<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, 1998                    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 Identification Number)
incorporation or organization)

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


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, 1998, 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, 1998.

                                       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, 1998, these properties were 98.0% occupied, compared
to 96.0% at December 31, 1997, 98.0% at December 31, 1996, and 97.0% at December
31, 1995.

The following table shows lease expirations during each of the next ten years
for all leases as of December 31, 1998, assuming no exercise of renewal options
or termination rights:

<TABLE>
<CAPTION>
                                                                                  Partnership                         Percentage of
                                                                                   Share of                               Total 
                               Number of                        Annualized        Annualized        Percentage of      Annualized   
       Year of Lease             Leases       Square Feet       Gross Base        Gross Base         Total Square      Gross Base 
        Expiration              Expiring        Expiring          Rent(1)           Rent(1)          Feet Expiring         Rent
----------------------------------------------------------------------------------------------------------------------------------
<S>                          <C>             <C>             <C>               <C>               <C>               <C>
          1999                     7              14,790           206,393           105,507             5.18%             5.01%
          2000(2)                  2              44,400           549,060           314,721            15.56%            13.32%
          2001(3)                  7              34,734           739,446           488,618            12.17%            17.94%
          2002(4)                 16              50,434           787,242           281,312            17.67%            19.10%
          2003                     5             129,955         1,623,706           673,919            45.54%            39.40%
          2004                     0                   0                 0                 0             0.00%             0.00%
          2005                     0                   0                 0                 0             0.00%             0.00%
          2006                     1               5,935           122,294            11,031             2.08%             2.97%
          2007                     0                   0                 0                 0             0.00%             0.00%
          2008                     1               5,124            93,336            53,500             1.80%             2.26%
-----------------------------------------------------------------------------------------------------------------------------------
                                  39             285,372        $4,121,477        $1,928,608           100.00%           100.00%
</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, 1998:


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, 1998, 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 1998 and
1997, 100% in 1996, 1995, and 1994.

The average effective annual rental per square foot at the Greenville Property
was $16.43 for 1998, $16.66 for 1997, $17.40 for 1996, $17.01 for 1995,and
$16.73 for 1994.

One tenant occupies ten percent or more of the rentable square footage -
International Business Machines Corporation ("IBM"), a computer sales and
service corporation.

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 Property should the Partnership receive a bona fide offer from the
third party to purchase the Greenville Property 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.


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, 1998, 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 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 was funded out of reserves and cash 

                                       5
<PAGE>
 
flows of the Partnership, Wells Fund II and Wells Fund II-OW. As of December 31,
1998, the Partnership had contributed approximately $659,810, Fund II had
contributed approximately $387,752, Wells Fund II OW had contributed
approximately $21,744, 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, 1998, the Fund
II, Fund II-OW Joint Venture holds an equity interest of approximately 61%, and
the Partnership holds an equity interest of approximately 39% in the Atrium
Project.


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 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 for the Brookwood Grill, a sole tenant, was 100% as of
December 31,1998, 1997, 1996, 1995, and 1994.  The average effective annual
rental per square foot at the Brookwood Grill is $30.26 for 1998 and 1997,
$30.29 for 1996, $30.21 for 1995, 1994 and 1993.

                                       6
<PAGE>
 
As of December 31, 1998, the Partnership and Fund II - Fund II-OW Joint Venture
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 undeveloped 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.  Fifteen tenants occupied the Holcomb Bridge Property as of
December 31, 1998 and 1997 for an occupancy rate of 94% and 63% for 1996.  The
average effective annual rental per square foot was $17.41 for 1998, $13.71 for
1997 and $9.87 for 1996.

As of December 31, 1998, Fund II and Fund III Joint Venture had contributed
$1,729,116 in land and improvements for an equity interest of approximately
24.1%, Wells Fund VI had contributed $1,817,179 for an equity interest of
approximately 26.9%,  and Wells Fund VII had contributed $3,496,604 for an
equity interest of approximately 49.0%.  The total cost to develop the Holcomb
Bridge Road Property is currently estimated to be approximately $5,478,649,
excluding land.  The Partnership is not obligated to provide any additional
funding for the Holcomb Bridge Road Property.

                                       7
<PAGE>
 
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, 1998, 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 100% in 1998, 93% in
1997, 1996 and 1995, and 97% in 1994.  The average effective annual rental per
square foot at the Stockbridge Property was $10.82 for 1998, $9.86 for 1997,
$9.59 for 1996, $10.16 for 1995, $10.26 for 1994.

As of December 31, 1998, 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.

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 

                                       8
<PAGE>
 
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, 1998, 1997, 1996, 1995, and
1994. The average effective annual rental per square foot at the G.E. Building
is $12.26 for 1998, $12.27 for 1997, 1996, 1995, and 1994. As of December 31,
1998, 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, III, 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.

                                       9
<PAGE>
 
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 1998.


                                    PART II
                                        

ITEM 5.   MARKET FOR PARTNERSHIP'S UNITS AND RELATED SECURITY
-------------------------------------------------------------
          HOLDER MATTERS
          ---------------

As of February 28, 1999, 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, 1998 to be $1.08 per Class A unit and $1.58
per Class B unit based on market conditions existing in early December, 1998.
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.

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.

                                       10
<PAGE>
 
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       General 
 Quarter Ended         Distributed        Income          Capital         Capital        Partner
------------------------------------------------------------------------------------------------------
<S>                   <C>                 <C>             <C>              <C>           <C>
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
March, 31, 1998        $372,249            $0.02           $0.00           $0.00          $0.00
June 30, 1998          $392,720            $0.02           $0.00           $0.00          $0.00
September 30, 1998     $393,035            $0.02           $0.00           $0.00          $0.00
December 31, 1998      $494,774            $0.02           $0.00           $0.02          $0.00
</TABLE>

The fourth quarter distribution was accrued for accounting purposes in 1998, and
was not actually paid to the Limited Partners holding Class A units until
February 1999.  The General Partners anticipate that cash distributions to
Limited Partners holding Class A units will continue in 1999 at a level at least
comparable with 1998 cash distributions; however, there is no guarantee of this.

                                       11
<PAGE>
 
ITEM 6.   SELECTED FINANCIAL DATA.
--------------------------------- 

The following sets forth a summary of the selected financial data for the fiscal
years ended December 31, 1998, 1997, 1996, 1995, and 1994:

<TABLE>
<CAPTION>
                               1998             1997             1996             1995             1994
----------------------------------------------------------------------------------------------------------
<S>                      <C>               <C>              <C>              <C>              <C>           
Total Assets              $15,900,936       $16,791,667      $17,114,963      $18,059,571      $18,561,131
Total Revenues              1,099,102           850,058        1,155,615        1,587,267         1572,895
Net Income                    649,007           385,224          731,244        1,143,704        1,130,464
Net Income                                                                                  
  allocated to                                                                              
  General Partners                  0                 0                0           15,205                0
Net Income                                                                                  
 allocated to Class                                                                         
 A Limited Partners           608,058           385,224          731,244        1,104,316        1,608,929
Net Income (Loss)                                                                           
 allocated to Class                                                                         
 B Limited Partners            40,949                 0                0           24,183         (478,465)
Net Income                                                                                  
 per Class A Limited                                                                        
 Partner Unit                     .03               .02              .04              .06              .08
Net Income (Loss) per                                                                       
 Class B Limited                                                                            
 Partner Unit                     .02               .00              .00              .01             (.19)
Cash Distributions to                                                                       
 Investors--                                                                                
Investment Income                                                                           
 Class A Units:                   .08               .04              .07              .08              .08
Return of Capital                                                                           
 Class A Units:                   .00               .00              .00              .00              .00
Return of Capital                                                                           
 Class B Units:                   .02               .00              .00              .08              .02
Cash Distribution to                                                                        
 General Partners                 .00               .00              .00           15,205              .00
 
</TABLE>

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

                                       12
<PAGE>
 
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 $1,099,102 for the fiscal year ended
December 31, 1998, as compared to $850,058 for the fiscal year ended December
31, 1997, and $1,155,615 for the fiscal year ended December 31, 1996.  The
increase for 1998 and 1997 is due primarily to an increase in equity in income
of joint venture and the decrease for 1997 over 1996 is primarily due to the
loss of equity from the joint venture. These changes in the equity in joint
ventures is due primarily to the termination of the Lockheed lease at The Atrium
on June 30, 1996 and the occupancy of Boeing at The Atrium in May, 1997.

Expenses of the Partnership were $450,095 for the fiscal year ended December 31,
1998, as compared to $464,834 for the fiscal year ended December 31, 1997 and
$424,371 for the fiscal year ended December 31, 1996.  Operating expenses
decreased significantly for the period ended December 31, 1998 due to additional
tenant reimbursements of approximately $63,000 during the third quarter of 1998
offset by extraordinary roof and parking lot repairs.  In 1997, operating
expenses increased over 1996 due primarily to a change in estimate related
timing differences in common area maintenance billings to tenants.  In 1996, the
increase in depreciation was offset by a decrease in operating expenses.

