.4 million which were paid to non-affiliated broker-dealers in conjunction
          with such capital-raising activities.
 
 Merchant
          Development Funds - The
          advisory/sponsorship business invests in and actively manages six 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 invest
          as
          both the general partner and as a limited partner, and our advisory/sponsorship
          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, 2006, 2005 and 2004, we earned asset management fees of $823,000,
          $495,000 and $361,000, respectively, which are recurring fees earned over
          the
          life of the partnership.
 
 As
          of
          December 31, 2006, the advisory group directly managed, through its six
          actively
          managed merchant development funds, a total of $121 million in contributed
          capital. One of the six partnerships, AmREIT Opportunity Fund, Ltd. (AOF),
          entered into the liquidation phase in 2003, and the remaining five partnerships
          are scheduled to enter their liquidation phases in 2008, 2010, 2011, 2012,
          and
          2013. As these partnerships enter into liquidation, we, acting as the general
          partner, 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, 2006, 2005 and 2004, AmREIT recognized approximately
          $414,000, $0 and $869,000 related to its general partner interest in AOF.
          See
          Footnote 5 in the accompanying consolidated financial statements for more
          information. In accordance with GAAP, any unrealized gains associated with
          potential profit participation in our merchant development partnerships
          have not
          been reflected on our balance sheet or statement of operations. The income
          generated from our advisory/sponsorship 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 at a faster pace 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 Business*
 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,
          acquisitions, brokerage, leasing, construction, general contracting, asset
          and
          property management services to our portfolio of properties, to our
          advisory/sponsorship 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 quarterly earnings will be
          volatile.
 
  -7-
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              of Contents
  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/sponsorship 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/sponsorship business, as well
          as to
          third parties, our real estate team continues to generate fees and profits.
          During the years ended December 31, 2006, 2005 and 2004, ARIC generated
          net real
          estate and asset management fees of $9.1 million, $5.6 million, and $2.2
          million, which represented 15%, 16%, and 15% 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, 2006 and 2005, assets held for sale totaled approximately
          $2.7
          million and $3.6 million, respectively. For the years ended December 31,
          2006,
          2005 and 2004, ARIC has generated gains on sales of properties acquired
          for sale
          of $382,000, $3.2 million, and $1.8 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, 2006, AmREIT had 64 full time employees, 1 full 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.”
 
 -8-
 Table
              of Contents
  **Item
          1A. Risk Factors**
 
 **Risks
          Associated with an Investment in AmREIT**
 
 ***There
          may be significant fluctuations in our quarterly
          results.***
 Our
          quarterly operating results will fluctuate based on a number of factors,
          including, among others:
 ·
                Interest
                    rate changes;·
                The
                    volume and timing of our property acquisitions;·
                The
                    amount and timing of income generated by our advisory/sponsorship
                    business
                    as well as our real estate development and operating
                    business;·
                The
                    recognitions of gains or losses on property sales;·
                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
          results.
 
 ***Our
          class A common shares have limited average daily trading
          volume.***
 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, 2006, the average daily trading volume was approximately
          16,475 shares based on a 90-day average. As a result, the class A
          common shares currently have limited liquidity.
 
 ***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, 2006, there were 4,145,531 class C common shares outstanding
          and
          11,039,803 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
 
 ***Conversion
          of class B common shares could put downward pressure on the market price of
          our class A common shares.***
 As
          of
          December 31, 2006, there were 1,080,180 class B common shares
          outstanding, each of which is currently convertible into class A common
          shares on a one-for-one basis. The class B common shares are not listed on
          any exchange, and no trading market presently exists for the class B common
          shares. As a result, holders of the class B common shares who convert to
          class A common shares may be doing so, in part, to be able to liquidate
          some or all of their investment in AmREIT. Due to the limited average trading
          volume of the class A common shares, substantial sales of class A
          common shares would result in short-term downward pressure on the price
          of the
          class A common shares.
 
 
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  ***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 B common shares and
          class C common shares have been paid. As a result, the class A common
          shares are subordinate to the class B and 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;
                    and·
                The
                    expense of periodically renovating, repairing and re-leasing
                    spaces.
 Our
          properties consist primarily of neighborhood and community shopping centers
          and,
          therefore, our performance is linked to general economic conditions in
          the
          market for retail space. The market for retail space has been and may continue
          to be adversely affected by weakness in the national, regional and local
          economies where our properties are located, the adverse financial condition
          of
          some large retailing companies, the ongoing consolidation in the retail
          sector,
          the excess amount of retail space in a number of markets and increasing
          consumer
          purchases through catalogues and the Internet. To the extent that any of
          these
          conditions occur, they are likely to affect market rents for retail space.
          In
          addition, we may face challenges in the management and maintenance of the
          properties or encounter increased operating costs, such as real estate
          taxes,
          insurance and utilities, which may make our properties unattractive to
          tenants.
 
 ***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 AmREIT’s 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 9.2%, 7.4% and 3.5%, respectively, of our total operating
          revenues
          for the year ended December 31, 2006. 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
          59% of our rental income for the year ended December 31, 2006, is generated
          from properties located in the Houston, Texas metropolitan area. Additionally,
          approximately 91% 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.
 
 -10-
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  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, 2006, AmREIT had outstanding debt totaling
          $144.5 million, $132.5 million of which was fixed-rate secured financing.
          This debt represented approximately 48% of AmREIT’s net real estate investments.
 
 ***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.
 
 ***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.
 
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  **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 .
 
 ***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.
 
 -12-
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              of Contents
  ***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.
 
 **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.
 
 -13-
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 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
 
 -14-
 Table
              of Contents
  **Item
          2. Properties**
 
 **General**
 
 At
          December 31, 2006, we owned 49 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/sponsorship 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 83% of annualized rental
          income from properties owned as of December 31, 2006, 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.
 
 **Location
          of Properties**
 
 Based
          in
          Houston, our current focus is on property investments in Texas. Of our
          49
          properties, 23 are located in Texas, with 17 being located in the greater
          Houston metropolitan statistical area. These 17 properties represented
          59% of
          our rental income for the year ended December 31, 2006. 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 and Dallas economy 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.
 
 Additionally,
          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 48% of Houston’s population
          growth has been from net migration with 77% of that growth attributed to
          international immigration.  Only 28 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 82% 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 2.403 million
          payroll jobs in July 2006 - 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.
 
 -15-
 Table
              of Contents
  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, 2006:
 
 Multi-Tenant
                      Shopping Centers
                  
                  Major
                      Tenants
                  
                  City
                  
                  State
                  
                  Date
                      Acquired
                  
                  GLA
                  
                  ABR
                  
                  %
                      LeasedUptown
                      Park
                  
                  
                  McCormick
                      & Schmick's
                  
                  
                  Houston
                  
                  
                  TX
                  
                  
                  06/01/05
                  
                  
                  169,112
                  
                  $
                  4,520,617
                  
                  
                  93
                  %Southbank
                      - Riverwalk
                  
                  
                  Hard
                      Rock Café
                  
                  
                  San
                      Antonio
                  
                  
                  TX
                  
                  
                  09/30/05
                  
                  
                  46,673
                  
                  
                  1,511,552
                  
                  
                  100
                  %MacArthur
                      Park
                  
                  
                  Kroger
                  
                  
                  Dallas
                  
                  
                  TX
                  
                  
                  12/04
                      and 12/05
                  
                  
                  237,381
                  
                  
                  3,917,651
                  
                  
                  97
                  %Plaza
                      in the Park
                  
                  
                  Kroger
                  
                  
                  Houston
                  
                  
                  TX
                  
                  
                  07/01/04
                  
                  
                  144,062
                  
                  
                  2,496,892
                  
                  
                  95
                  %Cinco
                      Ranch
                  
                  
                  Kroger
                  
                  
                  Houston
                  
                  
                  TX
                  
                  
                  07/01/04
                  
                  
                  97,297
                  
                  
                  1,207,722
                  
                  
                  98
                  %Bakery
                      Square
                  
                  
                  Walgreens
                      & Bank of America
                  
                  
                  Houston
                  
                  
                  TX
                  
                  
                  07/21/04
                  
                  
                  34,614
                  
                  
                  853,738
                  
                  
                  100
                  %Uptown
                      Plaza
                  
                  
                  CVS/pharmacy
                  
                  
                  Houston
                  
                  
                  TX
                  
                  
                  12/10/03
                  
                  
                  28,000
                  
                  
                  1,236,646
                  
                  
                  94
                  %Woodlands
                      Plaza
                  
                  
                  FedEx/Kinkos
                      & Rug Gallery
                  
                  
                  The
                      Woodlands
                  
                  
                  TX
                  
                  
                  06/03/98
                  
                  
                  20,018
                  
                  
                  373,317
                  
                  
                  100
                  %Sugarland
                      Plaza
                  
                  
                  Mattress
                      Giant
                  
                  
                  Sugarland
                  
                  
                  TX
                  
                  
                  07/01/98
                  
                  
                  16,750
                  
                  
                  349,612
                  
                  
                  100
                  %Terrace
                      Shops
                  
                  
                  Starbucks
                  
                  
                  Houston
                  
                  
                  TX
                  
                  
                  12/15/03
                  
                  
                  16,395
                  
                  
                  436,844
                  
                  
                  93
                  %584
                      N. Germantown Parkway
                  
                  
                  Baptist
                      Memorial & Auto Zone
                  
                  
                  Memphis
                  
                  
                  TN
                  
                  
                  07/23/02
                  
                  
                  15,000
                  
                  
                  194,026
                  
                  
                  75
                  %Uptown
                      Dallas
                  
                  
                  Grotto,
                      Century Bank, Pei Wei
                  
                  
                  Dallas
                  
                  
                  TX
                  
                  
                  03/30/06
                  
                  
                  33,840
                  
                  
                  1,622,985
                  
                  
                  100
                  %Courtyard
                      at Post Oak
                  
                  
                  Verizon
                      Wireless
                  
                  
                  Houston
                  
                  
                  TX
                  
                  
                  06/15/04
                  
                  
                  13,597
                  
                  
                  477,361
                  
                  
                  100
                  %Multi-Tenant
                      Shopping Centers Total
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  872,739
                  
                  $
                  19,198,963Single
                      Tenant (Ground Leases)
                  
                  
                  
                  
                  
                  City
                  
                  
                  State
                  
                  
                  Date
                      Acquired
                  
                  
                  GLA
                  
                  
                  ABR
                  
                  
                  %LeasedCVS
                      Corporation
                  
                  
                  
                  
                  
                  Houston
                  
                  
                  TX
                  
                  
                  01/10/03
                  
                  
                  13,824
                  
                  
                  327,167
                  
                  
                  100
                  %Darden
                      Restaurants
                  
                  
                  
                  
                  
                  Peachtree
                      City
                  
                  
                  GA
                  
                  
                  12/18/98
                  
                  
                  6,867
                  
                  
                  79,366
                  
                  
                  100
                  %Carlson
                      Restaurants
                  
                  
                  
                  
                  
                  Hanover
                  
                  
                  MD
                  
                  
                  09/16/03
                  
                  
                  6,802
                  
                  
                  141,674
                  
                  
                  100
                  %Citibank
                  
                  
                  
                  
                  
                  San
                      Antonio
                  
                  
                  TX
                  
                  
                  12/17/04
                  
                  
                  4,439
                  
                  
                  155,000
                  
                  
                  100
                  %Fontana
                      Tract (2)
                  
                  
                  
                  
                  
                  Dallas
                  
                  
                  TX
                  
                  
                  12/11/06
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -Washington
                      Mutual
                  
                  
                  
                  
                  
                  Houston
                  
                  
                  TX
                  
                  
                  12/11/96
                  
                  
                  3,685
                  
                  
                  98,160
                  
                  
                  100
                  %Washington
                      Mutual
                  
                  
                  
                  
                  
                  The
                      Woodlands
                  
                  
                  TX
                  
                  
                  09/23/96
                  
                  
                  3,685
                  
                  
                  61,794
                  
                  
                  100
                  %Single
                      Tenant (Ground Leases) Total
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  39,302
                  
                  $
                  863,161Single
                      Tenant (Fee Simple)
                  
                  
                  
                  
                  
                  City
                  
                  
                  State
                  
                  
                  Date
                      Acquired
                  
                  
                  GLA
                  
                  
                  ABR
                  
                  
                  %
                      LeasedGolden
                      Corral
                  
                  
                  
                  
                  
                  Houston
                  
                  
                  TX
                  
                  
                  7/23/2002
                  
                  
                  12,000
                  
                  
                  182,994
                  
                  
                  100
                  %Golden
                      Corral
                  
                  
                  
                  
                  
                  Humble
                  
                  
                  TX
                  
                  
                  7/23/2002
                  
                  
                  12,000
                  
                  
                  181,688
                  
                  
                  100
                  %Carlson
                      Restaurants
                  
                  
                  
                  
                  
                  Houston
                  
                  
                  TX
                  
                  
                  7/23/2002
                  
                  
                  8,500
                  
                  
                  200,000
                  
                  
                  100
                  %IHOP
                      Corporation
                  
                  
                  
                  
                  
                  Sugarland
                  
                  
                  TX
                  
                  
                  9/22/1999
                  
                  
                  4,020
                  
                  
                  189,146
                  
                  
                  100
                  %IHOP
                      Corporation (5)
                  
                  
                  
                  
                  
                  Centerville
                  
                  
                  UT
                  
                  
                  7/25/2002
                  
                  
                  4,020
                  
                  
                  162,656
                  
                  
                  100
                  %IHOP
                      Corporation (5)
                  
                  
                  
                  
                  
                  Memphis
                  
                  
                  TN
                  
                  
                  8/23/2002
                  
                  
                  4,020
                  
                  
                  178,898
                  
                  
                  100
                  %IHOP
                      Corporation
                  
                  
                  
                  
                  
                  Topeka
                  
                  
                  KS
                  
                  
                  9/30/1999
                  
                  
                  4,020
                  
                  
                  158,359
                  
                  
                  100
                  %AFC,
                      Inc.
                  
                  
                  
                  
                  
                  Atlanta
                  
                  
                  GA
                  
                  
                  7/23/2002
                  
                  
                  2,583
                  
                  
                  119,279
                  
                  
                  100
                  %Advance
                      Auto (1) (2) (3) (4)
                  
                  
                  
                  
                  
                  Various
                  
                  
                  Various
                  
                  
                  Various
                  
                  
                  21,000
                  
                  
                  131,421
                  
                  
                  -Single
                      Tenant (Fee Simple) Total
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  72,163
                  
                  $
                  1,504,441Single
                      Tenant (Leasehold)
                  
                  
                  
                  
                  
                  City
                  
                  
                  State
                  
                  
                  Date
                      Acquired
                  
                  
                  GLA
                  
                  
                  ABR
                  
                  
                  %
                      LeasedIHOP
                      Corporation (5)
                  
                  
                  
                  
                  
                  Various
                  
                  
                  Various
                  
                  
                  Various
                  
                  
                  60,300
                  
                  $
                  1,560,215
                  
                  
                  100
                  %Company
                      Totals
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,044,504
                  
                  $
                  23,126,780
                  
                  
                  96.50
                  %
 
 (1)
              Under
                  Development (any GLA disclosed 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 be 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.  -16-
 Table
              of Contents
  The
          rental income generated by our properties during 2006 by state/city is
          as
          follows:
 
 State/City
                    
                    Rental
                        Income
                    
                    Rental
                        ConcentrationTexas
                        - Houston
                    
                    $
                    17,785
                    
                    
                    58.9
                    %Texas
                        - Dallas
                    
                    
                    7,318
                    
                    
                    24.2
                    %Texas
                        - San Antonio
                    
                    
                    2,226
                    
                    
                    7.4
                    %Texas
                        - other
                    
                    
                    230
                    
                    
                    0.8
                    %Total
                        Texas
                    
                    
                    27,559
                    
                    
                    91.3
                    %Tennessee
                    
                    
                    716
                    
                    
                    2.4
                    %Louisiana
                    
                    
                    218
                    
                    
                    0.7
                    %Kansas
                    
                    
                    255
                    
                    
                    0.8
                    %Illinois
                    
                    
                    49
                    
                    
                    0.2
                    %Missouri
                    
                    
                    115
                    
                    
                    0.4
                    %Colorado
                    
                    
                    109
                    
                    
                    0.4
                    %Georgia
                    
                    
                    198
                    
                    
                    0.7
                    %Oregon
                    
                    
                    181
                    
                    
                    0.6
                    %Virginia
                    
                    
                    173
                    
                    
                    0.6
                    %Utah
                    
                    
                    163
                    
                    
                    0.5
                    %Maryland
                    
                    
                    133
                    
                    
                    0.4
                    %New
                        York
                    
                    
                    125
                    
                    
                    0.4
                    %California
                    
                    
                    112
                    
                    
                    0.4
                    %New
                        Mexico
                    
                    
                    82
                    
                    
                    0.3
                    %Total
                    
                    $
                    30,188
                    
                    
                    100.0
                    %
 
   -17-
 Table
              of Contents
  **Grocery-Anchored
          Shopping Centers**
 
 Our
          grocery-anchored shopping centers comprise 33% of our annualized rental
          income
          from the properties owned as of December 31, 2006. 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 five to 20 years and
          generally include one or more five-year renewal options. Annual rental
          income
          from these leases ranges from $22,000 to $1.0 million per year.
 
