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

                                   Form 10-Q

 
(Mark one)
 
[X]   Quarterly report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934

For the quarterly period ended   September 30, 1996                          or
                                 --------------------------------------------
 
[ ]   Transition report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934

For the transition period from                          to
                              --------------------------  --------------------- 

Commission file number                  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 No.)
 incorporation or organization)

3885 Holcomb Bridge Road, Norcross, Georgia                   30092
-------------------------------------------------------------------------------
(Address of principal executive offices)                   (Zip Code)

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

-------------------------------------------------------------------------------
       (Former name, former address and former fiscal year,
       if changed since last report)


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

Yes     X        No  
     -------         -------
<PAGE>
 
                                   Form 10-Q
                                   ---------
                                        
                       Wells Real Estate Fund III, L.P.
                       --------------------------------
                                        
                                     INDEX
                                     -----
                                        

                                                                       Page No.

PART I.   FINANCIAL INFORMATION
-------   ---------------------
 
          Item 1.  Financial Statements
 
                   Balance Sheets - September 30, 1996
                    and December 31, 1995.................................... 3
 
                   Statements of Income for the Three Months and Nine Months
                    Ended September 30, 1996 and 1995........................ 4
 
                   Statement of Partner's Capital for the
                    Nine Months Ended September 30, 1996
                    and the Year Ended December 31, 1995..................... 5
 
                   Statements of Cash Flows for the Nine
                    Months Ended September 30, 1996 and 1995................. 6
 
                   Condensed Notes to Financial Statements..................  7
 
          Item 2.  Management's Discussion and Analysis of
                    Financial Condition and Results of
                    Operations.............................................. 14
 
PART II.  OTHER INFORMATION................................................. 22
 

                                       2
<PAGE>
 
                        WELLS REAL ESTATE FUND III, L.P.
                     (A GEORGIA PUBLIC LIMITED PARTNERSHIP)

                                 BALANCE SHEETS
<TABLE>
<CAPTION>

                    Assets                            September 30, 1996  December  31, 1995
                    ------                            ------------------  ------------------
<S>                                                   <C>                 <C>
Real estate, at cost: (Note 2)
  Land                                                    $   576,350         $   576,350
  Building and improvements, less accumulated
  depreciation of $573,635 in 1996 and $367,097
  in 1995                                                   2,991,966           3,110,696
                                                          -----------         -----------
 
   Total real estate                                        3,568,316           3,687,046
                                                          -----------         -----------
 
Cash and cash equivalents                                     437,011             500,327
Investment in joint ventures (Note 3)                      13,070,476          13,446,045
Due from affiliates                                           174,390             336,216
Accounts receivable                                            60,585              60,841
Prepaid expenses and other assets                              26,103              29,096
                                                          -----------         -----------
 
   Total assets                                           $17,336,881         $18,059,571
                                                          ===========         ===========
 
          Liabilities and Partners' Capital
          ---------------------------------          
 
Liabilities:
  Accounts payable                                        $    10,409         $     5,035
  Partnership distributions payable                           316,403             617,810
  Due to affiliates                                            15,570               6,269
                                                          -----------         -----------
 
   Total liabilities                                          342,382             629,114
                                                          -----------         -----------
 
Partners' capital:
  General Partners                                                  0                   0
  Limited Partners:
   Class A - 19,635,965 units outstanding                  16,994,499          17,430,457
   Class B - 2,544,540 units outstanding                            0                   0
                                                          -----------         -----------
 
      Total partners' capital                              16,994,499          17,430,457
                                                          -----------         -----------
 
      Total liabilities and partners' capital             $17,336,881         $18,059,571
                                                          ===========         ===========
</TABLE>
            See accompanying condensed notes to financial statements

                                       3
<PAGE>
 
                        WELLS REAL ESTATE FUND III, L.P.
                     (A GEORGIA PUBLIC LIMITED PARTNERSHIP)

                              STATEMENTS OF INCOME
<TABLE>
<CAPTION>
                                                  Three Months Ended                        Nine Months Ended
                                       ----------------------------------------  ---------------------------------------
                                       September 30, 1996   September 30, 1995   September 30, 1996  September 30, 1995
                                       -------------------  -------------------  ------------------  -------------------
<S>                                    <C>                  <C>                  <C>                 <C>
Revenues:
  Rental Income (Note 2)                         $147,242            $ 145,389             $439,225          $  437,339
  Equity in income of
   joint ventures (Note 3)                        137,437              262,983              521,120             851,535
  Interest Income                                   3,883                4,322               13,544              16,160
                                                 --------            ---------             --------          ----------
                                                  288,562              412,694              973,889           1,305,034
                                                 --------            ---------             --------          ----------
 
