<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                   FORM 10-K

(Mark One)
   [X]  Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
        Act of 1934 [Fee Required]
 
   For the fiscal year ended               December 31, 1997                 or
                             -----------------------------------------------
 
   [ ]  Transition report pursuant to Section 13 or 15(d) of the Securities 
        Exchange Act of 1934 [No Fee Required]
 
   For the transition period                         to
                             -----------------------    -----------------------
   Commission file number       0-18407
                             ------------


                       Wells Real Estate Fund III, L.P.
            ------------------------------------------------------
            (Exact name of registrant as specified in its charter)
 

          Georgia                                     58-1800833
-------------------------------                ------------------------
(State or other jurisdiction of                     (I.R.S. Employer 
incorporation or organization)                   Identification Number)
 

3885 Holcomb Bridge Road, Norcross, Georgia               30992
-------------------------------------------        --------------------- 
 (Address of principal  executive offices)              (Zip code) 
                    

Registrant's telephone number, including area code    (770) 449-7800
                                                     ----------------

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

   Title of each class                   Name of exchange on which registered
   -------------------                   ------------------------------------
          NONE                                            NONE
          ----                                            ----

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

                                 CLASS A UNITS
                               ----------------
                               (Title of Class)

                                 CLASS B UNITS
                               ----------------
                               (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes  X   No 
   ----     ----

                  Aggregate market value of the voting stock 
                    held by non-affiliates:  Not Applicable
                                            ----------------
<PAGE>
 
                                     PART I

ITEM 1.    BUSINESS
------     --------

GENERAL
-------

Wells Real Estate Fund III, L.P. (the "Partnership") is a Georgia public limited
partnership having Leo F. Wells, III and Wells Capital, Inc., a Georgia
corporation, as General Partners.  The Partnership was formed on July 31, 1988,
for the purpose of acquiring, developing, constructing, owning, operating,
improving, leasing and otherwise managing for investment purposes income-
producing commercial or industrial properties.

On October 24, 1988, the Partnership commenced a public offering of its limited
partnership units pursuant to a Registration Statement filed on Form S-11 under
the Securities Act of 1933.  The Partnership terminated its offering on October
23, 1990, and received gross proceeds of $22,206,310 representing subscriptions
from 2,700 Limited Partners, composed of two classes of limited partnership
interests, Class A and Class B limited partnership units.

The Partnership owns interests in properties directly and through equity
ownership in the following joint ventures:  (i) the Fund II - Fund III Joint
Venture, (ii) the Fund II, III, VI and VII Joint Venture, and (iii) the Fund III
- Fund IV Joint Venture.

As of December 31, 1997, the Partnership owned interest in the following
properties:  (i) the Greenville Property, an office building in Greenville,
North Carolina, owned by the Partnership,  (ii) The Atrium, an office building
in Houston, Texas, owned by the Fund II - Fund III Joint Venture, (iii) the
Brookwood Grill, a restaurant located in Roswell, Georgia, owned by the Fund II
- Fund III Joint Venture, (iv) the Stockbridge Village Shopping Center, a retail
shopping center located in Stockbridge, Georgia, southeast of Atlanta, owned by
the Fund III - Fund IV Joint Venture, (v) the G.E. Office Building located in
Richmond, Virginia, owned by the Fund III - Fund IV Joint Venture, and (vi) an
office/retail center in Roswell, Georgia, owned by the Fund II, III, VI and VII
Joint Venture.  All of the foregoing properties were acquired on an all cash
basis.

EMPLOYEES
---------

The Partnership has no direct employees.  The employees of Wells Capital, Inc.,
a General Partner of the Partnership, perform a full range of real estate
services including leasing and property management, accounting, asset management
and investor relations for the Partnership.  See Item 11 - "Compensation of
General Partners and Affiliates" for a summary of the compensation and fees paid
to the General Partners and their affiliates during the fiscal year ended
December 31, 1997.

                                       2
<PAGE>
 
INSURANCE
---------

Wells Management Company, Inc., an affiliate of the General Partner, carries
comprehensive liability and extended coverage with respect to all the properties
owned directly or indirectly by the Partnership.  In the opinion of management
of the registrant, the properties are adequately insured.

COMPETITION
-----------

The Partnership will experience competition for tenants from owners and managers
of competing projects which may include the General Partners and their
affiliates.  As a result, the Partnership may be required to provide free rent,
reduced charges for tenant improvements and other inducements, all of which may
have an adverse impact on results of operations.  At the time the Partnership
elects to dispose of its properties, the Partnership will also be in competition
with sellers of similar properties to locate suitable purchasers for its
properties.

ITEM 2.    PROPERTIES
------     ----------

The Partnership owns six properties directly or through its ownership in joint
ventures of which three are office buildings, one a restaurant, one a retail
building and one a retail/office project.  The Partnership does not have control
over the operations of the joint ventures; however, it does exercise significant
influence.  Accordingly, investment in joint ventures is recorded on the equity
method.  As of December 31, 1997, these properties were 96.0% occupied, compared
to 98.0% at December 31, 1996, 97.0% at December 31, 1995, 99.0% at December 31,
1994, and 99.0% at December 31, 1993.

The following table shows lease expirations during each of the next ten years
for all leases as of December 31, 1997, assuming no exercise of renewal options
or termination rights:

<TABLE>
<CAPTION>
                                                                          Partnership                                       
                                                                            Share of                         Percentage of  
                        Number of                        Annualized        Annualized      Percentage of         Total      
Year of Lease             Leases       Square Feet    Gross Base Rent   Gross Base Rent     Total Square       Annualized   
  Expiration            Expiring        Expiring           (1)               (1)          Feet Expiring     Gross Base Rent 
---------------------------------------------------------------------------------------------------------------------------- 
<S>                     <C>             <C>            <C>               <C>               <C>               <C>
  1998                      6             18,154           197,316           142,982              6.3%              4.7%
  1999                      6             11,843           156,049            55,452              4.1%              3.7%
  2000(2)                   3             50,793           686,498           327,625             17.8%             16.2%
  2001(3)                   5             32,767           664,891           488,389             11.5%             15.7%
  2002(4)                  17            166,436         2,413,416           924,447             58.2%             56.8%
  2003                      0                  0                 0                 0               .0%              0.0%
  2004                      0                  0                 0                 0               .0%              0.0%
  2005                      0                  0                 0                 0               .0%              0.0%
  2006                      1              5,935           122,294            11,496              2.1%              2.9%
  2007                      0                  0                 0                 0               .0%               .0%
---------------------------------------------------------------------------------------------------------------------------- 
                           38            285,928        $4,240,464        $1,950,391            100.0%            100.0%
</TABLE>

                                       3
<PAGE>
 
------------
(1)  Average monthly gross rent over the life of the lease, annualized.

(2)  Expiration of General Electric.

(3)  Expiration of IBM with 23,322 square feet at the Greenville Property and
     the Brookwood
     Grill with 7,440 square feet.

(4)  Expiration of Boeing at The Atrium with 119,040 square feet.

The following describes the properties in which the Partnership owns an interest
as of December 31, 1997:


The Greenville Property/Fund III
--------------------------------

On June 30, 1990, the Partnership acquired a 2.34 acre tract of land located in
Greenville, North Carolina (the "Greenville Property") for a purchase price of
the land of $576,350, including acquisition expenses for the purpose of
developing, constructing and operating a two-story office building containing
approximately 34,300 rentable square feet.  As of December 31, 1997, the
Partnership had expended approximately $3,778,000 for the acquisition,
development and construction of the Greenville Project.

The occupancy rate at the Greenville Property at year end was 92% in 1997, 100%
in 1996, 1995, and 1994, and 95% in 1993.

The average effective annual rental per square foot at the Greenville Property
was $16.66 for 1997, $17.40 for 1996, $17.01 for 1995, $16.73 for 1994, and
$16.74 for 1993.

Two tenants occupy ten percent or more of the rentable square footage -
International Business Machines Corporation ("IBM"), a computer sales and
service corporation, and Team YASNY (McDonald's) a fast-food restaurant chain.

The Partnership entered into a net lease with IBM for a portion of the first
floor and the entire second floor of the Greenville Property representing
approximately 23,300 rentable square feet or approximately 67% of the Greenville
Project.  The initial term of the IBM lease is nine years and ten months and
commenced in April of 1991.  IBM has the option to extend the initial term of
the lease for two consecutive five-year periods.  The annual base rent payable
under the IBM lease is $462,242, net of all expenses of operation, and is
payable in monthly installments of $38,520.17.  The annual base rent will
increase in the sixth year of the initial term of the lease to $478,101 payable
in equal monthly installments of $39,841.75 and will remain constant for each of
the subsequent years in the initial term of the lease.  In addition to the base
rent, IBM is required to pay additional rent equal to its share of all operating
expenses during the lease term.

The lease provides IBM with the right of first refusal to purchase the
Greenville Project should the Partnership receive a bona fide offer from the
third party to purchase the Greenville Project during the term of the lease.
IBM also has the right of first refusal to lease all or a portion of any 

                                       4
<PAGE>
 
space which may from time to time become available. The IBM lease also provides
that the Partnership will not lease or consent to any sublease to any entity
which, as a major part of its business engages in sales and services similar to
those of IBM.

Team YASNY's original lease represented 3,122 rentable square feet.  In 1994,
Team YASNY expanded and increased their rentable space on additional 1,232
square feet for a total of 4,354 rentable square feet.  The Team YASNY lease
calls for an annual rent of $50,150 in 1995, $51,717 in 1996, and $53,200 in
1997.  The Team YASNY lease expires March 31, 1998.


The Atrium/Fund II - Fund III Joint Venture
-------------------------------------------

On April 3, 1989, the Partnership formed a joint venture (the "Fund II - Fund
III Joint Venture") with an existing joint venture (the "Fund II - Fund II-OW
Joint Venture") previously formed between Wells Real Estate Fund II ("Wells Fund
II") and Wells Real Estate Fund II-OW ("Wells Fund II-OW").  Wells Fund II and
Wells Fund II-OW are public limited partnerships affiliated with the Partnership
through common general partners with investment objectives substantially
identical to those of the Partnership.

In April 1989, the Fund II - Fund III Joint Venture acquired a four-story office
building located on a 5.6 acre tract of land adjacent to the Johnson Space
Center in metropolitan Houston, in Nassau Bay, Harris County, Texas, known as
"The Atrium at Nassau Bay" (the "Atrium").

The funds used by the Fund II - Fund III Joint Venture to acquire the Atrium
were derived from capital contributions made to the Fund II - Fund III Joint
Venture by the Fund II - Fund II-OW Joint Venture and the Partnership in the
amounts of $8,327,856 and $2,538,000, respectively, for total initial capital
contributions of $10,865,856.  As of December 31, 1997, the Fund II - Fund II-OW
Joint Venture and the Partnership had made total capital contributions to the
Fund II - Fund III Joint Venture of approximately $8,330,000 and $4,448,000,
respectively, for the acquisition and development of the Atrium.

The Atrium was first occupied in 1987 and contains approximately 119,000 net
rentable square feet.  Each floor of the Atrium was originally under a separate
lease to Lockheed Engineering and Science Company, Inc., a wholly-owned
subsidiary of the Lockheed Company, each of which leases had terms of
approximately eight years and expired on June 30, 1996, and upon which date
Lockheed vacated the property.

On March 3, 1997, a lease was signed with The Boeing Company for the entire
Atrium building.  The lease is for a period of five years with an option to
renew for an additional five year term.  The rental rate for the first three
years of the lease term is $12.25 per square foot and $12.50 per square foot for
the final two years of initial lease term.  The rate for the optional five year
term will be determined based upon then current  market rates.   Upon 150 day
prior written notice, Boeing has the right to cancel its lease in the event that
NASA or another prime contractor were to cancel or substantially reduce its
contract.  In addition, there is a no-cause cancellation provision at the end of
the first three year period.  If this no-cause cancellation is exercised, Boeing
would be required to 

                                       5
<PAGE>
 
pay unamortized, up-front tenant improvement costs. The lease also provides that
tenant will pay certain operating expenses in excess of $5.50 per square foot on
an annual basis.

Boeing began the move-in phase of its occupancy on April 15, 1997, and occupied
The Atrium and began paying rent on May 15, 1997.  The total cost of completing
the required tenant improvements and outside broker commissions of approximately
$1.4 million is being funded out of reserves and cash flows of the Partnership,
Wells Fund II and Wells Fund II-OW.  As of December 31, 1997, the Partnership
had contributed approximately $659,810, Wells Fund II-OW had contributed
approximately $21,744, Wells Fund II had contributed approximately $387,752, and
Fund II  Fund III Joint Venture had contributed $330,694 to fund the tenant
improvements and outside broker commissions required.  The ownership percentages
in The Atrium have been adjusted as a result of these additional capital
contributions, and as of December 31, 1997, the Fund II - Fund II-OW Joint
Venture holds an equity interest in The Atrium of approximately 61%, and the
Partnership holds an equity interest of approximately 39% in the Atrium project.

The occupancy rate of the Atrium Property as of December 31, 1997 was 100%, in
1996 was 0% and 100% for 1993 through 1995.  The average annual effective rate
was $7.77 for 1997, $8.81 for 1996, and 17.47 for 1993 through 1995.


The Brookwood Grill Property/Fund II - Fund III Joint Venture
-------------------------------------------------------------

On January 31, 1990, the Fund II - Fund II-OW Joint Venture acquired a 5.8 acre
tract of undeveloped real property at the intersection of Warsaw Road and
Holcomb Bridge Road in  Roswell, Fulton County, Georgia (the "Holcomb Bridge
Road Property"). The Fund II - Fund II-OW Joint Venture paid $1,848,561,
including acquisition expenses, for the 5.8 acre tract of undeveloped property.

On September 20, 1991, the Fund II - Fund II-OW Joint Venture contributed
approximately 1.5 acres of the Holcomb Bridge Road Property (the "Brookwood
Grill Property"), along with its interest as landlord under the lease agreement
referred to below, as a capital contribution to the Fund II - Fund III Joint
Venture.  As of September 20, 1991, the Fund II - Fund II-OW Joint Venture had
expended approximately $2,128,000 for the land acquisition and development of
the Brookwood Grill Property.

As of September 20, 1991, a lease agreement was entered into with the Brookwood
Grill of Roswell, Inc. for the development of approximately 1.5 acres and the
construction of a 7,440 square foot restaurant.  This Roswell site, which opened
early in March 1992, is the second location in the Atlanta area for what is
anticipated as a southeastern chain of restaurants similar in concept to
Houston's, Ruby Tuesday, and Friday's.  This chain is principally owned by David
Rowe, an Atlanta real estate developer of Kroger shopping centers, and several
operating partners formerly with Houston's.  The terms of the lease call for an
initial term of 9 years and 11 months, with two additional 10-year option
periods.  The agreement calls for a base rental of $217,006 per year for Years 1
through 5, with a 15% increase for the remainder of the initial term.  Rental
rates for all option periods will be based on the prevailing market values and
rates for those periods. The Fund II - Fund III Joint Venture has expended
approximately $1,100,000 

                                       6
<PAGE>
 
for the development and construction of the restaurant building together with
parking areas, driveways, landscaping and other improvements. In addition to the
base rent described above, the tenant is required to pay "additional rent" in
amounts equal to a 12% per annum return on all amounts expended for such
improvements.

The occupancy rate at year end for the Brookwood Grill, a sole tenant, was 100%
for 1997, 1996, 1995, 1994, and 1993.  The average effective annual rental per
square foot at the Brookwood Grill is $30.26 for 1997, $30.29 for 1996, $30.21
for 1995, 1994 and 1993.

As of December 31, 1997, the Fund II - Fund II-OW Joint Venture and the
Partnership had made total contributions to the Fund II - Fund III Joint Venture
of approximately $2,128,000 and $1,330,000, respectively, for the acquisition
and development of the Brookwood Grill. The Fund II - Fund II-OW Joint Venture
holds an approximately 62% equity interest in the Brookwood Grill Property, and
the Partnership holds an approximately 38% equity interest in the project.

On January 10, 1995, the remaining 4.3 acres of land comprising the Holcomb
Bridge Road Property was contributed to a new joint venture, Fund II, III, VI
and VII Associates by Fund II - Fund III Joint Venture.  This property is
described below.


Holcomb Bridge Road Property/Fund II, III, VI and VII Associates
----------------------------------------------------------------

On January 10, 1995, Fund II - Fund III Joint Venture, Wells Real Estate Fund
VI, L.P. ("Wells Fund VI"), a Georgia public limited partnership having Leo F.
Wells, III and Wells Partners, L.P., a Georgia limited partnership, as general
partners, and Wells Real Estate Fund VII, L.P. ("Wells Fund VII"), a Georgia
public limited partnership having Leo F. Wells, III and Wells Partners, L.P., a
Georgia limited partnership, as general partners, entered into a Joint Venture
Agreement known as Fund II, III, VI and VII Associates ("Fund II, III, VI and
VII Joint Venture"). Wells Partners, L.P. is a private limited partnership
having Wells Capital, Inc., a General Partner of the Partnership, as its sole
general partner. The investment objectives of Wells Fund VI and Wells Fund VII
are substantially identical to those of the Partnership.

