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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 March 31, 2004



OR



| ̈ |  | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- |  | ----------------------------------------------------------------------------------------



For the transition period from
 to



Commission file number 0-18407



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WELLS REAL ESTATE FUND III, L.P.

(Exact name of registrant as specified in
its charter)



---



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



---

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



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



Yes x     No ̈



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CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS



Certain statements contained in this Form 10-Q
of Wells Real Estate Fund III, L.P. (the Partnership) other than historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Such statements include, in particular, statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially from
those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward- looking statements can generally be identified by our use of forward-looking terminology such as
may, will, expect, intend, anticipate, estimate, believe, continue, or other similar words. 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. Neither the Partnership nor the general partners make any representations or warranties (expressed or implied) about the
accuracy of any such forward-looking statements. Actual results could differ materially from any forward-looking statements contained in this Form 10-Q, and we do not intend to publicly update or revise any forward-looking statements, whether as a
result of new information, future events, or otherwise.



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



General economic risks



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



| |  |  | Adverse economic conditions affecting the particular industry of one or more of our tenants;
| | - |  | --------------------------------------------------------------------------------------------



Real estate risks



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



| |  |  | Supply of or demand for similar or competing rentable space, which may adversely impact our ability to retain or obtain new tenants at lease expiration at acceptable rental amounts;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | Our potential need to fund tenant improvements, lease-up costs, or other capital expenditures out of operating cash flow;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | Increases in property operating expenses, including property taxes, insurance, and other costs at our properties;
| | - |  | -----------------------------------------------------------------------------------------------------------------



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



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



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



| |  |  | Our ability to sell a property when desirable at an acceptable return, including the ability of the purchaser to satisfy any continuing obligations to us;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



Other operational risks



| |  |  | Our dependency on Wells Capital, Inc., our corporate General Partner, its key personnel, and its affiliates for various administrative services;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



| |  |  | Our ability to prove compliance with any governmental, tax, real estate, environmental, and zoning in the event that any such position is questioned by the respective authority; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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TABLE OF CONTENTS





|         |  |                       |  |                                                                                                                            |  |         
|-------- |  | --------------------- |  | -------------------------------------------------------------------------------------------------------------------------- |  | --------
|         |  |                       |  |                                                                                                                            |  | Page No.
|         |  |                      
|PART I.  |  | FINANCIAL INFORMATION |  |                                                                                                                           
|         |  |                       | 
|         |  | Item 1.               |  | Financial Statements                                                                                                       |  |         
|         |  |                       | 
|         |  |                       |  | Balance SheetsMarch 31, 2004 (unaudited) and December 31, 2003                                                            |  | 5       
|         |  |                       | 
|         |  |                       |  | Statements of Operations for the Three Months Ended March 31, 2004 (unaudited) and 2003 (unaudited)                        |  | 6       
|         |  |                       | 
|         |  |                       |  | Statements of Partners Capital for the Year Ended December 31, 2003 and the Three Months Ended March 31, 2004 (unaudited) |  | 7       
|         |  |                       | 
|         |  |                       |  | Statements of Cash Flows for the Three Months Ended March 31, 2004 (unaudited) and 2003 (unaudited)                        |  | 8       
|         |  |                       | 
|         |  |                       |  | Condensed Notes to Financial Statements (unaudited)                                                                        |  | 9       
|         |  |                       | 
|         |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                      |  | 14      
|         |  |                       | 
|         |  | Item 3.               |  | Quantitative and Qualitative Disclosures about Market Risks                                                                |  | 21      
|         |  |                       | 
|         |  | Item 4.               |  | Controls and Procedures                                                                                                    |  | 21      
|         |  |                      
|PART II. |  | OTHER INFORMATION     |  | 22                                                                                                                        



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WELLS REAL ESTATE FUND
III, L.P.



BALANCE SHEETS



ASSETS



|                                        |  |                          |            |                  |   |           
|--------------------------------------- |  | ------------------------ | ---------- | ---------------- | - | ----------
|                                        |  | (unaudited)March 31,2004 |            | December 31,2003
|Investments in joint ventures           |  | $                        | 9,796,507  |                  | $ | 9,906,037 
|Cash and cash equivalents               |  |                          | 1,202,078  |                  |   | 2,552,904 
|Due from joint ventures                 |  |                          | 259,008    |                  |   | 200,239   
|                                        |  |                          |            |                  |   |           
|Total assets                            |  | $                        | 11,257,593 |                  | $ | 12,659,180
|                                        |  |                          |            |                  |   |           
|                                       
|LIABILITIES AND PARTNERS CAPITAL:     
|Liabilities:                            |  |                          |            |                  |   |           
|Accounts payable and accrued expenses   |  | $                        | 18,069     |                  | $ | 6,571     
|Partnership distributions payable       |  |                          | 0          |                  |   | 220,904   
|                                        |  |                          |            |                  |   |           
|Total liabilities                       |  |                          | 18,069     |                  |   | 227,475   
|                                        |  |                          |            |                  |   |           
|Partners capital:                      |  |                          |            |                  |   |           
|Limited partners:                       |  |                          |            |                  |   |           
|Class A19,635,965 units outstanding    |  |                          | 11,239,524 |                  |   | 12,431,705
|Class B2,544,540 units outstanding     |  |                          | 0          |                  |   | 0         
|General partners                        |  |                          | 0          |                  |   | 0         
|                                        |  |                          |            |                  |   |           
|Total partners capital                 |  |                          | 11,239,524 |                  |   | 12,431,705
|                                        |  |                          |            |                  |   |           
|Total liabilities and partners capital |  | $                        | 11,257,593 |                  | $ | 12,659,180
|                                        |  |                          |            |                  |   |           



See accompanying notes.



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WELLS REAL ESTATE FUND
III, L.P.



