<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, 1998

                             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.

Prior to December 30, 1998, NAPICO was a wholly owned subsidiary of Casden
Investment Corporation ("CIC"), which is wholly owned by Alan I. Casden. On
December 30, 1998, Casden Properties Operating Partnership, L.P. (the "Operating
Partnership"), a majority owned subsidiary of Casden Properties Inc., a real
estate investment trust organized by Alan I. Casden, purchased a 95.25% economic
interest in NAPICO. 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 11 local limited partnerships as
of December 31, 1998, and a general partner interest in Real Estate Associates
("REA") which in turn holds limited partnership interests in an additional 1
limited partnership; therefore, REAL III holds directly or indirectly through
REA, investments in 12 local limited partnerships. The general partners of REA
are REAL III and NAPICO. In December 1998, the Partnership sold its interest in
20 local limited partnerships to the Operating Partnership. 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, the United States Department of Housing and
Urban Development ("HUD") has determined not to renew the Housing Assistance
Payment ("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. The payments under the renewed HAP Contracts are
not expected to be in an amount that would provide sufficient cash flow to
permit owners of properties subject to HAP Contracts to meet the debt service
requirements of existing loans insured by the Federal Housing Administration of
HUD ("FHA") unless such mortgage loans are restructured. 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 ("MAHRAA"),
which was adopted in October 1997, provides for the restructuring of mortgage
loans insured by the FHA with respect to properties subject to the Section 8
program. Under MAHRAA, an FHA-insured mortgage loan can be restructured into a
first mortgage loan which will be amortized on a current basis and a low
interest second mortgage loan payable to FHA which



<PAGE>   3

will only be payable on maturity of the first mortgage loan. This restructuring
results in a reduction in annual debt service payable by the owner of the
FHA-insured mortgage loan and is expected to result in an insurance payment from
FHA to the holder of the FHA-insured loan due to the reduction in the principal
amount. MAHRAA also phases out project-based subsidies on selected properties
serving families not located in rental markets with limited supply, converting
such subsidies to a tenant-based subsidy.

MAHRAA provides that properties begin the restructuring process in federal
fiscal year 1999 (beginning October 1, 1998). On September 11, 1998, HUD issued
interim regulations implementing MAHRAA and final regulations are expected to be
issued in 1999. With respect to the local limited partnerships' expiring HAP
Contracts, it is expected that the HAP payments will be reduced or terminated
pursuant to the terms of MAHRAA.

When the HAP Contracts are subject to renewal, there can be no assurance that
the local limited partnerships in which the Partnership has an investment will
be permitted to restructure its mortgage indebtedness under MAHRAA. In addition,
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 is uncertain.

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
or 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 1998, the projects in which REAL III had invested were substantially
rented. The following is a schedule of the status as of December 31, 1998, 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, 1998

<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>
Charlotte Lakeview, Riverview          553          114/153          529           96%
 Residential Project
 Rochester, NY

Hidden Pines Apts.                      40             40/0           37           93%
 Greenville, MI

Jenks School Apts.                      83             82/0           82           99%
 Pawtucket, RI

Lakeside Apts.                          32             0/13           31           97%
 Stuart, FL

Ramblewood Apts.                        64             0/13           58           91%
 Fort Payne, AL

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

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

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

Village Apts.                           50             50/0           50          100%
 La Follette, TN
</TABLE>




<PAGE>   5

            SCHEDULE OF PROJECTS OWNED BY LOCAL LIMITED PARTNERSHIPS
                       IN WHICH REAL III HAS AN INVESTMENT
                          DECEMBER 31, 1998 (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> 
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             65             90%
 Albertville, AL
                               -----          -------          -----          -----

TOTALS                         1,181          797/195          1,139             96%
                               =====          =======          =====          =====
</TABLE>



<PAGE>   6

ITEM 2. PROPERTIES:

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


ITEM 3. LEGAL PROCEEDINGS:

On August 27, 1998, two investors holding an aggregate of eight units of limited
partnership interests in Real Estate Associates Limited III (an affiliated
partnership in which NAPICO is the managing general partner) and two investors
holding an aggregate of five units of limited partnership interest in Real
Estate Associates Limited VI (another affiliated partnership in which NAPICO is
the managing general partner) commenced an action in the United States District
Court for the Central District of California against the Partnership, NAPICO and
certain other affiliated entities. The complaint alleges that the defendants
breached their fiduciary duty to the limited partners of certain NAPICO managed
partnerships and made materially false and misleading statements in the consent
solicitation statements sent to the limited partners of such partnerships
relating to approval of the transfer of partnership interests in limited
partnerships, owning certain of the properties, to the Operating Partnership
organized by an affiliate of NAPICO. The plaintiffs seek preliminary and
permanent injunctive relief and other equitable relief, as well as compensatory
and punitive damages. The managing general partner of such NAPICO managed
partnerships and the other defendants believe that the plaintiffs' claims are
without merit and intend to contest the action vigorously.

