<PAGE>   1
                             Washington, D.C. 20549

                                    FORM 10-K

                Annual Report Pursuant to Section 13 or 15(d) of
                       the Securities Exchange Act of 1934

                   For the Fiscal Year Ended December 31, 1997

                             Commission File Number
                                     0-10673

                       REAL ESTATE ASSOCIATES LIMITED III

                        A CALIFORNIA LIMITED PARTNERSHIP
                  I.R.S. Employer Identification No. 95-3547611
         9090 Wilshire Blvd., Suite 201, Beverly Hills, California 90211
        Registrant's Telephone Number, Including Area Code (310) 278-2191
      Securities Registered Pursuant to Section 12(b) or 12(g) of the Act:

                                      NONE

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed with the Commission by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding twelve months (or 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]



<PAGE>   2


PART I.

ITEM 1. BUSINESS:

Real Estate Associates Limited III ("REAL III" or the "Partnership") is a
limited partnership which was formed under the laws of the State of California
on July 25, 1980. On January 5, 1981, Real Estate Associates Limited III offered
3,000 units consisting of 6,000 Limited Partnership Interests and Warrants to
purchase a maximum of 6,000 Additional Limited Partnership Interests through a
public offering managed by E.F. Hutton Inc.

The general partners of Real Estate Associates Limited III are National
Partnership Investments Corp. ("NAPICO"), a California Corporation (the
"Corporate General Partner"), and Coast Housing Investments Associates, a
Limited Partnership formed under the California Limited Partnership Act and
consisting of Messrs. Nicholas G. Ciriello, an unrelated individual, as general
partner, and Charles H. Boxenbaum as limited partner. The business of REAL III
is conducted primarily by NAPICO.

NAPICO is a wholly owned subsidiary of Casden Investment Corporation ("CIC"),
which is wholly owned by Alan I. Casden. The current members of NAPICO's Board
of Directors are Charles H. Boxenbaum, Bruce E. Nelson, Alan I. Casden and Henry
C. Casden.

REAL III holds limited partnership interests in 26 local limited partnerships as
of December 31, 1997, and a general partner interest in Real Estate Associates
("REA") which in turn holds limited partnership interests in an additional 6
limited partnerships; therefore, REAL III holds directly or indirectly through
REA, investments in thirty-two local limited partnerships. The general partners
of REA are REAL III and NAPICO. Each of the limited partnerships owns a low
income housing project which is subsidized and/or has a mortgage note payable to
or insured by agencies of the federal or local government.

In order to stimulate private investment in low income housing, the federal
government and certain state and local agencies have provided significant
ownership incentives, including among others, interest subsidies, rent
supplements, and mortgage insurance, with the intent of reducing certain market
risks and providing investors with certain tax benefits, plus limited cash
distributions and the possibility of long-term capital gains. There remain,
however, significant risks. The long-term nature of investments in government
assisted housing limits the ability of REAL III to vary its portfolio in
response to changing economic, financial and investment conditions; such
investments are also subject to changes in local economic circumstances and
housing patterns, as well as rising operating costs, vacancies, rent collection
difficulties, energy shortages and other factors which have an impact on real
estate values. These projects also require greater management expertise and may
have higher operating expenses than conventional housing projects.

Under recent adopted law and policy, HUD has determined not to renew HAP
contracts on a long term basis on the existing terms. In connection with
renewals of the HAP Contracts under such new law and policy, the amount of
rental assistance payments under renewed HAP Contracts will be based on market
rentals instead of above market rentals, which was generally the case under
existing HAP Contracts. As a result, existing HAP Contracts that are renewed in
the future on projects insured by the FHA will not provide sufficient cash flow
to permit owners of properties to meet the debt service requirements of these
existing FHA-insured mortgages. In order to address the reduction in payments
under HAP Contracts as a result of this new policy, the Multi-family Assisted
Housing Reform and Affordability Act of 1997 (the "MAHRAA"), which was adopted
in October 1997, provides for the restructuring of mortgage loans insured by
the FHA with respect to properties subject to HAP Contracts that have been
renewed under the new policy. The restructured loans will be held by the
current lender or another lender. Under MAHRAA, an FHA-insured mortgage loan
can be restructured to reduce the annual debt service on such loan. There can
be no assurance that the Partnership will be permitted to restructure its
mortgage indebtedness pursuant to the new HUD rules implementing MAHRAA or that
the Partnership would choose to restructure such mortgage indebtedness if it
were eligible to participate in the MAHRAA program. It should be noted that
there are uncertainties as to the economic impact on the Partnership of the
combination of the reduced payments under the HAP Contracts and the
restructuring of the existing FHA-insured mortgage loans under MAHRAA.
<PAGE>   3
Accordingly, the General Partners are unable to predict with certainty their
impact on the Partnership's future cash flow.

The partnerships in which REAL III has invested were, at least initially,
organized by private developers who acquired the sites, or options thereon, and
applied for applicable mortgage insurance and subsidies. REAL III became the
principal limited partner in these local limited partnerships pursuant to
arm's-length negotiations with these developers, or others, who act as general
partners. As a limited partner, REAL III's liability for obligations of the
local limited partnership is limited to its investment. The local general
partner of the local limited partnership retains responsibility for developing,
constructing, maintaining, operating and managing the Project. Under certain
circumstances of default, REAL III has the right to replace the general partner
of the local limited partnerships but otherwise does not have control of sale,
refinancing, etc.

Although each of the partnerships in which REAL III has invested generally owns
a project which must compete in the market place for tenants, interest subsidies
and rent supplements from governmental agencies make it possible to offer these
dwelling units to eligible "low income" tenants at a cost significantly below
the market rate for comparable conventionally financed dwelling units in the
area.


<PAGE>   4

During 1997, the projects in which REAL III had invested were substantially
rented. The following is a schedule of the status as of December 31, 1997, of
the projects owned by local limited partnerships in which REAL III is a limited
partner.


            SCHEDULE OF PROJECTS OWNED BY LOCAL LIMITED PARTNERSHIPS
                       IN WHICH REAL III HAS AN INVESTMENT
                                DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                           Units Authorized
                                           For Rental
                                           Assistance Under
                                            Section 8 or
                                             Other Rent
                                    No. of    Supplement   Units     Percentage of
Name & Location                     Units      Program    Occupied   Total Units
---------------                     -----      -------    --------   -----------
<S>                                 <C>    <C>            <C>        <C>
Bowin Place                         193         191/0       191        99%
 Detroit, MI

Casa de las Hermanitas               88          88/0        88       100%
  Los Angeles, CA

Charlotte Lakeview, Riverview       553       114/153       514        93%
 Residential Project
 Rochester, NY

Creekview Apts                       80          80/0        80       100%
 Stroudsburg, PA

Foothill Gardens                     54          54/0        54       100%
 Los Angeles, CA

Frazier Park Apts                    60          60/0        60       100%
 Baldwin Park, CA

Gary Manor                          198         198/0       196        99%
 Gary, IN

Grandview Homes                      26          26/0        26       100%
 Los Angeles, CA

Hidden Pines Apts                    40          40/0        35        88%
 Greenville, MI

Highlawn Place Apartments           133         133/0       133       100%
Huntington, WV

Jenks School Apts                    83          82/0        83       100%
 Pawtucket, RI
</TABLE>

<PAGE>   5

            SCHEDULE OF PROJECTS OWNED BY LOCAL LIMITED PARTNERSHIPS
                       IN WHICH REAL III HAS AN INVESTMENT
                          DECEMBER 31, 1997 (Continued)

<TABLE>
<CAPTION>
                                        Units Authorized
                                          For Rental
                                        Assistance Under
                                         Section 8 or
                                          Other Rent
                                 No. of   Supplement     Units    Percentage
Name & Location                  Units     Program      Occupied  Total Units
---------------                  -----   -----------    --------  -----------
<S>                              <C>        <C>         <C>       <C>
Kern Villa                        49         49/0        49       100%
 Los Angeles, CA

Lakeside Apts                     32         0/13        32       100%
 Stuart, FL

New Baltimore                    101        101/0        99        98%
 New Baltimore, MI

Panorama Park Apts                66         66/0        64        97%
 Bakersfield, CA

Ramblewood Apts                   64         0/13        59        92%
 Fort Payne, AL

Santa Maria Apts                  86         86/0        86       100%
 San German, Puerto Rico

Senior Chateau on the Hill       185        183/0       181        98%
 Cincinnati, OH

Sheraton Towers                   97         97/0        97       100%
 High Point, NC

South Bay Villa                   80         80/0        80       100%
 Los Angeles, CA

Sunset Grove Apts                 22         22/0        22       100%
 Carson City, MI

Sunshine Canyon                   26         26/0        26       100%
 Stanton, MI

Tujunga Gardens                   54         53/0        54       100%
 Los Angeles, CA

Twenty-nine Palms                 48         47/0        40        83%
 Twenty-nine Palms, CA
</TABLE>

<PAGE>   6

                SCHEDULE OF PROJECTS OWNED BY LOCAL LIMITED PARTNERSHIPS
                       IN WHICH REAL III HAS AN INVESTMENT
                          DECEMBER 31, 1997 (Continued)

<TABLE>
<CAPTION>
                                         Units Authorized
                                           For Rental
                                         Assistance Under
                                          Section 8 or
                                           Other Rent
                              No. of       Supplement      Units      Percentage
Name & Location               Units         Program       Occupied    Total Units
---------------               -----         -------       --------    -----------
<S>                           <C>        <C>              <C>         <C>
Village Apts                    51            51/0          49          96%
 La Follette, TN

Village of Kaufman              68            68/0          66          97%
 Kaufman, TX

Village Grove Apts             104            None          97          93%
 Corona, CA

Vincente Geigel                 80            80/0          80         100%
 Polanco Apts 
 Isabela, Puerto Rico

Vista De Jagueyes               73            73/0          73         100%
 Aguas Buenas, PR

Westgate Apts                   72           33/16          62          86%
 Albertville, AL

Wilderness Trail Manor         124           124/0         124         100%
 Pineville, KY

Wilkes Towers                   72            72/0          70          97%
 Wilkesboro, NC
                             -----       ---------       -----          -- 

TOTALS                       3,062       2,376/195       2,970          97%
                             =====       =========       =====          == 

</TABLE>



<PAGE>   7

ITEM 2. PROPERTIES:

Through local limited partnerships in which REAL III holds interests own various
multi-family rental properties. See Item 1 for information pertaining to these
properties and Schedule XI.


