Table of Contents





UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549

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| |  | 
| |  | 

Form 10-Q

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| |  | 

|                                                                                           
|-------------------------------------------------------------------------------------------
|(Mark One)                                                                                 
|x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 THE SECURITIES EXCHANGE ACT OF 1934 
|                                                                                           
|For the quarterly
 period ended June 30, 2010                                              
|                                                                                           
|o TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
 OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                                                           
|For the transition period from _________ to _________                                      
|                                                                                           
|Commission file number: 000-52619                                                          

| |  | 
| |  | 
| |  | 

|                                                                                              
|----------------------------------------------------------------------------------------------
|                                                                                              
|AmREIT
MONTHLY INCOME & GROWTH FUND III, LTD.
(Name of Registrant as specified in its charter)

|                                                                |              |                                       |  |  |            |  |  |  |  | 
|--------------------------------------------------------------- | ------------ | ------------------------------------- |  |  | ---------- |  |  |  |  | 
|                                                                | Texas        |                                       |  |  | 20-2964630 | 
|(State
 or other jurisdiction of incorporation or organization) |              | (I.R.S.
 Employer Identification No.)
|                                                                |              |                                      
|8
 Greenway Plaza, Suite 1000                                   |              |                                      
|                                                                | Houston,
 TX |                                       |  |  | 77046      | 
|(address
 of principle executive offices)                       |              | (Zip
 Code)                          

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

Not ApplicableFormer
name, former address and former fiscal year, if changed from last report:

| |  | 
| |  | 
| |  | 

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 o

Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o

Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):

|                           |                                              |                         |                            
|-------------------------- | -------------------------------------------- | ----------------------- | ---------------------------
|Large accelerated filer
 o | Accelerated filer o                          | Non-accelerated filer o | Smaller reporting company x
|                           | (Do
 not check if smaller reporting company)

Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x





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|                               |         |                                                                                        |  |      | 
|------------------------------ | ------- | -------------------------------------------------------------------------------------- |  | ---- | 
|TABLE OF CONTENTS             
|                               |         |                                                                                        |  | PAGE
|PART I - FINANCIAL INFORMATION |         |                                                                                        | 
|                               | ITEM 1. | FINANCIAL
 STATEMENTS                                                                  |  | 1    | 
|                               | ITEM 2. | MANAGEMENTS
 DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 16   | 
|                               | ITEM 3. | QUANTITATIVE
 AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  | 21   | 
|                               | ITEM 4. | CONTROLS AND
 PROCEDURES                                                               |  | 21   | 
|PART II -
 OTHER INFORMATION   |         |                                                                                        | 
|                               | ITEM 6. | EXHIBITS                                                                               |  | 21   | 
|SIGNATURES                     |         | 22                                                                                     | 
|EXHIBIT INDEX                  |         | 23                                                                                     | 

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Table of Contents

PART I  FINANCIAL INFORMATION

|        |                       
|------- | ----------------------
|ITEM 1. | FINANCIAL
 STATEMENTS.

AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND
SUBSIDIARIESCONSOLIDATED
BALANCE SHEETS(in
thousands, except for unit data)

|                                                                                  |  |                |        |                    |   |        |  
|--------------------------------------------------------------------------------- |  | -------------- | ------ | ------------------ | - | ------ | -
|                                                                                  |  | June 30,
 2010 |        | December 31,
 2009 |  
|                                                                                  |  | (unaudited)    |        |                    |   |       
|ASSETS                                                                            |  |                |        |                    |   |        |  
|Real estate investments at
 cost:                                                 |  |                |        |                    |   |        |  
|Land                                                                              |  | $              | 18,446 |                    | $ | 18,446 |  
|Buildings                                                                         |  |                | 47,295 |                    |   | 47,295 |  
|Tenant improvements                                                               |  |                | 1,069  |                    |   | 983    |  
|                                                                                  |  |                | 66,810 |                    |   | 66,724 |  
|Less accumulated depreciation and amortization                                    |  |                | (7,595 | )                  |   | (6,691 | )
|                                                                                  |  |                | 59,215 |                    |   | 60,033 |  
|                                                                                  |  |                |        |                    |   |        |  
|Investment in non-consolidated entities                                           |  |                | 23,807 |                    |   | 26,212 |  
|Acquired lease intangibles, net                                                   |  |                | 1,540  |                    |   | 1,804  |  
|Net real estate investments                                                       |  |                | 84,562 |                    |   | 88,049 |  
|                                                                                  |  |                |        |                    |   |        |  
|Cash and cash equivalents                                                         |  |                | 1,936  |                    |   | 3,297  |  
|Tenant receivables, net                                                           |  |                | 576    |                    |   | 367    |  
|Accounts receivable -
 related party                                              |  |                | 422    |                    |   | 132    |  
|Deferred costs, net                                                               |  |                | 526    |                    |   | 522    |  
|Other assets                                                                      |  |                | 669    |                    |   | 706    |  
|TOTAL ASSETS                                                                      |  | $              | 88,691 |                    | $ | 93,073 |  
|                                                                                  |  |                |        |                    |   |        |  
|LIABILITIES
 AND CAPITAL                                                          |  |                |        |                    |   |        |  
|Liabilities:                                                                      |  |                |        |                    |   |        |  
|Notes payable                                                                     |  | $              | 50,455 |                    | $ | 50,537 |  
|Notes payable - related party                                                     |  |                | 2,640  |                    |   | 2,907  |  
|Accounts payable and other liabilities                                            |  |                | 990    |                    |   | 1,292  |  
|Accounts payable - related party                                                  |  |                | 17     |                    |   | 10     |  
|Acquired below-market lease intangibles, net                                      |  |                | 239    |                    |   | 324    |  
|Security deposits                                                                 |  |                | 128    |                    |   | 125    |  
|TOTAL LIABILITIES                                                                 |  |                | 54,469 |                    |   | 55,195 |  
|                                                                                  |  |                |        |                    |   |        |  
|Capital:                                                                          |  |                |        |                    |   |        |  
|Partners capital:                                                                |  |                |        |                    |   |        |  
|General partner                                                                   |  |                |       |                    |   |       |  
|Limited partners, 2,833 units outstanding at June 30, 2010 and
 December 31, 2009 |  |                | 32,840 |                    |   | 36,638 |  
|Accumulated other comprehensive gain (loss)                                       |  |                | 78     |                    |   | (79    | )
|TOTAL PARTNERS CAPITAL                                                           |  |                | 32,918 |                    |   | 36,559 |  
|                                                                                  |  |                |        |                    |   |        |  
|Non-controlling interest                                                          |  |                | 1,304  |                    |   | 1,319  |  
|TOTAL CAPITAL                                                                     |  |                | 34,222 |                    |   | 37,878 |  
|TOTAL LIABILITIES AND CAPITAL                                                     |  | $              | 88,691 |                    | $ | 93,073 |  

See Notes to Consolidated
Financial Statements.

1

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Table of Contents

AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS(in
thousands, except for per unit data)(unaudited)

|                                                  |  |                             |         |                           |   |         |   |      |           |   |   |         |  
|------------------------------------------------- |  | --------------------------- | ------- | ------------------------- | - | ------- | - | ---- | --------- | - | - | ------- | -
|                                                  |  | Three months ended June 30, |         | Six months ended June 30, |  
|                                                  |  | 2010                        |         | 2009                      |   | 2010    |   | 2009 |          
|                                                  |  |                             |         |                           |   |         |   |      |           |   |   |         |  
|Revenues:                                         |  |                             |         |                           |   |         |   |      |           |   |   |         |  
|Rental income from operating leases               |  | $                           | 1,645   |                           | $ | 1,650   |   | $    | 3,331     |   | $ | 3,476   |  
|Total revenues                                    |  |                             | 1,645   |                           |   | 1,650   |   |      | 3,331     |   |   | 3,476   |  
|                                                  |  |                             |         |                           |   |         |   |      |           |   |   |         |  
|Expenses:                                         |  |                             |         |                           |   |         |   |      |           |   |   |         |  
|General and administrative                        |  |                             | 45      |                           |   | 42      |   |      | 57        |   |   | 59      |  
|General and administrative - related party        |  |                             | 120     |                           |   | 164     |   |      | 213       |   |   | 262     |  
|Asset management fees - related party             |  |                             | 155     |                           |   | 155     |   |      | 309       |   |   | 309     |  
|Property expense                                  |  |                             | 410     |                           |   | 488     |   |      | 777       |   |   | 990     |  
|Property management fees - related party          |  |                             | 61      |                           |   | 62      |   |      | 123       |   |   | 153     |  
|Legal and professional                            |  |                             | 67      |                           |   | 59      |   |      | 119       |   |   | 104     |  
|Depreciation and amortization                     |  |                             | 591     |                           |   | 617     |   |      | 1,178     |   |   | 1,353   |  
|Total operating expenses                          |  |                             | 1,449   |                           |   | 1,587   |   |      | 2,776     |   |   | 3,230   |  
|                                                  |  |                             |         |                           |   |         |   |      |           |   |   |         |  
|Operating income                                  |  |                             | 196     |                           |   | 63      |   |      | 555       |   |   | 246     |  
|                                                  |  |                             |         |                           |   |         |   |      |           |   |   |         |  
|Other income (expense):                           |  |                             |         |                           |   |         |   |      |           |   |   |         |  
|Interest and other income                         |  |                             | 4       |                           |   | 12      |   |      | 4         |   |   | 26      |  
|Interest expense                                  |  |                             | (812    | )                         |   | (775    | ) |      | (1,622    | ) |   | (1,546  | )
|Equity in losses from non-consolidated entities   |  |                             | (1,051  | )                         |   | (362    | ) |      | (2,727    | ) |   | (661    | )
|Margin tax expense                                |  |                             | (12     | )                         |   | (14     | ) |      | (23       | ) |   | (26     | )
|Total other income (expense)                      |  |                             | (1,871  | )                         |   | (1,139  | ) |      | (4,368    | ) |   | (2,207  | )
|                                                  |  |                             |         |                           |   |         |   |      |           |   |   |         |  
|Net loss, including
 non-controlling interest     |  |                             | (1,675  | )                         |   | (1,076  | ) |      | (3,813    | ) |   | (1,961  | )
|                                                  |  |                             |         |                           |   |         |   |      |           |   |   |         |  
|Net loss attributable to non-controlling interest |  |                             | 7       |                           |   | 28      |   |      | 15        |   |   | 59      |  
|Net loss attributable to partners                 |  | $                           | (1,668  | )                         | $ | (1,048  | ) | $    | (3,798    | ) | $ | (1,902  | )
|                                                  |  |                             |         |                           |   |         |   |      |           |   |   |         |  
|Weighted average units
 outstanding               |  |                             | 2,833   |                           |   | 2,833   |   |      | 2,833     |   |   | 2,834   |  
|Net loss per unit                                 |  | $                           | (588.78 | )                         | $ | (369.87 | ) | $    | (1,340.63 | ) | $ | (671.24 | )

See Notes to Consolidated
Financial Statements.