As of December 31, 1998, REAL III's Corporate General Partner was plaintiff or
defendant in several other lawsuits. None of these suits were related to REAL
III.


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

In August 1998, a consent solicitation statement was 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, by the Operating
Partnership, together with certain amendments to the Partnership Agreement and
other disclosures of various conflicts of interest in connection with the
proposed transaction. Prior to the sale of the partnership interests, the
consents of the limited partners to the sale and amendments to the Partnership
Agreement were obtained.

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, 1998 there were 1,995 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. In March 1999, the Partnership made distributions of
$6,881,025 to the limited partners and $69,505 to the general partners, which
included using proceeds from the sale of the partnership interests.



<PAGE>   7


ITEM 6.       SELECTED FINANCIAL DATA:



<TABLE>
<CAPTION>
                                                           Year Ended December 31,
                             -----------------------------------------------------------------------------------
                                 1998              1997              1996              1995             1994
                             ------------      ------------      ------------      ------------      -----------
<S>                          <C>               <C>               <C>               <C>               <C>       
Loss From Operations         $   (928,096)     $   (443,767)     $   (518,472)     $   (567,421)     $ (577,031)
                                                                                                     
Gain on Sale of  Limited                                                                             
   Partnership Interests          2647716                --                --                --              --
                                                                                                     
Distributions From                                                                                   
   Limited Partnerships                                                                              
   Recognized as Income         1,508,602         1,072,912           858,869           765,514         683,491
                                                                                                     
Equity in Income of                                                                                  
   Limited Partnerships                                                                              
   and Amortization of                                                                               
   Acquisition Costs              564,059           255,652           383,682           887,919         539,729
                             ------------      ------------      ------------      ------------      ----------
                                                                                                     
Net Income                   $  3,792,281      $    884,797      $    724,079      $  1,086,012      $  646,189
                             ============      ============      ============      ============      ==========
                                                                                                     
Net Income per Limited                                                                               
   Partnership Interest      $        331      $         77      $         63      $         95      $       56
                             ============      ============      ============      ============      ==========
                                                                                                     
Total assets                 $ 14,026,790      $ 11,960,231      $ 10,933,018      $ 10,185,039      $9,095,839
                             ============      ============      ============      ============      ==========
                                                                                                     
Investments in Limited                                                                               
   Partnerships              $    744,457      $  1,249,421      $  1,063,487      $    930,576      $  690,570
                             ============      ============      ============      ============      ==========
                                                                                                     
Notes Payable                $         --      $  1,510,000      $  1,510,000      $  1,510,000      $1,510,000
                             ============      ============      ============      ============      ==========
</TABLE>



<PAGE>   8

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. It is not expected that any
of the local limited partnerships in which the Partnership has invested will
generate cash flow sufficient to provide for distributions to the Partnership's
limited partners in any material amount. The Partnership made a cash
distribution to investors in March 1999, primarily using proceeds from the
disposition of its investments in certain limited partnerships.

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, 1998, the Partnership has investments in 12 limited
partnerships, all of which own housing projects that were substantially all
rented. The Partnership sold its interests in 20 local partnerships in December
1998. 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 are 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. At December 31, 1998, the Partnership has a positive investment balance
in only one 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 $99,000, $55,000 and $(453,000) for the years
ended December 31, 1998, 1997 and 1996, 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 $564,059, $255,652 and $383,682 for the years ended December 31,
1998, 1997 and 1996, respectively. Included in recognized equity in income of
limited partnerships for 1998, 1997 and 1996 is $225,000, $0 and $174,000,
respectively, is 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 $15,741,000 and $20,770,000 as
of December 31, 1998 and 1997, respectively.




<PAGE>   9

Distributions from the local limited partnerships in which the Partnership did
not have a positive investment balance were $1,508,602, $1,072,912 and $858,869
for the years ended December 31, 1998, 1997 and 1996, respectively. These
amounts were recognized as income on the accompanying statements of operations,
in accordance with the equity method of accounting.