ITEM 3. LEGAL PROCEEDINGS:

As of December 31, 1997, REAL III's Corporate General Partner was plaintiff or
defendant in several lawsuits. None of these suits were related to REAL III.


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

Not applicable.


PART II.

ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP INTERESTS AND RELATED SECURITY
        HOLDER MATTERS

The Limited Partnership Interests are not traded on a public exchange but were
sold through a public offering managed by E.F. Hutton Inc. It is not
anticipated that any public market will develop for the purchase and sale of any
Partnership interest. Limited Partnership Interests may be transferred only if
certain requirements are satisfied. At December 31, 1997 there were 2,086
registered holders of units in REAL III. One distribution in the aggregate
amount of $3,345,000 (or $584 per unit) was made in 1989. This represented the
proceeds from the sale of one of the Partnership's real estate investments. The
Partnership has invested in certain government assisted projects under programs
which in many instances restrict the cash return available to Project owners.
The Partnership was not designed to provide cash distributions to investors in
circumstances other than refinancing or disposition of its investment in the
limited partnerships.


<PAGE>   8

ITEM 6. SELECTED FINANCIAL DATA:


<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                              --------------------------------------------------------------------------------------------
                                  1997                1996                1995                1994                1993
                              ------------        ------------        ------------        ------------        ------------
<S>                           <C>                 <C>                 <C>                 <C>                 <C>          
Loss From Operations          $   (443,767)       $   (518,472)       $   (567,421)       $   (577,031)       $   (586,269)

Distributions From
   Limited Partnerships
   Recognized as Income          1,072,912             858,869             765,514             683,491             987,697

Equity in Income of
   Limited Partnerships
   and Amortization of
   Acquisition Costs               255,652             383,682             887,919             539,729             708,865
                              ------------        ------------        ------------        ------------        ------------

Net Income                    $    884,797        $    724,079        $  1,086,012        $    646,189        $  1,110,293
                              ============        ============        ============        ============        ============

Net Income per Limited
   Partnership Interest       $         77        $         63        $         95        $         56        $         96
                              ============        ============        ============        ============        ============



Total assets                  $ 11,960,231        $ 10,933,018        $ 10,185,039        $  9,095,839        $  8,489,578
                              ============        ============        ============        ============        ============

Investments in Limited
   Partnerships               $  1,249,421        $  1,063,487        $    930,576        $    690,570        $    679,271
                              ============        ============        ============        ============        ============

Notes Payable                 $  1,510,000        $  1,510,000        $  1,510,000        $  1,510,000        $  1,510,000
                              ============        ============        ============        ============        ============
</TABLE>


<PAGE>   9


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS:

Liquidity

The Partnership's primary sources of funds include interest income on money
market investments and certificates of deposit and distributions from local
partnerships in which the Partnership has invested.

Capital Resources

REAL III received $14,320,000 in subscriptions for units of Limited Partnership
Interests (at $5,000 per unit) during the period March 31, l981 to October 30,
1981, pursuant to a registration statement on Form S-11. As of March 10, 1982,
REAL III received an additional $14,320,000 in subscriptions pursuant to the
exercise of warrants and the sale of Additional Limited Partnership Interests.

Results of Operations

The Partnership was formed to provide various benefits to its partners as
discussed in Item 1. It is anticipated that the local limited partnerships in
which REAL III has invested could produce tax losses for as long as 20 years.
Tax benefits will decline over time as the advantages of accelerated
depreciation are greatest in the earlier years, as deductions for interest
expense will decrease as mortgage principal is amortized and as the Tax Reform
Act of 1986 limits the deductions available.

At December 31, 1997, the Partnership has investments in 32 limited
partnerships, all of which own housing projects that were substantially all
rented. The Partnership, as a limited partner, is entitled to 75% to 99% of the
profits and losses of the local limited partnerships. The Partnership accounts
for its investments in the local limited partnerships on the equity method,
thereby adjusting its investment balance by its proportionate share of the
income or loss of the local limited partnerships. Equity in losses of limited
partnerships is recognized in the financial statements until the limited
partnership investment account is reduced to a zero balance. Losses incurred
after the limited partnership investment account is reduced to zero are not
recognized. Limited partners are not liable for losses beyond their contributed
capital. The Partnership has a positive investment balance in only two local
limited partnerships.

Distributions received from limited partnerships are recognized as return of
capital until the investment balance has been reduced to zero or to a negative
amount equal to future capital contributions required. Subsequent distributions
received are recognized as income.

The total income (losses) from the 32 local limited partnerships that were
allocated to the Partnership were $55,000, $(453,000), $(184,000) for the years
ended December 31, 1997, 1996 and 1995, respectively. However, because losses
incurred after the investment account is reduced to a zero balance are not
recognized and subsequent income is not recognized until the investment account
becomes positive again, the Partnership recognized equity in income of limited
partnerships of $255,652, $383,682 and $887,919 for the years ended December 31,
1997, 1996 and 1995, respectively. Included in recognized equity in income of
limited partnerships for 1997, 1996 and 1995 is $0, $149,000 and $592,000,
respectively, in income from partnerships in which the Partnership does not have
a positive investment balance, but it was able to recognize this income because
it received cash distributions from these partnerships equal to these amounts.
The balance of the income recognized is from the partnerships with positive
investment balances. The cumulative amount of the unrecognized equity in losses
of certain limited partnerships was approximately $20,770,000 and $20,515,000 as
of December 31, 1997 and 1996, respectively.

Distributions from the local limited partnerships in which the Partnership did
not have a positive investment balance were $1,072,912, $858,869 and $765,514
for the years ended December 31, 1997, 1996 and 1995, respectively. These


<PAGE>   10

amounts were recognized as income on the accompanying statements of operations,
in accordance with the equity method of accounting.

As of December 31, 1997, 1996 and 1995, the Partnership has cash and cash
equivalents of $10,575,810, $9,734,531, and $9,028,963, respectively.
Substantially all of these amounts are on deposit with two high credit quality
financial institutions, earning interest. In addition, as a result of changing
financial institutions where the cash and cash equivalents are on deposit, the
interest rate earned on such deposits in 1997 was significantly greater than in
prior years. This resulted in the Partnership earning $478,000, $302,000 and
$267,000 in interest income for the years ended December 31, 1997, 1996 and
1995, respectively. The amount of interest income varies with market rates
available on deposits and with the amount of funds available for investment.
Cash equivalents can be converted to cash to meet obligations of the Partnership
as they arise. The Partnership intends to continue investing available funds in
this manner.

A recurring partnership expense is the annual management fee. The fee is payable
to the Corporate General Partner of the Partnership and is calculated at .4
percent of the Partnership's invested assets. The management fee is paid to the
Corporate General Partner for its continuing management of partnership affairs.
The fee is payable beginning with the month following the Partnership's initial
investment in a local limited partnership. Since the invested assets have not
changed during each of the three years in the period ended December 31, 1997,
management fees have remained constant at $454,800 for each of these years.

The Partnership is obligated on non-recourse notes payable of $1,510,000 which
bear interest at 10 percent per annum and have principal maturities ranging from
June 2020 to March 2024. The notes and related interest are payable from cash
flow generated from operations of the related rental properties as defined in
the notes. These obligations are collateralized by the Partnership's investments
in the limited partnerships. Unpaid interest is due at maturity of the notes.
Because no payments have been made on these notes, interest expense has remained
constant at $151,000 for each of the three years in the period ended December
31, 1997.

Under recent adopted law and policy, HUD has determined not to renew HAP
Contracts on a long term basis on the existing terms. In connection with
renewals of the HAP Contracts under such new law and policy, the amount of
rental assistance payments under renewed HAP Contracts will be based on market
rentals instead of above market rentals, which was generally the case under
existing HAP Contracts. As a result, existing HAP Contracts that are renewed in
the future on projects insured by the FHA will not provide sufficient cash flow
to permit owners of properties to meet the debt service requirements of these
existing FHA-insured mortgages. In order to address the reduction in payments
under HAP Contracts as a result of this new policy, the Multi-family Assisted
Housing Reform and Affordability Act of 1997 (the "MAHRAA"), which was adopted
in October 1997, provides for the restructuring of mortgage loans insured by
the FHA with respect to properties subject to HAP Contracts that have been
renewed under the new policy. The restructured loans will be held by the
current lender or another lender. Under MAHRAA, an FHA-insured mortgage loan
can be restructured to reduce the annual debt service on such loan. There can
be no assurance that the Partnership will be permitted to restructure its
mortgage indebtedness pursuant to the new HUD rules implementing MAHRAA or that
the Partnership would choose to restructure such mortgage indebtedness if it
were eligible to participate in the MAHRAA program. It should be noted that
there are uncertainties as to the economic impact on the Partnership of the
combination of the reduced payments under the HAP Contracts and the
restructuring of the existing FHA-insured mortgage loans under MAHRAA.
Accordingly, the General Partners are unable to predict with certainty their
impact on the Partnership's future cash flow.

As a result of the foregoing, the Partnership is undergoing an extensive review
of disposition, refinancing or re-engineering alternatives for the properties
in which the limited partnerships have invested and are subject to HUD mortgage
and rental subsidy programs. The Partnership has incurred expenses in
connection with this review by various third party professionals, including
accounting, legal, valuation, structural and engineering costs, which amounted
to $140,915 for the year ended December 31, 1997.

<PAGE>   11

A real estate investment trust ("REIT") organized by an affiliate of NAPICO
has advised the Partnership that it intends to make a proposal to purchase from
the Partnership certain of the limited partnership interests held for
investment by the Partnership.

The REIT proposes to purchase such limited partner interests for cash, which it
plans to raise in connection with a private placement of its equity securities.
The purchase is subject to, among other things, (i) consummation of such
private placement by the REIT; (ii) the purchase of the general partner
interests in the local limited partnerships by the REIT; (iii) the approval of
HUD and certain state housing finance agencies; (iv) the consent of the limited
partners to the sale of the local limited partnership interests held for
investment by REAL III; and (v) the consummation of a minimum number of
purchase transactions with other Casden affiliated partnerships. As of March
31, 1998, the REIT had completed buy-out negotiations with a majority of the
general partners of the local limited partnerships.

A proxy is contemplated to be sent to the limited partners setting forth the
terms and conditions of the purchase of the limited partners' interests held for
investment by the Partnership, together with certain amendments to the
Partnership Agreement and other disclosures of various conflicts of interest in
connection with the transaction.

Operating expenses, other than management fees and interest expense, consist of
legal and accounting fees for services rendered to the Partnership and
administrative expenses, which were generally consistent for the three years
presented. Legal and accounting fees were $76,993, $150,156 and $135,191 for the
years ended December 31, 1997, 1996 and 1995, respectively. Administrative
expenses were $238,598, $64,982 and $93,619 for the years ended December 31,
1997, 1996 and 1995, respectively. Included in administrative expenses are
reimbursements to NAPICO for certain expenses, which totalled $35,227, $32,176
and $29,927 for the years ended December 31, 1997, 1996 and 1995, respectively.
Also included in administrative expenses for 1997 is $140,915, approximately
$112,000 of which is included in accounts payable at December 31, 1997, related
to the aforementioned third party review of the properties owned by the local
partnerships.

The results of operations of the local limited partnerships were fairly constant
during the years ended December 31, 1997, 1996 and 1995. Contributing to the
relative stability of operations at the local partnerships is the fact that
substantially all of the local partnerships are operating apartment projects
which are subsidized and have mortgage notes payable to or insured by agencies
of the federal or local government.

Total revenue for the 32 local partnerships has remained fairly constant, and
was $23,173,000, $22,387,000 and $22,082,000 for the years ended December 31,
1997, 1996 and 1995, respectively. Revenue increased in 1997 primarily
as a result of retroactive Housing Assistance Payments of $669,000 received by
five local partnerships pursuant to the terms of a settlement agreement with
HUD.

Total expenses for the 32 local partnerships remained fairly consistent, and
were $22,652,000, $23,222,000 and $22,278,000 for the years ended December 31,
1997, 1996 and 1995, respectively. Expenses were greater in 1996 than in 1997
and 1995 primarily as a result of bad debt of $454,000 charged to expense in
1996 related to loans receivable from an unrelated general partner of two local
partnerships.

The total net income (loss) for the 32 local partnerships for 1997, 1996 and
1995 aggregated $59,000, $(835,000) and $(196,000), respectively. The income
(losses) allocated to the Partnership were $55,000, $(453,000) and $(184,000)
for 1997, 1996 and 1995, respectively.

The Partnership, as a Limited Partner in the local limited partnerships in which
it has invested, is subject to the risks incident to the construction,
management, and ownership of improved real estate. The Partnership investments
are also subject to adverse general economic conditions, and, accordingly, the
status of the national economy, including substantial unemployment and
concurrent inflation, could increase vacancy levels, rental payment defaults,
and operating expenses, which in turn, could substantially increase the risk of
operating losses for the projects.






<PAGE>   12

The Partnership has assessed the potential impact of the Year 2000 computer
systems issue on its operations. The Partnership believes that no significant
actions are required to be taken by the Partnership to address the issue and
that the impact of the Year 2000 computer systems issue will not materially
affect the Partnership's future operating results or financial condition.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:

The Financial Statements and Supplementary Data are listed under Item 14.


ITEM 9. CHANGES WITH AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE:

Not applicable.
<PAGE>   13

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A California limited partnership)

                              FINANCIAL STATEMENTS,
                          FINANCIAL STATEMENT SCHEDULES
                   AND INDEPENDENT PUBLIC ACCOUNTANTS' REPORT
                                DECEMBER 31, 1997





<PAGE>   14


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Partners of
Real Estate Associates Limited III
(A California limited partnership)

We have audited the accompanying balance sheets of Real Estate Associates
Limited III (a California limited partnership) as of December 31, 1997 and 1996,
and the related statements of operations, partners' equity (deficiency) and cash
flows for each of the three years in period ended December 31, 1997. Our audits
also included the financial statement schedules listed in the index on item 14.
These financial statements and financial statement schedules are the
responsibility of the management of the Partnership. Our responsibility is to
express an opinion on these financial statements and financial statement
schedules based on our audits. We did not audit the financial statements of
certain limited partnerships, the investments in which are reflected in the
accompanying financial statements using the equity method of accounting. The
investments in these limited partnerships represent 4 percent and 4 percent of
total assets as of December 31, 1997 and 1996, respectively, and the equity in
income of these limited partnerships represents 19 percent, 23 percent and 33
percent of the total net income of the Partnership for the years ended December
31, 1997, 1996 and 1995, respectively, and represent a substantial portion of
the investee information in Note 2 and the financial statement schedules. The
financial statements of these limited partnerships are audited by other
auditors. Their reports have been furnished to us and our opinion, insofar as it
relates to the amounts included for these limited partnerships, is based solely
on the reports of the other auditors.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits and the reports of other auditors provide a reasonable
basis for our opinion.

In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Real Estate Associates Limited III as of December 31,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles. Also, in our opinion, based on our
audits and the reports of other auditors, such financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.



DELOITTE & TOUCHE LLP

Los Angeles, California
April 6, 1998


<PAGE>   15

                         [COOPERS & LYBRAND LETTERHEAD]


REPORT OF INDEPENDENT ACCOUNTANTS


To the Partners of
Bowin Place Associates
Limited Dividend Housing Association

We have audited the accompanying balance sheets of Bowin Place Associates
Limited Dividend Housing Association (A Michigan Limited Partnership, MSHDA
Development Number 551), as of December 31, 1997 and 1996, and the related
statements of operations, changes in partners' deficit, and cash flows for the
years then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards
and Government Auditing Standards, issued by the Comptroller General of the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bowin Place Associates Limited
Dividend Housing Association, MSHDA No. 551, as of December 31, 1997 and 1996,
and the results of its operations, and its cash flows for the years then ended
in conformity with generally accepted accounting principles.

Our 1997 audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The other financial information of Bowin
Place Associates Limited Dividend Housing Association, MSHDA No. 551, on pages 9
through 18 is presented for purposes of additional analysis and is not a
required part of the basic financial statements. This additional information is
the responsibility of the Partnership's management. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.

In accordance with Government Auditing Standards, we have also issued a report
dated February 2, 1998 on our consideration of Bowin Place Associates Limited
Dividend Housing Association's internal control structure and a report dated
February 2, 1998 on its compliance with laws and regulations.



                                                   /s/ COOPERS & LYBRAND, L.L.P.

Cleveland, Ohio
February 2, 1998

<PAGE>   16
                         [COOPERS & LYBRAND LETTERHEAD]

REPORT OF INDEPENDENT ACCOUNTANTS

To the Partners of
Bowin Place Associates
Limited Dividend Housing Association

We have audited the accompanying balance sheets of Bowin Place Associates
Limited Dividend Housing Association (A Michigan Limited Partnership, MSHDA
Development Number 551), as of December 31, 1996 and 1995, and the related
statements of operations, changes in partners' deficit, and cash flows for the
years then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted audits in accordance with generally accepted auditing standards and
Government Auditing Standards, issued by the Comptroller General of the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bowin Place Associates Limited
Dividend Housing Association, MSHDA No. 551, as of December 31, 1996 and 1995,
and the results of its operations, and its cash flows for the years then ended
in conformity with generally accepted accounting principles.

Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The other financial information of Bowin
Place Associates Limited Dividend Housing Association, MSHDA No. 551, on pages 8
through 16 is presented for purposes of additional analysis and is not a
required part of the basic financial statements. This additional information is
the responsibility of the Partnership's management. Such information has been
subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.

In accordance with Government Auditing Standards, we have also issued a
report dated January 27, 1997 on our consideration of Bowin Place Associates
Limited Dividend Housing Association's internal control structure and a report
dated January 27, 1997 on its compliance with laws and regulations.




                                        /s/  COOPERS & LYBRAND L.L.P.

Cleveland, Ohio
January 27, 1997

 
<PAGE>   17
                           D'AMBRA & ASSOCIATES, P.C.
                          CERTIFIED PUBLIC ACCOUNTANTS
                            ELEVEN VANDERBILT AVENUE
                               NORWOOD, MA 02062

PHONE (781) 551-0070                                          FAX (781) 551-3424

                          INDEPENDENT AUDITORS' REPORT

To the Partners of
300 Broadway Associates
(a Limited Partnership)

We have audited the accompanying balance sheet of 300 Broadway Associates (a
Limited Partnership), HUD Project No. RI-43-H023-110, as of December 31, 1997,
and the related statements of income, partners' equity (deficiency) and cash
flow for the year then ended. These financial statements are the responsibility
of the Partnership's management. Our responsibility is to express an opinion
on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards
and Government Auditing Standards, issued by the Comptroller General of the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of 300 Broadway Associates (a
Limited Partnership) as of December 31, 1997, and the results of its
operations, the changes in partners' equity (deficiency) and its cash flow for
the year then ended in conformity with generally accepted accounting principles.

In accordance with Government Auditing Standards and the Consolidated Audit
Guide for Audits of HUD Programs issued by the U.S. Department of Housing and
Urban Development, we have also issued a report dated January 17, 1998, on our
consideration of 300 Broadway Associates' internal control and reports dated
January 17, 1998 on its compliance with specific requirements applicable to
major HUD program and specific requirements applicable to Fair Housing and
Non-discrimination.


/s/ D'AMBRA & ASSOCIATES

Norwood, Massachusetts
January 17, 1998
<PAGE>   18

                           D'AMBRA & ASSOCIATES, P.C.
                          CERTIFIED PUBLIC ACCOUNTANTS
                            ELEVEN VANDERBILT AVENUE
                               NORWOOD, MA 02062

PHONE (781) 551-0070                                          FAX (781) 551-3424

                          INDEPENDENT AUDITORS' REPORT

To the Partners of
300 Broadway Associates
(a Limited Partnership)

We have audited the accompanying balance sheet of 300 Broadway Associates (a
Limited Partnership), HUD Project No. RI-43-H023-110, as of December 31, 1996,
and the related statements of income, partners' equity (deficiency) and cash
flow for the year then ended. These financial statements are the responsibility
of the Partnership's management. Our responsibility is to express an opinion
on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards
and Government Auditing Standards, issued by the Comptroller General of the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of 300 Broadway Associates (a
Limited Partnership) as of December 31, 1996, and the results of its
operations, the changes in partners' equity (deficiency) and its cash flow for
the year then ended in conformity with generally accepted accounting principles.

In accordance with Government Auditing Standards and the Consolidated Audit
Guide for Audits of HUD Programs issued by the U.S. Department of Housing and
Urban Development, we have also issued a report dated February 3, 1997, on our
consideration of 300 Broadway Associates' internal control structure and
reports dated February 3, 1997, on its compliance with specific requirements
applicable to major HUD program and specific requirements applicable to
Affirmative Fair Housing.


/s/ D'AMBRA & ASSOCIATES

Norwood, Massachusetts
January 23, 1997
<PAGE>   19

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                 BALANCE SHEETS

                           DECEMBER 31, 1997 AND 1996



<TABLE>
<CAPTION>
                                                                 1997                1996
                                                             ------------        ------------
<S>                                                          <C>                 <C>         
                     ASSETS

INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2)                 $  1,249,421        $  1,063,487

CASH AND CASH EQUIVALENTS (Note 1)                             10,575,810           9,734,531

OTHER ASSETS                                                      135,000             135,000
                                                             ------------        ------------

    TOTAL ASSETS                                             $ 11,960,231        $ 10,933,018
                                                             ============        ============


                      LIABILITIES AND PARTNERS' EQUITY

LIABILITIES:
  Notes payable (Notes 3 and 7)                              $  1,510,000        $  1,510,000
  Interest payable (Notes 3 and 7)                                414,277             374,603
    Accounts payable                                              110,192               7,450
                                                             ------------        ------------

                                                                2,034,469           1,892,053
                                                             ------------        ------------

COMMITMENTS AND CONTINGENCIES (Notes 4 and 5)


PARTNERS' EQUITY (DEFICIENCY):
  General partners                                                (99,718)           (108,566)
  Limited partners                                             10,025,480           9,149,531
                                                             ------------        ------------

                                                                9,925,762           9,040,965
                                                             ------------        ------------
      TOTAL LIABILITIES AND PARTNERS'
        EQUITY                                               $ 11,960,231        $ 10,933,018
                                                             ============        ============

</TABLE>


    The accompanying notes are integral part of these financial statements.


<PAGE>   20

                       REAL ESTATE ASSOCIATES LIMITED III
                       (a California limited partnership)

                            STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995



<TABLE>
<CAPTION>
                                                                  1997               1996               1995
                                                              -----------        -----------        -----------
<S>                                                           <C>                <C>                <C>        
INTEREST AND OTHER INCOME                                     $   477,624        $   302,466        $   267,189
                                                              -----------        -----------        -----------

OPERATING EXPENSES:
      Legal and accounting                                         76,993            150,156            135,191
      Management fees - general partner (Note 4)                  454,800            454,800            454,800
      Interest (Note 3)                                           151,000            151,000            151,000
      Administrative  (Note 4)                                    238,598             64,982             93,619
                                                              -----------        -----------        -----------

                     Total operating expenses                     921,391            820,938            834,610
                                                              -----------        -----------        -----------

LOSS FROM OPERATIONS                                             (443,767)          (518,472)          (567,421)

DISTRIBUTIONS FROM LIMITED
      PARTNERSHIPS RECOGNIZED AS
      INCOME (Note 2)                                           1,072,912            858,869            765,514

EQUITY IN INCOME OF LIMITED
      PARTNERSHIPS AND AMORTI-
       ZATION OF ACQUISITION
       COSTS (Note 2)                                             255,652            383,682            887,919
                                                              -----------        -----------        -----------

NET INCOME                                                    $   884,797        $   724,079        $ 1,086,012
                                                              ===========        ===========        ===========

NET INCOME PER LIMITED PARTNERSHIP
     INTEREST (Note 1)                                        $        77        $        63        $        95
                                                              ===========        ===========        ===========

</TABLE>

    The accompanying notes are integral part of these financial statements.

<PAGE>   21


                       REAL ESTATE ASSOCIATES LIMITED III
                       (a California limited partnership)

                   STATEMENTS OF PARTNERS' EQUITY (DEFICIENCY)
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995


<TABLE>
<CAPTION>
                            General             Limited
                            Partners            Partners           Total
                           -----------        -----------       -----------
<S>                        <C>                  <C>               <C>      
EQUITY (DEFICIENCY),
  January 1, 1995          $  (126,667)       $ 7,357,541       $ 7,230,874

Net income for 1995             10,860          1,075,152         1,086,012
                           -----------        -----------       -----------

EQUITY (DEFICIENCY),
  December 31, 1995           (115,807)         8,432,693         8,316,886

 Net income for 1996             7,241            716,838           724,079
                           -----------        -----------       -----------

EQUITY (DEFICIENCY),
 December 31, 1996            (108,566)         9,149,531         9,040,965

Net income for 1997              8,848            875,949           884,797
                           -----------        -----------       -----------

EQUITY (DEFICIENCY),
 December 31, 1997         $   (99,718)       $10,025,480       $ 9,925,762
                           ===========        ===========       ===========

</TABLE>


The accompanying notes are integral part of these financial statements.


<PAGE>   22

                       REAL ESTATE ASSOCIATES LIMITED III
                       (a California limited partnership)

                            STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
                                                                1997                1996                1995
                                                            ------------        ------------        ------------
<S>                                                         <C>                 <C>                 <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                               $    884,797        $    724,079        $  1,086,012
   Adjustments to reconcile net income to net cash
     provided by operating activities:
   Equity in income of limited partnerships and
     amortization of acquisition costs                          (255,652)           (383,682)           (887,919)
   Increase in other assets                                           --             (34,500)            (50,500)
   Increase (decrease) in interest and other payables            142,416              23,900               3,188
                                                            ------------        ------------        ------------

   Net cash provided by operating activities                     771,561             329,797             150,781
                                                            ------------        ------------        ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Distribution from limited partnerships
     recognized as return of capital                              69,718             255,471             647,913
   Capital contributions and advances
     to limited partnerships                                          --              (4,700)                 --
   Decrease in short term investments                                 --             125,000           1,021,022
                                                            ------------        ------------        ------------

   Net cash provided by investing activities                      69,718             375,771           1,668,935
                                                            ------------        ------------        ------------

NET INCREASE IN CASH AND
   CASH EQUIVALENTS                                              841,279             705,568           1,819,716

CASH AND CASH EQUIVALENTS,
   BEGINNING OF YEAR                                           9,734,531           9,028,963           7,209,247
                                                            ------------        ------------        ------------

CASH AND CASH EQUIVALENTS,
   END OF YEAR                                              $ 10,575,810        $  9,734,531        $  9,028,963
                                                            ============        ============        ============

SUPPLEMENTAL DISCLOSURE OF
   CASH FLOW INFORMATION:
   Cash paid during the year for interest                   $    111,326        $    121,159        $    150,245
                                                            ============        ============        ============
</TABLE>


     The accompanying notes are integral part of these financial statements.


<PAGE>   23

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A California limited partnership)

                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1997

1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          Organization

          Real Estate Associates Limited III (the Partnership) was formed under
          the California Limited Partnership Act on July 25, 1980. The
          Partnership was formed to invest either directly or indirectly in
          other partnerships which own and operate primarily federal, state and
          local government-assisted housing projects. The general partners are
          National Partnership Investments Corp. (NAPICO), the corporate general
          partner, and Coast Housing Investment Associates (CHIA), a limited
          partnership. Casden Investment Corporation owns 100 percent of
          NAPICO's stock. The limited partner of CHIA is an officer of NAPICO.
          The business of REAL IV is conducted primarily by NAPICO.

          These financial statements include the accounts of Real Estate
          Associates Limited III and Real Estate Associates ("REA"), a
          California general partnership in which the Partnership holds a 99.9
          percent general partner interest. Losses in excess of the minority
          interest in equity that would otherwise be attributed to the minority
          interest are being allocated to the Partnership.

          The Partnership offered 3,000 units and issued 2,864 units of limited
          partner interests through a public offering. Each unit was comprised
          of two limited partner interests and a warrant granting the investor
          the right to purchase two additional limited partner interests. An
          additional 5,728 interests were issued from the exercise of the
          warrants and the sale of interests associated with warrants not
          exercised. The general partners have a 1 percent interest in profits
          and losses of the Partnership. The limited partners have the remaining
          99 percent interest in proportion to their respective investments.

          The Partnership shall be dissolved only upon the expiration of 52
          complete calendar years (December 31, 2032) from the date of the
          formation of the Partnership or the occurrence of other events as
          specified in the terms of the Partnership agreement.

          Upon total or partial liquidation of the Partnership or the
          disposition or partial disposition of a project or project interest
          and distribution of the proceeds, the general partners will be
          entitled to a liquidation fee as stipulated in the Partnership
          agreement. The limited partners will have a priority return equal to
          their invested capital attributable to the project(s) or project
          interest(s) sold and shall receive from the sale of the project(s) or
          project interest(s) an amount sufficient to pay state and federal
          income taxes, if any, calculated at the maximum rate then in effect.
          The general partners' liquidation fee may accrue but shall not be paid
          until the limited partners have received distributions equal to 100
          percent of their capital contributions.

          Use of Estimates

          The preparation of financial statements in conformity with generally
          accepted accounting principles requires management to make estimates
          and assumptions that affect the reported amounts of assets and
          liabilities and disclosure of contingent assets and liabilities at the
          date of the financial statements and reported amounts of revenues and
          expenses during the reporting period. Actual results could differ from
          those estimates.

                                       5

<PAGE>   24

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A California limited partnership)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1997

1.        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

          Method of Accounting for Investments in Limited Partnerships

          The investments in limited partnerships are accounted for on the
          equity method. Acquisition, selection and other costs related to the
          acquisition of the projects are capitalized as part of the investment
          account and are being amortized on a straight line basis over the
          estimated lives of the underlying assets, which is generally 30 years.

          Net Income Per Limited Partnership Interest

          Net income per limited partnership interest was computed by dividing
          the limited partners' share of net income by the number of limited
          partnership interests outstanding during the year. The number of
          limited partnership interests was 11,456 for all years presented.

          Cash and Cash Equivalents

          Cash and cash equivalents consist of cash and bank certificates of
          deposit with an original maturity of three months or less. The
          Partnership has its cash and cash equivalents on deposit primarily
          with two high credit quality financial institutions. Such cash and
          cash equivalents are in excess of the FDIC insurance limit.

          Impairment of Long-Lived Assets

          The Partnership reviews long-lived assets to determine if there has
          been any permanent impairment whenever events or changes in
          circumstances indicate that the carrying amount of the asset may not
          be recoverable. If the sum of the expected future cash flows is less
          than the carrying amount of the assets, the Partnership recognizes an
          impairment loss.