2

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Table of Contents

AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITAL
For the six months ended June 30, 2010(in
thousands)(unaudited)

|                                     |  |                    |   |                   |   |                                                |   |                           |     |       |   |       |   |   |        |  
|------------------------------------ |  | ------------------ | - | ----------------- | - | ---------------------------------------------- | - | ------------------------- | --- | ----- | - | ----- | - | - | ------ | -
|                                     |  | Partners
 Capital |   |                   |   |                                                |   |                           |    
|                                     |  | General
 Partner   |   | Limited
 Partners |   | Accumulated
 other
 comprehensive gain
 (loss) |   | Non-controlling
 interest |     | Total |  
|                                     |  |                    |   |                   |   |                                                |   |                           |     |       |   |       |   |   |        |  
|Balance at
 December 31, 2009        |  | $                  |  |                   | $ | 36,638                                         |   | $                         | (79 | )     | $ | 1,319 |   | $ | 37,878 |  
|                                     |  |                    |   |                   |   |                                                |   |                           |     |       |   |       |   |   |        |  
|Net loss (1)                         |  |                    |  |                   |   | (3,798                                         | ) |                           |    |       |   | (15   | ) |   | (3,813 | )
|Increase in fair value of derivative |  |                    |  |                   |   |                                               |   |                           | 157 |       |   |      |   |   | 157    |  
|                                     |  |                    |   |                   |   |                                                |   |                           |     |       |   |       |   |   |        |  
|Balance at
 June 30, 2010            |  | $                  |  |                   | $ | 32,840                                         |   | $                         | 78  |       | $ | 1,304 |   | $ | 34,222 |  

| |     |                                                                                                                                                                                                                                                                                                                                                                      
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | The allocation of net loss
 includes a curative allocation to increase the General Partner capital
 account by $38 for the six months ended June 30, 2010. The cumulative
 curative allocation since inception of the Partnership is $297. The Partnership
 Agreement provides that no Partner shall be required to fund a deficit
 balance in their capital account.

See Notes to Consolidated
Financial Statements.

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Table of Contents

AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS(in
thousands)(unaudited)


|                                                                                                                                                                                    |  |                           |        |      |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------ | ---- | - | ------ | -
|                                                                                                                                                                                    |  | Six months ended June 30, |       
|                                                                                                                                                                                    |  | 2010                      |        | 2009 |  
|Cash flows from operating
 activities:                                                                                                                                              |  |                           |        |      |   |        |  
|Net loss, including non-controlling interest                                                                                                                                        |  | $                         | (3,813 | )    | $ | (1,961 | )
|Adjustments to reconcile net loss to net cash provided by (used in)
 operating activities:                                                                                          |  |                           |        |      |   |        |  
|Equity in losses from non-consolidated entities                                                                                                                                     |  |                           | 2,727  |      |   | 661    |  
|Depreciation and amortization                                                                                                                                                       |  |                           | 1,178  |      |   | 1,353  |  
|Amortization of above- and below-market leases, net                                                                                                                                 |  |                           | (61    | )    |   | (74    | )
|Amortization of loan acquisition costs                                                                                                                                              |  |                           | 37     |      |   | 38     |  
|Bad debt expense                                                                                                                                                                    |  |                           | 42     |      |   | 129    |  
|Decrease (increase) in tenant receivables                                                                                                                                           |  |                           | (251   | )    |   | 251    |  
|Decrease (increase) in accounts receivable - related party                                                                                                                          |  |                           | (290   | )    |   | 1,057  |  
|Increase in deferred costs                                                                                                                                                          |  |                           | (75    | )    |   | (14    | )
|Decrease in other assets                                                                                                                                                            |  |                           | 37     |      |   | 184    |  
|Decrease in accounts payable and other liabilities                                                                                                                                  |  |                           | (302   | )    |   | (95    | )
|Increase in accounts payable - related party                                                                                                                                        |  |                           | 340    |      |   | 18     |  
|Increase (decrease) in security deposits                                                                                                                                            |  |                           | 3      |      |   | (18    | )
|Net
 cash provided by (used in) operating activities                                                                                                                                |  |                           | (428   | )    |   | 1,529  |  
|                                                                                                                                                                                    |  |                           |        |      |   |        |  
|Cash flows from investing
 activities:                                                                                                                                              |  |                           |        |      |   |        |  
|Improvements to real estate                                                                                                                                                         |  |                           | (86    | )    |   | (16    | )
|Payments received on notes receivable                                                                                                                                               |  |                           |       |      |   | 75     |  
|Investments in non-consolidated entities                                                                                                                                            |  |                           | (289   | )    |   | (638   | )
|Distributions from non-consolidated entities                                                                                                                                        |  |                           | 124    |      |   | 114    |  
|Net cash used in investing activities                                                                                                                                               |  |                           | (251   | )    |   | (465   | )
|                                                                                                                                                                                    |  |                           |        |      |   |        |  
|Cash flows from financing
 activities:                                                                                                                                              |  |                           |        |      |   |        |  
|Payments on notes payable                                                                                                                                                           |  |                           | (82    | )    |   | (78    | )
|Proceeds from notes payable - related party                                                                                                                                         |  |                           | 400    |      |   |       |  
|Payments on notes payable - related party                                                                                                                                           |  |                           | (1,000 | )    |   |       |  
|Optional redemptions                                                                                                                                                                |  |                           |       |      |   | (28    | )
|Distributions                                                                                                                                                                       |  |                           |       |      |   | (1,073 | )
|Distributions to non-controlling interest                                                                                                                                           |  |                           |       |      |   | (218   | )
|Net cash used in financing activities                                                                                                                                               |  |                           | (682   | )    |   | (1,397 | )
|                                                                                                                                                                                    |  |                           |        |      |   |        |  
|Net decrease in cash and
 cash equivalents                                                                                                                                          |  |                           | (1,361 | )    |   | (333   | )
|Cash and cash equivalents,
 beginning of period                                                                                                                                     |  |                           | 3,297  |      |   | 918    |  
|Cash and cash equivalents,
 end of period                                                                                                                                           |  | $                         | 1,936  |      | $ | 585    |  
|                                                                                                                                                                                    |  |                           |        |      |   |        |  
|Supplemental schedule of cash flow information:                                                                                                                                     |  |                           |        |      |   |        |  
|                                                                                                                                                                                    |  |                           |        |      |   |        |  
|Cash paid during the period for interest                                                                                                                                            |  | $                         | 1,441  |      | $ | 1,513  |  
|Cash paid during the period for taxes                                                                                                                                               |  | $                         | 40     |      | $ | 41     |  
|                                                                                                                                                                                    |  |                           |        |      |   |        |  
|Supplemental schedule of noncash investing and financing
 activities:                                                                                                               |  |                           |        |      |   |        |  
|                                                                                                                                                                                    |  |                           |        |      |   |        |  
|During
 the six months ended June 30, 2010, $81,000 in accrued interest on notes
 payable - related party was added to the note balances.                                          
|                                                                                                                                                                                    |  |                           |        |      |   |        |  
|During
 the six months ended June 30, 2010, $252,000 in accounts payable - related
 party was reclassified to notes payable - related party.                                       
|                                                                                                                                                                                    |  |                           |        |      |   |        |  
|During
 the six months ended June 30, 2009, $75,000 of accounts receivable from one
 of our non-consolidated entities was reclassified to investment in
 non-consolidated entities.

See Notes to Consolidated
Financial Statements.

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Table of Contents

AmREIT MONTHLY INCOME & GROWTH FUND III,
LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010(unaudited)

|   |                                                 
|-- | ------------------------------------------------
|1. | DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS

AmREIT Monthly
Income & Growth Fund III, Ltd., a Texas limited partnership (hereinafter
referred to as the Partnership, MIG III, we, us or our), was formed
on April 19, 2005 to acquire, develop and operate, directly or indirectly
through joint venture arrangements, a portfolio of commercial real estate consisting
primarily of multi-tenant shopping centers and mixed-use developments. The
general partner of the Partnership is AmREIT Monthly Income & Growth III
Corporation, a Texas corporation (the General Partner), which is a subsidiary
of AmREIT, Inc., a Securities and Exchange Commission (SEC) reporting,
non-traded Maryland corporation that has elected to be taxed as a real estate
investment trust (AmREIT). The General Partner maintains its principal place
of business in Houston, Texas.