 **Neighborhood,
          Lifestyle and Community Shopping Centers**
 
 As
          of
          December 31, 2006, 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 $13,000 to $547,000 per year and typically allow for rental increases,
          or
          bumps, periodically through the life of the lease.
 
 **Single-tenant
          Properties**
 
 As
          of
          December 31, 2006, we owned 35 single-tenant properties, representing
          approximately 171,765 lease-able 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 $60,000 to $327,000 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. As of
          December 31, 2006, we have one parcel of undeveloped property within our
          REIT
          portfolio. 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.
 
 -18-
 Table
              of Contents
  **Property
          Acquisitions and Dispositions**
 
 *Shopping
          Centers*
 During
          2005 and continuing through 2006, we invested approximately $134 million
          through
          the acquisition of four shopping center 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.
 
 On
          September 30, 2005, we acquired for cash The South Bank, a 47,000 square
          foot
          shopping 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. 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 lifestyle 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.
          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.
 
 Additionally,
          during 2005, we used the net proceeds from the sale of the single-tenant
          non-core assets discussed below 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.
 
 *Single-tenant
          Properties*
 During
          2006, we sold four single-tenant assets for gross proceeds of $6.7 million
          in
          cash to unrelated third parties, generating gains of $667,000. During 2005,
          we
          sold 10 single-tenant non-core properties for $16.6 million in cash to
          unrelated
          third parties resulting in gains of $3.4 million. In addition, we completed
          the
          sale of six single-tenant retail properties that were acquired for resale
          for a
          total of approximately $11.5 million in cash generating gains of $3.2
          million.
 
 **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 2006 fiscal year.
  -19-
 Table
              of Contents
  **PART
          II**
 
 **Item
          5. Market for Registrant’s Common Equity, Related
          Stockholder Matters and Issuer Purchases of Equity
          Securities**
 
 As
          of
          March 27, 2007, there were approximately 635 holders of record for 6,401,467
          of
          the Company's class A common shares outstanding on such date, net of 178,367
          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, 2006.
 
 **Calendar
                    Period**
                
                **High**
                
                **Low**
                
                **Dividends**2006Fourth
                    Quarter
                
                $
                8.65
                
                $
                7.25
                
                $
                .1242Third
                    Quarter
                
                $
                7.46
                
                $
                6.85
                
                $
                .1242Second
                    Quarter
                
                $
                7.60
                
                $
                6.95
                
                $
                .1242First
                    Quarter
                
                $
                7.96
                
                $
                6.73
                
                $
                .12422005Fourth
                    Quarter
                
                $
                7.96
                
                $
                6.70
                
                $
                .1242Third
                    Quarter
                
                $
                8.49
                
                $
                7.25
                
                $
                .1242Second
                    Quarter
                
                $
                8.75
                
                $
                7.90
                
                $
                .1242First
                    Quarter
                
                $
                8.75
                
                $
                7.90
                
                $
                .1236
 
 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 B and C common shares, as well as our earnings and financial
          needs.
 
 Class
          B Common Shares —
As
          of
          March 27, 2007, there were approximately 531 holders of record for 1,050,442
          of
          the Company’s class B common shares. The class B common shares are not listed on
          an exchange and there is currently no available trading market for the
          class B
          common shares. The class B common shares have voting rights, together with
          all
          classes of common shares, as one class of stock. The class B common shares
          were
          issued at $9.25 per share. They receive a fixed 8.0% cumulative and preferred
          annual dividend, paid in quarterly installments, and are convertible into
          the
          class A common shares on a one-for-one basis at any time, at the holder’s
          option. Beginning in July 2005, we have the right to call the shares and,
          at the
          holder’s option, either convert them on a one-for-one basis for class A shares
          or redeem them for $10.18 per share in cash plus any accrued and unpaid
          dividends.
 
 Class
          C Common Shares —
As
          of
          March 27, 2007, there were approximately 1,282 holders of record for 4,154,129
          of 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
          27, 2007, 848 holders are participating in the dividend reinvestment
          plan.
 
 Class
          D Common Shares —
As
          of
          March 27, 2007, there were approximately 3,464 holders of record for 11,023,040
          of the Company’s 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 per share. In
          either
          case, the conversion premium will be pro rated based on the number of years
          the
          shares are 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. As of March 27, 2007, 2,388 holders are participating
          in the dividend reinvestment plan.
 
  -20-
 Table
              of Contents
  **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.
 AmREIT
 Selected
            Historical
 Consolidated
            Financial and Other Data
  December
                        31,
                    
                    December
                        31,
                    
                    December
                        31,
                    
                    December
                        31,
                    
                    December
                        31,2006
                    
                    2005
                    
                    2004
                    
                    2003
                    
                    2002**Balance
                        sheet data (at end of period)**Real
                        estate investments beforeaccumulated
                        depreciation........................
                    
                    $
                    312,405
                    
                    $
                    290,097
                    
                    $
                    198,744
                    
                    $
                    98,128
                    
                    $
                    72,192Total
                        assets ...............................................
                    
                    
                    328,419
                    
                    
                    314,971
                    
                    
                    203,151
                    
                    
                    101,327
                    
                    
                    73,976Notes
                        payable ............................................
                    
                    
                    144,453
                    
                    
                    114,687
                    
                    
                    105,964
                    
                    
                    48,485
                    
                    
                    33,586Shareholders'
                        equity ..............................
                    
                    
                    169,050
                    
                    
                    187,285
                    
                    
                    88,370
                    
                    
                    48,796
                    
                    
                    38,207**Other
                        data**Funds
                        from operations,available
                        to class A (1).....................
                    
                    
                    4,750
                    
                    
                    3,644
                    
                    
                    (2,003
                    )
                    
                    607
                    
                    
                    (845
                    )**Operating
                        Data**Revenues.........................................................
                    
                    
                    59,342
                    
                    
                    33,981
                    
                    
                    15,184
                    
                    
                    7,394
                    
                    
                    5,157Expenses
                        (2)....................................................
                    
                    
                    45,704
                    
                    
                    24,269
                    
                    
                    13,305
                    
                    
                    6,923
                    
                    
                    6,366Other
                        expenses.................................................
                    
                    
                    6,711
                    
                    
                    6,165
                    
                    
                    2,290
                    
                    
                    1,684
                    
                    
                    1,488Income
                        (loss) from discontinued operations (3).......................
                    
                    
                    254
                    
                    
                    3,356
                    
                    
                    (828
                    )
                    
                    2,425
                    
                    
                    2,038Gain
                        on sale of real estate acquired for resale...
                    
                    
                    382
                    
                    
                    3,223
                    
                    
                    1,827
                    
                    
                    787
                    
                    
                    -Net
                        income (loss) ................................................
                    
                    $
                    7,563
                    
                    $
                    10,126
                    
                    $
                    588
                    
                    $
                    1,999
                    
                    $
                    (659
                    )Net
                        income (loss) available to class A shareholders ..........
                    
                    $
                    (3,879
                    )
                    $
                    881
                    
                    $
                    (3,866
                    )
                    $
                    56
                    
                    $
                    (1,524
                    )Net
                        (loss) income per common share - basic and dilutedLoss
                        before discontinued operations
                    
                    $
                    (0.72
                    )
                    $
                    (1.09
                    )
                    $
                    (1.50
                    )
                    $
                    (1.13
                    )
                    $
                    (1.44
                    )Income
                        from discontinued operations
                    
                    
                    0.10
                    
                    
                    1.26
                    
                    
                    0.31
                    
                    
                    1.15
                    
                    
                    0.83Net
                        income (loss)
                    
                    $
                    (0.62
                    )
                    $
                    0.17
                    
                    $
                    (1.19
                    )
                    $
                    0.02
                    
                    $
                    (0.61
                    )Distributions
                        per share - class A ................................
                    
                    $
                    0.50
                    
                    $
                    0.50
                    
                    $
                    0.48
                    
                    $
                    0.45
                    
                    $
                    0.35
 (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, 2003 and 2002, FFO includes deferred
            merger costs of $1.7 million, $915,000 and $1.9 million 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, 2003 and 2002
          include
          a charge of $1.7 million, $915,000 and $1.9 million, 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.
  -21-
 Table
              of Contents
  **Item
          7. Management's Discussion and Analysis of
          Financial Condition and Results of Operations**
 
 **Forward-Looking
          Statements**
 
 Certain
          information presented in this Form 10-K constitutes forward-looking statements
          within the meaning of Section 27A of the Securities Act of 1933 and Section
          21E
          of the Securities Exchange Act of 1934. Although the Company believes that
          the
          expectations reflected in such forward-looking statements are based upon
          reasonable assumptions, the Company's actual results could differ materially
          from those set forth in the forward-looking statements. Certain factors
          that
          might cause such a difference include the following: changes in general
          economic
          conditions, changes in real estate market conditions, continued availability
          of
          proceeds from the Company's debt or equity capital, the ability of the
          Company
          to locate suitable tenants for its properties, the ability of tenants to
          make
          payments under their respective leases, timing of acquisitions, development
          starts and sales of properties and the ability to meet development
          schedules.
 
 The
          following discussion should be read in conjunction with the consolidated
          financial statements and notes thereto and the comparative summary of selected
          financial data appearing elsewhere in this report. Historical results and
          trends
          which might appear should not be taken as indicative of future operations.
 
 **Executive
          Overview**
 
 We
          are an
          established real estate company that, at our core, are value creators who
          have
          delivered results to our investors for 22 years and have elected to be
          taxed as
          a REIT for federal income tax purposes. Our mission is to build a real
          estate
          business with the potential to realize profitable growth year over year
          regardless of market cycles. Our structure consists of two distinct companies,
          representing three synergistic businesses that provide earnings potential
          from
          multiple sources. First, we own an institutional-grade portfolio of
          Irreplaceable Corners - premier retail properties in high-traffic, highly
          populated areas - which are held for long-term value and provide a foundation
          to
          our FFO growth through a steady stream of rental income. Second, our *advisory/sponsorship
          business* broadens
          the Company’s avenues to capital and raises capital for a series of merchant
          development funds. And third, as a *real
          estate development and operating company* ,
          we
          provide value through offering an array of services to our tenants and
          properties, to our advisory/sponsorship business’s portfolios and to third
          parties. These
          three business segments add value to the overall Company and, together,
          give us
          the flexibility to achieve our financial objectives over the long-term
          as we
          navigate the changing market cycles that come our way.
 
 As
          of
          December 31, 2006, we have over 600,000 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 $48 million to $328 million, including 49 properties
          located in 15 states. Within our asset advisory business we manage an additional
          $227 million in assets, representing 20 properties in 2 states, and equity
          under
          management within our advisory/sponsorship business has grown from $15
          million
          to $121 million.
 
 *Portfolio
          of Irreplaceable Corners*
 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, we
          believed
          these centers attract well established tenants and can withstand the test
          of
          time, providing our shareholders a steady rental income stream.
 
 During
          2005 and continuing through 2006, we acquired approximately 289,000 square
          feet
          of multi-tenant shopping centers, representing approximately $134 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, 2006, we owned a real estate portfolio consisting of 49 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
          expect
          that single-tenant, credit leased properties, will continue to experience
          cap
          rate pressure during 2007 due to the low interest rate environment and
          increased
          buyer demand. Therefore, 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, 2006, 92% of our outstanding debt had a long-term fixed interest rate
          with
          an average term of 7.1 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%.
 
 -22-
 Table
              of Contents
  *Advisory/Sponsorship
          Business*
 The
          part
          of our business model and operating strategy that distinguishes us from
          other
          publicly-traded REITs is our asset advisory business, or AmREIT Securities
          Company, a NASD registered broker-dealer which is a wholly-owned subsidiary
          of
          ARIC. For the past 22 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.
 
 The advisory/sponsorship
          business invests
          in and actively manages six merchant development partnership funds which
          were
          formed to develop, own, manage, and add value to properties with an average
          holding period of two to four years. We invest as both the general partner
          and
          as a limited partner, and our advisory/sponsorship 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. 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.
 
 *Real
          Estate Development and Operating Company*
 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/sponsorship business, and to third parties.
          This
          operating subsidiary, which is a taxable REIT subsidiary, is a
          transaction-oriented subsidiary that is very active in the real estate
          market
          and generates significant profits and fees on an annual basis. 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 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.
 
 -23-
 Table
              of Contents
  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.
 
 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 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 lease 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
          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.
 
 **Recently
          Issued Accounting Pronouncements**
 
 In
          June 2005, the Emerging Issues Task Force issued EITF Issue No. 04-05
          (“EITF 04-05”), *Determining
          Whether a General Partner, or the General Partners as a Group, Controls
          a
          Limited Partnership or Similar Entity When the Limited Partners Have Certain
          Rights* .
          EITF
          04-05 makes it more likely that general partners will be required to consolidate
          limited partnerships by making it more difficult for a general partner
          to
          overcome the presumption that it controls the limited partnership. Under
          this
          new guidance, the presumption of general partner control will be overcome
          only
          when the limited partners have either of two types of rights - the right
          to
          dissolve or liquidate the partnership or otherwise remove the general partner
          “without cause” or the right to effectively participate in significant decisions
          made in the ordinary course of the partnership’s business. These ‘kick-out
          rights’ and ‘participating rights’ must be substantive in order to overcome the
          presumption of general partner control. The guidance was effective June 29,
          2005 for all newly-formed limited partnerships and for existing limited
          partnership agreements that are modified. The guidance was effective for
          existing limited partnership agreements that are not modified no later
          than the
          beginning of the first reporting period in fiscal years beginning after
          December 15, 2005. We adopted EITF 04-05 during the quarter ended March 31,
          2006 for existing limited partnerships, and it had no impact on our financial
          position or results of operations because the limited partners have substantive
          kick-out rights in each of the limited partnerships for which we serve
          as the
          general partner.
 
 -24-
 Table
              of Contents
  In
          December 2004, the FASB issued Statement No. 123R (“SFAS 123R”), *Share-Based
          Payment* that
          requires companies to expense the value of employee stock options and similar
          awards. SFAS 123R became effective in the first quarter of 2006. We have
          historically not used stock options as a means of compensating our employees,
          and therefore we have no stock options outstanding as of December 31, 2006.
          Our
          strategy to date has been to compensate our employees through issuance
          of our
          restricted class A common shares. We determine the fair value of such awards
          based on the fair market value of the shares on the date of grant and then
          record that expense over the vesting period of the respective awards. The
          provisions of SFAS 123R did not change this accounting treatment for our
          restricted share awards. Accordingly, our adoption of SFAS 123R did not
          materially impact our consolidated financial position, results of operations
          or
          cash flows.
 
 In
          June
          2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), *“Accounting
          for Uncertainty in Income Taxes-an interpretation of FASB Statement No.
          109.”* FIN 48
          clarifies the accounting for uncertainty in income taxes recognized in
          the
          financial statements. The interpretation prescribes a recognition threshold
          and
          measurement attribute for the financial statement recognition of a tax
          position
          taken, or expected to be taken, in a tax return. A tax position may only
          be
          recognized in the financial statements if it is more likely than not that
          the
          tax position will be sustained upon examination. There are also several
          disclosure requirements. We will adopt this interpretation during the first
          quarter of 2007, and we do not expect the adoption of this interpretation
          to
          have a material effect on our consolidated financial statements.
 