As of December 31, 1998, 1997 and 1996, the Partnership has cash and cash
equivalents of $11,331,803, $10,575,810 and $9,734,531, respectively.
Substantially all of these amounts are on deposit with two high credit quality
financial institutions, earning interest. Interest income has been increasing as
a result of increasing cash and cash equivalent balances. In addition, as a
result of changing financial institutions in 1997 where the cash and cash
equivalents are on deposit, the interest rate earned on such deposits in 1998
and 1997 was significantly greater than in prior years. This resulted in the
Partnership earning $494,000, $478,000 and $302,000 in interest income for the
years ended December 31, 1998, 1997 and 1996, 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 did not
change until the end of the three year period ended December 31, 1998,
management fees have remained constant at $454,800 for each of these years.

Until the sale of the partnership interests on December 30, 1998, the
Partnership was obligated on non-recourse notes payable of $1,510,000 which bore
interest at 10 percent per annum and had principal maturities ranging from June
2020 to March 2024. The notes and related interest were payable from cash flow
generated from operations of the related rental properties as defined in the
notes. These obligations were collateralized by the Partnership's investments in
the limited partnerships. Unpaid interest was due at maturity of the notes.
Because no payments were made on these notes through the sale of the limited
partnership interests, interest expense remained constant at $151,000 for each
of the three years in the period ended December 31, 1998. The Partnership was
relieved of these notes and related accrued interest in connection with the sale
of the partnership interests.

Under recent adopted law and policy, the United States Department of Housing and
Urban Development ("HUD") has determined not to renew the Housing Assistance
Payment ("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. The payments under the renewed HAP Contracts are
not expected to be in an amount that would provide sufficient cash flow to
permit owners of properties subject to HAP Contracts to meet the debt service
requirements of existing loans insured by the Federal Housing Administration of
HUD ("FHA") unless such mortgage loans are restructured. 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 ("MAHRAA"),
which was adopted in October 1997, provides for the restructuring of mortgage
loans insured by the FHA with respect to properties subject to the Section 8
program. Under MAHRAA, an FHA-insured mortgage loan can be restructured into a
first mortgage loan which will be amortized on a current basis and a low
interest second mortgage loan payable to FHA which will only be payable on
maturity of the first mortgage loan. This restructuring results in a reduction
in annual debt service payable by the owner of the FHA-insured mortgage loan and
is expected to result in an insurance payment from FHA to the holder of the
FHA-insured loan due to the reduction in the principal amount. MAHRAA also
phases out project-based subsidies on selected properties serving families not
located in rental markets with limited supply, converting such subsidies to a
tenant-based subsidy.




<PAGE>   10

MAHRAA provides that properties begin the restructuring process in federal
fiscal year 1999 (beginning October 1, 1998). On September 11, 1998, HUD issued
interim regulations implementing MAHRAA and final regulations are expected to be
issued in 1999. With respect to the local limited partnerships' expiring HAP
Contracts, it is expected that the HAP payments will be reduced or terminated
pursuant to the terms of MAHRAA.

When the HAP Contracts are subject to renewal, there can be no assurance that
the local limited partnerships in which the Partnership has an investment will
be permitted to restructure its mortgage indebtedness under MAHRAA. In addition,
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 is uncertain.

As a result of the foregoing, the Partnership in 1997 undertook 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 $627,059 and $140,915 for the years ended December 31, 1998 and 1997,
respectively, and are included in general and administrative expenses.

On December 30, 1998, the Partnership sold its limited partnership interests in
20 local limited partnerships, with a total carrying value of $988,570, to the
Operating Partnership. The sale resulted in proceeds to the Partnership of
$1,950,530 and a net gain of $2,647,716, after being relieved of notes and
interest payable of $1,947,962 and incurring selling costs of $262,206. The cash
proceeds were held in escrow at December 31, 1998 and received subsequent to
year-end. In March 1999, the Partnership made cash distributions of $6,881,025
to the limited partners and $69,505 to the general partners, which included
using proceeds from the sale of the partnership interests.

The Operating Partnership purchased such limited partner interests for cash,
which it raised in connection with a private placement of its equity securities.
The purchase was subject to, among other things, (i) the purchase of the general
partner interests in the local limited partnerships by the Operating
Partnership; (iii) the approval of HUD and certain state housing finance
agencies; and (iii) the consent of the limited partners to the sale of the local
limited partnership interests held for investment by the Partnership.

In August 1998, a consent solicitation statement was 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 proposed transaction. Prior to the
sale of the partnership interests, the consents of the limited partners to the
sale and amendments to the Partnership Agreement were obtained.

