Table of Contents





|                                   
|-----------------------------------
|UNITED STATES                      
|SECURITIES
 AND EXCHANGE COMMISSION
|WASHINGTON, DC 20549               
|                                   

---

FORM 10-Q

---

|(Mark One)                                                                                
|------------------------------------------------------------------------------------------
|xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 THE SECURITIES EXCHANGE ACT OF 1934 
|                                                                                          
|For the quarterly
 period ended September 30, 2009                                        
|                                                                                          
|or                                                                                        
|                                                                                          
|oTRANSITION 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.                                            
|(Exact 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, Texas                                        |  | 77046                               
|(Address of Principal Executive Offices)                                            |  | (Zip Code)                          
|                                                                                    |  |                                     
|713-850-1400                                                                       
|(Registrants Telephone Number, Including Area Code)                               
|                                                                                   
|Not Applicable                                                                     
|(Former Name, Former Address and Former Fiscal Year, if Changed Since
 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). o Yes o No

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





---

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                            |  | 20  
|Item 4T -                       | Controls and Procedures                                                                |  | 20  
|                               
|Part II  Other
 Information    |                                                                                        | 
|Item 6 -                        | Exhibits                                                                               |  | 20  
|Signatures                      |                                                                                        |  | 21  
|Exhibit Index                   |                                                                                        |  | 22  

---



Table of Contents

PART I  FINANCIAL INFORMATION

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

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

|                                                                                                              |  |                     |        |                    |   |        |  
|------------------------------------------------------------------------------------------------------------- |  | ------------------- | ------ | ------------------ | - | ------ | -
|                                                                                                              |  | September 30,
 2009 |        | December 31,
 2008 |  
|                                                                                                             
|                                                                                                              |  | (unaudited)         |        |                    |   |       
|ASSETS                                                                                                        |  |                     |        |                    |   |        |  
|Real estate
 investments at cost:                                                                             |  |                     |        |                    |   |        |  
|Land                                                                                                          |  | $                   | 18,446 |                    | $ | 18,446 |  
|Buildings                                                                                                     |  |                     | 47,280 |                    |   | 47,265 |  
|Tenant improvements                                                                                           |  |                     | 972    |                    |   | 1,020  |  
|                                                                                                              |  |                     | 66,698 |                    |   | 66,731 |  
|Less accumulated depreciation and
 amortization                                                               |  |                     | (6,238 | )                  |   | (4,917 | )
|                                                                                                              |  |                     | 60,460 |                    |   | 61,814 |  
|                                                                                                              |  |                     |        |                    |   |        |  
|Investment in non-consolidated entities                                                                       |  |                     | 26,495 |                    |   | 26,495 |  
|Acquired lease intangibles, net                                                                               |  |                     | 1,957  |                    |   | 2,488  |  
|Net real estate investments                                                                                   |  |                     | 88,912 |                    |   | 90,797 |  
|                                                                                                              |  |                     |        |                    |   |        |  
|Cash and
 cash equivalents                                                                                    |  |                     | 2,826  |                    |   | 918    |  
|Tenant
 receivables, net                                                                                      |  |                     | 591    |                    |   | 892    |  
|Accounts
 receivable                                                                                          |  |                     | 6      |                    |   | 8      |  
|Accounts
 receivable - related party                                                                          |  |                     | 231    |                    |   | 1,368  |  
|Notes
 receivable                                                                                             |  |                     | 210    |                    |   | 334    |  
|Deferred
 costs, net                                                                                          |  |                     | 541    |                    |   | 591    |  
|Other assets                                                                                                  |  |                     | 765    |                    |   | 830    |  
|TOTAL ASSETS                                                                                                  |  | $                   | 94,082 |                    | $ | 95,738 |  
|                                                                                                              |  |                     |        |                    |   |        |  
|LIABILITIES AND CAPITAL                                                                                       |  |                     |        |                    |   |        |  
|Liabilities:                                                                                                  |  |                     |        |                    |   |        |  
|Notes payable                                                                                                 |  | $                   | 50,577 |                    | $ | 50,693 |  
|Notes payable - related party                                                                                 |  |                     | 2,507  |                    |   |       |  
|Accounts payable and other liabilities                                                                        |  |                     | 1,365  |                    |   | 1,055  |  
|Accounts payable - related party                                                                              |  |                     | 233    |                    |   | 106    |  
|Acquired below-market lease intangibles,
 net                                                                 |  |                     | 368    |                    |   | 517    |  
|Security deposits                                                                                             |  |                     | 130    |                    |   | 133    |  
|TOTAL LIABILITIES                                                                                             |  |                     | 55,180 |                    |   | 52,504 |  
|                                                                                                              |  |                     |        |                    |   |        |  
|Capital:                                                                                                      |  |                     |        |                    |   |        |  
|Partners capital:                                                                                            |  |                     |        |                    |   |        |  
|General partner                                                                                               |  |                     |       |                    |   |       |  
|Limited partners, 2,833 and 2,834 units
 outstanding at September 30, 2009 and December 31, 2008 respectively |  |                     | 37,717 |                    |   | 41,857 |  
|Accumulated other comprehensive loss                                                                          |  |                     | (138   | )                  |   | (253   | )
|TOTAL PARTNERS CAPITAL                                                                                       |  |                     | 37,579 |                    |   | 41,604 |  
|                                                                                                              |  |                     |        |                    |   |        |  
|Non-controlling interest                                                                                      |  |                     | 1,323  |                    |   | 1,630  |  
|TOTAL CAPITAL                                                                                                 |  |                     | 38,902 |                    |   | 43,234 |  
|                                                                                                              |  |                     |        |                    |   |        |  
|TOTAL
 LIABILITIES AND CAPITAL                                                                                |  | $                   | 94,082 |                    | $ | 95,738 |  

See Notes to Consolidated Financial
Statements.

