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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark one)



| | x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | ---------------------------------------------------------------------------------------

For the quarterly period ended September 30, 2008

or



| |  ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | ----------------------------------------------------------------------------------------

For the transition period from to
 to

Commission file number 0-18407





WELLS REAL ESTATE FUND III,
L.P.

(Exact name of registrant as specified in its charter)







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

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, a non-accelerated filer, or a smaller reporting company. See the
definitions of large accelerated file, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.

Large accelerated filer   ̈                 Accelerated filer   ̈

Non-accelerated filer  x (Do not check if a smaller reporting
company)                 Smaller reporting company   ̈

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, 2007 along with Item 1A. of Part
II of this report 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, 2008 (unaudited) and December 31, 2007                                                         |  | 5       
|         |  |                       | 
|         |  |                       |  | Statements of Operations for the Three Months and Nine Months Ended September 30, 2008 (unaudited) and 2007 (unaudited)       |  | 6       
|         |  |                       | 
|         |  |                       |  | Statements of Partners Capital for the Year Ended December 31, 2007 and the Nine Months Ended September 30, 2008 (unaudited) |  | 7       
|         |  |                       | 
|         |  |                       |  | Statements of Cash Flows for the Nine Months Ended September 30, 2008 (unaudited) and 2007 (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                                                                    |  | 21      
|         |  |                       | 
|         |  | Item 4T.              |  | Controls and Procedures                                                                                                       |  | 21      
|         |  |                      
|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                                                                   |  | 22      
|         |  |                       | 
|         |  | Item 3.               |  | Defaults Upon Senior Securities                                                                                               |  | 22      
|         |  |                       | 
|         |  | Item 4.               |  | Submission of Matters to a Vote of Security Holders                                                                           |  | 22      
|         |  |                       | 
|         |  | Item 5.               |  | Other Information                                                                                                             |  | 22      
|         |  |                       | 
|         |  | Item 6.               |  | Exhibits                                                                                                                      |  | 22      



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|PART I. | FINANCIAL INFORMATION
|------- | ---------------------



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------

The information furnished in the
Partnerships accompanying balance sheets and 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, 2007. The Partnerships results of operations for the three months and nine months ended September 30, 2008 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 30,2008 |           | December 31,2007
|Investment in joint venture                                                                                                       |  | $                 | 2,347,916 |                  | $ | 2,059,276
|Cash and cash equivalents                                                                                                         |  |                   | 709,598   |                  |   | 1,244,856
|Due from joint venture                                                                                                            |  |                   | 0         |                  |   | 19,999   
|Other assets                                                                                                                      |  |                   | 1,423     |                  |   | 5,005    
|                                                                                                                                  |  |                   |           |                  |   |          
|Total assets                                                                                                                      |  | $                 | 3,058,937 |                  | $ | 3,329,136
|                                                                                                                                  |  |                   |           |                  |   |          
|                                                                                                                                 
|LIABILITIES AND PARTNERS CAPITAL                                                                                                
|LIABILITIES:                                                                                                                      |  |                   |           |                  |   |          
|Accounts payable and accrued expenses                                                                                             |  | $                 | 10,495    |                  | $ | 11,020   
|Due to affiliates                                                                                                                 |  |                   | 8,862     |                  |   | 6,791    
|                                                                                                                                  |  |                   |           |                  |   |          
|Total liabilities                                                                                                                 |  |                   | 19,357    |                  |   | 17,811   
|                                                                                                                                  |  |                  
|PARTNERS CAPITAL:                                                                                                                |  |                   |           |                  |   |          
|Limited partners:                                                                                                                 |  |                   |           |                  |   |          
|Class A 19,635,965 units issued and outstanding                                                                                  |  |                   | 3,039,580 |                  |   | 3,311,325
|Class B  2,544,290 units and 2,544,540 units issued and outstanding as of September 30, 2008 and December 31, 2007,
respectively |  |                   | 0         |                  |   | 0        
|General partners                                                                                                                  |  |                   | 0         |                  |   | 0        
|                                                                                                                                  |  |                   |           |                  |   |          
|Total partners capital                                                                                                           |  |                   | 3,039,580 |                  |   | 3,311,325
|                                                                                                                                  |  |                   |           |                  |   |          
|Total liabilities and partners capital                                                                                           |  | $                 | 3,058,937 |                  | $ | 3,329,136
|                                                                                                                                  |  |                   |           |                  |   |          