 In
          September 2006, the Securities and Exchange Commission (SEC) issued Staff
          Accounting Bulletin No. 108 (“SAB 108”). SAB 108 allows for the adjustment of
          the cumulative effect of prior year immaterial errors in assets and liabilities
          as of the beginning of the fiscal year, with an offsetting adjustment to
          the
          opening balance of retained earnings. We adopted SAB 108 for our annual
          financial statements for the year ended December 31, 2006. Such adoption
          did not
          impact our results of operations or financial position.
 
 **Liquidity
          and Capital Resources**
 At
          December 31, 2006 and December 31, 2005, our cash and cash equivalents
          totaled
          $3.4 million and $5.9 million, respectively. Cash flows provided by
          (used in) operating activities, investing activities and financing activities
          for the three years ended December 31, 2006, are as follows (in thousands):
 
 **2006**
                **2005**
                **2004****Operating
                    activities**
                $16,160
                $14,069
                $7,250**Investing
                    activities**
                $(22,123)
                $(107,519)
                $(99,801)**Financing
                    activities**
                $3,463
                $96,405
                $93,480
 
 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 increase
          our operating cash flow by selling the underperforming assets and deploying
          the
          capital generated into high-quality income-producing retail real estate
          assets.
          During 2005 and continuing through 2006, we executed this strategy through
          the
          acquisition of $134 million of shopping centers, comprising 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 and 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. During the first quarter of 2006, we acquired 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.
 
 In
          June 2004, we began marketing our class D common share offering, a
          $170 million publicly-registered, non-traded common share offering, offered
          through the independent financial planning community. We have utilized
          the
          proceeds from the sale of the class D shares primarily to pay down debt
          and to
          acquire properties. We determined during the third quarter of 2005 that
          we were
          in position to meet our real estate acquisition goals for the year with
          our
          existing capital. We therefore closed our class D common share offering
          after
          having raised approximately $110 million, including shares issued through
          the dividend reinvestment program.
 
 -25-
 Table
              of Contents
  Cash
          provided by operating activities as reported in the Consolidated Statements
          of
          Cash Flows increased by $2.1 million for the year ended December 31, 2006
          when
          compared to 2005. This net increase is the combination of several factors
          - an
          increase during 2006 of approximately $4.8 million in our income before
          the
          effects of gains on property sales, of income from merchant development
          funds
          and other affiliates and of depreciation and amortization as compared to
          2005.
          The acquisitions of Uptown Park in June 2005, The South Bank in
          September 2005 and Uptown Plaza in Dallas in March 2006 drove this increase
          in income. Additionally, we had an increase in working capital cash flow
          of
          approximately $6.6 million driven primarily by improved collection of
          receivables during 2006. These increases were significantly offset by a
          $9.3
          million reduction in 2006 of cash provided by sales of real estate acquired
          for
          resale. During 2006, we sold four properties acquired for resale for aggregate
          proceeds of $2.2 million, whereas during 2005, we sold six properties for
          aggregate proceeds of $11.5 million.
  Cash
          flows from investing activities as reported in the Consolidated Statements
          of
          Cash Flows decreased from a net investing outflow of approximately $107.5
          million in 2005 to a net investing outflow of $22.1 million in 2006. This
          $85.4 million decrease is primarily attributable to a $86.1 million
          decrease in property acquisitions during 2006, coupled with a $12.4 million
          net
          increase in loan payments from affiliates during 2006. These investing
          cash flow
          increases were partially offset by a $12.1 million reduction in proceeds
          from
          sales of properties held for investment. On the property acquisition side,
          in
          June 2005, we acquired Uptown Park, a 169,000 square foot lifestyle center
          located in Houston, Texas in the Galleria shopping district. 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 loan payments from affiliates, we have the ability as part of
          our
          treasury management function to place excess cash in short term bridge
          loans for
          our merchant development funds for the purpose of acquiring or developing
          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 as the lender
          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 a market rate
          of
          interest and are due upon demand. With respect to the decrease in proceeds
          from
          sales of investment property, during 2006, we sold two properties held
          for
          investment, generating proceeds of $4.5 million, whereas in 2005, we sold
          ten
          properties held for investment, generating proceeds from sale of $16.6
          million.
 
 Cash
          flows provided by financing activities decreased from $96.4 million during
          the 2005 period to $3.5 million during the 2006 period. This
          $92.9 million decrease was primarily attributable to us raising
          $97.6 million in equity proceeds (net of issuance costs) during 2005,
          whereas we did not issue any equity during 2006. The $97.6 million net
          equity
          proceeds were raised through an underwritten offering of 2.76 million of
          our
          class A common shares, including 360,000 over-allotment shares exercised
          by the
          underwriters, as well as through our class D common share offering, a $170
          million offering which was being offered through the independent financial
          planning community. The class A common share offering was priced at $8.10,
          and
          the net proceeds of the offering, after underwriting discounts, commissions
          and
          offering expenses, were approximately $20.4 million. The balance of the
          capital
          was raised through our class D offering which we closed during the third
          quarter
          of 2005. Additionally, during 2006, we elected to redeem $15.5 million
          of our
          non-traded common shares versus $1.8 million in redemptions in 2005. In
          December
          2006, we repurchased for $9.2 million approximately 998,000 of our Class
          B
          common shares as part of a tender offer. The shares repurchased represented
          approximately 48% of the outstanding Class B common shares. Dividends paid
          to
          shareholders increased by approximately $1.3 million due to the increase
          in the
          number of class D common shares outstanding during 2006 versus 2005, and
          we
          bought back into treasury an additional $2.0 million of our class A common
          shares during 2006 versus 2005. The above reductions in proceeds from financing
          activities were partially offset by a $21.0 million net increase in debt
          proceeds during the 2006 period.
 
 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 November 2007 and provides that we may borrow
          up to
          $40 million subject to the value of unencumbered assets. Effective November
          2005, 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. At December 31, 2006, we were in compliance with all financial
          covenants. The credit facility’s annual interest rate varies depending upon our
          debt to asset ratio, from LIBOR plus a spread of 1.35% to LIBOR plus a
          spread of
          2.35%. As of December 31, 2006, the interest rate was LIBOR plus 1.55%.
          As of
          December 31, 2006 and 2005, there was $11.9 million and $0 outstanding
          on the
          credit facility, respectively. As of December 31, 2006, we have approximately
          $26.1 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.
 
 -26-
 Table
              of Contents
  **Contractual
          Obligations**
 
 As
          of
          December 31, 2006, 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):
 
 2007
                
                2008
                
                2009
                
                2010
                
                2011
                
                Thereafter
                
                TotalUnsecured
                    debt:Revolving
                    credit facility*
                
                $
                11,929
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                11,929Secured
                    debt**
                
                
                1,257
                
                
                14,759
                
                
                1,448
                
                
                1,555
                
                
                1,607
                
                
                111,023
                
                
                131,649Interest*
                
                
                8,606
                
                
                7,727
                
                
                6,868
                
                
                6,775
                
                
                6,543
                
                
                32,579
                
                
                69,098Non-cancelable
                    operatinglease
                    payments
                
                
                320
                
                
                319
                
                
                204
                
                
                22
                
                
                22
                
                
                -
                
                
                887Total
                    contractual obligations
                
                $
                22,112
                
                $
                22,805
                
                $
                8,520
                
                $
                8,352
                
                $
                8,172
                
                $
                143,602
                
                $
                213,563
 
 *
          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 ($11.9 million) and the interest rate as of December
          31,
          2006 (7.1%) remain constant through maturity.
 **
          Secured debt as shown above is $875,000 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
          2006, we paid dividends to our shareholders of $14.6 million, compared
          with
          $11.8 million in 2005. 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
                      D****2006**Fourth
                      Quarter
                  
                  $
                  776
                  
                  $
                  200
                  
                  $
                  723
                  
                  $
                  1,790Third
                      Quarter
                  
                  $
                  782
                  
                  $
                  385
                  
                  $
                  724
                  
                  $
                  1,799Second
                      Quarter
                  
                  $
                  788
                  
                  $
                  390
                  
                  $
                  726
                  
                  $
                  1,798First
                      Quarter
                  
                  $
                  789
                  
                  $
                  390
                  
                  $
                  722
                  
                  $
                  1,794**2005**Fourth
                      Quarter
                  
                  $
                  802
                  
                  $
                  398
                  
                  $
                  716
                  
                  $
                  1,783Third
                      Quarter
                  
                  $
                  797
                  
                  $
                  400
                  
                  $
                  713
                  
                  $
                  1,556Second
                      Quarter
                  
                  $
                  550
                  
                  $
                  404
                  
                  $
                  713
                  
                  $
                  931First
                      Quarter
                  
                  $
                  430
                  
                  $
                  410
                  
                  $
                  698
                  
                  $
                  523
 
 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 volumes 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, 2006 to the year ended December 31,
          2005**
 
 Total
          revenues increased by $25.3 million or 74% in 2006 as compared to 2005
          ($59.3
          million in 2006 versus $34.0 million in 2005). Rental revenues increased
          by $7.7
          million, or 34%, in 2006 as compared to 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, AmREIT Construction Company (ACC), a wholly-owned
          subsidiary of ARIC, 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.
 
 -27-
 Table
              of Contents
  Real
          estate fee income increased approximately $3.2 million, 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.
 
 Securities
          commission revenue increased by $5.4 million or 464% in 2006 as compared
          to
          2005. This
          increase in commission revenue was driven by the capital-raising activities
          of
          our advisory/sponsorship 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 $21.4 million, or 88%, from $24.3 million
          in
          2005 to $45.7 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 $2.0 million or 41% in 2006 as compared to 2005 ($6.9
          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 $3.3 million, or 53%, during 2006
          to
          $9.5 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 $4.7 million or 470% 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 increased by $720,000 from $705,000 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 26%, from $6.4 million in 2005 to
          $8.1
          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. 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
          interest in West Road Plaza, which was sold during 2006.
 
 **Results
          of Operations**
 **Comparison
          of the year ended December 31, 2005 to the year ended December 31,
          2004**
 
 Total
          revenues increased by $18.8 million or 124% in 2005 as compared to 2004
          ($34.0
          million in 2005 versus $15.2 million in 2004). Rental revenues increased
          by
          $12.3 million, or 120%, in 2005 as compared to 2004. This increase is
          attributable to the significant property acquisitions that we made in the
          second
          half of 2004 as well as the acquisitions of Uptown Park in June 2005 and
          of The
          South Bank in September 2005. Real estate fee income increased approximately
          $3.2 million, or 174%, primarily as a result of increased brokerage commissions
          as well as acquisition and development fees earned on property transactions
          within our merchant development funds.
  -28-
 Table
              of Contents
  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 and recognized $4.7
          million
          in revenues associated with those contracts during 2005, approximately
          $130,000
          of which represents fee income on construction management contracts. Such
          revenues have been recognized under the percentage-of-completion method
          of
          accounting.
 
 Securities
          commission revenue decreased by $1.6 million or 58% in 2005 as compared
          to 2004.
          This decrease was driven by a decrease in the amount of merchant development
          fund capital raised through our advisory/sponsorship business during 2005
          versus
          2004. During 2004, we raised $25.4 million for AmREIT Monthly Income and
          Growth
          Fund II, L.P. During 2005, we raised $11.2 million for MIG III. 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 between 8% and 10.5% 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 $11.0 million, or 82%, from $13.3 million
          in
          2004 to $24.3 million 2005. This increase was primarily attributable to
          increases in property expense, construction costs and depreciation and
          amortization, coupled with smaller increases in general and administrative
          expenses. These expense increases were partially offset by a reduction
          in
          securities commissions of $1.4 million as well as a reduction in deferred
          merger
          charges of $1.7 million.
  General
          and administrative expense increased by $1.9 million, or 43%, during 2005
          to
          $6.2 million compared to $4.3 million in 2004. This increase is primarily
          due to
          increases in personnel. We increased our total number of employees during
          2004
          and have continued to do so throughout 2005 in order appropriately match
          our
          resources with the growth in our portfolio as well as in our real estate
          operating and development activities.
 
 Property
          expense increased $3.4 million or 243% in 2005 as compared to 2004 ($4.9
          million
          in 2005 versus $1.4 million in 2004) primarily as a result of the significant
          property acquisitions made during 2004 as well as the acquisitions of Uptown
          Park in June 2005 and The South Bank in September 2005.
 
 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
          $4.3 million in construction costs during 2005.
 
 Commission
          expense decreased by $1.4 million or 58%, from $2.4 million in 2004 to
          $1.0
          million in 2005. This decrease is attributable to reduced capital-raising
          activity through ASC during 2005 as discussed in *“Revenues”* above.
 
 Depreciation
          and amortization increased by $4.2 million, or 233%, to $6.0 million in
          2005
          compared to $1.8 million in 2004. The increased depreciation and amortization
          is
          attributable to the significant property acquisitions made during 2004
          and 2005
          as discussed above.
 
 Deferred
          merger costs were $1.7 million in 2004 whereas no such charges were recognized
          in 2005. The 2004 deferred merger costs were related to deferred consideration
          payable to H. Kerr Taylor, our Chairman and Chief Executive Officer, as
          a result
          of the acquisition of our advisor in 1998, which was owned by Mr. Taylor.
          In
          connection with the acquisition, Mr. Taylor agreed to payment for this
          advisory
          company in the form of common shares, paid as the Company increased its
          outstanding equity. Mr. Taylor received 900,000 class A common shares pursuant
          to this arrangement, the final installment of which was issued to him during
          2004.
  *Other*
 Interest
          expense increased by $3.1 million, or 95%, from $3.3 million in 2004 to
          $6.4
          million in 2005. The increase in interest expense is primarily due to the
          debt
          that we assumed in the second half of 2004 related to our property acquisitions
          as well as the debt we placed in conjunction with our June 2005 Uptown
          Park
          acquisition. We assumed a total of $44.8 million in debt, net of a premium
          of
          $1.4 million, as a result of the 2004 property acquisitions and placed
          $49.0
          million of debt in connection with the Uptown Park acquisition in
          2005.
 
 Income
          from merchant development funds and other affiliates decreased by $960,000,
          or
          86%, to $161,000 in 2005. During 2004, we realized $869,000 of profit
          participation from our general partner interest in AOF, one of our merchant
          development funds which is currently in liquidation. No such amounts were
          realized during 2005.
 
 -29-
 Table
              of Contents
  **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.
 
 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:
   **2006**
                  
                  **2005**
                  
                  **2004**Income
                      (loss) – before discontinued operations
                  
                  $
                  6,927
                  
                  $
                  3,547
                  
                  
                  ($411
                  )Income
                      – from discontinued operations
                  
                  
                  636
                  
                  
                  6,579
                  
                  
                  999Plus
                      depreciation of real estate assets – from operations
                  
                  
                  8,766
                  
                  
                  5,952
                  
                  
                  1,674Plus
                      depreciation of real estate assets – fromdiscontinued
                      operations
                  
                  
                  15
                  
                  
                  111
                  
                  
                  297Adjustments
                      for nonconsolidated affiliates
                  
                  
                  133
                  
                  
                  100
                  
                  
                  29Less
                      gain on sale of real estate assets acquiredfor
                      investment
                  
                  
                  (285
                  )
                  
                  (3,400
                  )
                  
                  (137
                  )Less
                      class B, C & D distributions
                  
                  
                  (11,442
                  )
                  
                  (9,245
                  )
                  
                  (4,454
                  )Total
                      Funds From Operations available to class Ashareholders
                  
                  $
                  4,750
                  
                  $
                  3,644
                  
                  $
                  ($2,003
                  )
 
  
 -30-
 Table
              of Contents
  **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.
 
 At
          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. The remaining $11.9 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, 2006. In the event interest rates were to increase 100 basis points,
          annual
          net income, FFO and future cash flows would decrease by $119,000 based
          on the
          variable-rate debt outstanding at December 31, 2006.
 