1

---



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 September 30, |         | Nine months ended September 30, |  
|                                                  |  | 2009                             |         | 2008                            |   | 2009    |   | 2008 |          
|                                                  |  |                                  |         |                                 |   |         |   |      |          
|Revenues:                                         |  |                                  |         |                                 |   |         |   |      |           |   |   |         |  
|Rental income from operating leases               |  | $                                | 1,638   |                                 | $ | 1,685   |   | $    | 5,114     |   | $ | 5,195   |  
|Total revenues                                    |  |                                  | 1,638   |                                 |   | 1,685   |   |      | 5,114     |   |   | 5,195   |  
|                                                  |  |                                  |         |                                 |   |         |   |      |           |   |   |         |  
|Expenses:                                         |  |                                  |         |                                 |   |         |   |      |           |   |   |         |  
|General and administrative                        |  |                                  | 16      |                                 |   | 40      |   |      | 75        |   |   | 128     |  
|General and administrative - related party        |  |                                  | 79      |                                 |   | 79      |   |      | 341       |   |   | 228     |  
|Asset management fees - related party             |  |                                  | 154     |                                 |   | 154     |   |      | 463       |   |   | 463     |  
|Property expense                                  |  |                                  | 409     |                                 |   | 418     |   |      | 1,399     |   |   | 1,313   |  
|Property management fees - related party          |  |                                  | 64      |                                 |   | 63      |   |      | 217       |   |   | 186     |  
|Legal and professional                            |  |                                  | 46      |                                 |   | 51      |   |      | 150       |   |   | 338     |  
|Depreciation and amortization                     |  |                                  | 618     |                                 |   | 622     |   |      | 1,971     |   |   | 1,922   |  
|Total operating expenses                          |  |                                  | 1,386   |                                 |   | 1,427   |   |      | 4,616     |   |   | 4,578   |  
|                                                  |  |                                  |         |                                 |   |         |   |      |           |   |   |         |  
|Operating income                                  |  |                                  | 252     |                                 |   | 258     |   |      | 498       |   |   | 617     |  
|                                                  |  |                                  |         |                                 |   |         |   |      |           |   |   |         |  
|Other income (expense):                           |  |                                  |         |                                 |   |         |   |      |           |   |   |         |  
|Interest income - related party                   |  |                                  |        |                                 |   | 8       |   |      |          |   |   | 26      |  
|Interest and other income                         |  |                                  | 9       |                                 |   | 114     |   |      | 35        |   |   | 354     |  
|Interest expense                                  |  |                                  | (785    | )                               |   | (781    | ) |      | (2,331    | ) |   | (2,334  | )
|Equity in losses from non-consolidated entities   |  |                                  | (473    | )                               |   | (387    | ) |      | (1,134    | ) |   | (1,283  | )
|Margin tax expense                                |  |                                  | 9       |                                 |   | (15     | ) |      | (17       | ) |   | (39     | )
|Total other income (expense)                      |  |                                  | (1,240  | )                               |   | (1,061  | ) |      | (3,447    | ) |   | (3,276  | )
|                                                  |  |                                  |         |                                 |   |         |   |      |           |   |   |         |  
|Net loss, including non-controlling interest      |  |                                  | (988    | )                               |   | (803    | ) |      | (2,949    | ) |   | (2,659  | )
|                                                 
|Net loss attributable to non-controlling interest |  |                                  | 30      |                                 |   | 12      |   |      | 89        |   |   | 41      |  
|Net loss attributable to partners                 |  | $                                | (958    | )                               | $ | (791    | ) | $    | (2,860    | ) | $ | (2,618  | )
|                                                  |  |                                  |         |                                 |   |         |   |      |           |   |   |         |  
|Weighted average units outstanding                |  |                                  | 2,832   |                                 |   | 2,842   |   |      | 2,833     |   |   | 2,842   |  
|Net loss per unit                                 |  | $                                | (338.28 | )                               | $ | (278.33 | ) | $    | (1,009.53 | ) | $ | (921.18 | )

See Notes to Consolidated
Financial Statements.

2

---



Table of Contents

AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITAL
For the nine months ended September 30, 2009
(in thousands)(unaudited)

|                                     |  |                   |     |                   |   |                                               |   |                           |      |       |   |       |   |   |        |  
|------------------------------------ |  | ----------------- | --- | ----------------- | - | --------------------------------------------- | - | ------------------------- | ---- | ----- | - | ----- | - | - | ------ | -
|                                     |  | Partners Capital |     |                   |   |                                               |  
|                                     |  | General
 Partner  |     | Limited
 Partners |   | Accumulated other
 comprehensive gain
 (loss) |   | Non-controlling
 interest |      | Total |  
|                                     |  |                   |     |                   |   |                                               |   |                           |      |       |   |       |   |   |        |  
|Balance at December 31, 2008         |  | $                 |    |                   | $ | 41,857                                        |   | $                         | (253 | )     | $ | 1,630 |   | $ | 43,234 |  
|                                     |  |                   |     |                   |   |                                               |   |                           |      |       |   |       |   |   |        |  
|Redemptions                          |  |                   |    |                   |   | (28                                           | ) |                           |     |       |   |      |   |   | (28    | )
|Net loss (1)                         |  |                   | 13  |                   |   | (2,873                                        | ) |                           |     |       |   | (89   | ) |   | (2,949 | )
|Distributions                        |  |                   | (13 | )                 |   | (1,239                                        | ) |                           |     |       |   | (218  | ) |   | (1,470 | )
|Increase in fair value of derivative |  |                   |    |                   |   |                                              |   |                           | 115  |       |   |      |   |   | 115    |  
|                                     |  |                   |     |                   |   |                                               |   |                           |      |       |   |       |   |   |        |  
|Balance at September 30, 2009        |  | $                 |    |                   | $ | 37,717                                        |   | $                         | (138 | )     | $ | 1,323 |   | $ | 38,902 |  

| |     |                                                                                                                                                                                                                                                                                                                                                                            
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | The
 allocation of net loss includes a curative allocation to increase the General
 Partner capital account by $42 for the nine months ended September 30, 2009.
 The cumulative curative allocation since inception of the Partnership is
 $249. 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.