In January 1995, the Fund II - Fund III Joint Venture contributed to the Fund
II-III-VI-VII Joint Venture approximately 4.3 acres of land at the intersection
of Warsaw Road and Holcomb Bridge Road in Roswell, Fulton County, Georgia (the
"Holcomb Bridge Road Property") including land improvements.  Development is
substantially complete on two buildings containing a total of approximately
49,500 square feet.  Fourteen tenants occupied the Holcomb Bridge Property as of
December 31, 1997, for an occupancy rate of 94% at year end.  The average
effective annual rental per square foot was $13.71 for 1997 and $9.87 for 1996.

As of December 31, 1997, Fund II and Fund III Joint Venture had contributed
$1,729,116 in land and improvements for an equity interest of approximately
24.2%, Wells Fund VI had contributed $1,812,579 for an equity interest of
approximately 26.9%,  and Wells Fund VII had contributed $3,335,121 for an
equity interest of approximately 48.9%.  The total cost to develop the Holcomb
Bridge Road Property is currently estimated to be approximately $5,214,000,
excluding land.  It is anticipated that of the remaining cost of approximately
$66,000 will be 

                                       7
<PAGE>
 
funded from reserves of Wells Fund VI and Wells Fund VII. Wells Fund VI and
Wells Fund VII have reserved sufficient funds for this purpose. The Partnership
is not obligated to provide any additional funding for the Holcomb Bridge Road
Property.


Fund III - Fund IV Joint Venture
--------------------------------

On March 27, 1991, the Partnership and Wells Real Estate Fund IV, L.P. ("Wells
Fund IV"), a Georgia public limited partnership having Leo F. Wells, III and
Wells Partners, L.P. as General Partners, entered into a Joint Venture Agreement
known as Fund III and Fund IV Associates (the "Fund III - Fund IV Joint
Venture").  As set forth above, Wells Partners, L.P. is a private limited
partnership having Wells Capital, Inc., a General Partner of the Partnership, as
its sole general partner.  The investment objectives of the Joint Venture are
substantially identical to those of the Partnership.  The Partnership holds an
approximate 57.3% equity interest in the Fund III - Fund IV Joint Venture which
owns and operates a multi-tenant retail center and an office building described
below.  As of December 31, 1997, the Partnership had contributed $8,119,603 and
Wells Fund IV had contributed $6,131,677 for total contributions of $14,251,280
to the Fund III - Fund IV Joint Venture for the acquisition and development of
the two properties as described below.


The Stockbridge Village Shopping Center/Fund III and Fund IV Joint Venture
--------------------------------------------------------------------------

On April 4, 1991, the Fund III - Fund IV Joint Venture purchased 13.62 acres of
real property located in Clayton County, Georgia, for the purchase price of
$3,057,729 including acquisition costs, for the purpose of developing,
constructing and operating a shopping center known as the Stockbridge Village
Shopping Center ("Stockbridge Property"). The Stockbridge Property consists of a
multi-tenant shopping center containing approximately 112,891 square feet of
which approximately 64,097 square feet is occupied by the Kroger Company, a
retail grocery chain.  The lease with the Kroger Company is for an initial term
of 20 years commencing November 14, 1991, with an option to extend for four
consecutive five-year periods.  The annual base rent payable under the Kroger
lease during the initial term is $492,692.  The remaining 48,794 square feet is
composed of 12 separate retail spaces and 3 free-standing buildings.  The
occupancy rate at year end for the Stockbridge Property was 93% in 1997, 1996
and 1995, 97% in 1994, and 95% in 1993.  The average effective annual rental per
square foot at the Stockbridge Property was $9.86 for 1997, $9.59 for 1996,
$10.16 for 1995, $10.26 for 1994, and $9.13 for 1993.

As of December 31, 1997, the Partnership had contributed a total of $4,515,042
and Wells Fund IV had contributed a total of $5,047,132 to fund the total cost
of approximately $9,562,000 for the acquisition and development of the
Stockbridge Property.


The G.E. Building/Fund III - Fund IV Joint Venture
--------------------------------------------------
 
The G.E. Building is a two-story office building containing approximately 43,000
square feet located in Richmond, Virginia which was acquired by the Fund III -
Fund IV Joint Venture on July 1, 1992 for a purchase price of $4,687,600.

                                       8
<PAGE>
 
The entire G.E. Building is currently under a net lease to General Electric
("G.E."), a corporate office for the lighting division.  The annual base rent
payable is currently $530,742 with annual base increases of 2%.  The G.E. lease
expires March 31, 2000, with an option to extend the lease for one additional
five-year period.  The occupancy rate at year end for the G.E. Building was 100%
for the years ended December 31, 1997, 1996, 1995, 1994, and 1993.  The average
effective annual rental per square foot at the G.E. Building is $12.27 for 1997,
1996, 1995, 1994, and 1993.  As of December 31, 1997, a total of $4,689,106 had
been incurred for the acquisition of the G.E. Building.  Of this amount, Wells
Fund IV contributed $1,084,545 and the Partnership contributed $3,604,561 to the
Fund III - Fund IV Joint Venture.


ITEM 3.   LEGAL PROCEEDINGS
------    -----------------

Litigation was instituted in the Superior Court of Gwinnett County, Georgia on
January 13, 1997 against the Partnership, Wells Real Estate Fund II, L.P.
("Wells Fund II"), Wells Capital, Inc. and Leo F. Wells, II, who are the
general partners of the Partnership and Wells Fund II, in connection with  a
request by a limited partner in the Partnership and Wells Fund II for a list of
the names, addresses and ownership interests of the limited partners which to
date the defendants have refused to furnish to the plaintiff.  The case is
styled Gramercy Park Investments L.P. v. Wells Real Estate Fund II, Wells Real
       -----------------------------------------------------------------------
Estate Fund III, L.P., Wells Capital, Inc. and Leo F. Wells, III.  The
-----------------------------------------------------------------     
plaintiff, which is a limited partner in both the Partnership and Wells Fund
II, alleged that it was entitled to copies of the limited partner lists under
applicable provisions of Georgia partnership law and the partnership agreements
of the Partnership and Wells Fund II so that plaintiff could make an offer to
purchase up to 4.9% of the partnership units in each fund.  The plaintiff sought
an order directing the defendants to furnish to the plaintiff a current list of
the names, addresses and ownership interests of the limited partners in the
Partnership and Wells Fund II, as well as an award of certain damages,
including its costs and attorneys' fees and such other relief as the court would
deem just and proper.  On February 26, 1997, the Court denied the plaintiff's
request for an immediate order requiring defendants to furnish the lists to the
plaintiff and instead ordered expedited discovery to be completed by March 31,
1997.  Ultimately, the Court secured an agreement between the plaintiff and
defendant, which detailed the conditions and circumstances under which copies of
limited partner lists would be made available for use by the plaintiff (via a
third-party mailing service, as specified by the agreement) and conditions under
which an offer would be made by the plaintiff to the limited partners.  The
agreement detailed time deadlines for actions by both the defendant and the
plaintiff.  The time deadline for the actual making of offers to the limited
partners was not met by the plaintiff. The list of investor names has been
returned to the defendant by the third-party mailing service, and this legal
proceeding appears to be terminated at this time.


ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------    ---------------------------------------------------

No matters were submitted to a vote of the Limited Partners during the fourth
quarter of 1997.

                                       9
<PAGE>
 
                                    PART II
                                        
ITEM 5.   MARKET FOR PARTNERSHIP'S UNITS AND RELATED SECURITY
------    ---------------------------------------------------
          HOLDER MATTERS
          --------------

As of February 28, 1998, the Partnership had 19,635,965 outstanding Class A
Units held by a total of 2,319 Limited Partners and 2,544,540 outstanding Class
B Units held by a total of 202 Limited Partners.  The capital contribution per
unit is $1.00.  There is no established public trading market for the
Partnership's limited partnership units, and it is not anticipated that a public
trading market for the units will develop.  Under the Partnership Agreement, the
General Partners have the right to prohibit transfers of units.

The General Partners have estimated the investment value of properties held by
the Partnership as of December 31, 1997 to be $1.10 per unit based on market
conditions existing in early December, 1997.  This value was confirmed as
reasonable by an independent MAI appraiser, David L. Beal Company, although no
actual MAI appraisal was performed due to the inordinate expense involved with
such an undertaking.  The valuation does not include any fractional interest
valuation or any distinction between different Classes of Partnership Units.

Class A Unit holders are entitled to an annual 8% non-cumulative distribution
preference over Class B Unit holders as to distributions from Net Cash From
Operations, as defined in the Partnership Agreement to mean Cash Flow, less
adequate cash reserves for other obligations of the Partnership for which there
is no provision, but are initially allocated none of the depreciation,
amortization, cost recovery and interest expense.  These items are allocated to
Class B Unit holders until their capital account balances have been reduced to
zero.

Net Cash From Operations to the Limited Partners is distributed on a quarterly
basis unless Limited Partners elect to have their cash distributions paid
monthly.  Cash distributions made to the Limited Partners during the two most
recent fiscal years were as follows:

<TABLE>
<CAPTION>
                                        Per Class A     Per Class A     Per Class B
                                           Unit             Unit            Unit
 Distribution for      Total Cash       Investment       Return of       Return of
 Quarter Ended         Distributed        Income          Capital         Capital      General Partner
------------------------------------------------------------------------------------------------------
<S>                   <C>               <C>             <C>             <C>            <C>
March 31, 1996           $392,719         $0.02            $0.00           $0.00            $0.00
June 30, 1996            $392,719         $0.02            $0.00           $0.00            $0.00
September 30, 1996       $312,517         $0.02            $0.00           $0.00            $0.00
December 31, 1996        $320,615         $0.01            $0.00           $0.00            $0.00
March 31, 1997           $      0         $0.00            $0.00           $0.00            $0.00
June 30, 1997            $      0         $0.00            $0.00           $0.00            $0.00
September 30, 1997       $349,938         $0.02            $0.00           $0.00            $0.00
December 31, 1997        $394,712         $0.02            $0.00           $0.00            $0.00
</TABLE>

                                       10
<PAGE>
 
The fourth quarter distribution was accrued for accounting purposes in 1997, and
was not actually paid to the Limited Partners holding Class A units until
February 1998.  The General Partners anticipate that cash distributions to
Limited Partners holding Class A units will continue in 1998 at a level at least
comparable with 1997 cash distributions; however, there is no guarantee of this.


ITEM 6.   SELECTED FINANCIAL DATA.
------    ----------------------- 

The following sets forth a summary of the selected financial data for the fiscal
years ended December 31, 1997, 1996, 1995, 1994, and 1993:

<TABLE>
<CAPTION>
                                  1997         1996           1995          1994            1993
------------------------------------------------------------------------------------------------------
<S>                           <C>           <C>           <C>           <C>             <C>
Total Assets                  $16,791,667   $17,114,963   $18,059,571   $18,561,131     $19,006,762
Total Revenues                    850,058     1,155,615     1,587,267     1,572,895       1,528,968
Net Income                        385,224       731,244     1,143,704     1,130,464       1,087,637
Net Income allocated
 to  General Partners                   0             0        15,205             0               0
Net Income allocated
 to Class A Limited
 Partners                         385,224       731,244     1,104,316     1,608,929       1,625,405
Net Income (Loss)
 allocated to Class B
 Limited Partners                       0             0        24,183      (478,465)       (537,768)
Net Income
 per Class A Limited
 Partner Unit                         .02           .04           .06           .08             .08
Net Income (Loss) per
 Class B Limited
 Partner Unit                         .00           .00           .01          (.19)           (.21)
Cash Distributions to
 Investors--
 Investment Income
 Class A Units:                       .04           .07           .08           .08             .08
 Return of Capital
 Class A Units:                       .00           .00           .00           .00             .00
 Investment Income
 Class B Units:                       .00           .00           .00           .00             .00
 Return of Capital
 Class B Units:                       .00           .00           .08           .02             .00
Cash Distribution to
 General Partners                     .00           .00     15,205.00           .00             .00

</TABLE>

                                       11
<PAGE>
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
-------------------------------------------------------------------------
          RESULTS OF OPERATION
          --------------------

The following discussion and analysis should be read in conjunction with the
Selected Financial Data and the accompanying financial statements of the
Partnership and notes thereto.  This Report contains forward-looking statements,
within the meaning of Section 27A of the Securities Act of 1933 and 21E of the
Securities Exchange Act of 1934, including discussion and analysis of the
financial condition of the Partnership, anticipated capital expenditures
required to complete certain projects, amounts of cash distributions anticipated
to be distributed to Limited Partners in the future and certain other matters.
Readers of this Report should be aware that there are various factors that could
cause actual results to differ materially from any forward-looking statement
made in this Report, which include construction costs which may exceed
estimates, construction delays, lease-up risks, inability to obtain new tenants
upon the expiration of existing leases, and the potential need to fund tenant
improvements or other capital expenditures out of operating cash flow.


Results of Operations and Changes in Financial Conditions
---------------------------------------------------------

GENERAL
-------

Gross revenues of the Partnership were $850,058 for the fiscal year ended
December 31, 1997, as compared to $1,155,615 for the fiscal year ended December
31, 1996, and $1,587,267 for the fiscal year ended December 31, 1995.  The
decrease for 1997 over 1996 and 1995 is primarily due to the loss of income
contributed from the Fund II - Fund III Joint Venture, due primarily to the
termination of the Lockheed lease at The Atrium on June 30, 1996.

Expenses of the Partnership were $464,834 for the fiscal year ended December 31,
1997, as compared to $424,371 for the fiscal year ended December 31, 1996 and
$443,563 for the fiscal year ended December 31, 1995.    In 1997, operating
expenses increased over 1996 due primarily to timing differences in common area
maintenance billings to tenants.  In 1996, the increase in depreciation was
offset by a decrease in operating expenses.  Depreciation expenses increased
from 1995 as compared to 1996 and 1997 due to a change in the estimated useful
lives of buildings and improvements from 40 years to 25 years which became
effective October 1, 1995.  For further discussion of depreciation expense,
please refer to the notes to the accompanying financial statements.

Net income of the Partnership was $385,224 for the fiscal year ended December
31, 1997, as compared to $731,244 for the fiscal year ended December 31, 1996,
and $1,143,704 for the fiscal year ended December 31, 1995.  The decrease in net
income for 1997 as compared to 1996 and 1995 is due primarily to the loss of
rental income from the Joint Ventures and increased depreciation expenses in
1996 and 1997, as noted above.

                                       12
<PAGE>
 
The Partnership's cash distributions to the Limited Partners holding Class A
Units were $0.04 per unit for the fiscal year ended December 31, 1997, and $0.07
for 1996 and $0.08 for 1995.  There were no cash distributions in 1997 and 1996
to the Limited Partners holding Class B Units; distributions  were $0.08 per
unit for fiscal year ended December 31, 1995.  This distribution was a return of
capital for the Class B Investors.

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 121, "Accounting for the impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed of", which is
effective for fiscal years beginning after December 15, 1995.  SFAS No. 121
established standards for determining when impairment losses on long-lived
assets have occurred and how impairment losses should be measured.  The joint
venture adopted SFAS No. 121, effective January 1, 1995.  The impact of adopting
SFAS No. 121 was not material to the financial statements of the joint ventures.


PROPERTY OPERATIONS
-------------------

As of December 31, 1997, the Partnership's ownership interest in the Greenville
Property is 100%, Fund II - Fund III Joint Venture is 34% and Fund III - Fund IV
Joint Venture is 57%.

As of December 31, 1997, the Partnership owned interests in the following
properties:


The Greenville Property/Fund III
--------------------------------

                           For the Year Ended December 31
                           ------------------------------
                             1997       1996       1995
                           --------   --------   --------
Revenues:
 Rental Income             $571,555   $586,466   $581,016
 Other Income                     0          0      2,350
                           --------   --------   --------
                            571,555    586,466    583,366
Expenses:
 Depreciation               158,308    158,308    112,196   
 Management and
  leasing expenses           71,075     85,366     72,694   
Other operating expenses    145,667     99,334    179,581
                           --------   --------   --------
                            375,050    343,008    364,471
                           --------   --------   --------
 
Net income                 $196,505   $243,458   $218,895
                           ========   ========   ========
 
Occupied %                       92%       100%       100%
Partnership Ownership %         100%       100%       100%
Cash Generated to the
 Partnership               $380,298   $411,469   $340,569
 
Net Income Allocated to
 the Partnership           $196,505   $243,458   $218,895

                                       13
<PAGE>
 
Rental income decreased due to an expiration of a lease in 1997 as compared to
1996 and 1995. Expenses of the Greenville Property remained relatively stable
for the three year period.  The increase in depreciation expenses in 1997 and
1996 as compared to 1995 was the result of the change in the estimated useful
lives of buildings and improvements as previously discussed under the "General"
section of "Results of Operations and Changes in Financial Conditions".  The
fluctuation in other operating expenses was due primarily to timing differences
in CAM billings to tenants.

The real estate taxes were $27,945 for 1997, $27,479 for 1996 and $27,692 for
1995.

The Partnership's ownership percentage remained constant at 100% for 1997, 1996
and 1995.