 The
          discussion above considers only those exposures that exist as of December
          31,
          2006. 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, 2006 and 2005
 Consolidated
          Statements of Operations for the Years Ended December 31, 2006, 2005 and
          2004
 Consolidated
          Statements of Shareholders' Equity for the Years Ended December 31, 2006,
          2005
          and 2004
 Consolidated
          Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and
          2004
 Notes
          to
          Consolidated Financial Statements
  (2)
                Financial
                    Statement Schedule (unaudited)
 
 Schedule
          III - Consolidated Real Estate Owned and Accumulated Depreciation
 
 **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, 2006. Based on that evaluation, our CEO and CFO concluded that our
          disclosure controls and procedures were effective as of December 31, 2006.
 
 Changes
          in Internal Controls
 
 There
          has
          been no change to our internal control over financial reporting during
          the
          quarter ended December 31, 2006 that has materially affected, or is reasonably
          likely to materially affect, our internal control over financial
          reporting.
 
 **Item
          9B. Other Information**
 Not
          applicable
  -31-
 Table
              of Contents
  **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 May 29,
          2007.
 
 **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 May 29,
          2007.
 
 **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 1,351,394 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, 2006:
 
 (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.
                  -
                  -
                  1,351,394Equity
                      compensation plans not approved by security holders.
                  -
                  -
                  -TOTAL
                  
                  
                  1,351,394
 
 **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 May 29,
          2007.
 
 **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 May 29,
          2007.
 
 
 -32-
 Table
              of Contents
 **PART
          IV**
 
 **Item
          15. Exhibits, Financial Statements and
          Schedules**
  (a)
                  (1)
                  Financial
                      Statements
                    Report
                      of Independent Registered Public Accounting Firm
                    Consolidated
                      Balance Sheets as of December 31, 2006 and 2005
                    Consolidated
                      Statements of Operations for the Years Ended December 31, 2006,
                      2005 and
                      2004
                    Consolidated
                      Statements of Shareholders’ Equity for the Years Ended December 31, 2006,
                      2005 and 2004
                    Consolidated
                      Statements of Cash Flows for the Years Ended December 31, 2006,
                      2005 and
                      2004
                    Notes
                      to Consolidated Financial Statements(2)
                  Financial
                      Statement Schedule (unaudited)
                    Schedule
                      III - Consolidated Real Estate Owned and Accumulated
                      Depreciation(b)
                  
                  Exhibits3.1
                  
                  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*
                  
                  Employment
                      agreement dated February 19, 2007 with H. Kerr Taylor10.5*
                  
                  Employment
                      agreement dated February 19, 2007 with Chad C. Braun10.6*
                  
                  Employment
                      agreement dated February 19, 2007 with Tenel Tayar10.7*
                  
                  Employment
                      agreement dated February 19, 2007 with David Thailing10.8*
                  
                  Employment
                      agreement dated February 19, 2007 with Preston
                      Cunningham21.1*
                  
                  Subsidiaries
                      of the Company31.1*
                  
                  Certification
                      pursuant to Rule 13a-14(a) of Chief Executive Officer dated
                      December 31,
                      200631.2*
                  
                  Certification
                      pursuant to Rule 13a-14(a) of Chief Financial Officer dated
                      December 31,
                      200632.1**
                  
                  Chief
                      Executive Officer certification pursuant to 18 U.S.C. Section
                      1350,
                      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                      200232.2**
                  
                  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
 
 -33-
 Table
              of Contents
  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 26th 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, 2007H.
                    KERR TAYLORPresident,
                    Chairman of the Board, Chief ExecutiveOfficer
                    and Director (Principal Executive Officer)/s/
                    Robert S. Cartwright, Jr.
                March
                    26, 2007ROBERT
                    S. CARTWRIGHT, JR., Trust Manager/s/
                    G. Steven Dawson
                March
                    26, 2007G.
                    STEVEN DAWSON, Trust Manager/s/
                    Philip W. Taggart
                March
                    26, 2007PHILIP
                    W. TAGGART, Trust Manager/s/
                    H.L. Rush, Jr.
                March
                    26, 2007H.L.
                    RUSH, JR., Trust Manager/s/
                    Brett P. Treadwell
                March
                    26, 2007BRETT
                    P. TREADWELL, Vice President - Finance(Principal
                    Accounting Officer)


**AmREIT
      AND SUBSIDIARIES**


**INDEX
      TO FINANCIAL
      STATEMENTS**





**Page****FINANCIAL
                  STATEMENTS:**Report
                  of Independent Registered Public Accounting
                  Firm
              F-2Consolidated
                  Balance Sheets as of December 31,
                  2006 and 2005
              F-3Consolidated
                  Statements of Operations for the years endedDecember
                  31, 2006, 2005 and 2004
              F-4Consolidated
                  Statements of Shareholders' Equityfor
                  the years ended December 31, 2006, 2005 and 2004
              F-5Consolidated
                  Statements of Cash Flows for the years endedDecember
                  31, 2006, 2005 and 2004
              F-6Notes
                  to Consolidated Financial
                  Statements
              F-7
                  to F-28**FINANCIAL
                  STATEMENT SCHEDULE:**
                Schedule
                  III - Consolidated Real Estate Owned and AccumulatedDepreciation
                  for the year ended December 31, 2006
              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.





Index




**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, 2006 and 2005, 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, 2006. 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, 2006 and 2005, and the results of their operations and their
      cash flows for each of the years in the three-year period ended December 31,
      2006, 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.








/s/
       KPMG LLP








Houston,
      Texas


April
      2,
      2007


F-2
 Index




PART
      I -
      FINANCIAL INFORMATION


**Item
      1. Financial Statements**




**AmREIT
      AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


**December
      31, 2006 and December 31, 2005**


**(in
      thousands, except share data)**


**December
                      31,**
                  
                  **December
                      31,****2006**
                  
                  **2005****ASSETS**Real
                      estate investments at cost:Land
                  
                  
                  
                  
                  $
                  122,043
                  
                  $
                  112,784Buildings
                  
                  
                  
                  
                  
                  140,487
                  
                  
                  127,094Tenant
                      improvements
                  
                  
                  
                  
                  
                  9,296
                  
                  
                  7,366271,826
                  
                  
                  247,244Less
                      accumulated depreciation and amortization
                  
                  
                  
                  
                  
                  (10,628
                  )
                  
                  (5,943
                  )261,198
                  
                  
                  241,301Real
                      estate held for sale, net
                  
                  
                  
                  
                  
                  2,708
                  
                  
                  3,569Net
                      investment in direct financing leases held for investment
                  
                  
                  
                  
                  
                  19,204
                  
                  
                  19,212Intangible
                      lease cost, net
                  
                  
                  
                  
                  
                  16,016
                  
                  
                  17,761Investment
                      in merchant development funds and other affiliates
                  
                  
                  
                  
                  
                  2,651
                  
                  
                  2,311Net
                      real estate investments
                  
                  
                  
                  
                  
                  301,777
                  
                  
                  284,154Cash
                      and cash equivalents
                  
                  
                  
                  
                  
                  3,415
                  
                  
                  5,915Tenant
                      receivables, net
                  
                  
                  
                  
                  
                  4,330
                  
                  
                  3,132Accounts
                      receivable, net
                  
                  
                  
                  
                  
                  1,772
                  
                  
                  1,807Accounts
                      receivable - related party
                  
                  
                  
                  
                  
                  1,665
                  
                  
                  4,158Notes
                      receivable - related party
                  
                  
                  
                  
                  
                  10,104
                  
                  
                  11,232Deferred
                      costs
                  
                  
                  
                  
                  
                  2,045
                  
                  
                  1,487Other
                      assets
                  
                  
                  
                  
                  
                  3,322
                  
                  
                  3,086TOTAL
                      ASSETS
                  
                  
                  
                  
                  $
                  328,430
                  
                  $
                  314,971**LIABILITIES
                      AND SHAREHOLDERS' EQUITY**Liabilities:Notes
                      payable
                  
                  
                  
                  
                  $
                  144,453
                  
                  $
                  114,687Accounts
                      payable and other liabilities
                  
                  
                  
                  
                  
                  9,162
                  
                  
                  8,232Below
                      market leases, net
                  
                  
                  
                  
                  
                  3,960
                  
                  
                  2,940Security
                      deposits
                  
                  
                  
                  
                  
                  668
                  
                  
                  651TOTAL
                      LIABILITIES
                  
                  
                  
                  
                  
                  158,243
                  
                  
                  126,510Minority
                      interest
                  
                  
                  
                  
                  
                  1,137
                  
                  
                  1,176Shareholders'
                      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,6,549,950
                      and 6,479,278 shares issued, respectively
                  
                  
                  
                  
                  
                  65
                  
                  
                  65Class
                      B Common shares, $.01 par value, 3,000,000 shares authorized,1,080,180
                      and 2,148,649 shares issued, respectively
                  
                  
                  
                  
                  
                  11
                  
                  
                  22Class
                      C Common shares, $.01 par value, 4,400,000 shares authorized,4,145,531
                      and 4,119,923 shares issued, respectively
                  
                  
                  
                  
                  
                  41
                  
                  
                  41Class
                      D Common shares, $.01 par value, 17,000,000 shares authorized,11,039,803
                      and 11,035,482 shares issued, respectively
                  
                  
                  
                  
                  
                  110
                  
                  
                  110Capital
                      in excess of par value
                  
                  
                  
                  
                  
                  194,696
                  
                  
                  204,331Accumulated
                      distributions in excess of earnings
                  
                  
                  
                  
                  
                  (23,749
                  )
                  
                  (16,736
                  )Cost
                      of treasury shares, 292,238 and 77,741 Class A shares, respectively
                  
                  
                  
                  
                  
                  (2,124
                  )
                  
                  (548
                  )TOTAL
                      SHAREHOLDERS' EQUITY
                  
                  
                  
                  
                  
                  169,050
                  
                  
                  187,285TOTAL
                      LIABILITIES AND SHAREHOLDERS' EQUITY
                  
                  
                  
                  
                  $
                  328,430
                  
                  $
                  314,971




See
      Notes
      to Consolidated Financial Statements




F-3
 Index




**AmREIT
      AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF
      OPERATIONS**


**For
      the years ended December 31, 2006, 2005 and 2004**


**(in
      thousands, except per share data)**




**2006**
                      
                      **2005**
                      
                      **2004**Revenues:Rental
                          income from operating leases
                      
                      $
                      28,158
                      
                      $
                      20,484
                      
                      $
                      8,200Earned
                          income from direct financing leases
                      
                      
                      2,030
                      
                      
                      2,030
                      
                      
                      2,029Real
                          estate fee income
                      
                      
                      1,334
                      
                      
                      485
                      
                      
                      409Real
                          estate fee income - related party
                      
                      
                      6,983
                      
                      
                      4,588
                      
                      
                      1,443Construction
                          revenues
                      
                      
                      3,025
                      
                      
                      2,302
                      
                      
                      -Construction
                          revenues - related party
                      
                      
                      10,435
                      
                      
                      2,434
                      
                      
                      -Securities
                          commission income - related party
                      
                      
                      6,554
                      
                      
                      1,163
                      
                      
                      2,742Asset
                          management fee income - related party
                      
                      
                      823
                      
                      
                      495
                      
                      
                      361Total
                          revenues
                      
                      
                      59,342
                      
                      
                      33,981
                      
                      
                      15,184Expenses:General
                          and administrative
                      
                      
                      9,489
                      
                      
                      6,209
                      
                      
                      4,334Property
                          expense
                      
                      
                      6,851
                      
                      
                      4,860
                      
                      
                      1,418Construction
                          costs
                      
                      
                      12,290
                      
                      
                      4,283
                      
                      
                      -Legal
                          and professional
                      
                      
                      1,559
                      
                      
                      1,593
                      
                      
                      1,102Real
                          estate commissions
                      
                      
                      1,042
                      
                      
                      266
                      
                      
                      544Securities
                          commissions
                      
                      
                      5,732
                      
                      
                      1,012
                      
                      
                      2,408Depreciation
                          and amortization
                      
                      
                      8,741
                      
                      
                      6,046
                      
                      
                      1,817Deferred
                          merger costs
                      
                      
                      -
                      
                      
                      -
                      
                      
                      1,682Total
                          expenses
                      
                      
                      45,704
                      
                      
                      24,269
                      
                      
                      13,305Operating
                          income
                      
                      
                      13,638
                      
                      
                      9,712
                      
                      
                      1,879Other
                          income (expense):Interest
                          and other income - related party
                      
                      
                      1,425
                      
                      
                      705
                      
                      
                      82Income
                          from merchant development funds and other affiliates
                      
                      
                      967
                      
                      
                      161
                      
                      
                      1,121Federal
                          income tax expense for taxable REIT subsidiary
                      
                      
                      (870
                      )
                      
                      (379
                      )
                      
                      (16
                      )Interest
                          expense
                      
                      
                      (8,083
                      )
                      
                      (6,412
                      )
                      
                      (3,290
                      )Minority
                          interest in income of consolidated joint ventures
                      
                      
                      (150
                      )
                      
                      (240
                      )
                      
                      (187
                      )Income
                          (loss) before discontinued operations
                      
                      
                      6,927
                      
                      
                      3,547
                      
                      
                      (411
                      )Income
                          (loss) from discontinued operations, net of taxes
                      
                      
                      254
                      
                      
                      3,356
                      
                      
                      (828
                      )Gain
                          on sales of real estate acquired for resale, net of taxes
                      
                      
                      382
                      
                      
                      3,223
                      
                      
                      1,827Income
                          from discontinued operations
                      
                      
                      636
                      
                      
                      6,579
                      
                      
                      999Net
                          income
                      
                      
                      7,563
                      
                      
                      10,126
                      
                      
                      588Distributions
                          paid to class B, C and D shareholders
                      
                      
                      (11,442
                      )
                      
                      (9,245
                      )
                      
                      (4,454
                      )Net
                          (loss) income available to class A shareholders
                      
                      $
                      (3,879
                      )
                      $
                      881
                      
                      $
                      (3,866
                      )Net
                          (loss) income per class A common share - basic and dilutedLoss
                          before discontinued operations
                      
                      $
                      (0.72
                      )
                      $
                      (1.09
                      )
                      $
                      (1.50
                      )Income
                          from discontinued operations
                      
                      
                      0.10
                      
                      
                      1.26
                      
                      
                      0.31Net
                          (loss) income
                      
                      $
                      (0.62
                      )
                      $
                      0.17
                      
                      $
                      (1.19
                      )Weighted
                          average class A common shares used tocompute
                          net (loss) income per share, basic and diluted
                      
                      
                      6,300
                      
                      
                      5,205
                      
                      
                      3,251


See Notes to Consolidated Financial
      Statements




F-4
 Index




**AmREIT
      AND SUBSIDIARIES**


CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS'
      EQUITY


For
      the years ended December 31, 2006, 2005
      and 2004


(in
      thousands, except share
      data)


Common
                  Shares Amount
              
              Capital
                  in excess of par value
              
              Accumulated
                  distributions in excess of earnings
              
              Cost
                  of treasury
              
              Total**Balance
                  at December 31, 2003**
              
              $
              67
              
              $
              59,207
              
              $
              (9,616
              )
              $
              (862
              )
              $
              48,796Net
                  income
              
              
              
              
              
              
              
              
              588
              
              
              
              
              
              588Deferred
                  compensation issuance of restricted shares, Class A
              
              
              
              
              
              (891
              )
              
              -
              
              
              
              
              
              (891
              )Issuance
                  of common shares, Class A
              
              
              5
              
              
              2,740
              
              
              -
              
              
              65
              
              
              2,810Conversion
                  of common shares, Class B
              
              
              (1
              )
              
              -
              
              
              -
              
              
              -
              
              
              (1
              )Issuance
                  of restricted shares, Class A
              
              
              -
              
              
              7
              
              
              -
              
              
              742
              
              
              749Amortization
                  of deferred compensation
              
              
              -
              
              
              265
              
              
              -
              
              
              -
              
              
              265Issuance
                  of common shares, Class C
              
              
              27
              
              
              24,242
              
              
              -
              
              
              -
              
              
              24,269Retirement
                  of common shares, Class C
              
              
              -
              
              
              (464
              )
              
              -
              
              
              -
              
              
              (464
              )Issuance
                  of common shares, Class D
              
              
              21
              
              
              18,238
              
              
              -
              
              
              -
              
              
              18,259Distributions
              
              
              
              
              
              -
              
              
              (6,010
              )
              
              -
              
              
              (6,010
              )**Balance
                  at December 31, 2004**
              
              $
              119
              
              $
              103,344
              
              $
              (15,038
              )
              $
              (55
              )
              $
              88,370Net
                  income
              
              
              -
              
              
              -
              
              
              10,126
              
              
              -
              
              
              10,126Deferred
                  compensation issuance of restricted shares, Class A
              
              
              -
              
              
              (1,248
              )
              
              -
              
              
              -
              
              
              (1,248
              )Issuance
                  of common shares, Class A
              
              
              30
              
              
              21,630
              
              
              -
              
              
              57
              
              
              21,717Conversion
                  of common shares, Class B
              
              
              -
              
              
              -
              
              
              -
              
              
              117
              
              
              117Amortization
                  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
              )
              
              169,050


See
        Notes
        to Consolidated Financial Statements.




