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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended September 30, 2004 or

For the transition period from                                 to                                 

Commission file number 0-14463

WELLS REAL ESTATE FUND I

(Exact name of registrant as specified in its charter)

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

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

Yes  x     No  ¨

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

Yes  ¨    No  x

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

General economic risks

Real estate risks inherent in properties owned directly and through joint ventures

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Other operational risks

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WELLS REAL ESTATE FUND I AND SUBSIDIARY

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WELLS REAL ESTATE FUND I AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

ASSETS

See accompanying notes.

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WELLS REAL ESTATE FUND I AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

See accompanying notes.

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WELLS REAL ESTATE FUND I AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL

FOR THE YEAR ENDED DECEMBER 31, 2003

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

See accompanying notes.

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WELLS REAL ESTATE FUND I AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

See accompanying notes.

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WELLS REAL ESTATE FUND I AND SUBSIDIARY

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004 (unaudited)

Wells Real Estate Fund I (the “Partnership”) is a Georgia public limited partnership with Leo F. Wells, III and Wells Capital, a Georgia corporation, serving as its general partners (collectively, the “General Partners”). The Partnership was formed on April 26, 1984 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. 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 partnership unit generally has equal voting rights regardless of class.

On September 6, 1984, 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 Partnership terminated its offering on September 5, 1986, upon receiving and accepting gross proceeds of $35,321,000 for a total of 141,284 Class A and Class B limited partner units from 4,895 limited partners at $250 per unit.

As of September 30, 2004, the Partnership owned interests in the following two properties directly: (i) Black Oak Plaza, a shopping center located in Knoxville, Tennessee, and (ii) a condominium interest in Paces Pavilion, a medical office building located in Atlanta, Georgia of approximately 27%.

During the periods presented, the Partnership also owned interests in the following joint venture (the “Joint Venture”):

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

On April 7, 2003, Fund I-II Tucker Associates sold the retail portion of Heritage Place, which comprises approximately 30% of the total premises, to an unrelated third party for a gross selling price of $3,400,000. As a

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result of this sale, the Partnership was allocated a gain of approximately $152,000 and received net sale proceeds of approximately $1,665,000.

On June 18, 2004, Wells-Baker Associates sold Peachtree Place to an unrelated third party for a gross selling price of $1,030,000. As a result of this sale, the Partnership was allocated a gain of approximately $314,000 and received net sale proceeds of approximately $858,000.

The consolidated financial statements include the accounts of the Partnership and Wells-Baker Associates. The Partnership’s interest in Wells-Baker Associates was approximately 90% for each of the periods presented. All significant intercompany balances have been eliminated in consolidation. Minority interest represents Wells & Associates, Inc.’s interest in Wells-Baker Associates of approximately 10% for each of the periods presented.

The consolidated 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 those periods. Results for interim periods are not necessarily indicative of full-year results. For further information, refer to the consolidated financial statements and footnotes included in the Partnership’s Form 10-K for the year ended December 31, 2003.

For the purpose of determining allocations per the partnership agreement, net income is defined generally 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 Class B limited partners 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.

Under the partnership agreement, gain on the sale or exchange of the Partnership’s properties is allocated as follows: (a) first, to partners having negative capital accounts, if any, until all negative capital accounts have been restored to zero; (b) then to the limited partners in proportion to and to the extent of the excess of (i) each limited partner’s adjusted capital contribution, plus a cumulative 15% per annum return on his adjusted capital contribution (16% for investments made before December 31, 1984), less the sum of all prior distributions of cash flow from operations previously made to such limited partner, over (ii) such limited partner’s capital account balance as of the sale date; (c) then to the General Partners in proportion to and to the extent of the excess of (i) each General Partner’s adjusted capital contribution, less the sum of all prior distributions of cash flow from operations previously made to such General Partners, over (ii) such General Partner’s capital account balance as of the sale date; and (d) thereafter 85% to the limited partners and 15% to the General Partners.

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Net cash from operations, if available, is generally distributed quarterly to the limited partners as follows:

In the third quarter of 2004, the Partnership completed a review of its real estate related depreciation by performing an analysis of the components of each property type in an effort to determine the weighted-average composite useful lives of its real estate assets. As a result of this review, effective July 1, 2004, the Partnership extended the weighted-average composite useful life from 25 years to 40 years for all building assets. This change resulted in an increase to net income of approximately $72,900, or $0.74 per unit, for Class A Units. This change had no effect on net income allocated to Class B Units. The Partnership believes that the change reflects the estimated useful lives of the respective assets and is consistent with prevailing industry practice.

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

The Partnership does not have control over the operations of Fund I-II Tucker Associates; however, it does exercise significant influence. Accordingly, the Partnership’s investment in Fund I-II Tucker Associates is recorded using the equity method of accounting, whereby original investments are recorded at cost and subsequently adjusted for contributions, distributions, and net income (loss) attributable to the Partnership. For further information, refer to the consolidated financial statements and footnotes included in the Partnership’s Form 10-K for the year ended December 31, 2003.

The following information summarizes the operations of Fund I-II Tucker Associates for the three months and nine months ended September 30, 2004 and 2003, respectively:

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Wells Management Company, Inc. (“Wells Management”), an affiliate of the General Partners, is entitled to compensation for the management and leasing of the Partnership’s properties owned directly or through 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 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 on-site management and leasing of Black Oak Plaza has been performed by an independent third-party property management company since the third quarter of 1998. Three percent of gross revenues from this property are payable to the third-party management company, and the balance is due to Wells Management.

Wells Management has elected to defer the current receipt of management and leasing fees and initial lease-up costs due from the Partnership with respect to the properties owned by the Partnership directly and through its interest in joint ventures. Accordingly, such fees are expensed as incurred and recorded as due to affiliate in the accompanying consolidated balance sheets. As of September 30, 2004, the Partnership owed aggregate management and leasing fees to Wells Management of $3,014,303, of which $2,240,604 is recorded as due to affiliate and $773,699 is attributable to the Partnership’s interest in Fund I-II Tucker Associates and, therefore, included in investment in joint ventures in the respective accompanying consolidated balance sheet. As of December 31, 2003, the Partnership owed aggregate management and leasing fees to Wells Management of $2,981,611, of which $2,223,843 is recorded as due to affiliate and $757,768 is attributable to the Partnership’s interest in Fund I-II Tucker Associates and, therefore, included in investment in joint ventures in the respective accompanying consolidated balance sheet.

Wells Capital, one of the General Partners, and its affiliates perform certain administrative services for the Partnership, such as accounting, property management, and other partnership administration, and incur the related expenses. Such expenses are allocated among various other entities affiliated with the General Partners (“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 and properties consolidated by the Partnership reimbursed Wells Capital $52,681 and $37,352 for the three months ended

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September 30, 2004 and 2003, respectively, and $182,055 and $112,939 for the nine months ended September 30, 2004 and 2003, respectively, for these services and expenses.

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

Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long Lived Assets” (“SFAS 144”), requires, among other things, the operating results of real estate assets sold or held for sale to be included in discontinued operations in the statements of operations for all periods presented, and to classify the carrying value of such assets as held for sale for all periods presented. Peachtree Place was sold on June 18, 2004. Accordingly, the results of operations of Peachtree Place are included in discontinued operations in the accompanying consolidated statements of operations.

The condensed operating results for Peachtree Place are summarized below (unaudited):

On January 17, 2003, the Partnership was served with a putative class action by a limited partner holding Class B Units, on behalf of all limited partners holding Class B Units as of January 15, 2003, that seeks equitable relief with regard to the rights and obligations of all the Partnership’s limited partners and general partners under the partnership agreement. This litigation was filed in the Superior Court of Gwinnett County, Georgia (Roy Johnston v. Wells Real Estate Fund I, Civil Action No. 03-A00525-6) (the “Johnston Action”). The plaintiff in the Johnston Action generally alleges that the terms of the partnership agreement, as it relates to the allocation and distribution of net sale

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proceeds, are inconsistent with the original intent of the parties. The plaintiff alleges that the original intent was that limited partners holding Class B Units would have a priority in payment of cash distributions of net sale proceeds to bring them even with the amount of cash distributions previously made to limited partners holding Class A Units. The Johnston Action seeks, among other things, to have the Partnership’s partnership agreement equitably reformed consistent with the alleged original intent or, in the alternative, to have the investments made by limited partners holding Class B Units equitably rescinded, and requests an injunction prohibiting the General Partners of the Partnership from distributing net sale proceeds until the resolution of the action.

On May 7, 2004, the Court granted summary judgment in favor of the Partnership on grounds of statutes of limitation and laches. On May 24, 2004, the Partnership filed a motion to recover its attorneys’ fees and expenses of litigation from plaintiff and his counsel. On or about June 4, 2004, another defendant in the Johnston Action moved the Court to award attorneys’ fees from the Partnership in the form of five percent of the Partnership’s net sale proceeds. The Partnership has opposed that motion.

On or about June 4, 2004, the plaintiff filed a Notice of Appeal with respect to the May 7, 2004 Orders granting summary judgment. Pursuant to Statement of Financial Accounting Standard No. 5 and the General Partners’ estimate of our current exposure under the Johnston Action, no reserves have been provided for in the accompanying financial statements.

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

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

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

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

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

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

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

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Portfolio Overview

We have moved from the positioning-for-sale phase into the disposition and liquidation phase of our life cycle. We have now sold three assets and a portion of another asset. Our focus on the remaining assets in our portfolio involves leasing and marketing efforts that we believe will result in the best disposition pricing for our investors.

The closing of the sale of the remaining building at Peachtree Place on June 18, 2004, in which we held an approximate 90% interest, is evidence of our continuing efforts to liquidate the portfolio.

Our General Partners are currently reserving operating cash flows in order to fund additional legal costs anticipated in connection with the litigation discussed herein and lease-up costs anticipated with increasing occupancy of Black Oak Plaza and the remaining office portion of Heritage Place.

While operating distributions to Class A Unit holders are currently being reserved, as of September 30, 2004, Class A Unit holders have received cumulative net operating cash flows of approximately $22.1 million since inception, which equates to approximately 89% of the $24.7 million originally invested. For Class A Unit holders, this equates to approximately $223.69 per unit from inception to date. Class B Unit holders have cumulatively received $250 per unit in allocated tax losses over that same period.

Property Summary

Information related to the properties owned, or previously owned, by the Partnership or its joint ventures follows:

In our attempts to position our remaining properties for sale, 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 downtime, re-leasing expenditures, ongoing property level costs, and portfolio costs. As we continue to operate in the disposition and liquidation phase, we will focus on locating suitable buyers and negotiating purchase and sale contracts that will attempt to maximize the total return to the limited partners and minimize contingencies and our post-closing involvement with the buyer.

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Industry Factors

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

General Economic and Real Estate Market Commentary

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

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

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

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

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

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

Revenues of the Partnership

Revenues of the Partnership were $300,873 and $299,354 for the three months ended September 30, 2004 and 2003, respectively, and $910,050 and $930,261 for the nine months ended September 30, 2004 and 2003, respectively. Revenues remained relatively stable for the three months ended September 30, 2004, as compared to 2003, as the decline in interest income resulting from a reduction in the interest rate earned on net sale proceeds was substantially offset through an increase in billings to tenants of Paces Pavilion for additional extra-hours HVAC reimbursements in 2004. Total revenues declined for the nine months ended September 30, 2004, as compared to 2003, as the magnitude of the decline in interest income for nine months ended September 30, 2004 was greater than the magnitude of the increase in reimbursement billings to tenants of Paces Pavilion for the same period.

Equity in Income (Loss) of Joint Venture

Equity in income (loss) of joint venture was $18,239 and $(10,846) for the three months ended September 30, 2004 and 2003, respectively, and $(9,723) and $165,285 for the nine months ended September 30, 2004 and 2003, respectively. The increase for the three months ended September 30, 2004, as compared to 2003, is primarily due to declines in (a) depreciation expense as a result of changing the useful life of all buildings owned through joint

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ventures from 25 to 40 years effective July 1, 2004, and (b) property tax expenses. Following the April 2003 sale of the retail portion of Heritage Place, Fund I-II Tucker has recorded property tax expenses for the remaining office portion of the property based on estimates. Fund I-II Tucker decreased current property tax expenses beginning in the third quarter of 2004 upon receiving the first property tax invoice for the unsold portion of the property on a stand-alone basis. Property tax reimbursement billings have not been adjusted, as operating cost reimbursements, including property taxes, are billable to the majority of the tenants of Heritage Place equal to amounts in excess of annual preset cap amounts per the respective leases. As of September 30, 2004, operating costs attributable to tenants in occupancy of the majority of space leased at Heritage Place are not projected to reach the respective preset caps on an annual basis.

The decrease in equity in income (loss) of Joint Venture for the nine months ended September 30, 2004, as compared to 2003, is primarily attributable to the gain recognized by Fund I-II Tucker Associates on the sale of the retail portion of Heritage Place in April 2003, and the reduction in income in 2004 as a result of this property sale.

Expenses of the Partnership

Our total expenses were $362,321 and $421,571 for the three months ended September 30, 2004 and 2003, respectively, and $1,586,248 and $1,324,362 for the nine months ended September 30, 2004 and 2003, respectively. The decrease for the three months ended September 30, 2004, as compared to 2003, is primarily attributable to a decline in depreciation expense due to changing the useful life of buildings owned directly by the Partnership from 25 to 40 years effective July 1, 2004, partially offset by an increase in association dues for Paces Pavilion as a result of receiving a reimbursement in the third quarter of 2003.

The increase in expenses for the nine months ended September 30, 2004, as compared to 2003, is primarily attributable to additional (i) legal costs related to defending the litigation discussed in Part II, Item 1 of this report, (ii) bad debt expense recognized for tenants of Paces Pavilion, (iii) administrative costs related to evaluating various re-leasing and exit strategies for the remainder of the Partnership’s portfolio, and (iv) increased partnership administration expenses associated with additional reporting and regulatory requirements. We anticipate additional increases related to implementing and adhering to such reporting and regulatory requirements going forward.

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

Short-Term Liquidity

Cash used in operating activities, including operating distributions received from Fund I-II Tucker Associates, was approximately $(351,000) for the nine months ended September 30, 2004, as compared to cash provided by operating activities of approximately $413,000 for the nine months ended September 30, 2003. Cash flows from operating activities decreased significantly from 2003 to 2004 primarily as a result of (a) foregone distributions received from joint venture due to the sale of the retail portion of Heritage Place in April 2003, and (b) funding additional partnership expenses as described in section (b) above. Cash flows provided by investing activities for

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2004 are primarily attributable to the June 2004 sale of Peachtree Place for net proceeds of approximately $954,000, of which approximately $858,000 is attributable to the Partnership. Operating cash flows are generally used to pay operating distributions to limited partners; however, the Partnership reserved such distributions for the first nine months of 2004. The General Partners anticipate continuing to reserve such distributions in order to fund additional legal costs anticipated in connection with the litigation discussed in Part II, Item 1., and lease-up costs anticipated with increasing occupancy of Paces Pavilion, Black Oak Plaza, and the remaining office portion of Heritage Place.

We believe that the cash on hand, including net proceeds from the sale of properties, is sufficient to cover our working capital needs, including liabilities of approximately $2,490,000, as of September 30, 2004.

Long-Term Liquidity

We expect that our future sources of capital will be primarily derived from net proceeds generated from the sale of properties and operating cash flows generated from Fund I-II Tucker Associates. Our future long-term liquidity requirements will include, but not be limited to, tenant improvements, renovations, expansions, and other significant capital improvements necessary for properties owned directly and through Fund I-II Tucker Associates. Future cash flows from operating activities will be primarily effected by distributions received from the Joint Venture, which is dependent upon net operating income generated by the properties owned by the Partnership or the Joint Venture, 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, or investing in joint ventures formed for the same purposes, and has invested all of the partners’ original capital contributions. Thus, it is unlikely that we will acquire interests in any additional properties or Joint Ventures. Historically, our investment strategy has generally involved acquiring properties that are pre-leased to creditworthy tenants on an all-cash basis through joint ventures with affiliated partnerships.

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

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

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

In accordance with Section 9.3 of the partnership agreement, except for reinvestment of net sale proceeds as provided in Section 11.3(g) (as amended), and after the payment or reserves allowed for Partnership debts and liabilities (including without limitation the deferred management fees owed to Wells Management in the amount of approximately $3,014,000 as of September 30, 2004), and after the establishment of reserves which our General Partners, in their sole discretion, deem reasonably necessary, as of September 30, 2004, there were net sale proceeds in the amount of approximately $8,755,000 available for distribution to limited partners, which sum is being held in a separate, interest-bearing bank account. As more fully set forth therein, Section 9.3 of the partnership agreement provides that the net sale proceeds are to be distributed “to each Partner in accordance with the positive balance in his Capital Account as of the date of distribution under this Section 9.3 (after allocation of the Gain on Sale as provided in Section 10.4 hereof).” Due to pending litigation, however, we are not in a position to distribute net sale proceeds until final resolution of the litigation described in Part II, Item 1.

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

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

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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 Fund I-II Tucker Associates, which are considered to be critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.

Investment in Real Estate Assets

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

In the third quarter of 2004, the Partnership completed a review of its real estate related depreciation by performing an analysis of the components of each property type in an effort to determine the weighted-average composite useful lives of its real estate assets. As a result of this review, effective July 1, 2004, we extended the weighted-average composite useful life from 25 years to 40 years for all building assets. This change resulted in an increase to our net income of approximately $72,900, or $0.74 per unit, for Class A Units. This change had no effect on net income allocated to Class B Units. Fund I-II Tucker Associates also extended the weighted-average composite useful life for all building assets from 25 years to 40 years, which resulted in an increase (decrease) to equity in income (loss) of joint venture for the three and nine months ended September 30, 2004. We believe that the change reflects the estimated useful lives of the respective assets and is consistent with prevailing industry practice. In the event that we use inappropriate useful lives or methods for depreciation, our net income would be misstated.

Valuation of Real Estate Assets

We continually monitor events and changes in circumstances that could indicate that the carrying amounts of the real estate assets in which we have an ownership interest, either directly or through investments in 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. We have determined that there has been no impairment in the carrying value of real estate assets we held as of September 30, 2004.