Table of Contents





|                                                                                            |           | 
|------------------------------------------------------------------------------------------- | --------- | 
|UNITED STATES                                                                              
|SECURITIES AND EXCHANGE COMMISSION                                                         
|WASHINGTON, DC 20549                                                                       
|                                                                                            |           | 
|                                                                                            |           | 
|                                                                                            |           | 
|                                                                                            | Form 10-Q | 
|                                                                                            |           | 
|                                                                                            |           | 
|                                                                                            |           | 
|(Mark One)                                                                                  |           | 
|x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 THE SECURITIES EXCHANGE ACT OF 1934 
|                                                                                           
|For the quarterly period ended September 30, 2010                                          
|                                                                                           
|o TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
 OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                                                            |           | 
|For the transition period from _________ to _________                                      
|                                                                                            |           | 
|Commission file number: 000-52619                                                          
|                                                                                            |           | 
|                                                                                            |           | 
|                                                                                            |           | 
|AmREIT MONTHLY INCOME & GROWTH FUND III, LTD.                                              
|(Name of Registrant as specified in its charter)                                           

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

|                                                                                                                                                                                                                                                                                                                                                                                                     |  | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|(713)
 850-1400                                                                                                                                                                                                                                                                                                                                                                                     
|Registrants telephone number, including area code:                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                    
|Not
 Applicable                                                                                                                                                                                                                                                                                                                                                                                     
|Former name, former address and former fiscal year, if changed from
 last report:                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                     |  | 
|                                                                                                                                                                                                                                                                                                                                                                                                     |  | 
|                                                                                                                                                                                                                                                                                                                                                                                                     |  | 
|Indicate
 by check mark whether the registrant (1) has filed all reports required to be
 filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
 the preceding 12 months (or for such shorter period that the registrant was
 required to file such reports), and (2) has been subject to such filing
 requirements for the past 90 days. YesxNoo                               
|                                                                                                                                                                                                                                                                                                                                                                                                    
|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). YesoNoo
|                                                                                                                                                                                                                                                                                                                                                                                                    
|Indicate
 by check mark whether the registrant is a large accelerated filer, an
 accelerated filer, a non-accelerated filer or a smaller reporting company.
 See the definitions of large accelerated filer, accelerated filer and
 smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):                                                                                 

|                                                                                                                              |                                              |                         |                            
|----------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | ----------------------- | ---------------------------
|Large accelerated filer
 o                                                                                                    | Accelerated filer o                          | Non-accelerated filer o | Smaller reporting company x
|                                                                                                                              | (Do
 not check if smaller reporting company)
|                                                                                                                              |                                             
|Indicate
 by check mark whether the registrant is a shell company (as defined in Rule
 12b-2 of the Exchange Act). Yes o No x





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

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Table of Contents

PART I  FINANCIAL
INFORMATION

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

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

|                                                                                  |  |                     |        |                    |   |        |  
|--------------------------------------------------------------------------------- |  | ------------------- | ------ | ------------------ | - | ------ | -
|                                                                                  |  | September 30,
 2010 |        | December 31,
 2009 |  
|                                                                                  |  | (unaudited)         |        |                    |  
|ASSETS                                                                            |  |                     |        |                    |   |        |  
|Real estate investments at cost:                                                  |  |                     |        |                    |   |        |  
|Land                                                                              |  | $                   | 18,446 |                    | $ | 18,446 |  
|Buildings                                                                         |  |                     | 47,295 |                    |   | 47,295 |  
|Tenant improvements                                                               |  |                     | 947    |                    |   | 983    |  
|                                                                                  |  |                     | 66,688 |                    |   | 66,724 |  
|Less accumulated depreciation and amortization                                    |  |                     | (7,926 | )                  |   | (6,691 | )
|                                                                                  |  |                     | 58,762 |                    |   | 60,033 |  
|                                                                                  |  |                     |        |                    |   |        |  
|Investment in non-consolidated entities                                           |  |                     | 22,533 |                    |   | 26,212 |  
|Acquired lease intangibles, net                                                   |  |                     | 1,382  |                    |   | 1,804  |  
|Net real estate investments                                                       |  |                     | 82,677 |                    |   | 88,049 |  
|                                                                                  |  |                     |        |                    |   |        |  
|Cash and cash equivalents                                                         |  |                     | 2,485  |                    |   | 3,297  |  
|Tenant receivables, net                                                           |  |                     | 508    |                    |   | 367    |  
|Accounts receivable - related party                                               |  |                     | 161    |                    |   | 132    |  
|Deferred costs, net                                                               |  |                     | 499    |                    |   | 522    |  
|Other assets                                                                      |  |                     | 785    |                    |   | 706    |  
|TOTAL ASSETS                                                                      |  | $                   | 87,115 |                    | $ | 93,073 |  
|                                                                                  |  |                     |        |                    |   |        |  
|LIABILITIES AND CAPITAL                                                           |  |                     |        |                    |   |        |  
|Liabilities:                                                                      |  |                     |        |                    |   |        |  
|Notes payable                                                                     |  | $                   | 50,414 |                    | $ | 50,537 |  
|Notes payable - related party                                                     |  |                     | 2,406  |                    |   | 2,907  |  
|Accounts payable and other liabilities                                            |  |                     | 1,146  |                    |   | 1,292  |  
|Accounts payable - related party                                                  |  |                     | 17     |                    |   | 10     |  
|Acquired below-market lease intangibles, net                                      |  |                     | 201    |                    |   | 324    |  
|Security deposits                                                                 |  |                     | 113    |                    |   | 125    |  
|TOTAL LIABILITIES                                                                 |  |                     | 54,297 |                    |   | 55,195 |  
|                                                                                  |  |                     |        |                    |   |        |  
|Capital:                                                                          |  |                     |        |                    |   |        |  
|Partners capital:                                                                |  |                     |        |                    |   |        |  
|General partner                                                                   |  |                     |       |                    |   |       |  
|Limited partners, 2,833 units outstanding at June 30, 2010 and
 December 31, 2009 |  |                     | 31,526 |                    |   | 36,638 |  
|Accumulated other comprehensive loss                                              |  |                     |       |                    |   | (79    | )
|TOTAL PARTNERS CAPITAL                                                           |  |                     | 31,526 |                    |   | 36,559 |  
|                                                                                  |  |                     |        |                    |   |        |  
|Non-controlling interest                                                          |  |                     | 1,292  |                    |   | 1,319  |  
|TOTAL CAPITAL                                                                     |  |                     | 32,818 |                    |   | 37,878 |  
|TOTAL LIABILITIES AND CAPITAL                                                     |  | $                   | 87,115 |                    | $ | 93,073 |  

See Notes to Consolidated Financial
Statements.