Net income of the Partnership was $649,007 for the fiscal year ended December
31, 1998, as compared to $385,224 for the fiscal year ended December 31, 1997,
and $731,244 for the fiscal year ended December 31, 1996. The increase in net
income for 1998 over 1997 is due primarily to increased equity in income of
joint ventures, due to a full year of rental income at the Atrium Property.  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, due to the vacancy at the
Atrium Property and increased depreciation expenses in 1996 and 1997, as noted
above.

The Partnership's cash distributions to the Limited Partners holding Class A
Units were $0.08 per unit for the fiscal year ended December 31, 1998, and $0.04
for 1997 and $0.07 for 1996.  Cash distributions to the Limited Partners holding
Class B Units were $0.02 for 1998.  There were no cash distributions in 1997 and
1996 to the Limited Partners holding Class B Units.

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 

                                       13
<PAGE>
 
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, 1998, the Partnership's ownership interest in the Greenville
Property is 100%, Fund II - Fund III Joint Venture is 39% and Fund III - Fund IV
Joint Venture is 57%.

As of December 31, 1998, the Partnership owned interests in the following
properties:

The Greenville Property/Fund III
--------------------------------
<TABLE>
<CAPTION>

                                                  For the Year Ended December 31
                                     -----------------------------------------------------
                                        1998                   1997                   1996
                                        ----                   ----                   ----
<S>                                 <C>                    <C>                    <C>                          
Revenues:
 Rental Income                       $562,951               $571,555               $586,466
 Other Income                             350                      0                      0
                                     --------               --------               --------
                                      563,301                571,555                586,466
                                     --------               --------               --------
Expenses:                                                                       
 Depreciation                         160,038                158,308                158,308 
 Management and                                                                 
  leasing expenses                     81,424                 71,075                 85,366 
 Other operating expenses             115,693                145,667                 99,334
                                      -------                -------                -------
                                      357,155                375,050                343,008
                                      -------                -------                -------
                                                                                
Net income                           $206,146               $196,505               $243,458
                                     ========               ========                =======
                                                                                
Occupied %                                92%                    92%                   100%
Partnership Ownership %                  100%                   100%                   100%
Cash Generated to the                                                           
Partnership                          $396,626               $380,298               $411,469
                                                                                
Net Income Allocated to                                                         
the Partnership                      $206,146               $196,505               $243,458
 
</TABLE>

Rental income decreased for the period ended December 31, 1998, as compared to
the same period in 1997 and 1996, due to a decline in occupancy from 100% in
1996 to 92% in 1998 and 1997.  Operating expenses decreased significantly from
$145,667 in 1997 to $115,693 in 1998 due to additional tenant reimbursements of
approximately $63,000 during the third quarter of 1998.

The real estate taxes were $29,228 for 1998, $27,945 for 1997,and  $27,479 for
1996.

                                       14
<PAGE>
 
The Partnership's ownership percentage remained constant at 100% for 1998, 1997
and 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.

The Atrium/Fund II - Fund III Joint Venture
-------------------------------------------
<TABLE>
<CAPTION>
                                                  For the Year Ended December 31
                               ----------------------------------------------------------------
                                        1998                   1997                   1996
                               ---------------------  ---------------------  ------------------
<S>                           <C>                    <C>                    <C>          
Revenues:
 Rental Income                      $1,470,144               $ 924,769               $1,048,583
 Interest Income                             0                   2,617                   24,188
 Other Income                           13,280                   8,638                        0    
                                    ----------               ---------               ----------
                                     1,483,424                 936,024                1,072,771
                                    ----------               ---------               ----------   
Expenses:                                                                        
 Depreciation                          866,778                 795,829                  674,479   
 Management and                                                                   
  leasing expenses                     186,102                 111,576                   71,381   
 Other operating expenses              713,955                 841,456                  158,405  
                                    ----------               ---------               ----------
                                     1,766,835               1,748,861                  904,265
                                    ----------               ---------               ----------         
                                                                                 
Net (loss) income                   $ (283,411)              $(812,837)              $  168,506
                                    ==========               =========               ==========
                                                                                 
Occupied %                             100.00%                 100.00%                    0.00%
                                                                                 
Partnership Ownership %                 38.72%                  38.72%                   34.40%

Cash distributed to the                                                          
 Partnership                        $  256,165               $  85,283               $  209,185
 
Net (loss) income allocated
 Partnership                        $ (109,680)              $(303,212)              $   57,966
 
</TABLE>

Rental revenue increased from $924,769 in 1997 to $1,470,144 in 1998 primarily
due to Atrium leased space to Boeing Company in May 1997. Other income increased
in 1998 due to a one-time adjustment for unused credits on the original tenant
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 1998
compared to 1997 due to the depreciation of tenant improvements made for the
Boeing Company and amortization of the leasing commission paid to acquire the
Boeing lease.

The real estate taxes were $148,006 for 1998, $140,366 for 1997, and $150,105
for 1996.

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

                                                               For the Year Ended December 31
                                            -------------------------------------------------------------------
                                                    1998                     1997                   1996
                                            ---------------------  ---------------------  ---------------------
<S>                                       <C>                     <C>                    <C>        
Revenues:
 Rental Income                                   $225,100                   $225,106               $225,359
 Equity in Income (Loss)                                                                          
  of Joint Venture                                 78,791                     27,213                (19,378)
                                                 --------                   --------               --------
                                                  303,891                    252,319                205,981
                                                 --------                   --------               --------
Expenses:                                                                                         
 Depreciation                                      54,012                     54,014                 54,014   
 Management and                                                                                    
  leasing expenses                                 23,349                     28,464                 27,004
 Other operating expenses                         (24,632)                    23,887                109,478
                                                 --------                   --------               --------
                                                   52,727                    106,365                190,496
                                                 --------                   --------               --------
                                                                                                  
Net income                                       $251,162                   $145,954               $ 15,485
                                                 ========                   ========               ========
                                                                                                  
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                                     $163,576                   $115,125               $ 40,154
                                                                         
Income allocated to the                                                  
 Partnership                                     $ 94,562                   $ 54,952               $  5,830
 
</TABLE>

Although rental income remained relatively stable, total revenues increased for
1998, as compared to 1997, due to the increased equity income from the Fund II
III, VI, VII Joint Venture, as the Holcomb Bridge Property become 100% occupied.
Operating expenses decreased in 1998, compared to 1997, due primarily to a
change in the rental agreement of billing water reimbursements to the tenant
which will result in the tenant being charged for a greater share of the total
bill.

Real estate taxes were $16,270 for 1998, $25,711 for 1997 and $33,494 for
1996.

                                       16
<PAGE>
 
The Stockbridge Village Shopping Center/Fund III - Fund IV Joint Venture
------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                       For the Year Ended December 31
                                    ------------------------------------
                                       1998         1997         1996
                                       ----         ----         ----
<S>                                 <C>          <C>          <C>          
Revenues:
 Rental Income                      $1,222,417   $1,113,238   $1,082,428
 Interest Income                         9,368       12,308       13,024        
                                    ----------   ----------   ---------- 
                                     1,231,785    1,125,546    1,095,452
                                    ----------   ----------   ----------   
Expenses:
 Depreciation                          346,144      338,989      338,989   
 Management and
  leasing expenses                     114,581      107,578       98,442
 Other operating expenses               83,952       68,797       90,187
                                    ----------   ----------   ----------
                                       544,677      515,364      527,618
                                    ----------   ----------   ----------

Net income                          $  687,108   $  610,182   $  567,834
                                    ==========   ==========   ==========
 
Occupied %                                100%          93%          93%
Partnership Ownership % in the
 Fund III Fund IV Joint Venture          57.3%        57.3%        57.3%

Cash Generated to the
 Partnership                        $  566,769   $  560,166   $  546,625

Net Income Allocated to
 the Partnership                    $  393,827   $  349,736   $  325,463
</TABLE>

Rental income increased to $1,222,417 for 1998 as compared to $1,113,238 in 1997
and $1,082,428 in 1996 due primarily to increased occupancy in 1998 and
increased rental rates.  Expenses of the property varied from $527,618 in 1996
and $515,364 in 1997 and $544,677 in 1998.  Other operating expenses decreased
in 1997 as compared to 1996 due primarily to savings in painting expense, but
increased in 1998 due primarily to parking lot repairs.  Net income of the
property varied from $687,108 for 1998 to  $610,182 for 1997 as compared to
$567,834 for 1996.

Real estate taxes were $110,891 for 1998, $98,138 for 1997, and $104,795 for
1996.

The Partnership's ownership percentage in the Fund III - Fund IV Joint Venture
remained constant at 57.3% for 1998, 1997 and 1996.

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.