STATEMENTS OF OPERATIONS



|                                                   |  |                                          |         |      |   |         |  
|-------------------------------------------------- |  | ---------------------------------------- | ------- | ---- | - | ------- | -
|                                                   |  | (unaudited) Three Months Ended March 31, |        
|                                                   |  | 2004                                     |         | 2003 |  
|REVENUES:                                          |  |                                          |         |      |   |         |  
|Equity in income of joint ventures (Note 2)        |  | $                                        | 149,478 |      | $ | 204,145 |  
|Interest income                                    |  |                                          | 2,909   |      |   | 4,195   |  
|Other income                                       |  |                                          | 0       |      |   | 1,533   |  
|                                                   |  |                                          |         |      |   |         |  
|                                                   |  |                                          | 152,387 |      |   | 209,873 |  
|                                                   |  |                                          |         |      |   |         |  
|EXPENSES                                           |  |                                          |         |      |   |         |  
|Partnership administration                         |  |                                          | 22,029  |      |   | 24,109  |  
|Legal and accounting                               |  |                                          | 10,024  |      |   | 30,262  |  
|Other general and administrative                   |  |                                          | 512     |      |   | 1,478   |  
|                                                   |  |                                          |         |      |   |         |  
|                                                   |  |                                          | 32,565  |      |   | 55,849  |  
|                                                   |  |                                          |         |      |   |         |  
|NET INCOME FROM CONTINUING OPERATIONS              |  |                                          | 119,822 |      |   | 154,024 |  
|                                                   |  |                                         
|DISCONTINUED OPERATIONS:                           |  |                                          |         |      |   |         |  
|Operating loss                                     |  |                                          | 0       |      |   | (2,366  | )
|                                                   |  |                                          |         |      |   |         |  
|LOSS FROM DISCONTINUED OPERATIONS                  |  |                                          | 0       |      |   | (2,366  | )
|                                                   |  |                                          |         |      |   |         |  
|NET INCOME                                         |  | $                                        | 119,822 |      | $ | 151,658 |  
|                                                   |  |                                          |         |      |   |         |  
|NET INCOME ALLOCATED TO CLASS A LIMITED PARTNERS   |  | $                                        | 31,008  |      | $ | 151,658 |  
|                                                   |  |                                          |         |      |   |         |  
|NET INCOME ALLOCATED TO CLASS B LIMITED PARTNERS   |  | $                                        | 88,814  |      | $ | 0       |  
|                                                   |  |                                          |         |      |   |         |  
|NET INCOME PER CLASS A LIMITED PARTNER UNIT        |  | $                                        | 0.00    |      | $ | 0.01    |  
|                                                   |  |                                          |         |      |   |         |  
|NET INCOME PER CLASS B LIMITED PARTNER UNIT        |  | $                                        | 0.03    |      | $ | 0.00    |  
|                                                   |  |                                          |         |      |   |         |  
|CASH DISTRIBUTION PER CLASS A LIMITED PARTNER UNIT |  | $                                        | 0.06    |      | $ | 0.01    |  
|                                                   |  |                                          |         |      |   |         |  
|CASH DISTRIBUTION PER CLASS B LIMITED PARTNER UNIT |  | $                                        | 0.03    |      | $ | 0.00    |  
|                                                   |  |                                          |         |      |   |         |  



See accompanying notes.



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WELLS REAL ESTATE FUND
III, L.P.



STATEMENTS OF PARTNERS CAPITAL



FOR THE YEAR ENDED DECEMBER 31, 2003

AND THE THREE MONTHS ENDED MARCH 31, 2004 (unaudited)



|                           |  |                  |  |         |            |   |                        |                 |         |   |         |   |  |   |   |  |   |            |  
|-------------------------- |  | ---------------- |  | ------- | ---------- | - | ---------------------- | --------------- | ------- | - | ------- | - |  | - | - |  | - | ---------- | -
|                           |  | Limited Partners |  |         |            |   | Total PartnersCapital |                
|                           |  | Class A          |  |         | Class B    |   |                        | GeneralPartners |        
|                           |  | Units            |  | Amounts |            |   | Units                  |                 | Amounts |   |         |  
|BALANCE, December 31, 2002 |  | 19,635,965       |  | $       | 13,311,090 |   |                        | 2,544,540       |         | $ | 0       |   |  | $ | 0 |  | $ | 13,311,090 |  
|Net loss                   |  | 0                |  |         | (13,276    | ) |                        | 0               |         |   | 0       |   |  |   | 0 |  |   | (13,276    | )
|Partnership distributions  |  | 0                |  |         | (866,109   | ) |                        | 0               |         |   | 0       |   |  |   | 0 |  |   | (866,109   | )
|                           |  |                  |  |         |            |   |                        |                 |         |   |         |   |  |   |   |  |   |            |  
|BALANCE, December 31, 2003 |  | 19,635,965       |  |         | 12,431,705 |   |                        | 2,544,540       |         |   | 0       |   |  |   | 0 |  |   | 12,431,705 |  
|Net income                 |  | 0                |  |         | 31,008     |   |                        | 0               |         |   | 88,814  |   |  |   | 0 |  |   | 119,822    |  
|Partnership distributions  |  | 0                |  |         | (1,223,189 | ) |                        | 0               |         |   | (88,814 | ) |  |   | 0 |  |   | (1,312,003 | )
|                           |  |                  |  |         |            |   |                        |                 |         |   |         |   |  |   |   |  |   |            |  
|BALANCE, March 31, 2004    |  | 19,635,965       |  | $       | 11,239,524 |   |                        | 2,544,540       |         | $ | 0       |   |  | $ | 0 |  | $ | 11,239,524 |  
|                           |  |                  |  |         |            |   |                        |                 |         |   |         |   |  |   |   |  |   |            |  



|See |  | accompanying notes.
|--- |  | -------------------



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WELLS REAL ESTATE FUND
III, L.P.



STATEMENTS OF CASH FLOWS



|                                                                                                       |  |                                          |            |   |      |   |           |  
|------------------------------------------------------------------------------------------------------ |  | ---------------------------------------- | ---------- | - | ---- | - | --------- | -
|                                                                                                       |  | (unaudited) Three Months Ended March 31, |           
|                                                                                                       |  | 2004                                     |            |   | 2003 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                  |  |                                          |            |   |      |   |           |  
|Net income from continuing operations                                                                  |  | $                                        | 119,822    |   |      | $ | 154,024   |  
|Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: |  |                                          |            |   |      |   |           |  
|Equity in income of joint ventures                                                                     |  |                                          | (149,478   | ) |      |   | (204,145  | )
|Changes in assets and liabilities:                                                                     |  |                                          |            |   |      |   |           |  
|Prepaid expenses and other assets                                                                      |  |                                          | 0          |   |      |   | 199       |  
|Accounts payable and accrued expenses                                                                  |  |                                          | 11,498     |   |      |   | 27,793    |  
|                                                                                                       |  |                                          |            |   |      |   |           |  
|Net cash used in continuing operations                                                                 |  |                                          | (18,158    | ) |      |   | (22,129   | )
|Net cash used in discontinued operations                                                               |  |                                          | 0          |   |      |   | (2,366    | )
|                                                                                                       |  |                                          |            |   |      |   |           |  
|Net cash used in operating activities                                                                  |  |                                          | (18,158    | ) |      |   | (24,495   | )
|                                                                                                       |  |                                         
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                  |  |                                          |            |   |      |   |           |  
|Investment in joint ventures                                                                           |  |                                          | 0          |   |      |   | (39,786   | )
|Distributions received from joint ventures                                                             |  |                                          | 200,239    |   |      |   | 323,016   |  
|                                                                                                       |  |                                          |            |   |      |   |           |  
|Net cash provided by investing activities                                                              |  |                                          | 200,239    |   |      |   | 283,230   |  
|                                                                                                       |  |                                          |            |   |      |   |           |  
|                                                                                                       |  |                                         
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                  |  |                                          |            |   |      |   |           |  
|Partnership distribution paid                                                                          |  |                                          | (1,532,907 | ) |      |   | (220,905  | )
|                                                                                                       |  |                                          |            |   |      |   |           |  
|                                                                                                       |  |                                         
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                                   |  |                                          | (1,350,826 | ) |      |   | 37,830    |  
|                                                                                                       |  |                                         
|CASH AND CASH EQUIVALENTS, beginning of period                                                         |  |                                          | 2,552,904  |   |      |   | 2,612,963 |  
|                                                                                                       |  |                                          |            |   |      |   |           |  
|CASH AND CASH EQUIVALENTS, end of period                                                               |  | $                                        | 1,202,078  |   |      | $ | 2,650,793 |  
|                                                                                                       |  |                                          |            |   |      |   |           |  
|                                                                                                       |  |                                         
|SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:                                                        |  |                                          |            |   |      |   |           |  
|Due from joint ventures                                                                                |  | $                                        | 259,008    |   |      | $ | 183,265   |  
|                                                                                                       |  |                                          |            |   |      |   |           |  
|Partnership distributions payable                                                                      |  | $                                        | 0          |   |      | $ | 220,905   |  
|                                                                                                       |  |                                          |            |   |      |   |           |  



See accompanying notes.



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WELLS REAL ESTATE FUND
III, L.P.



CONDENSED NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2004 (unaudited)



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



(a) Organization and Business



Wells Real Estate Fund III, L.P. (the Partnership) is a Georgia public limited partnership with Leo F. Wells, III and Wells Capital, Inc. (Wells
Capital), a Georgia corporation, serving as its general partners (collectively, the General Partners). The Partnership was formed on July 31, 1988 for the purpose of acquiring, developing, constructing, owning, operating,
improving, leasing, and managing income-producing commercial properties for investment purposes. The Partnership has two classes of limited partnership interests, Class A and Class B Units. The limited partners may vote to, among other things, (a)
amend the partnership agreement, subject to certain limitations; (b) change the business purpose or investment objectives of the Partnership; and (c) add or remove a general partner. A majority vote on any of the above-described matters will bind
the Partnership without the concurrence of the General Partners. Each limited partner unit generally has equal voting rights regardless of class.



On October 24, 1988, the Partnership commenced a public offering of its limited partnership units pursuant to a Registration Statement filed on Form S-11 under the
Securities Act of 1933. The offering was terminated on October 23, 1990 upon receiving and accepting $22,206,310 in limited partner capital contributions for a total of 22,206,310 Class A and Class B limited partner units at a price of $1.00 per
unit. In 1990 and 1991, the Partnership repurchased 6,128 and 19,677 limited partnership units, respectively.



The Partnership owns interests in all of its real estate assets through joint ventures with other Wells Real Estate Funds. During the periods presented, the Partnership owned interests in the following five properties
through the affiliated joint ventures listed below (the Joint Ventures):



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



|* |  | Fund II and Fund II-OW (Fund II-IIOW Associates) is a joint venture between Wells Real Estate Fund II and Wells Real Estate Fund II-OW.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------



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Each of the aforementioned properties was
acquired on an all-cash basis. The investment objectives of each of the joint venture partners listed in the above table are substantially identical to those of the Partnership. For further information regarding the foregoing joint ventures and
properties, refer to the report filed for the Partnership on Form 10-K for the year ended December 31, 2003.



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



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



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



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



Net loss, depreciation, and amortization deductions for each fiscal year are allocated as follows: (a) 99% to the limited partners holding Class B Units and 1% to the General Partners until their capital accounts are
reduced to zero; (b) then to 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.



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



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



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



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



| |  |  | In the event that the particular property sold is sold for a price 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 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;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



The Partnership owned interests in five properties during the periods presented through its ownership in the Joint Ventures. The Partnership does not have control over the operations of the Joint Ventures; however, it
does exercise significant influence. Accordingly, the Partnerships investments in the Joint Ventures are recorded using the equity method of accounting, whereby original investments are recorded at cost and subsequently adjusted for
contributions, distributions and net income (loss) income attributable to the Partnership. For further information regarding investments in Joint Ventures, see the report filed for the Partnership on Form 10-K for the year ended December 31, 2003.



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



The following information summarizes the operations of the Joint Ventures, for the three months ended March 31, 2004 and 2003, respectively:



|                       |  |                             |         |                                         |   |                                   |  |                             |         |   |      |   |         |  |      |         |      |   |         |  |   |         |  |   |        
|---------------------- |  | --------------------------- | ------- | --------------------------------------- | - | --------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | ------- |  | - | -------
|                       |  | Total Revenues              |         | Income (Loss) FromContinuing Operations |   | Income FromDiscontinuedOperations |  | Net Income                 
|                       |  | Three Months EndedMarch 31, |         | Three Months EndedMarch 31,             |   | Three Months EndedMarch 31,       |  | Three Months EndedMarch 31,
|                       |  | 2004                        |         | 2003                                    |   | 2004                              |  |                             | 2003    |   | 2004 |   | 2003    |  | 2004 |         | 2003
|Fund II-III Associates |  | $                           | 536,327 |                                         | $ | 520,988                           |  | $                           | 76,941  |   |      | $ | 78,731  |  | $    | 0       |      | $ | 0       |  | $ | 76,941  |  | $ | 78,731 
|Fund III-IV Associates |  |                             | 0       |                                         |   | 158,394                           |  |                             | (87,833 | ) |      |   | 32,918  |  |      | 298,473 |      |   | 271,892 |  |   | 210,640 |  |   | 304,810
|                       |  |                             |         |                                         |   |                                   |  |                             |         |   |      |   |         |  |      |         |      |   |         |  |   |         |  |   |        
|                       |  | $                           | 536,327 |                                         | $ | 679,382                           |  | $                           | (10,892 | ) |      | $ | 111,649 |  | $    | 298,473 |      | $ | 271,892 |  | $ | 287,581 |  | $ | 383,541
|                       |  |                             |         |                                         |   |                                   |  |                             |         |   |      |   |         |  |      |         |      |   |         |  |   |         |  |   |        



|* |  | The Partnerships share of income earned from its investment in Fund II-III-VI-VII Associates is recorded by Fund II-III Associates as equity in income of joint ventures,
which is classified as revenue.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The following information summarizes the
operations of the joint venture in which Fund II-III Associates holds an interest for the three months ended March 31, 2004 and 2003, respectively:



|                              |  |                              |         |                              |   |         |  |      |        |  |   |       
|----------------------------- |  | ---------------------------- | ------- | ---------------------------- | - | ------- |  | ---- | ------ |  | - | ------
|                              |  | Total Revenues               |         | Net Income                  
|                              |  | Three Months Ended March 31, |         | Three Months Ended March 31,
|                              |  | 2004                         |         | 2003                         |   | 2004    |  | 2003
|Fund II-III-VI-VII Associates |  | $                            | 210,913 |                              | $ | 135,573 |  | $    | 94,378 |  | $ | 10,398
|                              |  |                              |         |                              |   |         |  |      |        |  |   |       



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



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



Wells Management Company, Inc. (Wells Management), an affiliate of the General Partners, receives compensation for the management and leasing of the
Partnerships properties owned through joint ventures equal to (a) 3% of the gross revenues for management and 3% of the gross revenues for leasing (aggregate maximum of 6%) plus a separate fee for the one-time lease-up of newly constructed
properties in an amount not to exceed the fee customarily charged in arms-length transactions by others rendering similar services in the same geographic area for similar properties or (b) in the case of commercial properties which are leased
on a long-term net basis (ten or more years), 1% of the gross revenues except for initial leasing fees equal to 3% of the gross revenues over the first five years of the lease term. The properties in which the Partnership owns interests incurred
management and leasing fees payable to Wells Management of $66,487 and $68,153 for the three months ended March 31, 2004 and 2003, respectively.



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



Wells Capital and its affiliates perform certain administrative services for the Partnership, such as accounting, property management, and other partnership
administration, and incur the related expenses. Such expenses are allocated among the various Wells Real Estate Funds based on time spent on each fund by individual administrative personnel. In the opinion of management, this allocation is a
reasonable estimation of such expenses. The Partnership reimbursed Wells Capital $18,526 and $16,987 for the three months ended March 31, 2004 and 2003, respectively. In addition, the Joint Ventures reimbursed Wells Capital $31,755 and $46,918 for
the three months ended March 31, 2004 and 2003, respectively, for these services and expenses.



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



The General Partners are also general partners of other Wells Real Estate Funds. As such, there may exist conflicts of interest where the General Partners in their
capacity as general partners of other Wells Real Estate Funds may be in competition with the Partnership in connection with property acquisitions or for tenants in similar geographic markets.



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



The Partnership sold its 100% interest in Greenville Center on September 30, 2002.



Condensed financial information for the Greenville Center for the three months ended March 31, 2003 included in discontinued operations in
the accompanying statements of income, is summarized below



|                                  |  |   |        |  
|--------------------------------- |  | - | ------ | -
|Total property revenues           |  | $ | 0      |  
|                                  |  |   |        |  
|Operating costsrental property   |  |   | 2,366  |  
|                                  |  |   |        |  
|Total expenses                    |  |   | 2,366  |  
|                                  |  |   |        |  
|Operating loss                    |  |   | (2,366 | )
|                                  |  |   |        |  
|Loss from discontinued operations |  | $ | (2,366 | )
|                                  |  |   |        |  



|5. |  | SUBSEQUENT EVENT
|-- |  | ----------------



On April 6, 2004, Fund II-III Associates and Fund II-III-VI-VII Associates (collectively, the Seller) entered into an agreement to sell the two properties listed below to an unrelated third party (the
Purchaser) for a gross sales price of $9,500,000. This transaction is currently subject to a due diligence period expiring on May 21, 2004, during which the Purchaser has the right to terminate the agreement for any reason. Accordingly,
there are no assurances that this sale will close.



|                              |  |                                                                                               |  |                                                                               
|----------------------------- |  | --------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------
|                             
|Seller                        |  | Joint Venture Partners                                                                        |  | Properties                                                                    
|                             
|Fund II-III Associates        |  |  Fund II-IIOW Associates  Wells Real Estate Fund III, L.P.                                  |  | 1. Brookwood Grill A restaurant located in Fulton County, Georgia             
|                             
|Fund II-III-VI-VII Associates |  |  Fund II-III Associates  Wells Real Estate Fund VI, L.P.  Wells Real Estate Fund VII, L.P. |  | 2. Holcomb Bridge Property An office/retail center located in Roswell, Georgia
|                             



On April 29, 2004, four Wells
affiliated Joint Ventures (collectively, the Seller, defined below) sold the five real properties (the Sale Properties, defined below) located in Stockbridge, Georgia to an unrelated third party (the Purchaser)
for a gross sale price of $23,750,000. The Partnership holds an equity interest of approximately 57.2% in Fund III-IV Associates. As a result of the sale of Stockbridge Village Shopping Center, net proceeds of approximately $6.9 million and a gain
of approximately $2.7 million have been allocated to the Partnership.



|                                                       |  |                                                                      |  |                                                                                                
|------------------------------------------------------ |  | -------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------
|                                                      
|(Collectively, the Seller) The Joint Ventures        |  | Joint Venture Partners                                               |  | Sale Properties                                                                                
|                                                      
|Fund III-IV Associates                                 |  |  Wells Real Estate Fund III, L.P.  Wells Real Estate Fund IV, L.P. |  | 1. Stockbridge Village Shopping Center A retail shopping center located in Stockbridge, Georgia
|                                                      
|Fund V and Fund VI Associates (Fund V-VI Associates) |  |  Wells Real Estate Fund V, L.P.  Wells Real Estate Fund VI, L.P.   |  | 2. Stockbridge Village II Two retail buildings located in Stockbridge, Georgia                 
|                                                      



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|                                                               |  |                                                                        |  |                                                                                                                                                                                       
|-------------------------------------------------------------- |  | ---------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                              
|Fund VI and Fund VII Associates (Fund VI-VII Associates)     |  |  Wells Real Estate Fund VI, L.P.  Wells Real Estate Fund VII, L.P.   |  | 3. Stockbridge Village I Expansion A retail shopping center expansion located in Stockbridge, Georgia  4. Stockbridge Village III Two retail buildings located in Stockbridge, Georgia
|                                                              
|Fund VII and Fund VIII Associates (Fund VII-VIII Associates) |  |  Wells Real Estate Fund VII, L.P.  Wells Real Estate Fund VIII, L.P. |  | 5. Hannover Center A retail center located in Stockbridge, Georgia                                                                                                                    
|                                                              



|6. |  | CONTINGENCIES
|-- |  | -------------



On or about March 12, 2004, a putative class action complaint (the complaint) relating to Wells Real Estate Fund I, a public limited partnership that offered units from September 6, 1984 through September
5, 1986 (Wells Fund I), was filed by four individuals (the plaintiffs) against Leo F. Wells, III, Wells Capital, Wells Investment Securities, Inc., Wells Management, and Wells Fund I (collectively, the Wells
Defendants) (Hendry et al. v. Leo F. Wells, III et al., Superior Court of Gwinnett County, Georgia, Civil Action No. 04-A-2791 2). The Wells Defendants received notice of the complaint on or about March 19, 2004. The plaintiffs filed
the complaint purportedly on behalf of all limited partners holding B units of Wells Fund I as of January 15, 2003. The complaint alleges, among other things, that (a) during the offering period (September 6, 1984 through September 5, 1986), Mr.
Wells, Wells Capital, Wells Investment Securities, Inc., and Wells Fund I negligently or fraudulently made false statements and made material omissions in connection with the initial sale of the B units to investors of Wells Fund I by making false
statements and omissions in the Wells Fund I sales literature relating to the distribution of net sale proceeds to holders of B units; (b) Mr. Wells, Wells Capital and Wells Fund I negligently or fraudulently misrepresented and concealed disclosure
of, among other things, alleged discrepancies between such statements and the provisions in the partnership agreement for a period of time in order to delay such investors from taking any legal, equitable or other action to protect their investments
in Wells Fund I, among other reasons; and (c) Mr. Wells, Wells Capital and Wells Fund I breached their fiduciary duties to the limited partners. The plaintiffs seek, among other remedies, the following: rescission of all purported class
members purchases of B units and an order for a full refund of all money paid for such units together with interest; judgment against the Wells Defendants, jointly and severally, in an amount to be proven at trial; punitive damages; judicial
dissolution of Wells Fund I and the appointment of a receiver to wind up and terminate the partnership; and an award to plaintiffs of their attorneys fees, costs and expenses.



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



The following discussion and analysis should be read in conjunction with the Partnerships accompanying financial statements and notes
thereto.



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



Management believes that the Partnership would ideally operate through the course of the following five key life cycle phases. The time spent in each phase is dependent upon various economic, industry, market, and
other internal/external factors. Some overlap naturally exists in the transition from one phase to the next.



| |  |  | Fund-raising phase
| | - |  | ------------------

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



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

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



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

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



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

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



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

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



Currently, management believes that the Partnership straddles the positioning-for-sale phase and the disposition and liquidation phase. Upon investing all capital
proceeds and exiting the investing phase, the Partnership owned interests in six properties directly or through interests in affiliated joint ventures. As of March 31, 2004, three properties are substantially leased to tenants under renewed lease
terms, one property is under contract to be sold, one property was sold in 2002, and one property, 4400 Cox Road, is vacant. Management will continue to pursue various re-leasing scenarios during 2004.



As the Partnership evolves through the life cycle detailed above, our most significant risks
and challenges continue to evolve concurrently. During the positioning-for-sale phase, we will continue to focus on re-leasing vacant space and space that may become vacant upon the expiration of our current leases. In doing so, we seek to maximize
returns to the limited partners by negotiating long-term leases at market rental rates while attempting to minimize down time, re-leasing expenditures, ongoing property level costs and portfolio costs. As we embark further into the disposition and
liquidation phase, our attention will shift to locating suitable acquirers, negotiating purchase-sale contracts that will attempt to maximize the total return to the limited partners, and minimize contingencies and our post-closing involvement with
the acquirer.



For the three months ended March 31, 2004, net income decreased,
as compared to the three months ended March 31, 2003, primarily due to the vacancy of 4400 Cox Road beginning in July 2003 partially offset by an increase in occupancy at Boeing at the Atrium. Cash flows declined significantly due to the net sales
proceeds distributed to limited partners in January 2004.



During 2004, the
Partnership anticipates transitioning from the positioning-for-sale phase into the disposition and liquidation phase. Substantially all of our operating revenues are generated from the operations of the properties in the Partnerships
portfolio. On a quarterly basis, we deduct the expenses related to the recurring operations of the properties and the portfolio from such revenues and assess the amount of the remaining cash flows that will be required to fund known re-leasing costs
and other capital improvements. Any residual operating cash flows are considered available for distribution to the limited partners and are generally paid quarterly. As further outlined in section (c) below, we anticipate deploying a portion of
future operating cash flows to fund the costs necessary to re-lease 4400 Cox Road and to fund building improvements for Boeing at the Atrium.



Industry Factors



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



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General Economic and
Real Estate Market Commentary



The U.S. economy
appears to be recovering; however, thus far it has been a jobless recovery, and because of this, real estate office fundamentals may not improve until employment growth strengthens. The economy has shown signs of growth recently, as companies have
recommenced making investments in new employees. Job growth is the most significant demand driver for office markets. The jobless recovery has resulted in a demand deficit for office space. In general, the real estate office market lags behind the
overall economic recovery and, therefore, recovery is not expected until late 2004 or 2005 at the earliest, and then will vary by market.



Overall, real estate market fundamentals are weak; however, capital continues to flow into the asset class. This increased capital drives the prices of
many properties upward and investor returns downward. There is a significant pricing differential in underwriting parameters between well-leased assets with credit tenants and those with either existing vacancies or substantial near-term tenant
rollover. Properties with long-term leases to strong credit tenants have seen an increase in value.



The office market has significant excess space. Vacancy levels are believed to be at or near their peak. There is some encouraging news, new construction
continues to taper off, coming to a complete halt in many markets. As a result of the slowdown in new construction and the modest decline in sublease space, net absorption has turned positive, although barely, at year-end. Many industry
professionals believe office market fundamentals are bottoming-out; however, a recovery cannot be expected until job growth and corresponding demand for office space increases.



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



Real estate funds, such as the Partnership, that contain properties with
current vacancies or near-term tenant rollover may face a challenging leasing environment. The properties within these funds will face lower rents and higher concession packages to the tenants in order to re-lease vacant space.



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



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



Gross Revenues



Gross revenues of the Partnership were $152,387 and $209,873 for the three months ended March 31, 2004 and 2003, respectively. The 2004 decrease resulted primarily from the decrease in equity in income of Joint
Ventures as described in the following section. The results of operations of the Greenville Center, which was sold on September 30, 2002, are included in loss from discontinued operations for the three months ended March 31, 2003, as further
described below.



Equity In Income of Joint
VenturesContinuing Operations



Gross Revenues
of Joint Ventures



Gross revenues of Joint Ventures
decreased in 2004, as compared to 2003, primarily due to a decline in revenues resulting from the termination of the Reciprocal lease at 4400 Cox Road effective July 2003 partially offset by an increase in occupancy for Boeing at the Atrium.



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Expenses of Joint
Ventures



Expenses of Joint Ventures decreased in 2004, as
compared to 2003, primarily due to the decline in depreciation/amortization expenses at 4400 Cox Road. The decline in depreciation/amortization expenses arises from the 2003 write-off of tenant improvement costs and deferred commissions related to
the early termination of the Reciprocal lease at 4400 Cox Road effective July 2003. Partially offsetting the decline in depreciation/amortization expenses were non-recoverable operational expenses at 4400 Cox Road resulting from the building being
vacant and additional operating costs for Fund II-III Associates due to the increase in occupancy of Boeing at the Atrium.



Equity In Income of Joint VenturesDiscontinued Operations



Equity in income of Joint Ventures from discontinued operations increased in 2004, as compared to 2003, primarily due to a
decrease in depreciation expense as a result of classifying Stockbridge Village Shopping Center as held for sale effective March 18, 2003.



As a result of all of the aforementioned factors, equity in income of Joint Ventures decreased to $149,478 from $204,145 for the three months ended March
31, 2004 and 2003, respectively.



Expenses of the Partnership



Expenses of the Partnership were $32,565 and $55,849 for the three
months ended March 31, 2004 and 2003, respectively. The 2004 decrease is due primarily to a decrease in legal and accounting fees and expenses.



Net Income from Continuing Operations



As a result of the aforementioned factors, the Partnerships net income from continuing operations was $119,822 and $154,024 for the three months ended March 31,
2004 and 2003, respectively.



Net Loss from Discontinued Operations



The Partnership sold its 100% interest in Greenville Center on
September 30, 2002.



Condensed financial information for the Greenville Center
for the three months ended March 31, 2003 included in discontinued operations in the accompanying statements of income is summarized below:



|                                  |  |   |        |  
|--------------------------------- |  | - | ------ | -
|Total property revenues           |  | $ | 0      |  
|                                  |  |   |        |  
|Operating costsrental property   |  |   | 2,366  |  
|                                  |  |   |        |  
|Total expenses                    |  |   | 2,366  |  
|                                  |  |   |        |  
|Operating loss                    |  |   | (2,366 | )
|                                  |  |   |        |  
|Loss from discontinued operations |  | $ | (2,366 | )
|                                  |  |   |        |  



Net Income of the Partnership



As a result of the aforementioned factors, net income of the
Partnership was $119,822 and $151,658 for the three months ended March 31, 2004 and 2003, respectively.



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(c) Liquidity and Capital Resources



Cash Flows From Operating Activities



Net cash flows from operating activities were $(18,158) and $(24,495) for the three months
ended March 31, 2004 and 2003, respectively. The 2004 decrease in cash flows used from 2003 is primarily due to the decreases in partnership expenses described above.



Cash Flows From Investing Activities



Net cash flows from investing activities were $200,239 and $283,230 for the three months ended March 31, 2004 and 2003, respectively. The 2004 decrease from 2003
resulted primarily from a decline in distributions received from Fund III-IV Associates due to the vacancy of 4400 Cox Road effective July 31, 2003.



Cash Flows From Financing Activities



Net cash flows from financing activities were $(1,532,907) and $(220,905) for the three months ended March 31, 2004 and 2003, respectively. The 2004 increase in cash
flows used from 2003 is primarily due to the net sales proceeds distributions made to limited partners in January 2004.



Distributions



The Partnership made operating distributions to the limited partners holding Class A Units of $0.00 and $0.01 per unit for the quarters ended March 31, 2004 and 2003, respectively. Such distributions have been made
from net cash from operations and distributions received from investments in joint ventures. In accordance with the partnership agreement, no operating distributions have been made to the limited partners holding Class B Units or to the General
Partners.



The General Partners have reserved distribution to Class A limited
partners for the quarter ended March 31, 2004 and anticipate continuing to reserve such distributions until 4400 Cox Road is re-leased and related re-leasing costs are funded.



The Partnership made distributions of residual net sales proceeds from the sale of the Greenville Center to the limited partners holding
Class A Units of $0.06 per unit and to the limited partners holding Class B Units of $0.03 per unit in January 2004 to the limited partners of record as of December 31, 2003, which under the partnership agreement did not include limited partners who
acquired their units after September 30, 2003.



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 its funds available for investment. Accordingly, it is unlikely that the Partnership will acquire interests in any additional properties. In the near term, the
General Partners anticipate that the Partnership will utilize capital resources to fund its pro-rata portion of the costs necessary to (i) re-lease 4400 Cox Road and (ii) fund building improvements for Boeing at the Atrium.



Sales Proceeds



The sale of Greenville Center generated net sales proceeds of approximately $2,271,000 to the Partnership. Upon evaluating the capital needs
of the existing properties in which the Partnership holds an interest, the General Partners have determined that reserves of approximately $959,000 will be required to fund the costs anticipated



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##### Table of Contents



to re-lease the recently vacated 4400 Cox
Road. Thus, in accordance with the terms of the partnership agreement, the General Partners distributed in January 2004 residual net sales proceeds of approximately $1,312,000 to the limited partners of record as of December 31, 2003, which did
not include limited partners acquiring their units after September 30, 2003.



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



The Partnership and its joint ventures have entered into agreements with Wells Capital and its affiliates, whereby the Partnership or its joint ventures pay certain fees
or reimbursements to Wells Capital or its affiliates (e.g., property management and leasing fees, administrative salary reimbursements, etc.). See Note 4 to the Partnerships financial statements included in this report for a discussion of the
various related-party transactions, agreements, and fees.



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



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



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



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



Below is a
discussion of the accounting policies that management considers 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



Management is required to make subjective assessments as to the useful lives of its
depreciable assets. Management considers the period of future benefit of the asset to determine the appropriate useful lives. These assessments have a direct impact on net income. The estimated useful lives of the Joint Ventures assets by
class are as follows:



Building

25 yearsBuilding improvements

Remaining useful life of the buildingLand improvements

20 yearsTenant improvements

Lease term




In the event that management
uses inappropriate useful lives or methods for depreciation, the Partnerships net income would be misstated.



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Valuation of Real Estate Assets



Management continually monitors events and changes in circumstances
that could indicate that the carrying amounts of the real estate assets in which the Partnership has an ownership interest, either directly or through investments in joint ventures, may not be recoverable. When indicators of potential impairment are
present which indicate that the carrying amounts of real estate assets may not be recoverable, management assesses the recoverability of the real estate assets by determining whether the carrying value of the real estate assets will be recovered
through the undiscounted future operating cash flows expected from the use of the asset and its eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying value, management adjusts the real estate
assets to the fair value and recognizes an impairment loss.



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



|(g) |  | Certain Litigation Involving our General Partners
|--- |  | -------------------------------------------------



On or about March 12, 2004, a putative class action complaint (the complaint) relating to Wells Real Estate Fund I, a public limited partnership that offered
units from September 6, 1984 through September 5, 1986 (Wells Fund I), was filed by four individuals (the plaintiffs) against Leo F. Wells, III, Wells Capital, Wells Investment Securities, Inc., Wells Management, and Wells
Fund I (collectively, the Wells Defendants) (Hendry et al. v. Leo F. Wells, III et al., Superior Court of Gwinnett County, Georgia, Civil Action No. 04-A-2791 2). The Wells Defendants received notice of the complaint on or about
March 19, 2004. The plaintiffs filed the complaint purportedly on behalf of all limited partners holding B units of Wells Fund I as of January 15, 2003. The complaint alleges, among other things, that (a) during the offering period
(September 6, 1984 through September 5, 1986), Mr. Wells, Wells Capital, Wells Investment Securities, Inc., and Wells Fund I negligently or fraudulently made false statements and made material omissions in connection with the initial sale
of the B units to investors of Wells Fund I by making false statements and omissions in the Wells Fund I sales literature relating to the distribution of net sale proceeds to holders of B units; (b) Mr. Wells, Wells Capital and Wells Fund I
negligently or fraudulently misrepresented and concealed disclosure of, among other things, alleged discrepancies between such statements and the provisions in the partnership agreement for a period of time in order to delay such investors from
taking any legal, equitable or other action to protect their investments in Wells Fund I, among other reasons; and (c) Mr. Wells, Wells Capital and Wells Fund I breached their fiduciary duties to the limited partners. The plaintiffs seek, among
other remedies, the following: rescission of all purported class members purchases of B units and an order for a full refund of all money paid for such units together with interest; judgment against the Wells Defendants, jointly and severally,
in an amount to be proven at trial; punitive damages; judicial dissolution of Wells Fund I and the appointment of a receiver to wind up and terminate the partnership; and an award to plaintiffs of their attorneys fees, costs and expenses.