1

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Table of Contents

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

|                                                  |  |                                  |         |                                 |   |         |   |      |           |   |   |           |  
|------------------------------------------------- |  | -------------------------------- | ------- | ------------------------------- | - | ------- | - | ---- | --------- | - | - | --------- | -
|                                                  |  | Three months ended September 30, |         | Nine months ended September 30, |  
|                                                  |  | 2010                             |         | 2009                            |   | 2010    |   | 2009 |          
|                                                  |  |                                  |         |                                 |   |         |   |      |           |   |   |           |  
|Revenues:                                         |  |                                  |         |                                 |   |         |   |      |           |   |   |           |  
|Rental income from operating leases               |  | $                                | 1,508   |                                 | $ | 1,638   |   | $    | 4,839     |   | $ | 5,114     |  
|Total revenues                                    |  |                                  | 1,508   |                                 |   | 1,638   |   |      | 4,839     |   |   | 5,114     |  
|                                                  |  |                                  |         |                                 |   |         |   |      |           |   |   |           |  
|Expenses:                                         |  |                                  |         |                                 |   |         |   |      |           |   |   |           |  
|General and administrative                        |  |                                  | 24      |                                 |   | 16      |   |      | 81        |   |   | 75        |  
|General and administrative - related party        |  |                                  | 121     |                                 |   | 79      |   |      | 334       |   |   | 341       |  
|Asset management fees - related party             |  |                                  | 154     |                                 |   | 154     |   |      | 463       |   |   | 463       |  
|Property expense                                  |  |                                  | 395     |                                 |   | 409     |   |      | 1,172     |   |   | 1,399     |  
|Property management fees - related party          |  |                                  | 62      |                                 |   | 64      |   |      | 185       |   |   | 217       |  
|Legal and professional                            |  |                                  | 67      |                                 |   | 46      |   |      | 186       |   |   | 150       |  
|Depreciation and amortization                     |  |                                  | 637     |                                 |   | 618     |   |      | 1,815     |   |   | 1,971     |  
|Total operating expenses                          |  |                                  | 1,460   |                                 |   | 1,386   |   |      | 4,236     |   |   | 4,616     |  
|                                                  |  |                                  |         |                                 |   |         |   |      |           |   |   |           |  
|Operating income                                  |  |                                  | 48      |                                 |   | 252     |   |      | 603       |   |   | 498       |  
|                                                  |  |                                  |         |                                 |   |         |   |      |           |   |   |           |  
|Other income (expense):                           |  |                                  |         |                                 |   |         |   |      |           |   |   |           |  
|Interest and other income                         |  |                                  | 2       |                                 |   | 9       |   |      | 6         |   |   | 35        |  
|Interest expense                                  |  |                                  | (818    | )                               |   | (785    | ) |      | (2,440    | ) |   | (2,331    | )
|Equity in losses from non-consolidated entities   |  |                                  | (558    | )                               |   | (473    | ) |      | (3,285    | ) |   | (1,134    | )
|Margin tax benefit (expense)                      |  |                                  |        |                                 |   | 9       |   |      | (23       | ) |   | (17       | )
|Total other expense                               |  |                                  | (1,374  | )                               |   | (1,240  | ) |      | (5,742    | ) |   | (3,447    | )
|                                                  |  |                                  |         |                                 |   |         |   |      |           |   |   |           |  
|Net loss, including non-controlling interest      |  |                                  | (1,326  | )                               |   | (988    | ) |      | (5,139    | ) |   | (2,949    | )
|                                                  |  |                                  |         |                                 |   |         |   |      |           |   |   |           |  
|Net loss attributable to non-controlling interest |  |                                  | 12      |                                 |   | 30      |   |      | 27        |   |   | 89        |  
|Net loss attributable to partners                 |  | $                                | (1,314  | )                               | $ | (958    | ) | $    | (5,112    | ) | $ | (2,860    | )
|                                                  |  |                                  |         |                                 |   |         |   |      |           |   |   |           |  
|Weighted average units outstanding                |  |                                  | 2,833   |                                 |   | 2,833   |   |      | 2,833     |   |   | 2,833     |  
|Net loss per unit                                 |  | $                                | (463.82 | )                               | $ | (338.16 | ) | $    | (1,804.45 | ) | $ | (1,009.53 | )

See Notes to Consolidated Financial Statements.

2

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Table of Contents

AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND
SUBSIDIARIESCONSOLIDATED
STATEMENTS OF CAPITALFor the nine
months ended September 30, 2010(in thousands)(unaudited)

|                                     |  |                    |   |                   |   |                                                |   |                           |     |       |   |       |   |   |        |  
|------------------------------------ |  | ------------------ | - | ----------------- | - | ---------------------------------------------- | - | ------------------------- | --- | ----- | - | ----- | - | - | ------ | -
|                                     |  | Partners
 Capital |   |                   |  
|                                     |  | General
 Partner   |   | Limited
 Partners |   | Accumulated
 other
 comprehensive gain
 (loss) |   | Non-controlling
 interest |     | Total |  
|                                     |  |                    |   |                   |   |                                                |   |                           |     |       |   |       |   |   |        |  
|Balance at
 December 31, 2009        |  | $                  |  |                   | $ | 36,638                                         |   | $                         | (79 | )     | $ | 1,319 |   | $ | 37,878 |  
|                                     |  |                    |   |                   |   |                                                |   |                           |     |       |   |       |   |   |        |  
|Net loss (1)                         |  |                    |  |                   |   | (5,112                                         | ) |                           |    |       |   | (27   | ) |   | (5,139 | )
|Increase in fair value of derivative |  |                    |  |                   |   |                                               |   |                           | 79  |       |   |      |   |   | 79     |  
|                                     |  |                    |   |                   |   |                                                |   |                           |     |       |   |       |   |   |        |  
|Balance at
 September 30, 2010       |  | $                  |  |                   | $ | 31,526                                         |   | $                         |    |       | $ | 1,292 |   | $ | 32,818 |  

| |     |                                                                                                                                                                                                                                                                                                                                                                            
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | The allocation of net loss
 includes a curative allocation to increase the General Partner capital
 account by $51 for the nine months ended September 30, 2010. The cumulative
 curative allocation since inception of the Partnership is $310. 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