                                       17
<PAGE>
 
The G.E. Building/Fund III and Fund IV Joint Venture
----------------------------------------------------
<TABLE>
<CAPTION>
                                     For the Year Ended December 31
                                     ------------------------------
                                       1998       1997      1996
                                       ----       ----      ----
<S>                                 <C>        <C>        <C>   
Revenues:
 Rental Income                      $527,425   $527,425   $527,425
                                    --------   --------   --------
 
Expenses:
 Depreciation                        196,220    196,220    196,220
 Management and
  leasing expenses                    40,300     38,435     39,860   
 Other operating expenses             18,876      3,708      8,731
                                    --------   --------   --------
                                     255,396    238,363    244,811
                                    --------   --------   --------
 
Net income                          $272,029   $289,062   $282,614
                                    ========   ========   ========
 
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                        $281,937   $284,890   $275,251
Net Income Allocated to the
 Partnership                        $155,918   $165,680   $161,985
</TABLE>

Rental income remained constant for 1998, 1997, and 1996.  Total expenses
decreased to $238,363 in 1997 from $244,811 in 1996 but increased to $255,396 in
1998 due primarily to roof repairs.

The Partnership's ownership percentage in the Fund III - Fund IV Joint Venture
remained constant at 57.3% for 1998, 1997, and 1996.

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.

                                       18
<PAGE>
 
Holcomb Bridge Road Property/Fund II, III, VI, VII Joint Venture
----------------------------------------------------------------
 
<TABLE>
<CAPTION>
                                        For the Year Ended      For the Year Ended      Nine Months Ended
                                        December 31, 1998       December 31, 1997       December 31, 1996
                                      ----------------------  ----------------------  ----------------------
<S>                                   <C>                     <C>                     <C>
Revenues:
   Rental Income                            $862,360                $679,268                $255,062
                                            --------                --------                --------
                                      
Expenses:                             
  Depreciation                               376,290                 325,974                 181,798
  Management & leasing expenses               97,701                  48,962                  28,832
  Other operating expenses                    60,799                 195,567                 101,600
                                            --------                --------                --------
                                             534,790                 570,503                 312,230
                                            --------                --------                --------
                                      
Net income (loss)                           $327,570                $108,765                $(57,168)
                                            ========                ========                ========
                                      
Occupied %                                       94%                     94%                     63%
                                      
Partnership's Ownership % in the      
 Fund II, III, VI, VII Joint Venture           9.02%                   9.10%                   9.50%
                                      
Cash distribution to the              
 Fund II-Fund III Joint Venture             $179,198                $109,242                $ 19,494
                                      
Net income (loss) allocated to the    
  Fund II-Fund III Joint Venture            $ 78,791                $ 27,313                $(19,378)
</TABLE>


Since the Holcomb Bridge Road Property was under construction and not occupied
until first quarter, 1996, comparative income and expense figures for the years
ending December 31, 1997 and 1996 are not available.

Rental income increased in 1998 compared to 1997 due primarily to increased
tenant occupancy late in the 4th quarter at the property.  Operating expenses
decrease in 1998 compared to 1997, due primarily to decreased property taxes and
water/sewer reimbursement paid by Fulton County Water.

As of December 31, 1998, 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 $1,817,179 for an equity interest of
approximately 26.9%,  and Wells Fund VII had contributed $3,489,170 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 $5,372,649, excluding land.

Real estate taxes were $52,162 for 1998, $85,230 for 1997 and $37,191 for 1996.

                                       19
<PAGE>
 
The Partnership's ownership percentage in the Fund II, III, VI, VII Joint
Venture decreased to 9.02% in 1998, as compared to 9.1% in 1997, due to
additional funding by Wells Fund VI and Well Fund VII.

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 $17,983,843 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 $3,357.

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 $218,706 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 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 increased in 1998 to
$333,229 from $264,289 in 1997 and decreased in 1997 to $264,289 from $359,388
in 1996.  The increase in 1998 over 1997 is due primarily to lower operating
costs at Greenville and collection of accounts receivable, primarily due to the
occupancy increases at Boeing at the Atrium, who occupied the building in mid-
May of 1997, and the Holcomb Bridge Road Property in Roswell, Georgia.  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 1998 as compared to 1997  and in 1997 as
compared to 1996.

                                       20
<PAGE>
 
The Partnership's distributions paid and payable through the fourth quarter of
1998 have been paid from net cash from operations and a return of capital.  The
Partnership anticipates that distributions will continue to be paid on a
quarterly basis from Net Cash 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.

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.

Year 2000 Compliance
--------------------

The Partnership is presently reviewing the potential impact of Year 2000
compliance issues on its information systems and business operations.  A full
assessment of Year 2000 compliance issues was begun in late 1997 and is expected
to be completed by March 31, 1999.  Renovations and replacements of equipment
have been and are being made as warranted as the assessment progresses.  The
costs incurred by the Partnership and its affiliates thus far for renovations
and replacements have been immaterial.  Some testing of systems has begun and
all testing is expected to be complete by June 30, 1999.

As to the status of the Partnership's information technology systems, it is
presently believed that all major systems and software packages with the
exception of the accounting and property management package are Year 2000
compliant.  The Partnership's affiliated entities are purchasing the upgrade for
the accounting and property management package system; however, it is not slated
to be available until the end of the first quarter of 1999.  At the present
time, it is believed that all major non-information technology systems are Year
2000 compliant.  The cost to upgrade any non-compliant systems is believed to be
immaterial.

The Partnership is in the process of confirming with the Partnership's vendors,
including third-party service providers such as banks, that their systems will
be Year 2000 compliant.  Based on the information received thus far, the primary
third-party service providers with which the Partnership has relationships have
confirmed their Year 2000 readiness.

                                       21
<PAGE>
 
The Partnership relies on computers and operating systems provided by equipment
manufacturers, and also on application software designed for use with its
accounting, property management and investment portfolio tracking.  The
Partnership has preliminarily determined that any costs, problems or
uncertainties associated with the potential consequences of Year 2000 issues are
not expected to have a material impact on the future operations or financial
condition of the Partnership.  The Partnership will perform due diligence as to
the Year 2000 readiness of each property owned by the Partnership and each
property contemplated for purchase by the Partnership.

The Partnership's reliance on embedded computer systems (i.e., microcontrollers)
is limited to facilities related matters, such as office security systems and
environmental control systems.

The Partnership is currently formulating contingency plans to cover any areas of
concern.  Alternate means of operating the business are being developed in the
unlikely circumstance that the computer and phone systems are rendered
inoperable.  An off-site facility from which the Partnership could operate is
being sought as well as alternate means of communication with key third-party
vendors.  A written plan is being developed for testing and dispensation to each
staff member of the Advisor of the Partnership.

Management believes that the Partnership's risk of Year 2000 problems is
minimal.  In the unlikely event there is a problem, the worst case scenarios
would include the risks that the elevator or security systems within the
Partnership's properties would fail or the key third-party vendors upon which
the Partnership relies would be unable to provide accurate investor information.
In the event that the elevator shuts down, the Partnership has devised a plan
for each building whereby the tenants will use the stairs until the elevators
are fixed.  In the event that the security system shuts down, the Partnership
has devised a plan for each building to hire temporary on-site security guards.
In the event that a third-party vendor has Year 2000 problems relating to
investor information, the Partnership intends to perform a full system back-up
of all investor information as of December 31, 1999 so that the Partnership will
have accurate hard-copy investor information.


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
          -----------------------------------

There were no disagreements with the Partnership's accountants or other
reportable events during 1998.

                                       22
<PAGE>
 
                                    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 55 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.

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     Capacities in which served Form
              Group                           of Compensation                 Cash Compensation
---------------------------------------------------------------------------------------------------
<S>                                  <C>                                  <C>
Wells Management Company, Inc.       Property Manager-Management and              $183,589 (1)
                                     Leasing 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 1998 but not
     actually paid until January, 1999.

                                       23
<PAGE>
 
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, 1999:

<TABLE>
<S>                     <C>                       <C>                         <C>
                                 (2)                        (3)
         (1)              Name and Address of       Amount and Nature of               (4)
    Title of Class         Beneficial Owner         Beneficial Ownership        Percent of Class
----------------------  ----------------------   ------------------------   ----------------------
 
    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.


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, 1998, 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.

                                       24
<PAGE>
 
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, 1998, Wells Management Company, Inc. received $183,589
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 1998, no real estate
commissions were paid to the General Partners.

                                       25
<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 1998.

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

                                       26
<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 26th day of March,
1999.

                              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,            March 26, 1999
--------------------      President and Sole Director of
Leo F. Wells, III         Wells Capital, 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.