F-5
 Index


**AmREIT
        AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(in
        thousands, except share data)**
  **Years
                    ended December 31,****2006**
                
                **2005**
                
                **2004**Cash
                    flows from operating activities:Net
                    income
                
                $
                7,563
                
                $
                10,126
                
                $
                588Adjustments
                    to reconcile net income to net cashprovided
                    by operating activities:Investment
                    in real estate acquired for resale
                
                
                (3,331
                )
                
                (3,399
                )
                
                (5,053
                )Proceeds
                    from sales of real estate acquired for resale
                
                
                2,190
                
                
                11,497
                
                
                6,673Gain
                    on sales of real estate acquired for resale
                
                
                (382
                )
                
                (3,223
                )
                
                (1,827
                )Gain
                    on sales of real estate acquired for investment
                
                
                (285
                )
                
                (3,400
                )
                
                (137
                )Debt
                    prepayment penalty
                
                
                -
                
                
                109
                
                
                -Impairment
                    charges
                
                
                -
                
                
                -
                
                
                2,403Income
                    from merchant development funds and other affiliates
                
                
                (967
                )
                
                (161
                )
                
                (1,121
                )Depreciation
                    and amortization
                
                
                8,824
                
                
                5,777
                
                
                2,134Amortization
                    of deferred compensation
                
                
                556
                
                
                490
                
                
                265Minority
                    interest in income of consolidated joint ventures
                
                
                56
                
                
                838
                
                
                368Deferred
                    merger costs
                
                
                -
                
                
                -
                
                
                1,682Increase
                    in tenant receivables
                
                
                (1,198
                )
                
                (1,844
                )
                
                (325
                )Decrease
                    (increase) in accounts receivable
                
                
                35
                
                
                (1,770
                )
                
                -Decrease
                    (increase) in accounts receivable - related party
                
                
                2,493
                
                
                (3,073
                )
                
                (708
                )Cash
                    receipts from direct financing leasesmore
                    (less) than income recognized
                
                
                8
                
                
                7
                
                
                (5
                )Increase
                    in deferred costs
                
                
                (130
                )
                
                (219
                )
                
                (142
                )Increase
                    in other assets
                
                
                (296
                )
                
                (1,368
                )
                
                (492
                )Increase
                    in accounts payable and other liabilities
                
                
                1,002
                
                
                3,402
                
                
                2,676Increase
                    in security deposits
                
                
                22
                
                
                280
                
                
                271Net
                    cash provided by operating activities
                
                
                16,160
                
                
                14,069
                
                
                7,250Cash
                    flows from investing activities:Improvements
                    to real estate
                
                
                (4,026
                )
                
                (1,784
                )
                
                (1,511
                )Acquisition
                    of investment properties
                
                
                (24,518
                )
                
                (110,640
                )
                
                (104,347
                )Notes
                    receivable (advances) collections
                
                
                -
                
                
                (20
                )
                
                1,000Loans
                    to affiliates
                
                
                (22,069
                )
                
                (11,232
                )
                
                -Payments
                    from affiliates
                
                
                23,197
                
                
                -
                
                
                -Additions
                    to furniture, fixtures and equipment
                
                
                (128
                )
                
                (162
                )
                
                (463
                )Investment
                    in merchant development funds and other affiliates
                
                
                (1,055
                )
                
                (929
                )
                
                (1,534
                )Distributions
                    from merchant development funds and other affiliates
                
                
                1,994
                
                
                660
                
                
                1,221Proceeds
                    from sale of investment property
                
                
                4,466
                
                
                16,603
                
                
                5,852Increase
                    (decrease) in preacquisition costs
                
                
                16
                
                
                (15
                )
                
                (19
                )Net
                    cash used in investing activities
                
                
                (22,123
                )
                
                (107,519
                )
                
                (99,801
                )Cash
                    flows from financing activities:Proceeds
                    from notes payable
                
                
                82,650
                
                
                52,386
                
                
                103,820Payments
                    of notes payable
                
                
                (52,652
                )
                
                (43,436
                )
                
                (46,293
                )Purchase
                    of treasury shares
                
                
                (2,610
                )
                
                (582
                )
                
                -Issuance
                    of common shares
                
                
                -
                
                
                108,976
                
                
                46,414Retirement
                    of common shares
                
                
                (15,502
                )
                
                (1,781
                )
                
                (464
                )Issuance
                    costs
                
                
                (82
                )
                
                (11,424
                )
                
                (5,609
                )Distributions
                
                
                (8,246
                )
                
                (6,961
                )
                
                (4,287
                )Distributions
                    to minority interests
                
                
                (95
                )
                
                (773
                )
                
                (101
                )Net
                    cash provided by financing activities
                
                
                3,463
                
                
                96,405
                
                
                93,480Net
                    increase (decrease) in cash and cash equivalents
                
                
                (2,500
                )
                
                2,955
                
                
                929Cash
                    and cash equivalents, beginning of period
                
                
                5,915
                
                
                2,960
                
                
                2,031Cash
                    and cash equivalents, end of period
                
                $
                3,415
                
                $
                5,915
                
                $
                2,960**Supplemental
                    schedule of cash flow information:**Cash
                    paid during the year for:Interest
                
                $
                7,861
                
                $
                6,506
                
                $
                3,056Income
                    taxes
                
                
                945
                
                
                707
                
                
                165
  **Supplemental
          schedule of noncash investing and financing activities**
 
 During
          2006, 2005 and 2004, the Company converted 70,000, 98,000 and 116,000 B
          shares
          to A shares, respectively. Additionally, during 2006, 2005 and 2004, the
          Company
          issued Class C and D shares with a value of $6.2 million, $4.9 million
          and $1.7
          million, respectively, in satisfaction of dividends through the dividend
          reinvestment program.
 
 In
          2006,
          the Company issued 166,000 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. The Company recorded $1.2 million
          in
          deferred compensation related to the issuance of the restricted
          shares.
 
 In
          2005,
          the Company issued 165,000 restricted shares to employees and trust managers
          as
          part of their compensation plan. The restricted shares vest over a four
          and
          three year period, respectively. The Company recorded $1.3 million in deferred
          compensation related to the issuance of the restricted shares.
 
 In
          2004,
          the Company issued 141,000 restricted shares to employees and trust managers
          as
          part of their compensation plan. The restricted shares vest over a four
          and
          three year period, respectively. The Company recorded $918,000 in deferred
          compensation related to the issuance of the restricted stock.
 
 In
          2004,
          the Company assumed $44.8 million in debt (net of a premium of $1.4 million)
          related to the acquisition of investment properties.
 
 See
          Notes to Consolidated Financial Statements.




F-6
 Index


**AmREIT
      AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS**


**December
      31, 2006, 2005 and 2004**





**1.
      DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS**





AmREIT,
      a
      Texas real estate investment trust, is a real estate company with two distinct
      companies within one: a portfolio of Irreplaceable Corners - premier retail
      properties in high-traffic, highly-populated areas - which are held for
      long-term value and provide a foundation to AmREIT’s growth through a steady
      stream of rental income; and an advisory/sponsorship business that broadens
      AmREIT’s avenues to capital and raises private equity for a series of merchant
      development funds, resulting in recurring income from assets under management.
      AmREIT seeks to add more of a growth component to the recurring-income nature
      of
      each company as well as provide earnings potential from multiple sources with
      its real estate development and operating business, which seeks to provide
      value
      through offering an array of services (constructing, developing, acquiring,
      disposing of, brokering, leasing and managing properties) to AmREIT’s tenants
      and properties, to its advisory/sponsorship business portfolios and to third
      parties.





When
      we
      listed on the AMEX in July 2002, its total assets had a book value of $48
      million and equity within its advisory/sponsorship business totaled $15 million
      in equity assets under management. As of December 31, 2006, AmREIT owned a
      real
      estate portfolio consisting of 49 properties located in 15 states that had
      a
      book value of $328 million; directly managed, through its five actively managed
      merchant development funds, a total of $121 million in contributed capital;
      and
      had over 600,000 square feet of retail centers in various stages of development
      or in the pipeline for both its advisory/sponsorship business and for third
      parties.





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.





On
      July
      23, 2002, the Company completed a merger with three of its affiliated
      partnerships, AAA Net Realty Fund IX, Ltd., AAA Net Realty Fund X, Ltd., and
      AAA
      Net Realty Fund XI, Ltd. With the merger of the affiliated partnerships, we
      increased our real estate assets by approximately $24.3 million and issued
      approximately 2.6 million Class B common shares to the limited partners in
      the
      affiliated partnerships. The acquired properties are unencumbered, single
      tenant, free standing properties on lease to national and regional tenants,
      where the lease is the direct obligation of the parent company.





As
      discussed above, in June 1998, our predecessor merged with American Asset
      Advisors Corp., which was wholly-owned by our President and CEO. Subsequent
      to
      the merger, we paid deferred compensation to him in the form of additional
      Class
      A Common shares. These share issuances were recorded as deferred merger expenses
      in our statements of operations. During 2004, we issued 241,000 shares to him
      under the deferred consideration agreement as a result of the issuance of
      additional class C common shares, resulting in a non-cash charge to earnings
      of
      $1.7 million. This share issuance in 2004 represented the final installment
      of
      shares owed to him pursuant to the agreement. To date, we have issued 900,000
      class A common shares to him, and no further shares will be issued under this
      arrangement.





**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. All significant
      inter-company accounts and transactions have been eliminated in consolidation.





F-7
 Index




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, 2006, 2005 and 2004, we recognized
      percentage rents of $760,000, $154,000 and $65,000, 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, 2006, we recognized lease termination fees of $700,000, $0 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.





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, 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”. At December 31, 2005, $700,000 of
      unbilled receivables has been included in “Accounts receivable” and
      $2.3 million of unbilled receivables due from related parties has been
      included in “Accounts receivable - related party”. We had advance billings of
      $44,000 and $0 as of December 31, 2006 and December 31, 2005, 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, 2006, 2005 and 2004, interest and taxes
      in
      the amount of $57,000, $188,000, and $165,000, respectively were capitalized
      on
      properties under development.





F-8
 Index




Acquired
      Properties and Acquired Lease Intangibles - We
      account for real estate acquisitions pursuant to Statement of Financial
      Accounting Standards No. 141, *Business
      Combinations* (“SFAS
      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. 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,
      2006, we owned one property with a carrying value of $2.7 million which was
      classified as real estate held for sale. At December 31, 2005, we owned two
      properties with a combined carrying value of $3.6 million that were classified
      as real estate held for sale, both of which were disposed of during the quarter
      ended March 31, 2006.





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. During 2004, impairment charges in the
      aggregate amount of $2.4 million were recognized related to two of our
      single-tenant properties that were held for sale during 2004, one of which
      was
      sold during 2004 and the other of which was sold in December 2005. These
      impairment charges are reported as discontinued operations.





F-9
 Index




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
      December 31, 2006 and 2005, we had an allowance for uncollectible accounts
      of
      $157,000 and $163,000, respectively, related to our tenant receivables. During
      2006, 2005 and 2004, we recorded bad debt expense in the amount of
      $236,000 **,** $163,000 **** and
      $67,000 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 2004 or 2006 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, 2006 and
      2005, 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, 2006. 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.





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 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, 2006 and 2005
      totaled $421,000 and $268,000, respectively. Accumulated amortization related
      to
      leasing costs as of December 31, 2006 and 2005 totaled $264,000 and $164,000,
      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.





F-10
 Index





The
      following table presents restricted share activity during the year ended
      December 31, 2006:





Non-vested
              
              Weighted
                  Average grantShares
              
              date
                  fair valueBeginning
                  of period
              
              
              253,002
              
              $
              7.49Granted
              
              
              166,266
              
              
              7.01Vested
              
              
              (32,777
              )
              
              7.27Forfeited
              
              
              (30,892
              )
              
              7.23End
                  of period
              
              
              355,599
              
              $
              7.31








The
      weighted-average grant date fair value of restricted shares issued during the
      years ended December 31, 2006 and 2005 was $7.01 per share and $8.10 per share,
      respectively. The total fair value of shares vested during the years ended
      December 31, 2006 and 2005 was $238,000 and $237,000 respectively. Total
      compensation cost recognized related to restricted shares during the three
      years
      in the period ended December 31, 2006 was $556,000, $502,000 and $324,000,
      respectively. As of December 31, 2006, total unrecognized compensation cost
      related to restricted shares was $1.9 million, and the weighted average period
      over which we expect this cost to be recognized is 4.5 years.





General
      Partner Profit Participation Interests - We
      have assigned up to 45% of the 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. 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, 2006, 2005 and 2004, there were 40, 41 and 25 participants enrolled
      in the plan. Employer contributions to the plan were $99,000, $72,000 and
      $51,000, for the three years ended December 31, 2006, 2005 and 2004,
      respectively.





Stock
      Options - We are
      authorized to grant options on up to an aggregate of 1,351,394 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,
      2006 and December 31, 2005, none of these options have been granted.





FEDERAL
      INCOME TAXES





AmREIT
      has elected to be taxed as a real estate investment trust ("REIT") under the
      Internal Revenue Code of 1986, and is, therefore, not subject to Federal income
      taxes to the extent of dividends paid, provided it meets all conditions
      specified by the Internal Revenue Code for retaining its REIT status, including
      the requirement that at least 90% of its real estate investment trust taxable
      income be distributed to shareholders.





AmREIT’s
      real estate operating and development 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”). Federal and state income taxes are accounted for
      under the asset and liability method.




F-11
 Index




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 B, class C and class D shares which
      represent 24.7 million **,** 22.2
      million and 11.4 million potential common shares for the years ended December
      31, 2006, 2005 and 2004, respectively.





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


For
                the Years Ended December 31,2006
            2005
            2004(Loss)
                earnings to class A common shareholders
              (in
                thousands) *
            
            ($3,879)
            $881
            ($3,866)Weighted
                average class A common shares outstanding (in thousands)
            
            6,300
            5,205
            3,251Basic
                and diluted (loss)/earnings per share *
            
            ($0.62)
            $0.17
            ($1.19)





*
      The
      operating results for 2004 include a charge to earnings of $1.7 million, which
      was the market value of the class A common shares issued to H. Kerr Taylor,
      President & CEO, related to the sale of his advisory company to us in 1998.
      The charge represented deferred merger costs related to this sale that was
      triggered by the issuance of additional common stock as part of the merger
      with
      certain of our affiliated investment funds during 2002 and the issuance of
      common C stock in 2003 and in 2004. Additionally, the operating results for
      2004
      include impairment charges of $2.4 million, which are related to two of our
      single-tenant properties that were held for sale during 2004, one of which
      was
      sold during 2004 and another of which was sold in December 2005.





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. As of December 31, 2006,
      the carrying value of our total debt obligations was $144.5 million, $132.5
      million of which represent fixed-rate obligations with an estimated fair value
      of $132.9 million. 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, 2005, the carrying value of our total debt obligations was $114.7
      million, all of which represented fixed-rate obligations and had an estimated
      fair value of $117.3 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, 2006, 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 $4.1 million of our total consolidated assets at period end.
      This
      entity had no debt outstanding at period end.