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 $83,573, $76,993 and $150,156 for the
years ended December 31, 1998, 1997 and 1997, respectively. Administrative
expenses were $732,245, $238,598 and $64,982 for the years ended December 31,
1998, 1997 and 1996, respectively. Included in administrative expenses are
reimbursements to NAPICO for certain expenses, which totaled $35,231, $35,227
and $32,176 for the years ended December 31, 1998, 1997 and 1996, respectively.
Also included in administrative expenses for 1998 and 1997 is $627,059 and
$140,915, respectively, 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, 1998, 1997 and 1996. 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.




<PAGE>   11

Total revenue for the 32 local partnerships has remained fairly constant, and
was $22,480,000, $23,173,000 and $22,387,000 for the years ended December 31,
1998, 1997 and 1996, respectively. Revenues were higher in 1997 as compared to
1998 and 1996 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 $22,380,000, $22,652,000 and $23,222,000 for the years ended December 31,
1998, 1997 and 1996, respectively. Expenses were greater in 1996 than in 1997
and 1998 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 1998, 1997 and
1996 aggregated $101,000, $59,000 and $(835,000), respectively. The income
(losses) allocated to the Partnership were $99,000, $55,000 and $(453,000) for
1998, 1997 and 1996, 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, concurrent
inflation and changing legislation which could increase vacancy levels, rental
payment defaults, and operating expenses, which in turn, could substantially
increase the risk of operating losses for the projects.

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>   12

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A California limited partnership)

                              FINANCIAL STATEMENTS,
                          FINANCIAL STATEMENT SCHEDULES
                   AND INDEPENDENT PUBLIC ACCOUNTANTS' REPORT
                                DECEMBER 31, 1998



<PAGE>   13

                    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, 1998 and 1997,
and the related statements of operations, partners' equity (deficiency) and cash
flows for each of the three years in period ended December 31, 1998. Our audits
also included the financial statement schedules listed in the index in 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 5 percent and 4 percent of
total assets as of December 31, 1998 and 1997, respectively, and the equity in
income of these limited partnerships represents 11 percent, 19 percent and 23
percent of the total net income of the Partnership for the years ended December
31, 1998, 1997 and 1996, 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,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998 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, 1999


<PAGE>   14

                         [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>   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, 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>   16
                           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, 1998,
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, 1998, 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 5, 1999, on our
consideration of 300 Broadway Associates' internal control and reports dated
February 5, 1999 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
February 5, 1999
<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, 1998 AND 1997

                                     ASSETS


<TABLE>
<CAPTION>
                                                         1998                 1997 
                                                     ------------         ------------
<S>                                                  <C>                  <C>         
INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2)         $    744,457         $  1,249,421

CASH AND CASH EQUIVALENTS (Note 1)                     11,331,803           10,575,810

CASH DUE FROM ESCROW (Note 2)                           1,950,530                   --

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

          TOTAL ASSETS                               $ 14,026,790         $ 11,960,231
                                                     ============         ============


                           LIABILITIES AND PARTNERS' EQUITY

LIABILITIES:
     Notes payable (Notes 3 and 7)                   $         --         $  1,510,000
     Interest payable (Notes 3 and 7)                          --              414,277
     Accounts payable                                     308,747              110,192
                                                     ------------         ------------

                                                          308,747            2,034,469
                                                     ------------         ------------

COMMITMENTS AND CONTINGENCIES (Notes 4 and 5)


PARTNERS' EQUITY (DEFICIENCY):
    General partners                                      (61,795)             (99,718)
    Limited partners                                   13,779,838           10,025,480
                                                     ------------         ------------

                                                       13,718,043            9,925,762
                                                     ------------         ------------
           TOTAL LIABILITIES AND PARTNERS' EQUITY    $ 14,026,790         $ 11,960,231
                                                     ============         ============
</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, 1998, 1997 AND 1996



<TABLE>
<CAPTION>
                                                          1998             1997             1996
                                                      -----------      -----------      -----------
<S>                                                   <C>              <C>              <C>        
INTEREST AND OTHER INCOME                             $   493,522      $   477,624      $   302,466
                                                      -----------      -----------      -----------

OPERATING EXPENSES:
       Legal and accounting                                83,573           76,993          150,156
       Management fees - general partner (Note 4)         454,800          454,800          454,800
       Interest (Note 3)                                  151,000          151,000          151,000
       Administrative  (Note 4)                           732,245          238,598           64,982
                                                      -----------      -----------      -----------

            Total operating expenses                    1,421,618          921,391          820,938
                                                      -----------      -----------      -----------

LOSS FROM OPERATIONS                                     (928,096)        (443,767)        (518,472)

GAIN ON SALE OF LIMITED PARTNERSHIP
      INTERESTS (Note 2)                                2,647,716               --               --

DISTRIBUTIONS FROM LIMITED PARTNERSHIPS
      RECOGNIZED AS INCOME (Note 2)                     1,508,602        1,072,912          858,869

EQUITY IN INCOME OF LIMITED
      PARTNERSHIPS AND AMORTIZATION OF 
      ACQUISITION COSTS (Note 2)                          564,059          255,652          383,682
                                                      -----------      -----------      -----------

NET INCOME                                            $ 3,792,281      $   884,797      $   724,079
                                                      ===========      ===========      ===========

NET INCOME PER LIMITED PARTNERSHIP
     INTEREST (Note 1)                                $       331      $        77      $        63
                                                      ===========      ===========      ===========
</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, 1998, 1997 AND 1996


<TABLE>
<CAPTION>
                              General          Limited
                              Partners         Partners          Total
                             -----------      -----------     -----------
<S>                          <C>              <C>             <C>        
EQUITY (DEFICIENCY),
     January 1, 1996         $  (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

     Net income for 1998          37,923        3,754,358       3,792,281
                             -----------      -----------     -----------

EQUITY (DEFICIENCY),
     December 31, 1998       $   (61,795)     $13,779,838     $13,718,043
                             ===========      ===========     ===========
</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, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                            1998              1997              1996
                                                                        ------------      ------------      ------------
<S>                                                                     <C>               <C>               <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
      Net income                                                        $  3,792,281      $    884,797      $    724,079
      Adjustments to reconcile net income to net cash
        provided by operating activities:
          Gain on sale of partnership interests                           (2,647,716)
          Equity in income of limited partnerships and
              amortization of acquisition costs                             (564,059)         (255,652)         (383,682)
          Decrease (increase) in other assets                                135,000                --           (34,500)
          Increase accrued interest payable                                   23,685                --                --
          Increase in accounts payables                                      198,555           142,416            23,900
                                                                        ------------      ------------      ------------

               Net cash provided by operating activities                     937,746           771,561           329,797
                                                                        ------------      ------------      ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Costs related to sale of partnership interests                        (262,206)
      Distribution from limited partnerships
           recognized as return of capital                                   305,634            69,718           255,471
      Capital contributions and advances
           to limited partnerships                                          (225,181)               --            (4,700)
      Decrease in short term investments                                          --                --           125,000
                                                                        ------------      ------------      ------------

                Net cash (used in) provided by investing activities         (181,753)           69,718           375,771
                                                                        ------------      ------------      ------------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                    755,993           841,279           705,568

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                              10,575,810         9,734,531         9,028,963
                                                                        ------------      ------------      ------------

CASH AND CASH EQUIVALENTS, END OF YEAR                                  $ 11,331,803      $ 10,575,810      $  9,734,531
                                                                        ============      ============      ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
         Cash paid during the year for interest                         $    127,315      $    111,326      $    121,159
                                                                        ============      ============      ============

SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
             See Note 2 to financial statements regarding notes and interest payable
</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, 1998

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.

        Prior to December 30, 1998, NAPICO was a wholly owned subsidiary of
        Casden Investment Corporation ("CIC"), which is wholly owned by Alan I.
        Casden. On December 30, 1998, Casden Properties Operating Partnership,
        L.P. (the "Operating Partnership"), a majority owned subsidiary of
        Casden Properties Inc., a real estate investment trust organized by Alan
        I. Casden, purchased a 95.25% economic interest in NAPICO. The business
        of REAL III 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.

        On December 30, 1998, the Partnership sold its interests in 20 local
        limited partnerships for $1,950,530 to the Operating Partnership.



                                       5
<PAGE>   24


                       REAL ESTATE ASSOCIATES LIMITED III
                       (A California limited partnership)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1998


1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

        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.

        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 12 limited
        partnerships as of December 31, 1998, after selling its interest in 20
        limited partnerships. The limited partnerships owned as of December 31,
        1998, residential low income rental projects consisting of 1,181
        apartment units. The mortgage loans of these projects are payable to or
        insured by various governmental agencies.



                                       6

<PAGE>   25


                       REAL ESTATE ASSOCIATES LIMITED III
                       (A California limited partnership)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1998


2.      INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)

        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 the limited partnerships in which it has invested.