We commenced
our principal operations on June 30, 2005, when we accepted subscriptions for
the minimum offering of $2.0 million pursuant to the terms of our Offering
Memorandum dated April 19, 2005 (the Offering Memorandum) and issued the
initial 80 limited partnership units (the Units). As of October 31, 2006, we
had received $71.1 million for the sale of 2,844 Units and closed the offering.
As of June 30, 2010, our investments include three wholly-owned properties
comprising approximately 225,000 square feet of gross leasable area, one
property in which we own a controlling interest comprising approximately
102,000 square feet of gross leasable area and seven properties in which we own
a non-controlling interest through joint ventures comprising approximately
1,142,000 square feet of gross leasable area.

Our Units were
sold pursuant to exemptions from registration under the Securities Act of 1933,
as amended (Securities Act), and are not currently listed on a national
exchange. These Units will be transferable only if we register them under
applicable securities laws (such registration is not expected) or pursuant to
an exemption under the Securities Act and applicable state securities laws. We
do not anticipate that any public market for the Units will develop.

The United
States has undergone and may continue to experience a prolonged recession that
has been marked by pervasive and fundamental disruptions in the financial
markets. Continued concerns regarding the uncertainty of whether the U.S.
economy will be adversely affected by inflation, deflation or stagflation and
the systemic impact of increased unemployment, volatile energy costs,
geopolitical issues, the availability and cost of credit, the U.S. mortgage
market and a severely distressed real estate market have contributed to
increased market volatility and weakened business and consumer confidence. The
United States may not experience a sustained recovery and could suffer
pronounced instability and decreased economic activity for an extended period
of time. Our operations are sensitive to changes in overall economic conditions
that impact our tenants, including, among other things, increased bad debts due
to such recessionary pressures. A general reduction in the level of tenant
leasing or shifts in tenant leasing practices could adversely affect our
revenues, profitability and results of operations. It is difficult to determine
the breadth and duration of the financial market problems and the many ways in
which they may affect our tenants and our business in general. A significant
additional deterioration in the U.S. economy or the bankruptcy or insolvency of
one or more of our significant tenants could cause our 2010 cash resources to
be insufficient to meet our obligations. Effective July 15, 2009, we suspended
all distributions in an effort to conserve cash and to protect partners
invested capital. As we have several projects that are mid-stream in
redevelopment, we are conserving cash from operations to improve our ability to
fund capital improvements, tenant improvements and leasing commissions, and to
meet our obligations, including debt service. We expect that the economy and
real estate market will recover prior to our anticipated liquidation
commencement date of October 31, 2012. However, if the economy remains in a
protracted recession, we may seek to postpone liquidation if we believe such
liquidation is not in the best interests of the Partners at that time.

5

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We believe
that we will be able to generate sufficient liquidity to satisfy any cash
shortfalls through (1) managing the timing of forecasted capital expenditures
related to the lease-up of properties, (2) potential joint venture equity
investments in existing non-consolidated entities (3) financings of
unencumbered properties and (4) sales of certain of our investments in
non-consolidated entities. In July 2010, we and our joint venture partners on
our Woodlake Square property, AmREIT Monthly Income and Growth Fund IV, L.P.
(MIG IV) and AmREIT Realty Investment Corporation (ARIC), sold a 90% interest
in the property to a third party (see Note 12 for more discussion). The sale
generated net proceeds of approximately $3.4 million. Our portion of such
proceeds is approximately $1.0 million. As a result, our cash projections
indicate that we will have sufficient cash for the next 12 months. However, we
would consider the above options as necessary if those cash projections
deteriorate.

|   |                                           
|-- | ------------------------------------------
|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 (see
Note 3). The significant accounting policies of our non-consolidated entities
are consistent with those of our subsidiaries in which we have a controlling
financial interest. As applicable, we consolidate certain joint ventures and
partnerships in which we own less than a 100% equity interest if the entity is
a variable interest entity and we are the primary beneficiary (as defined in
Accounting Standards Codification (ASC) 810, Consolidation.
All significant inter-company accounts and transactions have been eliminated in
consolidation.

The
consolidated financial statements included in this Quarterly Report on Form
10-Q (Report) are unaudited; however, amounts presented in the consolidated
balance sheet as of December 31, 2009 are derived from our audited financial
statements as of that date. In our opinion, all adjustments necessary for a
fair presentation of such financial statements have been included. Such
adjustments consisted of normal recurring items.

REVENUE RECOGNITION

We lease space
to tenants under agreements with varying terms. All of the leases are accounted
for as operating leases, and, although certain leases of the properties provide
for tenant occupancy during periods for which no rent is due and/or increases
or decreases in the minimum lease payments over the terms of the leases,
revenue is recognized on a straight-line basis over the terms of the individual
leases. In most cases, revenue recognition under a lease begins when the lessee
takes possession of or controls the physical use of the leased asset.
Generally, possession or control occurs on the lease commencement date. We have
determined that we are the owner of any tenant improvements that we fund
pursuant to the lease terms. In cases where significant tenant improvements are
made prior to lease commencement, the leased asset is considered to be the
finished space, and revenue recognition therefore begins when the improvements
are substantially complete.

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 six months ended June 30, 2010 and 2009, there were no percentage
rents recognized. We recognize lease termination fees in the period that the
lease is terminated and collection of the fees is reasonably assured. Upon
early lease termination, we provide for losses related to unrecovered
intangibles and other assets. During the six months ended June 30, 2010 and
2009, we recognized no lease termination fees.

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. We did not capitalize any interest or
taxes on properties under development during the six months ended June 30, 2010
and 2009.

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Acquired Properties and Acquired Lease
Intangibles - We account for acquisitions of
operating properties pursuant to ASC 805, Business
Combinations, as we believe our operating real estate meets the
definition of a business pursuant to this guidance. Accordingly, we allocate
the purchase price of the acquired operating 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 above- and below-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 above- and below-market leases and in-place lease value
are recorded as acquired lease intangibles and are amortized as an adjustment
to rental income or amortization expense, as appropriate, over the remaining
terms of the underlying leases. Below-market leases include fixed-rate renewal
periods. Premiums or discounts on acquired above- and below-market debt are
amortized to interest expense over the remaining term of such debt.

We expense
acquisition costs associated with operating properties as incurred in
accordance with ASC 805. Prior to adoption of ASC 805, such costs were
capitalized and expensed if and when the acquisition became no longer probable.
We did not expense any acquisition costs during the six months ended June 30,
2010 and 2009.

Depreciation -Depreciation
is computed using the straight-line method over an estimated useful life of up
to 39 years for buildings and site improvements and over the term of lease for
tenant-specific improvements. We re-evaluate the useful lives of our buildings
and improvements as warranted by changing conditions at our properties. As part
of this re-evaluation, we may also consider whether such changes indicate a
potential impairment, and we perform an impairment analysis as necessary, at
the property level. In the case of a property redevelopment, we reassess the
useful lives of specific buildings and other improvements to be demolished as
part of that redevelopment once the redevelopment is probable to occur.
During 2010, we reassessed the useful lives of certain buildings at our Woodlake
 Square property (non-consolidated investment) as a result of our decision to redevelop the center,
 which will include the demolition of certain buildings.  As a result of this change in estimate, our
 equity in losses from non-consolidated entities was $647,000 and $1.9 million higher for the three and
 six months ended June 30, 2010, respectively.  The loss per unit was $228.38 and $660.66 higher, respectively, for the same periods.

Properties Held for Sale
-Properties will be 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. Properties held for sale will
be carried at the lower of cost or fair value less cost to sell. Depreciation
and amortization are suspended during the held for sale period. As of June 30,
2010 and December 31, 2009, we had no properties held for sale.

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. Both the estimated
undiscounted cash flow analysis and fair value determination are based upon
various factors which require complex and subjective judgments to be made by
management. Such assumptions include projecting lease-up periods, holding
periods, cap rates, rental rates, operating expenses, lease terms, tenant
creditworthiness, tenant improvement allowances, terminal sales value and
certain macroeconomic factors among other assumptions to be made for each
property. We have not incurred any impairment losses since our inception.

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ENVIRONMENTAL
EXPOSURES

We are subject
to numerous environmental laws and regulations as they apply to real estate
including those addressing chemicals used by the dry cleaning industry, the
existence of asbestos in older shopping centers, and underground petroleum
storage tanks. We believe that the tenants occupying our properties who
currently operate dry cleaning plants or gas stations do so in accordance with
current laws and regulations. We believe that the ultimate disposition of
currently known environmental matters will not have a material affect on our
financial position, liquidity, or operations (see Note 10). However, we can
give no assurance that existing environmental studies with respect to the
shopping centers have revealed all potential environmental liabilities; that
any previous owner, occupant or tenant did not create any material
environmental condition not known to it; that the current environmental
condition of the shopping centers will not be affected by tenants and
occupants, by the condition of nearby properties, or by unrelated third
parties; or that changes in applicable environmental laws and regulations or
their interpretation will not result in additional environmental liability to
the Partnership.

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. Bad debt expenses and
any related recoveries are included in property expense. As of June 30, 2010
and December 31, 2009, our allowance for uncollectible accounts related to our
tenant receivables was $286,000 and $255,000, respectively.

Accounts Receivable - Related Party- Included in accounts receivable - related party are short-term cash
advances provided to certain of our affiliated investment entities primarily
for their working capital needs. These cash advances are due upon demand.

DEFERRED COSTS

Deferred costs
include deferred leasing costs and loan acquisition costs, net of amortization.
Loan acquisition costs are incurred in obtaining financing and are amortized to
interest expense over the term of the debt agreements using a method that
approximates the effective interest method. Deferred leasing costs consist of
external commissions associated with leasing our properties and are amortized
to depreciation and amortization expense on a straight-line basis over the
lease term. If a lease is terminated early, or a loan is paid in full prior to
maturity, the remaining deferred costs will be written off. Accumulated
amortization related to loan acquisition costs as of June 30, 2010 and December
31, 2009 totaled $310,000 and $272,000, respectively. Accumulated amortization
related to leasing costs as of June 30, 2010 and December 31, 2009 totaled
$133,000 and $101,000, respectively.