F-12
 Index




NEW
      ACCOUNTING STANDARDS




In
      June
      2005, the Emerging Issues Task Force issued EITF Issue No. 04-05 (“EITF 04-05”), *Determining
      Whether a General Partner, or the General Partners as a Group, Controls a
      Limited Partnership or Similar Entity When the Limited Partners Have Certain
      Rights* .
      EITF
      04-05 makes it more likely that general partners will be required to consolidate
      limited partnerships by making it more difficult for a general partner to
      overcome the presumption that it controls the limited partnership. Under this
      new guidance, the presumption of general partner control will be overcome only
      when the limited partners have either of two types of rights - the right to
      dissolve or liquidate the partnership or otherwise remove the general partner
      “without cause” or the right to effectively participate in significant decisions
      made in the ordinary course of the partnership’s business. These ‘kick-out
      rights’ and ‘participating rights’ must be substantive in order to overcome the
      presumption of general partner control. The guidance was effective June 29,
      2005
      for all newly-formed limited partnerships and for existing limited partnership
      agreements that are modified. The guidance was effective for existing limited
      partnership agreements that are not modified no later than the beginning of
      the
      first reporting period in fiscal years beginning after December 15, 2005.





In
      December 2004, the FASB issued Statement No. 123R (“SFAS 123R”), *Share-Based
      Payment* that
      requires companies to expense the value of employee stock options and similar
      awards. SFAS 123R becomes effective in the first quarter of 2006. We have
      historically not used stock options as a means of compensating our employees,
      and therefore we have no stock options outstanding as of December 31, 2006.
      Our
      strategy to date has been to compensate our employees through issuance of
      restricted shares of our class A common stock. We determine the fair value
      of
      such awards based on the fair market value of the shares on the date of grant
      and then record that expense over the vesting period of the respective awards.
      The provisions of SFAS 123R did not change this accounting treatment for our
      restricted stock awards.





In
      June
      2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for
      Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109.” FIN 48
      clarifies the accounting for uncertainty in income taxes recognized in the
      financial statements. The interpretation prescribes a recognition threshold
      and
      measurement attribute for the financial statement recognition of a tax position
      taken, or expected to be taken, in a tax return. A tax position may only be
      recognized in the financial statements if it is more likely than not that the
      tax position will be sustained upon examination. There are also several
      disclosure requirements. We will adopt this interpretation during the first
      quarter of 2007, and we do not expect the adoption of this interpretation to
      have a material effect on our consolidated financial statements.





In
      September 2006, the Securities and Exchange Commission (SEC) issued Staff
      Accounting Bulletin No. 108 (“SAB 108”). SAB 108 allows for the adjustment of
      the cumulative effect of prior year immaterial errors in assets and liabilities
      as of the beginning of the fiscal year, with an offsetting adjustment to the
      opening balance of retained earnings.  We adopted SAB 108 for our annual
      financial statements for the year ended December 31, 2006.  Such adoption
      did not impact our results of operations or financial
      position.





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. SFAS No. 157 is effective for
      our
      fiscal year beginning January 1, 2008. The adoption of SFAS 157 is not expected
      to have a material effect on our results of operations or financial
      position.





F-13
 Index




DISCONTINUED
      OPERATIONS





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




2006
              
              2005
              
              2004Rental
                  revenue and earned income from DFL
              
              $
              52
              
              $
              1,804
              
              $
              2,094Interest
                  and other income
              
              
              -
              
              
              146
              
              
              936Gain
                  on sale of real estate held for resale
              
              
              382
              
              
              3,223
              
              
              1,827Gain
                  on sale of real estate held for investment
              
              
              285
              
              
              3,400
              
              
              137Total
                  revenues
              
              
              719
              
              
              8,573
              
              
              4,994Property
                  expense
              
              
              (104
              )
              
              (382
              )
              
              (355
              )General
                  and administrative
              
              
              (17
              )
              
              (271
              )
              
              (75
              )Legal
                  and professional
              
              
              (39
              )
              
              (2
              )
              
              (1
              )Depreciation
                  and amortization
              
              
              (15
              )
              
              (111
              )
              
              (297
              )Income
                  tax
              
              
              7
              
              
              (340
              )
              
              (521
              )Interest
                  expense
              
              
              (7
              )
              
              (182
              )
              
              (161
              )Minority
                  interest
              
              
              92
              
              
              (597
              )
              
              (182
              )Debt
                  prepayment penalty
              
              
              -
              
              
              (109
              )
              
              -Impairment
                  charge
              
              
              -
              
              
              -
              
              
              (2,403
              )Total
                  expenses
              
              
              (83
              )
              
              (1,994
              )
              
              (3,995
              )Income
                  from discontinued operations
              
              
              636
              
              
              6,579
              
              
              999Basic
                  and diluted income from discontinued operations per class A common
                  share$
              0.10
              
              $
              1.26
              
              $
              0.31
  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 statements.








F-14
 Index




**3.
      OPERATING LEASES**





Our
      operating leases range from five 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, 2006 is as follows (in thousands):




2007
                
                $
                19,3542008
                
                
                18,4702009
                
                
                17,5062010
                
                
                13,5902011
                
                
                9,7532012-thereafter
                
                
                61,338$
                140,011


**4.
      NET INVESTMENT IN DIRECT FINANCING LEASES**





The
      Company’s net investment in its direct financing leases at December 31, 2006 and
      2005 included (in thousands):




2006
                
                2005Minimum
                    lease payments receivable
                
                $
                44,797
                
                $
                46,835Unguaranteed
                    residual value
                
                
                1,763
                
                
                1,763Less:
                    Unearned income
                
                
                (27,356
                )
                
                (29,386
                )$
                19,204
                
                $
                19,212




A
      summary
      of minimum future rentals, exclusive of any renewals, under the non-cancelable
      direct financing leases in existence at December 31, 2006 is as follows (in
      thousands):


2007
              
              $
              2,1372008
              
              
              2,2172009
              
              
              2,2292010
              
              
              2,2402011
              
              
              2,2412012
                  - thereafter
              
              
              33,733Total
              
              $
              44,797




F-15
 Index




**5.
      INVESTMENTS IN MERCHANT DEVELOPMENT FUNDS AND OTHER
      AFFILIATES**





*Merchant
      Development Funds*


As
      of
      December 31, 2006, we, indirectly through wholly owned subsidiaries, owned
      interests in six limited partnerships which
      are
      accounted for under the equity method as AmREIT exercises significant
      influence over the
      investee. These six merchant development funds were formed to develop, own,
      manage and add value to properties with an average holding period of two to
      four
      years. In each of the partnerships, the limited partners, with or without cause,
      have the right to remove and replace the general partner by a vote of the
      limited partners owning a majority of the outstanding units. Our interests
      in
      these merchant development funds range from 1.4% to 10.5%. These partnerships
      were formed to develop, own, manage, and hold property for
      investment.








AmREIT
      Opportunity Fund (“AOF”) - AmREIT
      Opportunity Corporation (“AOC”), a wholly owned subsidiary of AmREIT, invested
      $250,000 as a limited partner and $1,000 as a general partner in AOF. AmREIT
      currently owns a 10.5% limited partner interest in AOF. Liquidation of AOF
      commenced in July of 2002, and as of December 31, 2006, AOF has an interest
      in
      one property. As the general partner, AOC receives a promoted interest in cash
      flow and profits after certain preferred returns are achieved for its limited
      partners.





AmREIT
      Income & Growth Fund, Ltd. (“AIG”) - AmREIT
      Income & Growth Corporation, a wholly owned subsidiary of AmREIT, invested
      $200,000 as a limited partner and $1,000 as a general partner in AIG. AmREIT
      currently owns an approximately 2.0% limited partner interest in AIG.





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





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





AmREIT
      Monthly Income & Growth Fund III (“MIG III”) - AmREIT
      Monthly Income & Growth III Corporation, 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.





AmREIT
      Monthly Income & Growth Fund IV (“MIG IV”) - AmREIT
      Monthly Income & Growth IV Corporation, 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, 2006,
      had raised approximately $1.4 million. We expect our limited partnership
      interest at completion of the offering to be between 0.8% and
      1.6%.


F-16
 Index


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):





Merchant
                  CapitalDevelopment
                  under
                  LP
                  GP
                  Scheduled
                  Sharing
                      Ratios*
                  LPFund
                  Management
                  Interest
                  Interest
                  Liquidation
                  LP
                  GP
                  Preference*AIG
                  $10
                      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
                  $1.4
                      million
                  56.1%
                  1.0%
                  2013
                  99%
                  1%
                  8.5%0%
                  100%
                  40%
                      Catch Up60%
                  40%
                  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. Thereafter, the LPs share in 90% of the cash distributions until they
      receive a 10% preferred return.





*Other
      affiliate*


Other
      than the merchant development funds, we had an investment in one entity that
      was
      accounted for under the equity method since we exercised significant influence
      over such investee. We invested $1.1 million in West Road Plaza, LP, for a
      25%
      limited partner interest in the partnership. West Road Plaza was formed in
      2004
      to acquire, redevelop, lease and manage West Road Plaza, a shopping center
      located on the north side of Houston, TX at the intersection of I-45 and West
      Road. West Road Plaza, the sole asset within West Road Plaza, L.P., was sold
      in
      October of 2006.


F-17
 Index




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)
                  
                  
                  
                  
                  
                  2006
                  
                  
                  2005AssetsProperty,
                      net
                  
                  
                  
                  
                  $
                  149,929
                  
                  $
                  101,461Cash
                  
                  
                  
                  
                  
                  34,221
                  
                  
                  4,048Notes
                      receivable
                  
                  
                  
                  
                  
                  18,608
                  
                  
                  -Other
                      assets
                  
                  
                  
                  
                  
                  24,453
                  
                  
                  19,839Total
                      Assets
                  
                  
                  
                  
                  
                  227,211
                  
                  
                  125,348Liabilities
                      and partners' capital:Notes
                      payable (1)
                  
                  
                  
                  
                  
                  122,979
                  
                  
                  56,258Other
                      liabilities
                  
                  
                  
                  
                  
                  1,168
                  
                  
                  13,499Partners
                      capital
                  
                  
                  
                  
                  
                  103,064
                  
                  
                  55,591Total
                      Liabilities and Partners' Capital
                  
                  
                  
                  
                  $
                  227,211
                  
                  $
                  125,348AmREIT
                      share of Partners' Capital
                  
                  
                  
                  
                  $
                  2,651
                  
                  $
                  2,311Years
                      ended December 31,**Combined
                      Statement of Operations**(in thousands)
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004RevenueRental
                      income
                  
                  
                  9,662
                  
                  
                  6,429
                  
                  
                  4,125Gain
                      on sale of properties
                  
                  
                  3,468
                  
                  
                  1,406
                  
                  
                  663Total
                      Revenue
                  
                  
                  13,130
                  
                  
                  7,835
                  
                  
                  4,788ExpenseInterest
                  
                  
                  3,196
                  
                  
                  1,849
                  
                  
                  715Depreciation
                      and amortization
                  
                  
                  2,757
                  
                  
                  996
                  
                  
                  304Other
                  
                  
                  3,722
                  
                  
                  2,306
                  
                  
                  1,135Total
                      Expense
                  
                  
                  9,675
                  
                  
                  5,151
                  
                  
                  2,154Net
                      Income
                  
                  $
                  3,455
                  
                  $
                  2,684
                  
                  $
                  2,634AmREIT
                      share of Net Income
                  
                  $
                  967
                  
                  $
                  161
                  
                  $
                  1,121




(1)
        Includes $10.1 million and $11.2 million payable to us as of December 31,
        2006
        and 2005, respectively.


**6.
      ACQUIRED LEASE INTANGIBLES**





In
      accordance with SFAS 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 net of accumulated amortization
      of
      $5.5 million and $2.9 million at December 31, 2006 and 2005, respectively.
      These
      assets are amortized over the leases’ remaining terms, which range from 1 month
      to 17 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
      $2.7 million, $2.0 million and $475,000 during 2006, 2005 and 2004,
      respectively. The amortization of above-market leases, which was recorded as
      a
      reduction of rental income, was $487,000, $337,000 and $20,000 during 2006,
      2005
      and 2004, respectively.




F-18
 Index


Acquired
      lease intangible liabilities (below-market leases) are net of previously
      accreted minimum rent of $1.1 million and $558,000 at December 31, 2006 and
      2005, respectively and are accreted over the leases’ remaining terms, which
      range from 1 month to 17 years. Accretion of below-market leases was $526,000,
      $495,000 and $63,000 during 2006, 2005


and
      2004,
      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)2007
                
                $
                2,344
                
                $
                1662008
                
                
                2,205
                
                
                1782009
                
                
                2,076
                
                
                1842010
                
                
                1,591
                
                
                3182011
                
                
                1,234
                
                
                290$
                9,450
                
                $
                1,136




**7.
      NOTES PAYABLE**





The
      Company’s outstanding debt at December 31, 2006 and 2005 consists of the
      following (in thousands):


2006
            
            2005Notes
                Payable:Fixed
                rate mortgage loans
            
            $
            132,524
            
            $
            113,927Fixed-rate
                unsecured loans*
            
            
            -
            
            
            760Total
                notes payable
            
            
            132,524
            
            
            114,687Variable-rate
                unsecured line of credit
            
            
            11,929
            
            
            -Total
            
            $
            144,453
            
            $
            114,687





*The
      fixed-rate unsecured loans were paid off in March 2006.





We
      have
      an unsecured credit facility (the "Credit Facility") in place which is being
      used to provide funds for the acquisition of properties and working capital.
      The
      Credit Facility matures in November 2007 and provides that we may borrow up
      to
      $40 million subject to the value of unencumbered assets. Effective November
      2005, 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. On December 31, 2006, we were in compliance with all financial
      covenants. The Credit Facility’s annual interest rate varies depending upon our
      debt to asset ratio, from LIBOR plus a spread of 1.35% to LIBOR plus a spread
      of
      2.35%. As of December 31, 2006, the interest rate was LIBOR plus 1.55%. As
      of
      December 31, 2006, there was $11.9 million outstanding under the Credit
      Facility. We have approximately $26.1 million available under our line of
      credit, subject to the covenants above.





As
      of
      December 31, 2006, the weighted average interest rate on our fixed-rate debt
      is
      6.02%, and the weighted average remaining life of such debt is 7.1 years. 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.





F-19
 Index




As
      of
      December 31, 2006, scheduled principal repayments on notes payable and the
      Credit Facility were as follows (in thousands):





Scheduled
                    Payments by Year
                
                Scheduled
                    Principal Payments
                
                Term-Loan
                    Maturities
                
                Total
                    Payments2007
                
                13,186
                
                -
                
                13,1862008
                
                1,349
                
                13,410
                
                14,7592009
                
                
                1,448
                
                
                -
                
                
                1,4482010
                
                
                1,555
                
                
                -
                
                
                1,5552011
                
                
                1,607
                
                
                -
                
                
                1,607Beyond
                    five years
                
                
                26,136
                
                
                84,887
                
                
                111,023Unamortized
                    debt premiums
                
                
                -
                
                
                875
                
                
                875Total
                
                $
                45,281
                
                $
                99,172
                
                $
                144,453


**8.
      CONCENTRATIONS**





As
      of
      December 31, 2006, 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 20% and 15%, respectively of total assets.
      Consistent with our strategy of investing in areas that we know well, 18 of
      our
      properties are located in the Houston metropolitan area. These Houston
      properties represent 59% of our rental income for the year ended December 31,
      2006. Houston is Texas’ largest city and the fourth largest city in the United
      States.





Following
      are the revenues generated by the Company’s top tenants for each of the years in
      the three-year period ended December 31 ($ in thousands):




Tenant
                
                2006
                
                2005
                
                2004Kroger
                    Company
                
                $
                2,801
                
                $
                2,899
                
                $
                804IHOP
                    Corporation
                
                
                2,249
                
                
                2,249
                
                
                2,499CVS/pharmacy
                
                
                1,046
                
                
                1,060
                
                
                935Landry's
                    Restaurants Inc.
                
                
                872
                
                
                445
                
                
                436Linens
                    N Things
                
                
                624
                
                
                716
                
                
                -Barnes
                    & Noble Inc.
                
                
                438
                
                
                466
                
                
                -$
                8,030
                
                $
                7,835
                
                $
                4,674





**9.
      FEDERAL INCOME TAXES**





The
      differences between net income for financial reporting purposes and taxable
      income before distribution deductions relate primarily to temporary differences
      and merger costs which are expensed for financial reporting purposes. At
      December 31, 2006 and 2005, the net book bases of real estate assets
      approximated their tax bases.