2.        INVESTMENTS IN LIMITED PARTNERSHIPS

          The Partnership holds limited partnership interests in 26 limited
          partnerships. In addition, the Partnership holds a general partner
          interest in REA. NAPICO is also a general partner in REA. REA, in
          turn, holds limited partner interests in six additional limited
          partnerships. In total, therefore, the Partnership holds interests,
          either directly or indirectly through REA, in 32 partnerships which
          own residential low income rental projects consisting of 3,062
          apartment units. The mortgage loans of these projects are payable to
          or insured by various governmental agencies.

          The Partnership, as a limited partner, is entitled to between 75
          percent and 99 percent of the profits and losses of the limited
          partnerships it has invested in directly. The Partnership is also
          entitled to 99.9 percent of the profits and losses of REA. REA holds a
          99 percent interest in each of the limited partnerships in which it
          has invested.


                                       6

<PAGE>   25

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A California limited partnership)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1997

2.        INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)

          Equity in losses of limited partnerships is recognized in the
          financial statements until the limited partnership investment account
          is reduced to a zero balance. Losses incurred after the limited
          partnership investment account is reduced to zero are not recognized.
          The cumulative amount of the unrecognized equity in losses of certain
          limited partnerships was approximately $20,770,000 and $20,515,000 as
          of December 31, 1997 and 1996, respectively.

          Distributions from limited partnerships are recognized as a reduction
          of capital until the investment balance has been reduced to zero.
          Subsequent distributions received are recognized as income.

          The following is a summary of the investments in limited partnerships
          and reconciliation to the limited partnership accounts: 

<TABLE>
<CAPTION>
                                                                           1997              1996
                                                                       -----------        -----------
<S>                                                                    <C>                <C>        
          Investment balance, beginning of year                        $ 1,063,487        $   930,576
          Equity in income of limited partnerships                         261,625            389,655
          Amortization of capitalized acquisition costs and fees            (5,973)            (5,973)
          Capital contributions to limited partnerships                         --              4,700
          Cash distributions recognized as return of capital               (69,718)          (255,471)
                                                                       -----------        -----------

          Investment balance, end of year                              $ 1,249,421        $ 1,063,487
                                                                       ===========        ===========
</TABLE>

          The difference between the investment in the accompanying balance
          sheets at December 31, 1997 and 1996, and the deficiency per the
          limited partnerships' combined financial statements is due primarily
          to the cumulative unrecognized equity in losses of certain limited
          partnerships, costs capitalized to the investment account and
          cumulative distributions recognized as income.

          Selected financial information from the combined financial statements
          at December 31, 1997 and 1996 and for each of the three years in the
          period ended December 31, 1997, of the limited partnerships in which
          the Partnership has invested directly or indirectly, is as follows:


                                       7

<PAGE>   26

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A California limited partnership)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1997

2.          INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)

                                 Balance Sheets
                                 --------------

<TABLE>
<CAPTION>
                                                                   1997           1996
                                                                 --------        --------
                                                                     (in thousands)

<S>                                                              <C>             <C>     
          Land and buildings, net                                $ 52,667        $ 55,007
                                                                 ========        ========

          Total assets                                           $ 65,203        $ 68,387
                                                                 ========        ========

          Mortgages payable                                      $ 88,765        $ 88,987
                                                                 ========        ========

          Total liabilities                                      $ 93,510        $ 95,492
                                                                 ========        ========

          Deficiency of Real Estate Associates Limited III       $(28,535)       $(27,400)
                                                                 ========        ======== 

          Equity of other partners                               $    229        $    295
                                                                 ========        ========
</TABLE>

                            Statements of Operations
                            ------------------------

<TABLE>
<CAPTION>
                                                                 1997           1996            1995
                                                               --------       --------        --------
                                                                           (in thousands)
<S>                                                            <C>            <C>             <C>     
          Total revenue                                        $ 23,173       $ 22,387        $ 22,082
                                                               ========       ========        ========
          Interest expense                                     $  6,929       $  7,032        $  6,914
                                                               ========       ========        ========
          Depreciation                                         $  3,674       $  3,757        $  3,722
                                                               ========       ========        ========
          Total expenses                                       $ 23,114       $ 23,222        $ 22,278
                                                               ========       ========        ========
          Net loss                                             $     59       $   (835)       $   (196)
                                                               ========       ========        ========
          Net income (loss) allocable to the Partnership       $     55       $   (453)       $   (184)
                                                               ========       ========        ========
</TABLE>

          Land and buildings, above, have been adjusted for the amount by which
          the investments in the limited partnerships exceed the Partnership's
          share of the net book value of the underlying net assets of the
          investee which are recorded at historical costs. Depreciation on the
          adjustment is provided for over the estimated remaining useful lives
          of the properties.

          An affiliate of NAPICO is the general partner in one of the limited
          partnerships included above, and another affiliate receives property
          management fees of 5 percent of its revenue. The affiliate received
          property management fees of $17,408, $16,128 and $16,128 in 1997, 1996
          and 1995, respectively.

                                       8

<PAGE>   27

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A California limited partnership)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1997

2.        INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)

          The following sets forth the significant data for this partnership,
          reflected in the accompanying financial statements using the equity
          method of accounting:

<TABLE>
<CAPTION>
                                                      1997           1996           1995
                                                     -------        -------        -------
                                                                (in thousands)
<S>                                                  <C>            <C>            <C>    
          Total assets                               $   944        $ 1,023
                                                     =======        =======

          Total liabilities                          $ 1,785        $ 1,775
                                                     =======        =======

          Deficiency of Real Estate Associates
            Limited III                              $  (963)       $  (875)
                                                     =======        =======

          Equity of other partners                   $   122        $   123
                                                     =======        =======

          Total revenues                             $   335        $   366        $   370
                                                     =======        =======        =======


          Net loss                                   $   (87)       $   (47)       $   (46)
                                                     =======        =======        =======
</TABLE>


          Under recent adopted law and policy, HUD has determined not to renew
          HAP Contracts on a long term basis on the existing terms. In
          connection with renewals of the HAP Contracts under such new law and
          policy, the amount of rental assistance payments under renewed HAP
          Contracts will be based on market rentals instead of above market
          rentals, which was generally the case under existing HAP Contracts. As
          a result, existing HAP Contracts that are renewed in the future on
          projects insured by the FHA will not provide sufficient cash flow to
          permit owners of properties to meet the debt service requirements of
          these existing FHA-insured mortgages. In order to address the
          reduction in payments under HAP Contracts as a result of this new
          policy, the Multi-family Assisted Housing Reform and Affordability Act
          of 1997 (the "MAHRAA"), which was adopted in October 1997, provides
          for the restructuring of mortgage loans insured by the FHA with
          respect to properties subject to HAP Contracts that have been renewed
          under the new policy. The restructured loans will be held by the
          current lender or another lender. Under MAHRAA, an FHA-insured
          mortgage loan can be restructured to reduce the annual debt service on
          such loan. There can be no assurance that the Partnership will be
          permitted to restructure its mortgage indebtedness pursuant to the new
          HUD rules implementing MAHRAA or that the Partnership would choose to
          restructure such mortgage indebtedness if it were eligible to
          participate in the MAHRAA program. It should be noted that there are
          uncertainties as to the economic impact on the Partnership of the
          combination of the reduced payments under the HAP Contracts and the
          restructuring of the existing FHA-insured mortgage loans under MAHRAA.
          Accordingly, the General Partners are unable to predict with certainty
          their impact on the Partnership's future cash flow.



                                       9

<PAGE>   28
3.        NOTES PAYABLE


          As a result of the foregoing, the Partnership is undergoing an
          extensive review of disposition, refinancing or re-engineering
          alternatives for the properties in which the limited partnerships have
          invested and are subject to HUD mortgage and rental subsidy programs.
          The Partnership has incurred expenses in connection with this review
          by various third party professionals, including accounting, legal,
          valuation, structural and engineering costs, which amounted to
          $140,915 for the year ended December 31, 1997.

          A real estate investment trust ("REIT") organized by an affiliate of
          NAPICO has advised the Partnership that it intends to make a proposal
          to purchase from the Partnership certain of the limited partnership
          interests held for investment by the Partnership.

          The REIT proposes to purchase such limited partner interests for cash,
          which it plans to raise in connection with a private placement of its
          equity securities. The purchase is subject to, among other things, (i)
          consummation of such private placement by the REIT; (ii) the purchase
          of the general partner interests in the local limited partnerships by
          the REIT; (iii) the approval of HUD and certain state housing finance
          agencies; (iv) the consent of the limited partners to the sale of the
          local limited partnership interests held for investment by REAL III;
          and (v) the consummation of a minimum number of purchase transactions
          with other Casden affiliated partnerships. As of March 31, 1998, the
          REIT had completed buy-out negotiations with a majority of the general
          partners of the local limited partnerships.

          A proxy is contemplated to be sent to the limited partners setting
          forth the terms and conditions of the purchase of the limited
          partners' interests held for investment by the Partnership, together
          with certain amendments to the Partnership Agreement and other
          disclosures of various conflicts of interest in connection with the
          transaction.

          Certain of the Partnership's investments involved purchases of
          partnership interests from partners who subsequently withdrew from the
          operating partnership. The Partnership is obligated on non-recourse
          notes payable of $1,510,000, bearing interest at 10 percent, to the
          sellers of the partnership interests. These notes are payable by the
          Partnership through REA, and have principal maturity dates in June
          2020 and March 2024 or upon the sale or refinancing of the underlying
          partnership properties. These notes and the related interest are
          collaterized by REA's investment in the respective limited
          partnerships and are payable only out of cash distributions from the
          investee partnerships, as defined in the notes.
          Unpaid interest is due at maturity of the notes.



                                       10

<PAGE>   29

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A California limited partnership)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1997


3.        NOTES PAYABLE (CONTINUED)

          Maturity dates on the notes payable are as follows:
        
<TABLE>
<CAPTION>
         Years Ending December 31
         ------------------------
<S>                                       <C>             
                       1998               $              -
                       1999                              -
                       2000                              -
                       2001                              -
                       2002                              -
                    Thereafter                   1,510,000
                                                ----------
                                                $1,510,000
                                                ==========
</TABLE>

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A California limited partnership)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1997

4.        FEES AND EXPENSES DUE GENERAL PARTNER

          Under the terms of the Restated Certificate and Agreement of Limited
          Partners, the Partnership is liable to NAPICO for an annual management
          fee equal to .4 percent of the original invested assets of the limited
          partnerships. Invested assets is defined as the costs of acquiring
          project interests, including the proportionate amount of the mortgage
          loans related to the Partnership's interest in the capital accounts of
          the respective partnerships.