INCOME TAXES

Federal -No
provision for U.S. federal income taxes is included in the accompanying
consolidated financial statements. As a partnership, we are not subject to
federal income tax, and the federal tax effect of our activities is passed
through to our partners.

State -In May
2006, the State of Texas adopted House Bill 3, which modified the states
franchise tax structure, replacing the previous tax based on capital or earned
surplus with one based on margin (often referred to as the Texas Margin Tax)
effective with franchise tax returns filed for tax years beginning on or after
January 1, 2007. The Texas Margin Tax is computed by applying the applicable
tax rate (1% for the Partnership) to the profit margin, which, generally, will
be determined for us as total revenue less a 30% standard deduction. Although
House Bill 3 states that the Texas Margin Tax is not an income tax, the
Partnership believes that ASC 740,Income
Taxes, applies to the
Texas Margin Tax. For the six months ended June 30, 2010 and 2009, we recorded
tax provisions of approximately $23,000 and $26,000, respectively, for the
Texas Margin Tax.

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USE OF ESTIMATES

The
preparation of consolidated financial statements in conformity with GAAP
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

We account for
assets and liabilities measured at fair value in accordance with ASC 820, Fair Value Measurements and Disclosures.
ASC 820 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement. Therefore, a fair value measurement should be
determined based on the assumptions that market participants would use in
pricing the asset or liability. As a basis for considering market participant
assumptions in fair value measurements, ASC 820 establishes a fair value
hierarchy that distinguishes between market participant assumptions based on
market data obtained from sources independent of the reporting entity (observable
inputs that are classified within Levels 1 and 2 of the hierarchy) and the
reporting entitys own assumptions about market participant assumptions
(unobservable inputs classified within Level 3 of the hierarchy). The three
levels of inputs used to measure fair value are as follows:

| |   |                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Level 1
 Inputs  Quoted prices (unadjusted) in active markets for identical assets or
 liabilities that the Partnership has the ability to access.                                     
| |   |                                                                                                                                                                                         
| |  | Level 2
 Inputs  Inputs other than quoted prices included in Level 1 that are
 observable for the asset or liability, either directly or indirectly.                                   
| |   |                                                                                                                                                                                         
| |  | Level 3
 Inputs  Unobservable inputs for the asset or liability, which are typically
 based on the Partnerships own assumptions, as there is little, if any,
 related market activity.

Derivative Financial Instruments
 We record our portion of the change in fair value of an interest rate swap
entered into by one of our non-consolidated joint venture entities (see Note
3). In determining the fair value of its derivative instrument, our joint venture
considers whether credit valuation adjustments are necessary to appropriately
reflect both its own nonperformance risk and the respective counterpartys
nonperformance risk in the fair value measurements. Although we have determined
that the majority of the inputs used to value the derivatives fall within Level
2 of the fair value hierarchy, the credit valuation assumptions associated with
its derivatives utilize Level 3 inputs such as estimates of current credit
spreads to evaluate the likelihood of default by our joint venture and its
counterparties. However, as of June 30, 2010, we have assessed the significance
of the impact of the credit valuation adjustments on the overall valuation of
the derivative positions and have determined that the credit valuation
adjustments are not significant to the overall valuation of our joint ventures
derivatives. As a result, we have determined that our portion of the derivative
valuation in its entirety is classified in Level 2 of the fair value hierarchy.

Notes Payable 
In determining the fair value of our debt instruments, we determine the
appropriate Treasury Bill Rate based on the remaining time to maturity for each
of the debt instruments. We then add the appropriate yield spread to the
Treasury Bill Rate. The yield spread is a risk premium estimated by investors
to account for credit risk involved in debt financing. The spread is typically
estimated based on the property type and loan-to-value ratio of the debt
instrument. The result is an estimate of the market interest rate a typical
investor would expect to receive given the underlying subject asset (property
type) and remaining time to maturity. We believe the fair value of our notes
payable is classified in Level 2 of the fair value hierarchy. Based on these
estimates, the fair value of notes payable was $50.3 million and $48.8 million
at June 30, 2010 and December 31, 2009, respectively.

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The following
table presents our accumulated other comprehensive gain (loss), notes payable
and related valuation inputs within the fair value hierarchy utilized to
measure fair value as of June 30, 2010 (in thousands):

|                                             |  |         |   |         |   |         |  |   |   | 
|-------------------------------------------- |  | ------- | - | ------- | - | ------- |  | - | - | 
|                                             |  | Level 1 |   | Level 2 |   | Level 3 | 
|                                            
|Accumulated other
 comprehensive gain (loss) |  | $       |  |         | $ | 78      |  | $ |  | 
|Notes payable                                |  |         |  |         |   | 50,347  |  |   |  | 

NEW ACCOUNTING
STANDARDS

In June 2009,
the FASB amended the consolidation guidance applicable to variable interest
entities in ASC 810 - Consolidation.
The amendments significantly affect the overall consolidation analysis under
FASB Interpretation No. 46(R), Consolidation
of Variable Interest Entitiesan interpretation of ARB No. 51, and
changes the way entities account for securitizations and variable interest
entities as a result of the elimination of the Qualified Special Purpose Entity
(QSPE) concept. We adopted the provisions of ASC 810 on January 1, 2010. Such
adoption did not have an effect on our results of operations or financial
position.

CASH AND CASH
EQUIVALENTS

We consider
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.

INTEREST

Interest is
charged to interest expense as it accrues. No interest has been capitalized on
any consolidated properties since inception of the Partnership.

SEGMENT REPORTING

ASC 280, Segment Reporting establishes standards
for reporting financial and descriptive information about an enterprises
reportable segments. We determined that we have one reportable segment with
activities related to investing in real estate. Our investments in real estate
generate rental revenue and other income through the leasing of multi-tenant
retail properties, which comprised 100% of our total consolidated revenues for
all periods presented. We evaluate operating performance on an individual
property level. However, as all of our properties have similar economic
characteristics, tenants and products and services, our properties have been
aggregated into one reportable segment.

RECLASSIFICATIONS

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

|   |                                         
|-- | ----------------------------------------
|3. | INVESTMENTS IN NON-CONSOLIDATED ENTITIES

Since
inception, we have made the following investments in five entities through
which we own an interest in seven properties:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In March
 2006, we acquired a 50% interest in 5433 Westheimer, LP which owns an office
 building with a gross leasable area of approximately 134,000 square feet and
 a 152-room hotel in Houston, Texas. In November 2008, we acquired an
 additional 7.5% interest in 5433 Westheimer, LP from our third party,
 joint-venture partner for $800,000. The remaining 42.5% is owned by that same
 party. The property is not consolidated into our financial statements as it
 does not meet all conditions for consolidation outlined in ASC 810, Consolidation. Construction of the hotel
 was completed in August 2009, and we are currently evaluating opportunities
 to further develop the property.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In December
 2006, we acquired a 20% interest in PTC/BSQ Holding Company LLC which owns
 three multi-tenant retail properties located in Plano, Texas with a combined
 gross leasable area of approximately 396,000 square feet. The remaining 80%
 is owned by an unaffiliated third party.                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | In December
 2006, we acquired a 50% interest in AmREIT Casa Linda, LP which owns a
 multi-tenant retail property located in Dallas, Texas with a combined gross
 leasable area of approximately 325,000 square feet. The remaining 50% is
 owned by MIG IV, an affiliate of our General Partner.                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | In August
 2007, we acquired a 30% interest in AmREIT Woodlake Square, LP which owns a
 multi-tenant retail property located in Houston, Texas with a combined gross
 leasable area of approximately 206,000 square feet. The remaining 70% is
 owned by affiliated AmREIT entities, MIG IV and ARIC. We have plans to
 redevelop this property beginning in the third quarter of 2010 (see Note 11 for further
 discussion).                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | In November
 2007, we acquired a 30% interest in AmREIT Westheimer Gessner, LP which owns
 Woodlake Pointe, a multi-tenant retail property located in Houston, Texas
 with a combined gross leasable area of approximately 82,000 square feet. The
 remaining 70% is owned by affiliated AmREIT entities, MIG IV and ARIC. In May
 2008, AmREIT Westheimer Gessner, LP acquired an additional tract of land
 adjacent to Woodlake Pointe for $1.3 million.