3

---



Table of Contents

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

|                                                                                                                                                                                          |  |                                 |        |      |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | ---- | - | ------ | -
|                                                                                                                                                                                          |  | Nine months ended September 30, |       
|                                                                                                                                                                                          |  | 2009                            |        | 2008 |  
|Cash flows from operating activities:                                                                                                                                                     |  |                                 |        |      |   |        |  
|Net loss, including non-controlling interest                                                                                                                                              |  | $                               | (2,949 | )    | $ | (2,659 | )
|Adjustments to reconcile net loss to net cash provided by (used in)
 operating activities:                                                                                                |  |                                 |        |      |   |        |  
|Loss from non-consolidated entities                                                                                                                                                       |  |                                 | 1,134  |      |   | 1,283  |  
|Depreciation and amortization                                                                                                                                                             |  |                                 | 1,971  |      |   | 1,922  |  
|Amortization of above and below market leases, net                                                                                                                                        |  |                                 | (107   | )    |   | (87    | )
|Amortization of loan acquisition costs                                                                                                                                                    |  |                                 | 57     |      |   | 56     |  
|Bad debt expense                                                                                                                                                                          |  |                                 | 140    |      |   |       |  
|Decrease in tenant receivables                                                                                                                                                            |  |                                 | 161    |      |   | 30     |  
|Decrease (increase) in accounts receivable                                                                                                                                                |  |                                 | 2      |      |   | (219   | )
|Decrease (increase) in accounts receivable - related party                                                                                                                                |  |                                 | 1,062  |      |   | (85    | )
|Increase in deferred costs                                                                                                                                                                |  |                                 | (59    | )    |   | (102   | )
|Decrease (increase) in other assets                                                                                                                                                       |  |                                 | 65     |      |   | (438   | )
|Increase (decrease) in accounts payable and other liabilities                                                                                                                             |  |                                 | 310    |      |   | (42    | )
|Increase (decrease) in accounts payable - related party                                                                                                                                   |  |                                 | 134    |      |   | (93    | )
|Increase (decrease) in security deposits                                                                                                                                                  |  |                                 | (3     | )    |   | 10     |  
|Net
 cash provided by (used in) operating activities                                                                                                                                      |  |                                 | 1,918  |      |   | (424   | )
|                                                                                                                                                                                          |  |                                 |        |      |   |        |  
|Cash flows from investing activities:                                                                                                                                                     |  |                                 |        |      |   |        |  
|Improvements to real estate                                                                                                                                                               |  |                                 | (76    | )    |   | (282   | )
|Payments received on notes receivable                                                                                                                                                     |  |                                 | 124    |      |   | 1,428  |  
|Payments received on notes receivable - related party                                                                                                                                     |  |                                 |       |      |   | 1,653  |  
|Advances for notes receivable - related party                                                                                                                                             |  |                                 |       |      |   | (530   | )
|Investments in non-consolidated entities                                                                                                                                                  |  |                                 | (1,099 | )    |   | (2,103 | )
|Distributions from non-consolidated entities                                                                                                                                              |  |                                 | 155    |      |   | 724    |  
|Net cash (used in) provided by investing activities                                                                                                                                       |  |                                 | (896   | )    |   | 890    |  
|                                                                                                                                                                                          |  |                                 |        |      |   |        |  
|Cash flows from financing activities:                                                                                                                                                     |  |                                 |        |      |   |        |  
|Payments on notes payable                                                                                                                                                                 |  |                                 | (116   | )    |   | (108   | )
|Proceeds from notes payable - related party                                                                                                                                               |  |                                 | 2,500  |      |   |       |  
|Optional redemptions                                                                                                                                                                      |  |                                 | (28    | )    |   | (23    | )
|Distributions                                                                                                                                                                             |  |                                 | (1,252 | )    |   | (4,037 | )
|Distributions to non-controlling interest                                                                                                                                                 |  |                                 | (218   | )    |   | (380   | )
|Net cash provided by (used in) financing activities                                                                                                                                       |  |                                 | 886    |      |   | (4,548 | )
|                                                                                                                                                                                          |  |                                 |        |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                                                                                                                                      |  |                                 | 1,908  |      |   | (4,082 | )
|Cash and cash equivalents, beginning of period                                                                                                                                            |  |                                 | 918    |      |   | 5,245  |  
|Cash and cash equivalents, end of period                                                                                                                                                  |  | $                               | 2,826  |      | $ | 1,163  |  
|                                                                                                                                                                                          |  |                                 |        |      |   |        |  
|Supplemental schedule of cash flow information:                                                                                                                                           |  |                                 |        |      |   |        |  
|                                                                                                                                                                                          |  |                                 |        |      |   |        |  
|Cash paid during the period for interest                                                                                                                                                  |  | $                               | 2,273  |      | $ | 2,283  |  
|Cash paid during the period for taxes                                                                                                                                                     |  | $                               | 23     |      | $ | 65     |  
|                                                                                                                                                                                          |  |                                 |        |      |   |        |  
|Supplemental schedule of noncash investing and
 financing activities:                                                                                                                     |  |                                 |        |      |   |        |  
|                                                                                                                                                                                          |  |                                 |        |      |   |        |  
|During
 the nine months ended September 30, 2009, $75,000 of accounts receivable from
 one of our non-consolidated entities was reclassified to investment in
 non-consolidated entities. | 
|                                                                                                                                                                                          |  |                                 |        |      |   |        |  
|During
 the nine months ended September 30, 2009, $7,000 in accrued interest on notes
 payable - related party was added to the note balances.                                           

See Notes to
Consolidated Financial Statements.