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Table of Contents

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

|                                                                                                                                                   |  |                                 |        |      |   |        |  
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | ---- | - | ------ | -
|                                                                                                                                                   |  | Nine months ended September 30, |       
|                                                                                                                                                   |  | 2010                            |        | 2009 |  
|Cash flows from operating
 activities:                                                                                                             |  |                                 |        |      |   |        |  
|Net loss, including non-controlling interest                                                                                                       |  | $                               | (5,139 | )    | $ | (2,949 | )
|Adjustments to reconcile net loss to net cash provided by (used in)
 operating activities:                                                         |  |                                 |        |      |   |        |  
|Equity in losses from non-consolidated entities                                                                                                    |  |                                 | 3,285  |      |   | 1,134  |  
|Depreciation and amortization                                                                                                                      |  |                                 | 1,815  |      |   | 1,971  |  
|Amortization of above- and below-market leases, net                                                                                                |  |                                 | (87    | )    |   | (107   | )
|Amortization of loan acquisition costs                                                                                                             |  |                                 | 56     |      |   | 57     |  
|Bad debt expense                                                                                                                                   |  |                                 | 154    |      |   | 140    |  
|Decrease (increase) in tenant receivables                                                                                                          |  |                                 | (295   | )    |   | 161    |  
|Decrease (increase) in accounts receivable - related party                                                                                         |  |                                 | (29    | )    |   | 1,062  |  
|Increase in deferred costs                                                                                                                         |  |                                 | (89    | )    |   | (59    | )
|Decrease (increase) in other assets                                                                                                                |  |                                 | (79    | )    |   | 67     |  
|Increase (decrease) in accounts payable and other liabilities                                                                                      |  |                                 | (146   | )    |   | 310    |  
|Increase in accounts payable - related party                                                                                                       |  |                                 | 506    |      |   | 134    |  
|Decrease in security deposits                                                                                                                      |  |                                 | (12    | )    |   | (3     | )
|Net
 cash provided by (used in) operating activities                                                                                               |  |                                 | (60    | )    |   | 1,918  |  
|                                                                                                                                                   |  |                                 |        |      |   |        |  
|Cash flows from investing
 activities:                                                                                                             |  |                                 |        |      |   |        |  
|Improvements to real estate                                                                                                                        |  |                                 | (102   | )    |   | (76    | )
|Payments received on notes receivable                                                                                                              |  |                                 |       |      |   | 124    |  
|Investments in non-consolidated entities                                                                                                           |  |                                 | (424   | )    |   | (1,099 | )
|Distributions from non-consolidated entities                                                                                                       |  |                                 | 897    |      |   | 155    |  
|Net cash provided by (used in) investing activities                                                                                                |  |                                 | 371    |      |   | (896   | )
|                                                                                                                                                   |  |                                 |        |      |   |        |  
|Cash flows from financing
 activities:                                                                                                             |  |                                 |        |      |   |        |  
|Payments on notes payable                                                                                                                          |  |                                 | (123   | )    |   | (116   | )
|Proceeds from notes payable - related party                                                                                                        |  |                                 | 400    |      |   | 2,500  |  
|Payments on notes payable - related party                                                                                                          |  |                                 | (1,400 | )    |   |       |  
|Optional redemptions                                                                                                                               |  |                                 |       |      |   | (28    | )
|Distributions                                                                                                                                      |  |                                 |       |      |   | (1,252 | )
|Distributions to non-controlling interest                                                                                                          |  |                                 |       |      |   | (218   | )
|Net cash provided by (used in) financing activities                                                                                                |  |                                 | (1,123 | )    |   | 886    |  
|                                                                                                                                                   |  |                                 |        |      |   |        |  
|Net increase (decrease) in
 cash and cash equivalents                                                                                              |  |                                 | (812   | )    |   | 1,908  |  
|Cash and cash equivalents,
 beginning of period                                                                                                    |  |                                 | 3,297  |      |   | 918    |  
|Cash and cash equivalents,
 end of period                                                                                                          |  | $                               | 2,485  |      | $ | 2,826  |  
|                                                                                                                                                   |  |                                 |        |      |   |        |  
|Supplemental schedule of cash flow information:                                                                                                    |  |                                 |        |      |   |        |  
|                                                                                                                                                   |  |                                 |        |      |   |        |  
|Cash paid during the period for interest                                                                                                           |  | $                               | 2,199  |      | $ | 2,273  |  
|Cash paid during the period for taxes                                                                                                              |  | $                               | 39     |      | $ | 23     |  
|                                                                                                                                                   |  |                                 |        |      |   |        |  
|Supplemental schedule of noncash investing and
 financing activities:                                                                              |  |                                 |        |      |   |        |  
|                                                                                                                                                   |  |                                 |        |      |   |        |  
|During the nine months
 ended September 30, 2010, $122,000 in accrued interest on notes payable -
 related party was added to the note balances.  
|                                                                                                                                                   |  |                                 |        |      |   |        |  
|During the nine months
 ended September 30, 2010, $377,000 in accounts payable - related party was
 reclassified to notes payable - related party.

See Notes to Consolidated
Financial Statements.

4

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Table of Contents

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010
(unaudited)

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

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

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

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

The United
States has undergone and may continue to experience a prolonged recession that
has been marked by pervasive and fundamental disruptions in the financial
markets. Continued concerns regarding the uncertainty of whether the U.S.
economy will be adversely affected by inflation, deflation or stagflation and
the systemic impact of increased unemployment, volatile energy costs,
geopolitical issues, the availability and cost of credit, the U.S. mortgage
market and a severely distressed real estate market have contributed to
increased market volatility and weakened business and consumer confidence. The
United States may not experience a sustained recovery and could suffer
pronounced instability and decreased economic activity for an extended period
of time. Our operations are sensitive to changes in overall economic conditions
that impact our tenants, including, among other things, increased bad debts due
to such recessionary pressures. A general reduction in the level of tenant
leasing or shifts in tenant leasing practices could adversely affect our
revenues, profitability and results of operations. It is difficult to determine
the breadth and duration of the financial market problems and the many ways in
which they may affect our tenants and our business in general. A significant
additional deterioration in the U.S. economy or the bankruptcy or insolvency of
one or more of our significant tenants could cause our cash resources to be
insufficient to meet our obligations over the next 12 months. Effective July
15, 2009, we suspended all distributions in an effort to conserve cash and to
protect partners invested capital. As we have several projects that are
mid-stream in redevelopment, we are conserving cash from operations to improve
our ability to fund capital improvements, tenant improvements and leasing
commissions, and to meet our obligations, including debt service. We believe
that the economy and real estate market may recover prior to our anticipated
liquidation commencement date of October 31, 2012. However, if the economy
remains in a protracted recession, we may seek to postpone liquidation if we
believe such liquidation is not in the best interests of the Partners at that
time.

Projected cash
sources, including cash on hand, and uses for the Partnership indicate periods
of cash shortfalls during the year ended December 31, 2011. 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) financings of unencumbered
properties and (3) 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.

5

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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. Investments in joint ventures and partnerships where we
have the ability to exercise significant influence but do not exercise
financial and operating control are accounted for using the equity method (see
Note 3). The significant accounting policies of our non-consolidated entities
are consistent with those of our subsidiaries in which we have a controlling
financial interest. As applicable, we consolidate certain joint ventures and
partnerships in which we own less than a 100% equity interest if the entity is
a variable interest entity and we are the primary beneficiary (as defined in
Accounting Standards Codification (ASC) 810, Consolidation).
All significant inter-company accounts and transactions have been eliminated in
consolidation.

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

REVENUE RECOGNITION

We lease space
to tenants under agreements with varying terms. All of the leases are accounted
for as operating leases, and, although certain leases of the properties provide
for tenant occupancy during periods for which no rent is due and/or increases
or decreases in the minimum lease payments over the terms of the leases,
revenue is recognized on a straight-line basis over the terms of the individual
leases. 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 recorded within rental income from
operating leases and 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, 2010 and 2009, there were no percentage rents recognized. We
recognize lease termination fees in the period that the lease is terminated and
collection of the fees is reasonably assured. Upon early lease termination, we
provide for losses related to unrecovered intangibles and other assets. During
the nine months ended September 30, 2010 and 2009, we recognized no lease
termination fees.

REAL ESTATE
INVESTMENTS

Development Properties - Land, buildings and improvements are recorded at cost. Expenditures related
to the development of real estate are carried at cost which includes
capitalized carrying charges, acquisition costs and development costs. Carrying
charges, primarily interest, real estate taxes and loan acquisition costs, and
direct and indirect development costs related to buildings under construction,
are capitalized as part of construction in progress. The capitalization of such
costs ceases at the earlier of one year from the date of completion of major
construction or when the property, or any completed portion, becomes available
for occupancy. We did not capitalize any interest or taxes on properties under
development during the nine months ended September 30, 2010 and 2009.

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Acquired Properties and Acquired Lease
Intangibles - We account for acquisitions of
operating properties pursuant to ASC 805, Business
Combinations, as we believe our operating real estate meets the
definition of a business pursuant to this guidance. Accordingly, we allocate
the purchase price of the acquired operating properties to land, building and
improvements, identifiable intangible assets and to the acquired liabilities
based on their respective fair values. Identifiable intangibles include amounts
allocated to acquired above- and below-market leases, the value of in-place
leases and customer relationship value, if any. We determine fair value based
on estimated cash flow projections that utilize appropriate discount and
capitalization rates and available market information. Estimates of future cash
flows are based on a number of factors including the historical operating
results, known trends and specific market and economic conditions that may
affect the property. Factors considered by management in our analysis of
determining the as-if-vacant property value include an estimate of carrying
costs during the expected lease-up periods considering market conditions and
costs to execute similar leases. In estimating carrying costs, management includes
real estate taxes, insurance and estimates of lost rentals at market rates
during the expected lease-up periods, tenant demand and other economic
conditions. Management also estimates costs to execute similar leases including
leasing commissions, tenant improvements, legal and other related expenses.
Intangibles related to above- and below-market leases and in-place lease value
are recorded as acquired lease intangibles and are amortized as an adjustment
to rental income or amortization expense, as appropriate, over the remaining
terms of the underlying leases. Below-market leases include fixed-rate renewal
periods. Premiums or discounts on acquired above- and below-market debt are
amortized to interest expense over the remaining term of such debt.

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

Depreciation - Depreciation
is computed using the straight-line method over an estimated useful life of up
to 39 years for buildings and site improvements and over the term of lease for
tenant-specific improvements. We reevaluate the useful lives of our buildings
and improvements as warranted by changing conditions at our properties. As part
of this re-evaluation, we may also consider whether such changes indicate a
potential impairment, and we perform an impairment analysis as necessary, at
the property level. In the case of a property redevelopment, we reassess the
useful lives of specific buildings and other improvements to be demolished as
part of that redevelopment once the redevelopment is probable to occur. During
2010, we reassessed the useful lives of certain buildings at our Woodlake
Square property (non-consolidated investment) as a result of our decision to
redevelop the center, which has included the demolition of certain buildings.
As a result of this change in estimate, our equity in losses from
non-consolidated entities was $1.8 million higher ($645.11 per unit) for the
nine months ended September 30, 2010 than it otherwise would have been.

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,
2010 and December 31, 2009, we had no properties held for sale.

Impairment - We review our properties for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets, including
acquired lease intangibles and accrued rental income, may not be recoverable
through operations. We determine whether an impairment in value occurred by
comparing the estimated future cash flows (undiscounted and without interest
charges), including the residual value of the property, with the carrying value
of the individual property. If impairment is indicated, a loss will be recorded
for the amount by which the carrying value of the asset exceeds its fair value.
Both the estimated undiscounted cash flow analysis and fair value determination
are based upon various factors which require complex and subjective judgments
to be made by management. Such assumptions include projecting lease-up periods,
holding periods, cap rates, rental rates, operating expenses, lease terms,
tenant creditworthiness, tenant improvement allowances, terminal sales value
and certain macroeconomic factors among other assumptions to be made for each
property. We have not incurred any impairment losses since our inception.

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As discussed
in Note 3, our Woodlake Square property recorded an impairment resulting from
the sale of a 90% interest to a third party joint venture partner. Our portion
of such impairment was recorded in equity in losses from non-consolidated
subsidiaries.

ENVIRONMENTAL
EXPOSURES

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

RECEIVABLES AND
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS

Tenant Receivables - Included in tenant receivables are base rents, tenant reimbursements and
receivables attributable to recording rents on a straight-line basis. An
allowance for the uncollectible portion of accrued rents and accounts
receivable is determined based upon customer credit-worthiness (including
expected recovery of our claim with respect to any tenants in bankruptcy),
historical bad debt levels and current economic trends. Bad debt expenses and
any related recoveries are included in property expense. As of September 30,
2010 and December 31, 2009, our allowance for uncollectible accounts related to
our tenant receivables was $399,000 and $255,000, respectively.

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

DEFERRED COSTS

Deferred costs
include deferred leasing costs and loan acquisition costs, net of amortization.
Loan acquisition costs are incurred in obtaining financing and are amortized to
interest expense over the term of the debt agreements using a method that
approximates the effective interest method. Deferred leasing costs consist of
external commissions associated with leasing our properties and are amortized
to depreciation and amortization expense on a straight-line basis over the
lease term. If a lease is terminated early, or a loan is paid in full prior to
maturity, the remaining deferred costs will be written off. Accumulated
amortization related to loan acquisition costs as of September 30, 2010 and
December 31, 2009 totaled $329,000 and $272,000, respectively. Accumulated
amortization related to leasing costs as of September 30, 2010 and December 31,
2009 totaled $139,000 and $101,000, respectively.

INCOME TAXES

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

State -In May
2006, the State of Texas adopted House Bill 3, which modified the states
franchise tax structure, replacing the previous tax based on capital or earned
surplus with one based on margin (often referred to as the Texas Margin Tax)
effective with franchise tax returns filed for tax years beginning on or after
January 1, 2007. The Texas Margin Tax is computed by applying the applicable
tax rate (1% for the Partnership) to the profit margin, which, generally, will
be determined for us as total revenue less a 30% standard deduction. Although
House Bill 3 states that the Texas Margin Tax is not an income tax, the
Partnership believes that ASC 740, Income Taxes, applies to the
Texas Margin Tax. For the nine months ended September 30, 2010 and 2009, we
recorded tax provisions of $23,000 and $17,000, respectively, for the Texas
Margin Tax.

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USE OF ESTIMATES

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

FAIR VALUE OF FINANCIAL
INSTRUMENTS

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

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

Notes Payable  In determining the fair value of our debt instruments, we determine the
appropriate Treasury Bill Rate based on the remaining time to maturity for each
of the debt instruments. We then add the appropriate yield spread to the
Treasury Bill Rate. The yield spread is a risk premium estimated by investors to
account for credit risk involved in debt financing. The spread is typically
estimated based on the property type and loan-to-value ratio of the debt
instrument. The result is an estimate of the market interest rate a typical
investor would expect to receive given the underlying subject asset (property
type) and remaining time to maturity. We believe the fair value of our notes
payable is classified in Level 2 of the fair value hierarchy. Based on these
estimates, the fair value of notes payable was $50.7 million and $48.8 million
at September 30, 2010 and December 31, 2009, respectively.