                                       27
<PAGE>
 
                       INDEX TO THE FINANCIAL STATEMENTS

 
Financial Statements                                         Page
------------------------------------------------------       ----
 
Independent Auditors' Reports                                 F2
 
Balance Sheets as of December 31, 1998 and 1997               F3
 
Statements of Income for the Years ended
  December 31, 1998, 1997, and 1996                           F4
 
Statements of Partners' Capital for the Years ended
  December 31, 1998, 1997, and 1996                           F5
 
Statements of Cash Flows for the Years ended
  December 31, 1998, 1997, and 1996                           F6
 
Notes to Financial Statements for December 31, 1998,
  1997, and 1996                                              F7

                                      F-1
<PAGE>
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
                                        



To 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, 1998 and 1997 and
the related statements of income, partners' capital, and cash flows for each of
the three years in the period ended December 31, 1998.  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, 1998 and 1997 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998 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, 1998 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.



ARTHUR ANDERSEN LLP



Atlanta, Georgia
January 27, 1999

                                      F-2
<PAGE>
 
                        WELLS REAL ESTATE FUND III, L.P.

                     (A GEORGIA PUBLIC LIMITED PARTNERSHIP)


                                 BALANCE SHEETS

                           DECEMBER 31, 1998 AND 1997



                                     ASSETS
                                        
<TABLE>
<CAPTION>
<S>                                                                           <C>                <C>
                                                                                        1998               1997
                                                                                    -----------        -----------  
 
REAL ESTATE ASSETS, at cost:
 Land                                                                               $   576,350        $   576,350
 Building and improvements, less accumulated depreciation of $931,559 and
  $771,521 at December 31, 1998 and 1997, respectively                                2,668,658          2,794,080
                                                                                    -----------        -----------  
       Total real estate assets                                                       3,245,008          3,370,430
 
INVESTMENT IN JOINT VENTURES                                                         12,132,961         12,807,576
CASH AND CASH EQUIVALENTS                                                               156,648            216,961
DUE FROM AFFILIATES                                                                     334,162            316,089
ACCOUNTS RECEIVABLE                                                                       8,000             62,621
PREPAID EXPENSES AND OTHER ASSETS                                                        24,157             17,990
                                                                                    -----------        -----------  
       Total assets                                                                 $15,900,936        $16,791,667
                                                                                    ===========        ===========
</TABLE>

                       LIABILITIES AND PARTNERS' CAPITAL

<TABLE>
<CAPTION>
LIABILITIES:
<S>                                                                           <C>                <C>
 Accounts payable and accrued expenses                                              $    13,362        $     7,535
 Partnership distributions payable                                                      458,724            396,991
 Due to affiliates                                                                        7,966              3,436
                                                                                    -----------        -----------  
       Total liabilities                                                                480,052            407,962
                                                                                    -----------        -----------  

COMMITMENTS AND CONTINGENCIES
 
PARTNERS' CAPITAL:
 Limited partners:
   Class A                                                                           15,420,884         16,383,705
   Class B                                                                                    0                  0
                                                                                    -----------        -----------  
       Total partners' capital                                                       15,420,884         16,383,705
                                                                                    -----------        -----------  
       Total liabilities and partners' capital                                      $15,900,936        $16,791,667
                                                                                    ===========        ===========

</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, 1998, 1997, AND 1996



<TABLE>
<CAPTION>

                                                                            1998             1997              1996
                                                                         ----------        --------         ---------- 
<S>                                                               <C>                <C>             <C>
REVENUES:
 Rental income                                                           $  562,951        $571,555         $  586,466
 Equity in income of joint ventures                                         534,627         267,156            551,244
 Interest income                                                              1,524          11,347             17,905
                                                                         ----------        --------         ---------- 
                                                                          1,099,102         850,058          1,155,615
                                                                         ----------        --------         ---------- 
EXPENSES:
 Depreciation                                                               160,038         158,308            158,308
 Operating costs, net of reimbursements                                      72,816         125,810             73,206
 Partnership administration                                                  74,328          57,312             70,005
 Management and leasing fees                                                 81,424          71,075             85,366
 Legal and accounting                                                        22,742          42,562             32,332
 Bad debt expense                                                            31,188               0                  0
 Computer costs                                                               7,559           9,767              5,154
                                                                         ----------        --------         ---------- 
                                                                            450,095         464,834            424,371
                                                                         ----------        --------         ---------- 
NET INCOME                                                               $  649,007        $385,224         $  731,244
                                                                         ==========        ========         ========== 
NET INCOME ALLOCATED TO CLASS A LIMITED PARTNERS                         $  608,058        $385,224         $  731,244
                                                                         ==========        ========         ========== 
NET INCOME ALLOCATED TO CLASS B LIMITED PARTNERS                         $   40,949        $      0         $        0
                                                                         ==========        ========         ========== 
NET INCOME PER CLASS A LIMITED PARTNER UNIT                              $     0.03        $   0.02         $     0.04
                                                                         ==========        ========         ========== 
NET INCOME PER CLASS B LIMITED PARTNER UNIT                              $     0.02        $   0.00         $     0.00
                                                                         ==========        ========         ========== 
CASH DISTRIBUTION PER CLASS A LIMITED PARTNER UNIT                       $     0.08        $   0.04         $     0.07
                                                                         ==========        ========         ========== 
CASH DISTRIBUTION PER CLASS B LIMITED PARTNER UNIT                       $     0.02        $   0.00         $     0.00
                                                                         ==========        ========         ========== 
</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, 1998, 1997, AND 1996



<TABLE>
<CAPTION>

                                           Limited Partners                                          Total
                                        Class A      Class A     Class B    Class B     General   Partners'
                                         Units        Amount       Units      Amount    Partners    Capital
                                       ----------  -----------   ---------   --------   --------  -----------
<S>                                  <C>               <C>           <C>        <C>         <C>       <C>

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
                               
 Net income                                     0      608,058           0     40,949          0      649,007
 Partnership distributions                      0   (1,570,879)          0    (40,949)         0   (1,611,828)
                                       ----------  -----------   ---------   --------   --------  -----------
BALANCE, December 31, 1998             19,635,965  $15,420,884   2,544,540   $      0         $0  $15,420,884
                                       ==========  ===========   =========   ========   ========  ===========     
</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, 1998, 1997, AND 1996




<TABLE>
<CAPTION>

                                                                            1998               1997               1996
<S>                                                               <C>                 <C>               <C>
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income                                                             $   649,007         $ 385,224         $   731,244
 Adjustments to reconcile net income to net cash provided by
  operating activities:
     Equity in income of joint ventures                                    (534,627)         (267,156)           (551,244)
     Depreciation                                                           160,038           158,308             158,308
     Changes in assets and liabilities:
       Accounts receivable                                                   54,621             5,169              (6,949)
       Prepaid expenses and other assets                                     (6,167)            6,110               4,996
       Accounts payable and accrued expenses                                  5,827           (15,406)             17,906
       Due to affiliates                                                      4,530            (7,960)              5,127
         Total adjustments                                                 (315,778)         (120,935)           (371,856)
         Net cash provided by operating activities                          333,229           264,289             359,388
CASH FLOWS FROM INVESTING ACTIVITIES:
 Investment in real estate                                                  (34,616)                0                   0
 Investment in joint ventures                                               (59,205)         (659,810)                  0
 Distributions received from joint ventures                               1,250,374           942,318           1,194,488
         Net cash provided by investing activities                        1,156,553           282,508           1,194,488
CASH FLOWS FROM FINANCING ACTIVITIES:
 Distributions to partners in excess of accumulated earnings             (1,056,213)         (267,191)           (170,157)
 Distributions to partners from accumulated earnings                       (493,882)         (404,963)         (1,541,728)
         Net cash used in financing activities                           (1,550,095)         (672,154)         (1,711,885)
NET DECREASE IN CASH AND CASH EQUIVALENTS                                   (60,313)         (125,357)           (158,009)
 
CASH AND CASH EQUIVALENTS, beginning of year                                216,961           342,318             500,327
CASH AND CASH EQUIVALENTS, end of year                                  $   156,648         $ 216,961         $   342,318
</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, 1998, 1997, AND 1996

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
   investment in its assets will be dependent on the Partnership's ability to
   maintain rental rates, occupancy, and an appropriate level of

                                      F-7
<PAGE>
 
   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 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 and amortization.  Net income, as defined, of the
   Partnership will be allocated each year in the same proportions that net cash
   from operations is distributed to 

                                      F-8
<PAGE>
 
   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, and amortization 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 and amortization 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.

   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 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, 1998.

   Depreciation for buildings and improvements is calculated using the straight-
   line method over 25 years.

   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.

                                      F-9
<PAGE>
 
   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, 1998, 1997, and 1996 is computed based on the average number of
   units outstanding during the period.