4

---



Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

September 30, 2009
(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, a non-traded Maryland real estate investment
trust that files reports with the Securities and Exchange Commission (SEC).
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. At September 30, 2009, 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 1,141,000 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.

Projected cash sources and uses for the Partnerships 2010 fiscal year
indicate certain periods of cash shortfalls within the twelve month period;
however, 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. No assurance can be given that we will be able to
generate such liquidity. In the event that we are unable to generate sufficient
liquidity, we may be forced to sell one or more properties at a time when it is
disadvantageous to do so, potentially resulting in losses on disposition of
those properties.

During the past several months, the United States has experienced an
unprecedented business downturn, coupled with a substantial curtailment of
available debt financing and a virtual shutdown of equity capital markets,
particularly in the real estate sector. While we expect to generate sufficient
cash flow from operations in 2009 to meet our contractual obligations, a
significant additional deterioration in the national economy, or the bankruptcy
or insolvency of one or more of our large tenants could cause our 2009 cash
resources to be insufficient to meet our obligations. If necessary, we have the
ability to defer capital improvements and to defer payment of certain operating
costs, including property taxes, until cash resources are available. Effective
July 15, 2009, we suspended all distributions in an effort to conserve cash and
to protect partners principal. As we have numerous projects that are
mid-stream in redevelopment, we are conserving cash from operations to ensure
that we have the ability to fund capital improvements, tenant improvements and
leasing commissions, and to meet our obligations, including debt service.

5

---



Table of Contents

|   |                                            
|-- | -------------------------------------------
|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 (see Note 9). 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.

Effective July 1, 2009, the Financial Accounting Standards Board
(FASB) established the ASC as the primary source of authoritative Generally
Accepted Accounting Principles (GAAP) recognized by the FASB to be applied to
nongovernmental entities. Although the establishment of the ASC did not change
current GAAP, it did change the way we refer to GAAP throughout this document
to reflect the updated referencing convention.

The consolidated financial statements included in this report are
unaudited; however, amounts presented in the consolidated balance sheet as of
December 31, 2008 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 nine months ended September 30, 2009 and 2008, 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 nine months ended
September 30, 2009 and 2008, 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.

6

---



Table of Contents

Acquired Properties and Acquired Lease
Intangibles - We account for acquisitions of operating
properties pursuant to ASC 805, Business
Combinations. 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 (liabilities) 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. During the nine months ended September 30, 2009 and 2008, we expensed
acquisition costs of $6,000 and $0, respectively. We did not capitalize any
interest or taxes during the same periods.

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
improvements.

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 September 30, 2009 and December 31, 2008, 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.

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.

7

---



Table of Contents

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 September 30, 2009 and December 31, 2008, our allowance for uncollectible
accounts related to our tenant receivables was $237,000 and $98,000,
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.

Notes Receivable - Included in notes receivable is a
loan made to our joint venture partner that owns a 42.5% interest in our 5433
Westheimer property. Interest accrues monthly at a rate of 15% per annum.
Interest payments are due monthly, and the balance of the note and any unpaid
interest is due in full on December 31, 2009.

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. Accumulated amortization related to
loan acquisition costs as of September 30, 2009 and December 31, 2008 totaled
$254,000 and $197,000, respectively. Accumulated amortization related to
leasing costs as of September 30, 2009 and December 31, 2008 totaled $88,000
and $55,000, 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
nine months ended September 30, 2009 and 2008, we recorded tax provisions of
approximately $17,000 and $39,000, respectively, for the Texas Margin Tax.

USE OF ESTIMATES

The preparation of consolidated financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

8

---



Table of Contents

FAIR VALUE OF FINANCIAL INSTRUMENTS

Our consolidated financial instruments consist primarily of cash and
cash equivalents, tenant receivables, accounts receivable, accounts
receivable-related party, notes receivable, accounts payable and other
liabilities, accounts payable-related party, notes payable and notes payable 
related party. The carrying value of all but the notes payable are
representative of their respective fair values due to the short-term nature of
these instruments.

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. Based on these estimates, the fair value
of notes payable was $49.7 million and $52.8 million at September 30, 2009 and
December 31, 2008, respectively.

NEW ACCOUNTING STANDARDS

In December 2007, the FASB issued an update to ASC 805, Business Combinations, which changes the
accounting for business combinations. Under the amended guidance, an acquiring
entity is required to recognize all the assets acquired and liabilities assumed
in a transaction at the acquisition-date fair value with limited exceptions.
ASC805 applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. We adopted the amended guidance on
January 1, 2009. Such adoption did not have a material impact on our results of
operations, cash flows or financial condition as we did not acquire any
properties or entities during the nine months ended September 30, 2009.

In December 2007, the FASB issued an update to ASC810, Consolidation, which establishes
accounting and reporting standards for the non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
non-controlling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. The amended guidance is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15, 2008.
It also requires retroactive adoption of the presentation and disclosure
requirements for existing non-controlling interests. All other requirements of
ASC810 shall be applied prospectively. Our adoption of the amended guidance
caused our partners capital to increase as a result of transferring the
non-controlling interest in our consolidated subsidiary from the mezzanine
section of our balance sheet into equity.

In March 2008, the FASB issued an update to ASC 815, Derivatives and Hedging, which requires
enhanced disclosures about an entitys derivative and hedging activities. Under
the amended guidance, an entity is required to provide enhanced disclosures
about how and why it uses derivative instruments and how derivative instruments
and related hedged items affect an entitys financial position, financial
performance, and cash flows. The amended guidance became effective for fiscal
years and interim periods beginning after November 15, 2008. Our adoption of
this guidance did not have a material impact on the results of our operations
or financial position.