          The Partnership reimburses NAPICO for certain expenses. The
          reimbursement to NAPICO was $35,227, $32,176 and $29,927 in 1997, 1996
          and 1995, respectively, and is included in operating expenses.

5.        CONTINGENCIES

          The corporate general partner of the Partnership is a plaintiff in
          various lawsuits and has also been named a defendant in other lawsuits
          arising from transactions in the ordinary course of business. In the
          opinion of management and the corporate general partner, the claims
          will not result in any material liability to the Partnership.

          The Partnership has assessed the potential impact of the Year 2000
          computer systems issue on its operations. The Partnership believes
          that no significant actions are required to be taken by the
          Partnership to address the issue and that the impact of the Year 2000
          computer systems issue will not materially affect the Partnership's
          future operating results or financial condition.



                                       11

<PAGE>   30

6.        INCOME TAXES

          No provision has been made for income taxes in the accompanying
          financial statements since such taxes, if any, are the liability of
          the individual partners. The major differences in tax and financial
          reporting result from the use of different bases and depreciation
          methods for the properties held by the limited partnerships.
          Differences in tax and financial losses also arise as losses are not
          recognized for financial reporting purposes when the investment
          balance has been reduced to zero.


7.        FAIR VALUE OF FINANCIAL INSTRUMENTS

          Statement of Financial Accounting Standards No. 107, "Disclosure about
          Fair Value of Financial Instruments," requires disclosure of fair
          value information about financial instruments, when it is practicable
          to estimate that value. The notes payable are collateralized by the
          Partnership's investments in the investee limited partnerships and are
          payable only out of cash distributions from the investee partnerships.
          The operations generated by the investee limited partnerships are
          subject to various government rules, regulations and restrictions
          which make it impracticable to estimate the fair value of the notes
          payable and related accrued interest. The carrying amount of other
          assets and liabilities reported on the balance sheets that require
          such disclosure approximates fair value due to their short-term
          maturity.

8.        FOURTH QUARTER ADJUSTMENT

          The Partnership's policy is to record its equity in income of limited
          partnerships on a quarterly basis, using estimated financial
          information furnished by the various local operating general partners.
          The equity in income reflected in the accompanying annual financial
          statements is based primarily upon audited financial statements of the
          investee limited partnerships. The increase of approximately $64,000,
          between the estimated nine-month equity in income and the actual total
          for 1997 equity in income has been recorded in the fourth quarter.





                                       12
<PAGE>   31

                                                                        SCHEDULE
                       REAL ESTATE ASSOCIATES LIMITED III
                       INVESTMENTS IN LIMITED PARTNERSHIPS
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
                                                            Year Ended December 31, 1997
                                              -----------------------------------------------------------------------
                                                                        Cash             Equity
                                              Balance                  Distri-              in             Balance
                                              January      Capital     butions             Income          December
Limited Partnerships                          1, 1997   Contributions  Received            (Loss)          31, 1997
                                             ---------- -------------  ----------        ----------       ----------
<S>                                          <C>           <C>         <C>               <C>              <C>       
          Bowin Place                        $  596,966    $           $  (28,489)       $  114,803       $  683,280
          Casa de las Hermanitas
          Charlotte
          Creekview Apartments
          Foothill Gardens
          Frazier Park Apartments
          Gary Manor
          Grandview Homes
          Hidden Pines Apartments
          Highlawn Place
          Jenks School Apartments               466,521                   (41,229)          140,849          566,141
          Kern Villa
          Lakeside Apartments
          New Baltimore Towers
          Panorama Park Apartments
          Ramblewood Apartments
          Santa Maria Apartments
          Senior Chateau
          Sheraton Towers
          South Bay Villa
          Sunset Grove Apartments
          Sunshine Canyon Apartments
          Tujunga Gardens
          Twenty-Nine Palms Apartments
          Vicente Geigel Polanco Apts 
          Village Apartments
          Village Apartments (Kaufman)
          Village Grove Apartments
          Vista De Jagueyes
          Westgate Apartments
          Wilderness Trail Manor
          Wilkes Towers
                                             ----------    --------    ----------        ----------       ----------

                                             $1,063,487    $      -    $  (69,718)       $  255,652       $1,249,421
                                             ==========    ========    ==========        ==========       ==========
</TABLE>


<PAGE>   32

                                                                        SCHEDULE
                                                                     (CONTINUED)
                       REAL ESTATE ASSOCIATES LIMITED III
                       INVESTMENTS IN LIMITED PARTNERSHIPS
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
                                                                        Year Ended December 31, 1996
                                               -----------------------------------------------------------------------------
                                                                           Cash                Equity
                                               Balance                     Distri-                in               Balance
                                               January        Capital      butions              Income            December
Limited Partnerships                           1, 1996     Contributions   Received             (Loss)            31, 1996
                                             -----------   -------------   -----------        -----------        -----------
<S>                                          <C>           <C>             <C>                <C>                <C>        
          Bowin Place                        $   519,960       $           $   (39,860)       $   116,865        $   596,965
          Casa de las Hermanitas                  21,171                                          (21,171)
          Charlotte
          Creekview Apartments
          Foothill Gardens
          Frazier Park Apartments
          Gary Manor
          Grandview Homes                                                       (19,948)            19,948
          Hidden Pines Apartments
          Highlawn Place                                                       (154,434)           154,434
          Jenks School Apartments                389,445                        (41,229)           118,306            466,522
          Kern Villa
          Lakeside Apartments                                   4,700                               (4,700)
          New Baltimore Towers
          Panorama Park Apartments
          Ramblewood Apartments
          Santa Maria Apartments
          Senior Chateau
          Sheraton Towers
          South Bay Villa
          Sunset Grove Apartments
          Sunshine Canyon Apartments
          Tujunga Gardens
          Twenty-Nine Palms Apartments
          Vicente Geigel Polanco Apts 
          Village Apartments
          Village Apartments (Kaufman)
          Village Grove Apartments
          Vista De Jagueyes
          Westgate Apartments
          Wilderness Trail Manor
          Wilkes Towers
                                             -----------       ------       -----------        -----------        -----------
                                             $   930,576       $4,700       $  (255,471)       $   383,682        $ 1,063,487
                                             ===========       ======       ===========        ===========        ===========

</TABLE>


<PAGE>   33

                                                                        SCHEDULE
                                                                     (CONTINUED)

                       REAL ESTATE ASSOCIATES LIMITED III
                       INVESTMENTS IN LIMITED PARTNERSHIPS
                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
                                                             Year Ended December 31, 1995
                                            ------------------------------------------------------------
                                                                               Cash               Equity
                                             Balance                           Distri-              in           Balance
                                             January           Capital         butions            Income         December
Limited Partnerships                         1, 1995        Contributions      Received           (Loss)         31, 1995
                                             ---------      -------------      ---------        ---------       ---------
<S>                                          <C>              <C>              <C>              <C>             <C>      
          Bowin Place                        $ 365,973        $                 $ (39,861)      $ 193,848       $ 519,960
          Casa de las Hermanitas                                                  (76,359)         97,530          21,171
          Charlotte
          Creekview Apartments
          Foothill Gardens                                                        (23,532)         23,532
          Frazier Park Apartments
          Gary Manor
          Grandview Homes                                                         (36,969)         36,969
          Hidden Pines Apartments
          Highlawn Place                                                         (122,066)        122,066
          Jenks School Apartments              324,597                            (36,972)        101,820         389,445
          Kern Villa
          Lakeside Apartments
          New Baltimore Towers                                                    (53,207)         53,207
          Panorama Park Apartments                                                (14,448)         14,448
          Ramblewood Apartments
          Santa Maria Apartments
          Senior Chateau                                                         (146,237)        146,237
          Sheraton Towers
          South Bay Villa                                                         (98,262)         98,262
          Sunset Grove Apartments
          Sunshine Canyon Apartments
          Tujunga Gardens
          Twenty-Nine Palms Apartments
          Vicente Geigel Polanco Apts 
          Village Apartments
          Village Apartments (Kaufman)
          Village Grove Apartments
          Vista De Jagueyes
          Westgate Apartments
          Wilderness Trail Manor
          Wilkes Towers
                                             ---------        ---------        ---------        ---------       ---------
          TOTAL                              $ 690,570        $       -        $(647,913)       $ 887,919       $ 930,576
                                             =========        =========        =========        =========       =========
</TABLE>


<PAGE>   34

                                                                        SCHEDULE
                                                                     (CONTINUED)


                       REAL ESTATE ASSOCIATES LIMITED III
          INVESTMENTS IN, EQUITY IN EARNINGS OF, AND DIVIDENDS RECEIVED
                        FROM AFFILIATES AND OTHER PERSONS
                                   YEARS ENDED
                        DECEMBER 31, 1997, 1996 AND 1995


NOTES:    1.        Equity in losses of the limited partnerships represents
                    the Partnership's allocable share of the net loss from the
                    limited partnerships for the year. Equity in losses of the
                    limited partnerships will be recognized until the investment
                    balance is reduced to zero or below zero to an amount equal
                    to future capital contributions to be made by the
                    Partnership.

          2.        Cash distributions from the local limited partnerships will
                    be treated as a return on the investment and will reduce the
                    investment balance until such time as the investment is
                    reduced to an amount equal to additional contributions.
                    Distributions subsequently received will be recognized as
                    income.

<PAGE>   35
                                  SCHEDULE III
                                  (Continued)
                                        
                                        
                       REAL ESTATE ASSOCIATES LIMITED III
                    REAL ESTATE AND ACCUMULATED DEPRECIATION
                 OF PROPERTY HELD BY LOCAL LIMITED PARTNERSHIPS
                       IN WHICH REAL III HAS INVESTMENTS
                               DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                                 Buildings, Furnishings
                                                                 & Equipment - Initial
                                                                  Cost to Partnership
                             Number     Outstanding                and Amount Carried
                              of         Mortgage                      at Close of                      Accumulated    Construction
Partnership/Location         Units         Loan          Land            Period              Total      Depreciation      Period
----------------------       ------     -----------      ----     ----------------------    -------    -------------   ------------
<S>                          <C>        <C>              <C>      <C>                       <C>        <C>             <C>

Browin Place                  193        $5,161,300    $752,729        $5,952,911          $6,705,640    $4,109,134           (A)
  Detroit, Michigan
Casa De Las Hermanitas         88         3,023,523     405,578         3,809,605           4,215,183     2,127,233          1981
  Los Angeles, California
Charlottle Lakeview           553        12,467,799     551,500        19,012,123          19,563,623    14,799,743           (A)
  Rochester, NY
Creekview Apartments           80         2,028,703     239,673         2,412,899           2,652,572     1,082,395     1981-1982
  Stroudsburg, Pennsylvania
Foothill Gardens               54         2,029,056     309,626         2,443,612           2,753,238     1,388,825          1981
  Los Angeles, California
Frazier Park Apartments        60         2,686,364     439,987         3,276,813           3,716,800     1,778,992     1981-1982
  Baldwin Park, California
Gary Manor                    198         5,487,281     403,285         7,015,228           7,418,513     4,837,489           (A)
  Gary, Indiana
Grandview Homes                26         1,234,724     324,293         1,377,730           1,702,023       775,157          1981
  Los Angeles, California
Hidden Pines Apartments        40         1,375,624      43,954         1,648,093           1,692,047     1,633,328          1981
  Greenville, Michigan
Highlawn Place                133         2,812,446     310,653         3,355,812           3,666,465     2,435,963           (A)
  Huntington, West Virginia
Jenks School Apartments        83         2,279,313      96,740         3,603,639           3,700,379     1,828,275     1981-1982
  Pawtucket, Rhode Island
Kern Villa                     49         2,333,343     384,091         2,795,915           3,180,006     1,569,529     1981-1982
  Los Angeles, California
Lakeside Apartments            32           914,132      72,336           946,139           1,018,475       780,522     1980-1981
  Stuart, Florida
New Baltimore Towers          101         2,134,604     455,282         3,152,866           3,608,148     2,451,958           (A)
  New Baltimore, MD
Panorama Park Apartments       66         2,827,525     680,296         3,253,405           3,933,701     1,784,311     1981-1982
  Bakerfield, California
Ramblewood Apartments          64         1,486,095      53,267         2,073,447           2,126,714     1,007,165     1980-1981
  Fort Payne, Alabama
Santa Maria Apartments         86         2,823,515      86,106         3,361,352           3,447,458     1,979,704     1981-1982
  San German, Puerto Rico
Senior Chateau                185         4,073,872     408,863         5,021,679           5,430,542     3,523,958           (A)
  Cincinnati, Ohio
Sheraton Towers                97         2,785,694      50,546         3,486,396           3,536,942     1,433,597     1981-1982
  High Point, North Carolina
South Bay Villa                80         3,586,962     365,333         4,609,170           4,974,503     2,587,654     1980-1981
  San Pedro, California
Sunset Groove Apartments       22           661,452      19,432           811,214             830,646       788,523     1981-1982
  Carson City, Michigan
Sunshine Canyon Apartments     26           841,243      20,262           999,551           1,019,813       969,696     1981-1982
  Stanton, Michigan
The Village Apartments         68          1,700,816    152,573         1,955,690           2,108,263     1,067,502     1980-1981
  Kaufman, Texas
Tujunga Gardens                54          2,009,777    325,492         2,390,317           2,715,809     1,352,996          1981
  Los Angeles, California
Twenty-Nine Palms Apts.        48          1,606,688    111,617         1,921,064           2,032,681     1,237,981     1981-1982
  Twenty-Nine Palms, California
Village Apartments             51          1,439,868     65,245         1,708,223           1,773,468     1,181,058     1981-1982
  La Follette, Tennessee
Village Grove Apartments      104          3,454,706    416,000         4,559,583           4,975,583     2,672,565          1974
  Corona, California
Vicente Geigel Polanco Apts.   80          2,579,965    107,685         2,936,652           3,044,337     1,716,445     1981-1982
  Issabela, Puerto Rico
Vista De Jagueyes              73          2,597,665    102,554         3,244,694           3,347,248     2,029,340     1981-1982
  Aguas Buenas, Puerto Rico
Westgate Apartments            72          1,058,378     80,000         1,480,833           1,560,833       740,089     1980-1981
  Albertville, Alabama
Wilderness Trail Manor        124          5,231,477    191,542         6,567,303           6,758,845     4,071,213          1982
  Pineville, Kentucky
Wilkes Towers                  72          2,031,360     32,471         2,303,197           2,335,668       949,985     1981-1982
  Wilkesboro, North Carolina
Additional basis of real estate
due to REAL III's capital
contribution to investee limited
partnership                                             769,172         9,502,360          10,271,532     6,458,758  
                              -----      ----------- ----------      ------------        ------------   -----------   
TOTAL                         3,062      $88,765,270 $8,828,183      $122,989,515        $131,817,698   $79,151,083 
                              =====      =========== ==========      ============        ============   ===========          

</TABLE>

<PAGE>   36

                                                                    SCHEDULE III
                                                                     (CONTINUED)

                       REAL ESTATE ASSOCIATES LIMITED III
              REAL ESTATE AND ACCUMULATED DEPRECIATION OF PROPERTY
                       HELD BY LOCAL LIMITED PARTNERSHIPS
                        IN WHICH REAL III HAS INVESTMENTS
                        DECEMBER 31, 1997, 1996 AND 1995


NOTES:    1.        Each local limited partnership has developed, owns and
                    operates the housing project. Substantially all projects
                    costs, including construction period interest expense, were
                    capitalized by the limited partnerships.

          2.        Depreciation is provided for by various methods over the
                    estimated useful lives of Projects. The estimated composite
                    useful lives of the buildings are generally from 25 to 40
                    years.

          3.        Investments in property and equipment:


<TABLE>
<CAPTION>
                                                              Buildings,
                                                              Furnishings,
                                               Land           and Equipment         Total
                                           ------------       ------------       ------------
<S>                                        <C>                <C>                <C>         
          Balance, January 1, 1995         $  8,606,844       $119,708,271       $128,315,115

          Net additions during 1995              79,359            826,700            906,059
                                           ------------       ------------       ------------

          Balance, December 31, 1995          8,686,203        120,534,971        129,221,174

          Net additions during 1996             136,210          1,183,455          1,319,665
                                           ------------       ------------       ------------

          Balance, December 31, 1996          8,822,413        121,718,426        130,540,839

          Net additions during 1997               5,770          1,271,089          1,276,859
                                           ------------       ------------       ------------

          Balance, December 31, 1997       $  8,828,183       $122,989,515       $131,817,698
                                           ============       ============       ============
</TABLE>


<PAGE>   37

                                                                    SCHEDULE III
                                                                     (CONTINUED)

                       REAL ESTATE ASSOCIATES LIMITED III
              REAL ESTATE AND ACCUMULATED DEPRECIATION OF PROPERTY
                       HELD BY LOCAL LIMITED PARTNERSHIPS
                        IN WHICH REAL III HAS INVESTMENTS
                                DECEMBER 31, 1997


<TABLE>
<CAPTION>
                                            Buildings,
                                           Furnishings,
                                               And
                                            Equipment
                                           -----------
          Accumulated Depreciation:
          -------------------------
<S>                                        <C>        
          Balance, January 1, 1995         $68,343,869

          Net additions during 1995          3,423,206
                                           -----------

          Balance, December 31, 1995        71,767,075

          Net additions during 1996          3,766,356
                                           -----------

          Balance, December 31, 1996        75,533,431

          Net additions during 1997          3,617,652
                                           -----------

          Balance, December 31, 1997       $79,151,083
                                           ===========

</TABLE>

<PAGE>   38


PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:

REAL ESTATE ASSOCIATES LIMITED III (the "Partnership") has no directors or
executive officers of its own.

National Partnership Investment Corp. ("NAPICO" or "the Managing General
Partner") is a wholly-owned subsidiary of Casden Investment Company, an
affiliate of The Casden Company. The following biographical information is
presented for the directors and executive officers of NAPICO with principal
responsibility for the Partnership's affairs.

CHARLES H. BOXENBAUM, 68, Chairman of the Board of Directors and Chief Executive
Officer of NAPICO.

Mr. Boxenbaum has been associated with the NAPICO since its inception. He has
been active in the real estate industry since 1960, and prior to joining NAPICO
was a real estate broker with the Beverly Hills firm of Carl Rhodes Company.

Mr. Boxenbaum has been a guest lecturer at national and state realty
conventions, certified properties exchanger's seminars, Los Angeles Town Hall,
National Association of Home Builders, International Council of Shopping
Centers, Society of Conventional Appraisers, California Real Estate Association,
National Institute of Real Estate Brokers, Appraisal Institute, various mortgage
banking seminars, and the North American Property Forum held in London, England.
In 1963, he was the winner of the Snyder Award, the highest annual award offered
by the National Association of Real Estate Boards for Best Exchange. He is one
of the founders and a past director of the First Los Angeles Bank, organized in
November 1974. Mr. Boxenbaum was a member of the Board of Directors of the
National Housing Council. Mr. Boxenbaum received his Bachelor of Arts degree
from the University of Chicago.

BRUCE E. NELSON, 46, President and a director of NAPICO.

Mr. Nelson joined the NAPICO in 1980 and became President in February 1989. He
is responsible for the operations of all NAPICO sponsored limited partnerships.
Prior to that he was primarily responsible for the securities aspects of the
publicly offered real estate investment programs. Mr. Nelson is also involved in
the identification, analysis, and negotiation of real estate investments.

From February 1979 to October 1980, Mr. Nelson held the position of Associate
General Counsel at Western Consulting Group, Inc., private residential and
commercial real estate syndicators. Prior to that time Mr. Nelson was engaged in
the private practice of law in Los Angeles. Mr. Nelson received his Bachelor of
Arts degree from the University of Wisconsin and is a graduate of the University
of Colorado School of Law. He is a member of the State Bar of California and is
a licensed real estate broker in California and Texas.

ALAN I. CASDEN, 52, Chairman of The Casden Company, an affiliate of Casden
Properties (formerly CoastFed Properties), a director and member of the audit
committee of NAPICO, and chairman of the Executive Committee of NAPICO.

Mr. Casden is Chairman of the Board, Chief Executive Officer and sole
shareholder of The Casden Company and Casden Investment Company. Prior to that,
he was the president and chairman of Mayer Group, Inc., which he joined in 1975.
He is also chairman of Mayer Management, Inc., a real estate management firm.
Mr. Casden has been involved in approximately $3 billion of real estate
financings and sales and has been responsible for the development and
construction of more than 12,000 apartment units and 5,000 single-family homes
and condominiums.