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,
|                                                 |  | 2008                                       |          |                                           | 2007 |   | 2008   |  |   | 2007    
|EQUITY IN INCOME (LOSS) OF JOINT VENTURE         |  | $                                          | (103,848 | )                                         |      | $ | 50,362 |  | $ | (155,373 | ) |  | $ | 125,619
|                                                 |  |                                            |          |                                          
|EXPENSES:                                        |  |                                            |          |                                           |      |   |        |  |   |          |   |  |   |        
|General and administrative                       |  |                                            | 38,246   |                                           |      |   | 36,598 |  |   | 137,576  |   |  |   | 113,090
|                                                 |  |                                            |          |                                          
|INTEREST AND OTHER INCOME                        |  |                                            | 4,848    |                                           |      |   | 15,434 |  |   | 21,204   |   |  |   | 46,217 
|                                                 |  |                                            |          |                                           |      |   |        |  |   |          |   |  |   |        
|NET INCOME (LOSS)                                |  | $                                          | (137,246 | )                                         |      | $ | 29,198 |  | $ | (271,745 | ) |  | $ | 58,746 
|                                                 |  |                                            |          |                                           |      |   |        |  |   |          |   |  |   |        
|                                                 |  |                                            |          |                                          
|NET INCOME (LOSS) ALLOCATED TO LIMITED PARTNERS: |  |                                            |          |                                           |      |   |        |  |   |          |   |  |   |        
|CLASS A                                          |  | $                                          | (137,246 | )                                         |      | $ | 29,198 |  | $ | (271,745 | ) |  | $ | 58,746 
|                                                 |  |                                            |          |                                           |      |   |        |  |   |          |   |  |   |        
|CLASS B                                          |  | $                                          | 0        |                                           |      | $ | 0      |  | $ | 0        |   |  | $ | 0      
|                                                 |  |                                            |          |                                           |      |   |        |  |   |          |   |  |   |        
|                                                 |  |                                            |          |                                          
|NET INCOME (LOSS) PER LIMITED PARTNER UNIT:      |  |                                            |          |                                           |      |   |        |  |   |          |   |  |   |        
|CLASS A                                          |  |                                            | $(0.01   | )                                         |      |   | $0.00  |  |   | $(0.01   | ) |  |   | $0.00  
|                                                 |  |                                            |          |                                           |      |   |        |  |   |          |   |  |   |        
|CLASS B                                          |  |                                            | $ 0.00   |                                           |      |   | $0.00  |  |   | $ 0.00   |   |  |   | $0.00  
|                                                 |  |                                            |          |                                           |      |   |        |  |   |          |   |  |   |        

See accompanying notes.



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WELLS REAL ESTATE FUND III, L.P.



STATEMENTS OF PARTNERS CAPITAL

FOR THE YEAR ENDED DECEMBER 31, 2007

AND THE NINE MONTHS ENDED SEPTEMBER 30,
2008 (UNAUDITED)



|                                                              |  |                  |  |                 |           |                       |       |           |   |         |    |  |    |  |   |           |  
|------------------------------------------------------------- |  | ---------------- |  | --------------- | --------- | --------------------- | ----- | --------- | - | ------- | -- |  | -- |  | - | --------- | -
|                                                              |  | Limited Partners |  | GeneralPartners |           | TotalPartnersCapital |      
|                                                              |  | Class A          |  |                 | Class B   |                       |      
|                                                              |  | Units            |  | Capital         |           |                       | Units |           |   | Capital |    | 
|BALANCE, December 31, 2006                                    |  | 19,635,965       |  | $               | 3,485,028 |                       |       | 2,544,540 |   |         | $0 |  | $0 |  | $ | 3,485,028 |  
|                                                              |  |                  |  |                 |           |                      
|Net income                                                    |  | 0                |  |                 | 13,855    |                       |       | 0         |   |         | 0  |  | 0  |  |   | 13,855    |  
|Distributions of operating cash flow ($0.01 per Class A Unit) |  | 0                |  |                 | (187,558  | )                     |       | 0         |   |         | 0  |  | 0  |  |   | (187,558  | )
|                                                              |  |                  |  |                 |           |                       |       |           |   |         |    |  |    |  |   |           |  
|BALANCE, December 31, 2007                                    |  | 19,635,965       |  |                 | 3,311,325 |                       |       | 2,544,540 |   |         | 0  |  | 0  |  |   | 3,311,325 |  
|                                                              |  |                  |  |                 |           |                      
|Class B limited partner rescission                            |  | 0                |  |                 | 0         |                       |       | (250      | ) |         | 0  |  | 0  |  |   | 0         |  
|Net loss                                                      |  | 0                |  |                 | (271,745  | )                     |       | 0         |   |         | 0  |  | 0  |  |   | (271,745  | )
|                                                              |  |                  |  |                 |           |                       |       |           |   |         |    |  |    |  |   |           |  
|BALANCE, September 30, 2008                                   |  | 19,635,965       |  | $               | 3,039,580 |                       |       | 2,544,290 |   |         | $0 |  | $0 |  | $ | 3,039,580 |  
|                                                              |  |                  |  |                 |           |                       |       |           |   |         |    |  |    |  |   |           |  

See accompanying notes.



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WELLS REAL ESTATE FUND III, L.P.



STATEMENTS OF CASH FLOWS



|                                                                                                   |  |                               |           |   |      |   |           |  
|-------------------------------------------------------------------------------------------------- |  | ----------------------------- | --------- | - | ---- | - | --------- | -
|                                                                                                   |  | (Unaudited) Nine Months Ended |          
|                                                                                                   |  | September 30,                 |          
|                                                                                                   |  | 2008                          |           |   | 2007 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                              |  |                               |           |   |      |   |           |  
|Net income (loss)                                                                                  |  | $                             | (271,745  | ) |      | $ | 58,746    |  
|Operating distributions received from joint venture                                                |  |                               | 83,346    |   |      |   | 285,736   |  
|Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: |  |                               |           |   |      |   |           |  
|Equity in (income) loss of joint venture                                                           |  |                               | 155,373   |   |      |   | (125,619  | )
|Changes in assets and liabilities:                                                                 |  |                               |           |   |      |   |           |  
|Decrease in other assets                                                                           |  |                               | 3,582     |   |      |   | 122       |  
|Decrease in accounts payable and accrued expenses                                                  |  |                               | (525      | ) |      |   | (1,215    | )
|Increase in due to affiliates                                                                      |  |                               | 2,071     |   |      |   | 4,528     |  
|                                                                                                   |  |                               |           |   |      |   |           |  
|Net cash (used in) provided by operating activities                                                |  |                               | (27,898   | ) |      |   | 222,298   |  
|                                                                                                   |  |                              
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                              |  |                               |           |   |      |   |           |  
|Investment in joint venture                                                                        |  |                               | (507,360  | ) |      |   | 0         |  
|                                                                                                   |  |                              
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                              |  |                               |           |   |      |   |           |  
|Operating distributions paid to limited partners                                                   |  |                               | 0         |   |      |   | (187,552  | )
|                                                                                                   |  |                               |           |   |      |   |           |  
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                               |  |                               | (535,258  | ) |      |   | 34,746    |  
|                                                                                                   |  |                              
|CASH AND CASH EQUIVALENTS, beginning of period                                                     |  |                               | 1,244,856 |   |      |   | 1,187,998 |  
|                                                                                                   |  |                               |           |   |      |   |           |  
|CASH AND CASH EQUIVALENTS, end of period                                                           |  | $                             | 709,598   |   |      | $ | 1,222,744 |  
|                                                                                                   |  |                               |           |   |      |   |           |  
|                                                                                                   |  |                              
|SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:                             |  |                               |           |   |      |   |           |  
|Partnership distributions payable                                                                  |  | $                             | 0         |   |      | $ | 62,517    |  
|                                                                                                   |  |                               |           |   |      |   |           |  

See accompanying notes.



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WELLS REAL ESTATE FUND III, L.P.



CONDENSED NOTES TO FINANCIAL STATEMENTS

SEPTEMBER 30, 2008 (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. (WREF). Leo F. Wells, III is the president and sole director of Wells Capital and the president, sole director, and sole owner of WREF. 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 sold approximately 19,635,965 Class A Units and
2,544,540 Class B Units representing total limited partner capital contributions of $22,180,505, adjusted for the Partnership repurchase of 22,805 Class A Units and 3,000 Class B Units. Since the termination of the offering in 1990, the total
number of outstanding Class B Units has decreased to 2,544,290 due to the rescission of certain units.

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



|                                                                                   |  |                                                                |  |                                                                                                                       
|---------------------------------------------------------------------------------- |  | -------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------
|Joint Venture                                                                      |  | Joint Venture Partners                                         |  | Property                                                                                                              
|Fund II and Fund III Associates (Fund II-III Associates  or the Joint Venture) |  |   Fund II and Fund II-OW*   Wells Real Estate Fund III, L.P. |  | 2100Space Park Drive (formerly known as Boeing at the
Atrium) A four-story office building located in Houston, Texas



| | * | Fund II and Fund II-OW is a joint venture between Wells Real Estate Fund II and Wells Real Estate Fund II-OW.
| | - | -------------------------------------------------------------------------------------------------------------

Wells Real Estate Fund II and Wells Real Estate Fund II-OW are affiliated with the Partnership through one or more common general partners. The property described above
was acquired on an all-cash basis. For further information regarding the Joint Venture and foregoing property, refer to the Partnerships Annual Report on Form 10-K for the year ended December 31, 2007.



|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 (SEC), 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



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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, 2007.

Investment in Joint Venture

The Partnership has evaluated the
Joint Venture and concluded that it is not variable interest entity 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 Venture; 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 Venture, or its 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 (SOP)
No. 78-9, Accounting for Investments In Real Estate Ventures, the Partnership accounts for its investments in the Joint Venture 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 agreement, 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.

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 contribution, 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.

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;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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, amortization, 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 Pronouncement

In
September 2006, the Financial Accounting Standards Board (FASB) 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, including amending SFAS No. 144, Accounting for the Impairment or Disposal on Long-Lived Assets. SFAS No. 157 emphasizes that fair value is a market-based measurement, as opposed to an
entity-specific measurement. In February 2008, the FASB issued Staff Position No. SFAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13 (FSP 157-1). FSP 157-1, which is effective upon the initial adoption of SFAS No.157, excludes SFAS No. 13, Accounting for Leases, as well as other
accounting pronouncements that address fair value measurements on lease classification or measurement under SFAS No. 13, from the scope of SFAS No. 157. In February 2008, the FASB issued Staff Position No. SFAS 157-2, Effective Date of
FASB Statement No. 157(FSP 157-2). FSP 157-2 delays the effective date of SFAS No. 157 for all nonrecurring nonfinancial assets and liabilities until fiscal years beginning after November 15, 2008. On
October 10, 2008, the FASB issued Staff Position No. SFAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active (FSP 157-3). FSP 157-3 includes guidance for how companies
should value illiquid assets under the fair value accounting method prescribed in SFAS No. 157, Fair Value Measurements, however, does not change any of the provisions of SFAS No. 157. FSP 157-3 is effective upon issuance on
October 10, 2008, and retrospective application is prohibited. FSP 157-2 will be effective for the Partnership beginning January 1, 2009, and the remaining aspects of SFAS No. 157 were effective for the Partnership beginning
January 1, 2008. SFAS No. 157 has not had a material impact on the Partnerships financial statements to date; however, the Partnership is currently assessing the provisions and evaluating the potential impact of FSP 157-2 on its
financial statements.



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|3. | INVESTMENT IN JOINT VENTURE
|-- | ---------------------------

Summary of Financial Information

Condensed financial information for the Joint Venture in which the Partnership held direct interests for the three months and nine months ended
September 30, 2008 and 2007, respectively, is presented below:



|                       |  |                    |  |                                         |  |                                    |  |                    |  |        |  |        |  |            |  |         
|---------------------- |  | ------------------ |  | --------------------------------------- |  | ---------------------------------- |  | ------------------ |  | ------ |  | ------ |  | ---------- |  | --------
|                       |  | Total Revenues     |  | Income (Loss) FromContinuing Operations |  | Income FromDiscontinued Operations |  | Net Income (Loss) 
|                       |  | Three Months Ended |  | Three Months Ended                      |  | Three Months Ended                 |  | Three Months Ended
|                       |  | September 30,      |  | September 30,                           |  | September 30,                      |  | September 30,     
|                       |  | 2008               |  | 2007                                    |  | 2008                               |  | 2007               |  | 2008   |  | 2007   |  | 2008       |  | 2007    
|Fund II-III Associates |  | $292,857           |  | $556,709                                |  | $(286,555)                         |  | $138,619           |  | $0     |  | $335   |  | $(286,555) |  | $138,954
|                       |  |                    |  |                                         |  |                                    |  |                    |  |        |  |        |  |            |  |         
|                       |  |                    |  |                                        
|                       |  | Total Revenues     |  | Income (Loss) FromContinuing Operations |  | Income FromDiscontinued Operations |  | Net Income (Loss) 
|                       |  | Nine Months Ended  |  | Nine Months Ended                       |  | Nine Months Ended                  |  | Nine Months Ended 
|                       |  | September 30,      |  | September 30,                           |  | September 30,                      |  | September 30,     
|                       |  | 2008               |  | 2007                                    |  | 2008                               |  | 2007               |  | 2008   |  | 2007   |  | 2008       |  | 2007    
|Fund II-III Associates |  | $656,573           |  | $1,553,500                              |  | $(437,044)                         |  | $344,298           |  | $7,999 |  | $2,245 |  | $(429,045) |  | $346,543
|                       |  |                    |  |                                         |  |                                    |  |                    |  |        |  |        |  |            |  |         

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



|                       |  |                                     |  |                                     |  |        |  |                 |  |             |  |       
|---------------------- |  | ----------------------------------- |  | ----------------------------------- |  | ------ |  | --------------- |  | ----------- |  | ------
|                       |  | Nine Months EndedSeptember 30, 2008 |  | Nine Months EndedSeptember 30, 2007
|                       |  | OperatingIncome                     |  | Gainon Sale                         |  | Total  |  | OperatingIncome |  | Gainon Sale |  | Total 
|Fund II-III Associates |  | $7,999                              |  | $0                                  |  | $7,999 |  | $2,245          |  | $0          |  | $2,245
|                       |  |                                     |  |                                     |  |        |  |                 |  |             |  |       

Due from Joint Venture

As presented in the accompanying balance sheets, due from joint venture as of December 31, 2007 represents operating cash flow generated by the Joint Venture for the three months ended December 31, 2007, 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 property owned through the Joint Venture equal to (a) 3% for management services and 3% for leasing services of the gross revenues collected
monthly (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 Venture and, accordingly, are included in equity in income of joint venture in the accompanying statements of
operations. The Partnerships share of management and leasing fees and lease acquisition costs incurred through the Joint Venture is $1,321 and $15,756 for the three months ended September 30, 2008 and 2007, respectively, and $5,666 and
$33,446 for the nine months ended September 30, 2008 and 2007, respectively.



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Administrative 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 incurred administrative expenses of $22,292 and $15,707 payable to Wells Capital and Wells Management for the three months ended September 30, 2008 and 2007, respectively, and $65,286 and
$56,268 for the nine months ended September 30, 2008 and 2007, respectively. In addition, Wells Capital and Wells Management pay for certain operating expenses of the Partnership (bill-backs) directly and invoice the Partnership for
the reimbursement thereof on a quarterly basis. As presented in the accompanying balance sheets, due to affiliates as of September 30, 2008 and December 31, 2007 represents administrative reimbursements and bill-backs due to Wells
Management and/or Wells Capital.

Economic Dependency

The Partnership has engaged Wells Capital and Wells Management to provide certain essential services, including supervision of the management and leasing of its remaining property, asset acquisition and disposition services, as well as
other administrative responsibilities, 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, the Partnership is
dependent upon Wells Capital and Wells Management.

Wells Capital and Wells Management are all owned and controlled by WREF. The operations of Wells
Capital and Wells Management represent substantially all of the business of WREF. Accordingly, the Partnership focuses on the financial condition of WREF when assessing the financial condition of Wells Capital and Wells Management. In the event
that WREF were to become unable to meet its obligations as they become due, the Partnership 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 well as anticipated dividend income earned from its holdings of common stock of Piedmont Office Realty Trust,
Inc. (Piedmont REIT), which was acquired in connection with the Piedmont REIT internalization transaction (see Assertion of Legal Actions Against Related-Parties below). In addition, WREF guarantees debt of another WREF-sponsored product
in the amount of approximately $76.1 million as of October 31, 2008. 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.

