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UNITED STATES

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, 2006 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 Number)
|                                                               | 
|6200 The Corners Pkwy., Norcross, Georgia                      |  | 30092-3365                             
|(Address of principal executive offices)                       |  | (Zip Code)                             
|                                                               | 
|Registrants telephone number, including area code             |  | (770) 449-7800                         

N/A

(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 a large
accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated
filer ̈Accelerated filer ̈Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (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 or the Registrant) 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, we consider, among others, statements concerning future operating results and cash flows, our ability
to meet future obligations, and the amount and timing of any 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 this report is filed with the Securities and Exchange Commission. We make no representations or warranties (express or implied) about the accuracy of any such 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 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 partners, and maintain the value of our remaining real estate property, may be significantly hindered. See Item 1A in the Partnerships Annual Report on Form 10-K for the year ended December 31, 2005 for a
discussion of some of the risks and uncertainties, although not all risks and uncertainties, which could cause actual results to differ materially from those presented in our forward-looking statements.



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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, 2006 (unaudited) and December 31, 2005                                                           |  | 5       
|         |  |                       | 
|         |  |                       |  | Statements of Operations for the Three Months and Nine Months Ended September 30, 2006 (unaudited) and 2005 (unaudited)       |  | 6       
|         |  |                       | 
|         |  |                       |  | Statements of Partners Capital for the Year Ended December 31, 2005 and the Nine Months Ended September 30, 2006 (unaudited) |  | 7       
|         |  |                       | 
|         |  |                       |  | Statements of Cash Flows for the Nine Months Ended September 30, 2006 (unaudited) and 2005 (unaudited)                        |  | 8       
|         |  |                       | 
|         |  |                       |  | Condensed Notes to Financial Statements (unaudited)                                                                           |  | 9       
|         |  |                       | 
|         |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                         |  | 15      
|         |  |                       | 
|         |  | Item 3.               |  | Quantitative and Qualitative Disclosures about Market Risk                                                                    |  | 20      
|         |  |                       | 
|         |  | Item 4.               |  | Controls and Procedures                                                                                                       |  | 20      
|         |  |                      
|PART II. |  | OTHER INFORMATION     |  |                                                                                                                              
|         |  |                       | 
|         |  | Item 1.               |  | Legal Proceedings                                                                                                             |  | 21      
|         |  |                       | 
|         |  | Item 1A.              |  | Risk Factors                                                                                                                  |  | 21      
|         |  |                       | 
|         |  | Item 2.               |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                   |  | 21      
|         |  |                       | 
|         |  | Item 3.               |  | Defaults Upon Senior Securities                                                                                               |  | 21      
|         |  |                       | 
|         |  | Item 4.               |  | Submission of Matters to a Vote of Security Holders                                                                           |  | 21      
|         |  |                       | 
|         |  | Item 5.               |  | Other Information                                                                                                             |  | 21      
|         |  |                       | 
|         |  | Item 6.               |  | Exhibits                                                                                                                      |  | 21      



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|PART I. | FINANCIAL STATEMENTS
|------- | --------------------

The information furnished in
the Partnerships accompanying balance sheets and consolidated statements of operations, partners capital, and cash flows reflects all adjustments that are, in managements opinion, necessary for a fair and consistent presentation of
the aforementioned financial statements.

The accompanying financial statements should be read in conjunction with the notes to the
Partnerships financial statements and Managements Discussion and Analysis of Financial Condition and Results of Operations included both in this report on Form 10-Q and in the Partnerships Annual Report on Form 10-K for the year
ended December 31, 2005. The Partnerships results of operations for the three months and nine months ended September 30, 2006 are not necessarily indicative of the operating results expected for the full year.



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WELLS REAL ESTATE FUND III, L.P.



BALANCE SHEETS

ASSETS



|                                                  |  |                              |           |                  |   |          
|------------------------------------------------- |  | ---------------------------- | --------- | ---------------- | - | ---------
|                                                  |  | (Unaudited)September 30,2006 |           | December 31,2005
|Investment in joint ventures                      |  | $                            | 2,370,471 |                  | $ | 2,557,806
|Cash and cash equivalents                         |  |                              | 1,194,190 |                  |   | 1,125,364
|Due from joint ventures                           |  |                              | 74,300    |                  |   | 35,739   
|Other assets                                      |  |                              | 7,232     |                  |   | 0        
|                                                  |  |                              |           |                  |   |          
|Total assets                                      |  | $                            | 3,646,193 |                  | $ | 3,718,909
|                                                  |  |                              |           |                  |   |          
|                                                 
|LIABILITIES AND PARTNERS CAPITAL                
|                                                  |  |                             
|LIABILITIES:                                      |  |                              |           |                  |   |          
|Accounts payable and accrued expenses             |  | $                            | 21,431    |                  | $ | 9,328    
|Due to affiliates                                 |  |                              | 5,306     |                  |   | 9,187    
|Partnership distributions payable                 |  |                              | 62,517    |                  |   | 0        
|                                                  |  |                              |           |                  |   |          
|Total liabilities                                 |  |                              | 89,254    |                  |   | 18,515   
|                                                  |  |                             
|PARTNERS CAPITAL:                                |  |                              |           |                  |   |          
|Limited partners:                                 |  |                              |           |                  |   |          
|Class A  19,635,965 units issued and outstanding |  |                              | 3,556,939 |                  |   | 3,700,394
|Class B  2,544,540 units issued and outstanding  |  |                              | 0         |                  |   | 0        
|General partners                                  |  |                              | 0         |                  |   | 0        
|                                                  |  |                              |           |                  |   |          
|Total partners capital                           |  |                              | 3,556,939 |                  |   | 3,700,394
|                                                  |  |                              |           |                  |   |          
|Total liabilities and partners capital           |  | $                            | 3,646,193 |                  | $ | 3,718,909
|                                                  |  |                              |           |                  |   |          

See accompanying notes.



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WELLS REAL ESTATE FUND III, L.P.



STATEMENTS OF OPERATIONS



|                                                 |  |                                             |        |   |                                            |   |         |      |  |   |         |   |  |   |        
|------------------------------------------------ |  | ------------------------------------------- | ------ | - | ------------------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | -------
|                                                 |  | (Unaudited) Three Months EndedSeptember 30, |        |   | (Unaudited) Nine Months EndedSeptember 30,
|                                                 |  | 2006                                        |        |   | 2005                                       |   |         | 2006 |  |   | 2005   
|EQUITY IN INCOME (LOSS) OF JOINT VENTURES        |  | $                                           | 6,511  |   |                                            | $ | (28,481 | )    |  | $ | 64,187  |   |  | $ | 905,159
|                                                 |  |                                             |        |  
|EXPENSES:                                        |  |                                             |        |   |                                            |   |         |      |  |   |         |   |  |   |        
|Partnership administration                       |  |                                             | 24,816 |   |                                            |   | 31,700  |      |  |   | 87,273  |   |  |   | 106,944
|Legal and accounting                             |  |                                             | 7,628  |   |                                            |   | 24,412  |      |  |   | 37,057  |   |  |   | 48,011 
|                                                 |  |                                             |        |   |                                            |   |         |      |  |   |         |   |  |   |        
|Total expenses                                   |  |                                             | 32,444 |   |                                            |   | 56,112  |      |  |   | 124,330 |   |  |   | 154,955
|                                                 |  |                                             |        |  
|INTEREST AND OTHER INCOME                        |  |                                             | 17,004 |   |                                            |   | 10,882  |      |  |   | 41,724  |   |  |   | 36,232 
|                                                 |  |                                             |        |   |                                            |   |         |      |  |   |         |   |  |   |        
|NET INCOME (LOSS)                                |  | $                                           | (8,929 | ) |                                            | $ | (73,711 | )    |  | $ | (18,419 | ) |  | $ | 786,436
|                                                 |  |                                             |        |   |                                            |   |         |      |  |   |         |   |  |   |        
|                                                 |  |                                             |        |  
|NET INCOME (LOSS) ALLOCATED TO LIMITED PARTNERS: |  |                                             |        |   |                                            |   |         |      |  |   |         |   |  |   |        
|CLASS A                                          |  | $                                           | (8,929 | ) |                                            | $ | (4,777  | )    |  | $ | (18,419 | ) |  | $ | 637,148
|                                                 |  |                                             |        |   |                                            |   |         |      |  |   |         |   |  |   |        
|CLASS B                                          |  | $                                           | 0      |   |                                            | $ | (68,934 | )    |  | $ | 0       |   |  | $ | 149,288
|                                                 |  |                                             |        |   |                                            |   |         |      |  |   |         |   |  |   |        
|                                                 |  |                                             |        |  
|NET INCOME (LOSS) PER LIMITED PARTNER UNIT:      |  |                                             |        |   |                                            |   |         |      |  |   |         |   |  |   |        
|CLASS A                                          |  | $                                           | 0.00   |   |                                            | $ | 0.00    |      |  | $ | 0.00    |   |  | $ | 0.03   
|                                                 |  |                                             |        |   |                                            |   |         |      |  |   |         |   |  |   |        
|CLASS B                                          |  | $                                           | 0.00   |   |                                            | $ | (0.03   | )    |  | $ | 0.00    |   |  | $ | 0.06   
|                                                 |  |                                             |        |   |                                            |   |         |      |  |   |         |   |  |   |        

See accompanying notes.



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WELLS REAL ESTATE FUND III, L.P.



STATEMENTS OF PARTNERS CAPITAL

FOR THE YEAR ENDED DECEMBER 31, 2005

AND THE NINE MONTHS ENDED SEPSTEMBER 30, 2006 (UNAUDITED)



|                                                                                                     |         |                  |         |         |                 |       |                        |           |  |   |          |   |  |    |  |   |            |  
|---------------------------------------------------------------------------------------------------- | ------- | ---------------- | ------- | ------- | --------------- | ----- | ---------------------- | --------- |  | - | -------- | - |  | -- |  | - | ---------- | -
|                                                                                                     |         | Limited Partners |         |         | GeneralPartners |       | Total PartnersCapital |          
|                                                                                                     | Class A |                  |         | Class B |                 |       |                       
|                                                                                                     | Units   |                  | Capital |         |                 | Units |                        | Capital   |  |   |         
|BALANCE, December 31, 2004                                                                           |         | 19,635,965       |         | $       | 7,603,539       |       |                        | 2,544,540 |  | $ | 0        |   |  | $0 |  | $ | 7,603,539  |  
|                                                                                                     |         |                  |         |         |                 |      
|Net income                                                                                           |         | 0                |         |         | 279,805         |       |                        | 0         |  |   | 542,049  |   |  | 0  |  |   | 821,854    |  
|Distributions of net sale proceeds ($0.21 and $0.21 per Class A Unit and Class B Unit, respectively) |         | 0                |         |         | (4,182,950      | )     |                        | 0         |  |   | (542,049 | ) |  | 0  |  |   | (4,724,999 | )
|                                                                                                     |         |                  |         |         |                 |       |                        |           |  |   |          |   |  |    |  |   |            |  
|BALANCE, December 31, 2005                                                                           |         | 19,635,965       |         |         | 3,700,394       |       |                        | 2,544,540 |  |   | 0        |   |  | 0  |  |   | 3,700,394  |  
|                                                                                                     |         |                  |         |         |                 |      
|Net loss                                                                                             |         | 0                |         |         | (18,419         | )     |                        | 0         |  |   | 0        |   |  | 0  |  |   | (18,419    | )
|Distributions of operating cash flows ($0.01 per Class A Unit)                                       |         | 0                |         |         | (125,036        | )     |                        | 0         |  |   | 0        |   |  | 0  |  |   | (125,036   | )
|                                                                                                     |         |                  |         |         |                 |       |                        |           |  |   |          |   |  |    |  |   |            |  
|BALANCE, September 30, 2006                                                                          |         | 19,635,965       |         | $       | 3,556,939       |       |                        | 2,544,540 |  | $ | 0        |   |  | $0 |  | $ | 3,556,939  |  
|                                                                                                     |         |                  |         |         |                 |       |                        |           |  |   |          |   |  |    |  |   |            |  

See accompanying notes.



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WELLS REAL ESTATE FUND III, L.P.



STATEMENTS OF CASH FLOWS



|                                                                                         |  |                                             |           |   |      |   |           |  
|---------------------------------------------------------------------------------------- |  | ------------------------------------------- | --------- | - | ---- | - | --------- | -
|                                                                                         |  | (Unaudited) Nine Months Ended September 30, |          
|                                                                                         |  | 2006                                        |           |   | 2005 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                    |  |                                             |           |   |      |   |           |  
|Net income (loss)                                                                        |  | $                                           | (18,419   | ) |      | $ | 786,436   |  
|Operating distributions received from joint ventures                                     |  |                                             | 234,281   |   |      |   | 244,401   |  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                                             |           |   |      |   |           |  
|Equity in income of joint ventures                                                       |  |                                             | (64,187   | ) |      |   | (905,159  | )
|Changes in assets and liabilities:                                                       |  |                                             |           |   |      |   |           |  
|Increase in other assets                                                                 |  |                                             | (7,232    | ) |      |   | 0         |  
|Increase (decrease) in accounts payable and accrued expenses                             |  |                                             | 12,103    |   |      |   | (6,911    | )
|(Decrease) increase in due to affiliates                                                 |  |                                             | (3,881    | ) |      |   | 365       |  
|                                                                                         |  |                                             |           |   |      |   |           |  
|Net cash provided by operating activities                                                |  |                                             | 152,665   |   |      |   | 119,132   |  
|                                                                                         |  |                                            
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                    |  |                                             |           |   |      |   |           |  
|Net sale proceeds received from joint ventures                                           |  |                                             | 0         |   |      |   | 3,607,520 |  
|Investment in joint venture                                                              |  |                                             | (21,320   | ) |      |   | (114,423  | )
|                                                                                         |  |                                             |           |   |      |   |           |  
|Net cash (used in) provided by investing activities                                      |  |                                             | (21,320   | ) |      |   | 3,493,097 |  
|                                                                                         |  |                                            
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                    |  |                                             |           |   |      |   |           |  
|Operating distributions paid to limited partners                                         |  |                                             | (62,519   | ) |      |   | 0         |  
|Net sale proceeds distributions paid to limited partners                                 |  |                                             | 0         |   |      |   | (775,000  | )
|                                                                                         |  |                                             |           |   |      |   |           |  
|Net cash used in financing activities                                                    |  |                                             | (62,519   | ) |      |   | (775,000  | )
|                                                                                         |  |                                             |           |   |      |   |           |  
|                                                                                         |  |                                            
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                                |  |                                             | 68,826    |   |      |   | 2,837,229 |  
|                                                                                         |  |                                            
|CASH AND CASH EQUIVALENTS, beginning of period                                           |  |                                             | 1,125,364 |   |      |   | 2,184,474 |  
|                                                                                         |  |                                             |           |   |      |   |           |  
|CASH AND CASH EQUIVALENTS, end of period                                                 |  | $                                           | 1,194,190 |   |      | $ | 5,021,703 |  
|                                                                                         |  |                                             |           |   |      |   |           |  
|                                                                                         |  |                                            
|SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:                   |  |                                             |           |   |      |   |           |  
|Partnership distributions payable                                                        |  | $                                           | 62,517    |   |      | $ | 0         |  
|                                                                                         |  |                                             |           |   |      |   |           |  

See accompanying notes.



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WELLS REAL ESTATE FUND III, L.P.



CONDENSED NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2006 (unaudited)



|1. | 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). Wells Capital is a wholly owned subsidiary of Wells Real Estate Funds, Inc. Leo F. Wells, III is the president and sole director of Wells Capital and the president, sole director, and sole owner of
Wells Real Estate Funds, Inc. 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 has equal voting rights regardless of class.

On October 24, 1988, the Partnership commenced an offering of up to
$50,000,000 of Class A or Class B limited partnership units ($1.00 per unit) pursuant to a Registration Statement filed on Form S-11 under the Securities Act of 1933. The offering was terminated on October 23, 1990, at which time the
Partnership had sold approximately 19,635,965 Class A and 2,544,540 Class B Units representing capital contributions of $22,206,310.

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) and properties:



|                                                                      |  |                                                                                                  |  |                                                                               
|--------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------
|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
|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. |  | No properties owned during the periods presented.                             
|Fund III and Fund IV Associates (Fund III-IV Associates)            |  |   Wells Real Estate Fund III, L.P.   Wells Real Estate Fund IV, L.P.                           |  | 2. 4400 Cox Road(2) 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) | This property was sold in June 2005.
| | --- | ------------------------------------

Wells Real Estate Fund II, Wells Real Estate Fund II-OW, Wells Real Estate Fund IV, L.P., Wells Real Estate Fund VI, L.P., and Wells Real
Estate Fund VII, L.P. are affiliated with the Partnership through one or more common general partners. Each of the properties described above was acquired on an all-cash basis. For further information regarding the Joint Ventures and foregoing
properties, refer to the Partnerships Annual Report on Form 10-K for the year ended December 31, 2005.

On June 21, 2005,
Fund III-IV Associates sold 4400 Cox Road to ASI Partners, LLC, which is the sole owner of Apex Systems, Inc., the majority tenant, for a gross sales price of $6,500,000. As a result of the sale, the Partnership received net sale proceeds of
approximately $3,609,000 and was allocated a gain of approximately $830,000.



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##### Table of Contents

|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- | ------------------------------------------

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
U.S. generally accepted accounting principles (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 and consistently 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 Annual Report on Form 10-K for the year ended December 31, 2005.

Investment in Joint Ventures

The Partnership has evaluated the Joint Ventures and concluded that none are variable interest entities under the provisions of
Financial Accounting Standards Board Interpretation (FIN) No. 46(R), Consolidation of Variable Interest Entities, which supersedes FIN No. 46 and is an interpretation of Accounting Research Bulletin (ARB)
No. 51, Consolidated Financial Statements. 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, upon applying the provisions of Statement of Financial Accounting Standard (SFAS)
No. 94, Consolidation of All Majority-Owned Subsidiaries, ARB No. 51, and Statement of Position No. 78-9, Accounting for Investments In Real Estate Ventures, the Partnership accounts for its investments in the Joint Ventures 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. Pursuant to the terms of the joint venture agreements,
all income (loss) and distributions are allocated to joint venture partners in accordance with their respective ownership interests. Distributions of net cash from operations, if available, are generally distributed to the joint venture partners on
a quarterly basis.

Other Assets

As of
September 30, 2006 and December 31, 2005, other assets is comprised of the following items:



|                            |  |                   |  |                 
|--------------------------- |  | ----------------- |  | ----------------
|                            |  | September 30,2006 |  | December 31,2005
|Interest income receivable  |  | $4,995            |  | $0              
|Insurance refund receivable |  | 2,237             |  | 0               
|                            |  |                   |  |                 
|Total                       |  | $7,232            |  | $0              
|                            |  |                   |  |                 

Distribution 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 limited partners
holding Class A Units until each has received an 8% per annum return on his adjusted capital contribution, as defined. Net cash from operations is then distributed to limited partners holding Class B Units until each has received an
8% per annum return on his 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.



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Distribution of Sale Proceeds

Upon the sale of properties, unless reserved, net sale proceeds are to be distributed in the following order:



| |  |  | In the event that the particular property sold is sold for a price that is less than the original property purchase price, to the limited partners holding
Class A Units until each has 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 limited partners until each limited partner has received 100% of his capital contributions, as defined;
| | - |  | ----------------------------------------------------------------------------------------------------------



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



| |  |  | To all limited partners until each limited partner has received a cumulative 12% per annum return on his adjusted capital contributions, as defined;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | To the General Partners until they have received 100% of their respective capital contributions, as defined; and
| | - |  | ----------------------------------------------------------------------------------------------------------------



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

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 and 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 holding Class A Units and the General Partners. To the extent the Partnerships net income in any year exceeds net cash from
operations, it will be allocated 99% to the limited partners and 1% to the General Partners.

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

Gains 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.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board issued SFAS No. 157, Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value, and expands disclosures required for fair value measurements under GAAP. SFAS No. 157 emphasizes that fair value is a market-based measurement, as opposed to an entity-specific measurement. SFAS
No. 157 will be effective for the Partnership beginning January 1, 2008. The Partnership is currently assessing provisions and evaluating the financial impact of SFAS No. 157 on its financial statements.



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##### Table of Contents

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements(SAB No. 108), which provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying
current year misstatements for the purpose of a materiality assessment. SAB No. 108 is effective for fiscal years ending after November 15, 2006, and will be effective for the Partnership beginning December 31, 2006. The Partnership
is currently assessing provisions and evaluating the financial statement impact of SAB No. 108 on its financial statements.



|3. | INVESTMENT IN JOINT VENTURES
|-- | ----------------------------

Summary of
Financial Information

Condensed financial information for the joint ventures in which the Partnership held direct interests for the
three months and nine months ended September 30, 2006 and 2005, respectively, is presented below:



|                       |  |                                 |  |                                         |  |          |                                           |  |          |                                 |  |          |   |  |               |   |  |          |   |  |             |  
|---------------------- |  | ------------------------------- |  | --------------------------------------- |  | -------- | ----------------------------------------- |  | -------- | ------------------------------- |  | -------- | - |  | ------------- | - |  | -------- | - |  | ----------- | -
|                       |  | Total Revenues                  |  | Income (Loss) FromContinuing Operations |  |          | Income (Loss) FromDiscontinued Operations |  |          | Net Income (Loss)               | 
|                       |  | Three Months EndedSeptember 30, |  | Three Months EndedSeptember 30,         |  |          | Three Months EndedSeptember 30,           |  |          | Three Months EndedSeptember 30, | 
|                       |  | 2006                            |  | 2005                                    |  | 2006     |                                           |  | 2005     |                                 |  | 2006     |   |  | 2005          |   |  | 2006     |   |  | 2005        |  
|Fund II-III Associates |  | $461,910                        |  | $429,291                                |  | $41,178  |                                           |  | $49,990  |                                 |  | $    932 |   |  | $  (8,981     | ) |  | $42,110  |   |  | $ 41,009    |  
|Fund III-IV Associates |  | 0                               |  | 0                                       |  | 3,188    |                                           |  | (8,918   | )                               |  | (1,059   | ) |  | (66,625       | ) |  | 2,129    |   |  | (75,543     | )
|                       |  |                                 |  |                                         |  |          |                                           |  |          |                                 |  |          |   |  |               |   |  |          |   |  |             |  
|                       |  | $461,910                        |  | $429,291                                |  | $44,366  |                                           |  | $41,072  |                                 |  | $   (127 | ) |  | $(75,606      | ) |  | $44,239  |   |  | $(34,534    | )
|                       |  |                                 |  |                                         |  |          |                                           |  |          |                                 |  |          |   |  |               |   |  |          |   |  |             |  
|                       |  |                                 |  |                                        
|                       |  | Total Revenues                  |  | Income (Loss) FromContinuing Operations |  |          | Income (Loss) FromDiscontinued Operations |  |          | Net Income (Loss)               | 
|                       |  | Nine Months EndedSeptember 30,  |  | Nine Months EndedSeptember 30,          |  |          | Nine Months EndedSeptember 30,            |  |          | Nine Months EndedSeptember 30,  | 
|                       |  | 2006                            |  | 2005                                    |  | 2006     |                                           |  | 2005     |                                 |  | 2006     |   |  | 2005          |   |  | 2006     |   |  | 2005        |  
|Fund II-III Associates |  | $1,389,112                      |  | $1,376,588                              |  | $204,552 |                                           |  | $317,786 |                                 |  | $ 3,417  |   |  | $      (6,698 | ) |  | $207,969 |   |  | $   311,088 |  
|Fund III-IV Associates |  | 911                             |  | 0                                       |  | (1,123   | )                                         |  | (19,351  | )                               |  | (1,059   | ) |  | 1,404,182     |   |  | (2,182   | ) |  | 1,384,831   |  
|                       |  |                                 |  |                                         |  |          |                                           |  |          |                                 |  |          |   |  |               |   |  |          |   |  |             |  
|                       |  | $1,390,023                      |  | $1,376,588                              |  | $203,429 |                                           |  | $298,435 |                                 |  | $ 2,358  |   |  | $1,397,484    |   |  | $205,787 |   |  | $1,695,919  |  
|                       |  |                                 |  |                                         |  |          |                                           |  |          |                                 |  |          |   |  |               |   |  |          |   |  |             |  