We report our
investments in these entities using the equity method of accounting due to our
ability to exercise significant influence over them. Combined condensed
financial information for our non-consolidated entities, at 100%, is summarized
for the three- and six-month periods ended June 30, 2010 and 2009, as follows
(in thousands):

|                               |  |                             |        |                           |   |        |   |      |         |   |   |        |  
|------------------------------ |  | --------------------------- | ------ | ------------------------- | - | ------ | - | ---- | ------- | - | - | ------ | -
|                               |  | Three months ended June 30, |        | Six months ended June 30, |  
|                               |  | 2010                        |        | 2009                      |   | 2010   |   | 2009 |        
|Revenue                        |  | $                           | 5,366  |                           | $ | 4,595  |   | $    | 10,870  |   | $ | 9,217  |  
|Depreciation and
 amortization |  |                             | (4,200 | )                         |   | (2,180 | ) |      | (10,455 | ) |   | (4,489 | )
|Interest expense               |  |                             | (1,658 | )                         |   | (1,464 | ) |      | (3,323  | ) |   | (2,921 | )
|Net loss                       |  |                             | (3,031 | )                         |   | (814   | ) |      | (8,106  | ) |   | (1,705 | )

DERIVATIVE FINANCIAL
INSTRUMENTS

In December
2007, AmREIT Woodlake Square, LP, one of our non-consolidated investment
entities, entered into an interest rate swap with a notional amount of $23.8
million and a fixed rate of 5.465% in order to manage the volatility inherent
in its variable-rate mortgage. On October 1, 2008, that interest rate swap was
designated as a hedge for financial reporting purposes. In accordance with ASC
820, Fair Value Measurements and
Disclosures, changes in fair value of derivatives that qualify as
cash flow hedges are recognized in other comprehensive income. Prior to October
1, 2008, such changes in fair value were recorded as a loss from derivative on
the propertys statement of operations. For the six months ended June 30, 2010
and 2009, our portion of the increase in fair value totaled $157,000 and
$75,000, respectively and is included in accumulated other comprehensive gain
(loss) on our consolidated statements of capital.
In June 2010, this swap transaction was terminated and in July 2010, the underlying mortgage was
 refinanced (see Note 11).  In accordance with ASC 815 Derivatives and Hedging, the balance in accumulated
 other comprehensive gain will be amortized into earnings (through interest expense at the AmREIT Woodlake
 Square, LP level) over the remaining term of the hedged transaction.  We will record this transaction as a
 component of equity in losses from non-consolidated subsidiaries.  We do not use derivative financial instruments
 for trading or speculative purposes.

|   |                           
|-- | --------------------------
|4. | ACQUIRED LEASE INTANGIBLES

In accordance
with ASC 805, Business Combinations,
we have identified and recorded the value of acquired lease intangibles at the
property acquisition date. Such intangibles include the value of acquired
in-place leases and above- and below-market leases. Acquired lease intangible
assets (in-place leases and above-market leases) are amortized over the leases
remaining terms, which range from 1 year to 14 years. Acquired lease intangible
liabilities (below-market leases) are accreted over the leases remaining
non-cancelable lease term, plus any fixed-rate renewal options, if any, which
range from 1 year to 14 years. The amortization of above (and below) market
leases is recorded as a reduction of (increase in) rental income, and the
amortization of in-place leases is included in depreciation and amortization
expense. The amortization expense related to in-place leases was approximately
$240,000 and $338,000 for the six months ended June 30, 2010 and 2009,
respectively. The amortization of above-market leases, which was recorded as a
reduction of rental income, was approximately $24,000 and $29,000 during the
six months ended June 30, 2010 and 2009, respectively. Accretion of
below-market leases was approximately $85,000 and $103,000 during the six
months ended June 30, 2010 and 2009, respectively.

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

|                                                |  |               |        |                   |   |        |  
|----------------------------------------------- |  | ------------- | ------ | ----------------- | - | ------ | -
|                                                |  | June 30, 2010 |        | December 31, 2009 |  
|Acquired lease intangible
 assets:              |  |               |        |                   |   |        |  
|In-place leases                                 |  | $             | 4,462  |                   | $ | 4,462  |  
|In-place leases -
 accumulated amortization     |  |               | (2,978 | )                 |   | (2,738 | )
|Above-market leases                             |  |               | 269    |                   |   | 269    |  
|Above-market leases -
 accumulated amortization |  |               | (213   | )                 |   | (189   | )
|Acquired lease intangibles, net                 |  | $             | 1,540  |                   | $ | 1,804  |  
|                                                |  |               |        |                   |   |        |  
|Acquired lease intangible
 liabilities:         |  |               |        |                   |   |        |  
|Below-market leases                             |  | $             | 1,127  |                   | $ | 1,127  |  
|Below-market leases -
 accumulated amortization |  |               | (888   | )                 |   | (803   | )
|Acquired below-market lease intangibles, net    |  | $             | 239    |                   | $ | 324    |  

|   |              
|-- | -------------
|5. | NOTES PAYABLE

Our
outstanding debt consisted entirely of fixed-rate mortgage loans of
approximately $50.5 million at June 30, 2010 and December 31, 2009. Our
mortgage loans are secured by our real estate properties and may be prepaid,
but such payments could be subject to a yield-maintenance premium or prepayment
penalty. Our mortgage loans are due in monthly installments of interest and
principal and mature over various terms ranging from September 2011 through
January 2036.

As of June 30,
2010, the weighted-average interest rate on our fixed-rate debt is 5.9%, and
the weighted average remaining life of such debt is 9.6 years.

As of June 30,
2010, scheduled principal repayments on notes payable were as follows (in
thousands):

|                            |  |   |                                |  |                       |        |                 |   |        |  | 
|--------------------------- |  | - | ------------------------------ |  | --------------------- | ------ | --------------- | - | ------ |  | 
|Scheduled
 Payments by Year |  |   | Scheduled
 Principal
 Payments |  | Term-Loan
 Maturities |        | Total
 Payments |  
|2010                        |  | $ | 83                             |  | $                     |       |                 | $ | 83     | 
|2011                        |  |   | 175                            |  |                       | 24,615 |                 |   | 24,790 | 
|2012                        |  |   | 183                            |  |                       |       |                 |   | 183    | 
|2013                        |  |   | 196                            |  |                       |       |                 |   | 196    | 
|2014                        |  |   | 207                            |  |                       |       |                 |   | 207    | 
|Thereafter                  |  |   | 92                             |  |                       | 24,904 |                 |   | 24,996 | 
|Total                       |  | $ | 936                            |  | $                     | 49,519 |                 | $ | 50,455 | 

We serve as
guarantor on debt in the amount of $44.0 million that is the primary obligation
of our non-consolidated joint ventures. This debt matures in 2013 and 2014.

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Notes Payable  Related Party
-In September 2009, we borrowed $2.5 million from affiliates of our
General Partner. In January of 2010, we repaid $1 million to ARIC and borrowed
$400,000 from AmREIT. Of the balance as of June 30, 2010, $1.5 million accrues
interest monthly at LIBOR plus a spread of 4.0% with a floor of 7.0%, and the
remaining amount accrues interest monthly at LIBOR plus a spread of 3.875% with
a floor of 5.375%. The notes are secured by our investment interests in the
Woodlake Pointe and Woodlake Square properties.

|   |               
|-- | --------------
|6. | CONCENTRATIONS

As of June 30,
2010 and December 31, 2009, each of our four consolidated properties
individually comprised greater than 10% of our consolidated total assets.
Consistent with our strategy of investing in geographic areas that we know
well, three of our four properties are located in the Houston metropolitan
area. These Houston properties represent 83% of our rental income for the six
months ended June 30, 2010 and 2009. Houston is Texas largest city and the
fourth largest city in the United States.

Following are
the base rents generated by our top five tenants during the three and six
months ended June 30, 2010 and 2009 (in thousands):

|                         |  |   |                             |  |                           |     |      |   |       |  |   |       |  | 
|------------------------ |  | - | --------------------------- |  | ------------------------- | --- | ---- | - | ----- |  | - | ----- |  | 
|                         |  |   | Three months ended June 30, |  | Six months ended June 30, |    
|Tenant                   |  |   | 2010                        |  | 2009                      |     | 2010 |   | 2009  | 
|H-E-B
 Grocery           |  | $ | 357                         |  | $                         | 357 |      | $ | 713   |  | $ | 713   | 
|Designer
 Shoe Warehouse |  |   | 137                         |  |                           | 137 |      |   | 275   |  |   | 275   | 
|Rice Food
 Markets, Inc. |  |   | 73                          |  |                           | 73  |      |   | 146   |  |   | 146   | 
|Fidelity
 Investments    |  |   | 47                          |  |                           | 52  |      |   | 100   |  |   | 105   | 
|Blockbuster
 Video       |  |   | 49                          |  |                           | 56  |      |   | 98    |  |   | 112   | 
|                         |  | $ | 663                         |  | $                         | 675 |      | $ | 1,332 |  | $ | 1,351 | 

As of June 30,
2010, Designer Shoe Warehouse (DSW) is our second largest tenant as
determined by base rents paid. DSWs existing lease expires on July 31, 2010,
and it has notified us of its intent to vacate. We are actively pursuing a
replacement tenant to occupy the space. The closing of any new leases would be
subject to the negotiation and execution of definitive lease agreements and the
fulfillment of customary conditions. No assurance can be given that a new lease
will be procured on the same terms as the DSW lease, if at all.

|   |                                               
|-- | ----------------------------------------------
|7. | PARTNERS CAPITAL AND NON-CONTROLLING INTEREST

Our General
Partner invested $800,000 as a limited partner and $1,000 as a general partner.
We began raising capital in June 2005 and raised approximately $71 million at
the time of the offerings closing in October 2006. The General Partners
$800,000 investment represents a 1.1% limited partner interest in the
Partnership.

Limited Optional Redemption Our Units were sold pursuant to exemptions from registration under the
Securities Act and are not currently listed on a national exchange or otherwise
traded in an organized securities market. These Units may be transferred only
with consent of the General Partner after delivery of required documents, and
in any event, only if we register the offer and sale of the Units under
applicable securities laws or if an exemption from such registration is
available. We do not expect to register the offer and sale of Units. Moreover,
we do not anticipate that any public market for the Units will develop. In
order to provide limited partners with the possibility of liquidity, limited
partners who have held their Units for at least three years may receive the
benefit of interim liquidity by presenting all of those Units to the
Partnership for redemption. At that time, we may, at our sole election and
subject to the conditions and limitations described below, redeem the Units
presented for cash to the extent that we have sufficient funds available to us
to fund such redemption. The redemption price to be paid will be 92% of the
limited partners unreturned invested capital. At no time during a 12-month
period, however, may the number of Units redeemed by us exceed 2% of the number
of Units outstanding at the beginning of that 12-month period. We suspended the
optional redemption program during the second quarter of 2009 due to
macroeconomic conditions and the need to preserve cash. During the six months
ended June 30, 2009, we received three redemption requests, two of which were denied
in the aggregate amount of $74,000 and one of which was granted in the amount
of $28,000. All redemption requests that have been granted were paid with cash
flows from operations.