The Partnership is also dependent upon the ability of its current tenants to pay
their contractual rent amounts as they become due. The inability of a tenant to pay future rental amounts would be likely to have a negative impact on the Partnerships results of operations. The Partnership is not currently aware of any reason
why its existing tenants will not be able to pay their contractual rental amounts as they become due in all material respects. Situations preventing the tenants from paying contractual rents could result in a material adverse impact on the
Partnerships results of operations.

Assertion of Legal Actions Against Related-Parties

On March 12, 2007, a stockholder of Piedmont REIT, filed a putative class action and derivative complaint, presently styled In re Wells Real Estate Investment
Trust, Inc. Securities Litigation, in the United States District Court for the District of Maryland against, among others, Piedmont REIT; Leo F. Wells, III and Wells Capital,



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our General Partners; Wells Management, our property manager; certain affiliates of WREF; the directors of Piedmont REIT; and certain individuals who
formerly served as officers or directors of Piedmont REIT prior to the closing of the internalization transaction on April 16, 2007. The complaint alleges, among other things, violations of the federal proxy rules and breaches of fiduciary duty
arising from the Piedmont REIT internalization transaction and the related proxy statement filed with the SEC on February 26, 2007, as amended. The complaint seeks, among other things, unspecified monetary damages and nullification of the
Piedmont REIT internalization transaction. On April 9, 2007, the District Court denied the plaintiffs motion for an order enjoining the internalization transaction. On April 17, 2007, the Court granted the defendants motion to
transfer venue to the United States District Court for the Northern District of Georgia, and the case was docketed in the Northern District of Georgia on April 24, 2007. On June 7, 2007, the Court granted a motion to designate the class
lead plaintiff and class co-lead counsel. On June 27, 2007, the plaintiff filed an amended complaint, which attempts to assert class action claims on behalf of those persons who received and were entitled to vote on the Piedmont REIT proxy
statement filed with the SEC on February 26, 2007 and derivative claims on behalf of Piedmont REIT. On July 9, 2007, the Court denied the plaintiffs motion for expedited discovery related to an anticipated motion for a preliminary
injunction. On August 13, 2007, the defendants filed a motion to dismiss the amended complaint. On March 31, 2008, the Court granted in part the defendants motion to dismiss the amended complaint. The Court dismissed five of the
seven counts of the amended complaint in their entirety. The Court dismissed the remaining two counts with the exception of allegations regarding the failure to disclose in the Piedmont REIT proxy statement details of certain expressions of interest
in acquiring Piedmont REIT. On April 21, 2008, the plaintiff filed a second amended complaint, which alleges violations of the federal proxy rules based upon allegations that the proxy statement to obtain approval for the Piedmont REIT
internalization transaction omitted details of certain expressions of interest in acquiring Piedmont REIT. The second amended complaint seeks, among other things, unspecified monetary damages, to nullify and rescind the internalization
transaction, and to cancel and rescind any stock issued to the defendants as consideration for the internalization transaction. On May 12, 2008, the defendants answered and raised certain defenses to the second amended complaint. On
June 23, 2008, the plaintiff filed a motion for class certification. As of the date of this filing, the time for the defendants to respond to the plaintiffs motion for class certification has not yet passed. The parties are presently
engaged in discovery. Mr. Wells, Wells Capital, and Wells Management intend to vigorously defend this action. Any financial loss incurred by Wells Capital, Wells Management, or their affiliates could hinder their ability to successfully manage
our operations and our portfolio of investments.

On August 24, 2007, two stockholders of Piedmont REIT filed a derivative complaint, styledDonald
and Donna Goldstein, Derivatively on behalf of Defendant Wells Real Estate Investment Trust, Inc. v. Leo F. Wells, III, et al.,in the Superior Court of Fulton County, Georgia, on behalf of Piedmont REIT against, among
others, Leo F. Wells, III and Wells Capital, our General Partners, and a number of individuals who currently or formerly served as officers or directors of Piedmont REIT. The complaint alleges, among other things, that the consideration
paid by Piedmont REIT as part of the internalization transaction was excessive; that the defendants breached their fiduciary duties to Piedmont REIT; and that the internalization transaction unjustly enriched the defendants. The complaint
seeks, among other things, a judgment declaring that the defendants committed breaches of their fiduciary duties and were unjustly enriched at the expense of Piedmont REIT; monetary damages equal to the amount by which Piedmont REIT was damaged by
the defendants; an order awarding Piedmont REIT restitution from the defendants and ordering disgorgement of all profits and benefits obtained by the defendants from their wrongful conduct and fiduciary breaches; an order rescinding the
internalization transaction; and the establishment of a constructive trust upon any benefits improperly received by the defendants as a result of their wrongful conduct. On October 19, 2007, the Court verbally granted the defendants
motion for a protective order (and entered a written order on October 24, 2007) staying discovery until the Court rules on the defendants motion to dismiss the complaint. On October 31, 2007, the defendants filed their motion to
dismiss the plaintiffs derivative complaint. On December 19, 2007, the Court entered an order allowing the plaintiffs to take limited written discovery on the issue of derivative demand, but the order staying discovery entered in
October 2007 otherwise remains in effect. The defendants responded to the limited discovery requested by the plaintiffs. On January 10, 2008, the plaintiffs filed an amended complaint, which contains substantially the same counts
against the same defendants as the original complaint with certain



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additional factual allegations based primarily on events occurring after the original complaint was filed. In addition, the plaintiffs responded to the
defendants motion to dismiss this lawsuit. A hearing on the motion to dismiss was held on February 22, 2008. On March 13, 2008, the Court granted the defendants motion to dismiss. On April 11, 2008, the plaintiffs
filed a notice to appeal the Courts judgment granting the defendants motion to dismiss. The appeal is currently pending in the Georgia Court of Appeals.



