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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

F

Commission file number 0-18407

WELLS REAL ESTATE FUND III, L.P.

(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(g) of the Act:

CLASS A UNITS

(Title of Class)

CLASS B UNITS

(Title of Class)

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  ¨

Aggregate market value of the voting stock held by non-affiliates:                         Not Applicable                        

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PART I

ITEM 1.    BUSINESS

General

Wells Real Estate Fund III, L.P. (the “Partnership”) is a Georgia public limited partnership with Leo F. Wells, III and Wells Capital, Inc., a Georgia corporation, serving as the General Partners. The Partnership was formed on July 31, 1988 for the purpose of acquiring, developing, constructing, owning, operating, improving, leasing and otherwise 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 a public offering of its limited partnership units pursuant to a Registration Statement filed on Form S-11 under the Securities Act of 1933. The offering was terminated on October 23, 1990 upon receiving and accepting $22,206,310 in limited partner capital contributions for a total of 22,206,310 Class A and Class B limited partner units at $1 per unit. From the original capital contributions, the Partnership has paid $1,554,442 in acquisition and advisory fees and acquisition expenses and $2,664,668 in selling commissions and organization and offering expenses, invested $17,983,843 in the properties described below, and maintains a working capital reserve of $3,357. In 1990 and 1991, the Partnership repurchased 6,128 and 19,677 limited partnership units, respectively.

Employees

The Partnership has no direct employees. The employees of Wells Capital, Inc. and Wells Management Company, Inc., an affiliate of the General Partners, perform a full range of real estate services including leasing and property management, accounting, asset management and investor relations for the Partnership. See Item 11 “Compensation of General Partners and Affiliates” for a summary of the fees paid to the General Partners and their affiliates during the year ended December 31, 2002.

Insurance

Wells Management Company, Inc. carries comprehensive liability and extended coverage with respect to all the properties owned directly or indirectly by the Partnership. In the opinion of management, the properties are adequately insured.

Competition

The Partnership will experience competition for tenants from owners and managers of competing projects, which may include the General Partners and their affiliates. As a result, the Partnership may provide free rent, reduced charges for tenant improvements and other inducements, all of which may have an adverse impact on results of operations. At the time the Partnership elects to dispose of its properties, the Partnership will also be in competition with sellers of similar properties to locate suitable purchasers for its properties.

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ITEM 2.    PROPERTIES

The Partnership owned a 100% interest in Greenville Center, an office building located in Greenville, North Carolina, through September 30, 2002. On this date, the Partnership sold Greenville Center to East Carolina University Real Estate Foundation, Inc., an unrelated third-party, for a gross sales price of $2,400,000. As a result of this sale, the Partnership received net sale proceeds of $2,271,187 and recognized a loss of $494,143.

As of December 31, 2002, the Partnership owned interests in all of its real estate through the following affiliated joint ventures listed below:

*Fund II-IIOW Associates is a joint venture between Wells Real Estate Fund II (“Wells Fund II) and Wells Real Estate Fund II-OW (“Wells Fund IIOW”) Wells Fund II and Wells Fund IIOW are public limited partnerships affiliated with the Partnership through common general partners. The investment objectives of Wells Fund II and Wells Fund IIOW are substantially identical to those of the Partnership.

The Partnership does not have control over the operations of the joint ventures; however, it does exercise significant influence. Accordingly, the Partnership accounts for its investments in joint ventures using the equity method of accounting. Each of the above properties was acquired on an all cash basis. For further information regarding the foregoing joint ventures and properties, refer to the footnotes to the financial statements included herein.

As of December 31, 2002, the lease expirations scheduled during each of the following ten years for all properties in which the Partnership held an interest through investments in joint ventures, assuming no exercise of renewal options or termination rights, are summarized below:

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The joint ventures and properties in which the Partnership owned an interest as of December 31, 2002 are further described below:

Boeing at the Atrium

On April 3, 1989, the Partnership formed Fund II-III Associates-Atrium with an existing joint venture, Fund II-IIOW Associates. In April 1989, Fund II-III Associates-Atrium acquired a four-story office building located on a 5.6 acre tract of land adjacent to the Johnson Space Center in metropolitan Houston, in the city of Nassau Bay, Harris County, Texas, known as “Boeing at the Atrium”.