Expenses:
  Management and leasing fees                       9,376               10,240               31,451              29,092
  Operating costs - rental property                67,241               58,841               95,557             156,074
  Depreciation                                     39,577               24,279              118,731              73,165
  Legal and Accounting                             (8,738)                 642               13,606               6,840
  Computer costs                                      479                1,167                3,196               5,143
  Partnership administration                       11,503               11,518               49,350              43,773
                                                 --------            ---------             --------          ----------
                                                  119,438              106,687              311,891             314,027
                                                 --------            ---------             --------          ----------
  Net income                                     $169,124            $ 306,007             $661,998          $  991,007
                                                 ========            =========             ========          ==========
 
Net income allocated to
  General Partners                               $      0            $       0             $      0          $        0
 
Net income allocated to
  Class A Limited Partners                       $169,124            $ 443,885             $661,998          $1,269,228
 
Net loss allocated to
  Class B Limited Partners                       $      0            $(137,877)            $      0          $ (406,017)
 
Net income per Class A
  Limited Partner Unit                              $0.01            $    0.02                $0.03          $     0.06
 
Net loss per Class B
  Limited Partner Unit                           $      0            $   (0.05)            $      0          $    (0.16)
 
Cash distribution per Class A
  Limited Partner Unit                              $0.02            $    0.02                $0.06          $     0.06
</TABLE>
     See accompanying condensed notes to consolidated financial statements.

                                       4
<PAGE>
 
                        WELLS REAL ESTATE FUND III, L.P.
                     (A GEORGIA PUBLIC LIMITED PARTNERSHIP)

                        STATEMENTS OF PARTNERS' CAPITAL
         FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE NINE MONTHS ENDED
                               SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
                                              LIMITED PARTNERS                            
                                       --------------------------------
                                       CLASS A                  CLASS B                      TOTAL
                                       -------                  -------          GENERAL     PARTNERS'
                                 UNITS       AMOUNTS       UNITS      AMOUNT     PARTNER     CAPITAL
                               ----------  ------------  ---------  ----------  ---------  ------------
<S>                            <C>         <C>           <C>        <C>         <C>        <C>
 
BALANCE, DECEMBER 31, 1994     19,635,965  $17,897,016   2,544,540  $ 179,381   $      0   $18,076,397
 
 Net income                             0    1,104,316           0     24,183     15,205     1,143,704
 Partnership distributions              0   (1,570,875)          0   (203,564)   (15,205)   (1,789,644)
                               ----------  -----------   ---------  ---------   --------   -----------
BALANCE, DECEMBER 31, 1995     19,635,965   17,430,457   2,544,540          0          0    17,430,457
 
 Net income                             0      661,998           0          0          0       661,998
 Partnership distributions              0   (1,097,956)          0          0          0    (1,097,956)
                               ----------  -----------   ---------  ---------   --------   -----------
BALANCE, SEPTEMBER 30, 1996    19,635,965  $16,994,499   2,544,540  $       0   $      0   $16,994,499
                               ==========  ===========   =========  =========   ========   ===========
 
</TABLE>
            See accompanying condensed notes to financial statements

                                       5
<PAGE>
 
                        WELLS REAL ESTATE FUND III, L.P.
                     (A GEORGIA PUBLIC LIMITED PARTNERSHIP)

                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                        September 30, 1996   September 30, 1995
                                                        -------------------  -------------------
<S>                                                     <C>                  <C>
Cash flows from operating activities:
  Net income                                                   $   661,998          $   991,007
   Adjustments to reconcile net earnings to net cash
    provided by operating activities:
      Equity in income of joint ventures                          (521,120)            (851,535)
      Distributions received from joint ventures                 1,058,515            1,131,461
      Partnership distributions paid                            (1,399,363)          (1,239,061)
      Depreciation                                                 118,731               73,165
      Changes in assets and liabilities:
       Decrease in accounts receivable                                 256               22,382
       Decrease in prepaids and
        other assets                                                 2,992                3,870
       Increase (decrease) in accounts payable                       5,374              (18,235)
       Increase (decrease) due to affiliates                         9,301                 (156)
                                                               -----------          -----------
        Net cash (used in) provided by
          operating activities                                     (63,316)             112,898
                                                               ===========          ===========
 
        Net (decrease) increase in cash and cash
          equivalents                                              (63,316)             112,898
 
Cash and cash equivalents, beginning of year                       500,327              318,250
                                                               -----------          -----------
 
Cash and cash equivalents, end of period                       $   437,011          $   431,148
                                                               ===========          ===========
</TABLE>
            See accompanying condensed notes to financial statements

                                       6
<PAGE>
 
                        WELLS REAL ESTATE FUND III, L.P.
                     (A Georgia Public Limited Partnership)

                    Condensed Notes to Financial Statements

(1)  Summary of Significant Accounting Policies
     ------------------------------------------

     (a)  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 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 $22,206,319
     representing subscriptions from 2,700 Limited Partners, composed to two
     classes of limited partnership interests, Class A and Class B limited
     partnership units.

     As of September 30, 1996, the Partnership owned interest in the following
     properties:  (i) the Greenville Property, an office building in Greenville,
     North Carolina, (ii) the Atrium, an office building in Houston Texas (iii)
     the Brookwood Grill, a restaurant located in Roswell, Georgia, (iv) the
     Stockbridge Village Shopping Center, a retail shopping center located in
     Stockbridge, Georgia, southeast of Atlanta, (v) the G.E. Office Building
     located in Richmond, Virginia, and (vi) an office/retail center in Roswell,
     Georgia.  All of the foregoing properties were acquired on an all cash
     basis.

     (b)  Basis of Presentation
     --------------------------

     The financial statements of Wells Real Estate Fund III, L.P. (the
     "Partnership") have been prepared in accordance with instructions to Form
     10-Q and do not include all of the information and footnotes required by
     generally accepted accounting principles for complete financial statements.
     These quarterly statements have not been examined by independent
     accountants, but in the opinion of the General Partners, the statements for
     the unaudited interim periods presented include all adjustments, which are
     of a normal and recurring nature, necessary to present a fair presentation
     of the results for such periods.  For further information, refer to the
     financial statements and footnotes included in the Partnership's Form 10-K
     for the year ended December 31, 1995.

                                       7
<PAGE>
 
     (c)  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.

     (d)  Insurance
     --------------

     Wells Management Company, Inc., an affiliate of the General Partners,
     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.

     (e)  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.

(2)  Real Estate and Rental Income
     -----------------------------

     The following describes the properties in which the Partnership owns an
     interest as of September 30, 1996:

     The Greenville Property
     -----------------------

     On September 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.

     The occupancy rate at the Greenville Property for the quarters ended
     September 30 was 100% in 1996, 100% in 1995 and 1994, 95% in 1993, and 94%
     in 1992.

     The average effective annual rental per square foot at the Greenville
     Property was $17.07 for 1996, $17.01 for 1995, $16.73 for 1994, $16.74  for
     1993, and $14.91 for 1992.

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

                                       8
<PAGE>
 
     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 Property.  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 based
     on the prevailing market values and rates for those periods.  The annual
     base rent payable under the IBM lease is $462,242, net of all expenses of
     operation.  The annual base rent will increase in the sixth year of the
     initial term of the lease to $478,101 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 a
     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 space which may from time to time become available.  The IBM lease
     also provides that the Partnership will not lease or consent to any
     sublease to any entity which, as a major part of its business engages in
     sales and services similar to those of IBM.

     Team YASNY's original lease represented 3,122 rentable square feet.  In
     1994, Team YASNY expanded and increased their rentable space by an
     additional 1,232 square feet for a total of 4,354 rentable square feet.
     The Team YASNY lease calls for an annual rent of $51,717 in 1996 and
     $53,200 in 1997.  The Team YASNY lease expires September 30, 1997.

(3)  Investment in Joint Ventures.
     -----------------------------

     The Partnership also owns the following properties through joint ventures.
     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.

     FUND II AND FUND III JOINT VENTURE
     ----------------------------------

     On April 3, 1989, the Partnership formed a joint venture, Fund II and Fund
     III Associates (the "Fund II-Fund III Joint Venture") with an existing
     joint venture (the "Fund II-Fund II-OW Joint Venture") formed by Wells Real
     Estate Fund II ("Wells Fund II"), a Georgia public limited partnership
     having Leo F. Wells, III and Wells Capital, Inc., a Georgia corporation, as
     General Partners, and Wells Real Estate Fund II-OW ("Wells Fund II-OW"), a
     Georgia public limited partnership having Leo F. Wells, III and Wells
     Capital, Inc., a Georgia corporation, as General Partners.  Wells Fund II
     and Wells Fund II-OW are affiliated with the Partnership through common
     general partners with investment objectives substantially identical to
     those of the Partnership.  The Partnership owns interests in the following
     two properties through the Fund II-Fund III Joint Venture:

                                       9
<PAGE>
 
     The Atrium/Fund II-Fund III Joint Venture
     -----------------------------------------

     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 September 30, 1996, 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 Fund II-Fund II-OW Joint Venture holds an
     approximately 66% equity interest in the Fund II-Fund III Joint Venture,
     and the Partnership holds an approximately 34% equity interest in the Fund
     II-Fund III Joint Venture.

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

     Since Lockheed vacated the building as of June 30, 1996, the occupancy rate
     of the Atrium was 0% for the third quarter of 1996.  Although the
     Partnership has responded to various potential tenants regarding leasing
     the Atrium, no leases have been signed as of September 30, 1996.  It is
     anticipated that when leases are obtained for the Atrium, rental rates will
     be lower than those paid by the previous tenant, and income could decrease
     significantly under these new leases.  In addition, such leases are likely
     to require substantial tenant finish and refurbishment expenditures by the
     Partnership which could substantially reduce future cash distributions to
     Limited Partners.

     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 "880
     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 the
     880 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

                                       10
<PAGE>
 
     had expended approximately $2,128,000 for the land acquisition and
     development of the 880 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.  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.  Under
     the terms of the lease, the Fund II-Fund III Joint Venture was required to
     make certain improvements for the development and construction of the
     restaurant building together with parking areas, driveways, landscaping and
     other improvements as agreed.  The Fund II-Fund III Joint Venture has
     expended approximately $1,100,000 for such 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, for the quarters
     ended September 30 was 100% for 1996, 1995, 1994, 1993, and 1992.  The
     average effective annual rental per square foot at the Brookwood Grill is
     $30.32 for 1996, 1995, 1994 and 1993, and $24.60 for 1992, the first year
     of occupancy.

     As of September 30, 1996, the Fund II-Fund II-OW Joint Venture and the
     Partnership had made total contributions to the Fund II-Fund III Joint
     Venture of approximately $2,128,000 and $1,330,000, respectively, for the
     acquisition and development of the Brookwood Grill.  The Fund II-Fund II-OW
     Joint Venture holds an approximately 62% equity interest in the Brookwood
     Grill property, and the Partnership holds an approximately 38% equity
     interest in the project.

     On January 10, 1995, the Fund II-Fund III Joint Venture contributed the
     remaining 4.3 acres of land comprising the 880 Property to a new joint
     venture, Fund II, III, VI and VII Associates.  This property is described
     below.

                                       11
<PAGE>
 
     FUND II, III, VI AND VII ASSOCIATES/HOLCOMB BRIDGE ROAD PROPERTY
     ----------------------------------------------------------------

     On January 10, 1995, the Partnership, Fund II-Fund III Joint Venture, and
     Wells Fund VI entered into a Joint Venture Agreement known as Fund II, III,
     VI and VII Associates ("Fund II, III, VI and VII Joint Venture").  The Fund
     II-Fund III Joint Venture is a joint venture between Wells Real Estate Fund
     III, a Georgia public limited partnership having Leo F. Wells, III and
     Wells Capital, Inc. as general partners, and an existing joint venture (the
     "Fund II-Fund II-OW Joint Venture") formed by Wells Real Estate Fund II
     ("Wells Fund II"),  a Georgia public limited partnership having Leo F.
     Wells, III and Wells Capital, Inc. as general partners, and Wells Real
     Estate Fund II-OW ("Wells Fund II-OW"), a Georgia public limited
     partnership having Leo F. Wells, III and Wells Capital, Inc. as general
     partners. The investment objectives of Wells Fund II, Wells Fund II-OW,
     Wells Fund III, and Wells Fund VI and 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 and 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.  Six tenants
     occupied the 880 Holcomb Bridge property as of September 30, 1996 for an
     occupancy rate of 54%.  The average effective annual rental was $6.83 per
     square foot for the third quarter of 1996.

     As of September 30, 1996, Fund II-Fund III Joint Venture had contributed
     $1,729,116 in land and improvements for an equity interest of approximately
     25.2%, Wells Fund VI  contributed $1,699,846 for an equity interest of
     approximately 26.0%, and Wells Fund VII contributed $3,217,154 for an
     equity interest of approximately 48.8%. The total costs to develop the
     Holcomb Bridge Road Property is currently estimated to be approximately
     $5,000,000, excluding land.  It is anticipated that of the remaining cost
     of approximately $83,000, $16,000 will be contributed by Wells Fund VI and
     $67,000 by Wells Fund VII, after which the equity interests in the property
     will be 48.8% for Wells Fund VII, 25.5% for Wells Fund VI, and 25.7% for
     the Fund II-Fund III Joint Venture.  Wells Fund VII and Wells Fund VI have
     reserved sufficient funds for this purpose.  The Partnership is not
     obligated to provide any additional funding for the Holcomb Bridge Road
     Property.