For comments on the general competitive conditions to which the property may be
subject, see Item 1, Business, page 2.  For additional information on the
property, tenants, etc., see Item 2, Properties, page 3.


The Atrium/Fund II - Fund III Joint Venture
-------------------------------------------

                               For the Year Ended December 31
                           -------------------------------------
                               1997         1996         1995
                           -----------   ----------   ----------
Revenues:
 Rental Income             $   924,769   $1,048,583   $2,079,345
 Interest Income                 2,617       24,188       29,965
 Other Income                    8,638            0            0
                           -----------   ----------   ----------
                               936,024    1,072,771    2,109,310
Expenses:
 Depreciation                  795,829      674,479      517,507   
 Management and
  leasing expenses             111,576       71,381      142,761   
Other operating                                                   
  expenses                     841,456      158,405      451,362 
                           -----------   ----------   ----------
                             1,748,861      904,265    1,111,630 
 
Net (loss) income          $  (812,837)  $  168,506   $  997,680
                           ===========   ==========   ==========
 
Occupied %                      100.00%        0.00%      100.00%
Partnership Ownership %          38.72%       34.40%       34.40%
Cash distributed to the
 Partnership               $    85,283   $  209,185   $  589,206
 
Net (loss) income allocated
 Partnership               $  (303,212)  $   57,966   $  343,202
 

                                       14
<PAGE>
 
Rental revenue decreased from $1,048,583 in 1996 to $924,768 in 1997 and from
$2,079,345 in 1995 due to the terminations of the Lockheed lease as of June 30,
1996.  Interest income decreased in 1997, compared to 1996 due to the decrease
in rent revenue being paid by Boeing, and the funding of operating expenses from
investment accounts during the vacancy of the Atrium.  Other income increased in
1997 due to a one-time adjustment for unused credits on the original build out
of The Atrium and a $5,000 reimbursement for the sale of office system
components which were unusable by the new tenant.  Depreciation and management
and leasing expenses and other operating expenses have increased in 1997
compared to 1996 due to the depreciation of tenant improvements made for the
Boeing Company and amortization of the leasing commission paid to acquire the
Boeing lease.  Other operating expenses have increased in 1997 compared to 1996
due to a $181,684 expense for asset retirements and a decrease in reimbursements
of operating expenses.  Depreciation expenses increased in 1997 and 1996 as
compared to 1995 due the change in estimated useful lives which was made
beginning in fourth quarter of 1995.  Management and leasing fees decreased in
1996 compared to 1995 due to the decrease in rental income for the last six
months of 1996.  Other operating expenses decreased from $451,362 in 1995 to
$158,405 in 1996 primarily due to vacancy of the Atrium for the last six months
of the year.

The real estate taxes were $140,366 for 1997, $150,105 for 1996, and $182,687
for 1995.

For comments on the general conditions to which the property may be subject, see
Item 1, Business, page 1.  For additional information on the property, tenants,
etc., see Item 2, Properties, page 3.





            (THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK)
                                        

                                       15
<PAGE>
 
The Brookwood Grill Property/Fund II - Fund III Joint Venture
-------------------------------------------------------------

                                    For the Year Ended December 31
                                    ------------------------------
                                      1997       1996       1995
                                    --------   --------   --------
Revenues:
 Rental Income                      $225,106   $225,359   $230,316
 Equity in Income (Loss)
  of Joint Venture                    27,213    (19,378)         0
                                    --------   --------   --------
                                     252,319    205,981    230,316
Expenses:
 Depreciation                         54,014     54,014     63,446   
 Management and
  leasing expenses                    28,464     27,004     29,351
 Other operating expenses             23,887    109,478     45,175
                                    --------   --------   --------
                                     106,365    190,496    137,972
                                    --------   --------   --------
 
Net income                          $145,954   $ 15,485   $ 92,344
                                    ========   ========   ========
 
Occupied %                            100.00%    100.00%    100.00%
Partnership Ownership % in the
 Fund II  Fund III Joint Venture       38.00%     38.00%     38.00%
Cash distributed to the
 Partnership                        $115,125   $ 40,154   $ 58,009
 
Income allocated to the
 Partnership                        $ 54,952   $  5,830   $ 34,767


Rental income remained stable in 1997 and 1996, and decreased from 1995 to 1996
due to a decrease in billing of administrative fees which were classified as
other rental income in 1995.  Equity in income of the II, III, VI and VII Joint
Venture increased substantially from 1996 to 1997 due to the increased occupancy
at the Holcomb Bridge Road Property.  Depreciation, management and leasing
expenses were stable for 1997 and 1996.  Although there was a change in useful
lives of assets from 40 years to 25 years in the fourth quarter of 1995,
depreciation expense decreased in 1996, compared to 1995, due to the
contribution of land improvements by the Fund II  Fund III Joint Venture to the
Holcomb Bridge Road Property.  Other operating expenses decreased in 1997,
compared to 1996, due to an increase in expense reimbursements from tenant,
adjustments to property taxes for prior year, and a decrease in administrative
expenses in 1997.  Other operating expenses increased in 1996 compared to 1995
due to decreased property tax reimbursements from tenants, and a reimbursement
to the tenant in first quarter, 1996, of administrative charges paid in 1995.
Net income increased in 1997 compared to 1996 and decreased in 1996 compared to
1995 due to the reasons cited in the discussion above.

                                       16
<PAGE>
 
Real estate taxes were  $25,771 for 1997, $33,494 for 1996, and $39,668 for
1995.


The Stockbridge Village Shopping Center/Fund III - Fund IV Joint Venture
------------------------------------------------------------------------

                                       For the Year Ended December 31
                                    ------------------------------------
                                       1997         1996         1995
                                    ----------   ----------   ----------
Revenues:
 Rental Income                      $1,113,238   $1,082,428   $1,148,600
 Interest Income                        12,308       13,024       15,482
                                    ----------   ----------   ----------
                                     1,125,546    1,095,452    1,164,082

Expenses:
 Depreciation                          338,989      338,989      249,689   
 Management and
  leasing expenses                     107,578       98,442      105,251
 Other operating expenses               68,797       90,187      101,047
                                    ----------   ----------   ----------
                                       515,364      527,618      455,987
                                    ----------   ----------   ----------
 
Net income                          $  610,182   $  567,834   $  708,095
                                    ==========   ==========   ==========
 
Occupied %                                  93%          93%          93%
Partnership Ownership % in the
 Fund III  Fund IV Joint Venture          57.3%        57.3%        57.3%
Cash Generated to the
 Partnership                        $  560,166   $  546,625   $  605,097
Net Income Allocated to
 the Partnership                    $  349,736   $  325,463   $  405,856


Rental income increased to $1,113,238 for 1997 as compared to $1,082,428 in 1996
due primarily to increased rental rates but decreased from $1,148,600 in 1995
due to decreased occupancy resulting from the early termination of a lease for
8,025 square feet in the fourth quarter of 1995.  Expenses of the property
varied from $455,987 in 1995 to $527,618 in 1996 and $515,364 in 1997 due
primarily to the increase in depreciation expenses which became effective in the
fourth quarter of 1995 as a result of the change in the estimated useful lives
of buildings and improvements as previously discussed under the "General"
section of "Results of Operations and Change in Financial Conditions".  Other
operating expenses decreased in 1997 as compared to 1996 due primarily to
savings in painting expense.  Net income of the property varied from $610,182
for 1997 as compared to $567,834 for 1996 and $708,095 for 1995 due primarily to
increased depreciation expenses and increased rental income, as discussed above.

Real estate taxes were $98,138 for 1997, $104,795 for 1996, and $120,899 for
1995.

                                       17
<PAGE>
 
The Partnership's ownership percentage in the Fund III - Fund IV Joint Venture
remained constant at 57.3% for 1997, 1996 and 1995.

For comments on the general conditions to which the property may be subject, see
Item 1, Business, page 2.  For additional information on the property, tenants,
etc., see Item 2, Properties, page 3.


The G.E. Building/Fund III and Fund IV Joint Venture
----------------------------------------------------

                                    For the Year Ended December 31
                                    ------------------------------
                                      1997       1996       1995
                                    --------   --------   --------
Revenues:
 Rental Income                      $527,425   $527,425   $527,425
 
Expenses:
 Depreciation                        196,220    196,220    132,727
 Management and
  leasing expenses                    38,435     39,860     39,821
 Other operating expenses              3,708      8,731      9,313
                                    --------   --------   --------
                                     238,363    244,811    181,861
                                    --------   --------   --------
 
Net income                          $289,062   $282,614   $345,564
                                    ========   ========   ========
 
Occupied %                               100%       100%       100%
Partnership Ownership % in the
 Fund III  Fund IV Joint Venture        57.3%      57.3%      57.3%
Cash Generated to the
 Partnership                        $284,890   $275,251   $253,847
Net Income Allocated to the
 Partnership                        $165,680   $161,985   $198,065


Rental income remained constant for 1997, 1996, and 1995.  Total expenses
decreased to $238,363 in 1997 from $244,811 in 1996 but increased from $181,861
in 1995.  During 1995, there was an increase in depreciation expense due to the
change in the estimated useful lives of buildings and improvements which became
effective in the fourth quarter of 1995, as previously discussed under the
"General" section of "Results of Operations and Change in Financial Conditions."

Due primarily to increased depreciation expenses in 1997 and 1996, as compared
to 1995, net income decreased to $289,062 in 1997 and $282,614 in 1996, as
compared to $345,564 in 1995.

                                       18
<PAGE>
 
The Partnership's ownership percentage in the Fund III - Fund IV Joint Venture
remained constant at 57.3% for 1997, 1996, and 1995.

Under the terms of the lease, G.E. pays the real estate taxes directly.

For comments on the general conditions to which the property may be subject, see
Item 1, Business, page 2.  For additional information on the property, tenants,
etc., see Item 2, Properties, page 3.


Holcomb Bridge Road Property/Fund II, III, VI, VII Joint Venture
----------------------------------------------------------------
 
                                        For the Year Ended    Nine Months Ended
                                        December 31, 1997     December 31, 1996
                                        ------------------    -----------------
Revenues:
  Rental income                              $679,268            $255,062

Expenses:
  Depreciation                                325,974             181,798
  Management & leasing expenses                48,962              28,832
  Other operating expenses                    195,567             101,600
                                             --------            --------
                                              570,503             312,230
                                             --------            --------

Net income (loss)                            $108,765            $(57,168)
                                             ========            ========

Occupied %                                      94.12%              62.90%

Partnership's Ownership % in the
   Fund II, III, VI, VII Joint Venture*          9.10%               9.50%

Cash distribution to the
  Fund II - Fund III Joint Venture*          $109,242            $ 19,494

Net income (loss) allocated to the
  Fund II - Fund III Joint Venture*          $ 27,213            $(19,378)

* The Partnership holds a 34% ownership in the Fund II - Fund III Joint
  Venture.

Since the Holcomb Bridge Road Property was under construction and not occupied
until first quarter, 1996, comparative income and expense figures for the prior
years are not available.

In January, 1995, the Fund II - Fund III Joint Venture contributed 4.3 acres of
land and land improvements at the Holcomb Bridge Road Property to the Fund II,
III, VI, VII Joint Venture.  Development has been substantially completed on two
buildings containing a total of approximately 49,500 square feet.  As of
December 31, 1997, fourteen tenants occupied 

                                       19
<PAGE>
 
approximately 46,600 square feet of space in the retail and office building
under leases of varying lengths.

As of December 31, 1997, the Fund II - Fund III Joint Venture contributed
$1,729,116 in land and land improvements for an equity interest of approximately
24.2%, Wells Fund VI had contributed $1,812,579 for an equity interest of
approximately 26.9%,  and Wells Fund VII had contributed $3,335,121 for an
equity interest of approximately 48.9% in the Fund II, III, VI, VII Joint
Venture.  The total cost to develop the Holcomb Bridge Road Property is
currently estimated to be approximately $5,214,000, excluding land.  It is
currently anticipated that approximately $66,000 will be required to complete
the development of the Holcomb Bridge Road Project, which amounts are
anticipated to be funded by additional capital contributions from Wells Fund VI
and Wells Fund VII, which have reserved sufficient funds for this purpose.

Real estate taxes were $85,230 for 1997 and $37,191 for 1996.

The Partnership's ownership percentage in the Holcomb Bridge Road Property was
9.1% in 1997 and 9.5% in 1996.

For comments on the general competitive conditions to which the property may be
subject, see Item 1, Business, page 2.  For additional information on the
property, tenants, etc., see Item 2, Properties, page 3.


LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

During its offering, which terminated on October 23, 1990, the Partnership
raised a total of $22,206,310 in capital through the sale of 22,206,310 Units.
No additional Units will be sold by the Partnership.  From the original funds
raised, the Partnership has invested a total of $17,765,137 in properties, paid
$1,554,442 in acquisition and advisory fees, $2,664,668 in selling commissions
and organization and offering expenses, and is maintaining a working capital
reserve of $162,072.

Since the Partnership is an investment partnership formed for the purpose of
acquiring, owning and operating income-producing real property and has invested
all of its funds available for investment, it is unlikely that the Partnership
will acquire interests in any additional properties, and the Partnership's
capital resources are anticipated to remain relatively stable over the holding
period of its investments.

Pursuant to the terms of the Partnership Agreement, the Partnership is required
to maintain working capital reserves in an amount equal to the cash operating
expenses required to operate the Partnership for a six-month period not to be
reduced below 1% of Limited Partners' capital contributions.  As set forth
above, in order to fund a portion of the tenant improvements at The Atrium, the
General Partners have used $60,000 of the Partnership's working capital reserves
to reduce the balance below this minimum amount, rather than funding the tenant
improvements out of operating cash flow, which would have the effect of reducing
cash flow distributions to Limited Partners.  It is anticipated that future
rental revenues associated with the Boeing lease 

                                       20
<PAGE>
 
will be allocated to restore the Partnership's minimum working capital reserve
levels over time in the future.

The Partnership's net cash provided by operating activities decreased in 1997 to
$264,289 from $359,388 in 1996 and $290,354 in 1995.  The decrease in 1997 was
due to a decrease in net income, primarily due to increased operating costs and
decreased payables due at year-end.

Cash and cash equivalents decreased in 1997 as compared to 1996 but increased as
compared to 1995 levels.

The Partnership's distributions paid and payable through the fourth quarter of
1997 have been paid from net cash from operations and from distributions
received from its equity investment in joint ventures.  No cash distributions
were paid to Class B Unit holders for 1997.  The Partnership expects to meet
liquidity, and budget demands through cash flow from operations.

The Partnership is unaware of any demands, commitments, events or capital
expenditures other than that which is required for the normal operations of its
properties that will result in the Partnership's liquidity increasing or
decreasing in any material way.  The Partnership is not obligated to provide any
additional funding on the Holcomb Bridge Road Property.  Additional funding for
the Holcomb Bridge Road Property is anticipated to be provided by capital
contributions from Wells Fund VI and Wells Fund VII, which have reserved
sufficient funds for this purpose.


Inflation
---------

Real estate has not been affected significantly by inflation in the past three
years due to the relatively low inflation rate.  There are provisions in the
majority of tenant leases executed by the Partnership to protect the Partnership
from the impact of inflation.  These leases contain common area maintenance
charges (CAM charges), real estate tax and insurance reimbursements on a per
square foot basis, or in some cases, annual reimbursements of operating expenses
above a certain per square foot allowance.  These provisions should reduce the
Partnership's exposure to increases in costs and operating expenses resulting
from inflation.  In addition, a number of the Partnership's leases are for terms
of less than five years which may permit the Partnership to replace existing
leases with new leases at higher base rental rates if the existing leases are
below market rate.  There is no assurance, however, that the Partnership would
be able to replace existing leases with new leases at higher base rentals.

The General Partners have verified that all operational computer systems are
year 2000 compliant.  This includes systems supporting accounting, property
management and investor services.  Also, as part of this review, all building
control systems have been verified as compliant.  The current line of business
applications are based on compliant operating systems and database servers.  All
of these products are scheduled for additional upgrades before the year 2000.
Therefore, it is not anticipated that the year 2000 will have significant impact
on operations.

                                       21
<PAGE>
 
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
------    -------------------------------------------

The Financial Statements of the Registrant and supplementary data are detailed
under Item 14(a) and filed as part of the report on the pages indicated.


ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------    ------------------------------------------------
          ACCOUNTING AND FINANCIAL DISCLOSURE
          ------------------------------------

The Partnership's change in accountants during 1995 was previously reported in
the Partnership's Form 8-K dated September 11, 1995.  There were no
disagreements with the Partnership's accountants or other reportable events
during 1997.



                                    PART III
                                        
ITEM 10.    GENERAL PARTNERS OF THE PARTNERSHIP
-------     -----------------------------------

Wells Capital, Inc.  Wells Capital, Inc. ("Capital") is a Georgia corporation
------------------                                                          
formed in April 1984.  The executive offices of Capital are located at 3885
Holcomb Bridge Road, Norcross, Georgia 30092.  Leo F. Wells, III is the sole
Director and the President of Capital.

LEO F. WELLS, III.  Mr. Wells is a resident of Atlanta, Georgia, is 54 years of
-----------------                                                              
age and holds a Bachelor of Business Administration Degree in Economics from the
University of Georgia.  Mr. Wells is the President and sole Director of Capital.
Mr. Wells is the President of Wells & Associates, Inc., a real estate brokerage
and investment company formed in 1976 and incorporated in 1978, for which he
serves as principal broker.  Mr. Wells is also currently the sole Director and
President of Wells Management Company, Inc., a property management company he
founded in 1983.  In addition, Mr. Wells is the President and Chairman of the
Board of Wells Investment Securities, Inc., Wells & Associates, Inc., and Wells
Management Company, Inc., which are affiliates of the General Partners.  From
1980 to February 1985, Mr. Wells served as Vice-President of Hill-Johnson, Inc.,
a Georgia corporation engaged in the construction business.  From 1973 to 1976,
he was associated with Sax Gaskin Real Estate Company and from 1970 to 1973, he
was a real estate salesman and property manager for Roy D. Warren & Company, an
Atlanta real estate company.

                                       22
<PAGE>
 
ITEM 11.    COMPENSATION OF GENERAL PARTNERS AND AFFILIATES
-------     -----------------------------------------------

The following table summarizes the compensation and fees paid to the General
Partners and their affiliates during the year ended December 31, 1997:

<TABLE>
<CAPTION>
                ( A )                                          ( B )                                   ( C )
Name of Individual or Number in Group      Capacities in which served Form of Compensation       Cash Compensation 
--------------------------------------------------------------------------------------------------------------------
<S>                                        <C>                                                   <C>
Wells Management Company, Inc.             Property Manager-Management and Leasing                  $194,174 (1)
                                           Fees

Wells Capital, Inc.                        General Partner  Partnership
                                           Cash Flow Distributions                                       -0-

Leo F. Wells, III                          General Partner  Partnership
                                           Cash Flow Distributions                                       -0-
</TABLE>

(1)  The majority of these fees are not paid directly by the Partnership but are
     paid by the joint venture entities which own properties for which the
     property management and leasing services relate and include management and
     leasing fees which were accrued for accounting purposes in 1997 but not
     actually paid until January, 1998.


ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-------     --------------------------------------------------------------

No Limited Partner is known by the Partnership to own beneficially more than 5%
of the outstanding units of the Partnership.

Set forth below is the security ownership of management as of February 28, 1998:

<TABLE>
<CAPTION> 
                                  (2)                        (3)                           
        (1)                Name and Address of         Amount and Nature of                (4)
  Title of Class            Beneficial Owner           Beneficial Ownership          Percent of Class
------------------         -------------------         --------------------          ----------------
<S>                        <C>                         <C>                           <C>  
  Class A Units             Leo F. Wells, III           11,158.79 Units                 Less than 1%
                                                          (IRA, 401 (k) and 
                                                           Profit Sharing)

  Class B Units             Leo F. Wells, III            1,750.00 Units                 Less than 1%
                                                          (401 (k))
</TABLE>

No arrangements exist which would, upon operation, result in a change in control
of the Partnership.

                                       23
<PAGE>
 
ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------        ----------------------------------------------

The compensation and fees paid or to be paid by the Partnership to the General
Partners and their affiliates in connection with the operation of the
Partnership are as follows:

INTEREST IN PARTNERSHIP CASH FLOW AND NET SALE PROCEEDS
-------------------------------------------------------

The General Partners receive a subordinated participation in net cash flow from
operations equal to 10% of net cash flow after the Limited Partners have
received preferential distributions equal to 8% of their adjusted capital
contribution.  For the year ended December 31, 1997, the General Partners
received no cash distributions.  The General Partners also receive a
subordinated participation in net sale proceeds and net financing proceeds equal
to 15% of residual proceeds available for distribution after the Limited
Partners have received a return of their adjusted capital contribution plus a
12% cumulative return on their adjusted capital contribution.  The General
Partners received no distribution from net sales proceeds.

PROPERTY MANAGEMENT AND LEASING FEES
------------------------------------

Wells Management Company, Inc., an affiliate of the General Partners, will
receive compensation for supervising the management of the Partnership
properties equal to 6% (3% management and 3% leasing) of rental income.  For the
year ended December 31, 1997, Wells Management Company, Inc. received $194,174
in management and leasing fees.  In no event will such fees exceed the sum of
(i) 6% of the gross receipts of each property, plus (ii) a separate one-time fee
for initial rent-up or leasing-up of development properties in an amount not to
exceed the fee customarily charged in arm's-length transactions by others
rendering similar services in the same geographic area for similar properties.
With respect to properties leased on a net basis for a period of ten years or
longer, property management fees will not exceed 1% of gross revenues from such
leases, plus a one-time initial leasing fee of 3% of the gross revenues which
are payable over the first five years of the term of such net leases.

REAL ESTATE COMMISSIONS
-----------------------

In connection with the sale of Partnership properties, the General Partners or
their affiliates may receive commissions not exceeding the lesser of (A) 50% of
the commissions customarily charged by other brokers in arm's-length
transactions involving comparable properties in the same geographic area or (B)
3% of the gross sales price of the property, and provided that payments of such
commissions will be made only after Limited Partners have received prior
distributions totaling 100% of their capital contributions plus a 6% cumulative
return on their adjusted capital contributions.  During 1997, no real estate
commissions were paid to the General Partners.

                                       24
<PAGE>
 
                                    PART IV
                                        

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
-------   --------------------------------------------
          REPORTS ON FORM 8-K
          -------------------

(a) 1. The Financial Statements are contained on pageS F-2 through F-32 of this
       Annual Report on Form 10-K, and the list of the Financial Statements
       contained herein is set forth on page F-1, which is hereby incorporated
       by reference.

(a) 2. Financial Statement Schedule III
       Information with respect to this item begins on Page S-1 of this Annual
       Report on Form 10-K.

(a) 3. The Exhibits filed in response to Item 601 of Regulation S-K are listed
       on the Exhibit Index attached hereto.

(b)    No reports on Form 8-K were filed with the Commission during the fourth
       quarter of 1997.

(c)    The Exhibits filed in response to Item 601 of Regulation S-K are listed
       on the Exhibit Index attached hereto.



           (THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.)
                                        

                                       25
<PAGE>
 
                                   SIGNATURES
                                   ----------
                                        
Pursuant to the requirements of Sections 13 or 15(d) 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 this 17th day of March,
1998.

                                       WELLS REAL ESTATE FUND III
                                       (Registrant)


                                       By: /S/ Leo F. Wells, III
                                           ---------------------
                                           LEO F. WELLS, III
                                           Individual General Partner and as
                                           President and Chief Financial Officer
                                           of Wells Capital, Inc., the Corporate
                                           General Partner


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following person on behalf of the registrant and in
the capacity as and on the date indicated.

Signature                Title
---------                -----
 
/S/ Leo F. Wells, III    Individual General Partner, President    March 17, 1998
---------------------    and Sole Director of Wells Capital,
    Leo F. Wells, III    Inc., the Corporate General Partner
 


SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE ACT BY REGISTRARS WHICH HAVE NOT BEEN REGISTERED PURSUANT TO
SECTION 12 OF THE ACT.

No annual report or proxy material relating to an annual or other meeting of
security holders has been sent to security holders.

                                       26
<PAGE>
 
                       INDEX TO THE FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
 
 
FINANCIAL STATEMENTS                                         PAGE
--------------------                                         ----
<S>                                                          <C>
 
Independent Auditors' Reports                                 F2
 
Balance Sheets as of December 31, 1997 and 1996               F3
 
Statements of Income for the Years ended
  December 31, 1997, 1996, and 1995                           F4
 
Statements of Partners' Capital for the Years ended
  December 31, 1997, 1996, and 1995                           F5
 
Statements of Cash Flows for the Years ended
  December 31, 1997, 1996, and 1995                           F6
 
Notes to Financial Statements for December 31, 1997,
  1996, and 1995                                              F7
 
</TABLE>

                                      F-1
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Partners of
Wells Real Estate Fund III, L.P.:

We have audited the accompanying balance sheets of WELLS REAL ESTATE FUND III,
L.P. (a Georgia public limited partnership) as of December 31, 1997 and 1996 and
the related statements of income, partners' capital, and cash flows for each of
the three years in the period ended December 31, 1997.  These financial
statements and the schedule referred to below are the responsibility of the
Partnership's management.  Our responsibility is to express an opinion on those
financial statements and schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement.  An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.  
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.  We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Wells Real Estate Fund III,
L.P. as of December 31, 1997 and 1996 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole.  Schedule III--Real Estate Investments
and Accumulated Depreciation as of December 31, 1997 is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements.  This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

                                        /s/ ARTHUR ANDERSEN LLP

Atlanta, Georgia
January 9, 1998
<PAGE>
 
                        WELLS REAL ESTATE FUND III, L.P.

                     (A GEORGIA PUBLIC LIMITED PARTNERSHIP)


                                 BALANCE SHEETS

                           DECEMBER 31, 1997 AND 1996



                                     ASSETS
                                        
<TABLE>
<CAPTION>
                                                                              1997               1996
                                                                         ------------        -----------
<S>                                                                 <C>                <C>
REAL ESTATE ASSETS, AT COST:                                   
  Land                                                                     $   576,350        $   576,350
  Building and improvements, less accumulated depreciation of  
     $771,521 and $613,213 at December 31, 1997 and 1996,      
     respectively                                                            2,794,080          2,952,388
  Construction in progress                                                           0             13,000
                                                                           -----------        -----------
        Total real estate assets                                             3,370,430          3,541,738
                                                               
INVESTMENT IN JOINT VENTURES                                                12,807,576         12,926,074
                                                               
CASH AND CASH EQUIVALENTS                                                      216,961            342,318
                                                               
DUE FROM AFFILIATES                                                            316,089            212,943
                                                               
ACCOUNTS RECEIVABLE                                                             62,621             67,790
                                                               
PREPAID EXPENSES AND OTHER ASSETS                                               17,990             24,100
                                                                           -----------        -----------
       Total assets                                                        $16,791,667        $17,114,963
                                                                           ===========        ===========
                                                               
                                                               
                       LIABILITIES AND PARTNERS' CAPITAL       
                                                               
LIABILITIES:                                                   
  Accounts payable and accrued expenses                                    $     7,535        $    35,941
  Partnership distributions payable                                            396,991            324,495
  Due to affiliates                                                              3,436             11,396
                                                                           -----------        -----------
        Total liabilities                                                      407,962            371,832
                                                                           -----------        -----------
COMMITMENTS AND CONTINGENCIES                                  
                                                               
PARTNERS' CAPITAL:                                             
  Limited partners:                                            
    Class A                                                                 16,383,705         16,743,131
    Class B                                                                          0                  0
                                                                           -----------        -----------
        Total partners' capital                                             16,383,705         16,743,131
                                                                           -----------        -----------
        Total liabilities and partners' capital                            $16,791,667        $17,114,963
                                                                           ===========        ===========
</TABLE>



      The accompanying notes are an integral part of these balance sheets.

                                      F-3
<PAGE>
 
                        WELLS REAL ESTATE FUND III, L.P.

                     (A GEORGIA PUBLIC LIMITED PARTNERSHIP)

                              STATEMENTS OF INCOME

             FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

<TABLE>
<CAPTION>
                                                               1997              1996             1995
                                                             --------         ----------       ----------
<S>                                                          <C>              <C>               <C>
REVENUES:                                                
 Rental income                                               $571,555         $  586,466       $  581,016
 Equity in income of joint ventures                           267,156            551,244          981,890
 Interest income                                               11,347             17,905           22,011
 Other income                                                       0                  0            2,350
                                                             --------         ----------       ----------
                                                              850,058          1,155,615        1,587,267
                                                             --------         ----------       ----------
EXPENSES:                                                
 Depreciation and amortization                                158,308            158,308          112,196
 Operating costs, net of reimbursements--rental property 
                                                              125,810             73,206          179,581
 Partnership administration                                    57,312             70,005           56,256
 Lease acquisition costs                                        5,022             44,867           34,981
 Management and leasing fees                                   66,053             40,499           37,713
 Legal and accounting                                          42,562             32,332           16,984
 Computer costs                                                 9,767              5,154            5,852
                                                             --------         ----------       ----------
                                                              464,834            424,371          443,563
                                                             --------         ----------       ----------
NET INCOME                                                   $385,224         $  731,244       $1,143,704
                                                             ========         ==========       ==========
NET INCOME ALLOCATED TO GENERAL PARTNERS                     $      0         $        0       $   15,205
                                                             ========         ==========       ==========
NET INCOME ALLOCATED TO CLASS A LIMITED PARTNERS             $385,224         $  731,244       $1,104,316
                                                             ========         ==========       ==========
NET INCOME ALLOCATED TO CLASS B LIMITED PARTNERS             $      0         $        0       $   24,183
                                                             ========         ==========       ==========
NET INCOME PER CLASS A LIMITED PARTNER UNIT                  $   0.02         $     0.04       $     0.06
                                                             ========         ==========       ==========
NET INCOME PER CLASS B LIMITED PARTNER UNIT                  $   0.00         $     0.00       $     0.01
                                                             ========         ==========       ==========
CASH DISTRIBUTION TO GENERAL PARTNERS                        $      0         $        0       $   15,205
                                                             ========         ==========       ==========
CASH DISTRIBUTION PER CLASS A LIMITED PARTNER UNIT           $   0.04         $     0.07       $     0.08
                                                             ========         ==========       ==========
CASH DISTRIBUTION PER CLASS B LIMITED PARTNER UNIT           $   0.00         $     0.00       $     0.08
                                                             ========         ==========       ==========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                      F-4
<PAGE>
 
                        WELLS REAL ESTATE FUND III, L.P.

                     (A GEORGIA PUBLIC LIMITED PARTNERSHIP)


                        STATEMENTS OF PARTNERS' CAPITAL

             FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995


<TABLE>
<CAPTION>
                                                           LIMITED  PARTNERS                               
                                            ----------------------------------------------
                                                     CLASS A                CLASS B                        TOTAL
                                            ----------------------------------------------   GENERAL      PARTNERS'
                                               UNITS       AMOUNT       UNITS      AMOUNT    PARTNERS     CAPITAL
                                            ----------  -----------   ---------  ---------   --------   -----------
<S>                                         <C>         <C>           <C>        <C>         <C>        <C>
BALANCE, DECEMBER 31, 1994                  19,635,965  $17,897,016   2,544,540  $ 179,381   $      0   $18,076,397
                                 
   Net income                                        0    1,104,316           0     24,183     15,205     1,143,704
   Partnership distributions                         0   (1,570,875)          0   (203,564)   (15,205)   (1,789,644)
                                            ----------  -----------   ---------  ---------   --------   -----------
BALANCE, DECEMBER 31, 1995                  19,635,965   17,430,457   2,544,540          0          0    17,430,457
                                 
   Net income                                        0      731,244           0          0          0       731,244
   Partnership distributions                         0   (1,418,570)          0          0          0    (1,418,570)
                                            ----------  -----------   ---------  ---------   --------   -----------
BALANCE, DECEMBER 31, 1996                  19,635,965   16,743,131   2,544,540          0          0    16,743,131
                                 
   Net income                                        0      385,224           0          0          0       385,224
   Partnership distributions                         0     (744,650)          0          0          0      (744,650)
                                            ----------  -----------   ---------  ---------   --------   -----------
BALANCE, DECEMBER 31, 1997                  19,635,965  $16,383,705   2,544,540  $       0   $      0   $16,383,705
                                            ==========  ===========   =========  =========   ========   ===========
</TABLE>
        The accompanying notes are an integral part of these statements.

                                      F-5
<PAGE>
 
                        WELLS REAL ESTATE FUND III, L.P.

                     (A GEORGIA PUBLIC LIMITED PARTNERSHIP)


                            STATEMENTS OF CASH FLOWS

             FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995




<TABLE>
<CAPTION>
                                                                          1997              1996               1995
                                                                        ---------        -----------        -----------
<S>                                                                     <C>              <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income                                                             $ 385,224        $   731,244        $ 1,143,704
                                                                        ---------        -----------        -----------
 Adjustments to reconcile net income to net cash provided by
  operating activities:
     Equity in income of joint ventures                                  (267,156)          (551,244)          (981,890)
     Depreciation and amortization                                        158,308            158,308            112,196
     Changes in assets and liabilities:
       Accounts receivable                                                  5,169             (6,949)            24,955
       Prepaid expenses and other assets                                    6,110              4,996              5,929
       Accounts payable and accrued expenses                              (15,406)            17,906            (14,101)
       Due to affiliates                                                   (7,960)             5,127               (439)
                                                                        ---------        -----------        -----------
         Total adjustments                                                120,935           (371,856)          (853,350)
                                                                        ---------        -----------        -----------
         Net cash provided by operating activities                        264,289            359,388            290,354
                                                                        ---------        -----------        -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Investment in joint ventures                                            (659,810)                 0                  0
 Distributions received from joint ventures                               942,318          1,194,488          1,522,447
                                                                        ---------        -----------        -----------
         Net cash provided by investing activities                        282,508          1,194,488          1,522,447
                                                                        ---------        -----------        -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Distributions to partners in excess of accumulated earnings             (267,191)          (170,157)                 0
 Distributions to partners from accumulated earnings                     (404,963)        (1,541,728)        (1,630,724)
                                                                        ---------        -----------        -----------
         Net cash used in financing activities                           (672,154)        (1,711,885)        (1,630,724)
                                                                        ---------        -----------        -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                     (125,357)          (158,009)           182,077
                                                                        ---------        -----------        -----------

CASH AND CASH EQUIVALENTS, beginning of year                              342,318            500,327            318,250
                                                                        ---------        -----------        -----------
CASH AND CASH EQUIVALENTS, end of year                                  $ 216,961        $   342,318        $   500,327
                                                                        =========        ===========        ===========
</TABLE>


        The accompanying notes are an integral part of these statements.