        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 $15,741,000 and $20,770,000 as of
        December 31, 1998 and 1997, 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>
                                                                       1998             1997 
                                                                   -----------      -----------
<S>                                                                <C>              <C>        
        Investment balance, beginning of year                      $ 1,249,421      $ 1,063,487
        Capital contributions                                          225,181               --
        Equity in income of limited partnerships                       570,032          261,625
        Investment in limited partnerships sold                       (988,570)              --
        Amortization of capitalized acquisition costs and fees          (5,973)          (5,973)
        Cash distributions recognized as return of capital            (305,634)         (69,718)
                                                                   -----------      -----------

        Investment balance, end of year                            $   744,457      $ 1,249,421
                                                                   ===========      ===========
</TABLE>

        The difference between the investment in the accompanying balance sheets
        at December 31, 1998 and 1997, 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, 1998 and 1997 and for each of the three years in the period
        ended December 31, 1998, 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, 1998


2.      INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)

                                 Balance Sheets

<TABLE>
<CAPTION>
                                                                   1998          1997 
                                                                 --------      --------
                                                                     (in thousands)
<S>                                                              <C>           <C>     
        Land and buildings, net                                  $ 13,709      $ 52,667
                                                                 ========      ========

        Total assets                                             $ 16,672      $ 65,203
                                                                 ========      ========

        Mortgages payable                                        $ 30,089      $ 88,765
                                                                 ========      ========

        Total liabilities                                        $ 32,270      $ 93,510
                                                                 ========      ========

        Deficiency of Real Estate Associates Limited III         $(15,950)     $(28,535)
                                                                 ========      ========

        Equity of other partners                                 $    352      $    229
                                                                 ========      ========
</TABLE>


                            Statements of Operations

<TABLE>
<CAPTION>
                                                             1998         1997         1996 
                                                           --------     --------     --------
                                                                     (in thousands)
<S>                                                        <C>          <C>          <C>     
        Total revenue                                      $ 22,480     $ 23,173     $ 22,387
                                                           ========     ========     ========

        Interest expense                                   $  6,564     $  6,929     $  7,032
                                                           ========     ========     ========

        Depreciation                                       $  3,617     $  3,674     $  3,757
                                                           ========     ========     ========

        Total expenses                                     $ 22,380     $ 23,114     $ 23,222
                                                           ========     ========     ========

        Net income (loss)                                  $    101     $     59     $   (835)
                                                           ========     ========     ========

        Net income (loss) allocable to the Partnership     $     99     $     55     $   (453)
                                                           ========     ========     ========
</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.

        Prior to the sale of certain partnership interests on December 30, 1998,
        an affiliate of NAPICO was the general partner in one of the limited
        partnerships included above, and another affiliate received property
        management fees of 5 percent of its revenue. The affiliate received
        property management fees of $16,128, $17,408 and $16,128 in 1998, 1997
        and 1996, respectively.




                                       8

<PAGE>   27

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A California limited partnership)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1998


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>
                                                 1998         1997         1996 
                                                 ----      -------      -------
                                                        (in thousands)
<S>                                              <C>       <C>          <C>    
        Total assets                             $ --      $   944
                                                 ====      =======

        Total liabilities                        $ --      $ 1,785
                                                 ====      =======

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

        Equity of other partners                 $ --      $   122
                                                 ====      =======

        Total revenues                           $329      $   335      $   366
                                                 ====      =======      =======

        Net loss                                 $(95)     $   (87)     $   (47)
                                                 ====      =======      =======
</TABLE>

        The local partnership was sold to the Operating Partnership on December
        30, 1998.

        Under recent adopted law and policy, the United States Department of
        Housing and Urban Development ("HUD") has determined not to renew the
        Housing Assistance Payment ("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. The payments under the renewed HAP Contracts are not expected
        to be in an amount that would provide sufficient cash flow to permit
        owners of properties subject to HAP Contracts to meet the debt service
        requirements of existing loans insured by the Federal Housing
        Administration of HUD ("FHA") unless such mortgage loans are
        restructured. 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 ( "MAHRAA"), which was
        adopted in October 1997, provides for the restructuring of mortgage
        loans insured by the FHA with respect to properties subject to the
        Section 8 program. Under MAHRAA, an FHA-insured mortgage loan can be
        restructured into a first mortgage loan which will be amortized on a
        current basis and a low interest second mortgage loan payable to FHA
        which will only be payable on maturity of the first mortgage loan. This
        restructuring results in a reduction in annual debt service payable by
        the owner of the FHA-insured mortgage loan and is expected to result in
        an insurance payment from FHA to the holder of the FHA-insured loan due
        to the reduction in the principal amount. MAHRAA also phases out
        project-based subsidies on selected properties serving families not
        located in rental markets with limited supply, converting such subsidies
        to a tenant-based subsidy.