On March 3, 1997, the Boeing Company entered into a five year lease, with an option to renew for an additional five year term, for the entire Boeing at the Atrium building. Under this lease, Boeing was required to pay base rent of $12.25 per square foot for the first three years and $12.50 per square foot for the final two years of initial lease term. Upon expiration of the initial lease term in March 2002, Boeing negotiated a new lease, the terms of which are described below.

In March 2002, Boeing/Shuttle Division (“Boeing”) entered into a lease for the top three floors of the four-story Boeing at the Atrium, (94,203 sq ft) with annual rent of $1,483,698 commencing on September 1, 2002 for approximately six years. Boeing has since entered into the following three amendments: amendment #1—to lease an additional 296 square feet with annual rent of $4,662, commencing October 1, 2002, amendment #2—to lease an additional 11,515 square feet with annual rent, of $181,365 commencing January 6, 2003, and amendment #3—to lease an additional 10,449 square feet with annual rent of $164,572, estimated to commence July 1, 2003. Upon commencement of occupancy pursuant to Amendment #3, occupancy of this property will increase to 100%.

As of December 31, 2002, the Partnership and Fund II-IIOW Associates had made total capital

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contributions to Fund II-III Associates-Atrium for equity interests of approximately 39% and 61%, respectively.

The average effective rental rate per square foot was $6.05 for 2002, $12.35 for 2001, $12.34 for 2000, and $12.35 for 1999 and 1998.

Brookwood Grill

On January 31, 1990, Fund II-IIOW Associates acquired a 5.8 acre tract of undeveloped real property at the intersection of Warsaw Road and Holcomb Bridge Road in Roswell, Fulton County, Georgia (the “Brookwood Grill Property”) for $1,848,561, including acquisition and closing costs. Concurrently, the Partnership entered into a second joint venture agreement Fund II-IIOW Associates, known as Fund II-III Associates-Brookwood Grill.

On September 20, 1991, Fund II-IIOW Associates contributed the Brookwood Grill Property, along with its interest as landlord under the lease agreement referred to below, as a capital contribution to Fund II-III Associates-Brookwood Grill. As of September 20, 1991, Fund II-IIOW Associates had expended approximately $2,128,000 for the land acquisition and development of Brookwood Grill.

In September 1991, a lease agreement was entered into with the Brookwood Grill of Roswell, Inc. for the development of approximately 1.5 acres and construction of a 7,440 square foot restaurant, which opened in March 1992, is similar in concept to Houston’s, Ruby Tuesday, and TGI Fridays’, this lease includes an initial term of 9 years and 11 months, which expires on February 29, 2012. The tenant has the option to exercise two additional five-year renewal options upon expiration. Fund II-III Associates-Brookwood has expended approximately $1,100,000 for the development and construction of the restaurant building together with parking areas, driveways, landscaping and other improvements.

The average effective rental rate per square foot was $27.04 for 2002, $31.56 for 2001, $30.22 for 2000 and 1999, and $30.26 for 1998.

As of December 31, 2002, the Partnership and Fund II-IIOW Associates had made total contributions to Fund II-III Associates-Brookwood of approximately $1,330,000 and $2,128,000, respectively, for the acquisition and development of the Brookwood Grill. Accordingly, the Partnership holds an equity interest of approximately 38%, and Fund II-IIOW Associates holds an equity interest of approximately 62% in Fund II-III Associates-Brookwood as of December 31, 2002.

On January 10, 1995, Fund II-III Associates-Brookwood contributed the remaining 4.3 undeveloped acres of land comprising the Brookwood Grill Property to a new joint venture, Fund II-III-VI-VII Associates, as further described below.

Holcomb Bridge Property

In January 1995, Fund II-III Associates-Brookwood contributed to Fund II-III-VI-VII Associates approximately 4.3 acres of land at the intersection of Warsaw Road and Holcomb Bridge Road in Roswell, Fulton County, Georgia (“the Brookwood Property”) including land improvements for the development and construction of two buildings with a total of 49,534 square feet. Once constructed, this property became known as the Holcomb Bridge Property.

