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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---

FORM 10-Q



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(Mark One)



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

For the quarterly period ended March 31, 2007 or



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

For the transition period from
 to

Commission file number 0-18407



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WELLS REAL ESTATE FUND III, L.P.

(Exact name of registrant as specified in
its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Georgia                                                        |  | 58-1800833                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|6200 The Corners Pkwy., Norcross, Georgia                      |  | 30092-3365                             
|(Address of principal executive offices)                       |  | (Zip Code)                             
|                                                               | 
|Registrants telephone number, including area code             |  | (770) 449-7800                         

N/A

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

Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈

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

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x



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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Form 10-Q of Wells Real Estate Fund III, L.P. (the Partnership or the Registrant) other than historical
facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements include, in particular, statements about our plans,
strategies, and prospects and are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended
to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as may, will, expect, intend,
anticipate, estimate, believe, continue, or other similar words. Specifically, we consider, among others, statements concerning future operating results and cash flows, our ability to meet future
obligations, and the amount and timing of any future distributions to limited partners to be forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this
report is filed with the Securities and Exchange Commission. We make no representations or warranties (express or implied) about the accuracy of any such forward-looking statements contained in this Form 10-Q, and we do not intend to publicly update
or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Any such forward-looking statements are
subject to unknown risks, uncertainties, and other factors and are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or
impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations, provide distributions to
partners, and maintain the value of our remaining real estate property, may be significantly hindered. See Item 1A. in the Partnerships Annual Report on Form 10-K for the year ended December 31, 2006 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  March 31, 2007 (unaudited) and December 31, 2006                                                          |  | 5       
|         |  |                       | 
|         |  |                       |  | Statements of Operations for the Three Months Ended March 31, 2007 (unaudited) and 2006 (unaudited)                        |  | 6       
|         |  |                       | 
|         |  |                       |  | Statements of Partners Capital for the Year Ended December 31, 2006 and the Three Months Ended March 31, 2007 (unaudited) |  | 7       
|         |  |                       | 
|         |  |                       |  | Statements of Cash Flows for the Three Months Ended March 31, 2007 (unaudited) and 2006 (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 Risk                                                                 |  | 19      
|         |  |                       | 
|         |  | Item 4.               |  | Controls and Procedures                                                                                                    |  | 19      
|         |  |                      
|PART II. |  | OTHER INFORMATION     |  |                                                                                                                           
|         |  |                       | 
|         |  | Item 1.               |  | Legal Proceedings                                                                                                          |  | 20      
|         |  |                       | 
|         |  | Item 1A.              |  | Risk Factors                                                                                                               |  | 20      
|         |  |                       | 
|         |  | Item 2.               |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                |  | 20      
|         |  |                       | 
|         |  | Item 3.               |  | Defaults Upon Senior Securities                                                                                            |  | 20      
|         |  |                       | 
|         |  | Item 4.               |  | Submission of Matters to a Vote of Security Holders                                                                        |  | 20      
|         |  |                       | 
|         |  | Item 5.               |  | Other Information                                                                                                          |  | 21      
|         |  |                       | 
|         |  | Item 6.               |  | Exhibits                                                                                                                   |  | 21      



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



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

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

The accompanying financial statements should be read in conjunction with the notes to the Partnerships
financial statements and Managements Discussion and Analysis of Financial Condition and Results of Operations included both in this report on Form 10-Q and in the Partnerships Annual Report on Form 10-K for the year ended
December 31, 2006. The Partnerships results of operations for the three months ended March 31, 2007 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)March 31,2007 |           | December 31,2006
|Investment in joint ventures |  | $                        | 2,218,440 |                  | $ | 2,277,476
|Cash and cash equivalents    |  |                          | 1,212,915 |                  |   | 1,187,998
|Due from joint ventures      |  |                          | 106,690   |                  |   | 92,389   
|Other assets                 |  |                          | 7,364     |                  |   | 7,279    
|                             |  |                          |           |                  |   |          
|Total assets                 |  | $                        | 3,545,409 |                  | $ | 3,565,142
|                             |  |                          |           |                  |   |          

LIABILITIES AND PARTNERS CAPITAL



|                                                  |  |   |           |  |   |          
|------------------------------------------------- |  | - | --------- |  | - | ---------
|LIABILITIES:                                      |  |   |           |  |   |          
|Accounts payable and accrued expenses             |  | $ | 13,533    |  | $ | 12,188   
|Due to affiliates                                 |  |   | 14,169    |  |   | 5,409    
|Partnership distributions payable                 |  |   | 62,517    |  |   | 62,517   
|                                                  |  |   |           |  |   |          
|Total liabilities                                 |  |   | 90,219    |  |   | 80,114   
|                                                  |  |  
|PARTNERS CAPITAL:                                |  |   |           |  |   |          
|Limited partners:                                 |  |   |           |  |   |          
|Class A  19,635,965 units issued and outstanding |  |   | 3,455,190 |  |   | 3,485,028
|Class B  2,544,540 units issued and outstanding  |  |   | 0         |  |   | 0        
|General partners                                  |  |   | 0         |  |   | 0        
|                                                  |  |   |           |  |   |          
|Total partners capital                           |  |   | 3,455,190 |  |   | 3,485,028
|                                                  |  |   |           |  |   |          
|Total liabilities and partners capital           |  | $ | 3,545,409 |  | $ | 3,565,142
|                                                  |  |   |           |  |   |          

See accompanying notes.



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WELLS REAL ESTATE FUND III, L.P.



STATEMENTS OF OPERATIONS



|                                                 |  |                                          |        |      |   |        |  
|------------------------------------------------ |  | ---------------------------------------- | ------ | ---- | - | ------ | -
|                                                 |  | (Unaudited) Three Months Ended March 31, |       
|                                                 |  | 2007                                     |        | 2006 |  
|                                                 |  |                                         
|EQUITY IN INCOME OF JOINT VENTURES               |  | $                                        | 47,654 |      | $ | 29,307 |  
|                                                 |  |                                         
|EXPENSES:                                        |  |                                          |        |      |   |        |  
|General and administrative                       |  |                                          | 30,410 |      |   | 50,549 |  
|                                                 |  |                                         
|INTEREST AND OTHER INCOME                        |  |                                          | 15,435 |      |   | 11,442 |  
|                                                 |  |                                          |        |      |   |        |  
|NET INCOME (LOSS)                                |  | $                                        | 32,679 |      | $ | (9,800 | )
|                                                 |  |                                          |        |      |   |        |  
|                                                 |  |                                         
|NET INCOME (LOSS) ALLOCATED TO LIMITED PARTNERS: |  |                                          |        |      |   |        |  
|                                                 |  |                                         
|CLASS A                                          |  | $                                        | 32,679 |      | $ | (9,800 | )
|                                                 |  |                                          |        |      |   |        |  
|CLASS B                                          |  | $                                        | 0      |      | $ | 0      |  
|                                                 |  |                                          |        |      |   |        |  
|                                                 |  |                                         
|NET INCOME (LOSS) PER LIMITED PARTNER UNIT:      |  |                                          |        |      |   |        |  
|                                                 |  |                                         
|CLASS A                                          |  |                                          | $0.00  |      |   | $0.00  |  
|                                                 |  |                                          |        |      |   |        |  
|CLASS B                                          |  |                                          | $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, 2006

AND THE THREE MONTHS ENDED MARCH 31, 2007 (UNAUDITED)



|                                                             |  |                  |  |         |           |                         |                  |           |         |   |   |  |   |   |  |   |           |  
|------------------------------------------------------------ |  | ---------------- |  | ------- | --------- | ----------------------- | ---------------- | --------- | ------- | - | - |  | - | - |  | - | --------- | -
|                                                             |  | Limited Partners |  |         |           | Total Partners Capital |                 
|                                                             |  | Class A          |  |         | Class B   |                         | General Partners |          
|                                                             |  | Units            |  | Capital |           |                         | Units            |           | Capital |   |  
|BALANCE, December 31, 2005                                   |  | 19,635,965       |  | $       | 3,700,394 |                         |                  | 2,544,540 |         | $ | 0 |  | $ | 0 |  | $ | 3,700,394 |  
|                                                             |  |                  |  |         |           |                        
|Net loss                                                     |  | 0                |  |         | (27,810   | )                       |                  | 0         |         |   | 0 |  |   | 0 |  |   | (27,810   | )
|Distributions of operating cash flow($0.01 per Class A Unit) |  | 0                |  |         | (187,556  | )                       |                  | 0         |         |   | 0 |  |   | 0 |  |   | (187,556  | )
|                                                             |  |                  |  |         |           |                         |                  |           |         |   |   |  |   |   |  |   |           |  
|BALANCE, December 31, 2006                                   |  | 19,635,965       |  |         | 3,485,028 |                         |                  | 2,544,540 |         |   | 0 |  |   | 0 |  |   | 3,485,028 |  
|                                                             |  |                  |  |         |           |                        
|Net income                                                   |  | 0                |  |         | 32,679    |                         |                  | 0         |         |   | 0 |  |   | 0 |  |   | 32,679    |  
|Distributions of operating cash flow($0.00 per Class A Unit) |  | 0                |  |         | (62,517   | )                       |                  | 0         |         |   | 0 |  |   | 0 |  |   | (62,517   | )
|                                                             |  |                  |  |         |           |                         |                  |           |         |   |   |  |   |   |  |   |           |  
|BALANCE, March 31, 2007                                      |  | 19,635,965       |  | $       | 3,455,190 |                         |                  | 2,544,540 |         | $ | 0 |  | $ | 0 |  | $ | 3,455,190 |  
|                                                             |  |                  |  |         |           |                         |                  |           |         |   |   |  |   |   |  |   |           |  

See accompanying notes.



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WELLS REAL ESTATE FUND III, L.P.



STATEMENTS OF CASH FLOWS



|                                                                                         |  |                                         |           |   |      |   |           |  
|---------------------------------------------------------------------------------------- |  | --------------------------------------- | --------- | - | ---- | - | --------- | -
|                                                                                         |  | (Unaudited) Three Months EndedMarch 31, |          
|                                                                                         |  | 2007                                    |           |   | 2006 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                    |  |                                         |           |   |      |   |           |  
|Net income (loss)                                                                        |  | $                                       | 32,679    |   |      | $ | (9,800    | )
|Operating distributions received from joint ventures                                     |  |                                         | 92,389    |   |      |   | 35,739    |  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                                         |           |   |      |   |           |  
|Equity in income of joint ventures                                                       |  |                                         | (47,654   | ) |      |   | (29,307   | )
|Changes in assets and liabilities:                                                       |  |                                         |           |   |      |   |           |  
|Increase in other assets                                                                 |  |                                         | (85       | ) |      |   | (4,104    | )
|Increase in accounts payable and accrued expenses                                        |  |                                         | 1,345     |   |      |   | 11,622    |  
|Increase (decrease) in due to affiliates                                                 |  |                                         | 8,760     |   |      |   | (2,632    | )
|                                                                                         |  |                                         |           |   |      |   |           |  
|Net cash provided by operating activities                                                |  |                                         | 87,434    |   |      |   | 1,518     |  
|                                                                                         |  |                                        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                    |  |                                         |           |   |      |   |           |  
|Investment in joint venture                                                              |  |                                         | 0         |   |      |   | (11,339   | )
|                                                                                         |  |                                        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                    |  |                                         |           |   |      |   |           |  
|Operating distributions paid to limited partners                                         |  |                                         | (62,517   | ) |      |   | 0         |  
|                                                                                         |  |                                         |           |   |      |   |           |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                     |  |                                         | 24,917    |   |      |   | (9,821    | )
|                                                                                         |  |                                        
|CASH AND CASH EQUIVALENTS, beginning of period                                           |  |                                         | 1,187,998 |   |      |   | 1,125,364 |  
|                                                                                         |  |                                         |           |   |      |   |           |  
|CASH AND CASH EQUIVALENTS, end of period                                                 |  | $                                       | 1,212,915 |   |      | $ | 1,115,543 |  
|                                                                                         |  |                                         |           |   |      |   |           |  
|                                                                                         |  |                                        
|SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:                   |  |                                         |           |   |      |   |           |  
|Partnership distributions payable                                                        |  | $                                       | 62,517    |   |      | $ | 0         |  
|                                                                                         |  |                                         |           |   |      |   |           |  

See accompanying notes.



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WELLS REAL ESTATE FUND III, L.P.



CONDENSED NOTES TO FINANCIAL STATEMENTS

MARCH 31, 2007 (unaudited)



|1. | ORGANIZATION AND BUSINESS
|-- | -------------------------

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

On October 24, 1988, the Partnership commenced an offering of up to $50,000,000 of Class A or Class B limited partnership
units ($1.00 per unit) pursuant to a Registration Statement filed on Form S-11 under the Securities Act of 1933, which was terminated on October 23, 1990. The Partnership sold approximately 19,635,965 Class A Units and 2,544,540 Class B
Units representing capital contributions of $22,180,505, adjusted for the Partnership repurchase of 22,805 Class A Units and 3,000 Class B Units.

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



|                                                              |  |                                                                        |  |                                                                               
|------------------------------------------------------------- |  | ---------------------------------------------------------------------- |  | ------------------------------------------------------------------------------
|Joint Venture                                                 |  | Joint Venture Partners                                                 |  | Properties                                                                    
|Fund II and Fund III Associates (Fund II-III Associates)    |  |   Fund II and Fund II-OW(1)   Wells Real Estate Fund III, L.P.       |  | 1. Boeing at the Atrium A four-story office building located in Houston, Texas
|Fund III and Fund IV Associates (Fund III-IV Associates)(2) |  |   Wells Real Estate Fund III, L.P.   Wells Real Estate Fund IV, L.P. |  | 2. 4400 Cox Road(3) An office building located
in Richmond, Virginia          



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



| | (2) | Fund III-IV Associates was liquidated in 2007.
| | --- | ----------------------------------------------



| | (3) | This property was sold in June 2005.
| | --- | ------------------------------------

Wells Real Estate Fund II, Wells Real Estate Fund II-OW, and
Wells Real Estate Fund IV, L.P. are affiliated with the Partnership through one or more common general partners. Each of the properties described above was acquired on an all-cash basis. For further information regarding the Joint Ventures and
foregoing properties, refer to the Partnerships Annual Report on Form 10-K for the year ended December 31, 2006.



|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



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Regulation S-X, and in accordance with such rules and regulations, do not include all of the information and footnotes required by U.S. generally accepted
accounting principles (GAAP) for complete financial statements. In the opinion of the General Partners, the statements for the unaudited interim periods presented include all adjustments that are of a normal and recurring nature and
necessary to fairly and consistently present the results for such periods. Results for interim periods are not necessarily indicative of full-year results. For further information, refer to the financial statements and footnotes included in the
Partnerships Annual Report on Form 10-K for the year ended December 31, 2006.