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

|              |  |         |   |         |  |         |  |  |   | 
|------------- |  | ------- | - | ------- |  | ------- |  |  | - | 
|              |  | Level 1 |   | Level 2 |  | Level 3 | 
|             
|Notes payable |  |         |  |         |  | 50,744  |  |  |  | 

NEW ACCOUNTING
STANDARDS

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

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CASH AND CASH
EQUIVALENTS

We consider
all highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents. Cash and cash equivalents consist of
demand deposits at commercial banks and money market funds.

INTEREST

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

SEGMENT REPORTING

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

RECLASSIFICATIONS

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

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

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In March
 2006, we acquired a 50% interest in 5433 Westheimer, LP which owns an office
 building with a gross leasable area of 134,000 square feet and a 152-room
 hotel in Houston, Texas. In November 2008, we acquired an additional 7.5%
 interest in 5433 Westheimer, LP from our third party, joint-venture partner
 for $800,000. The remaining 42.5% is owned by that same party. The property
 is not consolidated into our financial statements as we and our joint venture
 partner share equally in decision making rights through our equal ownership in
 the general partner. 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 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 325,000 square feet. The remaining 50% is owned by AmREIT
 Monthly Income and Growth Fund IV, LP (MIG IV), an affiliate of our General
 Partner.                                                                                                                                                                                                                                                                                                                                                                                               

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 206,000 square feet. The remaining 70% interest was held by
 affiliated AmREIT entities, MIG IV and AmREIT Realty Investment Corporation
 (ARIC). In July 2010, we and our affiliated partners of AmREIT Woodlake, LP
 entered into a joint venture with a third-party institutional partner wherein
 the partner acquired a 90% interest in the joint venture. As a result of this
 transaction, we now hold a 3% interest in Woodlake Square, which carries a
 promoted interest in profits and cash flows once an 11.65% return is met on
 the project. AmREIT Woodlake, LP recorded an impairment as a result of the
 transaction. Our portion of such impairment was $185,000 and has been
 recorded in equity in losses from non-consolidated subsidiaries in our
 consolidated statements of operations. We will continue to account for this
 investment using the equity method given our ability to significantly
 influence the propertys operations. The joint venture commenced
 redevelopment of this property in the third quarter of 2010. The total cost
 of the project is estimated to be $8.0 million, and it is scheduled to be
 completed in the second quarter of 2011.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | 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 82,000 square feet. The remaining 70%
 is owned by affiliated AmREIT entities, MIG IV and ARIC. In May 2008, AmREIT
 Westheimer Gessner, LP acquired an additional tract of land adjacent to
 Woodlake Pointe for $1.3 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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

|                              |  |                                  |        |                                |   |        |   |      |         |   |   |        |  
|----------------------------- |  | -------------------------------- | ------ | ------------------------------ | - | ------ | - | ---- | ------- | - | - | ------ | -
|                              |  | Three months ended September 30, |        | Nine months ended Septemer 30, |  
|                              |  | 2010                             |        | 2009                           |   | 2010   |   | 2009 |        
|Revenue                       |  | $                                | 4,662  |                                | $ | 4,232  |   | $    | 15,532  |   | $ | 13,449 |  
|Depreciation and amortization |  |                                  | (1,801 | )                              |   | (2,129 | ) |      | (12,256 | ) |   | (6,618 | )
|Interest expense              |  |                                  | (1,137 | )                              |   | (1,476 | ) |      | (4,460  | ) |   | (4,397 | )
|Net loss                      |  |                                  | (1,387 | )                              |   | (907   | ) |      | (9,493  | ) |   | (2,612 | )

DERIVATIVE FINANCIAL
INSTRUMENTS

In December
2007, AmREIT Woodlake Square, LP, one of our non-consolidated investment
entities, entered into an interest rate swap with a notional amount of $23.8
million and a fixed rate of 5.465% in order to manage the volatility inherent
in its variable-rate mortgage. On October 1, 2008, that interest rate swap was
designated as a hedge for financial reporting purposes. In accordance with ASC
820, Fair Value Measurements and
Disclosures, changes in fair value of derivatives that qualify as
cash flow hedges are recognized in other comprehensive income. Prior to October
1, 2008, such changes in fair value were recorded as a loss from derivative on
the propertys statement of operations. For the nine months ended September 30,
2010 and 2009, our portion of the increase in fair value totaled $79,000 and
$115,000, respectively and is included in accumulated other comprehensive gain
(loss) on our consolidated statements of capital. This swap transaction was
terminated, and the underlying mortgage was refinanced in conjunction with the
new joint venture agreement on the Woodlake Square property. In accordance with
ASC 815 Derivatives and Hedging,
the balance in accumulated other comprehensive gain was recorded to interest
expense at the AmREIT Woodlake Square, LP level upon termination of the swap.
We recorded our portion of this expense as a component of equity in losses from
non-consolidated subsidiaries. We do not use derivative financial instruments
for trading or speculative purposes.

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

In accordance
with ASC 805, Business Combinations,
we have identified and recorded the value of acquired lease intangibles at the
property acquisition date. Such intangibles include the value of acquired
in-place leases and above- and below-market leases. Acquired lease intangible
assets (in-place leases and above-market leases) are amortized over the leases
remaining terms, which range from 1 year to 14 years. Acquired lease intangible
liabilities (below-market leases) are accreted over the leases remaining
non-cancelable lease term, plus any fixed-rate renewal options, if any, which
range from 1 year to 14 years. The amortization (accretion) 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 $386,000 and
$455,000 for the nine months ended September 30, 2010 and 2009, respectively.
The amortization of above-market leases was $36,000 and $41,000 during the nine
months ended September 30, 2010 and 2009, respectively. Accretion of
below-market leases was $123,000 and $137,000 during the nine months ended
September 30, 2010 and 2009, respectively.

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

|                                                |  |                    |        |                   |   |        |  
|----------------------------------------------- |  | ------------------ | ------ | ----------------- | - | ------ | -
|                                                |  | September 30, 2010 |        | December 31, 2009 |  
|Acquired lease intangible
 assets:              |  |                    |        |                   |   |        |  
|In-place leases                                 |  | $                  | 3,992  |                   | $ | 4,462  |  
|In-place leases -
 accumulated amortization     |  |                    | (2,654 | )                 |   | (2,738 | )
|Above-market leases                             |  |                    | 269    |                   |   | 269    |  
|Above-market leases -
 accumulated amortization |  |                    | (225   | )                 |   | (189   | )
|Acquired lease intangibles,
 net                |  | $                  | 1,382  |                   | $ | 1,804  |  
|                                                |  |                    |        |                   |   |        |  
|Acquired lease intangible
 liabilities:         |  |                    |        |                   |   |        |  
|Below-market leases                             |  | $                  | 699    |                   | $ | 1,127  |  
|Below-market leases -
 accumulated amortization |  |                    | (498   | )                 |   | (803   | )
|Acquired below-market lease
 intangibles, net   |  | $                  | 201    |                   | $ | 324    |  

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

Our
outstanding debt consisted entirely of fixed-rate mortgage loans of $50.4
million and $50.5 million at September 30, 2010 and December 31, 2009,
respectively. Our mortgage loans are secured by our real estate properties and
may be prepaid, but such payments could be subject to a yield-maintenance
premium or prepayment penalty. Our mortgage loans are due in monthly
installments of interest and principal and mature over various terms ranging
from September 2011 through January 2036.