As of December 31, 2002, nine tenants occupied approximately 60% of the Holcomb Bridge Property, with only one tenant, Bertucci’s Restaurant, occupying more than 10% of the space at 5,935 square feet. The

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Bertucci’s Restaurant lease currently requires annual base rental payments of $127,850 and expires on February 28, 2006. Occupancy declined by approximately 29% during 2002, which resulted in a corresponding decrease in revenues of approximately $203,000. Certain leases have been executed that provide for commencement in 2003, and will result in additional revenues of approximately $45,000 for 2003. Management is actively seeking replacement tenants for the vacant space at this property.

The average effective annual rental rate per square foot was $12.97 for 2002, $17.07 for 2001, $17.55 for 2000, $19.36 for 1999, and $17.63 for 1998.

As of December 31, 2002, the joint venture partners had contributed the following amounts and held the following equity interests in Fund II-III-VI-VII Associates: (i) Fund II-III Associates-Brookwood—$1,729,116, in land and improvements, for an interest of approximately 24%, (ii) Wells Fund VI—$1,929,541 for an interest of approximately 26%, (iii) Wells Real Estate Fund VII, L.P.—$3,525,041 for an interest of approximately 50%.

Fund III-IV Associates

On March 27, 1991, the Partnership and Wells Real Estate Fund IV, L.P., (“Wells Fund IV”), a public limited partnership affiliated with the Partnership through common general partners formed Fund III-IV Associates. The investment objectives of Wells Fund IV are substantially identical to those of the Partnership. As of December 31, 2002, the Partnership had contributed $8,357,551 and Wells Fund IV had contributed $6,415,731 to Fund III-IV Associates for equity interests of approximately 57% and 43%, respectively. The Partnership owns interests in the following two properties through Fund III-IV Associates.

Stockbridge Village Shopping Center

On April 4, 1991, Fund III-IV Associates purchased 13.62 acres of real property located in Clayton County, Georgia for the purchase price of $3,057,729, including acquisition costs, for the purpose of developing, constructing and operating a shopping center known as the Stockbridge Village Shopping Center. The multi-tenant shopping center contains approximately 112,891 square feet, of which approximately 63,986 square feet are occupied by the Kroger Company, a retail grocery chain. Kroger is the only tenant in occupancy of more than ten percent of the rentable square feet of this property. The Kroger lease is for an initial term of 20 years, commencing November 14, 1991, with an option to extend for four consecutive five year periods at the same rental rate as the original lease. The annual base rent payable under the Kroger lease is $492,692. The remaining 48,794 square feet are comprised of 16 separate retail spaces and 3 free-standing retail buildings. As of December 31, 2002, the Partnership had contributed a total of $4,574,247 and Wells Fund IV had contributed a total of $5,114,502 to fund the total costs of $9,688,749 related to the acquisition and development of the Stockbridge Village Shopping Center.

The average effective annual rental rate per square foot was $11.32 for 2002, $11.82 for 2001, $11.29 for 2000, $11.23 for 1999, and $10.82 for 1998.

Reciprocal Group Building

The Reciprocal Group Building is a two-story office building containing approximately 43,000 square feet located in Richmond, Virginia, which was acquired by Fund III-IV Associates on July 1, 1992, for a purchase price of $4,689,106 including acquisition and closing costs. As of December 31, 2002, the Partnership had contributed $3,783,304 and Wells Fund IV had contributed $1,301,229 to Fund III-IV Associates for the acquisition of the Reciprocal Group Building.

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General Electric, the previous tenant, elected not to renew its lease at the Reciprocal Group Building, which expired March 31, 2000. Management leased 100% of this building to the Reciprocal Group on October 4, 2000 for a term of eight years, with rent commencing in February 2001. The total cost of refurbishments, tenant improvements and building maintenance was $1,407,002. These costs were funded out of cash from operations otherwise distributable to the Partnership and Wells Fund IV, which caused a substantial reduction in distributions paid to the Partnership from Fund III-IV Associates and, consequently, distributions payable from the Partnership to the Limited Partners in 2000. The Partnership funded $570,914 as its share of these improvements, which were fully funded as of December 31, 2001.