                                       9

<PAGE>   28


                       REAL ESTATE ASSOCIATES LIMITED III
                       (A California limited partnership)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1998


2.      INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)

        MAHRAA provides that properties begin the restructuring process in
        federal fiscal year 1999 (beginning October 1, 1998). On September 11,
        1998, HUD issued interim regulations implementing MAHRAA and final
        regulations are expected to be issued in 1999. With respect to the local
        limited partnerships' expiring HAP Contracts, it is expected that the
        HAP payments will be reduced or terminated pursuant to the terms of
        MAHRAA.

        When the HAP Contracts are subject to renewal, there can be no assurance
        that the local limited partnerships in which the Partnership has an
        investment will be permitted to restructure its mortgage indebtedness
        under MAHRAA. In addition, 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 is
        uncertain.

        As a result of the foregoing, the Partnership in 1997 undertook 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 $627,059
        and $140,915 for the years ended December 31, 1998 and 1997,
        respectively, and are included in general and administrative expenses.

        On December 30, 1998, the Partnership sold its limited partnership
        interests in 20 local limited partnerships, with a total carrying value
        of $988,570, to the Operating Partnership. The sale resulted in proceeds
        to the Partnership of $1,950,530 and a net gain of $2,647,716, after
        being relieved of notes and interest payable of $1,947,962 and incurring
        selling costs of $262,206. The cash proceeds were held in escrow at
        December 31, 1998 and were collected subsequent to year-end. In March
        1999, the Partnership made cash distributions of $6,881,025 to the
        limited partners and $69,505 to the general partners, which included
        using proceeds from the sale of the partnership interests.

        The Operating Partnership purchased such limited partner interests for
        cash, which it raised in connection with a private placement of its
        equity securities. The purchase was subject to, among other things, (i)
        the purchase of the general partner interests in the local limited
        partnerships by the Operating Partnership; (iii) the approval of HUD and
        certain state housing finance agencies; and (iii) the consent of the
        limited partners to the sale of the local limited partnership interests
        held for investment by the Partnership.

        In August 1998, a consent solicitation statement was 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
        proposed transaction. Prior to the sale of the partnership interests,
        the consents of the limited partners to the sale and amendments to the
        Partnership Agreement were obtained.





                                       10
<PAGE>   29


                       REAL ESTATE ASSOCIATES LIMITED III
                       (A California limited partnership)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1998


3.      NOTES PAYABLE

        Certain of the Partnership's investments involved purchases of
        partnership interests from partners who subsequently withdrew from the
        operating partnership. The Partnership was obligated on non-recourse
        notes payable of $1,510,000, bearing interest at 10 percent, to the
        sellers of the partnership interests. These notes were payable by the
        Partnership through REA, and had 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 were
        collateralized by REA's investment in the respective limited
        partnerships and were payable only out of cash distributions from the
        investee partnerships, as defined in the notes. Unpaid interest was due
        at maturity of the notes.

        The Partnership was relieved of these notes and related accrued interest
        in connection with the sale of the partnership interests.

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 $35,231, $35,227 and $32,176 in 1998, 1997
        and 1996, respectively, and is included in administrative expenses.

5.      CONTINGENCIES

        On August 27, 1998, two investors holding an aggregate of eight units of
        limited partnership interests in Real Estate Associates Limited III (an
        affiliated partnership in which NAPICO is the managing general partner)
        and two investors holding an aggregate of five units of limited
        partnership interest in Real Estate Associates Limited VI (another
        affiliated partnership in which NAPICO is the managing general partner)
        commenced an action in the United States District Court for the Central
        District of California against the Partnership, NAPICO and certain other
        affiliated entities. The complaint alleges that the defendants breached
        their fiduciary duty to the limited partners of certain NAPICO managed
        partnerships and made materially false and misleading statements in the
        consent solicitation statements sent to the limited partners of such
        partnerships relating to approval of the transfer of partnership
        interests in limited partnerships, owning certain of the properties, to
        the Operating Partnership organized by an affiliate of NAPICO. The
        plaintiffs seek preliminary and permanent injunctive relief and other
        equitable relief, as well as compensatory and punitive damages. The
        managing general partner of such NAPICO managed partnerships and the
        other defendants believe that the plaintiffs' claims are without merit
        and intend to contest the action vigorously.




                                       11

<PAGE>   30

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A California limited partnership)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                DECEMBER 31, 1998

5.      CONTINGENCIES (CONTINUED)

        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.