<PAGE>   39

Mr. Casden is a member of the American Institute of Certified Public Accountants
and of the California Society of Certified Public Accountants. Mr. Casden is a
member of the advisory board of the National Multi-Family Housing Conference,
the Multi-Family Housing Council, and the President's Council of the California
Building Industry Association. He also serves on the advisory board to the
School of Accounting of the University of Southern California. He holds a
Bachelor of Science and a Masters in Business Administration degree from the
University of Southern California.

HENRY C. CASDEN, 54, President, Chief Operating Officer and Secretary of The
Casden Company and a director and secretary of NAPICO.

Mr. Casden has been President and Chief Operating Officer of The Casden Company,
as well as a director of NAPICO since February 1988. He became secretary of both
companies in late 1994. From 1982 to 1988, Mr. Casden was of counsel and a
partner in the Los Angeles law firm of Troy, Casden & Gould. From 1978 to 1981,
he was of counsel and a partner in the Los Angeles law firm of Loeb & Loeb. From
1972 to 1978, Mr. Casden was a member of the Beverly Hills law firm of Fink &
Casden, Professional Corporation.

Mr. Casden received his Bachelor of Arts degree from the University of
California at Los Angeles, and is a graduate of the University of San Diego Law
School. Mr. Casden is a member of the State Bar of California and has numerous
professional affiliations.

BOB SCHAFER, 56, Senior Vice President of Finance

Mr. Schafer joined NAPICO in 1984 and is the Corporate Controller responsible
for the financial reporting function of the Company. Prior to this, he was a
Group and Division Controller at Bergen Brunswig for over eight years,
Controller at a Flintkote subsidiary for over four years, and Assistant
Controller at an electronics subsidiary of General Electric for two years.

Mr. Schafer is a member of the California Society of Certified Public
Accountants. He holds a Bachelor of Science degree in accounting from Woodbury
University, Los Angeles.

PATRICIA W. TOY, 68, Senior Vice President - Communications and Assistant
Secretary.

Mrs. Toy joined NAPICO in 1977, following her receipt of an MBA from the
Graduate School of Management, UCLA. From 1952 to 1956, Mrs. Toy served as a
U.S. Naval Officer in communications and personnel assignments. She holds a
Bachelor of Arts Degree from the University of Nebraska.

MARK L. WALTHER, 37, Executive Vice President, General Counsel and Assistant
Secretary.

Mr. Walther joined NAPICO in 1987 and is responsible for the legal affairs of
the NAPICO sponsored limited partnerships. Prior to joining NAPICO, Mr. Walther
worked in the San Francisco law firm of Browne and Kahn which specialized in
construction litigation. Mr. Walther received his Bachelor of Arts Degree in
Political Science from the University of California, Santa Barbara and is a
graduate of the University of California, Davis, School of Law. He is a member
of the State Bar of Hawaii.

NAPICO and several of its officers, directors and affiliates, including Charles
H. Boxenbaum, Bruce E. Nelson and Alan I. Casden, consented to the entry, on
June 25, 1997, of an administrative cease and desist order by the U.S.
Securities and Exchange Commission (the "Commission"), without admitting or
denying any of the findings made by the Commission. The Commission found that
NAPICO and others had violated certain federal securities laws in connection
with transactions unrelated to the Partnership. The Commission's order did not
impose any cost, burden or penalty on any partnership managed by NAPICO and
does not impact NAPICO's ability to serve as the Partnership's Managing General
Partner.
<PAGE>   40

ITEM 11.   MANAGEMENT RENUMERATION AND TRANSACTIONS

Real Estate Associates Limited III has no officers, employees or directors.
However, under the terms of the Restated Certificate and Agreement of Limited
Partnership, the Partnership is obligated to pay the Corporate General Partner
an annual management fee The annual management fee is approximately equal to .4
percent of the invested assets, including the Partnership's allocable share of
the mortgages related to real estate properties held by local limited
partnerships is to be paid to the general partners. The fee is earned beginning
in the month the Partnership makes its initial contribution to the limited
partnership. In addition, the Partnership reimburses the Corporate General
Partner for certain expenses.

An affiliate of the Corporate General Partner is responsible for the on-site
property management for a property owned by a limited partnership in which the
Partnership has invested.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT:

(a)       Security Ownership of Certain Beneficial Owners

          The general partners own all of the outstanding general partnership
          interests of REAL III; no person is known to own beneficially in
          excess of 5% of the outstanding limited partnership interests.

(b)       At December 31, 1997, security ownership of management is as listed:

<TABLE>
<CAPTION>
                                                                   Amount and           Percentage of
                                                                   Nature of             Outstanding
                                       Name of                     Beneficial              Limited
Title of Class                      Beneficial Owner                  Owner            Partner Interests
--------------                      ----------------               ----------          -----------------
<S>                              <C>                               <C>                                
Limited Partnership Interest     Coast Housing Investments
                                 Associates  (CHIA)
                                 9090 Wilshire Blvd., #201
                                 Beverly Hills, CA 90211               30,000                 *

Limited Partnership Interest     Charles H. Boxenbaum
                                 780 Latimer Road
                                 Santa Monica, CA 90402                17,500                 *

Limited Partnership Interest     Bruce E. Nelson
                                 7036 Grasswood Avenue
                                 Malibu, CA 90265                       5,000                 *
</TABLE>

 *  Cumulative Limited Partnership interests owned by corporate officers
    or the general partner is less than 1% interest of total outstanding
    Limited Partnership interests.


<PAGE>   41

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:

The Partnership has no officers, directors or employees of its own. All of its
affairs are managed by the Corporate General Partner, National Partnership
Investments Corp. The Partnership is obligated to NAPICO for an annual
management fee equal to .4 percent of the original invested assets of the
limited partnerships. Invested assets is defined as the costs of acquiring
project interests, including the proportionate amount of the mortgage loans
related to the Partnership's interest in the capital accounts of the respective
partnerships. The management fee was $454,800 for each of the three years in the
period ended December 31, 1997.

The Partnership reimburses NAPICO for certain expenses. The reimbursement to
NAPICO was $35,227, $32,176 and $29,927 in 1997, 1996 and 1995, respectively,
and is included in operating expenses.

An affiliate of NAPICO is the general partner in one of the limited partnerships
in which the Partnership has an investment, and another affiliate receives
property management fees of approximately 5 percent of its revenue. The
affiliate received property management fees of $17,408, $16,128 and $16,128 in
1997, 1996 and 1995, respectively.

A real estate investment trust ("REIT") organized by an affiliate of NAPICO 
has advised the Partnership that it intends to make a proposal to purchase 
from the Partnership certain of the limited partnership interests held for
investment by the Partnership.

The REIT proposes to purchase such limited partner interests for cash, which it
plans to raise in connection with a private placement of its equity securities.
The purchase is subject to, among other things, (i) consummation of such private
placement by the REIT; (ii) the purchase of the general partner interests in the
local limited partnerships by the REIT; (iii) the approval of HUD and certain
state housing finance agencies; (iv) the consent of the limited partners to the
sale of the local limited partnership interests held for investment by REAL III;
and (v) the consummation of a minimum number of purchase transactions with other
Casden affiliated partnerships. As of March 31, 1998, the REIT had completed
buy-out negotiations with a majority of the general partners of the local
limited partnerships.

A proxy is contemplated to be sent to the limited partners setting forth the
terms and conditions of the purchase of the limited partners' interests held for
investment by the Partnership, together with certain amendments to the
Partnership Agreement and other disclosures of various conflicts of interest in
connection with the transaction.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:

FINANCIAL STATEMENTS

Report of Independent Public Accountants.

Balance Sheets as of December 31, 1997 and 1996.

Statements of Operations for the years ended December 31, 1997, 1996 and 1995.

Statements of Partners' Equity (Deficiency) for the years ended December 31,
1997, 1996 and 1995.

Statements of Cash Flow for the years ended December 31, 1997, 1996 and 1995.

Notes to Financial Statements.

FINANCIAL STATEMENT SCHEDULES
APPLICABLE TO REAL ESTATE ASSOCIATES LIMITED III, REAL ESTATE ASSOCIATES AND THE
LIMITED PARTNERSHIPS IN WHICH REAL ESTATE ASSOCIATES LIMITED III AND REAL ESTATE
ASSOCIATES HAVE INVESTMENTS:

Schedule - Investments in Limited Partnerships, December 31, 1997, 1996 and
1995.

Schedule III - Real estate and accumulated depreciation, December 31, 1997.

The remaining schedules are omitted because the required information is included
in the financial statements and notes thereto or they are not applicable or
not required.


<PAGE>   42

EXHIBITS

(3)       Articles of incorporation and bylaws: The registrant is not
          incorporated. The Partnership Agreement was filed with Form S-11
          #268983 incorporated herein by reference.

(10)      Material contracts: The registrant is not party to any material
          contracts, other than the Restated Certificate and Agreement of
          Limited Partnership dated January 5, 1981, and the thirty-three
          contracts representing the Partnership investment directly or
          indirectly in local limited partnerships as previously filed at the
          Securities Exchange Commission, File 268983 which is hereby
          incorporated by reference.

REPORTS ON FORM 8-K

A report on Form 8-K dated February 14, 1997, was filed with the Securities and
Exchange Commission. This Form 8-K disclosed that the registrant became aware of
an entity conducting a tender offer for units in the registrant. The general
partners on behalf of the registrant, by letter, transmitted on or about
February 14, 1997, advised the limited partners that the general partners
expressed no opinion regarding this offer, but urged the limited partners to
consult with their tax advisors about the tax consequences that could result
from a sale of their units.


<PAGE>   43

                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) 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 in the City of Los Angeles,
State of California.


REAL ESTATE ASSOCIATES LIMITED III

By:   NATIONAL PARTNERSHIP INVESTMENTS CORP.
      The General Partner



/s/ CHARLES H. BOXENBAUM
------------------------------------------
Charles H. Boxenbaum
Chairman of the Board of Directors
and Chief Executive Officer



/s/ BRUCE E. NELSON
------------------------------------------
Bruce E. Nelson
Director and President



/s/ ALAN I. CASDEN
------------------------------------------
Alan I. Casden
Director



/s/ HENRY C. CASDEN
------------------------------------------
Henry C. Casden
Director


/s/ BOB E. SCHAFER
------------------------------------------
Bob E. Schafer
Senior Vice President of Finance