   Reclassifications

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

 2. RELATED-PARTY TRANSACTIONS

   Due from affiliates at December 31, 1998 and 1997 represents the
   Partnership's share of cash to be distributed from its joint venture
   investments for the fourth quarters of 1998 and 1997, respectively, as
   follows:

<TABLE>
<CAPTION>

                                                                           1998            1997
                                                                         --------        -------- 
<S>                                                                      <C>             <C>
Fund III and IV Associates                                               $233,680        $226,757
Fund II and III Associates--The Atrium                                     53,054          58,454
Fund II and III Associates--Brookwood Grill                                47,428          30,878
                                                                         --------        -------- 
                                                                         $334,162        $316,089
                                                                         ========        ========
 
</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 

                                      F-10
<PAGE>
 
   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 $183,589, $194,174,
   and $189,023 for the years ended December 31, 1998, 1997, and 1996,
   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 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.

 3. INVESTMENT IN JOINT VENTURES

   The Partnership's investment and percentage ownership in the joint ventures
   at December 31, 1998 and 1997 are summarized as follows:

<TABLE>
<CAPTION>

                                                
                                                               1998                             1997
                                                    ---------------------------      ---------------------------
                                                      Amount          Percent          Amount          Percent
                                                    -----------     -----------      -----------     ----------- 
<S>                                           <C>                <C>           <C>                <C>

Fund III and IV Associates                          $ 7,330,542           57%        $ 7,570,298           57%
Fund II and III Associates--The Atrium                3,569,416           37           3,935,261           39
Fund II and III Associates--Brookwood Grill           1,233,003           38           1,302,017           38
                                                    -----------                      -----------   
                                                    $12,132,961                      $12,807,576
                                                    ===========                      ===========      
</TABLE>

                                      F-11
<PAGE>
 
   The following is a rollforward of the Partnership's investment in joint
   ventures for the years ended December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                             1998                1997
                                                                          -----------         -----------
<S>                                                                 <C>                 <C>
Investment in joint ventures, beginning of year                           $12,807,576         $12,926,074
 Equity in income of joint ventures                                           534,627             267,156
 Contributions to joint ventures                                               59,205             659,810
 Distributions from joint ventures                                         (1,268,447)         (1,045,464)
                                                                          -----------         -----------
Investment in joint ventures, end of year                                 $12,132,961         $12,807,576
                                                                          ===========         ===========

</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 1.5 acres and is currently operating as the
   Brookwood Grill restaurant ("Fund II and III Associates--Brookwood Grill").
   The remaining 4.3 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
   $1,507,807 and $1,608,215 at December 31, 1998 and 1997, respectively, which
   represented a 24% interest for each year.

   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 five years.  There is no-cause cancellation provision at the end
   of the first three-year period.  If this no-cause cancellation is exercised,
   the tenant would be required to pay unamortized, up-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.

                                      F-12
<PAGE>
 
   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, 1998 AND 1997

                                     Assets

<TABLE>
<CAPTION>
 
                                                                              1998              1997
                                                                           ----------        -----------  
<S>                                                                   <C>              <C>

Real estate assets, at cost:
 Land                                                                      $1,504,743        $ 1,504,743
 Building and improvements, less accumulated depreciation of
  $5,433,962 in 1998 and $4,567,184 in 1997                                 7,938,061          8,804,839
                                                                           ----------        -----------  
       Total real estate assets                                             9,442,804         10,309,582
Cash and cash equivalents                                                     128,882            281,285
Accounts receivable                                                            18,114             18,950
Prepaid expenses and other assets                                             302,888            392,633
                                                                           ----------        -----------  
       Total assets                                                        $9,892,688        $11,002,450
                                                                           ==========        ===========  

</TABLE>


                       Liabilities and Partners' Capital

<TABLE>
<CAPTION>
Liabilities:
<S>                                                                   <C>              <C>
 Accounts payable                                                          $    4,587        $   151,366
 Partnership distributions payable                                            137,224            151,044
 Due to affiliates                                                                  0              3,829
                                                                           ----------        -----------  
       Total liabilities                                                      141,811            306,239
                                                                           ----------        -----------  

Partners' capital:
 Fund II and II-OW                                                          6,181,461          6,760,950

 Wells Real Estate Fund III                                                 3,569,416          3,935,261
                                                                           ----------        -----------  
       Total partners' capital                                              9,750,877         10,696,211
                                                                           ----------        -----------  
       Total liabilities and partners' capital                             $9,892,688        $11,002,450
                                                                           ==========        ===========     

</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, 1998, 1997, AND 1996

<TABLE>
<CAPTION>

                                     1998              1997          1996
                                  ----------        ----------     ----------
<S>                                     <C>           <C>           <C>

Revenues:          
  Rental income                   $1,470,144        $  924,769     $1,048,583
  Interest income                          0             2,617         24,188
  Other income                        13,280             8,638              0
                                  ----------        ----------     ----------
                                   1,483,424           936,024      1,072,771
                                  ----------        ----------     ----------

Expenses:
  Depreciation                       866,778           795,829        674,479
  Operating costs, 
   net of reimbursements             699,550           614,932         85,183
  Management and leasing fees        186,102           111,576         71,381
  Property administration             11,095            27,325         59,934
  Legal and accounting                 3,310            17,408         11,878
  Computer costs                           0               107          1,410
  Loss on real estate assets               0           181,684              0
                                  ----------        ----------     ----------
                                   1,766,835         1,748,861        904,265
                                  ----------        ----------     ----------
Net (loss) income                 $ (283,411)       $ (812,837)    $  168,506
                                  ==========        ==========     ==========
Net (loss) income allocated 
  to Fund II and II-OW            $ (173,731)       $ (509,625)    $  110,540
                                  ==========        ==========     ==========
Net (loss) income allocated 
  to Wells Real Estate Fund III   $ (109,680)       $ (303,212)    $   57,966
                                  ==========        ==========     ==========

</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, 1998, 1997, AND 1996

<TABLE>
<CAPTION>
                                                            Fund II          Wells Real           Total
                                                              and              Estate           Partners'
                                                             II-OW            Fund III           Capital
                                                           ----------        ----------         ----------- 
<S>                                                   <C>               <C>               <C>
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
 Net loss                                                    (173,731)         (109,680)           (283,411)
 Partnership distributions                                   (405,758)         (256,165)           (661,923)
                                                           ----------        ----------         ----------- 
Balance, December 31, 1998                                 $6,181,461        $3,569,416         $ 9,750,877
                                                           ==========        ==========         =========== 

</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, 1998, 1997, AND 1996

<TABLE>
<CAPTION>

                                                                         1998              1997               1996
<S>                                                                 <C>              <C>                <C>
 
Cash flows from operating activities:
 Net (loss) income                                                       $(283,411)        $ (812,837)        $ 168,506
                                                                         ---------         ----------         ---------
 Adjustments to reconcile net (loss) income to net cash provided
  by (used in) operating activities:
     Depreciation                                                          866,778            795,829           674,479
     Loss on real estate assets                                                  0            181,684                 0
     Changes in assets and liabilities:
       Accounts receivable                                                     836            (18,950)          113,362
       Prepaid expenses and other assets                                    89,745           (357,417)                0
       Accounts payable                                                   (146,779)           (37,394)         (338,991)
       Due to affiliates                                                    (3,829)             3,829            (6,802)
                                                                         ---------         ----------         ---------
         Total adjustments                                                 806,751            567,581           442,048
                                                                         ---------         ----------         ---------
         Net cash provided by (used in) operating activities               523,340           (245,256)          610,554
                                                                         ---------         ----------         ---------

Cash flows from investing activities:
 Investment in real estate assets                                                0           (932,156)          (35,038)
                                                                         ---------         ----------         ---------
Cash flows from financing activities:
 Contributions from joint venture partners                                       0          1,069,305                 0
 Distributions to joint venture partners                                  (675,743)           (58,720)         (973,577)
                                                                         ---------         ----------         ---------
         Net cash (used in) provided by financing activities              (675,743)         1,010,585          (973,577)
                                                                         ---------         ----------         ---------
Net decrease in cash and cash equivalents                                 (152,403)          (166,827)         (398,061)
                                                                         ---------         ----------         ---------
Cash and cash equivalents, beginning of year                               281,285            448,112           846,173
                                                                         ---------         ----------         ---------
Cash and cash equivalents, end of year                                   $ 128,882         $  281,285         $ 448,112
                                                                         =========         ==========         =========

</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, 1998 and 1997

                                     Assets

<TABLE>
<CAPTION>
                                                                              1998            1997
                                                                            ----------       ---------- 
<S>                                                                    <C>              <C>

Real estate assets, at cost:
 Land                                                                       $  745,223       $  745,223
 Building and improvements, less accumulated depreciation of
  $329,731 in 1998 and $275,717 in 1997                                        943,082          997,096
                                                                            ----------       ---------- 
       Total real estate assets                                              1,688,305        1,742,319
Investment in joint venture                                                  1,507,807        1,608,215
Cash and cash equivalents                                                       73,956           54,321
Due from affiliate                                                              50,479           32,092
Accounts receivable                                                             67,018           89,757
Prepaid expenses and other assets                                               17,480           23,048
                                                                            ----------       ---------- 
       Total assets                                                         $3,405,045       $3,549,752
                                                                            ==========       ========== 
</TABLE>