In May 2009, the FASB issued ASC 855, Subsequent
Events which establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. We adopted ASC
855 in the second quarter of 2009 and evaluated all events or transactions
through November 13, 2009. During this period, we did not have any material
subsequent events that impacted our consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS No.
167), which amends the consolidation guidance applicable to variable interest
entities. The amendments will 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 special purpose
entities as a result of the elimination of the Qualified Special Purpose Entity
(QSPE) concept in SFAS No.166. SFAS No. 167 is effective as of the beginning
of the first fiscal year that begins after November 15, 2009 and early adoption is prohibited. Management is currently evaluating
the impact on our consolidated financial statements of adopting SFAS No. 167.

9

---



Table of Contents

In June 2009, the FASB issued ASC 105, The
FASB Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles which became the single source of
authoritative nongovernmental U.S. generally accepted accounting principles,
superseding existing FASB, American Institute of Certified Public Accountants,
EITF, and related accounting literature. ASC 105 reorganizes the thousands of
GAAP pronouncements into roughly 90 accounting topics and displays them using a
consistent structure. Also included is relevant SEC guidance organized using
the same topical structure in separate sections. ASC 105 is effective for all
quarterly and annual reporting periods ending after September 15, 2009. We
adopted the provisions of ASC 105 for the quarter ended September 30, 2009.

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, SegmentRreporting
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 each 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. As noted below, we have since acquired an
 additional 7.5% interest. The remaining 42.5% is owned by a third party.
 Construction of the hotel was completed in August, 2009, and we are currently
 evaluating opportunities to further develop the property.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | 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 AmREIT Monthly Income
 & Growth Fund IV, L.P. (MIG IV), an affiliate of our General Partner.                                                                                                                    

10

---



Table of Contents

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | 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 AmREIT Realty Investment
 Corporation (ARIC).                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | 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.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | 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 805, Business Combinations.                                                                                         

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 as of and for the three months ended September 30, 2009 and
2008, and nine months ended September 30, 2009 and 2008, as follows (in
thousands):

|                              |  |                                  |        |                                 |   |        |   |      |        |   |   |        |  
|----------------------------- |  | -------------------------------- | ------ | ------------------------------- | - | ------ | - | ---- | ------ | - | - | ------ | -
|                              |  | Three months ended September 30, |        | Nine months ended September 30, |  
|                              |  | 2009                             |        | 2008                            |   | 2009   |   | 2008 |       
|Revenue                       |  | $                                | 4,282  |                                 | $ | 4,933  |   | $    | 13,499 |   | $ | 14,526 |  
|Depreciation and amortization |  |                                  | (2,130 | )                               |   | (2,436 | ) |      | (6,618 | ) |   | (7,494 | )
|Interest expense              |  |                                  | (1,476 | )                               |   | (1,415 | ) |      | (4,397 | ) |   | (4,435 | )
|Net loss                      |  | $                                | (907   | )                               | $ | (923   | ) | $    | (2,612 | ) | $ | (3,376 | )

DERIVATIVE FINANCIAL INSTRUMENTS

In December 2007, 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 nine months ended September 30,
2008, our portion of the loss totaled $125,000 and is included in loss from
non-consolidated entities in our consolidated statements of operations. For the
nine months ended September 30, 2009, our portion of the increase in fair value
totaled $115,000 and is included in accumulated other comprehensive gain (loss)
on our consolidated statements of capital.

|   |                            
|-- | ---------------------------
|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 $455,000 and $500,000 for the nine months ended September 30, 2009 and 2008,
respectively. The amortization of above-market leases, which was recorded as a reduction
of rental income, was approximately $41,000 and $48,000 during the nine months ended
September 30, 2009 and 2008, respectively. We recorded disposals of acquired lease
intangible assets of $34,000 for the nine months ended September 30, 2009 and 2008 related
to unscheduled tenant vacancies. Accretion of below-market leases was approximately
$137,000 and $142,000 during the nine months ended September 30, 2009 and 2008,
respectively. We recorded disposals of acquired lease intangible liabilities of $12,000
and $0 for the nine months ended September 30, 2009 and 2008, respectively, related to
unscheduled tenant vacancies.

11

---



Table of Contents

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

|                                                |  |                    |        |                   |   |        |  
|----------------------------------------------- |  | ------------------ | ------ | ----------------- | - | ------ | -
|                                                |  | September 30, 2009 |        | December 31, 2008 |  
|Acquired lease intangible
 assets:              |  |                    |        |                   |   |        |  
|In-place leases                                 |  | $                  | 4,462  |                   | $ | 4,585  |  
|In-place leases - accumulated
 amortization     |  |                    | (2,598 | )                 |   | (2,232 | )
|Above-market leases                             |  |                    | 269    |                   |   | 278    |  
|Above-market leases -
 accumulated amortization |  |                    | (176   | )                 |   | (143   | )
|Acquired lease intangibles, net                 |  | $                  | 1,957  |                   | $ | 2,488  |  
|                                                |  |                    |        |                   |   |        |  
|Acquired lease intangible
 liabilities:         |  |                    |        |                   |   |        |  
|Below-market leases                             |  | $                  | 1,127  |                   | $ | 1,161  |  
|Below-market leases -
 accumulated amortization |  |                    | (759   | )                 |   | (644   | )
|Acquired below-market lease intangibles, net    |  | $                  | 368    |                   | $ | 517    |  

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

Our outstanding debt consisted entirely of fixed-rate mortgage loans of
approximately $50.6 million and $50.7 million at September 30, 2009 and
December 31, 2008, respectively. Our mortgage loans are secured by our real
estate properties and may be prepaid, but 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 September 30, 2009, the weighted-average interest rate on our
fixed-rate debt is 5.9%, and the weighted average remaining life of such debt
is 11.4 years.