                                      F-6
<PAGE>
 
                        WELLS REAL ESTATE FUND III, L.P.

                     (A GEORGIA PUBLIC LIMITED PARTNERSHIP)

                         NOTES TO FINANCIAL STATEMENTS


                       DECEMBER 31, 1997, 1996, AND 1995

 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    ORGANIZATION AND BUSINESS

   Wells Real Estate Fund III, L.P. (the "Partnership") is a public limited
   partnership organized on July 31, 1988, under the laws of the state of
   Georgia.  The general partners are Leo F. Wells, III and Wells Capital, Inc.
   (the "Company").  The Partnership has two classes of limited partnership
   interests, Class A and Class B units.  Limited partners may vote to, among
   other things, (a) amend the partnership agreement, subject to certain
   limitations, (b) change the business purpose or investment objectives of the
   Partnership, and (c) remove a general partner.  A majority vote on any of the
   above described matters will bind the Partnership without the concurrence of
   the general partners.  Each limited partnership unit has equal voting rights,
   regardless of class.

   The Partnership was formed to acquire and operate commercial real properties,
   including properties which are either to be developed, currently under
   development or construction, newly constructed, or have operating histories.
   The Partnership directly owns an office building in Greenville, North
   Carolina.  In addition, the Partnership owns an interest in the following
   properties through joint ventures between the Partnership and other Wells
   Real Estate Funds:  (i) The Atrium of Nassau Bay ("The Atrium"), a four-story
   office building located in metropolitan Houston, Texas, (ii) the Brookwood
   Grill, a restaurant located in Roswell, Georgia, (iii) the Stockbridge
   Village Shopping Center, a retail shopping center located in Stockbridge,
   Georgia, southeast of Atlanta, Georgia, (iv) the G.E. Lighting National
   Customer Center, a two-story office building located in Richmond, Virginia,
   and (v) an office/retail center in Roswell, Georgia.

   USE OF ESTIMATES AND FACTORS AFFECTING THE PARTNERSHIP

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

   The carrying values of the real estate assets are based on management's
   current intent to hold the real estate assets as long-term investments.  The
   success of the Partnership's future operations and the ability to realize the

                                      F-7
<PAGE>
 
   investment in its assets will be dependent on the Partnership's ability to
   maintain rental rates, occupancy, and an appropriate level of operating
   expenses in future years.  Management believes that the steps it is taking
   will enable the Partnership to realize its investment in its assets.

   INCOME TAXES

   The Partnership is not subject to federal or state income taxes, and
   therefore, none have been provided for in the accompanying financial
   statements.  The partners are required to include their respective share of
   profits and losses in their individual income tax returns.

   DISTRIBUTION OF NET CASH FROM OPERATIONS

   Cash available for distribution is distributed on a cumulative noncompounded
   basis to limited partners quarterly.  In accordance with the partnership
   agreement, distributions are paid first to limited partners holding Class A
   units until they have received an 8% per annum return on their adjusted
   capital contributions, as defined.  Cash available for distribution is then
   distributed to limited partners holding Class B units until they have
   received an 8% per annum return on their adjusted capital contributions, as
   defined.  If any cash available for distribution remains, the general
   partners receive an amount equal to 10% of total net cash from operations
   distributed.  Thereafter, amounts are distributed 10% to the general partners
   and 90% to the limited partners.

   DISTRIBUTION OF SALES PROCEEDS

   Upon sales of properties, the net sales proceeds are distributed in the
   following order:

        .  To limited partners until all limited partners have received 100% of
           their adjusted capital contributions, as defined

        .  To limited partners holding Class B units until they receive an
           amount equal to the net cash available for distribution received by
           the limited partners holding Class A units

        .  To all limited partners until they receive a cumulative 12% per annum
           return on their adjusted capital contributions, as defined

        .  To all limited partners until they receive an amount equal to their
           respective cumulative distributions, as defined

        .  To all the general partners until they have received 100% of their
           capital contributions, as defined

        .  Thereafter, 85% to the limited partners and 15% to the general
           partners

   ALLOCATION OF NET INCOME, NET LOSS, AND GAIN ON SALE

   Net income is defined as net income recognized by the Partnership, excluding
   deductions for depreciation, amortization, and cost recovery.  Net income, as
   defined, of the Partnership will be allocated each year in the same

                                      F-8
<PAGE>
 
   proportions that net cash from operations is distributed to the partners.  To
   the extent the Partnership's net income in any year exceeds net cash from
   operations, it will be allocated 99% to the limited partners and 1% to the
   general partners.

   Net loss, depreciation, amortization, and cost recovery deductions for each
   fiscal year will be allocated as follows:  (a) 99% to the limited partners
   holding Class B units and 1% to the general partners until their capital
   accounts are reduced to zero, (b) then to any partner having a positive
   balance in his capital account in an amount not to exceed such positive
   balance, and (c) thereafter to the general partners.

   Gain on the sale or exchange of the Partnership's properties will be
   allocated generally in the same manner that the net proceeds from such sale
   are distributed to partners after the following allocations are made, if
   applicable, (a) allocations made pursuant to a qualified income offset
   provision in the partnership agreement; (b) allocations to partners having
   negative accounts until all negative capital accounts have been restored to
   zero; and (c) allocations to Class B limited partners in amounts equal to
   deductions for depreciation, amortization, and cost recovery previously
   allocated to them with respect to the specific partnership property sold, but
   not in excess of the amount of gain on sale recognized by the Partnership
   with respect to the sale of such property.

   REAL ESTATE ASSETS

   Real estate assets held by the Partnership directly or through investments in
   affiliated joint ventures are stated at cost less accumulated depreciation.
   Major improvements and betterments are capitalized when they extend the
   useful life of the related asset.  All repairs and maintenance are expensed
   as incurred.

   In March 1995, the Financial Accounting Standards Board issued Statement of
   Financial Accounting Standards ("SFAS") No. 121 , "Accounting for the
   Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
   which is effective for fiscal years beginning after December 15, 1995.  SFAS
   No. 121 establishes standards for determining when impairment losses on long-
   lived assets have occurred and how impairment losses should be measured.  The
   Partnership and the entities in which it holds a joint venture interest
   adopted SFAS No. 121 effective January 1, 1995.  The impact of adopting SFAS
   No. 121 was not material to the financial statements of the Partnership or
   its affiliated joint ventures.

   Management continually monitors events and changes in circumstances that
   could indicate carrying amounts of real estate assets may not be recoverable.
   When events or changes in circumstances are present that indicate the
   carrying amounts of real estate assets may not be recoverable, management
   assesses the recoverability of real estate assets under SFAS No. 121 by
   determining whether the carrying value of such real estate assets will be
   recovered through the future cash flows expected from the use of the asset
   and its eventual disposition.  Management has determined that there has been
   no impairment in the carrying value of real estate assets held by the
   Partnership or its affiliated joint ventures as of December 31, 1997.

   Depreciation for buildings and improvements is calculated using the straight-
   line method over the useful lives of the real estate assets.  Effective

                                      F-9
<PAGE>
 
   October 1, 1995, the Partnership and its affiliated joint ventures revised
   their estimate of the useful lives of buildings and improvements from 40 to
   25 years.  This change was made to better reflect the estimated periods
   during which such assets will remain in service.  The change had the effect
   on the Partnership, directly and through its ownership interest in joint
   ventures, of increasing depreciation expense approximately $61,167 in the
   fourth quarter of 1995 and $261,953 and $320,502 in the years ended December
   31, 1996 and 1997, respectively.

   REVENUE RECOGNITION

   All leases on real estate assets held by the Partnership are classified as
   operating leases, and the related rental income is recognized on a straight-
   line basis over the terms of the respective leases.

   DEFERRED LEASE ACQUISITION COSTS

   Costs incurred to procure operating leases are capitalized and amortized on a
   straight-line basis over the terms of the related lease.

   INVESTMENT IN JOINT VENTURES

   The Partnership does not have control over the operations of the joint
   ventures; however, it does exercise significant influence.  Accordingly,
   investments in joint ventures are recorded using the equity method of
   accounting.  The joint ventures follow the same significant accounting
   policies as the Partnership.

   Cash available for distribution and allocations of profit and loss to the
   Partnership by the joint ventures are made in accordance with the terms of
   the individual joint venture agreements.  Generally, these items are
   allocated in proportion to the partners' respective ownership interests.
   Cash is paid from the joint ventures to the Partnership quarterly.

   CASH AND CASH EQUIVALENTS

   For the purposes of the statements of cash flows, the Partnership considers
   all highly liquid investments purchased with an original maturity of three
   months or less to be cash equivalents.  Cash equivalents include cash and
   short-term investments.  Short-term investments are stated at cost, which
   approximates fair value, and consist of investments in money market accounts.

   PER UNIT DATA

   Net income per unit with respect to the Partnership for the years ended
   December 31, 1997, 1996, and 1995 is computed based on the number of units
   outstanding during the period.

   RECLASSIFICATIONS

   Certain prior year items have been reclassified to conform with current year
   financial statement presentation.

                                      F-10
<PAGE>
 
 2. RELATED-PARTY TRANSACTIONS

   Due from affiliates at December 31, 1997 and 1996 represents the
   Partnership's share of cash to be distributed for the fourth quarters of 1997
   and 1996, respectively, as follows:

<TABLE>
<CAPTION>
                                                           1997           1996
                                                         --------       --------
<S>                                                      <C>            <C>
        Fund III and IV Associates                       $226,757       $212,618
        Fund II and III Associates--The Atrium             58,454              0
        Fund II and III Associates--Brookwood Grill        30,878            325
                                                         --------       --------
                                                         $316,089       $212,943
                                                         ========       ========
</TABLE>

   The Partnership entered into a property management agreement with Wells
   Management Company, Inc. ("Wells Management"), an affiliate of the general
   partners.  In consideration for supervising the management of the
   Partnership's properties, the Partnership will generally pay Wells Management
   management and leasing fees equal to (a) 3% of the gross revenues for
   management and 3% of the gross revenues for leasing (aggregate maximum of 6%)
   plus a separate fee for the one-time initial lease-up of newly constructed
   properties in an amount not to exceed the fee customarily charged in arm's-
   length transactions by others rendering similar services in the same
   geographic area for similar properties or (b) in the case of commercial
   properties which are leased on a long-term net basis (ten or more years), 1%
   of the gross revenues except for initial leasing fees equal to 3% of the
   gross revenues over the first five years of the lease term.

   The Partnership incurred management and leasing fees and lease acquisition
   costs, both directly and at the joint venture level, of $194,174, $189,023,
   and $204,671 for the years ended December 31, 1997, 1996, and 1995,
   respectively, which were paid to Wells Management.

   The Company performs certain administrative services for the Partnership,
   such as accounting and other partnership administration, and incurs the
   related expenses.  Such expenses are allocated among the various Wells Real
   Estate Funds based on time spent on each fund by individual administrative
   personnel.  In the opinion of management, such allocation is a reasonable
   estimation of such expenses.

   The general partners are also general partners of other Wells Real Estate
   Funds.  As such, there may exist conflicts of interest where the general
   partners, while serving in the capacity as general partners of other Wells
   Real Estate Funds, may be in competition with the Partnership for tenants in
   similar geographic markets.

                                      F-11
<PAGE>
 
 3. INVESTMENT IN JOINT VENTURES

   The Partnership's investment and percentage ownership in the joint ventures
   at December 31, 1997 and 1996 are summarized as follows:

<TABLE>
<CAPTION>
                                                                1997                          1996
                                                    -------------------------       -------------------------
                                                       AMOUNT         PERCENT          Amount         Percent
                                                    -----------       -------       -----------       -------
<S>                                                 <C>               <C>           <C>               <C>
Fund III and IV Associates                          $ 7,570,298           57%       $ 7,899,938           57%
Fund II and III Associates-- The Atrium               3,935,261           39          3,663,946           34
Fund II and III Associates-- Brookwood Grill          1,302,017           38          1,362,190           38
                                                    -----------                     -----------
                                                    $12,807,576                     $12,926,074
                                                    ===========                     ===========
</TABLE>

   The following is a rollforward of the Partnership's investment in joint
   ventures for the years ended December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                              1997               1996
                                                          -----------        -----------
<S>                                                       <C>                <C>
Investment in joint ventures, beginning of year           $12,926,074        $13,446,045
 Equity in income of joint ventures                           267,156            551,244
 Contributions to joint ventures                              659,810                  0
 Distributions from joint ventures                         (1,045,464)        (1,071,215)
                                                          -----------        -----------
Investment in joint ventures, end of year                 $12,807,576        $12,926,074
                                                          ===========        ===========
</TABLE>

   FUND II AND III ASSOCIATES


   On April 3, 1989, the Partnership entered into a joint venture agreement with
   the Fund II and II-OW joint venture  The new joint venture, Fund II and III
   Associates, was formed for the purpose of investing in commercial real
   properties.  In April 1989, Fund II and III Associates acquired The Atrium.
   In 1991, the Fund II and II-OW joint venture contributed its interest in a
   parcel of land known as the 880 Property located in Roswell, Georgia, to Fund
   II and III Associates.  The property is a 5.8 acre tract of land.  A
   restaurant was developed on 1.3 acres and is currently operating as the
   Brookwood Grill restaurant ("Fund II and III Associates--Brookwood Grill").
   The remaining 4.6 acres of the 880 Property were transferred at cost to the
   Fund II, III, VI, and VII Associates joint venture during 1995.  Fund II and
   III Associates' investment in this transferred parcel of the 880 Property was
   $1,608,215 and $1,690,244 at December 31, 1997 and 1996, respectively, which
   represented a 24% and 25% interest, respectively.

   The Atrium was fully occupied from inception through June 1996, at which time
   the previous tenant's lease expired.  In March 1997, a lease was signed with
   a new tenant for the entire building and the new tenant began paying rent in
   May 1997.  The lease term is for five years with an option to renew for an
   additional is exercised, the tenant would be required to pay unamortized, up-

                                      F-12
<PAGE>
 
   front tenant improvement costs.  The cost of completing the required tenant
   improvements and outside broker commissions was funded out of reserves and
   contributions by the Partnership and Fund II and II-OW.