                       Liabilities and Partners' Capital

<TABLE>
<CAPTION>
Liabilities:
<S>                                                                    <C>              <C>
 Accounts payable                                                           $    1,200       $    3,879
 Due to affiliate                                                                3,894            5,381
 Partnership distributions payable                                             124,772           82,012
                                                                            ----------       ---------- 
       Total liabilities                                                       129,866           91,272
                                                                            ----------       ---------- 
Partners' capital:
 Fund II and II-OW                                                           2,042,176        2,156,463
 Wells Real Estate Fund III                                                  1,233,003        1,302,017
                                                                            ----------       ---------- 
       Total partners' capital                                               3,275,179        3,458,480
                                                                            ----------       ---------- 
       Total liabilities and partners' capital                              $3,405,045       $3,549,752
                                                                            ==========       ========== 
         
</TABLE>

                                      F-17
<PAGE>
 
                  Fund II and III Associates--Brookwood Grill

                           (A Georgia Joint Venture)

                              Statements of Income

             for the Years Ended December 31, 1998, 1997, and 1996

<TABLE>
<CAPTION>
<S>                                               <C>         <C>        <C>

                                                          1998            1997        1996
                                                        --------        --------    --------
Revenues:
  Rental income                                         $225,100        $225,106    $225,359
  Equity in income (loss) of
   joint venture                                          78,791          27,213     (19,378)
                                                        --------        --------    --------
                                                         303,891         252,319     205,981
                                                        --------        --------    --------
Expenses:
  Operating costs, net of reimbursements                 (31,540)         15,233      92,450  
  Depreciation                                            54,014          54,014      54,014
  Management and leasing fees                             23,348          28,464      27,004
  Property administration                                  3,708           3,875      12,454
  Legal and accounting                                     3,200           4,672       3,164
  Computer costs                                               0             107       1,410
                                                        --------        --------    --------
                                                          52,730         106,365     190,496
                                                        --------        --------    --------

Net income                                              $251,161        $145,954    $ 15,485
                                                        ========        ========    ========
Net income allocated to Fund II and II-OW               $156,599        $ 91,002    $  9,655
                                                        ========        ========    ========
Net income allocated to Wells Real Estate Fund III      $ 94,562        $ 54,952    $  5,830
                                                        ========        ========    ========

</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, 1998, 1997, and 1996

<TABLE>
<CAPTION>
<S>                                                            <C>               <C>               <C>
                                                             Fund II          Wells Real          Total
                                                               and              Estate          Partners'
                                                              II-OW            Fund III          Capital
                                                            ----------        ----------        ----------
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
 Net income                                                    156,599            94,562           251,161
 Partnership distributions                                    (270,886)         (163,576)         (434,462)
                                                            ----------        ----------        ----------
Balance, December 31, 1998                                  $2,042,176        $1,233,003        $3,275,179
                                                            ==========        ==========        ==========

</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, 1998, 1997, and 1996

<TABLE>
<CAPTION>
<S>                                                                   <C>               <C>               <C>
                                                                              1998              1997              1996
                                                                            ---------         ---------         --------- 
Cash flows from operating activities:
 Net income                                                                 $ 251,161         $ 145,954         $  15,485
                                                                            ---------         ---------         --------- 
 Adjustments to reconcile net income to net cash provided by
  operating activities:
     Depreciation                                                              54,014            54,014            54,014
     Equity in (income) loss of joint venture                                 (78,791)          (27,213)           19,378
     Changes in assets and liabilities:
       Accounts receivable                                                     22,739            24,229            (9,262)
       Prepaid expenses and other assets                                        5,568             5,568             5,568
       Accounts payable                                                        (2,679)          (16,161)           18,860
       Due to affiliates                                                       (1,487)           (1,163)              465
                                                                            ---------         ---------         --------- 
         Total adjustments                                                       (636)           39,274            89,023
                                                                            ---------         ---------         --------- 
         Net cash provided by operating activities                            250,525           185,228           104,508
                                                                            ---------         ---------         --------- 
Cash flows from investing activities:
 Distributions received from joint venture                                    160,812            89,622             7,022
                                                                            ---------         ---------         --------- 
Cash flows from financing activities:
 Distributions to joint venture partners                                     (391,702)         (229,631)         (136,320)
                                                                            ---------         ---------         --------- 
Net increase (decrease) in cash and cash equivalents                           19,635            45,219           (24,790)
Cash and cash equivalents, beginning of year                                   54,321             9,102            33,892
                                                                            ---------         ---------         --------- 
Cash and cash equivalents, end of year                                      $  73,956         $  54,321         $   9,102
                                                                            =========         =========         ========= 
</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, 1997,
   and 1998, Fund VI and Fund VII made contributions to the joint venture.
   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.

                                      F-20
<PAGE>
 
   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, 1998 and 1997

                                     Assets

<TABLE>
<CAPTION>
<S>                                                                    <C>              <C>

                                                                               1998             1997
                                                                           -----------      ----------- 
Real estate assets, at cost:
 Land                                                                       $1,325,242       $1,325,242
 Building and improvements, less accumulated depreciation of
  $884,062 in 1998 and $507,772 in 1997                                      4,773,062        5,025,276
 Construction in progress                                                       41,263           59,564
                                                                           -----------      ----------- 
       Total real estate assets                                              6,139,567        6,410,082
Cash and cash equivalents                                                      308,788          219,391
Accounts receivable                                                            111,460           54,524
Prepaid expenses and other assets                                              233,965          269,568
                                                                           -----------      ----------- 
       Total assets                                                         $6,793,780       $6,953,565
                                                                           ===========      =========== 
 
 
                                   Liabilities and Partners' Capital
 
Liabilities:
 Accounts payable and accrued expenses                                      $  192,072       $  170,776
 Partnership distributions payable                                             209,716          131,907
                                                                           -----------      ----------- 
                                                                               401,788          302,683
                                                                           -----------      ----------- 

Partners' capital:
 Fund II and III Associates                                                  1,507,807        1,608,215
 Wells Real Estate Fund VI                                                   1,682,380        1,789,811
 Wells Real Estate Fund VII                                                  3,201,805        3,252,856
                                                                           -----------      ----------- 
       Total partners' capital                                               6,391,992        6,650,882
                                                                           -----------      ----------- 
       Total liabilities and partners' capital                              $6,793,780       $6,953,565
                                                                           ===========      ===========    

</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, 1998, 1997, and 1996

<TABLE>
<CAPTION>
                                   1998          1997        1996
 
Revenues:
<S>                             <C>             <C>        <C>
  Rental income                 $872,978        $679,268   $255,062
  Other income                    36,000               0          0
                                --------        --------   -------- 
                                 908,978         679,268    255,062
                                --------        --------   -------- 
Expenses:
  Depreciation                   376,290         325,974    181,798
  Operating costs, 
    net of reimbursements         85,983         122,261     75,018
  Management and leasing fees     97,701          99,834     28,832
  Legal and accounting             6,509           4,885     14,928
  Property administration         14,926          17,321     10,286
  Computer costs                       0             228      1,368
                                --------        --------   -------- 
                                 581,409         570,503    312,230
                                --------        --------   -------- 
Net income (loss)               $327,569        $108,765   $(57,168)
                                ========        ========   ========  
Net income (loss) allocated 
  to Fund II and III Associates $ 78,791        $ 27,213   $(19,378)
                                ========        ========   ========  
Net income (loss) allocated 
  to Wells Real Estate Fund VI  $ 87,914        $ 28,409   $(10,193)
                                ========        ========   ========  
 
Net income (loss) allocated 
  to Wells Real Estate Fund VII $160,864        $ 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, 1998, 1997, and 1996

<TABLE>
<CAPTION>
<S>                                             <C>                <C>                <C>                <C>
                                                       Fund II             Wells           Wells Real            Total
                                                       and III          Real Estate          Estate            Partners'
                                                     Associates           Fund VI           Fund VII            Capital
                                                      ----------         ----------         ----------         ---------- 
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
 Partnership contributions                                     0              4,600            154,049            158,649
 Partnership distributions                              (179,199)          (199,945)          (365,964)          (745,108)
 Net income                                               78,791             87,914            160,864            327,569
                                                      ----------         ----------         ----------         ---------- 
Balance, December 31, 1998                            $1,507,807         $1,682,380         $3,201,805         $6,391,992
                                                      ==========         ==========         ==========         ==========

</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, 1998, 1997, and 1996

<TABLE>
<CAPTION>
<S>                                              <C>           <C>           <C>
                                                  1998          1997           1996
 