As of September 30, 2009, scheduled principal repayments on notes
payable were as follows (in thousands):

|                            |  |   |                                |  |                       |        |                 |  
|--------------------------- |  | - | ------------------------------ |  | --------------------- | ------ | --------------- | -
|Scheduled
 Payments by Year |  |   | Scheduled
 Principal
 Payments |  | Term-Loan
 Maturities |        | Total
 Payments |  
|2009                        |  | $ | 40                             |  | $                     |       |                 | $
|2010                        |  |   | 165                            |  |                       |       |                 |  
|2011                        |  |   | 335                            |  |                       | 24,455 |                 |  
|2012                        |  |   | 183                            |  |                       |       |                 |  
|2013                        |  |   | 196                            |  |                       |       |                 |  
|Thereafter                  |  |   | 299                            |  |                       | 24,904 |                 |  
|Total                       |  | $ | 1,218                          |  | $                     | 49,359 |                 | $

We serve as guarantor on debt in the amount of $21.5
million that is the primary obligation of our wholly-owned subsidiaries.
Additionally, we serve as guarantor on debt in the amount of $44.0 million that
is the primary obligation of our joint ventures. In conjunction with one such
guarantor arrangement, we are required to maintain $3.0 million of liquid
assets, as defined by the agreement. During the quarter, we were out of
compliance with this liquidity covenant which was cured with the lender during
the quarter. We expect that this liquidity requirement will be reduced to $1.5
million of liquid assets as we achieve certain property development conditions
as stipulated by the agreement. We believe we will be able to maintain
compliance with this covenant in the future, although no assurances can be
given. See further discussion of liquidity in Note 1.

12

---



Table of Contents

Notes Payable  Related Party -In September 2009, we borrowed $2.5
million from affiliates of our General Partner, which matures on December 31,
2009. Of this amount, $1.5 million accrues interest monthly at LIBOR plus a
spread of 4.0% with a floor of 7.0%, and the remaining 1.0 million accrues
interest monthly at LIBOR plus a spread of 3.0%. The note is secured by our
investment interest in the Woodlake Pointe and Woodlake Square properties.

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

As of September 30, 2009 and December 31, 2008, each of our four
consolidated properties individually comprised greater than 10% of our
consolidated total assets. Consistent with our strategy of investing in areas
that we know well, three of our four properties are located in the Houston
metropolitan area. These Houston properties represent 81% and 82% of our rental
income for the nine months ended September 30, 2009 and 2008, respectively.
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 nine months ended September 30, 2009 and 2008 (in thousands):

|                        |  |                                 |       |  |      |      
|----------------------- |  | ------------------------------- | ----- |  | ---- | -----
|                        |  | Nine months ended September 30, |      
|Tenant                  |  |                                 | 2009  |  | 2008 |      
|H-E-B Grocery           |  | $                               | 1,069 |  | $    | 1,069
|Designer Shoe Warehouse |  |                                 | 413   |  |      | 413  
|Rice Food Markets, Inc. |  |                                 | 219   |  |      | 219  
|Blockbuster Video       |  |                                 | 168   |  |      | 168  
|Fidelity Investments    |  |                                 | 158   |  |      | 158  
|                        |  | $                               | 2,027 |  | $    | 2,027

|   |                                                
|-- | -----------------------------------------------
|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. During the nine
months ended September 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. We received and granted one redemption
request during the nine months ended September 30, 2008 in the amount of
$28,000. All redemption requests that have been granted were paid with cash
flows from operations. We suspended the optional redemption program during the
second quarter of 2009 due to macroeconomic conditions and the need to preserve
cash.

13

---



Table of Contents

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.
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 nine month periods ended September 30, 2009 and 2008 (in
thousands):

|                                            |  |                                  |      |                                 |      |     |      |   |       | 
|------------------------------------------- |  | -------------------------------- | ---- | ------------------------------- | ---- | --- | ---- | - | ----- | 
|                                            |  | Three months ended September 30, |      | Nine months ended September 30, |     
|Type of service                             |  |                                  | 2009 |                                 | 2008 |     | 2009 |   | 2008  | 
|Asset management fees                       |  | $                                | 154  |                                 | $    | 154 |      | $ | 463   | 
|Property management fees and
 leasing costs |  |                                  | 108  |                                 |      | 75  |      |   | 275   | 
|Administrative costs
 reimbursements        |  |                                  | 79   |                                 |      | 79  |      |   | 341   | 
|                                            |  | $                                | 341  |                                 | $    | 308 |      | $ | 1,079 | 

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 nine months ended September 30, 2009 and
2008, such fees totaled $634,000 and $620,000, 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
nine months ended September 30, 2009 and 2008.

14

---



Table of Contents

|    |                               
|--- | ------------------------------
|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.

15

---



Table of Contents

|       |                                                                                       
|------ | --------------------------------------------------------------------------------------
|ITEM2. | 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 Quarterly 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. 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 the 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, a non-traded Maryland
real estate investment trust that files reports with the SEC. We qualify as a
partnership for federal income tax purposes.

As of September 30, 2009, 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
1,141,000 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 nine months
ended September 30, 2009 and 2008. As of September 30, 2009, our properties had
an average occupancy rate of approximately 78% and the average debt leverage
ratio of the properties in which we have an investment interest was
approximately 58%, with 87% 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.

16

---



Table of Contents

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 6. Financial Information 
Managements Discussion and Analysis or Plan of Operation of the Partnerships
Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
Management believes that as of September 30, 2009, there have been no material
changes to this information.