Condensed financial information for the joint venture in which the Partnership held an equity
interest through its ownership in Fund II-III Associates for the three months and nine months ended September 30, 2006 and 2005, respectively, is presented below:



|                              |  |                                 |  |                                 |  |      |                                    |         |                                 |  |      |  |         |  |      |  |        
|----------------------------- |  | ------------------------------- |  | ------------------------------- |  | ---- | ---------------------------------- | ------- | ------------------------------- |  | ---- |  | ------- |  | ---- |  | -------
|                              |  | 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,
|                              |  | 2006                            |  | 2005                            |  | 2006 |                                    | 2005    |                                 |  | 2006 |  | 2005    |  | 2006 |  | 2005   
|Fund II-III-VI-VII Associates |  | $0                              |  | $0                              |  | $0   |                                    | $(1,720 | )                               |  | $0   |  | $3,668  |  | $0   |  | $1,948 
|                              |  |                                 |  |                                 |  |      |                                    |         |                                 |  |      |  |         |  |      |  |        
|                              |  |                                 |  |                                
|                              |  | 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, 
|                              |  | 2006                            |  | 2005                            |  | 2006 |                                    | 2005    |                                 |  | 2006 |  | 2005    |  | 2006 |  | 2005   
|Fund II-III-VI-VII Associates |  | $0                              |  | $0                              |  | $0   |                                    | $(9,928 | )                               |  | $0   |  | $93,697 |  | $0   |  | $83,769
|                              |  |                                 |  |                                 |  |      |                                    |         |                                 |  |      |  |         |  |      |  |        



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The Partnership allocates its share of earnings generated by the properties owned by the Joint Ventures
to its Class A and Class B limited partners pursuant to the partnership agreement provisions outlined in Note 2 for net income, net loss, and gain on sale, respectively. The components of income (loss) from discontinued operations
recognized by the Joint Ventures results are provided below:



|                              |  |                                      |   |  |                                      |  |         |   |  |               |         |   |              |   |           |       |  |   |           |  
|----------------------------- |  | ------------------------------------ | - |  | ------------------------------------ |  | ------- | - |  | ------------- | ------- | - | ------------ | - | --------- | ----- |  | - | --------- | -
|                              |  | Nine Months Ended September 30, 2006 |   |  | Nine Months Ended September 30, 2005 | 
|                              |  | OperatingIncome (loss)               |   |  | Gainon Sale                          |  | Total   |   |  | Operatingloss |         |   | Gain on Sale |   |           | Total | 
|Fund II-III Associates        |  | $ 3,417                              |   |  | $0                                   |  | $ 3,417 |   |  | $             | (6,698  | ) |              | $ | 0         |       |  | $ | (6,698    | )
|Fund II-III-VI-VII Associates |  | 0                                    |   |  | 0                                    |  | 0       |   |  |               | (6,489  | ) |              |   | 100,186   | (1)   |  |   | 93,697    |  
|Fund III-IV Associates        |  | (1,059                               | ) |  | 0                                    |  | (1,059  | ) |  |               | (46,667 | ) |              |   | 1,450,849 |       |  |   | 1,404,182 |  
|                              |  |                                      |   |  |                                      |  |         |   |  |               |         |   |              |   |           |       |  |   |           |  
|                              |  | $ 2,358                              |   |  | $0                                   |  | $ 2,358 |   |  | $             | (59,854 | ) |              | $ | 1,551,035 |       |  | $ | 1,491,181 |  
|                              |  |                                      |   |  |                                      |  |         |   |  |               |         |   |              |   |           |       |  |   |           |  



| | (1) | Represents additional gain
recognized on the sale of the Holcomb Bridge Property, which was deferred at closing related to a rental guarantee for certain space at the Holcomb Bridge Property.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Due from Joint Ventures

As presented in the
accompanying balance sheets, due from joint ventures as of September 30, 2006 and December 31, 2005 represents operating cash flow generated by the Joint Ventures for the three months ended September 30, 2006 and December 31,
2005, respectively, which is attributable to the Partnership.



|4. | RELATED-PARTY TRANSACTIONS
|-- | --------------------------

Management
and Leasing Fees

In accordance with the property management and leasing agreement, 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 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, which is assessed periodically based on market studies, or (b) in the case of commercial properties 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. Management and leasing fees are paid by the Joint Ventures and, accordingly,
included in equity in income of joint ventures in the accompanying statements of operations. The Partnerships share of management and leasing fees and lease acquisition costs incurred through the Joint Ventures is $11,230 and $11,099 for the
three months ended September 30, 2006 and 2005, respectively, and $32,479 and $34,842 for the nine months ended September 30, 2006 and 2005, respectively.

Administration Reimbursements

Wells Capital and Wells Management perform certain administrative
services for the Partnership, relating to 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 based on
estimates of the amount of time spent dedicated to each fund by individual administrative personnel. In the opinion of the General Partners, this allocation is a reasonable estimation of such expenses. The Partnership reimbursed Wells Capital and
Wells Management for administrative expenses of $16,989 and $21,554 for the three months ended September 30, 2006 and 2005, respectively, and $51,641 and $73,861 for the nine months ended September 30, 2006, and 2005, respectively. In
addition, Wells Capital pays for certain operating expenses of the Partnership



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##### Table of Contents

(bill-backs) directly and invoices the Partnership for the reimbursement thereof. As of September 30, 2006 and December 31, 2005, due
to affiliates is comprised of administrative reimbursements and bill-backs due to Wells Capital and/or Wells Management.

Economic Dependency

We have engaged Wells Capital and Wells Management to provide certain essential services, including supervision of the management and
leasing of our properties, asset acquisition and disposition services, as well as other administrative responsibilities for us including accounting services and investor communications and relations. These agreements are terminable by either party
upon 60 days written notice. As a result of these relationships, we are dependent upon Wells Capital and Wells Management.

Wells
Capital and Wells Management are all 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. Accordingly, we focus on the
financial condition of WREF when assessing the financial condition of Wells Capital and Wells Management. In the event that WREF was to become unable to meet its obligations as they become due, we might be required to find alternative service
providers.

Future net income generated by WREF will be largely dependent upon the amount of fees earned by Wells Capital and Wells
Management based on, among other things, the level of investor proceeds raised from the sale of common stock for certain WREF-sponsored programs and the volume of future acquisitions and dispositions of real estate assets by WREF-sponsored programs.
As of September 30, 2006, the General Partners believe that WREF generates adequate cash flow from operations and has adequate liquidity available in the form of cash on hand and current receivables necessary to meet its current and future
obligations as they become due.



|5. | COMMITMENTS AND CONTINGENCIES
|-- | -----------------------------

The Partnership and its General Partners are from time to time a party to legal proceedings, which arise in the ordinary course of its business. The Partnership is not currently involved in any legal proceedings of which the outcome is
reasonably possible to have a material adverse effect on results of operations or financial condition. The Partnership is not aware of any legal proceedings contemplated by governmental authorities.



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##### Table of Contents

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

The following discussion and analysis should be read in conjunction with the accompanying financial statements and notes thereto. See also Cautionary Note Regarding Forward-Looking
Statements preceding Part I, as well as the notes to our financial statements and Managements Discussion and Analysis of Financial Condition and Results of Operations provided in our Annual Report on Form 10-K for the year ended
December 31, 2005.

Overview

Management believes that the Partnership typically operates through the following five key life cycle phases. The duration of 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 the Partnership owns and operates its real estate assets 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, distributes net sale proceeds to the partners, liquidates, and terminates the Partnership.

Portfolio Overview

We are currently in the
disposition-and-liquidation phase of our life cycle. Of the six assets in which we originally owned interests, we have sold five assets. Our focus on the remaining asset involves leasing and marketing efforts that we believe will result in the best
disposition pricing for our limited partners.

The third quarter 2006 operating distributions to limited partners holding Class A
Units remained consistent with the level paid in the prior quarter. We anticipate that operating distributions may be reserved or remain low in the future, as only one property remains in the portfolio. Once the details surrounding the potential
sale of the remaining property becomes known, the General Partners will evaluate if distributions of the remaining net sale proceeds from the sale of 4400 Cox Road would be appropriate.

Property Summary

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 the remaining property is positioned for sale, our attention will shift to locating suitable buyers and 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.



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##### Table of Contents

Information relating to the properties owned, or previously owned, by the Joint Ventures is provided
below:



| |  |  | The Greenville Center property was sold on September 30, 2002.
| | - |  | --------------------------------------------------------------



| |  |  | Stockbridge Village Shopping Center was sold on April 29, 2004.
| | - |  | ---------------------------------------------------------------



| |  |  | Brookwood Grill was sold on July 1, 2004.
| | - |  | -----------------------------------------



| |  |  | The Holcomb Bridge Property was sold on July 1, 2004.
| | - |  | -----------------------------------------------------



| |  |  | The 4400 Cox Road property was sold on June 21, 2005.
| | - |  | -----------------------------------------------------



| |  |  | Boeing at the Atrium is currently 100% occupied by the Boeing/Shuttle Division of The Boeing Company. The existing lease extends through March 2008.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

Liquidity and Capital Resources

Overview

Our operating strategy entails funding expenditures related to the recurring operations of the Joint
Ventures properties and the portfolio with operating cash flows, including current and prior period operating distributions received from the Joint Ventures, and assessing the amount of remaining cash flows that will be required to fund known
future re-leasing costs and other capital improvements. Any residual operating cash flows are generally considered available for distribution to the Class A limited partners and, unless reserved, are generally paid quarterly. To the extent that
operating cash flows are insufficient to fund our recurring operations, net sale proceeds will be utilized. 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 our tenants to honor lease payments and our ability to re-lease 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 could be adversely affected.

Short-Term Liquidity

During the nine months ended September 30, 2006, we generated net operating cash flows, including operating distributions received
from the Joint Ventures, of approximately $153,000, as compared to approximately $119,000 for the nine months ended September 30, 2005. The 2006 increase in net operating cash flows is primarily attributable to a decrease in legal fees and
administrative costs relative to the decrease in the size of the portfolio as a result of the sales of properties, partially offset by a decrease in operating distributions received from Fund II-III Associates resulting from an increase in utility
expenses and property taxes at Boeing at the Atrium. 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.

We expect operating distributions to limited partners will remain low or be reserved in the near-term,
since only one property remains in the portfolio. Any future operating distributions paid to limited partners will be largely dependent upon the amount of cash generated from Boeing at the Atrium, our expectations of future cash flows, and
determination of near-term cash needs for tenant re-leasing costs and other capital improvements for the remaining property owned by Fund II-III Associates.

We believe that the cash on hand is sufficient to cover our working capital needs, including liabilities of approximately $89,000, as of September 30, 2006. We anticipate that we will be able to fund our
proportionate share of the anticipated capital expenditures noted above using cash on hand and future operating cash flow.

Long-Term Liquidity

We expect that our future sources of capital will be primarily derived from operating cash flows generated from Fund II-III
Associates and net sale proceeds generated from the strategic sale of the remaining property. Our future long-term liquidity requirements will include, but not be limited to, funding tenant improvements,



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##### Table of Contents

renovations, expansions, and other significant capital improvements necessary for the remaining property owned through Fund II-III Associates. We expect to
continue to use substantially all future net cash flows from operations to provide funding for such requirements. Future cash flows from operating activities will be primarily affected by distributions received from Fund II-III Associates, which are
dependent upon net operating income generated by the remaining property, less reserves for known capital expenditures.

Capital Resources

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

Fund II-III Associates
funds capital expenditures primarily related to building improvements for the purpose of maintaining the quality of our remaining property, and tenant improvements for the purpose of readying our remaining property for re-leasing. As leases expire,
we typically 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 Fund
II-III Associates will be required to 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 approximately one month following calendar quarter-ends. However, the Joint Ventures will reserve operating distributions, or a portion thereof, as needed
in order to fund known capital and other expenditures. 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, 2006, we had received, used, distributed, and held net sale proceeds allocated to the Partnership from the sale of properties as presented below:



|                                                  |  |                   |            |                                       |       |         |                                              |              |                          |   |                                                                   |  |                                                         |  |              |  |              
|------------------------------------------------- |  | ----------------- | ---------- | ------------------------------------- | ----- | ------- | -------------------------------------------- | ------------ | ------------------------ | - | ----------------------------------------------------------------- |  | ------------------------------------------------------- |  | ------------ |  | -------------
|Property Sold                                     |  | Net Sale Proceeds |            | Partnerships Approximate Ownership % |       |         | Net SaleProceeds Allocated tothe Partnership |              | Use of Net Sale Proceeds |   | Net Sale Proceeds Distributed toPartners as of September 30, 2006 |  | Undistributed NetSale Proceeds as of September 30, 2006
|                                                  |  |                   |            | Amount                                |       | Purpose |                                              |             
|                                                  |  |                   |            |                                       |       |         |                                             
|Greenville Center(sold in 2002)                   |  |                   | $2,271,187 |                                       | 100.0 | %       |                                              | $  2,271,187 |                          | $ | 0                                                                 |  |                                                        |  | $  2,271,187 |  | $           0
|                                                  |  |                   |            |                                       |       |         |                                             
|Stockbridge Village Shopping Center(sold in 2004) |  | $                 | 12,024,223 |                                       | 57.2  | %       |                                              | 6,879,238    |                          |   | 626,466                                                           |  |   Re-leasing4400 Cox Roadbuilding (2004)               |  | 6,252,772    |  | 0            
|                                                  |  |                   |            |                                       |       |         |                                             
|Holcomb Bridge Property(sold in 2004)             |  |                   | $6,889,379 |                                       | 8.8   | %       |                                              | 607,643      |                          |   | 58,283                                                            |  |   Re-leasing4400 Cox Roadbuilding (2004)               |  | 549,360      |  | 0            
|                                                  |  |                   |            |                                       |       |         |                                             
|Brookwood Grill(sold in 2004)                     |  |                   | $2,318,115 |                                       | 37.7  | %       |                                              | 872,770      |                          |   | 84,746                                                            |  |   Re-leasing4400 Cox Roadbuilding (2004)               |  | 788,024      |  | 0            
|                                                  |  |                   |            |                                       |       |         |                                             
|4400 Cox Road(sold in 2005)                       |  |                   | $6,308,796 |                                       | 57.2  | %       |                                              | 3,609,357    |                          |   | 0                                                                 |  |                                                        |  | 2,833,662    |  | 775,695      
|                                                  |  |                   |            |                                       |       |         |                                              |              |                          |   |                                                                   |  |                                                         |  |              |  |              
|                                                  |  |                   |            |                                       |       |         |                                             
|Total                                             |  |                   |            |                                       |       |         |                                              | $14,240,195  |                          | $ | 769,495                                                           |  |                                                         |  | $12,695,005  |  | $775,695     
|                                                  |  |                   |            |                                       |       |         |                                              |              |                          |   |                                                                   |  |                                                         |  |              |  |              



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##### Table of Contents

Upon evaluating the Partnerships obligations, our General Partners have decided to reserve the net
sale proceeds on hand as of September 30, 2006 to fund the Partnerships ongoing operations.

Results of Operations

Equity in Income of Joint Ventures

Equity in income
(loss) of Joint Ventures was $6,511 and $(28,481) for the three months ended September 30, 2006 and 2005, respectively. The increase for the three months ended September 30, 2006, as compared to the three months ended September 30,
2005, is primarily attributable to incurring additional legal fees in the third quarter of 2005 related to the sale of 4400 Cox Road, partially offset by (i) an increase in utility expenses due to increased after-hour usage at Boeing at the
Atrium, and (ii) an increase in property taxes at Boeing at the Atrium.

Equity in income of Joint Ventures was $64,187 and $905,159
for the nine months ended September 30, 2006 and 2005, respectively. The decrease for the nine months ended September 30, 2006, as compared to the nine months ended September 30, 2005, is primarily attributable to (i) an increase
in utility expenses due to increased after-hour usage at Boeing at the Atrium, (ii) an increase in property taxes at Boeing at the Atrium, (iii) the gain recognized from the sale of 4400 Cox Road in June 2005, and (iv) a corresponding
decrease in operating income resulting from the aforementioned sale.

We expect future equity in income of Joint Ventures to remain at
similar levels, given the remaining property in the portfolio is currently stabilized.

Expenses

Our total expenses were $32,444 and $56,112 for the three months ended September 30, 2006 and 2005, respectively, and $124,330 and $154,955 for the
nine months ended September 30, 2006 and 2005, respectively. The 2006 decreases, as compared to 2005, are primarily attributable to (i) a decline in administrative costs and legal fees relative to the decrease in the size of the portfolio
as a result of the sales of properties, and (ii) decrease in accounting fees as a result of changing auditors.

We anticipate future
increases in our administrative expenses and legal fees in future periods resulting from increased costs relating to compliance with reporting and regulatory requirements.

Interest and Other Income

Interest and other income were $17,004 and $10,882 for the three months
ended September 30, 2006 and 2005, respectively, and $41,724 and $36,232 for the nine months ended September 30, 2006 and 2005, respectively. The 2006 increases, as compared to 2005, are primarily attributable to (i) an increase in
the daily interest, partially offset by (ii) a decrease in the average amount of net sale proceeds held during the respective periods.

Future levels of interest income will be largely dependent upon the timing of future dispositions and distributions of net sale proceeds to the investors.

Inflation

We are exposed to inflation risk as income from long-term leases is the primary source of our cash flows from
operations. There are provisions in the majority of our tenant leases that would protect us from the impact of inflation. These provisions include rent steps, 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. However, due to the long-term nature of our leases, the leases may not readjust their
reimbursement rates frequently enough to cover inflation.



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Application of Critical Accounting Policies

Summary

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 our depreciable assets. We will consider the period of future benefit of the remaining property to determine the appropriate useful lives. These assessments have a
direct impact on net income. The estimated useful lives for the remaining real estate asset owned through Fund II-III Associates by class are as follows:



|                      |  |                                       
|--------------------- |  | --------------------------------------
|Buildings             |  | 40 years                              
|Building improvements |  | 5-25 years                            
|Land improvements     |  | 20 years                              
|Tenant improvements   |  | Shorter of lease term or economic life

In the event that Fund II-III Associates utilizes 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 amount of the remaining property in which we have an ownership interest, through investment in
Fund II-III Associates, may not be recoverable. When indicators of potential impairment are present which indicate that the carrying amount 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 assets and their eventual disposition. In the event that such expected
undiscounted future cash flows do not exceed the carrying value, management adjusts the real estate asset to the fair value, as defined by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, and recognizes an
impairment loss. Estimated fair value is calculated based on the following information, dependent upon availability, in order of preference: (i) recently quoted market price, (ii) market prices for comparable properties, or (iii) the
present value of undiscounted cash flows, including estimated salvage value. We have determined that there has been no impairment in the carrying value of the remaining real estate asset held as of September 30, 2006.

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 the remaining real estate asset held by Fund II-III Associates and net income of the
Partnership.



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Related-Party Transactions

We have entered into agreements with Wells Capital, Wells Management, an affiliate of our General Partners, and their affiliates, whereby we pay certain fees and expense reimbursements to Wells Capital, Wells
Management, and their affiliates for asset management; the management and leasing of our properties; administrative services relating to accounting, property management, and other partnership administration; and incur the related expenses. See
Note 4 to our financial statements included in this report for a description of these fees and expense reimbursements we have incurred.

Potential
Tax Impact on Limited Partners Holding Class B Units  American Jobs Creation Act of 2004

The American Jobs Creation Act of 2004
added Section 470 to the Internal Revenue Code, which provides for certain limitations on the utilization of losses by investors that are attributable to leased property owned by a partnership having both taxable and tax-exempt partners such as
the Partnership. If Section 470 were deemed to apply to the Partnership, passive losses allocable to limited partners holding Class B Units could only be utilized to offset passive income generated from the same property or potentially from
properties owned by the same partnership. In March 2005, the Internal Revenue Service (IRS) announced that the IRS would not apply Section 470 to partnerships for the taxable year 2004 based solely on the fact that a partnership had
both taxable and tax-exempt partners, and in December 2005, the IRS extended the period for transitional relief through the 2005 tax year. In addition, pursuant to Section 403(ff) of the Gulf Opportunity Zone Act of 2005, the effective date
provisions regarding the applicability of Section 470 were amended to provide that, in the case of leased property treated as tax-exempt use property by reason of its being owned by a partnership having both taxable and tax-exempt partners,
Section 470 will apply only to property acquired after March 12, 2004. Since the Partnership acquired all of its properties prior to March 12, 2004, and is not expected to acquire interests in any additional properties in the future,
we do not believe that the provisions of Section 470 should apply to limit the utilization of losses attributable to the properties owned by the Partnership; however, due to the uncertainties and lack of guidance relating to this provision, it
is unclear as to whether the acquisition of a limited partnership interest in the Partnership after the March 12, 2004 effective date may be deemed to be an acquisition of property within the meaning of the effective date provisions of
Section 470.



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

Since we do not borrow any money, make any foreign investments or invest in any market risk-sensitive instruments, we are 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
|------- | -----------------------

We carried out an
evaluation, under the supervision and with the participation of management of Wells Capital, our corporate General Partner, including the Principal Executive Officer and the Principal Financial Officer of Wells Capital, of the effectiveness of the
design and operation of the Partnerships disclosure controls and procedures as defined in rule 13a-15(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based upon that evaluation, the Principal
Executive Officer and the Principal Financial Officer of Wells Capital concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report in providing a reasonable level of assurance
that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in applicable SEC rules and forms, including
providing a reasonable level of assurance that information required to be disclosed by us in such reports is accumulated and communicated to our management, including the Principal Executive Officer and the Principal Financial Officer of Wells
Capital, as appropriate, to allow timely decisions regarding required disclosure.

There were no significant changes in our internal
control over financial reporting during the quarter ended September 30, 2006 that have materially affected, or are likely to materially affect, our internal control over financial reporting.



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##### Table of Contents

|PART II. | OTHER INFORMATION
|-------- | -----------------



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

We are from time to time a party
to other legal proceedings, which arise in the ordinary course of our business. We are not currently involved in any litigation the outcome of which would, in managements judgment based on information currently available, have a material
adverse effect on our results of operations or financial condition, nor is management aware of any such litigation threatened against us during the quarter ended September 30, 2006, requiring disclosure under Item 103 of Regulation S-K.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

There have been no material changes
from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------



|(a) | We did not sell any equity securities that were not registered under the Securities Act of 1933 during the quarter ended September 30, 2006.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Not applicable.
|--- | ---------------



|(c) | We did not redeem any securities during the quarter ended September 30, 2006.
|--- | -----------------------------------------------------------------------------



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------



|(a) | We were not subject to any indebtedness and, therefore, did not default with respect to any indebtedness during the quarter ended September 30, 2006.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Not applicable.
|--- | ---------------



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

No matters were submitted to a vote of our limited partners during the quarter ended September 30, 2006.



|ITEM 5. | OTHER INFORMATION
|------- | -----------------



|(a) | During the quarter ended September 30, 2006, there was no information required to be disclosed in a report on Form 8-K which was not disclosed in a report
on Form 8-K.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Not applicable.
|--- | ---------------



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

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



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SIGNATURES

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

|                  |  |  |  |                                                                                                    |  |                            
|----------------- |  |  |  | -------------------------------------------------------------------------------------------------- |  | ---------------------------
|                  |  |  |  | WELLS REAL ESTATE FUND III, L.P. (Registrant)                                                     
|                  |  |  | 
|                  |  |  |  | By:                                                                                                |  | WELLS CAPITAL, INC.        
|                  |  |  |  |                                                                                                    |  | (Corporate General Partner)
|                  |  | 
|November 13, 2006 |  |  |  | /s/    LEO F. WELLS,
III                                                                          
|                  |  |  |  | Leo F. Wells, III President, Principal Executive Officer, and Sole Director of Wells Capital, Inc.
|                  |  | 
|November 13, 2006 |  |  |  | /s/    DOUGLAS P.
WILLIAMS                                                                        
|                  |  |  |  | Douglas P. Williams Principal Financial Officer of Wells Capital, Inc.                            



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##### Table of Contents

WELLS REAL ESTATE FUND III, L.P.



EXHIBIT INDEX

TO THIRD QUARTER FORM 10-Q

OF

WELLS REAL ESTATE FUND III, L.P.



|            |  |                                                                                                                               
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                   
|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