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

From time to time, the Partnership
and its General Partners are party to legal proceedings which arise in the ordinary course of our business. The Partnership is not currently involved in any litigation for which the outcome would, in the judgment of the General Partners based on
information currently available, have a materially adverse impact on the results of operations or financial condition of the Partnership, nor is management aware of any such litigation threatened against us.



|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, 2007.

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. We have sold five
assets with only one property remaining in the portfolio. The lease with Boeing/Shuttle Division (Boeing), the sole tenant at 2100 Space Park Drive, expired on March 31, 2008. On April 24, 2008, Fund II-III Associates entered
into a 90-month lease agreement with Hoyer Global (USA), Inc. (Hoyer) to occupy approximately 19% of 2100 Space Park Drive. On July 3, 2008, Fund II-III Associates entered into a 63-month lease agreement with



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Lockheed Martin Corporation (Lockheed) to occupy approximately 52% of 2100 Space Park Drive. Our focus at this time involves concentrating on
leasing and marketing efforts that we believe will ultimately result in the best disposition pricing of our remaining asset for our limited partners.

The
third quarter 2008 operating distributions to limited partners holding Class A Units were reserved as a result of funding our pro rata share of capital improvements and the re-leasing costs associated with the recently executed leases at
2100 Space Park Drive. Our General Partners anticipate continuing to reserve operating and net sale proceeds distributions primarily as a result of our intention to fund our pro rata share of anticipated capital improvements and re-leasing
costs at 2100 Space Park Drive. Once the details surrounding the leasing and disposition efforts for 2100 Space Park Drive become known, our General Partners will evaluate if distributions of net sale proceeds are appropriate.

Property Summary

As we move further into the
disposition-and-liquidation phase, we will continue to focus on re-leasing the remaining vacant space. In doing so, we seek to maximize returns to our limited partners by attempting to negotiate 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 a suitable buyer and negotiating a purchase-sale
contract that will attempt to maximize the total return to our limited partners and minimize contingencies and our post-closing involvement with buyers.

Information relating to the properties owned, or previously owned, by the Partnership or its joint ventures is presented 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.
| | - |  | -----------------------------------------------------



| |  |  | The 2100 Space Park Drive property, located in Houston, Texas, is approximately 71% leased following the commencement of the Lockheed lease. We continue to market
the remaining vacant space for lease.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Impact of Current Economic Conditions on our Property

The fundamentals of the U.S. office real estate market continue to weaken due to dislocation in the financial services industry and have been recently exacerbated by the
global financial crisis. During the nine months ended September 30, 2008, national vacancy rates rose steadily by approximately 90 basis points to 14.1%. During October 2008, vacancy rates have continued to increase as have sublease inventory
levels. Rising sublease inventories will create additional competition for landlords with direct space and, thus, will result in downward pressure on the rents that landlords are able to achieve with new leases.

While some of the market conditions noted above may indicate expected changes in rental rates, the extent to which our property may be affected is dependent upon the
contractual rental rates currently provided in existing leases at our remaining property. Additionally, the turbulence in the credit markets may adversely affect the ability of potential purchasers of our properties to obtain financing, which could
affect our timing and/or ability to complete the disposition-and-liquidation phase of our life cycle.

Less diversified real estate funds, such as the
Partnership, that own fewer properties, and those with current vacancies or near-term tenant rollover, may face a challenging leasing environment. The properties within these funds may be required to offer lower rental rates and higher concession
packages to potential tenants, the degree to which will depend heavily upon the specific property and market.



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

Liquidity and Capital Resources

Overview

Our operating strategy entails funding expenditures related to the recurring operations of the remaining property owned by Fund II-III Associates and the portfolio with operating cash flows, including current and prior period operating
distributions received from Fund II-III Associates, 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 not sufficient to fund our recurring operations, net sale proceeds will be
utilized. To the extent that net sale proceeds are not sufficient to fund our recurring operations, the General Partners are pursuing other funding options, which may include deferring the payment of administrative reimbursements and management and
leasing fees to Wells Capital and Wells Management, a purchase money mortgage with a potential buyer, and/or infusion of cash by the General Partners 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 one or more of our tenants to honor lease payments and our ability to re-lease space on favorable terms. 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, 2008, we used net operating cash flows, including distributions received from the Joint
Venture, of approximately $28,000 primarily to fund our pro rata share of capital improvements for 2100 Space Park Drive. Operating distributions from the Joint Venture 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 from the Joint Venture will decline in the near-term as a result of funding our pro rata share of anticipated
re-leasing costs and capital improvements for 2100 Space Park Drive and absorbing the rental abatement periods associated with the recent leasing activity at 2100 Space Park Drive. The extent of any future operating distributions paid to
limited partners will be largely dependent upon the amount of cash generated from the 2100 Space Park Drive, our expectations of future cash flows, and determination of near-term cash needs to fund our share of tenant re-leasing costs and other
capital improvements for the remaining property. During the nine months ended September 30, 2008, we invested approximately $507,000 in Fund II-III Associates primarily to fund re-leasing costs and capital improvements at 2100 Space Park Drive.