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Distributions
During the operating stage of the Partnership, net cash flow, as defined, will
be distributed 99% to the limited partners and 1% to the General Partner. Our
distributions were paid at a rate of 3.0% per annum on invested capital through
June 30, 2009. We suspended all distribution payments in July 2009 and do not
anticipate reinstating distributions until improvements in the real estate and
liquidity markets warrant such payment. All distributions to date have been a
return of capital, and the source of such distributions has been cash flows
from operations as well as our capital raising activities. During the
liquidation stage of the Partnership (anticipated to commence in October 2012,
unless extended), net cash flow, as defined, will be distributed among the
limited partners and the General Partner in the following manner:

| |   |                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | First - 99%
 to the limited partners and 1% to the General Partner until such time as the
 limited partners have received cumulative distributions from all sources
 (including monthly cash distributions during the operating stage of the
 Partnership) equal to 100% of their unreturned invested capital plus an
 amount equal to 10% per annum uncompounded on their invested capital;
| |   |                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Second -
 100% to the General Partner until it has received cumulative distributions
 from all sources (other than with respect to its limited partner Units it
 purchased) in an amount equal to 40% of the net cash flow paid to date to the
 limited partners in excess of their adjusted capital; and                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Thereafter -
 60% to the limited partners and 40% to the General Partner.                                                                                                                                                                                                                                                                                                                   

Non-controlling Interest
Non-controlling interest represents a 40% ownership interest that one of
our affiliate investment funds has in a real estate partnership that we
consolidate as a result of our 60% controlling financial interest in such
partnership.

|   |                           
|-- | --------------------------
|8. | RELATED PARTY TRANSACTIONS

Certain of our
affiliates received fees and compensation during the organizational stage of
the Partnership, including securities commissions and due diligence
reimbursements, marketing reimbursements and reimbursement of organizational
and offering expenses. These affiliates also receive fees for ongoing property
management and administrative services. In the event that these companies are
unable to provide us with the respective services, we would be required to find
alternative providers of these services. The following table summarizes the
amount of such compensation paid to our affiliates during the three and six
months ended June 30, 2010 and 2009 (in thousands):

|                                            |  |   |                             |  |                           |     |      |   |      |  |   |     |  | 
|------------------------------------------- |  | - | --------------------------- |  | ------------------------- | --- | ---- | - | ---- |  | - | --- |  | 
|                                            |  |   | Three months ended June 30, |  | Six months ended June 30, |    
|Type of
 service                            |  |   | 2010                        |  | 2009                      |     | 2010 |   | 2009 | 
|Asset management fees                       |  | $ | 155                         |  | $                         | 155 |      | $ | 309  |  | $ | 309 | 
|Property management fees
 and leasing costs |  |   | 100                         |  |                           | 74  |      |   | 199  |  |   | 167 | 
|Administrative cost
 reimbursements         |  |   | 120                         |  |                           | 164 |      |   | 213  |  |   | 262 | 
|                                            |  | $ | 375                         |  | $                         | 393 |      | $ | 721  |  | $ | 738 | 

In addition to
the above fees paid by us, the non-consolidated entities in which we have
investments pay property management and leasing fees to one of our affiliated
entities. During the six months ended June 30, 2010 and 2009, such fees totaled
$350,000 and $414,000, respectively. See also Note 3 regarding investments in
non-consolidated entities.

|   |                                          
|-- | -----------------------------------------
|9. | REAL ESTATE ACQUISITIONS AND DISPOSITIONS

We did not
have any real estate acquisitions or dispositions during the six months ended
June 30, 2010 and 2009.

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See Note 3 for
a discussion of our investment activity since our inception with respect to our
non-consolidated entities.

|    |                              
|--- | -----------------------------
|10. | COMMITMENTS AND CONTINGENCIES

Litigation - In
the ordinary course of business, we may become subject to litigation or claims.
There are no material pending legal proceedings known to be contemplated
against us.

Environmental matters- In connection with the ownership and operation of real estate, we may be
potentially liable for costs and damages related to environmental matters. We
have not been notified by any governmental authority of any non-compliance,
liability or other claim.

In conjunction
with our acquisition of the Lantern Lane shopping center in September 2006, we
identified an environmental exposure caused by a dry cleaning business that
operated on the property prior to our ownership. Our agreement with the seller
provides that, if the seller cannot provide satisfactory evidence that they
have performed appropriate remediation, we can reduce our note payable to them
by the lesser of the actual costs to remediate or $1.0 million. We believe that
the remediation costs will not exceed $1.0 million based on our environmental
investigation. We have not recorded a separate liability for this exposure as
we believe that we are fully indemnified by the seller pursuant to this
arrangement. To the extent that we are required to fund a portion of the remediation,
such amount will be financed through the reduction of the note payable to the
seller. We believe that this matter will not have an adverse effect on our
consolidated financial position or results of operations, and we are aware of
no other environmental exposures.

|    |                  
|--- | -----------------
|11. | SUBSEQUENT EVENTS

In July 2010, we and our affiliated joint venture partners on the Woodlake Square property,
 MIG IV and ARIC, entered into a new joint venture agreement with a third party.  As part of this transaction,
 we and our affiliates sold 90% of our interest in the property and retained a 10% ownership interest which carries
 a promoted interest in cash flows and profits once an 11.65% preferred return threshold is met on the project.  Prior
 to the transaction, we owned a 30% interest in the property, and we own a 3% interest post-transaction.  The fair
 value of the interest that we sold approximated its carrying value.  Accordingly, no significant gain or loss will
 be recognized upon sale.  The sale generated cash proceeds of approximately $3.4 million (our share was approximately
 $1.0 million), and we and our joint venture partners are responsible for funding the pro rata amount of the redevelopment
 costs on the project, which are currently estimated to be approximately $8.0 million.
As part of the consideration received, we and our affiliated joint venture partners are due a reimbursement from our
third party joint venture partner for a portion of such redevelopment costs already incurred.
Additionally, as part of the
 transaction, the $23.8 million loan on the property, which was due to mature in September 2010, was paid in full at
closing.  The new entity in which we now own a 3% interest, VIF II/AmREIT Woodlake L.P., is the borrower on the new $20.9
 million loan which has a 3-year term with two one-year extension options, provided certain conditions are met.  We, along
 with our affiliate, MIG IV are joint and several repayment guarantors on the loan.  In the future, we will continue to
 account for our interest in the property using the equity method of accounting as we and our affiliates, MIG IV and ARIC,
 have the ability to exercise significant influence over the operations of the property.

We have evaluated all events or transactions as of the date through which the financial statements were made
available for issuance. With the exception of the event listed above, we did not have any material subsequent events that impacted
 our consolidated financial statements during this period.

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|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|ITEM 2. | MANAGEMENTS DISCUSSION AND
 ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and
analysis should be read in conjunction with the accompanying consolidated
financial statements and notes thereto.

Certain information
presented in this Report constitutes forward-looking statements within the
meaning of Section 27A of the Securities Act, and Section 21E of the Securities
Exchange Act of 1934, as amended (Exchange Act). Although we believe that the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, our 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 our debt or equity capital, our ability to locate suitable
tenants for our properties, the ability of tenants to make payments under their
respective leases, timing of acquisitions, development starts and sales of
properties, the ability to meet development schedules and other risks,
uncertainties and assumptions. Any forward-looking statement speaks only as of
the date on which it was made, and the Partnership undertakes no obligation to
update or revise forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes to future operation results over
time.

Overview

We are a Texas limited
partnership formed on April 19, 2005 to acquire, develop and
operate, directly or indirectly through joint venture or other
arrangements, commercial retail real estate consisting of single-tenant and
multi-tenant properties net leased to investment grade and other creditworthy
tenants throughout the United States. We focus on properties characterized by
high automobile traffic counts, high populations, high household incomes and
limited opportunities for competition.

We have no employees and are
managed by AmREIT Monthly & Income III Corporation, our General Partner,
pursuant to our Partnership Agreement. Our General Partner is a wholly owned
subsidiary of AmREIT, Inc., an SEC
reporting, non-traded Maryland corporation that has elected to be taxed as a
real estate investment trust (AmREIT). Our General Partner has contributed $1,000 to us for its general
partner interest and has contributed $800,000 to us in exchange for Units. The
remaining Units are held by other limited partners. We qualify as a partnership
for federal income tax purposes.

As of June 30, 2010, our investments include three
wholly-owned properties comprising approximately 225,000 square feet of gross
leasable area, one property in which we own a controlling interest
comprising approximately 102,000 square feet of gross leasable area and seven
properties in which we own a non-controlling interest through joint ventures
comprising approximately 1,142,000 square feet of gross leasable area. A
majority of our properties are located in highly populated, suburban
communities in Texas. We derive a substantial portion of our revenue from
rental income from these properties, primarily from net leasing arrangements,
where most of the operating expenses of the properties are absorbed by our
tenants. As a result, our operating results and cash flows are primarily
influenced by rental income from our properties and interest expense on our
property acquisition indebtedness. Rental income accounted for 100% of our
total revenue during the six months ended June 30, 2010 and 2009. As of June
30, 2010, our properties had an average occupancy rate of approximately 79%, and the average debt
leverage ratio of the properties in which we have an investment interest was
approximately 60%, with 69% of such debt carrying a fixed rate of interest.

Summary of Critical Accounting Policies

The
preparation of the consolidated financial statement information contained
herein requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, net sales and expenses, and related
disclosure of contingent assets and liabilities. Management bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

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An accounting
policy is deemed to be critical if it requires an accounting estimate to be
made based on assumptions about matters that are highly uncertain at the time
the estimate is made, and if different estimates that reasonably could have
been used, or changes in the accounting estimates that are reasonably likely to
occur periodically, could materially impact the financial statements.
Information with respect to the Partnerships critical accounting policies that
the Partnership believes could have the most significant effect on the
Partnerships reported results and require subjective or complex judgments by
management is contained in Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations of the Partnerships Annual
Report on Form 10-K for the fiscal year ended December 31, 2009.
Management believes that, as of June 30, 2010, there have been no material
changes to these policies.