As of
September 30, 2010, the weighted-average interest rate on our fixed-rate debt
is 5.9%, and the weighted average remaining life of such debt is 9.3 years.

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

|                            |  |   |                                |  |                       |        |                 |   |        |  | 
|--------------------------- |  | - | ------------------------------ |  | --------------------- | ------ | --------------- | - | ------ |  | 
|Scheduled
 Payments by Year |  |   | Scheduled
 Principal
 Payments |  | Term-Loan
 Maturities |        | Total
 Payments |  
|2010                        |  | $ | 42                             |  | $                     |       |                 | $ | 42     | 
|2011                        |  |   | 175                            |  |                       | 24,615 |                 |   | 24,790 | 
|2012                        |  |   | 183                            |  |                       |       |                 |   | 183    | 
|2013                        |  |   | 196                            |  |                       |       |                 |   | 196    | 
|2014                        |  |   | 207                            |  |                       |       |                 |   | 207    | 
|Thereafter                  |  |   | 92                             |  |                       | 24,904 |                 |   | 24,996 | 
|Total                       |  | $ | 895                            |  | $                     | 49,519 |                 | $ | 50,414 | 

We serve as
guarantor on debt in the amount of $36.9 million that is the primary obligation
of our non-consolidated joint ventures. This debt matures in 2013 and 2014. We
believe that any potential obligation arising as a result of our guarantees
would be satisfied from our share of distributions following the sale of the
mortgaged property. As such, we have not accrued any liabilities related to
these guarantees.

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

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

As of
September 30, 2010 and December 31, 2009, each of our four consolidated
properties individually comprised greater than 10% of our consolidated total
assets. Consistent with our strategy of investing in geographic areas that we
know well, three of our four properties are located in the Houston metropolitan
area. These Houston properties represent 82% of our rental income for the nine
months ended September 30, 2010 and 2009. Houston is Texas largest city and
the fourth largest city in the United States.

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

|                        |  |   |                                  |  |                                 |     |      |   |       |  |   |       |  | 
|----------------------- |  | - | -------------------------------- |  | ------------------------------- | --- | ---- | - | ----- |  | - | ----- |  | 
|                        |  |   | Three months ended September 30, |  | Nine months ended September 30, |    
|Tenant                  |  |   | 2010                             |  | 2009                            |     | 2010 |   | 2009  | 
|H-E-B Grocery           |  | $ | 356                              |  | $                               | 356 |      | $ | 1,069 |  | $ | 1,069 | 
|Designer Shoe Warehouse |  |   | 115                              |  |                                 | 138 |      |   | 390   |  |   | 413   | 
|Rice Food Markets, Inc. |  |   | 73                               |  |                                 | 73  |      |   | 219   |  |   | 219   | 
|Fidelity Investments    |  |   | 46                               |  |                                 | 53  |      |   | 147   |  |   | 158   | 
|Blockbuster Video       |  |   | 49                               |  |                                 | 56  |      |   | 147   |  |   | 168   | 
|                        |  | $ | 639                              |  | $                               | 676 |      | $ | 1,972 |  | $ | 2,027 | 

On September
15, 2010, Designer Shoe Warehouse (DSW), our second largest tenant as
determined by base rents paid, vacated its space upon expiration of its lease.
We have executed a short term lease with a seasonal tenant that expires on
November 15, 2010. We are actively pursuing a permanent replacement tenant to
occupy the space. The closing of any new leases would be subject to the
negotiation and execution of definitive lease agreements and the fulfillment of
customary conditions. No assurance can be given that a new lease will be
procured on the same terms as the DSW lease, if at all.

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

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

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

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

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

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

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

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

|                                            |  |   |                                  |  |                                 |     |      |   |       |  |   |       |  | 
|------------------------------------------- |  | - | -------------------------------- |  | ------------------------------- | --- | ---- | - | ----- |  | - | ----- |  | 
|                                            |  |   | Three months ended September 30, |  | Nine months ended September 30, |    
|Type of
 service                            |  |   | 2010                             |  | 2009                            |     | 2010 |   | 2009  | 
|Asset
 management fees                      |  | $ | 154                              |  | $                               | 154 |      | $ | 463   |  | $ | 463   | 
|Property
 management fees and leasing costs |  |   | 76                               |  |                                 | 108 |      |   | 275   |  |   | 275   | 
|Administrative
 cost reimbursements         |  |   | 121                              |  |                                 | 79  |      |   | 334   |  |   | 341   | 
|                                            |  | $ | 351                              |  | $                               | 341 |      | $ | 1,072 |  | $ | 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, 2010 and 2009, such fees
totaled $498,000 and $634,000, respectively. See also Note 3 regarding
investments in non-consolidated entities.

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

As discussed
in Note 3 above, in July 2010, we and our affiliated partners of AmREIT
Woodlake L.P. entered into a joint venture agreement with a third party whereby
the new partner acquired a 90% interest in the sole property owned by AmREIT
Woodlake L.P. As a result of this transaction, we now hold a 3% interest in the
property.

We had no
property acquisitions during the nine months ended September 30, 2010. See Note
3 for a discussion of our investment activity since our inception with respect
to our non-consolidated entities.

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

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

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

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

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

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

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

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

Certain information
presented in this Quarterly Report on Form 10-Q (Report) constitutes
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (Securities Act), and Section 21E of the Securities
Exchange Act of 1934, as amended (Exchange Act). Although we believe that the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, our actual results could differ materially from those
set forth in the forward-looking statements. Certain factors that might cause
such a difference include the following: changes in general economic
conditions, changes in real estate market conditions, continued availability of
proceeds from our debt or equity capital, our ability to locate suitable tenants
for our properties, the ability of tenants to make payments under their
respective leases, timing of acquisitions, development starts and sales of
properties, the ability to meet development schedules and other risks,
uncertainties and assumptions. Any forward-looking statement speaks only as of
the date on which it was made, and the Partnership undertakes no obligation to
update or revise forward-looking statements to reflect changed assumptions, the
occurrence of unanticipated events or changes to future operation results over
time.