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 September 30, 2009,
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 1,141,000 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 September 30, 2009 versus
Three Months Ended September 30, 2008

Revenue.Revenue decreased approximately
$47,000 to $1.6 million for the three months ended September 30, 2009, compared
to approximately $1.7 million for the three months ended September 30, 2008. A
decrease in common area maintenance (CAM) expenses resulted in a
corresponding decrease in CAM recoveries billed to our tenants.

General and Administrative.General and administrative expenses
decreased approximately $24,000 to approximately $16,000 for the three months
ended September 30, 2009, compared to approximately $40,000 for the three
months ended September 30, 2008. This decrease was primarily due to a reduction
in marketing costs, which were incurred during the second quarter of 2008 but
not incurred during 2009.

Interest Income  Related Party.Interest income  related party
recorded during the three months ended September 30, 2008, relates to a note
receivable from one of our investment properties. The note was paid in full
during 2008, and we had no related party notes receivable outstanding during
2009.

Interest and Other Income. Interest and other income decreased
approximately $105,000 to approximately $9,000 during the three months ended
September 30, 2009, compared to approximately $114,000 for the three months
ended September 30, 2008. This decrease resulted primarily from a lower
outstanding balance on the note receivable from our joint venture partner on
our investment in 5433 Westheimer L.P. (see Note 2 to the consolidated
financial statements).

Equity in Losses From Non-Consolidated
Entities.Equity in losses from non-consolidated entities increased approximately
$86,000 to approximately $473,000 for the three months ended September 30,
2009, compared to approximately $387,000 for the three months ended September
30, 2008. These amounts represent our ownership portion of our joint ventures
net income or loss for the period. The increased loss is due to lower occupancy
rates, and thus lower revenues, at Casa Linda resulting from our re-development
of that property in 2008 and 2009 and an increase in bad debt expense at Preston Towne Crossing associated with
the expected uncollectability of certain tenant receivables.

17

---



Table of Contents

Nine Months Ended September 30, 2009 versus
Nine Months Ended September 30, 2008

Revenue.Revenue decreased approximately
$81,000 to approximately $5.1 million for the nine months ended September 30,
2009, compared to approximately $5.2 million for the nine months ended
September 30, 2008. A decrease in CAM expenses resulted in a corresponding
decrease in CAM recoveries billed to our tenants.

General and Administrative.General and administrative expenses
decreased approximately $53,000 to approximately $75,000 for the nine months
ended September 30, 2009, compared to approximately $128,000 for the nine
months ended September 30, 2008. This decrease was due to a reduction in
insurance costs for directors and officers and a reduction in marketing costs
incurred during 2008 but not incurred during 2009.

General and Administrative  Related Party.General and administrative expenses
paid to our affiliate increased approximately $113,000 to approximately
$341,000 during the nine months ended September 30, 2009, compared to
approximately $228,000 for the nine months ended September 30, 2008. This
increase was due to an increase in the compensation pool and to an increase in
the allocation of those costs during the period to better reflect the level of
effort expended by our affiliates financial personnel in providing accounting
and financial reporting services to us.

Property Expense.Property operating expenses
increased approximately $86,000 to approximately $1.4 million during the nine
months ended September 30, 2009, compared to approximately $1.3 million for the
nine months ended September 30, 2008. This increase was primarily due to an
increase in bad debt expense associated with the expected uncollectability of
certain tenant receivables, offset slightly by a decrease in CAM expenses.

Property Management Fees  Related Party. Property management fees to our
affiliate increased approximately $31,000 to approximately $217,000 for the
nine months ended September 30, 2009, compared to approximately $186,000 for
the nine months ended September 30, 2008. Property management fees are
calculated based on tenant billings. This increase is primarily due to 2008
expense recoveries that were billed to tenants during the first quarter of
2009. Such fees billed during the first quarter of 2008 were less as the CAM
billings during 2007 more closely approximated the actual fees incurred during
2007.

Legal and Professional Fees.Legal and professional fees
decreased approximately $188,000 to approximately $150,000 during the nine
months ended September 30, 2009, compared to approximately $338,000 for the
nine months ended September 30, 2008. This decrease is primarily due to fees
incurred in the first quarter of 2008 related to an audit of one of our
investment properties that was required during 2008. This audit was not
required in subsequent periods.

Depreciation and Amortization Expense.Depreciation and amortization
expense increased approximately $49,000 to approximately $2.0 million during
the nine months ended September 30, 2009, compared to approximately $1.9
million for the nine months ended September 30, 2008. This increase was
primarily due to write-offs of tenant improvements and acquired lease
intangibles due to tenant vacancies during the first quarter of 2009.

Interest Income  Related Party.Interest income  related party
recorded during the nine months ended September 30, 2008 relates to a note
receivable from one of our investment properties. The note was paid in full
during 2008, and we had no related party notes receivable outstanding during
2009.

Interest and Other Income. Interest and other income decreased
approximately $319,000 to approximately $35,000 during the nine months ended
September 30, 2009, compared to approximately $354,000 for the nine months
ended September 30, 2008. This decrease resulted primarily from a lower
outstanding balance on the note receivable from our joint venture partner on
our investment in 5433 Westheimer L.P. (see Note 2 to the consolidated
financial statements).

18

---



Table of Contents

Equity in Losses From Non-Consolidated
Entities.Equity in losses from non-consolidated entities decreased approximately
$149,000 to approximately $1.1 million for the nine months ended September 30,
2009, compared to approximately $1.3 million for the nine months ended September 30,
2008. These amounts represent our ownership portion of our joint ventures net
income or loss for the period. The decreased loss is due primarily to a loss
recorded by our Woodlake Square property during 2008 due to changes in fair
value of its interest rate swap. The interest rate swap was designated as a
hedge on October 1, 2008. The net change in fair value subsequent to October 1,
2008 is reported through accumulated other comprehensive income.