   Following are the financial statements for Fund II and III Associates--The
   Atrium:

                     FUND II AND III ASSOCIATES--THE ATRIUM

                           (A GEORGIA JOINT VENTURE)

                                 BALANCE SHEETS

                           DECEMBER 31, 1997 AND 1996

                                     Assets

<TABLE>
<CAPTION>
                                                                  1997              1996
                                                              -----------       -----------
<S>                                                           <C>               <C>
Real estate assets, at cost:
 Land                                                         $ 1,504,743       $ 1,504,743
 Building and improvements, less accumulated          
   depreciation of $4,567,184 in 1997 and $3,852,396  
   in 1996                                                      8,804,839         8,816,719
 Construction in progress                                               0            33,477
                                                              -----------       -----------
       Total real estate assets                                10,309,582        10,354,939
Cash and cash equivalents                                         281,285           448,112
Accounts receivable                                                18,950                 0
Prepaid expenses and other assets                                 392,633            35,216
                                                              -----------       -----------
       Total assets                                           $11,002,450       $10,838,267
                                                              ===========       ===========
                                                      
            Liabilities and Partners' Capital                     
                                                      
Liabilities:                                          
 Accounts payable                                             $   151,366       $   188,760
 Partnership distributions payable                                151,044                 0
 Due to affiliates                                                  3,829                 0
                                                              -----------       -----------
       Total liabilities                                          306,239           188,760
                                                              -----------       -----------
Partners' capital:                                    
 Fund II and II-OW                                              6,760,950         6,985,561
 Wells Real Estate Fund III                                     3,935,261         3,663,946
                                                              -----------       -----------
       Total partners' capital                                 10,696,211        10,649,507
                                                              -----------       -----------
       Total liabilities and partners' capital                $11,002,450       $10,838,267
                                                              ===========       ===========
</TABLE>

                                      F-13
<PAGE>
 
                    FUND II AND III ASSOCIATES--THE ATRIUM
                           (A GEORGIA JOINT VENTURE)
                          STATEMENTS OF (LOSS) INCOME
             FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
                                        
<TABLE>
<CAPTION>
                                             1997        1996        1995
                                           ---------   --------    --------- 
<S>                                        <C>         <C>         <C>
Revenues:
 Rental income                             $  924,769  $1,048,583  $2,079,345
 Interest income                                2,617      24,188      29,965
 Other income                                   8,638           0           0
                                            ---------  ----------  ----------
                                              936,024   1,072,771   2,109,310
                                            ---------  ----------  ----------
Expenses:
 Depreciation                                 795,829     674,479     517,507
 Operating costs, net of reimbursements       614,932      85,183     419,152
 Management and leasing fees                   55,486      71,381     142,761
 Property administration                       27,325      59,934      23,077
 Legal and accounting                          17,408      11,878       7,384
 Computer costs                                   107       1,410       1,749
 Lease acquisition costs                       56,090           0           0
 Loss on real estate assets                   181,684           0           0
                                           ----------  ----------  ----------
                                            1,748,861     904,265   1,111,630
                                           ----------  ----------  ----------
Net (loss) income                          $ (812,837) $  168,506  $  997,680
                                           ==========  ==========  ==========
Net (loss) income allocated to 
  Fund II and II-OW                        $ (509,625) $  110,540  $  654,478
                                           ==========  ==========  ==========
Net (loss) income allocated to Wells
  Real Estate Fund III                     $ (303,212) $   57,966  $  343,202
                                           ==========  ==========  ==========
</TABLE>

                                      F-14
<PAGE>
 
                     FUND II AND III ASSOCIATES--THE ATRIUM

                           (A GEORGIA JOINT VENTURE)

                        STATEMENTS OF PARTNERS' CAPITAL

             FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

<TABLE>
<CAPTION>
                                        FUND II          WELLS REAL           TOTAL
                                          AND              ESTATE           PARTNERS'
                                         II-OW            FUND III           CAPITAL
                                      -----------        ----------        -----------
<S>                              <C>                <C>               <C>
Balance, December 31, 1994            $ 7,743,056        $4,061,169        $11,804,225
 Net income                               654,478           343,202            997,680
 Partnership distributions             (1,123,602)         (589,206)        (1,712,808)
                                      -----------        ----------        -----------
Balance, December 31, 1995              7,273,932         3,815,165         11,089,097
 Net income                               110,540            57,966            168,506
 Partnership distributions               (398,911)         (209,185)          (608,096)
                                      -----------        ----------        -----------
Balance, December 31, 1996              6,985,561         3,663,946         10,649,507
 Net loss                                (509,625)         (303,212)          (812,837)
 Partnership contributions                409,495           659,810          1,069,305
 Partnership distributions               (124,481)          (85,283)          (209,764)
                                      -----------        ----------        -----------
Balance, December 31, 1997            $ 6,760,950        $3,935,261        $10,696,211
                                      ===========        ==========        ===========
</TABLE>

                                      F-15
<PAGE>
 
                     FUND II AND III ASSOCIATES--THE ATRIUM

                           (A GEORGIA JOINT VENTURE)

                            STATEMENTS OF CASH FLOWS

             FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

<TABLE>
<CAPTION>
                                                                 1997             1996              1995
                                                              ----------        ---------        -----------
<S>                                                           <C>               <C>              <C>
Cash flows from operating activities:
 Net (loss) income                                            $ (812,837)       $ 168,506        $   997,680
                                                              ----------        ---------        -----------
 Adjustments to reconcile net (loss) income to net
  cash (used in) provided by operating activities:
     Depreciation                                                795,829          674,479            517,507
     Loss on real estate assets                                  181,684                0                  0
     Changes in assets and liabilities:
       Accounts receivable                                       (18,950)         113,362            226,724
       Prepaid expenses and other assets                        (357,417)               0                  0
       Accounts payable                                          (37,394)        (338,991)           163,364
       Due to affiliates                                           3,829           (6,802)           (13,603)
                                                              ----------        ---------        -----------
         Total adjustments                                       567,581          442,048            893,992
                                                              ----------        ---------        -----------
         Net cash (used in) provided by operating
          activities                                            (245,256)         610,554          1,891,672
                                                              ----------        ---------        -----------
 
Cash flows from investing activities:
 Investment in real estate assets                               (932,156)         (35,038)           (15,501)
                                                              ----------        ---------        -----------
Cash flows from financing activities:
 Contributions from joint venture partners                     1,069,305                0                  0
 Distributions to joint venture partners                         (58,720)        (973,577)        (1,714,751)
                                                              ----------        ---------        -----------
         Net cash provided by (used in) financing
          activities                                           1,010,585         (973,577)        (1,714,751)
                                                              ----------        ---------        -----------
Net (decrease) increase in cash and cash equivalents            (166,827)        (398,061)           161,420
Cash and cash equivalents, beginning of year                     448,112          846,173            684,753
                                                              ----------        ---------        -----------
Cash and cash equivalents, end of year                        $  281,285        $ 448,112        $   846,173
                                                              ==========        =========        ===========
</TABLE>

                                      F-16
<PAGE>
 
   Following are the financial statements for Fund II and III Associates--
   Brookwood Grill:

                  FUND II AND III ASSOCIATES--BROOKWOOD GRILL

                           (A GEORGIA JOINT VENTURE)

                                 BALANCE SHEETS

                           DECEMBER 31, 1997 AND 1996

                                     Assets

<TABLE>
<CAPTION>
                                                                   1997             1996
                                                                ----------       ----------
<S>                                                             <C>              <C>
Real estate assets, at cost:                                 
   Land                                                         $  745,223       $  745,223
   Building and improvements, less accumulated               
     depreciation of $275,717 in 1997 and                    
     $221,703 in 1996                                              997,096        1,051,110
                                                                ----------       ----------
       Total real estate assets                                  1,742,319        1,796,333
Investment in joint venture                                      1,608,215        1,690,244
Cash and cash equivalents                                           54,321            9,102
Due from affiliate                                                  32,092           12,472
Accounts receivable                                                 89,757          113,986
Prepaid expenses and other assets                                   23,048           28,616
                                                                ----------       ----------
       Total assets                                             $3,549,752       $3,650,753
                                                                ==========       ==========
                                                             
                       Liabilities and Partners' Capital     

Liabilities:                                                 
 Accounts payable                                               $    3,879       $   20,040
 Due to affiliate                                                    5,381            6,544
 Partnership distributions payable                                  82,012            5,865
                                                                ----------       ----------
       Total liabilities                                            91,272           32,449
                                                                ----------       ----------
Partners' capital:                                           
 Fund II and II-OW                                               2,156,463        2,256,114
 Wells Real Estate Fund III                                      1,302,017        1,362,190
                                                                ----------       ----------
       Total partners' capital                                   3,458,480        3,618,304
                                                                ----------       ----------
       Total liabilities and partners' capital                  $3,549,752       $3,650,753
                                                                ==========       ==========
</TABLE>

                                      F-17
<PAGE>
 
                  FUND II AND III ASSOCIATES--BROOKWOOD GRILL

                           (A GEORGIA JOINT VENTURE)

                             STATEMENTS OF INCOME

             FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
                                           1997        1996        1995
                                         --------    --------    --------
<S>                                      <C>         <C>         <C>
Revenues:
   Rental income                         $225,106    $225,359    $230,316
   Equity in income (loss) of
    joint venture                          27,213     (19,378)          0
                                         --------    --------    --------
                                          252,319     205,981     230,316
                                         --------    --------    --------
Expenses:
   Operating costs, net of
    reimbursements                         15,233      92,450      15,508
   Depreciation                            54,014      54,014      63,446
   Management and leasing fees             22,896      21,436      23,783
   Property administration                  3,875      12,454      13,890  
   Lease acquisition costs                  5,568       5,568       5,568
   Legal and accounting                     4,672       3,164      14,028
   Computer costs                             107       1,410       1,749
                                         --------    --------    --------
                                          106,365     190,496     137,972
                                         --------    --------    --------
Net income                               $145,954    $ 15,485    $ 92,344
                                         ========    ========    ========
Net income allocated to
  Fund II and II-OW                      $ 91,002    $  9,655    $ 57,577
                                         ========    ========    ========
Net income allocated to
  Wells Real Estate Fund III             $ 54,952    $  5,830    $ 34,767
                                         ========    ========    ========
</TABLE>

                                      F-18
<PAGE>
 
                  FUND II AND III ASSOCIATES--BROOKWOOD GRILL
                           (A GEORGIA JOINT VENTURE)
                        STATEMENTS OF PARTNERS' CAPITAL
             FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

<TABLE>
<CAPTION>
                                          FUND II          WELLS REAL          TOTAL
                                            AND              ESTATE          PARTNERS'
                                           II-OW            FUND III          CAPITAL
                                         ----------        ----------        ----------
<S>                                      <C>               <C>               <C>
Balance, December 31, 1994               $2,351,445        $1,419,756        $3,771,201
 Net income                                  57,577            34,767            92,344
 Partnership distributions                  (96,065)          (58,009)         (154,074)
                                         ----------        ----------        ----------
Balance, December 31, 1995                2,312,957         1,396,514         3,709,471
 Net income                                   9,655             5,830            15,485
 Partnership distributions                  (66,498)          (40,154)         (106,652)
                                         ----------        ----------        ----------
Balance, December 31, 1996                2,256,114         1,362,190         3,618,304
 Net income                                  91,002            54,952           145,954
 Partnership distributions                 (190,653)         (115,125)         (305,778)
                                         ----------        ----------        ----------
Balance, December 31, 1997               $2,156,463        $1,302,017        $3,458,480
                                         ==========        ==========        ==========
</TABLE>

                                      F-19
<PAGE>
 
                  FUND II AND III ASSOCIATES--BROOKWOOD GRILL
                           (A GEORGIA JOINT VENTURE)
                            STATEMENTS OF CASH FLOWS
             FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

<TABLE>
<CAPTION>
                                                                   1997             1996             1995
                                                                ---------        ---------        ----------
<S>                                                             <C>              <C>              <C>
Cash flows from operating activities:
 Net income                                                     $ 145,954        $  15,485        $   92,344
                                                                ---------        ---------        ----------
 Adjustments to reconcile net income to net cash
  provided by operating activities:
     Depreciation                                                  54,014           54,014            63,446
     Equity in (income) loss of joint venture                     (27,213)          19,378                 0
     Changes in assets and liabilities:
       Accounts receivable                                         24,229           (9,262)           (7,188)
       Prepaid expenses and other assets                            5,568            5,568             5,568
       Accounts payable                                           (16,161)          18,860            (3,431)
       Due to affiliates                                           (1,163)             465               465
                                                                ---------        ---------        ----------
         Total adjustments                                         39,274           89,023            58,860
                                                                ---------        ---------        ----------
         Net cash provided by operating activities                185,228          104,508           151,204
                                                                ---------        ---------        ----------
Cash flows from investing activities:
 Distributions received from joint venture                         89,622            7,022                 0
                                                                ---------        ---------        ----------
Cash flows from financing activities:
 Advances received from affiliate                                       0                0            30,173
 Distributions to joint venture partners                         (229,631)        (136,320)         (179,724)
                                                                ---------        ---------        ----------
       Net cash used in financing activities                     (229,631)        (136,320)         (149,551)
                                                                ---------        ---------        ----------
Net increase (decrease) in cash and cash equivalents               45,219          (24,790)            1,653
Cash and cash equivalents, beginning of year                        9,102           33,892            32,239
                                                                ---------        ---------        ----------
Cash and cash equivalents, end of year                          $  54,321        $   9,102        $   33,892
                                                                =========        =========        ==========
Supplemental disclosure of noncash items:
 Transfer of real estate assets to joint venture for
  partnership interest, net of accumulated depreciation
  of $50,484                                                    $       0        $       0        $1,729,116
                                                                =========        =========        ==========
</TABLE>

   Fund II, III, VI, and VII Associates


   On January 1, 1995, the Fund II and III Associates joint venture entered into
   a joint venture agreement with Wells Real Estate Fund VI, L.P. ("Fund VI")
   and Wells Real Estate Fund VII, L.P. ("Fund VII").  The joint venture, Fund
   II, III, VI, and VII Associates, was formed for the purpose of acquiring,
   developing, operating, and selling real properties.  During 1995, Fund II and
   III Associates contributed a 4.3-acre tract of land from its 880 Property to
   the Fund II, III, VI, and VII Associates joint venture.  During 1996 and
   1997, Fund VI and Fund VII made contributions to the joint venture.

                                      F-20
<PAGE>
 
   Ownership percentage interests were recompleted accordingly.  Development was
   substantially completed in 1996 on two retail and office buildings containing
   a total of approximately 49,500 square feet.

   The following are the financial statements for Fund II, III, VI, and VII
   Associates:

                      FUND II, III, VI, AND VII ASSOCIATES
                           (A GEORGIA JOINT VENTURE)
                                 BALANCE SHEETS
                           DECEMBER 31, 1997 AND 1996

                                     Assets

<TABLE>
<CAPTION>
                                                                   1997             1996
                                                                ----------       ----------
<S>                                                            <C>               <C>
Real estate assets, at cost:                                 
 Land                                                           $1,325,242       $1,325,242
 Building and improvements, less accumulated                 
   depreciation of $507,772 in 1997 and $181,798 in 1996         5,025,276        4,568,805
 Construction in progress                                           59,564          214,398
                                                                ----------       ----------
       Total real estate assets                                  6,410,082        6,108,445
Cash and cash equivalents                                          219,391          675,703
Accounts receivable                                                 54,524           67,334
Prepaid expenses and other assets                                  269,568          145,820
                                                                ----------       ----------
       Total assets                                             $6,953,565       $6,997,302
                                                                ==========       ==========
                                                             
                                                             
                       Liabilities and Partners' Capital     
                                                             
Liabilities:                                                 
 Accounts payable and accrued expenses                          $  170,776       $  204,970
 Partnership distributions payable                                 131,907           49,590
                                                                ----------       ----------
                                                                   302,683          254,560
                                                                ----------       ----------
Partners' capital:                                           
 Fund II and III Associates                                      1,608,215        1,690,244
 Wells Real Estate Fund VI                                       1,789,811        1,759,947
 Wells Real Estate Fund VII                                      3,252,856        3,292,551
                                                                ----------       ----------
       Total partners' capital                                   6,650,882        6,742,742
                                                                ----------       ----------
       Total liabilities and partners' capital                  $6,953,565       $6,997,302
                                                                ==========       ==========
</TABLE>

                                      F-21
<PAGE>
 
                      FUND II, III, VI, AND VII ASSOCIATES
                           (A GEORGIA JOINT VENTURE)
                          STATEMENTS OF INCOME (LOSS)
                 FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                    1997       1996
                                                                  --------   --------
<S>                                                               <C>       <C>
Revenues:                                                      
 Rental income                                                    $679,268   $255,062
                                                                  --------   --------
Expenses:                                                      
 Depreciation                                                      325,974    181,798
 Operating costs, net of reimbursements                            122,261     75,018
 Management and leasing fees                                        48,962     16,376
 Legal and accounting                                                4,885     14,928
 Lease acquisition costs                                            50,872     12,456
 Property administration                                            17,321     10,286
 Computer costs                                                        228      1,368
                                                                  --------   --------
                                                                   570,503    312,230
                                                                  --------   --------
Net income (loss)                                                 $108,765   $(57,168)
                                                                  ========   ========
Net income (loss) allocated to Fund II and III Associates         $ 27,213   $(19,378)
                                                                  ========   ========
Net income (loss) allocated to Wells Real Estate Fund VI          $ 28,409   $(10,193)
                                                                  ========   ========
Net income (loss) allocated to Wells Real Estate Fund VII         $ 53,143   $(27,597)
                                                                  ========   ========
</TABLE>

                                      F-22
<PAGE>
 
                      FUND II, III, VI, AND VII ASSOCIATES
                           (A GEORGIA JOINT VENTURE)
                        STATEMENTS OF PARTNERS' CAPITAL
             FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995

<TABLE>
<CAPTION>
                                    FUND II             WELLS           WELLS REAL           TOTAL
                                    AND III          REAL ESTATE          ESTATE            PARTNERS'
                                  ASSOCIATES           FUND VI           FUND VII            CAPITAL
                                  ----------         ----------         ----------         ----------
<S>                         <C>                <C>                <C>                <C>
Balance, January 1, 1995          $        0         $        0         $        0         $        0
 Partnership contributions         1,729,116          1,028,210          2,521,739          5,279,065
                                  ----------         ----------         ----------         ----------
Balance, December 31, 1995         1,729,116          1,028,210          2,521,739          5,279,065
 Partnership contributions                 0            761,259            835,646          1,596,905
 Partnership distributions           (19,494)           (19,329)           (37,237)           (76,060)
 Net loss                            (19,378)           (10,193)           (27,597)           (57,168)
                                  ----------         ----------         ----------         ----------
Balance, December 31, 1996         1,690,244          1,759,947          3,292,551          6,742,742
 Partnership contributions                 0            116,675            121,576            238,251
 Partnership distributions          (109,242)          (115,220)          (214,414)          (438,876)
 Net income                           27,213             28,409             53,143            108,765
                                  ----------         ----------         ----------         ----------
Balance, December 31, 1997        $1,608,215         $1,789,811         $3,252,856         $6,650,882
                                  ==========         ==========         ==========         ==========
</TABLE>                                 