Income
      tax expense consists of the following for the years ended December 31, 2006,
      2005 and 2004 which is included in income tax expense or in discontinued
      operations as appropriate ($ in thousands):


2006
                
                2005
                
                2004Current
                $
                    692
                
                $
                    1,006
                
                $
                    522Deferred
                171
                
                (287)
                
                15Total
                    income tax expense
                $
                    863
                
                $
                    719
                
                $
                    537





F-20
 Index




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 $129,000 and $300,000 at December 31, 2006 and 2005, 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, 2006 and 2005 as we believe
      that it is more likely than not that the future benefits associated with these
      deferred tax assets will be realized.





For
      federal income tax purposes, distributions paid to shareholders consist of
      ordinary income, capital gains and return of capital as follows for our class
      A
      common shares:





2006
              (estimated)
            
            2005
            
            2004Ordinary
                income
            
            
            43.5
            %
            
            60.4
            %
            
            48.8
            %Qualified
            
            
            1.0
            %
            
            1.4
            %
            
            19.6
            %Return
                of capital
            
            
            54.0
            %
            
            19.5
            %
            
            31.0
            %Capital
                gain
            
            
            1.5
            %
            
            18.7
            %
            
            0.6
            %Total
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %








**10.
      STOCKHOLDERS’ 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, 2006, there were 6,257,712 of
      our class A common shares outstanding, net of 292,238 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 B and class C common shares, as well as our earnings and financial needs.





Class
      B Common Shares —
The
      class B common shares are not listed on an exchange and there is currently
      no
      available trading market for the class B common shares. The class B common
      shares have voting rights, together with all classes of common shares, as one
      class of stock. The class B common shares were issued at $9.25 per share. They
      receive a fixed 8.0% cumulative and preferred annual dividend, paid in quarterly
      installments, and are convertible into the class A common shares on a
      one-for-one basis at any time, at the holder’s option. We have the right to call
      the shares and, at the holder’s option, either convert them on a one-for-one
      basis for class A shares or redeem them for $10.18 per share in cash plus any
      accrued and unpaid dividends. As of December 31, 2006, there were 1,080,180
      of
      our class B common shares outstanding. In December 2006, we completed a tender
      offer for approximately 48% of our class B common shares. We repurchased 998,000
      shares at $9.25 per share for a total purchase price of $9.2 million.





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,
      2006, there were 4,145,531 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.





F-21
 Index




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,
      2006, there were 11,039,803 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 $7.0 million, $4.6
      million and $1.4 million were paid by the funds to the Company for 2006, 2005,
      and 2004, respectively. Additionally, construction revenues of $10.4 million,
      $2.4 million and $0 were earned from the merchant development funds during
      2006,
      2005 and 2004, 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 $823,000, $495,000
      and $361,000 were paid by the funds to us for 2006, 2005 and 2004,
      respectively.





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 at the same time
      allowing for a competitive compensation structure in order to attract and retain
      key management positions without increasing the overhead burden.





On
      July
      23, 2002, we completed a merger with three of our affiliated partnerships,
      AAA
      Net Realty Fund IX, Ltd., AAA Net Realty Fund X, Ltd., and AAA Net Realty Fund
      XI, Ltd. We accounted for this merger as a purchase, whereby the assets of
      the
      partnerships were recorded at fair value. We increased our real estate assets
      by
      approximately $24.3 million and issued approximately 2.6 million shares of
      Class
      B common stock to the limited partners in the affiliated partnerships as a
      result of the merger. The acquired properties are unencumbered, single tenant,
      free standing properties on lease to national and regional tenants, where the
      lease is the direct obligation of the parent company.





In
      June
      1998, our predecessor merged with American Asset Advisors Corp., which was
      wholly-owned by our President and CEO. Subsequent to the merger, we paid
      deferred compensation to him in the form of additional Class A Common shares.
      These share issuances were recorded as deferred merger expenses in our
      statements of operations. During 2004, we issued 241,000 shares to him under
      the
      deferred consideration agreement as a result of the issuance of additional
      class
      C common shares, resulting in a non-cash charge to earnings of $1.7 million.
      This share issuance in 2004 represented the final installment of shares owed
      to
      him pursuant to the agreement. To date, we have issued 900,000 class A common
      shares to him, and no further shares will be issued under this
      arrangement.





On
      March
      20, 2002, we formed AAA CTL Notes, Ltd. (“AAA”), a majority owned subsidiary
      which is consolidated in our financial statements, through which we purchased
      fifteen IHOP leasehold estate properties and two IHOP fee simple
      properties.




F-22
 Index




**12.
      REAL ESTATE ACQUISITIONS AND DISPOSITIONS**





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 occupancy 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.





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.





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.





During
      2004, we invested $105.2 million through the acquisition of five multi-tenant
      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, during 2004, we sold six single
      tenant non-core properties. The sale of the six properties resulted in a net
      gain of $861,000 after including impairment charges of $1.1 million. The cash
      proceeds from the sale of the six properties were approximately $11.1 million
      after paying down debt of $1.4 million.





**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 for daily
      activities. Rental expense for the years ended December 31, 2006, 2005 and
      2004
      was $334,000, $233,000 and $183,000, respectively.




F-23
 Index





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




2007
                
                $
                3202008
                
                
                3192009
                
                
                2042010
                
                
                222011
                
                
                222012
                    & thereafter
                
                
                -Total
                
                $
                887
  **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, 2006, this segment consists of 49 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, 2006 occurred within the portfolio
      segment.





Our
      real
      estate development and operating business 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. Our securities operation consists of an
      NASD
      registered securities business that, through the internal securities group,
      raises capital from the independent financial planning marketplace. The merchant
      development funds sell limited partnership interests to retail investors, in
      which AmREIT indirectly invests as both the general partner and as a limited
      partner (see Note 5). 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.


F-24
 Index


Asset
                    Advisory/Sponsorship2006
                    (in thousands)
                
                Portfolio
                
                Real
                    Estate Development & Operating Company
                
                Securities
                    Operations
                
                Merchant
                    Development Funds
                
                Eliminations
                
                TotalRental
                    income
                
                $
                30,139
                
                $
                49
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                30,188Securities
                    commission income
                
                
                -
                
                
                -
                
                
                6,554
                
                
                -
                
                
                -
                
                
                6,554Real
                    estate fee income
                
                
                -
                
                
                8,317
                
                
                -
                
                
                -
                
                
                -
                
                
                8,317Construction
                    revenues
                
                
                -
                
                
                13,460
                
                
                -
                
                
                -
                
                
                -
                
                
                13,460Asset
                    Management Fee Income
                
                
                -
                
                
                -
                
                
                -
                
                
                823
                
                
                -
                
                
                823Total
                    revenue
                
                
                30,139
                
                
                21,826
                
                
                6,554
                
                
                823
                
                
                -
                
                
                59,342Securities
                    commissions
                
                
                -
                
                
                -
                
                
                5,732
                
                
                -
                
                
                -
                
                
                5,732Depreciation
                    and amortization
                
                
                8,734
                
                
                7
                
                
                
                
                
                -
                
                
                -
                
                
                8,741Property
                    expense
                
                
                6,828
                
                
                -
                
                
                23
                
                
                -
                
                
                -
                
                
                6,851Construction
                    costs
                
                
                -
                
                
                12,290
                
                
                -
                
                
                -
                
                
                -
                
                
                12,290Legal
                    and professional
                
                
                1,248
                
                
                1,284
                
                
                69
                
                
                -
                
                
                -
                
                
                2,601General
                    and administrative
                
                
                1,819
                
                
                5,219
                
                
                2,284
                
                
                167
                
                
                -
                
                
                9,489Total
                    expenses
                
                
                18,629
                
                
                18,800
                
                
                8,108
                
                
                167
                
                
                -
                
                
                45,704Interest
                    expense
                
                
                (7,519
                )
                
                (330
                )
                
                (234
                )
                
                -
                
                
                -
                
                
                (8,083
                )Other
                    income (expense)
                
                
                1,033
                
                
                (415
                )
                
                602
                
                
                152
                
                
                -
                
                
                1,372Income
                    from discontinued operations
                
                
                281
                
                
                355
                
                
                -
                
                
                -
                
                
                -
                
                
                636Net
                    income (loss)
                
                $
                5,305
                
                $
                2,636
                
                $
                (1,186
                )
                $
                808
                
                $
                -
                
                $
                7,563





F-25
 Index


Asset
                  Advisory/Sponsorship2005
                  (in thousands)
              
              
              Portfolio
              
              
              Real
                  Estate Development & Operating Company
              
              
              Securities
                  Operations
              
              
              Merchant
                  Development Funds
              
              
              Eliminations
              
              
              TotalRental
                  income
              
              $
              22,514
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              22,514Securities
                  commission income
              
              
              -
              
              
              -
              
              
              10,350
              
              
              -
              
              
              (9,187
              )
              
              1,163Real
                  estate fee income
              
              
              -
              
              
              5,073
              
              
              -
              
              
              -
              
              
              -
              
              
              5,073Construction
                  revenues
              
              
              -
              
              
              4,736
              
              
              -
              
              
              -
              
              
              -
              
              
              4,736Asset
                  management fee income
              
              
              -
              
              
              -
              
              
              -
              
              
              495
              
              
              -
              
              
              495Total
                  revenue
              
              
              22,514
              
              
              9,809
              
              
              10,350
              
              
              495
              
              
              (9,187
              )
              
              33,981Securities
                  commissions
              
              
              -
              
              
              -
              
              
              8,076
              
              
              -
              
              
              (7,064
              )
              
              1,012Depreciation
                  and amortization
              
              
              6,046
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              6,046Property
                  expense
              
              
              4,803
              
              
              57
              
              
              -
              
              
              -
              
              
              -
              
              
              4,860Construction
                  costs
              
              
              -
              
              
              4,283
              
              
              -
              
              
              -
              
              
              -
              
              
              4,283Legal
                  and professional
              
              
              1,214
              
              
              532
              
              
              112
              
              
              1
              
              
              -
              
              
              1,859General
                  and administrative
              
              
              1,657
              
              
              3,595
              
              
              2,820
              
              
              260
              
              
              (2,123
              )
              
              6,209Total
                  expenses
              
              
              13,720
              
              
              8,467
              
              
              11,008
              
              
              261
              
              
              (9,187
              )
              
              24,269Interest
                  expense
              
              
              (5,816
              )
              
              (572
              )
              
              (24
              )
              
              -
              
              
              -
              
              
              (6,412
              )Other
                  income (expense)
              
              
              270
              
              
              (19
              )
              
              (60
              )
              
              56
              
              
              -
              
              
              247Income
                  from discontinued operations
              
              
              4,584
              
              
              1,995
              
              
              -
              
              
              -
              
              
              -
              
              
              6,579Net
                  income (loss)
              
              $
              7,832
              
              $
              2,746
              
              $
              (742
              )
              $
              290
              
              $
              -
              
              $
              10,126







F-26
 Index


Asset
                  Advisory/Sponsorship2004
                  (in thousands)
              
              
              Portfolio
              
              
              Real
                  Estate Development & Operating Company
              
              
              Securities
                  Operations
              
              
              Merchant
                  Development Funds
              
              
              Eliminations
              
              
              TotalRental
                  income
              
              $
              10,229
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              10,229Securities
                  commission income
              
              
              -
              
              
              -
              
              
              7,656
              
              
              -
              
              
              (4,914
              )
              
              2,742Real
                  estate fee income
              
              
              -
              
              
              1,852
              
              
              -
              
              
              -
              
              
              -
              
              
              1,852Construction
                  revenues
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Asset
                  management fee income
              
              
              -
              
              
              -
              
              
              -
              
              
              361
              
              
              -
              
              
              361Total
                  revenue
              
              
              10,229
              
              
              1,852
              
              
              7,656
              
              
              361
              
              
              (4,914
              )
              
              15,184Deferred
                  merger expense
              
              
              1,682
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,682Securities
                  commissions
              
              
              -
              
              
              -
              
              
              6,270
              
              
              -
              
              
              (3,862
              )
              
              2,408Depreciation
                  and amortization
              
              
              1,817
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,817Property
                  expense
              
              
              1,413
              
              
              5
              
              
              -
              
              
              -
              
              
              -
              
              
              1,418Construction
                  costs
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Legal
                  and professional
              
              
              917
              
              
              649
              
              
              80
              
              
              -
              
              
              -
              
              
              1,646General
                  and administrative expense
              
              
              929
              
              
              1,951
              
              
              2,405
              
              
              101
              
              
              (1,052
              )
              
              4,334Total
                  expenses
              
              
              6,758
              
              
              2,605
              
              
              8,755
              
              
              101
              
              
              (4,914
              )
              
              13,305Interest
                  expense
              
              
              (3,234
              )
              
              (56
              )
              
              -
              
              
              -
              
              
              -
              
              
              (3,290
              )Other
                  income (expense)
              
              
              (141
              )
              
              629
              
              
              (79
              )
              
              591
              
              
              -
              
              
              1,000Income
                  (loss) from discontinued operations
              
              
              (203
              )
              
              1,202
              
              
              -
              
              
              -
              
              
              -
              
              
              999Net
                  income (loss)
              
              $
              (107
              )
              $
              1,022
              
              $
              (1,178
              )
              $
              851
              
              $
              -
              
              $
              588




F-27
 Index


**15.
      SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)**





Presented
      below is a summary of the consolidated quarterly financial data for the years
      ended December 31, 2006 and 2005 (amounts in thousands, except per share
      data):




2006:
                
                
                1st
                    Quarter
                
                
                2nd
                    Quarter
                
                
                3rd
                    Quarter
                
                
                4th
                    QuarterRevenues
                    as reported
                
                $
                11,588
                
                $
                13,260
                
                $
                14,077
                
                $
                20,664Reclassified
                    to discontinued operations
                
                
                (12
                )
                
                -
                
                
                -
                
                
                -Reclassified
                    to other income (1)
                
                
                (235
                )
                
                -
                
                
                -
                
                
                -Adjusted
                    Revenues
                
                
                11,341
                
                
                13,260
                
                
                14,077
                
                
                20,664Net
                    (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
                )
                
                0.152005:
                
                
                1st
                    Quarter
                
                
                2nd
                    Quarter
                
                
                3rd
                    Quarter
                
                
                4th
                    QuarterRevenues
                    as reported
                
                $
                6,119
                
                $
                7,031
                
                $
                9,418
                
                $
                12,636Reclassified
                    to discontinued operations
                
                
                (491
                )
                
                (19
                )
                
                (8
                )
                
                -Reclassified
                    to other income (1)
                
                
                (188
                )
                
                (108
                )
                
                (358
                )
                
                (51
                )Adjusted
                    Revenues
                
                
                5,440
                
                
                6,904
                
                
                9,052
                
                
                12,585Net
                    (loss) income available to class A shareholders
                
                
                (274
                )
                
                (310
                )
                
                (635
                )
                
                2,101Net
                    (loss) income per class A share: basic and diluted
                
                
                (0.08
                )
                
                (0.07
                )
                
                (0.10
                )
                
                0.32


(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.