     FUND III AND 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 Wells Fund IV are substantially identical to those of the Partnership.
     The Partnership holds an approximate 57.3% equity interest in the Fund III-

                                       12
<PAGE>
 
     Fund IV Joint Venture which owns and operates the multi-tenant retail
     center and an office building described below.  As of September 30, 1996,
     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 two
     properties as described below.

     The Stockbridge Property/Fund III-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 (the "Stockbridge Property").  The Stockbridge
     Property consists of a multi-tenant shopping center containing
     approximately 113,011 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
     at the same rental rate as the original lease.  The annual base rent
     payable under the Kroger lease during the initial term is $492,692.  The
     remaining 48,914 square feet is comprised of 12 separate retail spaces and
     3 free-standing buildings.  The occupancy rates at the Stockbridge Property
     for the quarters ended September 30 were 93% in 1996, 100% in 1995, 99% in
     1994 and  1993, and 94% in 1992.  The average effective annual rental per
     square foot at the Stockbridge Property was $9.56 for 1996, $10.16 for
     1995, $10.26 for 1994, $9.13 for 1993, and $7.34 for 1992.

     As of September 30, 1996, 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/Richmond/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 for
     one additional five-year period at the same rental rate as the original
     lease.  The occupancy rate at the G.E. Building for the quarters ended
     September 30 was 100% for 1996, 1995, 1994, 1993, and 1992.  The average
     effective annual rental per square foot at the G.E. Building is $12.27 for
     1996, 1995, 1994, 1993, and 1992.  As of September 30, 1996, a total of
     $4,689,106 had been incurred for the acquisition of the G.E. Building.  Of

                                       13
<PAGE>
 
     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 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
     -----------------------------------------------------------------------
     RESULTS OF OPERATIONS.
     ----------------------

     The following discussion and analysis should be read in conjunction with
     the accompanying financial statements of the Partnership and notes thereto.
     This Report contains forward-looking statements, with the meaning of
     Section 27A of the Securities Act of 1993 and 21E of the Securities
     Exchange Act of 1934, including discussion and analysis of the financial
     condition of the Partnership, anticipated capital expenditures required to
     complete certain projects, amounts of cash distributions anticipated to be
     distributed to Limited Partners in the future and certain other matters.
     Readers of this Report should be aware that there are various factors that
     could cause actual results to differ materially from any forward-looking
     statement made in the 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 in Operations and Changes in Financial Conditions
     ---------------------------------------------------------

     General
     -------

     Gross revenues of the Partnership were $288,562 for the three months ended
     September 30, 1996, as compared to $412,694 for the three months ended
     September 30, 1995, and $973,889 for the nine months ended September 30,
     1996, as compared to $1,305,034 for the same period in 1995.  The decrease
     for 1996 over 1995 was due primarily to decreased income from joint
     ventures which was primarily due to the increased depreciation expenses
     described below.

     Expenses of the Partnership decreased for 1996 compared to 1995 for the
     three months and nine months ended September 30 due primarily to increased
     tenant reimbursements.  Depreciation expenses of the Partnership and the
     joint ventures increased in 1996 as compared to 1995 due to a change in the
     estimated useful lives of all buildings and improvements in which the
     Partnership owned an interest as of December 31, 1995, from 40 years to 25
     years.  Legal and accounting expenses also increased in 1996 compared to
     1995.

     Net cash used in operating activities decreased from cash provided of
     $112,898 in 1995 to a use of cash of $63,316 in 1996.  The decrease was due
     primarily to decreased distributions received from joint ventures and an
     increase in distributions paid.  Cash and cash equivalents remained
     relatively stable for each of the nine months ending September 30, 1996 and
     1995.  The Partnership generally distributes cash available less reserves.
     As a result, the level of cash remains relatively stable.

                                       14
<PAGE>
 
     The Partnership's cash distributions to the Limited Partners holding Class
     A Units were $0.02 per Unit for each of the three months ended September
     30, 1996 and 1995 and $0.06 per Unit for each of the nine months ended
     September 30, 1996 and 1995.  All distributions for 1995 and 1996 were made
     from investment income.  No cash distributions were made to the Limited
     Partners holding Class B Units or the General Partners for the three months
     or nine months ended September 30, 1996 and 1995.