Overview

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

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

As of September 30, 2010,
our investments include three wholly-owned properties comprising 225,000 square
feet of gross leasable area, one property in which we own a controlling
interest comprising 102,000 square feet of gross leasable area and seven
properties in which we own a non-controlling interest through joint ventures
comprising 1,142,000 square feet of gross leasable area. A majority of our
properties are located in highly populated, suburban communities in Texas. We
derive a substantial portion of our revenue from rental income from these
properties, primarily from net leasing arrangements, where most of the
operating expenses of the properties are absorbed by our tenants. As a result,
our operating results and cash flows are primarily influenced by rental income
from our properties and interest expense on our property acquisition
indebtedness. Rental income accounted for 100% of our total revenue during the
nine months ended September 30, 2010 and 2009. As of September 30, 2010, our
properties had an average occupancy rate of 80%, and the average debt leverage
ratio of the properties in which we have an investment interest was 62%, with 70%
of such debt carrying a fixed rate of interest.

Summary of Critical Accounting Policies

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

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

Results of Operations

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

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

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

Revenue.Revenue decreased $130,000 or 8% during the three months ended
September 30, 2010, compared to the same period in 2009 ($1.5 million in 2010
versus $1.6 million in 2009). This decrease is due primarily to a decrease in
expense recoveries due to a property tax refund received for our Lantern Lane
property.

General and Administrative.General and administrative expenses increased
$8,000 or 50% during the three months ended September 30, 2010 compared to the
same period in 2009 ($24,000 in 2010 versus $16,000 in 2009). This increase was
primarily due to an increase in insurance premiums for directors and officers
of our general partner.

General and Administrative  Related Party.General and administrative expenses paid to
affiliates of our General Partner increased $42,000 or 53% during the three
months ended September 30, 2010, compared to the same period in 2009 ($121,000
in 2010 versus $79,000 in 2009). This increase was primarily due to timing
differences in our General Partners compensation accrual recorded during the
third quarter of 2010 which caused a higher than normal expense for that
period.

Property Expenses.Property operating expenses decreased $14,000 or 3% during the three
months ended September 30, 2010 compared to the same period in 2009 ($395,000
in 2010 versus $409,000 in 2009). This decrease was primarily due to a property
tax refund received for our Lantern Lane property. The decrease was partially offset
by an increase in bad debt expense associated with certain tenant receivables
at our Olmos Creek and Westside Plaza properties.

Legal and Professional Fees.Legal and professional fees increased $21,000
or 43% during the three months ended September 30, 2010 compared to the same
period in 2009 ($67,000 in 2010 versus $46,000 in 2009). This increase was
primarily due to services provided related to the collection of past due tenant
receivables and costs associated with leases that were ultimately not executed.

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Depreciation and Amortization Expense.Depreciation and amortization expense
increased $19,000 or 3% during the three months ended September 30, 2010
compared to the same period in 2009 ($637,000 in 2010 versus $618,000 in 2009).
This increase was primarily due to the accelerated amortization of intangible
lease costs resulting from tenant vacancies.

Interest and Other Income. Interest and other income of $9,000 recorded
during the three months ended September 30, 2009, represents interest on the
outstanding balance on a note receivable from our joint venture partner on our
investment in 5433 Westheimer L.P. That note was paid in full during the fourth
quarter of 2009. Interest income earned during the three months ended September
30, 2010 was limited to interest earned on deposit accounts.

Interest Expense. Interest expense increased $33,000 or 4% during the three months
ended September 30, 2010 compared to the same period in 2009 ($818,000 in 2010
versus $785,000 in 2009). This increase resulted from interest accrued on
borrowings from affiliates of our General Partner in September 2009 (see Note 5
to the consolidated financial statements).

Equity in Losses From Non-Consolidated Entities.Equity in losses from non-consolidated
entities increased $85,000 or 18% during the three months ended September 30,
2010, compared the same period in 2009 ($558,000 in 2010 versus $473,000 in
2009). These amounts represent our ownership portion of our joint ventures net
income or loss for the period. The increased loss is due to increased
depreciation expense resulting from the redevelopment project at our Woodlake
Square property. Our joint venture has reassessed and shortened the estimated
useful lives of various buildings consistent with the demolition of such
buildings as part of the redevelopment. The redevelopment commenced in July
2010.

Margin Tax Expense. Margin tax benefit decreased $9,000 or 100% during the three months
ended September 30, 2010 compared to the same period in 2009 ($0 in 2010 compared
to $9,000 in 2009). This decrease was due to a large margin tax refund we
received in the third quarter of 2009 related to an overpayment of our 2008
taxes.

Net Loss Attributable to Non-Controlling Interest. Net loss attributable to non-controlling
interest decreased $18,000 or 60% during the three months ended September 30,
2010 compared to the same period in 2009 ($12,000 in 2010 versus $30,000 in
2009). This decrease was primarily due to a decrease in the loss recorded at
our Lake Houston property resulting from increased rental income generated by a
new tenant.

Nine Months Ended September 30, 2010 versus Nine Months Ended
September 30, 2009

Revenue.Revenue decreased $275,000 or 5% during the nine months ended September
30, 2010 compared to the same period in 2009 ($4.8 million in 2010 versus $5.1
million in 2009). A decrease in recoverable property tax expenses resulted in a
corresponding decrease in expense recoveries billed to our tenants.

Property Expense.Property operating expenses decreased $227,000 or 16% during the nine
months ended September 30, 2010 compared to the same period in 2009 ($1.2
million in 2010 versus $1.4 million in 2009). This decrease was primarily due
to a property tax refund received for our Lantern Lane property as well as
decreased property tax accruals for the 2010 tax year for our Lantern Lane and
Westside Plaza properties.

Property Management Fees  Related Party. Property management fees to affiliates of
our General Partner decreased $32,000 or 15% during the nine months ended
September 30, 2010 compared to the same period in 2009 ($185,000 in 2010 versus
$217,000 in 2009). Property management fees are calculated based on tenant
billings. This decrease was primarily due to a decrease in expense recoveries
that were billed to tenants during the first quarter of 2010 compared to the
first quarter of 2009.

Legal and Professional Fees.Legal and professional fees increased $36,000
or 23% during the nine months ended September 30, 2010 compared to the same
period in 2009 ($186,000 in 2010 versus $150,000 in 2009). This increase was
primarily due to services provided related to the collection of past due tenant
receivables and costs associated with leases were ultimately not executed.

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Depreciation and Amortization Expense.Depreciation and amortization expense
decreased $156,000 or 8% during the
nine months ended September 30, 2010 compared to the same period in 2009 ($1.8
million in 2010 versus $2.0 million in 2009). This decrease was primarily due
to a decrease in depreciation of tenant improvements and amortization of
in-place leases as a substantial portion of those costs were written off due to
tenant vacancies during the early part of 2009.

Interest and Other Income. Interest and other income of $35,000 recorded
during the nine months ended September 30, 2009, represents interest on the
outstanding balance on a note receivable from our joint venture partner on our
investment in 5433 Westheimer L.P. That note was paid in full during the fourth
quarter of 2009. Interest income earned during the nine months ended September
30, 2010 was limited to interest earned on deposit accounts.