                                      F-23
<PAGE>
 
                      FUND II, III, VI, AND VII ASSOCIATES

                           (A GEORGIA JOINT VENTURE)

                            STATEMENTS OF CASH FLOWS

             FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
                                                                       1997            1996            1995
                                                                    ---------      -----------      -----------
<S>                                                                 <C>            <C>              <C>
Cash flows from operating activities:
 Net income (loss)                                                  $ 108,765      $   (57,168)     $         0
                                                                    ---------      -----------      -----------
 Adjustments to reconcile net income (loss) to net cash
  provided by (used in) operating activities:
     Depreciation                                                     325,974          181,798                0
     Changes in assets and liabilities:
       Accounts receivable                                             12,810          (67,334)               0
       Prepaid expenses and other assets                             (123,748)        (104,792)         (41,028)
       Accounts payable and accrued expenses                          (34,194)          88,532           22,256
                                                                    ---------      -----------      -----------
         Total adjustments                                            180,842           98,204          (18,772)
                                                                    ---------      -----------      -----------
         Net cash provided by (used in) operating activities          289,607           41,036          (18,772)
                                                                    ---------      -----------      -----------
Cash flows from investing activities:
 (Decrease) increase in construction payables                               0         (358,467)         452,649
 Investment in real estate                                           (620,059)      (1,736,082)      (2,595,190)
                                                                    ---------      -----------      -----------
         Net cash used in investing activities                       (620,059)         (26,470)               0
                                                                    ---------      -----------      -----------
Cash flows from financing activities:
 Contributions from joint venture partners                            230,699        1,434,308        3,482,691
 Distributions to joint venture partners                             (356,559)      (2,094,549)      (2,142,541)         
                                                                    ---------      -----------      -----------
         Net cash (used in) provided by financing activities         (125,860)       1,407,838        3,482,691
                                                                    ---------      -----------      -----------
Net (decrease) increase in cash and cash equivalents                 (456,312)        (645,675)       1,321,378
Cash and cash equivalents, beginning of year                          675,703        1,321,378                0
                                                                    ---------      -----------      -----------
Cash and cash equivalents, end of year                              $ 219,391      $   675,703      $ 1,321,378
                                                                    =========      ===========      ===========
 Supplemental disclosure of noncash activities:
   Contribution of real estate assets                               $       0      $         0      $ 1,729,116
                                                                    =========      ===========      ===========
   Deferred project costs applied by partners                       $   7,552      $   162,597      $    67,257
                                                                    =========      ===========      ===========
</TABLE>

FUND III AND IV ASSOCIATES

On March 27, 1991, the Partnership entered into a joint venture with Wells Real 
Estate Fund IV, L.P.  The joint venture, Fund III and IV Associates, was formed 
for the purpose of developing, constructing, and operating the Stockbridge 
Village Shopping Center in Stockbridge, Georgia.  In addition, in July 1992, 
Fund III and IV Associates purchased the G.E. Lighting National Customer Center 
in Richmond, Virginia.

                                      F-24
<PAGE>
 
 The following are financial statements for Fund III and IV Associates: 
 
                           FUND III AND IV ASSOCIATES
                           (A GEORGIA JOINT VENTURE)
                                 BALANCE SHEETS
                           DECEMBER 31, 1997 AND 1996

                                     Assets

<TABLE>
<CAPTION>
                                                           1997              1996
<S>                                                     <C>               <C>
                                                        -----------       -----------
Real estate assets, at cost:                     
 Land                                                   $ 3,331,775       $ 3,331,775
 Building and improvements, less accumulated     
   depreciation of $2,328,264 in 1997 and        
   $1,793,055 in 1996                                     9,750,996        10,286,205
                                                        -----------       -----------
       Total real estate assets                          13,082,771        13,617,980
Cash and cash equivalents                                   306,194           297,901
Accounts receivable                                         207,223           247,567
Prepaid expenses and other assets                            42,905            36,231
                                                        -----------       -----------
       Total assets                                     $13,639,093       $14,199,679
                                                        ===========       ===========
                                                 
               Liabilities and Partners' Capital                
                                                 
Liabilities:                                     
 Accounts payable                                       $    36,172       $    39,722
 Partnership distributions payable                          388,117           370,953
 Due to affiliates                                            6,939             6,018
                                                        -----------       -----------
       Total liabilities                                    431,228           416,693
                                                        -----------       -----------
Partners' capital:                               
 Wells Real Estate Fund III                               7,570,298         7,899,938
 Wells Real Estate Fund IV                                5,637,567         5,883,048
                                                        -----------       -----------
       Total partners' capital                           13,207,865        13,782,986
                                                        -----------       -----------
       Total liabilities and partners' capital          $13,639,093       $14,199,679
                                                        ===========       ===========
</TABLE>

                                      F-25
<PAGE>
 
                          FUND III AND IV ASSOCIATES

                           (A GEORGIA JOINT VENTURE)

                             STATEMENTS OF INCOME

             FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE> 
<CAPTION> 
                                            1997          1996         1995
                                         ----------    ----------   ----------  
<S>                                      <C>           <C>          <C>
Revenues:
   Rental income                         $1,640,663    $1,609,853   $1,676,025
   Interest income                           12,308        13,024       15,482
                                         ----------    ----------   ----------
                                          1,652,971     1,622,877    1,691,507
                                         ----------    ----------   ----------
Expenses:
   Depreciation                             535,209       535,209      382,416
   Management and leasing fees              117,965        87,401       93,024
   Operating costs, net of 
    reimbursements                           36,973        60,043       40,195
   Lease acquisition costs                   28,048        50,901       78,766
   Property administration                   21,735        23,054       26,364
   Legal and accounting                      13,797        11,191       10,928
   Computer costs                                 0         4,569        5,790
   Amortization of organization costs             0            61          366
                                         ----------    ----------   ----------
                                            753,727       772,429      637,849
                                         ----------    ----------   ----------
Net income                               $  899,244    $  850,448   $1,053,658
                                         ==========    ==========   ==========
Net income allocated to 
  Wells Real Estate Fund III             $  515,416    $  487,448   $  603,921  
                                         ==========    ==========   ==========
Net income allocated to 
  Wells Real Estate Fund IV              $  383,828    $  363,000   $  449,737 
                                         ==========    ==========   ==========

</TABLE> 

                                      F-26
<PAGE>
 
                           FUND III AND IV ASSOCIATES
                           (A GEORGIA JOINT VENTURE)
                        STATEMENTS OF PARTNERS' CAPITAL
             FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
                                        
<TABLE>
<CAPTION>
                                       WELLS REAL        WELLS REAL          TOTAL
                                         ESTATE            ESTATE           PARTNERS'
                                        FUND III          FUND IV            CAPITAL
                                       ----------        ----------        -----------
<S>                                    <C>               <C>               <C>
Balance, December 31, 1994             $8,489,389        $6,321,951        $14,811,340
 Net income                               603,921           449,737          1,053,658
 Partnership contributions                      0                59                 59
 Partnership distributions               (858,944)         (639,651)        (1,498,595)
                                       ----------        ----------        -----------
Balance, December 31, 1995              8,234,366         6,132,096         14,366,462
 Net income                               487,448           363,000            850,448
 Partnership distributions               (821,876)         (612,048)        (1,433,924)
                                       ----------        ----------        -----------
Balance, December 31, 1996              7,899,938         5,883,048         13,782,986
 Net income                               515,416           383,828            899,244
 Partnership distributions               (845,056)         (629,309)        (1,474,365)
                                       ----------        ----------        -----------
Balance, December 31, 1997             $7,570,298        $5,637,567        $13,207,865
                                       ==========        ==========        ===========
</TABLE>

                                      F-27
<PAGE>
 
                           FUND III AND IV ASSOCIATES
                           (A GEORGIA JOINT VENTURE)
                            STATEMENTS OF CASH FLOWS
             FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
                                        
<TABLE>
<CAPTION>
                                                                 1997               1996               1995
                                                             -----------        -----------        -----------
<S>                                                          <C>                <C>                <C>
Cash flows from operating activities:
 Net income                                                  $   899,244        $   850,448        $ 1,053,658
                                                             -----------        -----------        -----------
 Adjustments to reconcile net income to net cash
  provided by operating activities:
     Depreciation                                                535,209            535,209            382,416
     Changes in assets and liabilities:
       Accounts receivable                                        40,344             46,711             73,382
       Prepaid expenses and other assets                          (6,674)            18,111             54,265
       Accounts payable                                           (3,550)             6,501             (2,728)
       Due to affiliates                                             921             (1,133)            (8,261)
                                                             -----------        -----------        -----------
         Total adjustments                                       566,250            605,399            499,074
                                                             -----------        -----------        -----------
         Net cash provided by operating activities             1,465,494          1,455,847          1,552,732
                                                             -----------        -----------        -----------
Cash flows from investing activities:
 Investment in real estate                                             0             (1,976)           (29,209)
                                                             -----------        -----------        -----------
Cash flows from financing activities:
 Contributions from joint venture partners                             0                  0                 59
 Distributions to joint venture partners                      (1,457,201)        (1,406,873)        (1,508,718)
                                                             -----------        -----------        -----------
       Net cash used in financing activities                  (1,457,201)        (1,406,873)        (1,508,659)
                                                             -----------        -----------        -----------
Net increase in cash and cash equivalents                          8,293             46,998             14,864
Cash and cash equivalents, beginning of year                     297,901            250,903            236,039
                                                             -----------        -----------        -----------
Cash and cash equivalents, end of year                       $   306,194        $   297,901        $   250,903
                                                             ===========        ===========        ===========
</TABLE>

                                      F-28
<PAGE>
 
 4. INCOME TAX BASIS NET INCOME AND PARTNERS' CAPITAL

   The Partnership's income tax basis net income for the years ended December
   31, 1997, 1996, and 1995 is calculated as follows:

<TABLE>
<CAPTION>
                                                                                  1997         1996           1995
                                                                              -----------   -----------    -----------
<S>                                                                           <C>           <C>            <C>
Financial statement net income                                                $   385,224   $  731,244     $1,143,704
Increase (decrease) in net income resulting from:
 Depreciation expense for financial reporting purposes in 
  excess of amounts for income tax purposes                                       320,502      261,953         61,167
 Rental income accrued for financial reporting purposes less 
  than (in excess of) amounts for income tax purposes                               9,634       68,420         (3,371)
 Expenses (added) deductible when paid for income tax
  purposes, accrued for financial reporting purposes                               (6,871)       4,219        104,161
 Fixed asset retirement in excess of amounts for income tax
  purposes                                                                         (7,064)           0              0
 Other                                                                              6,213            0              0
                                                                              -----------   -----------    -----------
Income tax basis net income                                                   $   707,638   $1,065,836     $1,305,661
                                                                              ===========   ===========    ===========
</TABLE>

   The Partnership's income tax basis partners' capital at
   December 31, 1997, 1996, and 1995 is computed as follows:

<TABLE>
<CAPTION>
                                                                                  1997         1996            1995
                                                                              -----------   -----------    -----------
<S>                                                                           <C>           <C>            <C>
Financial statement partners' capital                                         $16,383,705   $16,743,131    $17,430,457
Increase (decrease) in partners' capital resulting from:
 Depreciation expense for financial reporting purposes in
  excess of amounts for income tax purposes                                       643,622       323,120         61,167
 Capitalization of syndication costs for income tax
  purposes, which are accounted for as cost of capital for
  financial reporting purposes                                                  2,624,555     2,624,555      2,624,555
 Accumulated rental income accrued for financial reporting 
  purposes in excess of amounts for income tax purposes                          (283,936)     (293,570)      (361,990)
 Accumulated expenses deductible when paid for income 
  tax purposes, accrued for financial reporting purposes                          121,401       128,272        127,059
 Partnership's distribution payable                                               396,991       324,495        619,021
 Other                                                                             (2,691)       (1,840)         2,154
                                                                              -----------   -----------    -----------
Income tax basis partners' capital                                            $19,883,647   $19,848,163    $20,502,423
                                                                              ===========   ===========    ===========
</TABLE>

 5. RENTAL INCOME

   The future minimum rental income due from the Partnership's direct investment
   in real estate or its respective ownership interest in joint ventures under
   noncancelable operating leases at December 31, 1997 is as follows:

                                      F-29
<PAGE>
 
<TABLE>
<CAPTION>
                  
                  <S>                                  <C> 
                  Year ending December 31:   
                   1998                                $ 2,030,562
                   1999                                  1,988,400
                   2000                                  1,711,755
                   2001                                  1,229,432
                   2002                                    683,033
                  Thereafter                             3,439,611
                                                       -----------
                                                       $11,082,793
                                                       ===========
</TABLE>                                   

   Three significant tenants contributed approximately 21%, 17%, and 19% of
   revenues, which is either included as rental income in the accompanying
   statements of income or in the calculation of equity in income of joint
   ventures for the year ended December 31, 1997.  In addition, two significant
   tenants will contribute approximately 57% and 22% of future minimum rental
   income.

   The future minimum rental income due Fund II and III Associates--The Atrium
   under noncancelable operating leases at December 31, 1997 is as follows:

<TABLE>
<CAPTION>
                  <S>                                  <C>
                  Year ending December 31:    
                    1998                               $ 1,458,240
                    1999                                 1,458,240
                    2000                                 1,476,960
                    2001                                 1,488,000
                    2002                                   550,722
                   Thereafter                                    0
                                                       -----------
                                                       $ 6,432,162
                                                       ===========
</TABLE>

   One significant tenant at the Atrium contributed 100% of rental income for
   the year ended December 31, 1997 and will contribute 100% of future minimum
   rental income.

   The future minimum rental income due Fund II and III Associates--Brookwood
   Grill under noncancelable operating leases at December 31, 1997 is as
   follows:

<TABLE>
<CAPTION>
                  <S>                                  <C>
                  Year ending December 31:   
                   1998                                $   249,550
                   1999                                    249,550
                   2000                                    249,550
                   2001                                    249,550
                   2002                                     20,795
                                                       -----------
                                                       $ 1,018,995
                                                       ===========
</TABLE>

   One significant tenant contributed 100% of rental income for the year ended
   December 31, 1997 and will contribute 100% of future minimum rental income.

                                      F-30
<PAGE>
 
   The future minimum rental income due Fund II, III, VI, and VII Associates
   under noncancelable operating leases at December 31, 1997 is as follows:

<TABLE>
<CAPTION>
                  <S>                                  <C>
                  Year ending December 31:
                   1998                                $   811,017
                   1999                                    800,552
                   2000                                    655,056
                   2001                                    589,985
                   2002                                    335,261
                  Thereafter                               385,280
                                                       -----------
                                                       $ 3,577,151
                                                       ===========
</TABLE>

   Two significant tenants contributed approximately 18% and 15% of rental
   income for the year ended December 31, 1997.  In addition, two significant
   tenants will contribute approximately 28% and 14% of future minimum rental
   income.

   The future minimum rental income due Fund III and IV Associates under
   noncancelable operating leases at December 31, 1997 is as follows:

<TABLE>
<CAPTION>
                  <S>                                  <C>
                  Year ending December 31:
                   1998                                 $ 1,659,180
                   1999                                   1,634,297
                   2000                                   1,166,970
                   2001                                   1,023,783
                   2002                                     810,501
                  Thereafter                              5,942,564
                                                        -----------
                                                        $12,237,295
                                                        ===========
</TABLE>

   Two significant tenants contributed approximately 30% and 32% of rental
   income for the year ended December 31, 1997.  In addition, two significant
   tenants will contribute approximately 90% and 10% of future minimum rental
   income.

 6. QUARTERLY RESULTS (UNAUDITED)

   Presented below is a summary of the unaudited quarterly financial information
   for the years ended December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                            1997 QUARTERS ENDED
                                                               ---------------------------------------------
                                                               MARCH 31  JUNE 30   SEPTEMBER 30  DECEMBER 31
                                                               --------  --------  ------------  -----------
<S>                                                            <C>       <C>       <C>           <C>
Revenues                                                       $199,709  $196,951     $281,182     $172,216
Net income                                                       64,405    75,417      168,471       76,931
Net income allocated to Class A limited partners                 64,405    75,417      168,471       76,931
Net income per Class A limited partner unit                    $   0.00  $   0.00     $   0.01     $   0.01
Cash distribution per Class A limited partner unit                 0.00      0.00         0.02         0.02
</TABLE>

                                      F-31
<PAGE>
 
<TABLE>
<CAPTION>
                                                                            1996 Quarters Ended
                                                               ---------------------------------------------
                                                               March 31  June 30   September 30  December 31
                                                               --------  -------   ------------  -----------
<S>                                                            <C>       <C>       <C>           <C>
Revenues                                                       $355,197  $330,130      $288,562     $181,726
Net income                                                      235,136   257,738       169,124       69,246
Net income allocated to Class A limited partners                235,136   257,738       169,124       69,246
Net income per Class A limited partner unit (a)                $   0.01  $   0.01      $   0.01     $   0.00
Cash distribution per Class A limited partner unit                 0.02      0.02          0.02         0.01
</TABLE>

   (a) The total of the four quarterly amounts for net income per Class A
       limited partner unit for the year ended December 31, 1996 does not equal
       the total for the year.  This difference results from rounding
       differences.