                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       15
<PAGE>
 
PROPERTY OPERATIONS
-------------------

As of September 30, 1996, the Partnership owned interests in the following
properties:
<TABLE>
<CAPTION>
The Greenville Property
-----------------------------------
 
                                                 Three Months Ended                        Nine Months Ended
                                                 ------------------                        -----------------
                                      September 30, 1996   September 30, 1995   September 30, 1996   September 30, 1995
                                      ------------------   ------------------   ------------------   ------------------
<S>                                   <C>                  <C>                  <C>                  <C> 
Revenues:
  Rental income                                 $147,242             $146,323             $439,225             $437,339
 
Expenses:
  Depreciation                                    39,577               24,388              118,731               73,165
  Management and leasing expenses                 21,995               17,578               57,817               55,407
  Other operating expenses                        53,182               47,317               69,192              129,760
                                                --------             --------             --------             --------
                                                 114,754               89,283              245,740              258,332
                                                --------             --------             --------             --------
 
Net income                                      $ 32,488             $ 57,040             $193,485             $179,007
                                                ========             ========             ========             ========
 
Occupied %                                           100%                 100%                 100%                 100%
Partnership's Ownership %                            100%                 100%                 100%                 100%
 
Cash generated to the Partnership               $ 73,858             $ 69,356             $318,847             $258,500
 
Net income allocated to the
  Partnership                                   $ 32,488             $ 57,040             $193,485             $179,007
</TABLE>

Rental income remained stable from 1995 to 1996.  The increase in depreciation
expenses was due to the change in the estimated useful lives of buildings and
improvements as previously discussed under the "General" section of "Results of
Operations and Changes in Financial Condition".  Operating expenses decreased
due to increased tenant reimbursement by IBM received in the second quarter of
1995.  Prior year expenses were reimbursed, and IBM is now making monthly
estimated payments toward current year expenses.

                                       16
<PAGE>
 
The Atrium/Fund II-Fund III Joint Venture
-----------------------------------------
<TABLE>
<CAPTION>
                                                  Three Months Ended                      Nine Months Ended
                                                  ------------------                      -----------------              
                                         September 30,1996   September 30,1995   September 30,1996   September 30,1995
                                         -----------------   -----------------   -----------------   -----------------
<S>                                      <C>                 <C>                 <C>                 <C>
Revenues:
  Rental income                                 $   8,909            $519,836          $1,048,582          $1,559,509
  Interest income                                   6,091               6,658              21,409              21,762
                                                ---------            --------          ----------          ----------
                                                   15,000             526,494           1,069,991           1,581,271
                                                ---------            --------          ----------          ----------
 
Expenses:
  Depreciation                                    168,691             117,029             505,788             351,087
  Management and leasing expenses                       0              35,691              71,380             107,071
  Other operating expenses                       (176,240)             64,686              57,310             196,713
                                                ---------            --------          ----------          ----------
                                                   (7,549)            217,406             634,478             654,871
                                                ---------            --------          ----------          ----------
 
Net income                                      $  22,549            $309,088          $  435,513          $  926,400
                                                =========            ========          ==========          ==========
 
Occupied %                                              0%                100%                  0%                100%
Partnership's Ownership %                            34.4%               34.4%               34.4%               34.4%
 
Cash distributed to the Partnership             $       0            $154,593          $  247,603          $  463,481
 
Net income allocated to the
  Partnership                                   $   7,757            $106,326          $  149,817          $  318,682
</TABLE>

Rental income decreased for the three and nine months ended September 30, 1996
compared to the same periods in 1995 due to the termination of the Lockheed
lease as of June 30, 1996.  The increase in depreciation expenses for the three
months and nine months ended September 30, 1996 over the same periods of 1995 is
due to the change in the estimated useful lives of buildings and improvements
which was made in the fourth quarter 1995. The decrease in operating expenses
for the three month period ended September 30, 1996 compared to September 30,
1995 resulted from a reclassification of prior years' excess reimbursements.
The decrease in the nine month operating expenses for September 30, 1996
compared to September 30, 1995 is due to this reclassification and the vacancy
of the project during the quarter.

The lease with Lockheed Company expired on June 30, 1996, and although the
Partnership has responded to various potential tenants regarding leasing the
Atrium, no leases have been signed as of September 30, 1996.  It is anticipated
that when leases are obtained for the Atrium, rental rates will be lower than
those paid by the previous tenant, and income could decrease significantly under
these new leases.  In addition, such leases are likely to require substantial
tenant finish and refurbishment expenditures by the Partnership which could
substantially reduce future cash distributions to Limited Partners.