Cash flows from operating activities:
  Net income (loss)                             $327,569      $ 108,765     $   (57,168)
                                                --------      ---------     -----------
 Adjustments to reconcile net income
  (loss) to net cash provided by operating
  activities:     
     Changes in assets and liabilities:
        Depreciation                             376,290        325,974         181,798
        Accounts receivable                      (56,936)        12,810         (67,334)
        Prepaid expenses and other assets         35,603       (123,748)       (104,792)
        Accounts payable and 
          accrued expenses                        21,296        (34,194)         88,532
                                                --------      ---------     -----------
                Total adjustments                376,253        180,842          98,204
                                                --------      ---------     -----------
                Net cash provided by 
                 operating activities            703,822        289,607          41,036
                                                --------      ---------     -----------
Cash flows from investing activities:
  Decrease in construction payables                    0              0        (358,467)
  Investment in real estate                     (102,122)      (620,059)     (1,736,082)
                                                --------      ---------     -----------
                Net cash used in investing 
                  activities                    (102,122)      (620,059)     (2,094,549)
                                                --------      ---------     -----------
Cash flows from financing activities:
  Contributions from joint 
    venture partners                             154,996        230,699       1,434,308
  Distributions to joint 
    venture partners                            (667,299)      (356,559)        (26,470)  
                                                --------      ---------     -----------
                Net cash (used in) provided 
                   by financing activities      (512,303)      (125,860)      1,407,838
                                                --------      ---------     -----------
Net increase (decrease) in cash and 
  cash equivalents                                89,397       (456,312)       (645,675)
Cash and cash equivalents, beginning of year     219,391        675,703       1,321,378
                                                --------      ---------     -----------
Cash and cash equivalents, end of year          $308,788       $219,391     $   675,703          
                                                ========      =========     ===========
Supplemental disclosure of noncash activities: 
  Deferred project costs contributed            $  3,653       $  7,552     $  162,597
                                                ========      =========     ===========

</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 the financial statements for Fund III and IV Associates:

                           Fund III and IV Associates

                           (A Georgia Joint Venture)

                                 Balance Sheets

                           December 31, 1998 and 1997


                                     Assets

<TABLE>
<CAPTION>

                                                                               1998               1997
                                                                           -----------        ----------- 
<S>                                                                        <C>                <C>
Real estate assets, at cost:
 Land                                                                      $ 3,331,775        $ 3,331,775
 Building and improvements, less accumulated depreciation of
  $2,870,627 in 1998 and $2,328,264 in 1997                                  9,320,016          9,750,996
                                                                           -----------        ----------- 
       Total real estate assets                                             12,651,791         13,082,771
Cash and cash equivalents                                                      336,958            306,194
Accounts receivable                                                            173,633            207,223
Prepaid expenses and other assets                                               74,533             42,905
                                                                           -----------        ----------- 
       Total assets                                                        $13,236,915        $13,639,093
                                                                           ===========        =========== 
 
                                 Liabilities and Partners' Capital
 
Liabilities:
 Accounts payable                                                          $    38,139        $    36,172
 Partnership distributions payable                                             407,701            388,117
 Due to affiliates                                                               1,512              6,939
                                                                           -----------         ---------- 
       Total liabilities                                                       447,352            431,228
                                                                           -----------         ---------- 

Partners' capital:
 Wells Real Estate Fund III                                                  7,330,542          7,570,298
 Wells Real Estate Fund IV                                                   5,459,021          5,637,567
                                                                           -----------        ----------- 
       Total partners' capital                                              12,789,563         13,207,865
                                                                           -----------        ----------- 
       Total liabilities and partners' capital                             $13,236,915        $13,639,093
                                                                           ===========        ===========
</TABLE>

                                      F-25
<PAGE>
 
                           Fund III and IV Associates

                           (A Georgia Joint Venture)

                              Statements of Income

             for the Years Ended December 31, 1998, 1997, and 1996


<TABLE>
<CAPTION>

                                               1998         1997         1996
                                          ----------      ----------   ---------- 
<S>                                        <C>          <C>          <C>
Revenues:
  Rental income                           $1,749,842      $1,640,663   $1,609,853
  Interest income                              9,368          12,308       13,024
                                          ----------      ----------   ---------- 
                                           1,759,210       1,652,971    1,622,877
                                          ----------      ----------   ---------- 
Expenses:
  Depreciation                               542,363         535,209      535,209
  Management and leasing fees                154,881         146,013      138,302  
  Operating costs, net of reimbursements      62,863          36,973       60,043
  Property administration                     27,546          21,735       23,054
  Legal and accounting                        12,420          13,797       11,191
  Computer costs                                   0               0        4,569
  Amortization of organization costs               0               0           61
                                           ---------       ---------   ---------- 
                                             800,073         753,727      772,429
                                           ---------       ---------   ---------- 
Net income                                 $ 959,137       $ 899,244   $  850,448
                                           =========       =========   ========== 
Net income allocated to Wells 
  Real Estate Fund III                     $ 549,745       $ 515,416   $  487,448
                                           =========       =========   ========== 
 
Net income allocated to Wells 
  Real Estate Fund IV                      $ 409,392      $  383,828   $  363,000
                                           =========      ==========   ========== 

</TABLE>

                                      F-26
<PAGE>
 
                           Fund III And IV Associates

                           (A Georgia Joint Venture)

                        Statements of Partners' Capital

              for the Years Ended December 31, 1998, 1997 and 1996


<TABLE>
<CAPTION>
<S>                                                           <C>               <C>                <C>
                                                           Wells Real        Wells Real           Total
                                                             Estate            Estate           Partners'
                                                            Fund III          Fund IV            Capital
                                                           ----------        ----------         ----------- 
 
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
 Net income                                                   549,745           409,392             959,137
 Partnership contributions                                     59,205            44,090             103,295
 Partnership distributions                                   (848,706)         (632,028)         (1,480,734)
                                                           ----------        ----------         ----------- 
Balance, December 31, 1998                                 $7,330,542        $5,459,021         $12,789,563
                                                           ==========        ==========         ============ 
</TABLE>

                                      F-27
<PAGE>
 
                           Fund III and IV Associates

                           (A Georgia Joint Venture)

                            Statements of Cash Flows

             for the Years Ended December 31, 1998, 1997, and 1996


<TABLE>
<CAPTION>
                                                                       1998                1997                1996
                                                                       ----                ----                ----
<S>                                                                    <C>                 <C>                 <C>
 
Cash flows from operating activities:
 Net income                                                           $   959,137         $   899,244         $   850,448
                                                                      -----------         -----------         ----------- 
 Adjustments to reconcile net income to net cash provided by
  operating activities:
     Depreciation                                                         542,363             535,209             535,209
     Changes in assets and liabilities:
       Accounts receivable                                                 33,590              40,344              46,711
       Prepaid expenses and other assets                                  (31,628)             (6,674)             18,111
       Accounts payable                                                     1,967              (3,550)              6,501
       Due to affiliates                                                   (5,427)                921              (1,133)
                                                                      -----------         -----------         ----------- 
         Total adjustments                                                540,865             566,250             605,399
                                                                      -----------         -----------         ----------- 
         Net cash provided by operating activities                      1,500,002           1,465,494           1,455,847
                                                                      -----------         -----------         ----------- 

Cash flows from investing activities:
 Investment in real estate                                               (111,383)                  0              (1,976)
                                                                      -----------         -----------         ----------- 
Cash flows from financing activities:
 Contributions from joint venture partners                                103,295                   0                   0
 Distributions to joint venture partners                               (1,461,150)         (1,457,201)         (1,406,873)
                                                                      -----------         -----------         ----------- 
       Net cash used in financing activities                           (1,357,855)         (1,457,201)         (1,406,873)
                                                                      -----------         -----------         ----------- 
Net increase in cash and cash equivalents                                  30,764               8,293              46,998
Cash and cash equivalents, beginning of year                              306,194             297,901             250,903
                                                                      -----------         -----------         ----------- 
Cash and cash equivalents, end of year                                $   336,958         $   306,194         $   297,901
                                                                      ===========         ===========         =========== 

</TABLE>

 4. INCOME TAX BASIS NET INCOME AND PARTNERS' CAPITAL

   The Partnership's income tax basis net income for the years ended December
   31, 1998, 1997, and 1996 is calculated as follows:

<TABLE>
<CAPTION>
<S>                                                                                   <C>       <C>        <C>  
                                                                                    1998        1997        1996
                                                                                 ----------   --------   ----------
 
Financial statement net income                                                   $  649,007   $385,224   $  731,244
Increase (decrease) in net income resulting from:
 Depreciation expense for financial reporting purposes in excess of amounts
  for income tax purposes                                                           353,230    320,502      261,953
 
 Rental income recognized for income tax purposes in excess of amounts for
  financial reporting purposes                                                       45,896      9,634       68,420
 
 Expenses deductible when paid for income tax purposes, accrued for financial
  reporting purposes                                                                 (1,014)    (6,871)       4,219
 
 Fixed asset retirement in excess of amounts for income tax purposes                      0     (7,064)           0
 Other                                                                                  960      6,213            0
                                                                                 ----------   --------   ----------
Income tax basis net income                                                      $1,048,079   $707,638   $1,065,836
                                                                                 ==========   ========   ==========
</TABLE>

                                      F-28
<PAGE>
 
   The Partnership's income tax basis partners' capital at December 31, 1998,
   1997, and 1996 is computed as follows:

<TABLE>
<CAPTION>
<S>                                                                        <C>           <C>           <C>
                                                                               1998          1997          1996
                                                                           -----------   -----------   -----------
Financial statement partners' capital                                      $15,420,884   $16,383,705   $16,743,131
Increase (decrease) in partners' capital resulting from:
 Depreciation expense for financial reporting purposes in excess of
  amounts for income tax purposes                                              996,852       643,622       323,120
 
 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                                   (238,040)     (283,936)     (293,570)
 
 Accumulated expenses deductible when paid for income tax purposes,
  accrued for financial reporting purposes                                     120,387       121,401       128,272
 
 Partnership's distribution payable                                            458,724       396,991       324,495
 Other                                                                          (1,731)       (2,691)       (1,840)
                                                                           -----------   -----------   -----------
Income tax basis partners' capital                                         $19,381,631   $19,883,647   $19,848,163
                                                                           ===========   ===========   ===========
</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, 1998 is as follows:

<TABLE>
<CAPTION>
Year ending December 31:
<S>                                                                    <C>
 1999                                                                       $2,207,855
 2000                                                                        1,935,161
 2001                                                                        1,481,156
 2002                                                                          798,538
 2003                                                                          374,722
Thereafter                                                                   3,063,880
                                                                            ----------
                                                                            $9,861,312
                                                                            ========== 
</TABLE>

   Three significant tenants contributed approximately 33%, 16%, and 17% 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, 1998.  In addition, two significant
   tenants will contribute approximately 43% and 19% of future minimum rental
   income.

                                      F-29
<PAGE>
 
   The future minimum rental income due Fund II and III Associates--The Atrium
   under noncancelable operating leases at December 31, 1998 is as follows:

<TABLE>
<CAPTION>
Year ending December 31:
<S>                                                                    <C>
 1999                                                                       $1,458,240
 2000                                                                        1,478,080
 2001                                                                        1,488,000
 2002                                                                          496,000
                                                                            ----------
                                                                            $4,920,320
                                                                            ==========
</TABLE>

   One tenant at the Atrium contributed 100% of rental income for the year ended
   December 31, 1998 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, 1998 is as
   follows:

<TABLE>
<CAPTION>
Year ending December 31:
<S>                                                                      <C>
 1999                                                                          $249,550
 2000                                                                           249,550
 2001                                                                           249,550
 2002                                                                            20,796
                                                                               --------
                                                                               $769,446
                                                                               ========
</TABLE>

   One tenant contributed 100% of rental income for the year ended December 31,
   1998 and will contribute 100% of future minimum rental income.

   The future minimum rental income due Fund II, III, VI, and VII Associates
   under noncancelable operating leases at December 31, 1998 is as follows:

<TABLE>
<CAPTION>
Year ending December 31:
<S>                                                                    <C>
 1999                                                                       $  733,044
 2000                                                                          701,474
 2001                                                                          654,767
 2002                                                                          335,261
 2003                                                                          121,668
Thereafter                                                                     263,613
                                                                            ----------
                                                                            $2,809,827
                                                                            ==========
</TABLE>

   Four significant tenants contributed approximately 15%, 14%, 13%, and 12% of
   rental income for the year ended December 31, 1998.  In addition, two
   significant tenants will contribute approximately 31% and 14% of future
   minimum rental income.

                                      F-30
<PAGE>
 
   The future minimum rental income due Fund III and IV Associates under
   noncancelable operating leases at December 31, 1998 is as follows:

<TABLE>
<CAPTION>
Year ending December 31:
<S>                                                                   <C>
 1999                                                                       $ 1,784,575
 2000                                                                         1,318,671
 2001                                                                         1,157,062
 2002                                                                           937,583
 2003                                                                           634,323
Thereafter                                                                    5,303,155
                                                                            -----------
                                                                            $11,135,369
                                                                            ===========
</TABLE>

   Two significant tenants contributed approximately 30% and 28% of rental
   income for the year ended December 31, 1998.  In addition, one significant
   tenant will contribute approximately 66% 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, 1998 and 1997:


<TABLE>
<CAPTION>
<S>                                                           <C>       <C>       <C>           <C>
                                                                           1998 Quarters Ended
                                                              ---------------------------------------------
                                                              March 31  June 30   September 30  December 31
                                                              --------  -------   ------------  -----------
Revenues                                                      $255,657  $285,440      $270,116     $287,889
Net income                                                     145,730   162,589       185,563      155,125
Net income allocated to Class A limited partners               145,730   162,589       185,563      114,176
Net income allocated to Class B limited partners                     0         0             0       40,949
Net income per Class A limited partner unit                   $   0.01  $   0.01      $   0.01     $   0.00
Net income per Class B limited partner unit                       0.00      0.00          0.00         0.02
Cash distribution per Class A limited partner unit                0.02      0.02          0.02         0.02
Cash distribution per Class B limited partner unit                0.00      0.00          0.00         0.02
</TABLE>

<TABLE>
<CAPTION>
<S>                                                           <C>       <C>       <C>           <C>

                                                                           1997 Quarters Ended
                                                              ---------------------------------------------
                                                              March 31  June 30   September 30  December 31
                                                              --------  -------   ------------  -----------
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>
 
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, 1998

<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                 3,646,588
880 PROPERTY--BROOKWOOD GRILL (c)                            None          523,319              0                 1,494,717
STOCKBRIDGE VILLAGE (d)                                      None        2,551,645              0                 7,860,501
G.E. LIGHTING NATIONAL CUSTOMER CENTER (e)                   None          529,546      4,158,223                   422,504
880 PROPERTY (f)                                             None        1,325,242              0                 5,698,385
                                                                       -----------   ------------              ------------

       Total                                                            $6,826,729    $15,141,223               $21,649,461
                                                                       ===========   ============              ============



                                                           Gross Amount at Which Carried at December 31, 1998
                                                       -------------------------------------------------------------------
                                                                     Buildings and   Construction      
                     Description                           Land       Improvements    in Progress                 Total
----------------------------------------------         -------------   -----------   ------------               ----------

THE ATRIUM AT NASSAU BAY (a)                           $1,504,743      $13,372,023        $     0               $14,876,766
GREENVILLE PROJECT (b)                                    576,350        3,600,215              0                 4,176,565
880 PROPERTY--BROOKWOOD GRILL (c)                         745,223        1,272,813              0                 2,018,036
STOCKBRIDGE VILLAGE (d)                                 2,758,193        7,653,953              0                10,412,146
G.E. LIGHTING NATIONAL CUSTOMER CENTER (e)                573,582        4,536,691              0                 5,110,273
880 PROPERTY (f)                                        1,325,242        5,657,122         41,263                 7,023,627
                                                       ----------      -----------   ------------              ------------
       Total                                           $7,483,333      $36,092,817        $41,263               $43,617,413
                                                       ==========      ===========   ============              ============


                                                                                                             Life on Which  
                                                       Accumulated     Date of          Date                 Depreciation
                     Description                       Depreciation    Construction    Acquired               Is Computed(g)
----------------------------------------------         -------------   -----------   ------------            -------------
THE ATRIUM AT NASSAU BAY (a)                          $ 5,433,962             1988       04/03/89             12 to 25 years
GREENVILLE PROJECT (b)                                    931,558             1990       06/30/90             20 to 25 years
880 PROPERTY--BROOKWOOD GRILL (c)                         329,729             1991       05/27/91             20 to 25 years
STOCKBRIDGE VILLAGE (d)                                 1,872,337             1991       04/04/91             20 to 25 years
G.E. LIGHTING NATIONAL CUSTOMER CENTER (e)                998,291             1991       07/01/92             20 to 25 years
880 PROPERTY (f)                                          884,062             1996       01/31/90             20 to 25 years
                                                      ===========      ===========   ============              ============
       Total                                          $10,449,939


</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 37% interest in
                        Fund II and III Associates as of December 31, 1998.

                    (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, 1998.

                    (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, 1998.

                    (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, 1998.

                    (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, 1998.

                    (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, 1998



<TABLE>
<CAPTION>
                                                                    Accumulated
                                                         Cost      Depreciation
                                                     -----------   ------------   
<S>                                                  <C>           <C>
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
                                      
 1998 additions                                          251,771      1,999,481
                                                     -----------   ------------   
BALANCE AT DECEMBER 31, 1998                         $43,617,413    $10,449,939
                                                     ===========   ============
</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)