|(h) |  | Subsequent Event
|--- |  | ----------------



On April 6, 2004, Fund II-III Associates and Fund II-III-VI-VII Associates (collectively, the Seller) entered into an agreement to sell the two properties listed below to an unrelated third party (the
Purchaser) for a gross sales price of $9,500,000. This transaction is currently subject to a due diligence period expiring on May 21, 2004, during which the Purchaser has the right to terminate the agreement for any reason. Accordingly,
there are no assurances that this sale will close.



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|                              |  |                                                                                               |  |                                                                               
|----------------------------- |  | --------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------
|                             
|Seller                        |  | Joint Venture Partners                                                                        |  | Properties                                                                    
|                             
|Fund II-III Associates        |  |  Fund II-IIOW Associates  Wells Real Estate Fund III, L.P.                                  |  | 1. Brookwood Grill A restaurant located in Fulton County, Georgia             
|                             
|Fund II-III-VI-VII Associates |  |  Fund II-III Associates  Wells Real Estate Fund VI, L.P.  Wells Real Estate Fund VII, L.P. |  | 2. Holcomb Bridge Property An office/retail center located in Roswell, Georgia
|                             



On April 29, 2004, four Wells
affiliated Joint Ventures (collectively, the Seller, defined below) sold the five real properties (the Sale Properties, defined below) located in Stockbridge, Georgia to an unrelated third party (the Purchaser)
for a gross sale price of $23,750,000. The Partnership holds an equity interest of approximately 57.2% in Fund III-IV Associates. As a result of the sale of Stockbridge Village Shopping Center, net proceeds of approximately $6.9 million and a gain
of approximately $2.7 million have been allocated to the Partnership.



|                                                               |  |                                                                        |  |                                                                                                                                                                                       
|-------------------------------------------------------------- |  | ---------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                              
|(Collectively, the Seller) The Joint Ventures                |  | Joint Venture Partners                                                 |  | Sale Properties                                                                                                                                                                       
|                                                              
|Fund III-IV Associates                                         |  |  Wells Real Estate Fund III, L.P.  Wells Real Estate Fund IV, L.P.   |  | 1. Stockbridge Village Shopping Center A retail shopping center located in Stockbridge, Georgia                                                                                       
|                                                              
|Fund V and Fund VI Associates (Fund V-VI Associates)         |  |  Wells Real Estate Fund V, L.P.  Wells Real Estate Fund VI, L.P.     |  | 2. Stockbridge Village II Two retail buildings located in Stockbridge, Georgia                                                                                                        
|                                                              
|Fund VI and Fund VII Associates (Fund VI-VII Associates)     |  |  Wells Real Estate Fund VI, L.P.  Wells Real Estate Fund VII, L.P.   |  | 3. Stockbridge Village I Expansion A retail shopping center expansion located in Stockbridge, Georgia  4. Stockbridge Village III Two retail buildings located in Stockbridge, Georgia
|                                                              
|Fund VII and Fund VIII Associates (Fund VII-VIII Associates) |  |  Wells Real Estate Fund VII, L.P.  Wells Real Estate Fund VIII, L.P. |  | 5. Hannover Center A retail center located in Stockbridge, Georgia                                                                                                                    
|                                                              



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



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



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



The Partnership carried out an evaluation, under the supervision and with the participation of management of Wells Capital, the corporate general partner of the
Partnership, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Partnerships disclosure



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controls and procedures as of the end of the
period covered by this report pursuant to the Securities Exchange Act of 1934. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the Partnerships disclosure controls and procedures were
effective.



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



PART II    OTHER INFORMATION



|ITEM 6. |  | EXHIBITS AND REPORTS ON FORM 8-K.
|------- |  | ---------------------------------



|(a) |  | The Exhibits to this report are set forth on Exhibit Index to First Quarter Form 10-Q attached hereto.
|--- |  | ------------------------------------------------------------------------------------------------------



|(b) |  | No Current Reports on Form 8-K were filed with the Commission during the first quarter of 2004.
|--- |  | -----------------------------------------------------------------------------------------------



SIGNATURES



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



|             |  |  |  |  |  |                                                                                                     
|------------ |  |  |  |  |  | ----------------------------------------------------------------------------------------------------
|             |  |  |  |  |  | WELLS REAL ESTATE FUND III, L.P. (Registrant)  By:   WELLS CAPITAL, INC. (Corporate General Partner)
|             |  |  | 
|May 10, 2004 |  |  |  |  |  | /S/    LEO F. WELLS, III                                                                            
|             |  |  |  |  |  |                                                                                                     
|             |  |  |  |  |  | Leo F. Wells, III President                                                                         
|             |  |  | 
|May 10, 2004 |  |  |  |  |  | /S/    DOUGLAS P. WILLIAMS                                                                          
|             |  |  |  |  |  |                                                                                                     
|             |  |  |  |  |  | Douglas P. Williams Principal Financial
Officer of Wells Capital, Inc.                              



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EXHIBIT INDEX

TO

FIRST QUARTER
FORM 10-Q

OF

WELLS REAL ESTATE FUND III, L.P.



|            |  |                                                                                                                               
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                   
|            | 
|31.1        |  | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                        
|            | 
|31.2        |  | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                        
|            | 
|32.1        |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002