                                       17
<PAGE>
 
The Brookwood Grill Property/Fund II and Fund III Joint Venture
---------------------------------------------------------------
<TABLE>
<CAPTION>
                                                   Three Months Ended                        Nine Months Ended
                                                   ------------------                        -----------------              
                                         September 30, 1996   September 30, 1995   September 30, 1996   September 30, 1995
                                         ------------------   ------------------   ------------------   ------------------
<S>                                     <C>                  <C>                  <C>                  <C>
Revenues:
  Rental Income                                    $56,797              $60,316             $169,172             $172,691
  Equity loss of joint venture                        (573)                   0              (26,996)                   0
                                                   -------              -------             --------             --------
                                                    56,224               60,316              142,176              172,691
                                                   -------              -------             --------             --------
 
Expenses:
  Depreciation                                      13,503               14,664               40,509               43,994
  Management and leasing expenses                    7,483                7,833               20,178               22,112
  Other operating expenses                          13,665               11,919               48,941               30,750
                                                   -------              -------             --------             --------
                                                    34,651               34,416              109,628               96,856
                                                   -------              -------             --------             --------
 
Net income                                         $21,573              $25,900             $ 32,548             $ 75,835
                                                   =======              =======             ========             ========
 
Occupied %                                             100%                 100%                 100%                 100%
Partnership Ownership %                              37.65%               37.65%               37.65%               37.65%
 
Cash distributed to the Partnership                $16,207              $15,111             $ 39,829             $ 44,631
 
Net income allocated to the
  Partnership                                      $ 8,122              $ 9,751             $ 12,254             $ 28,552
</TABLE>

Rental income decreased slightly for the three months and nine months ended
September 30, 1996 compared to the same periods in 1995 due primarily to a
decrease in billing of expenses to the tenant.  Expenses were stable for the
three months ended September 30, 1996 and 1995, but were substantially higher
for the nine month periods ended September 30, 1996 compared to September 30,
1995.  The increase in other operating expenses is the result of decreased
property tax reimbursements and a reimbursement to the tenant in first quarter
of 1996 of administrative charges paid in 1995.  Although there was a change in
useful lives of assets from forty years to twenty-five years in December 1995,
depreciation expense decreased in 1996 compared to the same periods in 1995 due
to the contribution of land and land improvements by Brookwood Grill to the 880
Holcomb Bridge Property.  Net income decreased for both the three and nine month
periods of 1996 compared to 1995 for the reasons cited above and due to the net
loss generated by the Fund II, III, VI, and VII Joint Venture.

                                       18
<PAGE>
 
Holcomb Bridge Road Property/Fund II, III, VI, VII Joint Venture
----------------------------------------------------------------
<TABLE>
<CAPTION>
                                                Three Months Ended    Nine Months Ended
                                                ------------------    -----------------
                                                September 30, 1996   September 30, 1996
                                                ------------------   ------------------
<S>                                           <C>                  <C>
Revenues:
  Rental  income                                          $82,869             $136,044
 
Expenses:
  Depreciation                                             54,939              138,881
  Management and leasing expenses                           8,530               14,610
  Other operating expenses                                 22,279               70,012
                                                          -------             --------
                                                           85,748              223,503
                                                          -------             --------
Net Loss                                                  $(2,879)            $(87,459)
                                                          =======             ========
 
Occupied %                                                   53.6%                53.6%
Partnership's Ownership % in the
  Fund II, III, VI, VII Joint Venture                         9.5%                 9.5%
 
Cash distributed to the Fund II-Fund III
  Joint Venture*                                          $ 7,022             $  7,022
 
Net loss allocated to the Fund II-Fund III
  Joint Venture*                                          $  (572)            $(26,995)
</TABLE>
*     The Partnership holds a 37.65% ownership in the Fund II-Fund III Joint
Venture.

In January 1995, the Fund II-Fund III Joint Venture contributed 4.3 acres of
land and land improvements at 880 Holcomb Bridge Road (the "Holcomb Bridge Road
Property") to the Fund II, III, VI, and VII Joint Venture.  Development is being
completed on two buildings with a total of approximately 49,500 square feet.  As
of September 30, 1996, six tenants are occupying approximately 26,549 square
feet of space in the retail and office building under leases of varying lengths.
Since the property was not developed as of September 30, 1995, no comparative
figures are available for the quarter.

As of September 30, 1996, the Fund II-Fund III Joint Venture contributed
$1,729,116 in land and improvements for an equity interest of approximately
25.2%, Wells Fund VI contributed $1,699,846 for an equity interest of
approximately 26.0%, and Wells Fund VII contributed $3,217,154 for an equity
interest of approximately 48.8%.  The total costs to develop the Holcomb Bridge
Road Property is currently estimated to be approximately $5,000,000, excluding
land.  It is anticipated that of the remaining cost of approximately $83,000,
$16,000 will be contributed by Wells Fund VI and $67,000 by Wells Fund VII,
after which the equity interests in the property will be 48.8% for Wells Fund
VII, 25.5% for Wells Fund VI,  and 25.7% for the Fund II-Fund III Joint Venture.
Wells Fund VI and Wells Fund VII have reserved sufficient funds for this
purpose.

                                       19
<PAGE>
 
The Stockbridge Property/Fund III-Fund IV Joint Venture
-------------------------------------------------------
<TABLE>
<CAPTION>
                                                  Three Months Ended                        Nine Months Ended
                                                  ------------------                        -----------------            
                                        September 30, 1996   September 30, 1995   September 30, 1996   September 30, 1995
                                        ------------------   ------------------   ------------------   ------------------
<S>                                     <C>                  <C>                  <C>                  <C>
Revenues:
  Rental income                                   $271,532             $300,453             $809,874             $896,724
  Interest income                                    3,526                3,760               10,218               12,302
                                                  --------             --------             --------             --------
                                                   275,058              304,213              820,092              909,026
                                                  --------             --------             --------             --------
 
Expenses:
  Depreciation                                      84,747               55,355              254,243              165,947
  Management and leasing expenses                   24,114               29,567               75,434               88,833
  Other expenses                                    26,243               18,715               74,605               49,282
                                                  --------             --------             --------             --------
                                                   135,104              103,637              404,282              304,062
                                                  --------             --------             --------             --------
 
Net income                                        $139,954             $200,576             $415,810             $604,964
                                                  ========             ========             ========             ========
 
Occupied %                                              93%                 100%                  93%                 100%
Partnership's Ownership %                             57.3%                57.3%                57.3%                57.3%
 
Cash distributed to the Partnership               $135,507             $152,800             $404,219             $458,882
 
Net income allocated to the
  Partnership                                     $ 80,217             $114,963             $238,328             $346,745
</TABLE>

Rental income decreased for the three and the nine months ended September 30,
1996, as compared to the same periods in 1995, due to a decrease in occupancy
resulting from the early termination of a lease for 8,025 square feet. Although
no leases have been signed as yet, every effort is being made to re-lease this
space.   Expenses of the property increased from $304,062 in 1995 to $404,282 in
1996 due primarily to the increase in depreciation expenses as a result of the
change in the estimated useful lives of buildings and improvements as previously
discussed under the "General" section of "Results of Operations and Changes in
Financial Condition", timing differences in billing tenant expense
reimbursements plus an extraordinary painting expenditure.

                                       20
<PAGE>
 
The G.E. Building/Richmond/Fund III-Fund IV Joint Venture
---------------------------------------------------------
<TABLE>
<CAPTION>
                                                  Three Months Ended                        Nine Months Ended
                                                  ------------------                        -----------------               
                                        September 30, 1996   September 30, 1995   September 30, 1996   September 30, 1995
                                        ------------------   ------------------   ------------------   ------------------
<S>                                     <C>                  <C>                  <C>                  <C>
Revenues:
  Rental income                                   $131,857             $131,857             $395,569             $395,569
 
Expenses:
  Depreciation                                      49,056               28,159              147,162               84,479
  Management and leasing expenses                    9,965                9,965               29,895               29,856
  Other operating expenses                             708                1,440                7,890                6,345
                                                  --------             --------             --------             --------
                                                    59,729               39,564              184,947              120,680
                                                  --------             --------             --------             --------
 
Net income                                        $ 72,128             $ 92,293             $210,622             $274,889
                                                  ========             ========             ========             ========
 
Occupied %                                             100%                 100%                 100%                 100%
Partnership's Ownership %                             57.3%                57.3%                57.3%                57.3%
 
Cash distributed to the Partnership               $ 69,214             $ 68,483             $205,040             $202,949
 
Net income allocated to the
  Partnership                                     $ 41,341             $ 52,899             $120,721             $157,557
</TABLE>

Rental income remained constant for 1996 and 1995.  Total expenses increased in
1996, over 1995, and accordingly, net income decreased in 1996, as compared to
1995, due primarily to the increase in depreciation expenses as a result of the
change in the estimated useful lives of buildings and improvements as previously
discussed under the "General" section of "Results of Operations and Change in
Financial Condition".

                                       21
<PAGE>
 
                          PART  II - OTHER INFORMATION
                          ----------------------------

Item 6(b).  No reports on Form 8-K were filed during the third quarter of 1996.

                                   SIGNATURES

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

                                   WELLS REAL ESTATE FUND III, L.P.
                                   (Registrant)
Dated:  November 11, 1996          By:  /s/Leo F. Wells, III
                                      -------------------------------
                                      Leo F. Wells, III, as Individual
                                      General Partner and as President,
                                      Sole Director and Chief Financial
                                      Officer of Wells Capital, Inc.

                                       22