Margin Tax Expense.Margin tax expense decreased
approximately $22,000 to approximately $17,000 for the nine months ended
September 30, 2009, compared to approximately $39,000 for the nine months ended
September 30, 2008. This decrease is due to a margin tax refund received during
2009 related to overpayment of 2008 taxes.

Net Loss Attributable to Non-controlling
Interest. Net loss attributable to non-controlling interest increased
approximately $48,000 to approximately $89,000 for the nine months ended
September 30, 2009, compared to approximately $41,000 for the nine months ended
September 30, 2008. This increase was primarily due to an increase in the loss
recorded at our Lake Houston property resulting from decreased revenues and
write-off of intangible costs related to a tenant that vacated the property
during 2009.

Liquidity and Capital Resources

We expect to meet our short-term liquidity requirements with cash on
hand, through net cash provided by property operations and through 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 September 30, 2009 and December 31, 2008, our cash and cash
equivalents totaled approximately $2.8 million and $918,000, respectively. Cash
flows provided by (used in) operating activities, investing activities and
financing activities for the nine months ended September 30, 2009 and 2008 are
as follows (in thousands):

|                     |  |                                 |       |      |   |        |  
|-------------------- |  | ------------------------------- | ----- | ---- | - | ------ | -
|                     |  | Nine months ended September 30, |      
|                     |  | 2009                            |       | 2008 |  
|Operating activities |  | $                               | 1,918 |      | $ | (424   | )
|Investing activities |  |                                 | (896  | )    |   | 890    |  
|Financing activities |  |                                 | 886   |      |   | (4,548 | )

Net cash flows provided by operating activities increased approximately
$2.3 million to inflows of approximately $1.9 million for the nine months ended
September 30, 2009 compared to outflows of approximately $424,000 for the nine
months ended September 30, 2008. This increase in cash flows provided by
operating activities was primarily due to an increase in working capital cash
flows of approximately $2.6 million which was driven by an increase in cash
received from tenants, payments received on accounts receivable  related party
and a decrease in cash paid for escrow deposits and accounts payable and other
liabilities.

Net cash flows provided by investing activities decreased approximately
$1.8 million to net cash outflows of approximately $896,000 for the nine months
ended September 30, 2009 compared to net cash inflows of approximately $890,000
for the nine months ended September 30, 2008. This decrease is primarily due to
a decrease in payments received on notes receivable and notes receivable 
related party of approximately $1.3 million and $1.7 million, respectively.
Also, cash investments in non-consolidated entities decreased approximately
$1.0 million during the period.

Net cash flows used in financing activities decreased approximately
$5.4 million to inflows of approximately $886,000 for the nine months ended
September 30, 2009 compared to outflows of approximately $4.5 million for the
nine months ended September 30, 2008. This decrease was primarily due to a
reduction in distributions of approximately $2.8 million as we reduced our
distribution rate in December 2008, and subsequently suspended all
distributions in July 2009. We also received $2.5 million in proceeds from
notes payable  related parties during 2009.

19

---



Table of Contents

We serve as guarantor on debt in the amount of $21.5
million that is the primary obligation of our wholly-owned subsidiaries.
Additionally, we serve as guarantor on debt in the amount of $44.0 million that
is the primary obligation of our joint ventures. In conjunction with one such
guarantor arrangement, we are required to maintain $3.0 million of liquid
assets, as defined by the agreement. During the quarter, we were out of
compliance with this liquidity covenant which was cured with the lender during
the quarter. We expect that this liquidity requirement will be reduced to $1.5
million of liquid assets as we achieve certain property development conditions
as stipulated by the agreement. We believe we will be able to maintain
compliance with this covenant in the future, although no assurances can be
given.

Projected cash sources and uses for the Partnerships 2010 fiscal year
indicate certain periods of cash shortfalls within the twelve month period;
however, 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. No assurance can be given that we will be able to
generate such liquidity. In the event that we are unable to generate sufficient
liquidity, we may be forced to sell one or more properties at a time when it is
disadvantageous to do so, potentially resulting in losses on disposition of
those properties.

During the past several months, the United States has experienced an
unprecedented business downturn, coupled with a substantial curtailment of
available debt financing and a virtual shutdown of equity capital markets,
particularly in the real estate sector. While we expect to generate sufficient
cash flow from operations in 2009 to meet our contractual obligations, a
significant additional deterioration in the national economy or the bankruptcy
or insolvency of one or more of our large tenants could cause our 2009 cash
resources to be insufficient to meet our obligations. If necessary, we have the
ability to defer capital improvements and to defer payment of certain operating
costs, including property taxes, until cash resources are available. Effective
July 15, 2009, we suspended all distributions in an effort to conserve cash and
to protect investors invested capital. As we have numerous 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.

|        |                                                            
|------- | -----------------------------------------------------------
|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES
 ABOUT MARKET RISK

Not applicable.

|         |                        
|-------- | -----------------------
|ITEM 4T. | 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 Securities Exchange Act of 1934) as of September
30, 2009. Based on that evaluation, our General Partners CEO and CFO concluded
that, as of September 30, 2009, 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 September 30, 2009 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.

PART II  OTHER INFORMATION

|       |         
|------ | --------
|ITEM6. | EXHIBITS

The exhibits listed on the accompanying Exhibit Index are filed,
furnished, or incorporated by reference (as stated therein) as part of this
Quarterly Report on Form 10-Q.

20

---



Table of Contents

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: November 13,
 2009 |                                                |                                                                             
|                         |                                                |                                                                             
|                         | 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

21

---



Table of Contents

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
 dated August 14, 2009 (filed herewith).                                                                                                            
|             |  |                                                                                                                                                                                                                                                 
|Exhibit 31.2 |  | Certification
 pursuant to Rule 13a-14(a) of Chief Financial Officer of our General Partner
 dated August 14, 2009 (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).                                                     

22

---