Results of Operations

We commenced
our principal operations on June 30, 2005 when we accepted subscriptions for
the minimum offering of $2.0 million pursuant to the terms of our Offering
Memorandum and issued the initial 80 Units to investors. During 2005, we
acquired a direct interest in a property on September 30, 2005 and acquired an
interest in another property on December 12, 2005 through a consolidated joint
venture. During 2006, we acquired direct interests in two more properties, one
on June 30, 2006 and the other on September 29, 2006. In 2006, we also made
investments in three joint ventures through which we obtained an ownership
interest in five other properties. In 2007, we made investments in two more
joint ventures through which we obtained an ownership interest in two other
properties. During 2008, we made an investment in one additional property
through an existing joint venture and acquired an additional equity interest in
another existing joint venture. As of June
30, 2010, our investments include three wholly-owned properties comprising
approximately 225,000 square feet of gross leasable area, one property
in which we own a controlling interest comprising approximately 102,000 square
feet of gross leasable area and seven properties in which we own a
non-controlling interest through joint ventures comprising approximately
1,142,000 square feet of gross leasable area.

Our direct
property acquisitions were accounted for as purchases, and the results of their
operations are included in our consolidated financial statements from their
respective dates of acquisition. We report our investments in joint ventures
under the equity method of accounting given our ability to exercise significant
influence over them.

Three Months Ended June 30, 2010 versus Three Months Ended
June 30, 2009

Revenue.Revenue
remained constant at approximately $1.65 million during the three months ended
June 30, 2010, compared to the three months ended June 30, 2009 as we
experienced no significant changes in occupancy during the period.

General and Administrative  Related Party.General
and administrative expenses paid to affiliates of our General Partner decreased
approximately $44,000 to approximately $120,000 during the three months ended
June 30, 2010, compared to approximately $164,000 during the three months ended
June 30, 2009. This decrease was primarily due to timing differences in our
General Partners compensation accrual recorded during the second quarter of
2009 which caused a higher than normal expense for that period.

Property Expenses.Property
operating expenses decreased approximately $78,000 to approximately $410,000
during the three months ended June 30, 2010 compared to approximately $488,000
during the three months ended June 30, 2009. This decrease was primarily due to
a decrease in bad debt expense at Lantern Lane as well as a decrease in
property tax expense at our Lantern Lane, Olmos Creek and Westside Plaza
properties.

Legal and Professional Fees.Legal
and professional fees increased approximately $8,000 to approximately $67,000
during the three months ended June 30, 2010 compared to approximately $59,000
during the three months ended June 30, 2009. This increase was due to an
increase in audit costs related to internal controls testing which was required
for SEC registrants of our size beginning with our fiscal year ended December
31, 2010. As a result of the Dodd-Frank Wall Street Reform and Consumer
Protection Act issued in July 2010, issuers of our size have been permanently
exempted from this audit requirement.

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Depreciation and Amortization Expense.Depreciation
and amortization expense decreased approximately $26,000 to approximately
$591,000 during the three months ended June 30, 2010 compared to approximately
$617,000 during the three months ended June 30, 2009. This decrease was
primarily due to a decrease in depreciation of tenant improvements and
amortization of in-place leases as a substantial portion of those costs became
fully amortized, or were written off due to tenant vacancies, during the early
part of 2009.

Interest and Other Income.
Interest and other income of $12,000 recorded during the three months ended
June 30, 2009, represents interest on the outstanding balance on a note
receivable from our joint venture partner on our investment in 5433 Westheimer
L.P. That note was paid in full during the fourth quarter of 2009. Interest income
earned during the three months ended June 30, 2010 was limited to interest
earned on deposit accounts.

Interest Expense.
Interest expense increased approximately $37,000 to approximately $812,000
during the three months ended June 30, 2010 compared to approximately $775,000
during the three months ended June 30, 2009. This increase resulted from
interest accrued on Notes Payable  Related Party borrowings from affiliates of
our General Partner in September 2009 (see Note 5 to the consolidated financial
statements).

Equity in Losses From Non-Consolidated
Entities.Equity in losses from non-consolidated
entities increased approximately $689,000 to approximately $1.0 million for the
three months ended June 30, 2010, compared to approximately $362,000 for the
three months ended June 30, 2009. These amounts represent our ownership portion
of our joint ventures net income or loss for the period. The increased loss is
due to increased depreciation expense resulting from the impending
redevelopment of the Woodlake Square property. Our joint venture has reassessed
and shortened the estimated useful lives of various buildings consistent with
its current plan to demolish such buildings as part of the redevelopment. The
redevelopment commenced in July 2010.

Net Loss Attributable to Non-controlling
Interest. Net loss attributable to non-controlling
interest decreased approximately $21,000 to approximately $7,000 for the three
months ended June 30, 2010 compared to approximately $28,000 for the three
months ended June 30, 2009. This decrease was primarily due to a decrease in
the loss recorded at our Lake Houston property resulting from increased rental
income generated by a new tenant.

Six Months Ended June 30, 2010 versus Six Months Ended June
30, 2009

Revenue.Revenue
decreased approximately $145,000 to approximately $3.33 million for the six
months ended June 30, 2010 compared to approximately $3.48 million for the six
months ended June 30, 2009. A decrease in recoverable property tax expenses
resulted in a corresponding decrease in expense recoveries billed to our
tenants.

General and Administrative  Related Party.General
and administrative expenses paid to our affiliate decreased approximately
$49,000 to approximately $213,000 during the six months ended June 30, 2010
compared to approximately $262,000 for the six months ended June 30, 2009. This
decrease was primarily due to timing differences in our General Partners
compensation accrual recorded during the second quarter of 2009 which caused a
higher than normal expense for that period.

Property Expense.Property
operating expenses decreased approximately $213,000 to approximately $777,000
during the six months ended June 30, 2010 compared to approximately $990,000
for the six months ended June 30, 2009. This decrease was primarily due to a
decrease in property tax expense at our Lantern Lane, Olmos Creek and Westside
Plaza properties as well as a decrease in bad debt expense at Lantern Lane and
Olmos Creek.

Property Management Fees  Related Party.
Property management fees to our affiliate decreased approximately $30,000 to
approximately $123,000 for the six months ended June 30, 2010 compared to
approximately $153,000 for the six months ended June 30, 2009. Property
management fees are calculated based on tenant billings. This decrease is
primarily due to a decrease in expense recoveries that were billed to tenants
during the first quarter of 2010 compared to the first quarter of 2009.

Legal and Professional Fees.Legal
and professional fees increased approximately $15,000 to approximately $119,000
during the six months ended June 30, 2010 compared to approximately $104,000
for the six months ended June 30, 2009. This increase was due to an increase in
audit costs related to internal controls testing which was required for SEC
resgistrants of our size beginning with our fiscal year ended December 31,
2010. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection
Act issued in July 2010, issuers of our size have been permanently exempted
from this audit requirement.

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Depreciation and Amortization Expense.Depreciation
and amortization expense decreased approximately $175,000 to approximately
$1.18 million during the six months ended June 30, 2010 compared to
approximately $1.35 million for the six months ended June 30, 2009. This
decrease was primarily due to a decrease in depreciation of tenant improvements
and amortization of in-place leases as a substantial portion of those costs
became fully amortized, or were written off due to tenant vacancies, during the
early part of 2009.

Interest and Other Income.
Interest and other income of $26,000 recorded during the six months ended June
30, 2009, represents interest on the outstanding balance on a note receivable
from our joint venture partner on our investment in 5433 Westheimer L.P. That
note was paid in full during the fourth quarter of 2009. Interest income earned
during the six months ended June 30, 2010 was limited to interest earned on
deposit accounts.

Interest Expense.
Interest expense increased approximately $76,000 to approximately $1.62 million
during the six months ended June 30, 2010 compared to approximately $1.55 million
during the six months ended June 30, 2009. This increase resulted from interest
accrued on Notes Payable  Related Party borrowings from affiliates of our
General Partner in September 2009 (see Note 5 to the consolidated financial
statements).

Equity in Losses From Non-Consolidated
Entities.Equity in losses from non-consolidated
entities increased approximately $2.07 million to approximately $2.72 million
for the six months ended June 30, 2010 compared to approximately $661,000 for
the six months ended June 30, 2009. These amounts represent our ownership
portion of our joint ventures net income or loss for the period. The increased
loss is due to increased depreciation expense resulting from the impending
redevelopment of the Woodlake Square property. Our joint venture has reassessed
and shortened the estimated useful lives of various buildings consistent with
its current plan to demolish such buildings as part of the redevelopment.

Net Loss Attributable to Non-controlling
Interest. Net loss attributable to non-controlling
interest decreased approximately $44,000 to approximately $15,000 for the six
months ended June 30, 2010 compared to approximately $59,000 for the six months
ended June 30, 2009. This decrease was primarily due to a decrease in the loss
recorded at our Lake Houston property resulting from increased revenues from a
new tenant and decreases in bad debt and depreciation and amortization
expenses.

Liquidity and Capital Resources

We expect to meet our
short-term liquidity requirements with cash on hand and through net cash
provided by property operations and financing activities. We expect to meet our
long-term liquidity requirements through proceeds from secured or unsecured
financings from banks and other lenders, the selective and strategic sale of
properties and net cash flows from operations. We have no material refinancing
obligations over the next twelve months.