Investment in Joint Ventures

The Partnership has evaluated the Joint Ventures and concluded that none are variable interest entities under the provisions of Financial Accounting Standards Board
Interpretation (FIN) No. 46(R), Consolidation of Variable Interest Entities, which supersedes FIN No. 46 and is an interpretation of Accounting Research Bulletin (ARB) No. 51, Consolidated Financial
Statements. The Partnership does not have control over the operations of the Joint Ventures; however, it does exercise significant influence. Approval by the Partnership as well as the other joint venture partners is required for any major
decision or any action that would materially affect the Joint Ventures, or their real property investments. Accordingly, upon applying the provisions of Statement of Financial Accounting Standard (SFAS) No. 94, Consolidation of
All Majority-Owned Subsidiaries, ARB No. 51, and Statement of Position No. 78-9, Accounting for Investments In Real Estate Ventures, the Partnership accounts for its investments in the Joint Ventures using the equity method of
accounting, whereby original investments are recorded at cost and subsequently adjusted for contributions, distributions, and net income (loss) attributable to the Partnership. Pursuant to the terms of the joint venture agreements, all income (loss)
and distributions are allocated to joint venture partners in accordance with their respective ownership interests. Distributions of net cash from operations, if available, are generally distributed to the joint venture partners on a quarterly basis.

Other Assets

As of March 31, 2007 and
December 31, 2006, other assets is comprised of the following items:



|                            |  |               |       |                  |   |      
|--------------------------- |  | ------------- | ----- | ---------------- | - | -----
|                            |  | March 31,2007 |       | December 31,2006
|Interest income receivable  |  | $             | 5,127 |                  | $ | 5,042
|Insurance refund receivable |  |               | 2,237 |                  |   | 2,237
|                            |  |               |       |                  |   |      
|Total                       |  | $             | 7,364 |                  | $ | 7,279
|                            |  |               |       |                  |   |      

Distribution of Net Cash from Operations

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

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



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| |  |  | To limited partners until each limited partner has received 100% of his capital contributions, as defined;
| | - |  | ----------------------------------------------------------------------------------------------------------



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



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



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



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

Allocations of Net Income, Net Loss, and Gain on Sale

For the purpose of determining allocations per the partnership
agreement, net income is defined as net income recognized by the Partnership, excluding deductions for depreciation, 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.

Reclassifications

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

Recent Accounting Pronouncements

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 of Long-Lived Assets. SFAS No. 157
emphasizes that fair value is a market-based measurement, as opposed to an entity-specific measurement. SFAS No. 157 will be effective for the Partnership beginning January 1, 2008. The Partnership is currently assessing provisions and
evaluating the financial impact of SFAS No. 157 on its financial statements, however, does not believe the adoption of this pronouncement will have a material impact on its financial statements.

In July 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109, Accounting for Income
Taxes, which clarifies the relevant criteria and approach for the



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recognition, derecognition, and measurement of uncertain tax positions. FIN No. 48 was effective for the Partnership beginning January 1, 2007. The
adoption of this pronouncement has not had a material impact on the Partnerships financial statements.



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

Summary of Financial Information

Condensed financial information for the joint ventures in which the Partnership held direct interests for the three months ended March 31, 2007
and 2006, respectively, is presented below:



|                       |  |                    |         |                                         |   |         |                                   |      |                    |  |      |        |      |  |      |     |      |   |       |  |   |         |  |   |        |  
|---------------------- |  | ------------------ | ------- | --------------------------------------- | - | ------- | --------------------------------- | ---- | ------------------ |  | ---- | ------ | ---- |  | ---- | --- | ---- | - | ----- |  | - | ------- |  | - | ------ | -
|                       |  | Total Revenues     |         | Income (Loss) FromContinuing Operations |   |         | Income FromDiscontinuedOperations |      | Net Income (Loss)  | 
|                       |  | Three Months Ended |         | Three Months Ended                      |   |         | Three Months Ended                |      | Three Months Ended | 
|                       |  | March 31,          |         | March 31,                               |   |         | March 31,                         |      | March 31,          | 
|                       |  | 2007               |         | 2006                                    |   | 2007    |                                   | 2006 |                    |  | 2007 |        | 2006 |  | 2007 |     | 2006 |  
|Fund II-III Associates |  | $                  | 522,595 |                                         | $ | 460,687 |                                   | $    | 130,478            |  | $    | 84,696 |      |  | $    | 978 |      | $ | 1,553 |  | $ | 131,456 |  | $ | 86,249 |  
|Fund III-IV Associates |  |                    | 0       |                                         |   | 806     |                                   |      | 0                  |  |      | (3,446 | )    |  |      | 0   |      |   | 0     |  |   | 0       |  |   | (3,446 | )
|                       |  |                    |         |                                         |   |         |                                   |      |                    |  |      |        |      |  |      |     |      |   |       |  |   |         |  |   |        |  
|                       |  | $                  | 522,595 |                                         | $ | 461,493 |                                   | $    | 130,478            |  | $    | 81,250 |      |  | $    | 978 |      | $ | 1,553 |  | $ | 131,456 |  | $ | 82,803 |  
|                       |  |                    |         |                                         |   |         |                                   |      |                    |  |      |        |      |  |      |     |      |   |       |  |   |         |  |   |        |  

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



|                       |  |                 |     |                |   |       |  |                 |     |              |   |       |  |   |   |  |   |      
|---------------------- |  | --------------- | --- | -------------- | - | ----- |  | --------------- | --- | ------------ | - | ----- |  | - | - |  | - | -----
|                       |  | March 31, 2007  |     | March 31, 2006
|                       |  | OperatingIncome |     | Gain on Sale   |   | Total |  | OperatingIncome |     | Gain on Sale |   | Total
|Fund II-III Associates |  | $               | 978 |                | $ | 0     |  | $               | 978 |              | $ | 1,553 |  | $ | 0 |  | $ | 1,553
|Fund III-IV Associates |  |                 | 0   |                |   | 0     |  |                 | 0   |              |   | 0     |  |   | 0 |  |   | 0    
|                       |  |                 |     |                |   |       |  |                 |     |              |   |       |  |   |   |  |   |      
|                       |  | $               | 978 |                | $ | 0     |  | $               | 978 |              | $ | 1,553 |  | $ | 0 |  | $ | 1,553
|                       |  |                 |     |                |   |       |  |                 |     |              |   |       |  |   |   |  |   |      

Due from Joint Ventures

As presented in the accompanying balance sheets, due from joint ventures as of March 31, 2007 and December 31, 2006 represents operating cash flow generated by the Joint Ventures for the three months ended
March 31, 2007 and December 31, 2006, respectively, which is attributable to the Partnership.



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

Management and Leasing Fees

In accordance with the property management and leasing agreement, Wells Management Company, Inc. (Wells Management), an affiliate of the
General Partners, receives compensation for the management and leasing of the Partnerships properties owned through the Joint Ventures equal to (a) of the gross revenues collected monthly, 3% of the gross revenues for management and 3% of
the gross revenues for leasing (aggregate maximum of 6%) plus a separate fee for the one-time lease-up of newly constructed properties in an amount not to exceed the fee customarily charged in arms-length transactions by others rendering
similar services in the same geographic area for similar properties, which is assessed periodically based on market studies, or (b) in the case of commercial properties leased on a long-term net basis (ten or more years), 1% of the gross
revenues except for initial leasing



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fees equal to 3% of the gross revenues over the first five years of the lease term. Management and leasing fees are paid by the Joint Ventures and,
accordingly, included in equity in income of joint ventures in the accompanying statements of operations. The Partnerships share of management and leasing fees and lease acquisition costs incurred through the Joint Ventures is $10,385 and
$10,400 for the three months ended March 31, 2007 and 2006, respectively.

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 reimbursed Wells Capital and Wells Management for administrative expenses of $17,329 and $18,235 for the three months
ended March 31, 2007 and 2006, respectively. In addition, Wells Capital pays for certain operating expenses of the Partnership (bill-backs) directly and invoices the Partnership for the reimbursement thereof. As of March 31,
2007 and December 31, 2006, due to affiliates is comprised of administrative reimbursements and bill-backs due to Wells Capital and/or Wells Management.

Economic Dependency

We have engaged Wells Capital and Wells Management to provide certain essential services for us, including supervision
of the management and leasing of our properties, 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, we are dependent upon Wells Capital and Wells Management.

Wells
Capital and Wells Management are all owned and controlled by Wells Real Estate Funds, Inc. (WREF). The operations of Wells Capital and Wells Management represent substantially all of the business of WREF. Accordingly, we focus on the
financial condition of WREF when assessing the financial condition of Wells Capital and Wells Management. In the event that WREF were to become unable to meet its obligations as they become due, we might be required to find alternative service
providers.