 7. COMMITMENTS AND CONTINGENCIES

   Management, after consultation with legal counsel, is not aware of any
   significant litigation or claims against the Partnership or the Company.  In
   the normal course of business, the Partnership or the Company may become
   subject to such litigation or claims.

                                      F-32
<PAGE>
 
                        WELLS REAL ESTATE FUND III, L.P.

                     (A GEORGIA PUBLIC LIMITED PARTNERSHIP)

                     SCHEDULE III--REAL ESTATE INVESTMENTS

                          AND ACCUMULATED DEPRECIATION

                               DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                     INITIAL COST
                                              -------------------------      COSTS OF
                                                          BUILDINGS AND    CAPITALIZED
        DESCRIPTION            ENCUMBRANCES      LAND     IMPROVEMENTS     IMPROVEMENTS
----------------------------   ------------   ----------  -------------    ------------
<S>                             <C>           <C>         <C>              <C>
THE ATRIUM AT NASSAU BAY (A)      None        $1,367,000    $10,983,000     $ 2,526,766

GREENVILLE PROJECT (B)            None           529,977              0       3,611,974

880 PROPERTY--BROOKWOOD
  GRILL (C)                       None           523,319              0       1,494,717

STOCKBRIDGE VILLAGE (D)           None         2,551,645              0       7,749,117

G.E. LIGHTING NATIONAL
  CUSTOMER CENTER (E)             None           529,546      4,158,223         422,504

880 PROPERTY (F)                  None         1,325,242              0       5,592,612
                                              ----------    -----------     -----------
       Total                                  $6,826,729    $15,141,223     $21,397,690
                                              ==========    ===========     ===========
</TABLE>

<TABLE>
<CAPTION>

                                   GROSS AMOUNT AT WHICH CARRIED AT DECEMBER 31, 1997
                                  ----------------------------------------------------
                                              BUILDINGS AND  CONSTRUCTION
                                     LAND     IMPROVEMENTS   IN PROGRESS     TOTAL
                                  ----------  -------------  ------------  -----------
<S>                               <C>          <C>           <C>           <C>
THE ATRIUM AT NASSAU BAY (A)      $1,504,743    $13,372,023       $     0  $14,876,766

GREENVILLE PROJECT (B)               576,350      3,565,601             0    4,141,951

880 PROPERTY--BROOKWOOD
  GRILL (C)                          745,223      1,272,813             0    2,018,036

STOCKBRIDGE VILLAGE (D)            2,758,193      7,542,569             0   10,300,762

G.E. LIGHTING NATIONAL
  CUSTOMER CENTER (E)                573,582      4,536,691             0    5,110,273

880 PROPERTY (F)                   1,325,242      5,533,048        59,564    6,917,854
                                  ----------  -------------  ------------  -----------
       Total                      $7,483,333    $35,822,745       $59,564  $43,365,642
                                  ==========  =============  ============  ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                          LIFE ON WHICH
                                   ACCUMULATED     DATE OF      DATE      DEPRECIATION
                                  DEPRECIATION  CONSTRUCTION  ACQUIRED    IS COMPUTED (G)
                                  ------------  ------------  --------    ---------------
<S>                               <C>           <C>           <C>         <C>
THE ATRIUM AT NASSAU BAY (A)       $4,567,184       1988       04/03/89    12 to 25 years

GREENVILLE PROJECT (B)                771,521       1990       06/30/90    20 to 25 years

880 PROPERTY--BROOKWOOD
  GRILL (C)                          275,717        1991       03/27/91    20 to 25 years

STOCKBRIDGE VILLAGE (D)             1,526,193       1991       04/04/91    20 to 25 years

G.E. LIGHTING NATIONAL
  CUSTOMER CENTER (E)                 802,071       1991       07/01/92    20 to 25 years

880 PROPERTY (F)                      507,772       1996       01/31/90    20 to 25 years
                                   ----------
       Total                       $8,450,458
                                   ==========
</TABLE>

(a) The Atrium at Nassau Bay is a four-story office building located in Houston,
    Texas. It is owned by Fund II and III Associates. The Partnership owned a
    39% interest in Fund II and III Associates as of December 31, 1997.

(b) The Greenville Project is a two-story office building located in Greenville,
    North Carolina, owned entirely by the Partnership.

(c) The 880 Property--Brookwood Grill is a 7,440-square-foot restaurant located
    in Fulton County, Georgia. It is owned by a joint venture, Fund II and III
    Associates. The Partnership owned a 38% interest in the 880 Property--
    Brookwood Grill as of December 31, 1997.

(d) Stockbridge Village is a 13.62-acre retail shopping center located in
    Stockbridge, Georgia. It is owned by Fund III and IV Associates. The
    Partnership owned a 57% interest in Fund III and IV Associates as of
    December 31, 1997.

(e) The G.E. Lighting National Customer Center is a 43,000-square-foot office
    building located in Richmond, Virginia. It is owned by Fund III and IV
    Associates. The Partnership owned a 57% interest in Fund III and IV
    Associates as of December 31, 1997.

(f) The 880 Property is a 4.3-acre tract of real property under development in
    Fulton County, Georgia. It is owned by Fund II, III, VI, and VII Associates.
    The Partnership owned a 9% interest in Fund II, III, VI, and VII Associates
    as of December 31, 1997.

(g) Depreciation lives used for buildings were 40 years through September 1995,
    changed to 25 years thereafter. Depreciation lives used for land
    improvements are 12 to 20 years.

                                      S-1

<PAGE>
 
                        WELLS REAL ESTATE FUND III, L.P.

                     (A GEORGIA PUBLIC LIMITED PARTNERSHIP)


                     SCHEDULE III--REAL ESTATE INVESTMENTS

                          AND ACCUMULATED DEPRECIATION

                               DECEMBER 31, 1997




<TABLE>
<CAPTION>
                                                        Accumulated
                                             Cost      Depreciation
                                         -----------   ------------
<S>                                      <C>           <C>
BALANCE AT DECEMBER 31, 1995             $40,132,907     $5,058,357
                                   
 1996 additions                            1,948,693      1,603,808
                                         -----------     ----------
BALANCE AT DECEMBER 31, 1996              42,081,600      6,662,165
                                   
 1997 additions                            1,546,767      1,869,334
 1997 deductions                            (262,725)       (81,041)
                                         -----------     ----------
BALANCE AT DECEMBER 31, 1997             $43,365,642     $8,450,458
                                         ===========     ==========
</TABLE>

                                      S-2
<PAGE>
 
                                 EXHIBIT INDEX
                                 -------------

                      (Wells Real Estate Fund III, L.P.)


  The following documents are filed as exhibits to this report.  Those exhibits
previously filed and incorporated herein by reference are identified below by an
asterisk.  For each such asterisked exhibit, there is shown below the
description of the previous filing.  Exhibits which are not required for this
report are omitted.
 
EXHIBIT                                                      SEQUENTIAL
NUMBER               DESCRIPTION OF DOCUMENT                 PAGE NUMBER
---------  --------------------------------------------      -------------
 
*4(a)      Agreement of Limited Partnership of               N/A
           Wells Real Estate Fund III, L.P.
           (Registration Statement of Wells Real
           Estate Fund III, L.P., Exhibit B to the
           Prospectus, File No. 33-24063)
 
*4(b)      Amendment to Agreement of Limited                 N/A
           Partnership of Wells Real Estate
           Fund III, L.P. (Exhibit 4(a) to
           Post-Effective Amendment No. 1 to
           Registration Statement of Wells Real
           Estate Fund III, L.P., File No. 33-24063)
 
*4(c)      Second Amendment to Agreement of                  N/A
           Limited Partnership of Wells Real
           Estate Fund III, L.P. (Exhibit 4(a)
           to Post-Effective Amendment No. 5
           to Registration Statement of Wells
           Real Estate Fund III, L.P., File No. 33-24063)
 
*4(d)      Third Amendment to Agreement of                   N/A
           Limited Partnership of Wells Real
           Estate Fund III, L.P. (Exhibit to
           Post-Effective Amendment No. 7 to
           Registration Statement of Wells Real
           Estate Fund III, L.P., File No. 33-24063)
<PAGE>
 
EXHIBIT                                                      SEQUENTIAL
NUMBER               DESCRIPTION OF DOCUMENT                 PAGE NUMBER
---------  --------------------------------------------      -------------
*10(a)     Management Agreement between Registrant           N/A
           and Wells Management Company, Inc. (Exhibit
           to Form 10-K of Wells Real Estate Fund III,
           L.P. for the fiscal year ended December 31,
           1990, File No. 0-18407)
 
*10(b)     Leasing and Tenant Coordination Agreement         N/A
           between Registrant and Wells Management
           Company, Inc. (Exhibit to Form 10-K of
           Wells Real Estate Fund III, L.P. for the
           fiscal year ended December 31, 1990, File
           No. 0-18407)
 
*10(c)     Purchase Agreement for the Acquisition            N/A
           of the Atrium at Nassau Bay dated
           March 1, 1989 (Exhibit 10(i) to Form 10-K
           of Wells Real Estate Fund II for the
           fiscal year ended December 31, 1990,
           File No. 0-16518)
 
*10(d)     Joint Venture Agreement of Fund II and            N/A
           Fund III Associates dated March 1,
           1989 (Exhibit to Post-Effective
           Amendment No. 2 to Registration
           Statement of Wells Real Estate Fund
           III, L.P., File No. 33-24063)
 
*10(e)     First Amendment to Joint Venture Agreement        N/A
           of Fund II and Fund III Associates dated
           April 1, 1989 (Exhibit 10(k) to Form 10-K
           of Wells Real Estate Fund II for the
           fiscal year ended December 31, 1990,
           File No. 0-16518)
 
*10(f)     Leases with Lockheed Engineering and              N/A
           Sciences Company, Inc. (Exhibit 10(l)
           to Form 10-K of Wells Real Estate Fund
           II for the fiscal year ended
           December 31, 1990, File No. 0-16518)
<PAGE>
 
EXHIBIT                                                      SEQUENTIAL
NUMBER               DESCRIPTION OF DOCUMENT                 PAGE NUMBER
---------  --------------------------------------------      -------------
*10(g)     Custodial Agency Agreement between                N/A
           Registrant and Citizens and Southern
           Trust Company (Georgia), National
           Association dated January 1, 1990
           (Exhibit to Post-Effective
           Amendment No. 5 to Registration
           Statement of Wells Real Estate Fund
           III, L.P., File No. 33-24063)
 
*10(h)     Purchase Agreement for the Acquisition            N/A
           of the Greenville Property dated
           April 10, 1990 (Exhibit to Form 10-K of
           Wells Real Estate Fund III, L.P. for the
           fiscal year ended December 31, 1990, File
           No. 0-18407)
 
*10(i)     Development Agreement with ADEVCO                 N/A
           Corporation dated June 15, 1990 (Exhibit
           to Form 10-K of Wells Real Estate Fund III,
           L.P. for the fiscal year ended December 31,
           1990, File No. 0-18407)
 
*10(j)     Construction Contract with McDevitt               N/A
           & Street Company dated May 31, 1990 (Exhibit
           to Form 10-K of Wells Real Estate Fund III,
           L.P. for the fiscal year ended December 31,
           1990, File No. 0-18407)
 
*10(k)     Lease with International Business                 N/A
           Machines Corporation dated May 15,
           1990 (Exhibit to Form 10-K of Wells Real
           Estate Fund III, L.P. for the fiscal year
           ended December 31, 1990, File No. 0-18407)
 
*10(l)     Amended and Restated Joint Venture                N/A
           Agreement of Fund II and Fund III Associates
           (Exhibit 10(o) to Form 10-K of Wells Real
           Estate Fund II for the fiscal year ended
           December 31, 1991, File No. 0-16518)
<PAGE>
 
EXHIBIT                                                      SEQUENTIAL
NUMBER               DESCRIPTION OF DOCUMENT                 PAGE NUMBER
---------  --------------------------------------------      -------------
*10(m)     Land and Building Lease Agreement between         N/A
           Fund II and Fund II-OW and Brookwood Grill
           of Roswell, Inc. (Exhibit 10(p) to Form
           10-K of Wells Real Estate Fund II for the
           fiscal year ended December 31, 1991, File
           No. 0-16518)
 
*10(n)     Assignment and Assumption of Lease dated          N/A
           September 20, 1991 between Fund II and
           Fund II-OW and Fund II and Fund III
           Associates (Exhibit 10(q) to Form 10-K
           of Wells Real Estate Fund II for the
           fiscal year ended December 31, 1991,
           File No. 0-16518)
 
*10(o)     Fund III and Fund IV Associates Joint             N/A
           Venture Agreement dated March 27, 1991
           (Exhibit 10(g) to Post-Effective Amendment
           No. 1 to Registration Statement of Wells
           Real Estate Fund IV, L.P. and Wells Real
           Estate Fund V, L.P., File No. 33-37830)
 
*10(p)     Agreement of Purchase and Sale dated              N/A
           October 31, 1990 between 675 Industrial
           Park, Ltd. and The Vlass-Fotos Group, Inc.
           (Exhibit 10(h) to Post-Effective Amendment
           No. 1 to Registration Statement of Wells
           Real Estate Fund IV, L.P. and Wells Real
           Estate Fund V, L.P., File No. 33-37830)
 
*10(q)     Lease dated January 31, 1991 between The          N/A
           Vlass-Fotos Group, Inc. and The Kroger Co.
           (Exhibit 10(i) to Post-Effective Amendment
           No. 1 to Registration Statement of Wells
           Real Estate Fund IV, L.P. and Wells Real
           Estate Fund V, L.P., File No. 33-37830)
 
<PAGE>
 
EXHIBIT                                                      SEQUENTIAL
NUMBER               DESCRIPTION OF DOCUMENT                 PAGE NUMBER
---------  --------------------------------------------      -------------
*10(r)     Lease Agreement dated January 31, 1991            N/A
           between The Vlass-Fotos Group, Inc. and
           The Kroger Co. (Exhibit 10(j) to Post-
           Effective Amendment No. 1 to Registration
           Statement of Wells Real Estate Fund IV,
           L.P. and Wells Real Estate Fund V, L.P.,
           File No. 33-37830)
 
*10(s)     First Amendment to Lease dated April 3,           N/A
           1991 between The Vlass-Fotos Group, Inc.
           and The Kroger Co. (Exhibit 10(k) to Post-
           Effective Amendment No. 1 to Registration
           Statement of Wells Real Estate Fund IV,
           L.P. and Wells Real Estate Fund V, L.P.,
           File No. 33-37830)
 
*10(t)     First Amendment to Lease Agreement dated          N/A
           April 3, 1991 between The Vlass-Fotos
           Group, Inc. and The Kroger Co. (Exhibit
           10(l) to Post-Effective Amendment No. 1
           to Registration Statement of Wells Real
           Estate Fund IV, L.P. and Wells Real Estate
           Fund V, L.P., File No. 33-37830)
 
*10(u)     Development Agreement dated April 4, 1991         N/A
           between Fund III and Fund IV Associates
           and The Vlass-Fotos Group, Inc. (Exhibit
           10(m) to Post-Effective Amendment No. 1 to
           Registration Statement of Wells Real Estate
           Fund IV, L.P. and Wells Real Estate Fund V,
           L.P., File No. 33-37830)
 
*10(v)     First Amendment to Joint Venture Agreement        N/A
           of Fund III and IV Associates dated July 1,
           1992 (Exhibit to Form 10-K of Wells Real
           Estate Fund III, L.P. for the fiscal year
           ended December 31, 1992, File No. 0-18407)
 
<PAGE>
 
EXHIBIT                                                      SEQUENTIAL
NUMBER               DESCRIPTION OF DOCUMENT                 PAGE NUMBER
---------  --------------------------------------------      -------------
*10(w)     Agreement for the Purchase and Sale of            N/A
           Property between Rowe Properties-Markel,
           L.P. and Fund III and Fund IV Associates
           and Addendum to Agreement for the Purchase
           and Sale of Property (Exhibit to Form 10-K
           of Wells Real Estate Fund III, L.P. for
           the fiscal year ended December 31, 1992,
           File No. 0-18407)
 
*10(x)     Office Lease with G.E. Lighting, Rider            N/A
           No. 1 to Lease, Addendum of Lease, Second
           Addendum of Lease, Third Amendment of Lease
           and Fourth Amendment to Office Lease
           (Exhibit to Form 10-K of Wells Real Estate
           Fund III, L.P. for the fiscal year ended
           December 31, 1992, File No. 0-18407)
 
*10(y)    Amended and Restated Custodial Agency              N/A
          Agreement between Wells Real Estate Fund
          III, L.P. and NationsBank of Georgia, N.A.
          dated April 1, 1994 (Exhibit to Form 10-K
          of Wells Real Estate Fund III, L.P. for
          the fiscal year ended December 31, 1994,
          File No. 0-18407)

*10(z)    Joint Venture Agreement of Fund II, III,           N/A
          VI and VII Associates (Exhibit to Form
          10-K of Wells Real Estate Fund VI, L.P.
          for the fiscal year ended December 31,
          1995, File No. 0-23656)