We believe that the cash on hand, including net proceeds from the sale of properties, may not be sufficient to cover our working capital needs, including
funding our pro rata share of anticipated re-leasing costs and capital improvements for 2100 Space Park Drive. Therefore, the General Partners are pursuing other funding options, which may include deferring the payment of administrative
reimbursements and management and leasing fees to Wells Capital and Wells Management, a purchase money mortgage with a potential buyer, and/or infusion of cash by the General Partners.

Long-Term Liquidity

We expect that our future sources of capital will be primarily derived from net sale proceeds
generated from the strategic sale of the remaining property and the aforementioned funding options being pursued by the General Partners. Our future long-term liquidity requirements will include, but not be limited to, funding our share of
tenant improvements, renovations, expansions, and other significant capital improvements necessary for the remaining property owned through Fund II-III Associates. Future cash flows from operating activities will be



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##### Table of Contents

primarily affected by distributions received from Fund II-III Associates, which are dependent upon the 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 net offering proceeds available
for investment. 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 incurs 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 funded from the operations of Fund II-III Associates will be required to be funded by the Partnership and the other
respective joint venture partners on a pro rata basis. In the event that the Partnership cannot fund its pro rata share of capital or other expenditures, the General Partners will consider other funding options, which may include deferring the
payment of administrative reimbursements and management and leasing fees to Wells Capital and Wells Management, a purchase money mortgage with a potential buyer, and/or infusion of cash by the General Partners.

Operating cash flows, if available, are generally distributed from the Joint Venture to the Partnership following calendar quarter-ends. However, the Joint Venture 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 not sufficient to fund such costs, net sale proceeds reserves would then be utilized. If
net sale proceeds reserves are not sufficient to fund such costs, the General Partners are pursuing other funding options previously mentioned.

As of
September 30, 2008, 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 SaleProceeds |  | PartnershipsApproximateOwnership % |  | Net Sale ProceedsAllocated to
thePartnership |            | Use ofNet Sale Proceeds |   | Net Sale ProceedsDistributed toPartners
as ofSeptember 30, 2008 |  | Undistributed NetSale Proceeds as ofSeptember 30, 2008  
|                                                  |  |                  |  | 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-leasing of 4400 Cox Road (2004)                    |  |   | 6,252,772  |  |   | 0      
|Holcomb Bridge Property(sold in 2004)             |  | $6,889,379       |  | 8.8%                                |  |                                              | 607,643    |                         |   | 58,283                                                          |  |   Re-leasing of 4400 Cox Road (2004)                    |  |   | 549,360    |  |   | 0      
|Brookwood Grill(sold in 2004)                     |  | $2,318,115       |  | 37.7%                               |  |                                              | 872,770    |                         |   | 84,746                                                          |  |   Re-leasing of 4400 Cox Road (2004)                    |  |   | 788,024    |  |   | 0      
|4400 Cox Road(sold in 2005)                       |  | $6,308,796       |  | 57.2%                               |  |                                              | 3,609,357  |                         |   | 100,000                                                         |  |   Capital improvements for 2100 Space Park Drive (2008) |  |   | 2,833,662  |  |   | 675,695
|                                                  |  |                  |  |                                     |  |                                              |            |                         |   |                                                                 |  |                                                          |  |   |            |  |   |        
|Total                                             |  |                  |  |                                     |  | $                                            | 14,240,195 |                         | $ | 869,495                                                         |  |                                                          |  | $ | 12,695,005 |  | $ | 675,695
|                                                  |  |                  |  |                                     |  |                                              |            |                         |   |                                                                 |  |                                                          |  |   |            |  |   |        



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Upon evaluating the capital needs of our remaining property in which we currently hold an interest, our
General Partners have determined that substantially all of the undistributed net sale proceeds above will be required to fund our pro rata share of anticipated re-leasing costs and capital improvements at 2100 Space Park Drive.

Results of Operations

Equity in Income (Loss) of Joint Venture

Equity in income (loss) of Joint Venture is $(103,848) and $50,362 for the three months ended September 30, 2008 and 2007, respectively, and
$(155,373) and $125,619 for the nine months ended September 30, 2008 and 2007, respectively. These increases in loss are primarily attributable to the following activities at the 2100 Space Park Drive property (i) repairing damage caused
by Hurricane Ike, (ii) a decrease in rental income as a result of the Boeing lease expiration in March 2008, partially offset by (iii) an increase in rental income related to the recently executed leases with Hoyer and Lockheed.

We anticipate that equity in loss of Joint Venture will decline in the near-term as a result of incurring repair costs in the third quarter of 2008 at
2100 Space Park Drive related to the damage caused by Hurricane Ike.

Expenses

General and administrative expenses remained relatively stable at $38,246 for the three months ended September 30, 2008 and $36,598 for the three months ended September 30, 2007.

General and administrative expenses were $137,576 and $113,090 for the nine months ended September 30, 2008 and 2007, respectively. The increase is primarily
attributable to an increase in legal fees and administrative costs incurred in connection with reporting and regulatory requirements.