Index




**Schedule
        III**
 Consolidated
        Real Estate Owned and AccumulatedDepreciation
 **December
        31, 2006**
  Initial
                    Cost
                
                
                
                
                **Total
                    Cost****Property      
                    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**
                
                
                **Total**
                
                
                **Accumulated
                    Depreciation**
                
                
                **Date
                    Acquired**
                
                
                **Encumbrances****SHOPPING
                    CENTERS****Bakery
                    Square, Texas**
                
                
                **4,806,518**
                
                
                **4,325,612**
                
                
                **-**
                
                
                **(7,130**
                **)**
                
                **4,789,514**
                
                
                **4,335,486**
                
                
                **-**
                
                
                **-**
                
                
                **9,125,000**
                
                
                **378,657**
                
                
                **07-21-04**
                
                
                **3,967,152****Cinco
                    Ranch, Texas**
                
                
                **11,558,491**
                
                
                **2,666,534**
                
                
                **-**
                
                
                **839**
                
                
                **11,557,638**
                
                
                **2,668,226**
                
                
                **-**
                
                
                **-**
                
                
                **14,225,864**
                
                
                **915,256**
                
                
                **07-01-04**
                
                
                **8,297,863****Courtyard
                    Square, Texas**
                
                
                **1,777,161**
                
                
                **4,133,641**
                
                
                **-**
                
                
                **24,400**
                
                
                **1,784,450**
                
                
                **4,150,752**
                
                
                **-**
                
                
                **-**
                
                
                **5,935,202**
                
                
                **159,396**
                
                
                **06-15-04**
                
                
                **-****Lake
                    Woodlands Plaza, Texas**
                
                
                **2,385,103**
                
                
                **1,366,452**
                
                
                **-**
                
                
                **1,028,056**
                
                
                **3,410,547**
                
                
                **1,369,064**
                
                
                **-**
                
                
                **-**
                
                
                **4,779,611**
                
                
                **797,558**
                
                
                **06-03-98**
                
                
                **-****McArthur
                    Park Pads, Texas**
                
                
                **5,853,816**
                
                
                **6,946,048**
                
                
                **-**
                
                
                **3,602**
                
                
                **5,857,417**
                
                
                **6,946,049**
                
                
                **-**
                
                
                **-**
                
                
                **12,803,466**
                
                
                **298,531**
                
                
                **12-15-05**
                
                
                **-****McArthur
                    Park, Texas**
                
                
                **26,445,219**
                
                
                **8,637,580**
                
                
                **-**
                
                
                **(14,138**
                **)**
                
                **26,431,081**
                
                
                **8,637,580**
                
                
                **-**
                
                
                **-**
                
                
                **35,068,661**
                
                
                **1,859,776**
                
                
                **12-27-04**
                
                
                **13,410,000****Plaza
                    in the Park, Texas**
                
                
                **17,375,782**
                
                
                **13,257,976**
                
                
                **-**
                
                
                **102,593**
                
                
                **17,474,559**
                
                
                **13,261,792**
                
                
                **-**
                
                
                **-**
                
                
                **30,736,351**
                
                
                **1,371,641**
                
                
                **07-01-04**
                
                
                **17,537,800****Riverwalk,
                    Texas**
                
                
                **17,148,688**
                
                
                **7,979,779**
                
                
                **-**
                
                
                **179,007**
                
                
                **17,318,506**
                
                
                **7,988,968**
                
                
                **-**
                
                
                **-**
                
                
                **25,307,474**
                
                
                **644,269**
                
                
                **09-30-05**
                
                
                **20,000,000****Sugar
                    Land Plaza, Texas**
                
                
                **3,016,816**
                
                
                **1,280,043**
                
                
                **-**
                
                
                **-**
                
                
                **3,016,816**
                
                
                **1,280,043**
                
                
                **-**
                
                
                **-**
                
                
                **4,296,859**
                
                
                **673,721**
                
                
                **07-01-98**
                
                
                **2,286,092****Terrace
                    Shops, Texas**
                
                
                **2,544,592**
                
                
                **2,212,278**
                
                
                **-**
                
                
                **66,125**
                
                
                **2,610,717**
                
                
                **2,212,278**
                
                
                **-**
                
                
                **-**
                
                
                **4,822,995**
                
                
                **209,527**
                
                
                **12-15-03**
                
                
                **2,731,296****Uptown
                    Park, Texas**
                
                
                **27,060,070**
                
                
                **36,976,809**
                
                
                **-**
                
                
                **1,085,822**
                
                
                **28,257,600**
                
                
                **36,865,101**
                
                
                **-**
                
                
                **-**
                
                
                **65,122,701**
                
                
                **1,810,444**
                
                
                **06-01-05**
                
                
                **49,000,000****Uptown
                    Plaza Dallas, Texas**
                
                
                **14,129,798**
                
                
                **9,295,665**
                
                
                **-**
                
                
                **1,768**
                
                
                **14,131,566**
                
                
                **9,295,665**
                
                
                **-**
                
                
                **-**
                
                
                **23,427,231**
                
                
                **379,930**
                
                
                **03-30-06**
                
                
                **-****Uptown
                    Plaza, Texas**
                
                
                **4,887,774**
                
                
                **7,796,383**
                
                
                **-**
                
                
                **141,553**
                
                
                **5,029,327**
                
                
                **7,796,383**
                
                
                **-**
                
                
                **-**
                
                
                **12,825,710**
                
                
                **410,863**
                
                
                **12-10-03**
                
                
                **-****Total
                    Shopping Centers**
                
                
                **138,989,828**
                
                
                **106,874,800**
                
                
                **-**
                
                
                **2,612,497**
                
                
                **141,669,738**
                
                
                **106,807,387**
                
                
                **-**
                
                
                **-**
                
                
                **248,477,125**
                
                
                **9,909,569**
                
                
                
                
                
                **117,230,203****SINGLE
                    TENANT****410
                    and Blanco, Texas**
                
                
                **-**
                
                
                **1,318,418**
                
                
                **-**
                
                
                **165,742**
                
                
                **50,943**
                
                
                **1,433,217**
                
                
                **-**
                
                
                **-**
                
                
                **1,484,160**
                
                
                **2,857**
                
                
                **12-17-04**
                
                
                **-****Advance
                    Auto, Illinois**
                
                
                **-**
                
                
                **552,258**
                
                
                **-**
                
                
                **182,238**
                
                
                **107,190**
                
                
                **627,306**
                
                
                **-**
                
                
                **-**
                
                
                **734,496**
                
                
                **n/a**
                
                
                **06-03-04**
                
                
                **-****Advance
                    Auto, Illinois**
                
                
                **-**
                
                
                **623,055**
                
                
                **-**
                
                
                **770,471**
                
                
                **765,471**
                
                
                **628,055**
                
                
                **-**
                
                
                **-**
                
                
                **1,393,526**
                
                
                **6,665**
                
                
                **01-27-06**
                
                
                **-****Advance
                    Auto, Missouri**
                
                
                **-**
                
                
                **361,187**
                
                
                **-**
                
                
                **12,574**
                
                
                **-**
                
                
                **373,761**
                
                
                **-**
                
                
                **-**
                
                
                **373,761**
                
                
                **n/a**
                
                
                **02-13-04**
                
                
                **-****Advance
                    Auto, Missouri**
                
                
                **-**
                
                
                **352,508**
                
                
                **-**
                
                
                **92,058**
                
                
                **92,058**
                
                
                **352,508**
                
                
                **-**
                
                
                **-**
                
                
                **444,566**
                
                
                **n/a**
                
                
                **09-24-04**
                
                
                **-****Baptist
                    Memorial Health, Tennessee**
                
                
                **1,455,429**
                
                
                **623,755**
                
                
                **-**
                
                
                **573,347**
                
                
                **2,028,525**
                
                
                **624,006**
                
                
                **-**
                
                
                **-**
                
                
                **2,652,531**
                
                
                **179,657**
                
                
                **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**
                
                
                **-**
                
                
                **7,786**
                
                
                **-**
                
                
                **-**
                
                
                **2,707,786**
                
                
                **-**
                
                
                **2,707,786**
                
                
                **n/a**
                
                
                **12-11-06**
                
                
                **-****Golden
                    Corral, Texas**
                
                
                **1,093,139**
                
                
                **718,702**
                
                
                **-**
                
                
                **10,926**
                
                
                **1,099,818**
                
                
                **722,949**
                
                
                **-**
                
                
                **-**
                
                
                **1,822,767**
                
                
                **125,727**
                
                
                **07-23-02**
                
                
                **-****Golden
                    Corral, Texas**
                
                
                **1,290,347**
                
                
                **553,006**
                
                
                **-**
                
                
                **10,719**
                
                
                **1,297,850**
                
                
                **556,222**
                
                
                **-**
                
                
                **-**
                
                
                **1,854,072**
                
                
                **148,366**
                
                
                **07-23-02**
                
                
                **-****IHOP,
                    California**
                
                
                **-**
                
                
                **-**
                
                
                **987,204**
                
                
                **30,694**
                
                
                **-**
                
                
                **-**
                
                
                **-**
                
                
                **1,017,898**
                
                
                **1,017,898**
                
                
                **Note
                    B**
                
                
                **08-23-02**
                
                
                **667,803****IHOP,
                    Colorado**
                
                
                **-**
                
                
                **-**
                
                
                **1,104,574**
                
                
                **(28,775**
                **)**
                
                **-**
                
                
                **-**
                
                
                **-**
                
                
                **1,075,799**
                
                
                **1,075,799**
                
                
                **Note
                    B**
                
                
                **08-23-02**
                
                
                **749,000****IHOP,
                    Kansas**
                
                
                
                
                
                **450,984**
                
                
                **958,975**
                
                
                **62,367**
                
                
                **-**
                
                
                **450,984**
                
                
                **-**
                
                
                **1,021,342**
                
                
                **1,472,326**
                
                
                **n/a**
                
                
                **09-30-99**
                
                
                **-****IHOP,
                    Kansas**
                
                
                **-**
                
                
                **-**
                
                
                **876,324**
                
                
                **21,615**
                
                
                **-**
                
                
                **-**
                
                
                **-**
                
                
                **897,939**
                
                
                **897,939**
                
                
                **Note
                    B**
                
                
                **04-16-02**
                
                
                **664,685****IHOP,
                    Louisiana**
                
                
                **-**
                
                
                **-**
                
                
                **1,464,105**
                
                
                **(111,630**
                **)**
                
                **-**
                
                
                **-**
                
                
                **-**
                
                
                **1,352,475**
                
                
                **1,352,475**
                
                
                **Note
                    B**
                
                
                **04-23-02**
                
                
                **1,107,290****IHOP,
                    Missouri**
                
                
                **-**
                
                
                **-**
                
                
                **1,203,723**
                
                
                **(47,521**
                **)**
                
                **-**
                
                
                **-**
                
                
                **-**
                
                
                **1,156,202**
                
                
                **1,156,202**
                
                
                **Note
                    B**
                
                
                **05-17-02**
                
                
                **914,916****IHOP,
                    New Mexico**
                
                
                **-**
                
                
                **-**
                
                
                **884,965**
                
                
                **(40,677**
                **)**
                
                **-**
                
                
                **-**
                
                
                **-**
                
                
                **844,288**
                
                
                **844,288**
                
                
                **Note
                    B**
                
                
                **04-23-02**
                
                
                **670,066****IHOP,
                    New York**
                
                
                **-**
                
                
                **-**
                
                
                **1,125,356**
                
                
                **31,367**
                
                
                **-**
                
                
                **-**
                
                
                **-**
                
                
                **1,156,723**
                
                
                **1,156,723**
                
                
                **Note
                    B**
                
                
                **04-16-02**
                
                
                **841,843****IHOP,
                    Oregon**
                
                
                **-**
                
                
                **-**
                
                
                **1,036,506**
                
                
                **22,474**
                
                
                **-**
                
                
                **-**
                
                
                **-**
                
                
                **1,058,980**
                
                
                **1,058,980**
                
                
                **Note
                    B**
                
                
                **04-16-02**
                
                
                **785,252****IHOP,
                    Oregon**
                
                
                **-**
                
                
                **-**
                
                
                **730,472**
                
                
                **(41,126**
                **)**
                
                **-**
                
                
                **-**
                
                
                **-**
                
                
                **689,346**
                
                
                **689,346**
                
                
                **Note
                    B**
                
                
                **05-17-02**
                
                
                **551,145****IHOP,
                    Tennessee**
                
                
                **-**
                
                
                **469,502**
                
                
                **1,074,438**
                
                
                **72,850**
                
                
                **-**
                
                
                **469,502**
                
                
                **-**
                
                
                **1,147,288**
                
                
                **1,616,790**
                
                
                **n/a**
                
                
                **07-26-02**
                
                
                **1,199,366****IHOP,
                    Tennessee**
                
                
                
                
                
                
                
                
                **1,050,313**
                
                
                **32,152**
                
                
                **-**
                
                
                **-**
                
                
                **-**
                
                
                **1,082,465**
                
                
                **1,082,465**
                
                
                **Note
                    B**
                
                
                **08-23-02**
                
                
                **695,923****IHOP,
                    Texas**
                
                
                
                
                
                **740,882**
                
                
                **962,752**
                
                
                **63,541**
                
                
                **-**
                
                
                **740,882**
                
                
                **-**
                
                
                **1,026,293**
                
                
                **1,767,175**
                
                
                **n/a**
                
                
                **09-22-99**
                
                
                **1,154,689****IHOP,
                    Texas**
                
                
                
                
                
                
                
                
                **886,212**
                
                
                **27,678**
                
                
                **-**
                
                
                **-**
                
                
                **-**
                
                
                **913,890**
                
                
                **913,890**
                
                
                **Note
                    B**
                
                
                **04-16-02**
                
                
                **673,475****IHOP,
                    Texas**
                
                
                
                
                
                
                
                
                **1,144,152**
                
                
                **35,734**
                
                
                **-**
                
                
                **-**
                
                
                **-**
                
                
                **1,179,886**
                
                
                **1,179,886**
                
                
                **Note
                    B**
                
                
                **08-23-02**
                
                
                **801,540****IHOP,
                    Utah**
                
                
                
                
                
                **457,493**
                
                
                **1,067,483**
                
                
                **45,438**
                
                
                **-**
                
                
                **457,493**
                
                
                **-**
                
                
                **1,112,921**
                
                
                **1,570,414**
                
                
                **n/a**
                
                
                **07-25-02**
                
                
                **1,109,772****IHOP,
                    Virginia**
                
                
                
                
                
                
                
                
                **741,991**
                
                
                **14,465**
                
                
                **-**
                
                
                **-**
                
                
                **-**
                
                
                **756,456**
                
                
                **756,456**
                
                
                **Note
                    B**
                
                
                **04-23-02**
                
                
                **557,937****IHOP,
                    Virginia**
                
                
                
                
                
                **-**
                
                
                **839,240**
                
                
                **13,345**
                
                
                **-**
                
                
                **-**
                
                
                **-**
                
                
                **852,585**
                
                
                **852,585**
                
                
                **Note
                    B**
                
                
                **06-21-02**
                
                
                **634,361****IHOP,
                    Virginia**
                
                
                
                
                
                
                
                
                **850,110**
                
                
                **11,098**
                
                
                **-**
                
                
                **-**
                
                
                **-**
                
                
                **861,208**
                
                
                **861,208**
                
                
                **Note
                    B**
                
                
                **07-18-02**
                
                
                **640,225****McAlister
                    Deli, Illinois**
                
                
                **-**
                
                
                **550,425**
                
                
                **-**
                
                
                **438,745**
                
                
                **438,745**
                
                
                **550,425**
                
                
                **-**
                
                
                **-**
                
                
                **989,170**
                
                
                **n/a**
                
                
                **07-19-06**
                
                
                **-****Popeye's,
                    Georgia**
                
                
                **778,772**
                
                
                **333,758**
                
                
                **-**
                
                
                **-**
                
                
                **778,772**
                
                
                **333,758**
                
                
                **-**
                
                
                **-**
                
                
                **1,112,530**
                
                
                **89,026**
                
                
                **07-23-02**
                
                
                **-****Smokey
                    Bones, Georgia**
                
                
                
                
                
                **773,800**
                
                
                **-**
                
                
                **(60,414**
                **)**
                
                **-**
                
                
                **713,386**
                
                
                **-**
                
                
                **-**
                
                
                **713,386**
                
                
                **n/a**
                
                
                **12-18-98**
                
                
                **-****TGI
                    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**
                
                
                **166,189**
                
                
                **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**
                
                
                **-****Total
                    Single Tenant**
                
                
                **6,043,530**
                
                
                **17,744,573**
                
                
                **18,988,895**
                
                
                **2,483,699**
                
                
                **8,113,141**
                
                
                **15,235,786**
                
                
                **2,707,786**
                
                
                **19,203,984**
                
                
                **45,260,697**
                
                
                **718,487**
                
                
                
                
                
                **14,419,288****Total**
                
                **$**
                **145,033,358**
                
                **$**
                **124,619,373**
                
                **$**
                **18,988,895**
                
                **$**
                **5,096,196**
                
                **$**
                **149,782,879**
                
                **$**
                **122,043,173**
                
                **$**
                **2,707,786**
                
                **$**
                **19,203,984**
                
                **$**
                **293,737,822**
                
                **$**
                **10,628,056**
                
                
                
                
                **$**
                **131,649,491**





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, 2006, 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:




Cost
              
              
              Accumulated
                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
              
              $
              10,628,476








S-1