Future net income generated by WREF will be largely dependent upon the amount of fees earned by Wells Capital and Wells Management based on,
among other things, the level of investor proceeds raised from the sale of common stock for certain WREF-sponsored programs and the volume of future acquisitions and dispositions of real estate assets by WREF-sponsored programs. As of March 31,
2007, 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.

Assertion of Legal Action Against Related-Parties

On March 12, 2007, a stockholder of Wells REIT filed a purported class action and derivative complaint, Washtenaw County Employees Retirement System v. Wells Real Estate Investment Trust, Inc., et al., in the United States
District Court for the District of Maryland against, among others, Wells REIT, Leo F. Wells, III, one of our General Partners, Wells Capital, the corporate general partner of Wells Partners, our other general partner, Wells Management, our property
manager, certain affiliates of WREF, the directors of Wells REIT, and certain individuals who formerly served as officers and directors of Wells REIT prior to the closing of the internalization transaction on April 16, 2007. The complaint
alleges violations of the federal proxy rules based on allegations that the proxy statement of Wells REIT filed with the SEC on February 26, 2007 contains false and misleading statements and omits to state material facts and breaches of
fiduciary duty arising from the Wells REIT internalization transaction and the related proxy statement. The complaint seeks, among other things,



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unspecified monetary damages. 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. Mr. Wells, Wells Capital, and Wells Management intend to vigorously defend this action. Any financial loss incurred by Wells Capital, Wells Management, or its affiliates could hinder their ability to successfully manage our
operations and our portfolio of investments.



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

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



|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, 2006.

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. In the fourth quarter of 2006, the majority tenant of Boeing at the



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Atrium, the Boeing/Shuttle Division (Boeing), exercised its option to reduce the square footage leased by approximately 46% effective
September 18, 2007. Our focus on the remaining asset involves leasing and marketing efforts that we believe will result in the best disposition pricing for our limited partners.

The first quarter 2007 operating distributions to limited partners holding Class A Units remained consistent with the level paid in the prior quarter. We anticipate that operating distributions may be reserved or
remain low in the future, as only one property remains in the portfolio. Once the details surrounding leasing and/or the potential sale of the remaining property becomes known, our General Partners will evaluate if distributions of the remaining net
sale proceeds from the sale of 4400 Cox Road would be appropriate.

Property Summary

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

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 Boeing at the Atrium property is currently 99% occupied by Boeing. The existing Boeing lease extends through March 2008. Boeing exercised the option to reduce
the square footage by approximately 46% of its space effective September 18, 2007, which consists of the first two floors. We have begun our marketing efforts for this space.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Liquidity and Capital Resources

Overview

Our operating strategy entails funding expenditures related to the recurring operations of the Joint Ventures properties and the portfolio with operating cash
flows, including current and prior period operating distributions received from the Joint Ventures, and assessing the amount of remaining cash flows that will be required to fund known future re-leasing costs and other capital improvements. Any
residual operating cash flows are generally considered available for distribution to the Class A limited partners and, unless reserved, are generally paid quarterly. To the extent that operating cash flows are insufficient to fund our recurring
operations, net sale proceeds will be utilized. As a result, the ongoing monitoring of our cash position is critical to ensuring that adequate liquidity and capital resources are available. Economic downturns in one or more of our core markets could
adversely impact the ability of our tenants to honor lease payments and our ability to re-lease space on favorable terms as leases expire or space otherwise becomes vacant. In the event of either situation, cash flows and, consequently, our ability
to provide funding for capital needs could be adversely affected.

Short-Term Liquidity

We generated net operating cash flows, including distributions received from the Joint Ventures, of approximately $87,000 for the three months ended March 31, 2007,
which were used primarily to fund operating



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distributions to limited partners of approximately $63,000. Operating distributions from the Joint Ventures are generally representative of rental revenues
and tenant reimbursements, less property operating expenses, management fees, general administrative expenses, and capital expenditures. We expect operating distributions to limited partners to remain low or be reserved in the near-term, as we
intend to fund our pro-rata share of anticipated re-leasing costs for Boeing at the Atrium. To the extent of any future operating distributions paid to limited partners will be largely dependent upon the amount of cash generated from Boeing at the
Atrium, our expectations of future cash flows, and determination of near-term cash needs for re-leasing costs and other capital improvements for the remaining property owned by Fund II-III Associates.

We believe that the cash on hand, including net proceeds from the sale of properties, and distributions due from Fund II-III Associates are sufficient to cover our
working capital needs, including liabilities of approximately $90,000 as of March 31, 2007.

Long-Term Liquidity

We expect that our future sources of capital will be primarily derived from operating cash flows generated from Fund II-III Associates and net sale proceeds
generated from the strategic sale of the remaining property. Our future long-term liquidity requirements will include, but not be limited to, funding tenant improvements, renovations, expansions, and other significant capital improvements necessary
for the remaining property owned through Fund II-III Associates. We expect to continue to use substantially all future net cash flows from operations to provide funding for such requirements. Future cash flows from operating activities will be
primarily affected by distributions received from Fund II-III Associates, which are dependent upon net operating income generated by the remaining property, less reserves for known capital expenditures.

Capital Resources

The Partnership is an investment vehicle formed
for the purpose of acquiring, owning, and operating income-producing real properties and has invested all of the partners original 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 funds capital expenditures primarily related to building improvements for the purpose of maintaining the quality of our remaining property, and
tenant improvements for the purpose of readying our remaining property for re-leasing. As leases expire, we typically attempt to re-lease space to an existing tenant or market the space to prospective new tenants. Generally, tenant improvements
funded in connection with lease renewals require less capital than those funded in connection with new leases. However, external conditions, such as the supply of and demand for comparable space available within a given market, drive capital costs
as well as rental rates. Any capital or other expenditures not provided for by the operations of Fund II-III Associates will be required to be funded by the Partnership and respective joint venture partners on a pro-rata basis.

Operating cash flows, if available, are generally distributed from the Joint Ventures to the Partnership approximately one month following calendar quarter-ends.
However, the Joint Ventures will reserve operating distributions, or a portion thereof, as needed in order to fund known capital and other expenditures. Our cash management policy typically includes first utilizing current period operating cash flow
until depleted, at which point operating reserves are utilized to fund capital and other required expenditures. In the event that current and prior period accumulated operating cash flows are insufficient to fund such costs, net property sale
proceeds reserves would then be utilized.



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As of March 31, 2007, we had received, used, distributed, and held net sale proceeds allocated to the Partnership
from the sale of properties as presented below:



|                                                  |  |                   |  |                                       |        |                                              |            |                          |   |                                                                |  |                                                      |  |   |            |  |   |        
|------------------------------------------------- |  | ----------------- |  | ------------------------------------- | ------ | -------------------------------------------- | ---------- | ------------------------ | - | -------------------------------------------------------------- |  | ---------------------------------------------------- |  | - | ---------- |  | - | -------
|                                                  |  | Net Sale Proceeds |  | Partnerships Approximate Ownership % |        | Net SaleProceeds Allocated tothe Partnership |            | Use of Net Sale Proceeds |   | Net Sale Proceeds
Distributed to Partners as
of March 31, 2007 |  | Undistributed Net Sale Proceeds as of March 31, 2007
|Property Sold                                     |  |                   |  |                                       | 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 4400 Cox Road building (2004)          |  |   | 6,252,772  |  |   | 0      
|Holcomb Bridge Property(sold in 2004)             |  | $6,889,379        |  | 8.8%                                  |        |                                              | 607,643    |                          |   | 58,283                                                         |  |   Re-leasing 4400 Cox Road building (2004)          |  |   | 549,360    |  |   | 0      
|Brookwood Grill(sold in 2004)                     |  | $2,318,115        |  | 37.7%                                 |        |                                              | 872,770    |                          |   | 84,746                                                         |  |   Re-leasing 4400 Cox Road building (2004)          |  |   | 788,024    |  |   | 0      
|4400 Cox Road(sold in 2005)                       |  | $6,308,796        |  | 57.2%                                 |        |                                              | 3,609,357  |                          |   | 0                                                              |  |                                                     |  |   | 2,833,662  |  |   | 775,695
|                                                  |  |                   |  |                                       |        |                                              |            |                          |   |                                                                |  |                                                      |  |   |            |  |   |        
|Total                                             |  |                   |  |                                       |        | $                                            | 14,240,195 |                          | $ | 769,495                                                        |  |                                                      |  | $ | 12,695,005 |  | $ | 775,695
|                                                  |  |                   |  |                                       |        |                                              |            |                          |   |                                                                |  |                                                      |  |   |            |  |   |        

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 the Partnerships share of anticipated re-leasing costs and capital improvements for Boeing at the Atrium.

Results of Operations

Equity in Income of Joint Ventures

Equity in income of Joint Ventures increased from $29,307 for the three months ended March 31, 2006 to $47,654 for the three months ended
March 31, 2007. The increase is primarily attributable to an adjustment to 2006 operating expense reimbursement billings to Boeing made in the first quarter of 2007. The Joint Ventures bill tenants for operating expense reimbursements based on
estimates, which are reconciled in the following calendar year based on actual costs incurred and the terms of the corresponding tenant leases. We anticipate equity in income of Joint Ventures to decrease in the second quarter of 2007 as a result of
recognizing the aforementioned nonrecurring operating expense reimbursement adjustment in the first quarter of 2007.

Expenses

Our total expenses decreased from $50,549 for the three months ended March 31, 2006 to $30,410 for the three months ended March 31, 2007. The decrease is
primarily attributable to a corresponding decrease in the size of our portfolio. We anticipate incurring additional administrative expenses and legal fees in future periods, as a result of complying with additional reporting and regulatory
requirements, which may partially offset the aforementioned decrease caused by the compression of the portfolio.

Interest and Other Income

Interest and other income increased from $11,442 for the three months ended March 31, 2006 to $15,435 for the three months ended March 31,
2007. The increase is primarily attributable to an increase 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.



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Inflation

We are
exposed to inflation risk, as income from long-term leases is the primary source of our cash flows from operations. There are provisions in the majority of our tenant leases that would protect us from the impact of inflation. These provisions
include rent steps, reimbursement billings for operating expense pass-through charges, real estate tax, and insurance reimbursements on a per-square-foot basis or, in some cases, annual reimbursement of operating expenses above a certain
per-square-foot allowance. However, due to the long-term nature of our leases, the leases may not readjust their reimbursement rates frequently enough to cover inflation.

Application of Critical Accounting Policies

Summary

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

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

Investment
in Real Estate Assets

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



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

In the event that Fund II-III Associates utilizes inappropriate useful lives or methods of depreciation, our net
income would be misstated.

Valuation of Real Estate Assets

We continually monitor events and changes in circumstances that could indicate that the carrying amount of the remaining property in which we have an ownership interest, through investment in Fund II-III Associates, may not be recoverable.
When indicators of potential impairment are present which indicate that the carrying amount of real estate assets may not be recoverable, management assesses the recoverability of the real estate assets by determining whether the carrying value of
the real estate assets will be recovered through the undiscounted future operating cash flows expected from the use of the assets and their eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the
carrying value, management adjusts the real estate asset to the fair value, as defined by SFAS No. 144, and recognizes an impairment loss. Estimated fair value is calculated based on the following information, dependent upon availability, in
order of preference: (i) recently



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quoted market price, (ii) market prices for comparable properties, or (iii) the present value of undiscounted cash flows, including estimated
salvage value. We have determined that there has been no impairment in the carrying value of the remaining real estate asset held as of March 31, 2007.

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

Related-Party Transactions

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

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

The American Jobs Creation Act of 2004 added Section 470 to the Internal Revenue Code, which provides for certain limitations on the utilization of losses by
investors that are attributable to leased property owned by a partnership having both taxable and tax-exempt partners such as the Partnership. If Section 470 were deemed to apply to the Partnership, passive losses allocable to limited partners
holding Class B Units could only be utilized to offset passive income generated from the same property or potentially from properties owned by the same partnership. In March 2005, the IRS announced that it would not apply Section 470 to
partnerships for the taxable year 2004 based solely on the fact that a partnership had both taxable and tax-exempt partners. In December 2005, the IRS extended the period for transitional relief through the 2005 tax year, and in December 2006, the
IRS again extended the period for transitional relief through all tax years beginning prior to January 1, 2007. In addition, pursuant to Section 403(ff) of the Gulf Opportunity Zone Act of 2005, the effective date provisions regarding the
applicability of Section 470 were amended to provide that, in the case of leased property treated as tax-exempt use property by reason of its being owned by a partnership having both taxable and tax-exempt partners, Section 470 will apply
only to property acquired after March 12, 2004. Since the Partnership acquired all of its properties prior to March 12, 2004, and is not expected to acquire interests in any additional properties in the future, we do not believe that the
provisions of Section 470 should apply to limit the utilization of losses attributable to the properties owned by the Partnership; however, due to the uncertainties and lack of guidance relating to this provision, it is unclear as to whether
the acquisition of a limited partnership interest in the Partnership after the March 12, 2004 effective date may be deemed to be an acquisition of property within the meaning of the effective date provisions of Section 470.



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

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



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

We carried out an evaluation, under the
supervision and with the participation of management of Wells Capital, our corporate General Partner, including the Principal Executive Officer and the Principal Financial Officer of



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

There were no significant changes in our internal control over financial reporting during the quarter ended March 31, 2007 that have materially affected, or are
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 March 31, 2007, requiring disclosure under Item 103 of Regulation S-K.



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

There have been no material changes from the risk
factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006.



|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 March 31, 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------



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



|(c) | We did not redeem any securities during the quarter ended March 31, 2007.
|--- | -------------------------------------------------------------------------



|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 March 31, 2007.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------



|(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 March 31, 2007.



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



|(a) | During the quarter ended March 31, 2007, 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 First 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)
|             |  | 
|May 11, 2007 |  |  |  | /S/    LEO F. WELLS,
III                                                                         
|             |  |  |  | Leo F. Wells, III President, Principal
Executive Officer,and Sole Director of Wells Capital, Inc.
|             |  | 
|May 11, 2007 |  |  |  | /S/    DOUGLAS P.
WILLIAMS                                                                       
|             |  |  |  | Douglas P. Williams Principal Financial
Officer of Wells Capital, Inc.                           



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##### Table of Contents

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