Interest Expense. Interest expense increased $109,000 or 5% during the nine months
ended September 30, 2010 compared to the same period in 2009 ($2.4 million in
2010 versus $2.3 million in 2009). This increase resulted from interest accrued
on borrowings from affiliates of our General Partner in September 2009 (see
Note 5 to the consolidated financial statements).

Equity in Losses From Non-Consolidated Entities.Equity in losses from non-consolidated
entities increased $2.2 million or 190% during the nine months ended September
30, 2010 compared to the same period in 2009 ($3.3 million in 2010 versus $1.1
million in 2009). These amounts represent our ownership portion of our joint
ventures net income or loss for the period. The increased loss is due to
increased depreciation expense resulting from the redevelopment project at our
Woodlake Square property. Our joint venture has reassessed and shortened the
estimated useful lives of various buildings consistent with the demolition of
such buildings as part of the redevelopment.

Net Loss Attributable to Non-Controlling Interest. Net loss attributable to non-controlling
interest decreased $62,000 or 70% during the nine months ended September 30,
2010 compared to the same period in 2009 ($27,000 in 2010 versus $89,000 in
2009). This decrease was primarily due to a decrease in the loss recorded at
our Lake Houston property resulting from increased revenues from a new tenant
and a decrease in depreciation and amortization expenses.

Liquidity and Capital Resources

We expect to meet our
short-term liquidity requirements with cash on hand and through net cash
provided by property operations and financing activities. We expect to meet our
long-term liquidity requirements through proceeds from secured or unsecured
financings from banks and other lenders, the selective and strategic sale of
properties and net cash flows from operations. As further discussed below under
Debt, we have two refinancing obligations in 2011.

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

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Projected cash sources and
uses for the Partnership indicate periods of cash shortfalls during the year
ended December 31, 2011. 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) financings of unencumbered properties and (3) 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.

As of September 30, 2010 and
December 31, 2009, our cash and cash equivalents totaled $2.5 million and $3.3
million, respectively. Cash flows provided by (used in) operating activities,
investing activities and financing activities during the nine months ended
September 30, 2010 and 2009 are as follows (in thousands):

|                     |  |                                 |        |      |   |       |  
|-------------------- |  | ------------------------------- | ------ | ---- | - | ----- | -
|                     |  | Nine months ended September 30, |       
|                     |  | 2010                            |        | 2009 |  
|                    
|Operating activities |  | $                               | (60    | )    | $ | 1,918 |  
|Investing activities |  |                                 | 371    |      |   | (896  | )
|Financing activities |  |                                 | (1,123 | )    |   | 886   |  

Operating Activities

During the nine months ended
September 30, 2010 and 2009, net cash flows provided by operating activities
decreased $2.0 million ($60,000 of cash outflows during the 2010 period versus
$1.9 million of cash inflows during the 2009 period). This decrease in cash flows
was primarily due to the collection of accounts receivable  related party
during the first quarter of 2009 for amounts that had been advanced during
2008. We had no such collections in 2010. In addition, cash collections from
tenants decreased as a result of the timing of property tax recovery payments
from our anchor tenants. The 2008 property tax recoveries were collected during
the first quarter of 2009 while the 2009 property tax recoveries were billed
and collected during the fourth quarter of 2009. Net cash flows provided by
operating activities also decreased as a result of the timing of property tax
payments. We deferred payment of 2009 property taxes for three of our
properties until the first quarter of 2010. In 2009, we deferred payment for only
two properties.

Investing Activities

During the nine months ended
September 30, 2010, we received $897,000 in distributions from our
non-consolidated joint venture entities compared to $155,000 during the same
period in 2009. The increase in 2010 was primarily attributable to a $573,000
distribution we received from our Woodlake Square investment which was driven
by the sale of 90% of our interest to a new joint venture partner.
Additionally, we had cash investments of $424,000 in our non-consolidated joint
ventures during the nine months ended September 30, 2010 compared to $1.1
million during the same period in 2009. Investments were lower in 2010 due to
reduced working capital needs at our Casa Linda property resulting from
increased occupancy following the redevelopment of that center. The increase in
cash from the reduction of investments and the increase in distributions
received was offset by a decrease of $124,000 in payments received on notes
receivable as the note was paid in full in December 2009.

Financing Activities

During the nine months ended
September 30, 2010, we made net repayments on notes payable  related party of
$1.0 million compared to net borrowings of $2.5 million during the 2009 period.
During 2010, we had cash savings of $1.5 million due to the suspension of all
distribution and redemption payments beginning July 2009.

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Debt

The $24.6 million in debt
maturities in 2011 consists of a $13.4 million mortgage on our Lantern Lane
property which matures in September 2011 and a $11.2 million mortgage on our
Olmos Creek property that matures in December 2011. In each case, we believe
that we will be able to extend the mortgage with the current lender, refinance
with a new lender, or dispose of the property in an orderly sale prior to the
maturity date. If we are unable to extend or refinance the mortgage, we may be
forced to sell the properties at a time when it is disadvantageous to do so,
and such disposal could result in a loss.

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

Not applicable.

|        |                         
|------- | ------------------------
|ITEM 4. | CONTROLS
 AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

Under the supervision and
with the participation of our General Partners Chief Executive Officer (CEO)
and Chief Financial Officer (CFO), our General Partners management has
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the
Exchange Act) as of September 30, 2010. Based on that evaluation, our General
Partners CEO and CFO concluded that, as of September 30, 2010, our disclosure
controls and procedures were effective in causing material information relating
to us to be recorded, processed, summarized, and reported by management on a
timely basis and to ensure the quality and timeliness of our public disclosures
in accordance with SEC disclosure obligations.

Changes in Internal Controls

There has been no change to
our internal control over financial reporting during the quarter ended
September 30, 2010 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 Report.

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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 15, 2010 |                                                |                                                    
|                        |                                                |                                                    
|                        | By:                                            | /s/ H. Kerr Taylor                                 
|                        |                                                | H. Kerr Taylor                                     
|                        |                                                | President, Chief Executive
 Officer, and Director  
|                        |                                                |                                                    
|                        | By:                                            | /s/ Chad C. Braun                                  
|                        |                                                | Chad C. Braun                                      
|                        |                                                | Executive Vice President,
 Chief Financial Officer,
|                        |                                                | Treasurer and Secretary                            

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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 (filed
 herewith).                                                                                                                                  
|             |  |                                                                                                                                                                                                                                                 
|Exhibit 31.2 |  | Certification pursuant to
 Rule 13a-14(a) of Chief Financial Officer of our General Partner (filed
 herewith).                                                                                                                                  
|             |  |                                                                                                                                                                                                                                                 
|Exhibit 32.1 |  | Chief Executive Officer of
 our General Partner certification pursuant to 18 U.S.C. Section 1350, adopted
 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished
 herewith).                                                     
|             |  |                                                                                                                                                                                                                                                 
|Exhibit 32.2 |  | Chief Financial Officer of
 our General Partner certification pursuant to 18 U.S.C. Section 1350, adopted
 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished
 herewith).                                                     

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