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

Interest and Other Income

Interest and other income was $4,848 and $15,434 for the three months ended
September 30, 2008 and 2007, respectively, and $21,204 and $46,217 for the nine months ended September 30, 2008 and 2007, respectively. The decreases are primarily attributable to a decrease in the average amount of cash held during the
respective periods and a decline in the daily interest yield. Future levels of interest income will be largely dependent upon the timing of future dispositions and distributions of net sale proceeds to the limited partners.

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 are intended to help 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.

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



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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 Venture, 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 are required to make subjective
assessments as to the useful lives of our depreciable assets. We consider the period of future benefit of the assets to determine the appropriate useful lives. These assessments have a direct impact on net income.

The estimated useful lives of the Joint Ventures assets are depreciated using the straight-line method over the following useful lives:



|                      |  |                                       
|--------------------- |  | --------------------------------------
|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 amounts of the real estate assets in which we have an ownership interest through investments in the Joint Venture may not be recoverable. When
indicators of potential impairment are present which suggest that the carrying amounts of real estate assets may not be recoverable, we assess the recoverability of the real estate assets by determining whether the respective carrying values will be
recovered through the estimated undiscounted future operating cash flows expected from the use of the assets and their eventual disposition for assets held for use, or with the estimated fair values, less costs to sell, for assets held for sale. In
the event that such expected undiscounted future cash flows for assets held for use, or the estimated fair values, less costs to sell, for assets held for sale, do not exceed the respective assets carrying values, we adjust the real estate
assets to the estimated fair values and recognize an impairment loss. Estimated fair values are calculated based on the following information, in order of preference, dependent upon availability: (i) recently quoted market prices,
(ii) market prices for comparable properties, or (iii) the present value of future cash flows, including estimated salvage value. We have determined that there has been no impairment in the carrying value of any of our real estate assets
held as of September 30, 2008.

Projections of expected future cash flows require that we estimate future market rental income amounts subsequent to
the expiration of current lease agreements, property operating expenses, the number of months it takes to re-lease the property, and the number of years the property is held for investment, among other factors. The subjectivity of assumptions used
in the future cash flow analysis, including discount rates, could result in an incorrect assessment of the propertys future cash flows and fair value, and could result in the misstatement of the carrying value of real estate assets held by the
Joint Venture 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 remaining property; 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 the fees and expense reimbursements we have incurred.



|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 currency exchange rate fluctuations, or the other market risks contemplated
by Item 305 of Regulation S-K.



|ITEM 4T. | 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 (the Exchange Act) as of the end of the quarterly 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 the reports we file or submit under the Exchange Act 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 the reports we file under the Exchange Act 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 changes in our internal control over
financial reporting during the quarter ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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



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

We are from time to time a party to 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, 2008, requiring disclosure under Item 103 of Regulation S-K.



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

Item 1A. in our Annual Report on Form 10-K for
the year ended December 31, 2007 includes various risk factors applicable to the Partnership. The information presented below updates, and should be read in conjunction with, the risk factors and information disclosed in our Annual Report on
Form 10-K for the year ended December 31, 2007. Except as presented below, there have been no material changes from the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2007.



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Current economic conditions and turmoil in the credit markets may cause market rental rates and property values to
decline and may impede disposition of a property at commercially reasonable terms.

Current economic conditions, the availability and cost of credit,
the mortgage market, and declining real estate markets have contributed to increased volatility and diminished expectations for real estate markets and the economy as a whole on a going-forward basis. Many economists are predicting continued
deterioration in economic conditions in the United States, along with significant increases in unemployment and vacancy rates at commercial properties. As a result, current economic conditions and the credit crisis may cause commercial real estate
values and market rental rates to decline significantly. Deteriorating economic conditions could adversely impact the ability of one or more of our tenants to honor their lease payments and our ability to re-lease space on favorable terms as leases
expire or as space otherwise becomes vacant at our properties. While we do not anticipate the need to access the credit markets, the impact of the current crisis in the credit markets may adversely affect the ability of potential purchasers of our
remaining property to obtain financing. Therefore, this may affect our timing and/or ability to sell this property at commercially reasonable terms. No assurances can be given that current economic conditions and the effects of the credit crisis
will not have a material adverse effect on our business, financial condition, and results of operations.



|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, 2008.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------



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



|(c) | We did not redeem any securities during the quarter ended September 30, 2008.
|--- | -----------------------------------------------------------------------------



|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, 2008.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------



|(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, 2008.



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



|(a) | During the quarter ended September 30, 2008, 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 7, 2008 |  |  |  | /s/ LEO F. WELLS, III                                                                             
|                 |  |  |  | Leo F. Wells, III President, Principal Executive Officer, and Sole Director of Wells Capital, Inc.
|                 |  | 
|November 7, 2008 |  |  |  | /s/ DOUGLAS P. WILLIAMS                                                                           
|                 |  |  |  | Douglas P. Williams Principal Financial Officer of Wells Capital, Inc.                            



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EXHIBIT INDEX

TO THIRD QUARTER FORM 10-Q

OF

WELLS REAL ESTATE FUND III, L.P.



|           |  |                                                                                                                                                                                                          
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                                                                                              
|           | 
|*10.1      |  | Office Lease with Lockheed Martin Corporation relating to 2100 Space Park Drive (Exhibit 10.2 to Form 10-Q of Wells Real Estate Fund II for the quarter ended June 30, 2008, Commission
File No. 0-16518)
|           | 
|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                                                                           



|* | previously filed and incorporated herein by reference
|- | -----------------------------------------------------