As of June 30,
2010 and December 31, 2009, our cash and cash equivalents totaled approximately
$1.9 million and $3.3 million, respectively. Cash flows provided by (used in)
operating activities, investing activities and financing activities during the
six months ended June 30, 2010 and 2009 are as follows (in thousands):

|                      |  |                           |      |      |   |        |  
|--------------------- |  | ------------------------- | ---- | ---- | - | ------ | -
|                      |  | Six months ended June 30, |     
|                      |  | 2010                      |      | 2009 |  
|                      |  |                           |      |      |  
|Operating
 activities |  | $                         | (428 | )    | $ | 1,529  |  
|Investing
 activities |  |                           | (251 | )    |   | (465   | )
|Financing
 activities |  |                           | (682 | )    |   | (1,397 | )

Net cash flows
provided by operating activities decreased approximately $2.0 million to
outflows of approximately $428,000 during the six months ended June 30, 2010
compared to inflows of approximately $1.5 million during the six months ended
June 30, 2009. This decrease in cash flows provided by operating activities was
primarily due to the collection of accounts receivable  related party during
the first quarter of 2009 for amounts that had been advanced during 2008 as
well as the timing of collection of property tax recoveries from our anchor
tenants. The 2008 property tax recoveries were collected during the first
quarter of 2009 while the 2009 property tax recoveries were billed and
collected during the fourth quarter of 2009.

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Net cash flows
used in investing activities decreased approximately $214,000 to approximately
$251,000 during the six months ended June 30, 2010 compared to approximately
$465,000 during the six months ended June 30, 2009. This decrease is primarily
due to a decrease in contributions made to our non-consolidated investment
properties of approximately $349,000. The decrease was partially offset by a
decrease in payments received on notes receivable of approximately $75,000 and
an increase in cash paid for improvements to real estate of approximately
$70,000.

Net cash flows
used in financing activities decreased approximately $715,000 to approximately
$682,000 for the six months ended June 30, 2010 compared to approximately $1.4
million for the six months ended June 30, 2009. This decrease was primarily due
to the suspension of all distribution and redemption payments beginning July
2009, which resulted in cash savings of approximately $1.3 million. Such
savings were offset by net repayments on notes payable  related party of $600,000.

The United States has undergone and may continue to experience a
prolonged recession that has been marked by pervasive and fundamental
disruptions in the financial markets. Continued concerns regarding the
uncertainty of whether the U.S. economy will be adversely affected by
inflation, deflation or stagflation and the systemic impact of increased
unemployment, volatile energy costs, geopolitical issues, the availability and
cost of credit, the U.S. mortgage market and a severely distressed real estate
market have contributed to increased market volatility and weakened business
and consumer confidence. The United States may not experience a sustained
recovery and could suffer pronounced instability and decreased economic
activity for an extended period of time. Our operations are sensitive to
changes in overall economic conditions that impact our tenants, including,
among other things, increased bad debts due to such recessionary pressures. A
general reduction in the level of tenant leasing or shifts in tenant leasing
practices could adversely affect our revenues, profitability and results of
operations. It is difficult to determine the breadth and duration of the
financial market problems and the many ways in which they may affect our
tenants and our business in general. A significant additional deterioration in
the U.S. economy or the bankruptcy or insolvency of one or more of our
significant tenants could cause our 2010 cash resources to be insufficient to
meet our obligations. Effective July 15, 2009, we suspended all distributions
in an effort to conserve cash and to protect investors invested capital. As we
have several projects that are mid-stream in redevelopment, we are conserving
cash from operations to improve our ability to fund capital improvements,
tenant improvements and leasing commissions, and to meet our obligations,
including debt service. We expect that the economy and real estate market will
recover prior to our anticipated liquidation commencement date of October 31,
2012. However, if the economy remains in a protracted recession, we may seek to
postpone liquidation if we believe such liquidation is not in the best interest
of the Partners at that time.

We believe
that we will be able to generate sufficient liquidity to satisfy any cash shortfalls
through (1) managing the timing of forecasted capital expenditures related to
the lease-up of properties, (2) potential joint venture equity investments in
existing non-consolidated entities (3) financings of unencumbered properties
and (4) sales of certain of our investments in non-consolidated entities.
See Subsequent Events below for a discussion of the $1.0 million in liquidity generated in July 2010 from a joint
venture transaction with a third party on our Woodlake Square investment.
As a result of this transaction, our cash projections indicate that we will have
sufficient cash for the next 12 months. However, we would consider the above
options as necessary if those cash projections deteriorate.

Subsequent Events

In July 2010, we and our affiliated joint venture partners on the Woodlake Square property, MIG IV and ARIC,
 entered into a new joint venture agreement with a third party in order to commence the redevelopment of the property and to
 generate liquidity.  As part of this transaction, we and our affiliates sold 90% of our interest in the property and retained a
 10% ownership interest which carries a promoted interest in cash flows and profits once an 11.65% preferred return threshold is met on the project.
  Prior to the transaction, we owned a 30% interest in the property, and we own a 3% interest post-transaction.  The fair value of the interest that
 we sold approximated its carrying value, after consideration of $9.3 million in depreciation and amortization recorded since inception of the project.
  Accordingly, no significant gain or loss will be recognized upon sale.  The sale generated cash proceeds of approximately $3.4 million (our share was
 approximately $1.0 million), and we and our joint venture partners are responsible for funding the pro rata amount of the redevelopment costs on the
 project, which are currently estimated to be approximately $8.0 million.
As part of the consideration received, we and our affiliated joint venture partners are due a reimbursement from our
third party joint venture partner for a portion of such redevelopment costs already incurred.
Additionally, as part of the transaction, the $23.8 million loan on the property,
 which was due to mature in September 2010, was paid in full at closing.  The new entity in which we now own a 3% interest, VIF II/AmREIT Woodlake L.P., is
 the borrower on the new $20.9 million loan which has a 3-year term with two one-year extension options, provided certain conditions are met.  We, along with
 our affiliate, MIG IV are joint and several repayment guarantors on the loan.  In the future, we will continue to account for our interest in the property using
 the equity method of accounting as we and our affiliates, MIG IV and ARIC, have the ability to exercise significant influence over the operations of the property.

We have evaluated all events or transactions as of the date through which the financial statements were made available for issuance.
 With the exception of the event listed above, we did not have any material subsequent events that impacted our consolidated financial statements
 during this period.

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Table of Contents

|                |                                                            
|--------------- | -----------------------------------------------------------
|ITEM 3.         | QUANTITATIVE
 AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|               
|Not applicable.
|               
|ITEM 4.         | CONTROLS
 AND PROCEDURES                                   

Evaluation of Disclosure Controls and
Procedures.

Under the
supervision and with the participation of our General Partners Chief Executive
Officer (CEO) and Chief Financial Officer (CFO), our General Partners
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 Exchange Act) as of June 30, 2010. Based on that evaluation, our General
Partners CEO and CFO concluded that, as of June 30, 2010, our disclosure
controls and procedures were effective in causing material information relating
to us to be recorded, processed, summarized, and reported by management on a
timely basis and to ensure the quality and timeliness of our public disclosures
in accordance with SEC disclosure obligations.

Changes in Internal Controls

There has been
no change to our internal control over financial reporting during the quarter
ended June 30, 2010 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

PART II  OTHER
INFORMATION

|        |         
|------- | --------
|ITEM 6. | EXHIBITS

The exhibits
listed on the accompanying Exhibit Index are filed, furnished, or incorporated
by reference (as stated therein) as part of this Report.

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SIGNATURES

Pursuant to
the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                       |                                                |                                                                       
|---------------------- | ---------------------------------------------- | ----------------------------------------------------------------------
|                       | AmREIT
 Monthly Income & Growth Fund III, Ltd.
|                       |                                                |                                                                       
|                       | By:                                            | AmREIT
 Monthly Income & Growth III 
 Corporation, its General Partner
|                       |                                                |                                                                       
|Date: August
 13, 2010 |                                                |                                                                       
|                       |                                                |                                                                       
|                       | By:                                            | /s/ H. Kerr
 Taylor                                                   
|                       |                                                | H. Kerr
 Taylor                                                       
|                       |                                                | President,
 Chief Executive Officer, and Director                     
|                       |                                                |                                                                       
|                       | By:                                            | /s/ Chad C.
 Braun                                                    
|                       |                                                | Chad C.
 Braun                                                        
|                       |                                                | Executive
 Vice President, Chief Financial Officer,                   
|                       |                                                | Treasurer
 and Secretary                                              

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EXHIBIT INDEX

|             |                                                                                                                                                                                                                                                 
|------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 3.1  | Certificate
 of Limited Partnership of AmREIT Monthly Income & Growth Fund III, Ltd.,
 dated April 19, 2005 (incorporated herein by reference from Exhibit 3.1 to
 the Partnerships Registration Statement on Form 10-SB dated April 30, 2007).
|             |                                                                                                                                                                                                                                                 
|Exhibit 3.2  | Agreement of
 Limited Partnership of AmREIT Monthly & Income Growth Fund III, Ltd.,
 dated April 19, 2005 (incorporated herein by reference from Exhibit 3.2 to
 the Partnerships Registration Statement on Form 10-SB dated April 30, 2007).  
|             |                                                                                                                                                                                                                                                 
|Exhibit 31.1 | Certification
 pursuant to Rule 13a-14(a) of Chief Executive Officer of our General Partner
 (filed herewith).                                                                                                                                  
|             |                                                                                                                                                                                                                                                 
|Exhibit 31.2 | Certification
 pursuant to Rule 13a-14(a) of Chief Financial Officer of our General Partner
 (filed herewith).                                                                                                                                  
|             |                                                                                                                                                                                                                                                 
|Exhibit 32.1 | Chief
 Executive Officer of our General Partner certification pursuant to 18 U.S.C.
 Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
 2002 (furnished herewith).                                                     
|             |                                                                                                                                                                                                                                                 
|Exhibit 32.2 | Chief
 Financial Officer of our General Partner certification pursuant to 18 U.S.C.
 Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
 2002 (furnished herewith).                                                     

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