The average effective annual rental rate per square foot was $13.45 for 2002, $12.83 for 2001, $3.07 for 2000 and $12.27 for 1999 and 1998.

ITEM 3.    LEGAL PROCEEDINGS

There were no material pending legal proceedings known to be contemplated by governmental authorities involving the Partnership during the fourth quarter of 2002.

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

No matters were submitted to a vote of the Limited Partners during the fourth quarter of 2002.

(THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK)

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PART II

ITEM 5.    MARKET FOR PARTNERSHIP’S UNITS AND RELATED SECURITY HOLDER MATTERS

As of February 28, 2002, the Partnership had 19,636,000 outstanding Class A Units held by a total of 2,293 Limited Partners and 2,544,540 outstanding Class B Units held by a total of 198 Limited Partners. The capital contribution per unit is $1.00. There is no established public trading market for the Partnership’s limited partnership units, and it is not anticipated that a public trading market for the units will develop. Under the Partnership Agreement, the General Partners have the right to prohibit transfers of units.

Because fiduciaries of retirement plans subject to ERISA are required to determine the value of the assets of such retirement plans on an annual basis, the General Partners are required under the Partnership Agreement to report estimated Unit values to the Limited Partners each year in the Partnership’s annual Form 10-K. The methodology to be utilized for determining such estimated Unit values under the Partnership Agreement requires the General Partners to estimate the amount a Unit holder would receive if the Partnership’s properties were sold at their estimated fair market values as of the end of the Partnership’s fiscal year and the proceeds therefrom (without reduction for selling expenses) were distributed to the Limited Partners in liquidation of the Partnership. Utilizing this methodology, the General Partners have estimated Unit valuations, based upon their estimates of property values as of December 31, 2002, to be approximately $0.76 per Class A Unit and $0.76 per Class B Unit, based upon market conditions existing in early December 2002. In connection with these estimated valuations, the General Partners obtained an opinion from David L. Beal Company, an independent MAI appraiser, to the effect that such estimates of value were reasonable; however, due to the inordinate expense involved in obtaining appraisals for all of the Partnership’s properties, no actual appraisals were obtained. Accordingly, these estimates should not be viewed as an accurate reflection of the values of the Limited Partners’ Units, what a Limited Partner might be able to sell his Units for, or the fair market value of the Partnership’s properties, nor do they represent the amount of net proceeds Limited Partners would receive if the Partnership’s properties were sold and the proceeds distributed in a liquidation of the Partnership. The valuations performed by the General Partners are estimates only, and are based a number of assumptions which may not be accurate or complete. In addition, property values are subject to change and could decline in the future. Further, as set forth above, no appraisals have or will be obtained. For these reasons, the estimated Unit valuations set forth above should not be used by or relied upon by investors, other than fiduciaries of retirement plans for limited ERISA reporting purposes, as any indication of the fair market value of their Units.

Class A Unit holders are entitled to an annual 8% non-cumulative distribution preference over Class B Unit holders as to distributions from Net Cash from Operations, as defined in the Partnership Agreement to mean Cash Flow, less adequate cash reserves for other obligations of the Partnership for which there is no provision, but are initially allocated none of the depreciation, amortization, cost recovery and interest expense. These items are allocated to Class B Unit holders until their capital account balances have been reduced to zero.

Net Cash From Operations to the Limited Partners is distributed on a annual basis unless Limited Partners elect to have their cash distributions paid monthly. Cash distributions made to the Limited Partners during the two most recent fiscal years were as follows:

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Distributions were reserved from the fourth quarter of 2001 through the fourth quarter of 2002 in order to fund leasing commissions and tenant improvements related to the new Boeing lease renewals described in Item 2 above.

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ITEM 6.    SELECTED FINANCIAL DATA.

The following sets forth a summary of the selected financial data as of and for the fiscal years ended December 31, 2002, 2001, 2000, 1999, and 1998: