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SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549



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Form 10-Q



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(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, 2004 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



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WELLS REAL ESTATE FUND III, L.P.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Georgia                                                        |  | 58-1800833                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|6200 The Corners Parkway,Norcross, Georgia                     |  | 30092-3365                          
|(Address of principal executive offices)                       |  | (Zip Code)                          
|                                                               | 
|Registrants telephone number, including area code             |  | (770) 449-7800                      



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(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 ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).



Yes ̈No  x



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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS



Certain statements contained in this Form 10-Q of Wells Real Estate Fund III, L.P. (the
Partnership) other than historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements include, in
particular, statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially from those projected or anticipated.
Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward- looking statements can generally be identified by our use of forward-looking terminology such as may, will,
expect, intend, anticipate, estimate, believe, continue, or other similar words. Specifically, among others, we consider statements concerning projections of future operating
results and cash flows, our ability to meet future obligations, and the amount and timing of future distributions to limited partners to be forward-looking statements.



Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date that this report is
filed with the Securities and Exchange Commission. Neither the Partnership nor the general partners make any representations or warranties (expressed or implied) about the accuracy of any such forward-looking statements. Actual results could differ
materially from any forward-looking statements contained in this Form 10-Q, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.



Any such forward-looking statements are subject to known and unknown risks, uncertainties,
and other factors and are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent
that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations; provide distributions to limited partners; and maintain the value of our real
estate properties, may be significantly hindered. Some of the risks and uncertainties, although not all risks and uncertainties, which could cause actual results to differ materially from those presented in certain forward-looking statements follow:



General economic risks



| |  |  | Adverse changes in general or local economic conditions; and
| | - |  | ------------------------------------------------------------



| |  |  | Adverse economic conditions affecting the particular industry of one or more tenants in properties owned by our joint ventures.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



Real estate risks inherent in properties owned through joint ventures



| |  |  | Ability to achieve appropriate occupancy levels resulting in sufficient rental amounts;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | Supply of or demand for similar or competing rentable space, which may adversely impact retaining or obtaining new tenants upon lease expiration at acceptable rental amounts;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Tenant ability or willingness to satisfy obligations relating to our existing lease agreements;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | Potential need to fund tenant improvements, lease-up costs, or other capital expenditures out of operating cash flow or net sale proceeds;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increases in property operating expenses, including property taxes, insurance, and other costs for not recoverable from tenants;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Ability to secure adequate insurance at reasonable and appropriate rates to avoid uninsured losses or losses in excess of insured amounts;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Discovery of previously undetected environmentally hazardous or other undetected adverse conditions;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | Unexpected costs of capital expenditures related to tenant build-out projects or other unforeseen capital expenditures; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | Ability to sell a property when desirable at an acceptable return, including the ability of the purchaser to satisfy any and all closing conditions.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



Other operational risks



| |  |  | Dependency on Wells Capital, Inc., (Wells Capital) our corporate general partner, its key personnel, and its affiliates for various administrative services;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Wells Capitals ability to attract and retain high-quality personnel who can provide acceptable service levels to us and generate economies of scale for us over time;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increases in our administrative operating expenses, including increased expenses associated with operating as a public company in the current regulatory environment;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in governmental, tax, real estate, environmental, and zoning laws and regulations and the related costs of compliance;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | Ability to demonstrate compliance with any governmental, tax, real estate, environmental, and zoning law or regulation in the event that any such position is questioned by the
respective authority; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Actions of our joint venture partners including potential bankruptcy, business interests differing from ours, or other actions that may adversely impact the operations of joint
ventures.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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WELLS REAL ESTATE FUND III, L.P.



TABLE OF CONTENTS



|         |  |                       |  |                                                                                                                               |  |         
|-------- |  | --------------------- |  | ----------------------------------------------------------------------------------------------------------------------------- |  | --------
|         |  |                       |  |                                                                                                                               |  | Page No.
|PART I.  |  | FINANCIAL INFORMATION |  |                                                                                                                              
|         |  |                       | 
|         |  | Item 1.               |  | Financial Statements                                                                                                          |  |         
|         |  |                       | 
|         |  |                       |  | Balance SheetsSeptember 30, 2004 (unaudited) and December 31, 2003                                                           |  | 5       
|         |  |                       | 
|         |  |                       |  | Statements of Operations for the Three and Nine Months Ended September 30, 2004 (unaudited) and 2003 (unaudited)              |  | 6       
|         |  |                       | 
|         |  |                       |  | Statements of Partners Capital for the Year Ended December 31, 2003 and the Nine Months Ended September 30, 2004 (unaudited) |  | 7       
|         |  |                       | 
|         |  |                       |  | Statements of Cash Flows for the Nine Months Ended September 30, 2004 (unaudited) and 2003 (unaudited)                        |  | 8       
|         |  |                       | 
|         |  |                       |  | Condensed Notes to Financial Statements (unaudited)                                                                           |  | 9       
|         |  |                       | 
|         |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                         |  | 13      
|         |  |                       | 
|         |  | Item 3.               |  | Quantitative and Qualitative Disclosures about Market Risks                                                                   |  | 21      
|         |  |                       | 
|         |  | Item 4.               |  | Controls and Procedures                                                                                                       |  | 21      
|         |  |                      
|PART II. |  | OTHER INFORMATION     |  | 22                                                                                                                           



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WELLS REAL ESTATE FUND III, L.P.



BALANCE SHEETS



ASSETS



|                                        |  |                               |            |                  |   |           
|--------------------------------------- |  | ----------------------------- | ---------- | ---------------- | - | ----------
|                                        |  | (unaudited) September 30,2004 |            | December 31,2003
|Investments in joint ventures           |  | $                             | 4,603,132  |                  | $ | 9,906,037 
|Cash and cash equivalents               |  |                               | 9,436,341  |                  |   | 2,552,904 
|Due from joint ventures                 |  |                               | 237,247    |                  |   | 200,239   
|                                        |  |                               |            |                  |   |           
|Total assets                            |  | $                             | 14,276,720 |                  | $ | 12,659,180
|                                        |  |                               |            |                  |   |           
|                                       
|LIABILITIES AND PARTNERS CAPITAL      
|Liabilities:                            |  |                               |            |                  |   |           
|Accounts payable and accrued expenses   |  | $                             | 26,415     |                  | $ | 6,571     
|Partnership distributions payable       |  |                               | 0          |                  |   | 220,904   
|                                        |  |                               |            |                  |   |           
|Total liabilities                       |  |                               | 26,415     |                  |   | 227,475   
|                                        |  |                              
|Partners capital:                      |  |                               |            |                  |   |           
|Limited partners:                       |  |                               |            |                  |   |           
|Class A19,635,965 units outstanding    |  |                               | 13,769,677 |                  |   | 12,431,705
|Class B2,544,540 units outstanding     |  |                               | 480,628    |                  |   | 0         
|General partners                        |  |                               | 0          |                  |   | 0         
|                                        |  |                               |            |                  |   |           
|Total partners capital                 |  |                               | 14,250,305 |                  |   | 12,431,705
|                                        |  |                               |            |                  |   |           
|Total liabilities and partners capital |  | $                             | 14,276,720 |                  | $ | 12,659,180
|                                        |  |                               |            |                  |   |           



See accompanying notes.



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WELLS REAL ESTATE FUND III, L.P.



STATEMENTS OF OPERATIONS

(unaudited)



|                                                                     |  |                                 |         |      |                                |          |      |  |      |           |  |   |          |  
|-------------------------------------------------------------------- |  | ------------------------------- | ------- | ---- | ------------------------------ | -------- | ---- |  | ---- | --------- |  | - | -------- | -
|                                                                     |  | Three Months EndedSeptember 30, |         |      | Nine Months EndedSeptember 30, |         
|                                                                     |  | 2004                            |         | 2003 |                                |          | 2004 |  | 2003 |          
|                                                                     |  |                                 |         |      |                                |          |      | 
|EQUITY IN INCOME (LOSS) OF JOINT VENTURES (Note 2)                   |  | $                               | 459,149 |      | $                              | (429,580 | )    |  | $    | 3,251,834 |  | $ | (38,125  | )
|                                                                     |  |                                 |         |     
|EXPENSES:                                                            |  |                                 |         |      |                                |          |      |  |      |           |  |   |          |  
|Partnership administration                                           |  |                                 | 31,639  |      |                                | 22,202   |      |  |      | 105,866   |  |   | 70,251   |  
|Legal and accounting                                                 |  |                                 | 15,899  |      |                                | 348      |      |  |      | 36,064    |  |   | 37,504   |  
|Other general and administrative                                     |  |                                 | 835     |      |                                | 3,462    |      |  |      | 2,217     |  |   | 7,098    |  
|                                                                     |  |                                 |         |      |                                |          |      |  |      |           |  |   |          |  
|Total expenses                                                       |  |                                 | 48,373  |      |                                | 26,012   |      |  |      | 144,147   |  |   | 114,853  |  
|                                                                     |  |                                 |         |     
|OTHER INCOME                                                         |  |                                 | 17,722  |      |                                | 5,848    |      |  |      | 22,916    |  |   | 17,754   |  
|                                                                     |  |                                 |         |      |                                |          |      |  |      |           |  |   |          |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS                             |  |                                 | 428,498 |      |                                | (449,744 | )    |  |      | 3,130,603 |  |   | (135,224 | )
|DISCONTINUED OPERATIONS:                                             |  |                                 |         |      |                                |          |      |  |      |           |  |   |          |  
|Operating loss                                                       |  |                                 | 0       |      |                                | 0        |      |  |      | 0         |  |   | (3,114   | )
|                                                                     |  |                                 |         |      |                                |          |      |  |      |           |  |   |          |  
|NET INCOME (LOSS)                                                    |  | $                               | 428,498 |      | $                              | (449,744 | )    |  | $    | 3,130,603 |  | $ | (138,338 | )
|                                                                     |  |                                 |         |      |                                |          |      |  |      |           |  |   |          |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS ALLOCATED TO:               |  |                                 |         |      |                                |          |      |  |      |           |  |   |          |  
|CLASS A LIMITED PARTNERS                                             |  | $                               | 418,562 |      | $                              | (449,744 | )    |  | $    | 2,561,161 |  | $ | (138,338 | )
|                                                                     |  |                                 |         |      |                                |          |      |  |      |           |  |   |          |  
|CLASS B LIMITED PARTNERS                                             |  | $                               | 9,936   |      | $                              | 0        |      |  | $    | 569,442   |  | $ | 0        |  
|                                                                     |  |                                 |         |      |                                |          |      |  |      |           |  |   |          |  
|LOSS FROM DISCONTINUED OPERATIONS ALLOCATED TO:                      |  |                                 |         |      |                                |          |      |  |      |           |  |   |          |  
|CLASS A LIMITED PARTNERS                                             |  | $                               | 0       |      | $                              | 0        |      |  | $    | 0         |  | $ | (3,114   | )
|                                                                     |  |                                 |         |      |                                |          |      |  |      |           |  |   |          |  
|CLASS B LIMITED PARTNERS                                             |  | $                               | 0       |      | $                              | 0        |      |  | $    | 0         |  | $ | 0        |  
|                                                                     |  |                                 |         |      |                                |          |      |  |      |           |  |   |          |  
|INCOME (LOSS) FROM CONTINUING OPERATIONS PER LIMITED PARTNER UNIT:   |  |                                 |         |      |                                |          |      |  |      |           |  |   |          |  
|CLASS A                                                              |  | $                               | 0.02    |      | $                              | (0.02    | )    |  | $    | 0.13      |  | $ | (0.01    | )
|                                                                     |  |                                 |         |      |                                |          |      |  |      |           |  |   |          |  
|CLASS B                                                              |  | $                               | 0.00    |      | $                              | 0.00     |      |  | $    | 0.22      |  | $ | 0.00     |  
|                                                                     |  |                                 |         |      |                                |          |      |  |      |           |  |   |          |  
|LOSS FROM DISCONTINUED OPERATIONS PER LIMITED PARTNER UNIT:          |  |                                 |         |      |                                |          |      |  |      |           |  |   |          |  
|CLASS A                                                              |  | $                               | 0.00    |      | $                              | 0.00     |      |  | $    | 0.00      |  | $ | 0.00     |  
|                                                                     |  |                                 |         |      |                                |          |      |  |      |           |  |   |          |  
|CLASS B                                                              |  | $                               | 0.00    |      | $                              | 0.00     |      |  | $    | 0.00      |  | $ | 0.00     |  
|                                                                     |  |                                 |         |      |                                |          |      |  |      |           |  |   |          |  
|DISTRIBUTION OF OPERATING CASH PER LIMITED PARTNER UNIT:             |  |                                 |         |      |                                |          |      |  |      |           |  |   |          |  
|CLASS A                                                              |  | $                               | 0.00    |      | $                              | 0.01     |      |  | $    | 0.00      |  | $ | 0.03     |  
|                                                                     |  |                                 |         |      |                                |          |      |  |      |           |  |   |          |  
|CLASS B                                                              |  | $                               | 0.00    |      | $                              | 0.00     |      |  | $    | 0.00      |  | $ | 0.00     |  
|                                                                     |  |                                 |         |      |                                |          |      |  |      |           |  |   |          |  
|DISTRIBUTION OF NET PROPERTY SALE PROCEEDS PER LIMITED PARTNER UNIT: |  |                                 |         |      |                                |          |      |  |      |           |  |   |          |  
|CLASS A                                                              |  | $                               | 0.00    |      | $                              | 0.00     |      |  | $    | 0.06      |  | $ | 0.00     |  
|                                                                     |  |                                 |         |      |                                |          |      |  |      |           |  |   |          |  
|CLASS B                                                              |  | $                               | 0.00    |      | $                              | 0.00     |      |  | $    | 0.03      |  | $ | 0.00     |  
|                                                                     |  |                                 |         |      |                                |          |      |  |      |           |  |   |          |  



See accompanying notes.



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WELLS REAL ESTATE FUND III, L.P.



STATEMENTS OF PARTNERS CAPITAL



FOR THE
YEAR ENDED DECEMBER 31, 2003

AND THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (unaudited)



|                                     |  |                  |  |         |                 |   |                       |           |         |   |         |   |  |   |   |  |   |            |  
|------------------------------------ |  | ---------------- |  | ------- | --------------- | - | --------------------- | --------- | ------- | - | ------- | - |  | - | - |  | - | ---------- | -
|                                     |  | Limited Partners |  |         | GeneralPartners |   | TotalPartnersCapital |          
|                                     |  | Class A          |  |         | Class B         |   |                       |          
|                                     |  | Units            |  | Amounts |                 |   | Units                 |           | Amounts |   |         |  
|BALANCE, December 31, 2002           |  | 19,635,965       |  | $       | 13,311,090      |   |                       | 2,544,540 |         | $ | 0       |   |  | $ | 0 |  | $ | 13,311,090 |  
|                                     |  |                  |  |         |                 |  
|Net loss                             |  | 0                |  |         | (13,276         | ) |                       | 0         |         |   | 0       |   |  |   | 0 |  |   | (13,276    | )
|Distributions of operating cash flow |  | 0                |  |         | (866,109        | ) |                       | 0         |         |   | 0       |   |  |   | 0 |  |   | (866,109   | )
|                                     |  |                  |  |         |                 |   |                       |           |         |   |         |   |  |   |   |  |   |            |  
|BALANCE, December 31, 2003           |  | 19,635,965       |  |         | 12,431,705      |   |                       | 2,544,540 |         |   | 0       |   |  |   | 0 |  |   | 12,431,705 |  
|                                     |  |                  |  |         |                 |  
|Net income                           |  | 0                |  |         | 2,561,161       |   |                       | 0         |         |   | 569,442 |   |  |   | 0 |  |   | 3,130,603  |  
|Operating distributions              |  | 0                |  |         | 0               |   |                       | 0         |         |   | 0       |   |  |   | 0 |  |   | 0          |  
|Distributions of net sale proceeds   |  | 0                |  |         | (1,223,189      | ) |                       | 0         |         |   | (88,814 | ) |  |   | 0 |  |   | (1,312,003 | )
|                                     |  |                  |  |         |                 |   |                       |           |         |   |         |   |  |   |   |  |   |            |  
|BALANCE, September 30, 2004          |  | 19,635,965       |  | $       | 13,769,677      |   |                       | 2,544,540 |         | $ | 480,628 |   |  | $ | 0 |  | $ | 14,250,305 |  
|                                     |  |                  |  |         |                 |   |                       |           |         |   |         |   |  |   |   |  |   |            |  



See accompanying notes.



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WELLS REAL ESTATE FUND III, L.P.



STATEMENTS OF CASH FLOWS

(unaudited)



|                                                                                                                    |  |                                |            |   |      |   |           |  
|------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ---------- | - | ---- | - | --------- | -
|                                                                                                                    |  | Nine Months EndedSeptember 30, |           
|                                                                                                                    |  | 2004                           |            |   | 2003 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                               |  |                                |            |   |      |   |           |  
|Net income (loss) from continuing operations                                                                        |  | $                              | 3,130,603  |   |      | $ | (135,224  | )
|Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities: |  |                                |            |   |      |   |           |  
|Equity in income of joint ventures                                                                                  |  |                                | (3,251,834 | ) |      |   | 38,125    |  
|Operating distributions received from joint ventures                                                                |  |                                | 433,008    |   |      |   | 748,904   |  
|Changes in assets and liabilities:                                                                                  |  |                                |            |   |      |   |           |  
|Prepaid expenses and other assets                                                                                   |  |                                | 0          |   |      |   | 199       |  
|Accounts payable and accrued expenses                                                                               |  |                                | 19,844     |   |      |   | (19,295   | )
|                                                                                                                    |  |                                |            |   |      |   |           |  
|Total adjustments                                                                                                   |  |                                | (2,798,982 | ) |      |   | 767,933   |  
|                                                                                                                    |  |                                |            |   |      |   |           |  
|Net cash provided by continuing operations                                                                          |  |                                | 331,621    |   |      |   | 632,709   |  
|Net cash used in discontinued operations                                                                            |  |                                | 0          |   |      |   | (3,114    | )
|                                                                                                                    |  |                                |            |   |      |   |           |  
|Net cash provided by operating activities                                                                           |  |                                | 331,621    |   |      |   | 629,595   |  
|                                                                                                                    |  |                               
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                               |  |                                |            |   |      |   |           |  
|Investment in joint ventures                                                                                        |  |                                | (274,929   | ) |      |   | (39,788   | )
|Net sale proceeds received from joint ventures                                                                      |  |                                | 8,359,652  |   |      |   | 0         |  
|                                                                                                                    |  |                                |            |   |      |   |           |  
|Net cash provided by (used in) investing activities                                                                 |  |                                | 8,084,723  |   |      |   | (39,788   | )
|                                                                                                                    |  |                                |            |   |      |   |           |  
|                                                                                                                    |  |                               
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                               |  |                                |            |   |      |   |           |  
|Operating distributions paid to limited partners                                                                    |  |                                | (220,904   | ) |      |   | (662,708  | )
|Net sale proceeds distributions paid to limited partners                                                            |  |                                | (1,312,003 | ) |      |   | 0         |  
|                                                                                                                    |  |                                |            |   |      |   |           |  
|Net cash used in financing activities                                                                               |  |                                | (1,532,907 | ) |      |   | (662,708  | )
|                                                                                                                    |  |                               
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                                |  |                                | 6,883,437  |   |      |   | (72,901   | )
|                                                                                                                    |  |                               
|CASH AND CASH EQUIVALENTS, beginning of period                                                                      |  |                                | 2,552,904  |   |      |   | 2,612,963 |  
|                                                                                                                    |  |                                |            |   |      |   |           |  
|CASH AND CASH EQUIVALENTS, end of period                                                                            |  | $                              | 9,436,341  |   |      | $ | 2,540,062 |  
|                                                                                                                    |  |                                |            |   |      |   |           |  
|SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:                                             |  |                                |            |   |      |   |           |  
|Partnership distributions payable                                                                                   |  | $                              | 0          |   |      | $ | 220,905   |  
|                                                                                                                    |  |                                |            |   |      |   |           |  



See accompanying notes.



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WELLS REAL ESTATE FUND III, L.P.



CONDENSED NOTES TO FINANCIAL STATEMENTS



SEPTEMBER 30, 2004 (unaudited)



|1. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- |  | ------------------------------------------



|(a) |  | Organization and Business
|--- |  | -------------------------



Wells Real Estate Fund III, L.P. (the Partnership) is a Georgia public limited partnership with Leo F. Wells, III and Wells Capital, Inc. (Wells
Capital), a Georgia corporation, serving as its general partners (collectively, the General Partners). The Partnership was formed on July 31, 1988 for the purpose of acquiring, developing, constructing, owning, operating,
improving, leasing, and managing income-producing commercial properties for investment purposes. The Partnership has two classes of limited partnership interests, Class A and Class B Units. The 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) add or 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 partner unit generally has equal voting rights regardless of class.



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 offering was terminated on October 23, 1990 upon receiving and accepting $22,206,310 in limited partner capital contributions for a total of 22,206,310 Class A and Class B limited partner units at a price of $1.00 per
unit. In 1990 and 1991, the Partnership repurchased 6,128 and 19,677 limited partnership units, respectively.



The Partnership owns indirect interests in all of its real estate assets through joint ventures with other entities affiliated with the General Partners. During the periods presented, the Partnership owned interests
in the following joint ventures (the Joint Ventures):



|                                                                      |  |                                                                                                     |  |    |  |                                                                                                                   
|--------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------- |  | -- |  | ------------------------------------------------------------------------------------------------------------------
|Joint Venture                                                         |  | Joint Venture Partners                                                                              |  |    |  | Properties                                                                                                        
|Fund II and Fund III Associates (Fund II-III Associates )           |  |    Fund II and Fund II-OW(1)    Wells Real Estate Fund III, L.P.                                  |  | 1. |  | Boeing at the Atrium A four-story office building
located in Houston, Texas                                       
|                                                                      |  |                                                                                                     |  | 2. |  | Brookwood Grill(2) A restaurant located in Fulton County, Georgia                                                 
|Fund II, III, VI and VII Associates (Fund II-III-VI-VII Associates) |  |    Fund
II-III Associates    Wells Real Estate Fund VI, L.P.    Wells Real Estate Fund VII, L.P. |  | 3. |  | Holcomb Bridge Property(2) An office/retail center located in Roswell,
Georgia                                    
|Fund III and Fund IV Associates (Fund III-IV
Associates)            |  |    Wells Real Estate Fund III, L.P.    Wells Real Estate Fund IV, L.P.                            |  | 4. |  | Stockbridge Village Shopping Center(3) A retail shopping center located in Stockbridge, Georgia                   
|                                                                      |  |                                                                                                     |  | 5. |  | 4400 Cox Road (formerly known as the Reciprocal Group Building) An office building located in Richmond, Virginia



|(1) |  | Fund II and Fund II-OW is a joint venture between Wells Real Estate Fund II and Wells Real Estate Fund II-OW.
|--- |  | -------------------------------------------------------------------------------------------------------------

|(2) |  | Properties were sold in July 2004.
|--- |  | ----------------------------------

|(3) |  | Property was sold in April 2004.
|--- |  | --------------------------------



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Each of the aforementioned properties was acquired on an all-cash basis. Approval by the Partnership as well as the other
Joint Venture partners is required for any major decision or any action that would materially affect the Joint Ventures, or their real property investments. For further information regarding the Joint Ventures and foregoing properties, refer to the
Partnerships Form 10-K for the year ended December 31, 2003.



On April
29, 2004, four Wells-affiliated Joint Ventures, including Fund III-IV Associates, sold five real properties, including Stockbridge Village Shopping Center, to an unrelated third party for a gross sale price of $23,750,000. As a result of the sale of
Stockbridge Village Shopping Center, net proceeds of approximately $6,900,000 and a gain of approximately $2,700,000 were allocated to the Partnership.



On July 1, 2004, Fund II-III Associates and Fund II-III-VI-VII Associates, collectively, sold Brookwood Grill and the Holcomb Bridge Property to an unrelated third party
for a gross sale price of $9,500,000. As a result of the sale of Brookwood Grill, net proceeds of approximately $873,000 and a gain of approximately $290,000 were allocated to the Partnership. As a result of the sale of the Holcomb Bridge Property,
the Partnership received net sale proceeds of approximately $608,000, recognized an immediate gain of approximately $164,000, and recorded a deferred gain of approximately $14,000. The deferred gain represents the Partnerships pro-rata
allocation of maximum exposure under an eighteen-month rental guarantee provided to the purchaser in connection with the sale. As of September 30, 2004, the Partnership had recognized approximately $700 of the deferred gain. Gain on the sales of
Brookwood Grill and the Holcomb Bridge Property may be adjusted as additional information becomes available in subsequent periods.



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



The financial statements of the Partnership have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, including the
instructions to Form 10-Q and Article 10 of Regulation S-X, and in accordance with such rules and regulations, do not include all of the information and footnotes required by accounting principles generally accepted in the United States
(GAAP) for complete financial statements. In the opinion of the General Partners, the statements for the unaudited interim periods presented include all adjustments that are of a normal and recurring nature and necessary to fairly
present the results for such periods. Results for interim periods are not necessarily indicative of full-year results. For further information, refer to the financial statements and footnotes included in the Partnerships Form 10-K for the year
ended December 31, 2003.



|(c) |  | Allocations of Net Income, Net Loss, and Gain on Sale
|--- |  | -----------------------------------------------------



For the purpose of determining allocations per the partnership agreement, net income is defined as Net Income recognized by the Partnership, excluding deductions for
depreciation, amortization, and cost recovery and the gain on the sale of assets. Net Income, as defined, of the Partnership is generally allocated each year in the same proportions that net cash from operations is distributed to the partners. To
the extent the Partnerships Net Income in any year exceeds net cash from operations, it will be allocated 99% to the limited partners and 1% to the General Partners.



Net loss, depreciation, and amortization deductions for each fiscal year are 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 the partners having a positive balance in their respective 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.



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##### Table of Contents

|(d) |  | Distributions of Net Cash from Operations
|--- |  | -----------------------------------------



Net cash from operations, if available, is generally distributed to limited partners quarterly. In accordance with the partnership agreement, such distributions are paid
first to the limited partners holding Class A Units until they have received an 8% per annum return on their respective adjusted capital contribution, as defined. Net cash from operations is then distributed to the limited partners holding Class B
Units until they have received an 8% per annum return on their respective adjusted capital contributions, as defined. If any net cash from operations remains, the General Partners receive an amount equal to 10% of total net cash from operations
distributed for such year. Thereafter, amounts are distributed 10% to the General Partners and 90% to the limited partners.



|(e) |  | Distribution of Sales Proceeds
|--- |  | ------------------------------



Upon the sale of properties, the net sale proceeds will be distributed in the following order:



| |  |  | In the event that the particular property sold is sold for a price less than its original property purchase price, to the limited partners holding Class A Units until such limited
partners have received an amount equal to the excess of the original property purchase price over the price for which the property was sold, limited to the amount of depreciation, amortization, and cost recovery deductions taken by the limited
partners holding Class B Units with respect to such property;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | To all limited partners until they have received 100% of their respective capital contributions, as defined;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | To limited partners holding Class B Units until such limited partners have received an amount equal to the net cash available for distribution paid to the limited partners holding
Class A Units on a per-unit basis;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | To all limited partners until they have received a cumulative 12% per annum return on their respective adjusted capital contributions, as defined;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Thereafter, 85% to the limited partners and 15% to the General Partners.
| | - |  | ------------------------------------------------------------------------



|(f) |  | Reclassifications
|--- |  | -----------------



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



|2. |  | INVESTMENTS IN JOINT VENTURES
|-- |  | -----------------------------



|(a) |  | Basis of Presentation
|--- |  | ---------------------



The Partnership owned interests in five properties during the periods presented through its ownership in the Joint Ventures. The Partnership does not have control over
the operations of the Joint Ventures; however, it does exercise significant influence. Approval by the Partnership, as well as the other Joint Venture partners, is required for any major decision or any action that would materially affect the Joint
Ventures, or their real property investments. Accordingly, the Partnerships investments in the Joint Ventures are recorded using the equity method of accounting, whereby original investments are recorded at cost and subsequently adjusted for
contributions, distributions, and net income (loss) attributable to the Partnership. For further information regarding investments in the Joint Ventures, refer to the financial statements and footnotes included in the Partnerships Form 10-K
for the year ended December 31, 2003.



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|(b) |  | Summary of Operations
|--- |  | ---------------------



The following information summarizes the operations of the Joint Ventures for the three and nine months ended September 30, 2004 and 2003, respectively:



|                       |  |                                 |         |      |                                         |         |      |                                    |   |                                 |   |  |      |            |      |  |      |           |  |      |         |  |   |           |      |  |   |          |  
|---------------------- |  | ------------------------------- | ------- | ---- | --------------------------------------- | ------- | ---- | ---------------------------------- | - | ------------------------------- | - |  | ---- | ---------- | ---- |  | ---- | --------- |  | ---- | ------- |  | - | --------- | ---- |  | - | -------- | -
|                       |  | Total Revenues                  |         |      | Income (Loss) FromContinuing Operations |         |      | Income FromDiscontinued Operations |   | Net Income (Loss)               |  
|                       |  | Three Months EndedSeptember 30, |         |      | Three Months EndedSeptember 30,         |         |      | Three Months EndedSeptember 30,    |   | Three Months EndedSeptember 30, |  
|                       |  | 2004                            |         | 2003 |                                         |         | 2004 |                                    |   | 2003                            |   |  | 2004 |            | 2003 |  | 2004 |           |  | 2003 |        
|Fund II-III Associates |  | $                               | 441,564 |      | $                                       | 434,390 |      |                                    | $ | 102,220                         |   |  | $    | 17,412     |      |  | $    | 1,204,795 |  | $    | 55,797  |  | $ | 1,307,015 | (1)  |  | $ | 73,209   |  
|Fund III-IV Associates |  |                                 | 0       |      |                                         | (58,446 | )    |                                    |   | (54,868                         | ) |  |      | (1,065,580 | )    |  |      | 0         |  |      | 267,228 |  |   | (54,868   | )(1) |  |   | (798,352 | )
|                       |  |                                 |         |      |                                         |         |      |                                    |   |                                 |   |  |      |            |      |  |      |           |  |      |         |  |   |           |      |  |   |          |  
|                       |  | $                               | 441,564 |      | $                                       | 375,944 |      |                                    | $ | 47,352                          |   |  | $    | (1,048,168 | )    |  | $    | 1,204,795 |  | $    | 323,025 |  | $ | 1,252,147 |      |  | $ | (725,143 | )
|                       |  |                                 |         |      |                                         |         |      |                                    |   |                                 |   |  |      |            |      |  |      |           |  |      |         |  |   |           |      |  |   |          |  



|                       |  |                                |           |                                         |   |           |                                    |   |                                |   |  |      |          |      |  |      |           |  |      |         |  |   |           |     |  |   |          |  
|---------------------- |  | ------------------------------ | --------- | --------------------------------------- | - | --------- | ---------------------------------- | - | ------------------------------ | - |  | ---- | -------- | ---- |  | ---- | --------- |  | ---- | ------- |  | - | --------- | --- |  | - | -------- | -
|                       |  | Total Revenues                 |           | Income (Loss) FromContinuing Operations |   |           | Income FromDiscontinued Operations |   | Net Income (Loss)              |  
|                       |  | Nine Months EndedSeptember 30, |           | Nine Months EndedSeptember 30,          |   |           | Nine Months EndedSeptember 30,     |   | Nine Months EndedSeptember 30, |  
|                       |  | 2004                           |           | 2003                                    |   | 2004      |                                    |   | 2003                           |   |  | 2004 |          | 2003 |  | 2004 |           |  | 2003 |        
|Fund II-III Associates |  | $                              | 1,333,772 |                                         | $ | 1,265,547 |                                    | $ | 128,480                        |   |  | $    | (8,390   | )    |  | $    | 1,340,576 |  | $    | 188,255 |  | $ | 1,469,056 | (1) |  | $ | 179,865  |  
|Fund III-IV Associates |  |                                | 0         |                                         |   | 255,668   |                                    |   | (278,454                       | ) |  |      | (991,148 | )    |  |      | 4,998,439 |  |      | 806,193 |  |   | 4,719,985 | (1) |  |   | (184,955 | )
|                       |  |                                |           |                                         |   |           |                                    |   |                                |   |  |      |          |      |  |      |           |  |      |         |  |   |           |     |  |   |          |  
|                       |  | $                              | 1,333,772 |                                         | $ | 1,521,215 |                                    | $ | (149,974                       | ) |  | $    | (999,538 | )    |  | $    | 6,339,015 |  | $    | 994,448 |  | $ | 6,189,041 |     |  | $ | (5,090   | )
|                       |  |                                |           |                                         |   |           |                                    |   |                                |   |  |      |          |      |  |      |           |  |      |         |  |   |           |     |  |   |          |  



|(1) |  | Effective July 1, 2004, the Joint Ventures extended the weighted-average composite useful
life for all building assets from 25 years to 40 years, which resulted in an increase (decrease) to net income (loss) for the three and nine months ended September 30, 2004 of approximately $72,131 and $25,461 for Fund II-III Associates and
Fund III-IV Associates, respectively.Management believes that this change more appropriately reflects the estimated useful lives of real estate assets and is consistent with prevailing industry practice.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following information summarizes the operations of the joint venture in which the
Partnership holds an equity interest through its ownership in Fund II-III Associates for the three and nine months ended September 30, 2004 and 2003, respectively:



|                              |  |                                 |   |                                 |   |                                    |  |                                 |         |   |      |   |      |  |      |           |      |   |        |  |   |           |  |   |       
|----------------------------- |  | ------------------------------- | - | ------------------------------- | - | ---------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ---- |  | ---- | --------- | ---- | - | ------ |  | - | --------- |  | - | ------
|                              |  | Total Revenues                  |   | Loss FromContinuing Operations  |   | Income FromDiscontinued Operations |  | Net Income                     
|                              |  | Three Months EndedSeptember 30, |   | Three Months EndedSeptember 30, |   | Three Months EndedSeptember 30,    |  | Three Months EndedSeptember 30,
|                              |  | 2004                            |   | 2003                            |   | 2004                               |  |                                 | 2003    |   | 2004 |   | 2003 |  | 2004 |           | 2003
|Fund II-III-VI-VII Associates |  | $                               | 0 |                                 | $ | 0                                  |  | $                               | (18,376 | ) |      | $ | 0    |  | $    | 1,869,206 |      | $ | 66,670 |  | $ | 1,850,830 |  | $ | 66,670
|                              |  |                                 |   |                                 |   |                                    |  |                                 |         |   |      |   |      |  |      |           |      |   |        |  |   |           |  |   |       



|                              |  |                                |   |                                |   |                                    |  |                                |         |   |      |   |      |  |      |           |      |   |        |  |   |           |  |   |       
|----------------------------- |  | ------------------------------ | - | ------------------------------ | - | ---------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ---- |  | ---- | --------- | ---- | - | ------ |  | - | --------- |  | - | ------
|                              |  | Total Revenues                 |   | Loss FromContinuing Operations |   | Income FromDiscontinued Operations |  | Net Income                    
|                              |  | Nine Months EndedSeptember 30, |   | Nine Months EndedSeptember 30, |   | Nine Months EndedSeptember 30,     |  | Nine Months EndedSeptember 30,
|                              |  | 2004                           |   | 2003                           |   | 2004                               |  |                                | 2003    |   | 2004 |   | 2003 |  | 2004 |           | 2003
|Fund II-III-VI-VII Associates |  | $                              | 0 |                                | $ | 0                                  |  | $                              | (26,534 | ) |      | $ | 0    |  | $    | 2,085,086 |      | $ | 95,598 |  | $ | 2,058,552 |  | $ | 95,598
|                              |  |                                |   |                                |   |                                    |  |                                |         |   |      |   |      |  |      |           |      |   |        |  |   |           |  |   |       



|3. |  | RELATED-PARTY TRANSACTIONS
|-- |  | --------------------------



|(a) |  | Management and Leasing Fees
|--- |  | ---------------------------



Wells Management Company, Inc. (Wells Management), an affiliate of the General Partners, receives compensation for the management and leasing of the
Partnerships properties owned through the Joint Ventures equal to (a) of the gross revenues collected monthly, 3% of the gross revenues for management and 3% of the gross revenues for leasing (aggregate maximum of 6%) plus a separate fee for
the one-time lease-up of newly constructed



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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s share of management and leasing fees and lease acquisition costs incurred through the Joint Ventures was $16,833 and $156,411 for the three months ended September 30, 2004 and 2003,
respectively, and $80,831 and $238,179 for the nine months ended September 30, 2004 and 2003, respectively.



|(b) |  | Administration Reimbursements
|--- |  | -----------------------------



Wells Capital, one of the General Partners, and its affiliates perform certain administrative services for the Partnership, such as accounting, property management, and
other partnership administration, and incur the related expenses. Such expenses are allocated among various other entities affiliated with the General Partners (the Wells Real Estate Funds) based on time spent on each fund by individual
administrative personnel. In the opinion of management, this allocation is a reasonable estimation of such expenses. The Partnership reimbursed Wells Capital $26,633 and $14,629 for the three months ended September 30, 2004 and 2003,
respectively, and $77,325 and $45,082 for the nine months ended September 30, 2004 and 2003, respectively.



|(c) |  | Conflicts of Interest
|--- |  | ---------------------



The General Partners are also general partners of other Wells Real Estate Funds. In addition, Wells Capital sponsors and advises two affiliated real estate investment
trusts (the REITs) in which it retains a residual interest. As such, there may exist conflicts of interest where the General Partners in their capacity as general partners of other Wells Real Estate Funds, or as the advisor to the REITs,
may be in competition with the Partnership in connection with property acquisitions or for tenants in similar geographic markets.



|4. |  | DISCONTINUED OPERATIONS
|-- |  | -----------------------



The Partnership sold its 100% interest in Greenville Center on September 30, 2002. Accordingly, the results of operations of Greenville Center are included in
discontinued operations in the accompanying statements of operations for all periods. The condensed operating results for the Greenville Center for the three months and nine months ended September 30, 2003, respectively, are summarized below:



(unaudited)Three Months EndedSeptember 30, 2003

(unaudited)Nine Months EndedSeptember 30, 2003Total property revenues

$
0

$
0Operating costsrental property


0


3,114Loss from discontinued operations

$
0

$
(3,114
)




|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 Partnerships accompanying financial statements and notes
thereto.



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##### Table of Contents

|(a) |  | Overview
|--- |  | --------



We believe that we will operate through the following five key life cycle phases. The time expected to be spent in each phase is dependent upon various economic, industry, market, and other internal/external factors.
Some overlap naturally exists in the transition from one phase to the next.



| |  |  | Fundraising phase
| | - |  | -----------------

The period during which the
Partnership is raising capital through the sale and issuance of limited partner units to the public;



| |  |  | Investing phase
| | - |  | ---------------

The period during which the
Partnership invests the capital raised during the fundraising phase, less upfront fees, into the acquisition of real estate assets;



| |  |  | Holding phase
| | - |  | -------------

The period during which real
estate assets are owned and operated by the Partnership during the initial lease terms of the tenants;



| |  |  | Positioning-for-sale phase
| | - |  | --------------------------

The period during
which the leases in place at the time of acquisition expire and, thus, the Partnership expends time, effort, and funds to re-lease such space to existing and/or new tenants. Following the holding phase, the Partnership continues to own and operate
the real estate assets, evaluate various options for disposition, and market the real estate assets for sale; and



| |  |  | Disposition and Liquidation phase
| | - |  | ---------------------------------

The period
during which the Partnership sells its real estate investments and distributes net sale proceeds to the partners.



Portfolio Overview



We have moved from the positioning-for-sale phase into the disposition and liquidation phase of our life cycle. We have invested in the Joint Ventures, which originally
acquired six properties, of which four properties have been sold. Our focus on the remaining assets in the Joint Ventures involves re-leasing and marketing efforts that we believe will result in the best disposition pricing for our investors.



Through the recent sales of Stockbridge Village Shopping Center on April 29,
2004, and the Holcomb Bridge Property and Brookwood Grill on July 1, 2004, we were able to capitalize on the current strong investor demand for retail shopping centers in the market. We held approximate equity interests of 57%, 9%, and 38% in these
three properties, respectively. We have signed two new leases at 4400 Cox Road with Apex Systems and New York Life for a total of approximately 36,000 square feet, representing 84% of the building. We made our first distribution of net sale proceeds
to limited partners in January 2004 of approximately $1,312,000, and anticipate distributing additional net proceeds of approximately $6,658,000 to limited partners in the fourth quarter 2004 from the sales Greenville Center and Stockbridge Village
Shopping Center.



As only two properties remain in the Partnerships
portfolio, our General Partners are currently reserving operating cash and a portion of net sale proceeds to fund the re-leasing costs anticipated for 4400 Cox Road. Further, our General Partners anticipate continuing to reserve operating
distributions until 4400 Cox Road is fully re-leased. As we move into 2005 and the outcome of the property re-leasing efforts becomes more certain, our General Partners will further evaluate the availability of net sale proceeds for additional
distributions to limited partners.



While operating distributions to Class A
Unit holders have been reserved, as of September 30, 2004, Class A Unit holders have received cumulative net operating cash flow distributions of approximately $16.3 million since inception, which equates to approximately 83% of the $19.6 million
originally invested. Limited partners who have held Class B Units since inception have cumulatively received $0.89 per unit in allocated tax losses through December 31, 2003, plus operating distributions of $0.12 per unit. No operating distributions
have been made to our General Partners.



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##### Table of Contents

Property Summary



Information related to the properties owned by the Joint Ventures follows:



| |  |  | Boeing at the Atrium is currently 100% occupied by the Boeing/Shuttle Division of The Boeing Company.
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | The Brookwood Grill property was sold on July 1, 2004, and approximately $873,000 in net sale proceeds has been allocated to the Partnership. Our General Partners are reviewing
costs anticipated to re-lease 4400 Cox Road to determine if all, or a portion, of these net sale proceeds can be distributed in 2005.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Holcomb Bridge Property was sold on July 1, 2004, and approximately $608,000 in net sale proceeds has been allocated to the Partnership. Our General Partners are reviewing costs
anticipated to re-lease 4400 Cox Road to determine if all, or a portion, of these net sale proceeds can be distributed in 2005.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Stockbridge Village Shopping Center was sold on April 29, 2004, and approximately $6,879,000 in net sale proceeds has been allocated to the Partnership. Approximately $197,000
of these proceeds has been used for our pro-rata share of the re-leasing costs at 4400 Cox Road. Our General Partners have reviewed the remaining re-leasing costs anticipated at 4400 Cox Road and determined that approximately $5,699,000 of these net
sale proceeds can be distributed, which is scheduled for the fourth quarter 2004. The remaining proceeds of approximately $983,000 will be reserved at this time.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 4400 Cox Road was previously occupied by the Reciprocal Group. We are in the process of re-leasing the building. Apex Systems, Inc. leased approximately 21,288 square feet, and this
lease will extend from November 2004 through August 2015. New York Life Insurance leased approximately 14,740 square feet, and this lease will extend from October 2004 through December 2014.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Greenville Center property was sold in 2002 and approximately $1,312,000 of the net sale proceeds was distributed to limited partners in January 2004. The remaining net sale
proceeds of approximately $959,000 are planned to be distributed in the fourth quarter 2004.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As we move further into the disposition and liquidation phase, we will continue to focus on re-leasing vacant space and space that may become vacant upon the expiration of our current leases. In doing so, we seek to
maximize returns to the limited partners by negotiating long-term leases at market rental rates while attempting to minimize down time, re-leasing expenditures, ongoing property level costs and portfolio costs. As properties are positioned for sale,
our attention will shift to locating suitable buyers, negotiating purchase-sale contracts that will attempt to maximize the total return to the limited partners and minimize contingencies and our post-closing involvement with the buyer.



Industry Factors



Our results continue to be impacted by a number of factors influencing the real estate
industry.



General Economic and Real Estate Market
Commentary



The U.S. economy appears to be on the road
to recovery. The economy has shown signs of growth recently, as companies have recommenced making investments in new employees. Job growth is the most significant demand driver for office markets. Market fundamentals are improving, and new office
jobs are slowly being created. In general, the real estate office market lags behind the overall economic recovery and, therefore, recovery is not expected until late 2004 or 2005 at the earliest, and then will vary by market.



Overall, real estate market fundamentals are weak; however, capital
continues to flow into this asset class. The increase in capital drives the prices of many properties upward and investor returns downward. There is a



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##### Table of Contents

significant pricing differential in the underwriting parameters of well-leased assets with credit tenants
and those with either existing vacancies or substantial near-term tenant rollover. Properties with long-term leases to strong credit tenants have seen an increase in value.



The office market has significant excess space. Vacancy levels are believed to have peaked and are expected to trend
downward moderately through the end of 2004. There is some encouraging news in that construction continues to taper off and has come to a complete halt in many markets. As a result of the slowdown in new construction and the modest decline in
sublease space, net absorption has turned positive. Many industry professionals believe that office market fundamentals have bottomed-out; however, a recovery cannot be expected until job growth and corresponding demand for office space begin to
significantly increase.



Wells Real Estate Funds with
Current Vacancy or Near-term Rollover Exposure



Real
estate funds, such as the Partnership, that invest in properties with current vacancies or near-term tenant rollover may face a challenging leasing environment. In connection with re-leasing vacant space, the properties within these funds are
generally encountering lower market rental rates and higher concession packages to tenants.



From a valuation standpoint, it is generally preferable to either renew an existing tenant lease or re-lease the property prior to marketing it for sale. Generally, buyers will heavily discount their offering price to
compensate for the existing or pending vacancies.



|(b) |  | Results of Operations
|--- |  | ---------------------



Equity in Income (loss) of Joint Ventures



Equity in income (loss) of Joint Ventures was $459,149 and $(429,580) for the three months ended September 30, 2004 and 2003, respectively, and $3,251,834 and $(38,125)
for the nine months ended September 30, 2004 and 2003, respectively. The 2004 increases are primarily attributable to (i) the gain recognized on the April 2004 sale of Stockbridge Village Shopping Center, (ii) the gain recognized on the July 2004
sale of the Holcomb Bridge Property and Brookwood Grill, (iii) an increase in occupancy of Boeing at the Atrium and the Holcomb Bridge Property beginning in the second half of 2003, (iv) a decline in depreciation expense for all buildings owned
through the Joint Ventures due to changing the estimated weighted-average composite useful life from 25 years to 40 years effective July 1, 2004, partially offset by (v) a decline in rental income resulting from the termination of the Reciprocal
lease at 4400 Cox Road effective July 2003.



We expect future equity in income
of Joint Ventures to increase as a result of entering into leases for approximately 84% of 4400 Cox Road at the current prevailing market rate.



Expenses of the Partnership



Our total expenses were $48,373 and $26,012 for the three months ended September 30, 2004 and 2003, respectively, and $144,147 and $114,853 for the nine months ended
September 30, 2004 and 2003, respectively. The 2004 increases are primarily attributable to increases in administrative salaries and accounting fees associated with increased reporting and regulatory requirements. We anticipate additional increases
related to implementing and adhering to such reporting and regulatory requirements going forward.



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|(c) |  | Liquidity and Capital Resources
|--- |  | -------------------------------



Our operating strategy entails funding expenses related to the recurring operations of the properties owned by the Joint Ventures with rental revenues collected, and
assessing the amount of remaining cash flows that will be required to fund portfolio expenses, known re-leasing costs and other capital improvements. Any residual operating cash flows distributed from the Joint Ventures to the Partnership, and are
considered available for distribution to the limited partners. Distributions are generally paid to the limited partners quarterly. As a result, the ongoing monitoring of our cash position is critical to ensuring that adequate liquidity and capital
resources are available. Economic downturns in one or more of our core markets could adversely impact the ability of the Joint Ventures tenants to honor lease payments and our ability to assist the Joint Ventures in re-leasing space on
favorable terms as leases expire or space otherwise becomes vacant. In the event of either situation, cash flows and, consequently, our ability to provide funding for capital needs would be adversely affected.



Short-Term Liquidity



During the nine months ended September 30, 2004, we generated net operating cash flows,
including distributions received from the Joint Ventures, of approximately $332,000, as compared to approximately $630,000 for the nine months ended September 30, 2003. Operating distributions from the Joint Ventures are generally representative of
rental revenues and tenant reimbursements, less property operating expenses, management fees, general administrative expenses, and capital expenditures. Such operating cash flows are generally used to pay operating distributions to limited partners;
however, we have reserved distributions to limited partners for the first three quarters of 2004 in order to fund our pro-rata share of costs anticipated in connection with re-leasing 4400 Cox Road.



Operating distributions from the Joint Ventures have declined as a result of the sales of
properties in previous and current periods and are expected to continue to decline as we sell additional properties in subsequent periods. Future operating distributions paid to limited partners will be largely dependent upon the amount of cash
generated from the Joint Ventures, our expectations of future cash flows, and determination of near-term cash needs for tenant re-leasing costs and other capital improvements for properties owned by the Joint Ventures.



During the nine months ended September 30, 2004, approximately $8,360,000 of net proceeds was
generated from the sales of Stockbridge Village Shopping Center and the Holcomb Bridge Property and Brookwood Grill. We also distributed net sale proceeds of approximately $1,312,000 to limited partners in January 2004. We invested approximately
$197,000 of net sale proceeds and approximately $78,000 of operating cash flows in Fund III-IV Associates to fund building improvements, tenant improvements, and leasing commissions related to new leases for approximately 84% of 4400 Cox Road and of
operating cash flows in Fund II-III Associates to fund a post-sale leasing commission and operating expenses for Brookwood Grill.



We believe that the cash on hand, including net proceeds from the sale of properties, and distributions due from the Joint Ventures are sufficient to cover our working
capital needs, including liabilities of approximately $26,000 as of September 30, 2004. During the remainder of 2004, our General Partners anticipate that we will fund its proportionate share of re-leasing costs of 4400 Cox Road.



Long-Term Liquidity



We expect that our future sources of capital will be primarily derived from operating cash
flows generated from the Joint Ventures, and net proceeds generated from the selective and strategic sale of properties. Our future long-term liquidity requirements will include, but not be limited to, tenant improvements, leasing commissions,
renovations, and other significant capital improvements necessary for properties owned through the Joint Ventures. Specifically, we anticipate funding the Partnerships proportionate share of the costs necessary to re-lease 4400 Cox Road. We
expect to continue to use substantially all future net cash flows from operations. Future cash flows from operating activities will be primarily effected by distributions received from the Joint Ventures, which are dependent upon net operating
income generated by the Joint Ventures properties, less reserves for known capital expenditures.



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Capital Resources



The Partnership is an investment vehicle formed for the purpose of acquiring, owning, and operating income-producing real properties or investing in joint ventures for
the same purpose, and has invested all of the partners original capital contributions. Thus, it is unlikely that we will acquire interests in any additional properties or joint ventures. Historically, our investment strategy has generally
involved acquiring properties that are pre-leased to creditworthy tenants on an all cash basis through joint ventures with affiliated partnerships.



The Joint Ventures incur capital expenditures primarily in the form of building improvements for the purpose of maintaining the quality of our properties, and tenant
improvements for the purpose of readying its properties for re-leasing. As leases expire, we will work with the Joint Ventures to attempt to re-lease space to an existing tenant or market the space to prospective new tenants. Generally, tenant
improvements funded in connection with lease renewals require less capital than those funded in connection with new leases. However, external conditions, such as the supply of and demand for comparable space available within a given market, drive
capital costs as well as rental rates. Any capital or other expenditures not provided for by the operations of the Joint Ventures will be funded by the Partnership and respective Joint Venture partners on a pro rata basis.



Operating cash flows, if available, are generally distributed from the Joint Ventures to the
Partnership during the second month following each calendar quarter-end. Our cash management policy typically includes first utilizing current period operating cash flow until depleted, at which point operating reserves are utilized to fund capital
and other required expenditures. In the event that current and prior period accumulated operating cash flows are insufficient to fund such costs, net property sale proceeds reserves would then be utilized.



As of September 30, 2004, We have received, used, and held net proceeds from the sale of
properties as presented below:



|                                                |  |              |            |                                       |        |   |                                              |   |                                  |  |                                 |         |                                                    |                                       |  |   |           |  |   |          
|----------------------------------------------- |  | ------------ | ---------- | ------------------------------------- | ------ | - | -------------------------------------------- | - | -------------------------------- |  | ------------------------------- | ------- | -------------------------------------------------- | ------------------------------------- |  | - | --------- |  | - | ---------
|                                                |  | Net Proceeds |            | Partnerships Approximate Ownership % |        |   | Net Proceeds Attributable to the Partnership |   | Cumulative Net Proceeds Invested |  | Distributed to Partners to date |         | Undistributed NetProceeds as of September 30, 2004
|Property Sold                                   |  |              |            |                                       | Amount |   | Purpose                                      |   |                                 
|Greenville Center (sold 2002)                   |  | $            | 2,271,187  |                                       | 100.0  | % |                                              | $ | 2,271,187                        |  | $                               | 0       |                                                    |                                      |  | $ | 1,312,003 |  | $ | 959,184  
|Stockbridge Village Shopping Center (sold 2004) |  |              | 12,024,223 |                                       | 57.2   | % |                                              |   | 6,879,238                        |  |                                 | 197,380 |                                                    | Re-leasing4400 CoxRoad building(2004) |  |   | 0         |  |   | 6,681,858
|Holcomb Bridge Property (sold 2004)             |  |              | 6,889,379  |                                       | 8.8    | % |                                              |   | 607,643                          |  |                                 | 0       |                                                    |                                       |  |   | 0         |  |   | 607,643  
|Brookwood Grill (sold 2004)                     |  |              | 2,346,693  |                                       | 37.7   | % |                                              |   | 883,530                          |  |                                 | 0       |                                                    |                                       |  |   | 0         |  |   | 883,530  
|                                                |  |              |            |                                       |        |   |                                              |   |                                  |  |                                 |         |                                                    |                                       |  |   |           |  |   |          
|Total                                           |  |              |            |                                       |        |   |                                              | $ | 10,641,598                       |  | $                               | 197,380 |                                                    |                                       |  | $ | 1,312,003 |  | $ | 9,132,215
|                                                |  |              |            |                                       |        |   |                                              |   |                                  |  |                                 |         |                                                    |                                       |  |   |           |  |   |          



Upon evaluating the capital needs of
the properties in which we currently hold an interest, our General Partners have determined that reserves of net sale proceeds of approximately $2,474,000 should be held to fund the costs anticipated in connection with re-leasing 4400 Cox Road and
capital improvements for Boeing at the Atrium. Our General Partners anticipate distributing residual net sale proceeds of approximately $6,658,000 in the fourth quarter of 2004 to the limited partners of record as of September 30, 2004, which under
the terms of the partnership agreement does not include limited partners acquiring their units after June 30, 2004.



|(d) |  | Related-Party Transactions
|--- |  | --------------------------



We have entered into agreements with Wells Capital and its affiliates, whereby we pay certain fees or reimbursements to Wells Capital or its affiliates (e.g., property
management and leasing fees, administrative salary reimbursements, etc.). See Note 3 to our financial statements included in this report for a discussion of the various related-party transactions, agreements, and fees.



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|(e) |  | Inflation
|--- |  | ---------



The real estate market has not been affected significantly by inflation in the past three years due to the relatively low inflation rate. However, there are provisions in the majority of tenant leases, which would
protect the Partnership from the impact of inflation. These provisions include reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements on a per-square-foot basis, or in some cases, annual
reimbursement of operating expenses above a certain per-square-foot allowance. There is no assurance, however, that we would be able to replace existing leases with new leases at higher base rental rates.



|(f) |  | Application of Critical Accounting Policies
|--- |  | -------------------------------------------



Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires management to use judgment in
the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements
and the reported amounts of revenue and expenses during the reporting periods. If managements judgment or interpretation of the facts and circumstances relating to various transactions had been different, it is possible that different
accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of
companies in similar businesses.



Below is a discussion of the accounting
policies used by the Partnership and the Joint Ventures, which are considered to be critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.



Investment in Real Estate Assets



We will be required to make subjective assessments as to the useful lives of its depreciable
assets. We will consider the period of future benefit of the asset to determine the appropriate useful lives. These assessments have a direct impact on net income. We expect that the estimated useful lives of the Joint Ventures assets by class
will be as follows:



|                      |  |            
|--------------------- |  | -----------
|Buildings             |  | 40 years   
|Building improvements |  | 10-25 years
|Land improvements     |  | 20 years   
|Tenant improvements   |  | Lease term 



Effective July 1, 2004, the Joint
Ventures extended the weighted-average composite useful life for all building assets from 25 years to 40 years, which resulted in an increase to our net income for the three and nine months ended September 30, 2004. We believe that this change more
appropriately reflects the estimated useful lives of real estate assets and is consistent with prevailing industry practice. In the event that the Joint Ventures utilize inappropriate useful lives or methods of depreciation, our net income would be
misstated.



Valuation of Real Estate Assets



We continually monitor events and changes in circumstances that could indicate that the
carrying amounts of the real estate assets in which we have an ownership interest, either directly or through investments in the Joint Ventures,



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may not be recoverable. When indicators of potential impairment are present which indicate that the carrying amounts of real estate assets may not be
recoverable, management assesses the recoverability of the real estate assets by determining whether the carrying value of the real estate assets will be recovered through the undiscounted future operating cash flows expected from the use of the
asset and its eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying value, management adjusts the real estate assets to the fair value and recognizes an impairment loss. We have determined
that there has been no impairment in the carrying value of real estate assets we held as of September 30, 2004.



Projections of expected future cash flows require management to estimate future market rental income amounts subsequent to the expiration of current lease agreements,
property operating expenses, discount rates, the number of months it takes to re-lease the property, and the number of years the property is held for investment. The use of inappropriate assumptions in the future cash flow analysis would result in
an incorrect assessment of the propertys future cash flows and fair value, and could result in the overstatement of the carrying value of real estate assets held by the Joint Ventures and Net Income of the Partnership.



|(g) |  | Economic Dependency
|--- |  | -------------------



We have engaged Wells Management to supervise the management and leasing of properties owned through the Joint Ventures, and Wells Capital to perform certain administrative services, including accounting, shareholder
communications, and investor relations. As a result of these relationships, we are dependent upon Wells Management, Wells Capital, and other affiliates thereof to provide certain services that are essential to the Partnerships operations,
including asset management and property management services, asset acquisition and disposition services, and other administrative responsibilities under agreements, some of which have terms of one year or less.



Wells Management and Wells Capital are owned and controlled by Wells Real Estate Funds, Inc.
(WREF). The operations of Wells Capital and Wells Management represent substantially all of the business of WREF. Due to their common ownership and importance to WREF, we focus on the financial condition of WREF when assessing the
financial condition of Wells Capital and Wells Management. In the event that WREF were to become unable to meet its obligations as they become due, it may become necessary for the Partnership and/or the Joint Ventures to find alternative service
providers.



For the nine months ended September 30, 2004, WREFs operating
expenses exceeded operating revenues by approximately $11 million. During the first two quarters of 2004, WREF incurred net losses primarily due to the fact that revenues from acquisition, advisory, asset management services, and property
management services were less than the costs to provide such services. In planning for 2004, WREF anticipated incurring short-term losses and, accordingly, has reserved funds adequate to cover such a shortfall. WREF anticipated generating lower
revenues in 2004, as compared to 2003, primarily due to the fact that the majority of its revenues are earned as a percentage of sales of affiliated investment products. The sale of shares of Wells Real Estate Investment Trust II, Inc. (REIT
II), an investment product sponsored by WREF whose offering commenced in December 2003, was anticipated to be significantly less in 2004 than the sale of shares of Wells Real Estate Investment Trust, Inc. (REIT I), another
investment product sponsored by WREF whose offering closed in December 2003. Consistent with sale of shares of REIT I during the beginning of its offering period, the sale of shares of REIT II was anticipated to remain relatively low in the
beginning of its offering period.



For the three months ended September 30,
2004, on a consolidated basis, WREFs operating revenues exceeded operating expenses by approximately $6 million. WREF is also expecting operating revenues to exceed operating expenses during the fourth quarter of 2004. WREF believes that the
cash availability provided by both funds on hand and borrowing capacity through various credit facilities will be adequate to meet its obligations.



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



Since the Partnership does not borrow any money, make any foreign investments or invest in any market risk- sensitive instruments, it is not subject to risks relating to
interest rates, foreign current exchange rate fluctuations, or the other market risks contemplated by Item 305 of Regulation S-K.



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



The Partnership carried out an evaluation, under the supervision and with the participation of management of Wells Capital, the corporate general partner of the
Partnership, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Partnerships disclosure controls and procedures as of the end of the period covered by this report
pursuant to the Securities Exchange Act of 1934. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the Partnerships disclosure controls and procedures were effective.



There were no significant changes in the Partnerships internal control over financial
reporting that has materially affected, or is reasonably likely to materially affect, the Partnerships internal control over financial reporting.



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PART II.    OTHER INFORMATION



|ITEM 6. |  | EXHIBITS
|------- |  | --------



The Exhibits to this report are set forth on Exhibit Index to Third Quarter Form 10-Q attached hereto.



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)                                                    
|                  | 
|                  |  | By: WELLS CAPITAL, INC. (Corporate General Partner)                                             
|                  | 
|November 12, 2004 |  | /S/    LEO F. WELLS, IIILeo F. Wells, III President                                             
|                  | 
|November 12, 2004 |  | /S/    DOUGLAS P. WILLIAMSDouglas P. Williams Principal
Financial Officer of Wells Capital, Inc.



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EXHIBIT INDEX

TO

THIRD QUARTER FORM 10-Q

OF

WELLS REAL ESTATE FUND III, L.P.



|            |  |                                                                                                                                                                                                                                                                                                  
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                      
|            | 
|10.1        |  | Purchase and Sale Agreement for 880 Holcomb Bridge Road and Brookwood Grill (previously filed with the Commission as Exhibit 10.1 to the Form 10-Q of Wells Real Estate Fund II for the period
ending September 30, 2004, Commission File No. 0-16518, and hereby incorporated by this reference)
|            | 
|10.2        |  | Lease Agreement with Apex Systems, Inc. for a portion of the 4400 Cox Road Building                                                                                                                                                                                                              
|            | 
|10.3        |  | Lease Agreement with New York Life Insurance Company for a portion of the 4400 Cox Road Building                                                                                                                                                                                                 
|            | 
|31.1        |  | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                           
|            | 
|31.2        |  | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                           
|            | 
|32.1        |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002