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 $372,059, between
        the estimated nine-month equity in income and the actual total for 1998
        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, 1998, 1997 AND 1996


<TABLE>
<CAPTION>
                                                                    Year Ended December 31, 1998
                                   ------------------------------------------------------------------------------------------------
                                                                         Cash            Equity
                                     Balance                            Distri-            in                            Balance
                                    January 1         Capital           butions          Income            Gain          December
Limited Partnerships                  1998         Contributions       Received          (Loss)          on Sale         31, 1998
--------------------               -----------     -------------       ---------         --------        ----------     ----------
<S>                                <C>             <C>                 <C>                <C>             <C>            <C>       
Bowin Place *                        $683,280         $                 $(39,861)         $154,970        $(798,389)       $     --
Casa de las Hermanitas *
Charlotte
Creekview Apartments *
Foothill Gardens *
Frazier Park Apartments *
Gary Manor *
Grandview Homes *
Hidden Pines Apartments
Highlawn Place *                                                         (175,156)         175,156                               --
Jenks School Apartments               566,141                             (41,229)         219,545                          744,457
Kern Villa *
Lakeside Apartments
New Baltimore Towers *                                                    (23,749)          23,749                               --
Panorama Park Apartments *                                                (25,639)          25,639                               --
Ramblewood Apartments                                   35,000                             (35,000)                              --
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 *                             190,181                                             (190,181)             --
Vista De Jagueyes
Westgate Apartments
Wilderness Trail Manor *
Wilkes Towers *
                                   ----------      -----------         ----------         --------        ---------      ----------
                                   $1,249,421      $   225,181         $ (305,634)        $564,059        $(988,570)     $  744,457
                                   ==========      ===========         ==========         ========        =========      ==========
</TABLE>

* Sold to the Operating Partnership in 1998



<PAGE>   32

                                                                        SCHEDULE
                                                                     (CONTINUED)

                       REAL ESTATE ASSOCIATES LIMITED III
                       INVESTMENTS IN LIMITED PARTNERSHIPS
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                        Year Ended December 31, 1997
                                              ----------------------------------------------------------------------------------
                                                                                      Cash            Equity
                                                Balance                              Distri-            in            Balance
                                               January 1,          Capital           butions          Income          December
Limited Partnerships                              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>   33


                                                                        SCHEDULE
                                                                     (CONTINUED)
                       REAL ESTATE ASSOCIATES LIMITED III
                       INVESTMENTS IN LIMITED PARTNERSHIPS
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<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>   34

                       REAL ESTATE ASSOCIATES LIMITED III
          INVESTMENTS IN, EQUITY IN EARNINGS OF, AND DIVIDENDS RECEIVED
                        FROM AFFILIATES AND OTHER PERSONS
                                   YEARS ENDED
                        DECEMBER 31, 1998, 1997 AND 1996


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, 1998, 1997 AND 1996


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, 1996            $   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

        Sales of Properties during 1998        (6,759,930)       (71,974,330)       (78,734,260)

        Net additions during 1998                       0            655,826            655,826
                                            -------------      -------------      -------------

        Balance, December 31, 1998          $   2,068,253      $  51,671,011      $  53,739,264
                                            =============      =============      =============
</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, 1998


<TABLE>
<CAPTION>
                                             Buildings,
                                            Furnishings,
                                                And
                                             Equipment
                                            ------------
<S>                                         <C>         
        Accumulated Depreciation:

        Balance, January 1, 1996            $ 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

        Sales of Properties during 1998      (50,235,484)

        Net additions during 1998              3,576,549
                                            ------------

        Balance, December 31, 1998          $ 32,492,148
                                            ============
</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, 1998



<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>       
Charlottle Lakeview                553    $12,361,774    $   551,500    $19,076,363    $19,627,863    $15,385,661           (A)
  Rochester, NY
Hidden Pines Apartments             40      1,369,491         43,954      1,648,093      1,692,047      1,638,825         1981
  Greenville, Michigan
Jenks School Apartments             83      2,107,769         96,740      3,662,298      3,759,038      1,955,946    1981-1982
  Pawtucket, Rhode Island
Lakeside Apartments                 32        893,113         72,336      1,018,475      1,090,811        791,477    1980-1981
  Stuart, Florida
Ramblewood Apartments               64      1,479,856         53,267      2,075,176      2,128,443      1,062,067    1980-1981
  Fort Payne, Alabama
Santa Maria Apartments              86      2,799,700         86,106      3,384,242      3,470,348      2,085,935    1981-1982
  San German, Puerto Rico
Sunset Groove Apartments            22        655,401         19,432        815,429        834,861        792,869    1981-1982
  Carson City, Michigan
Sunshine Canyon Apartments          26        836,541         20,262        999,551      1,019,813        974,780    1981-1982
  Stanton, Michigan
Village Apartments                  50      1,435,165         65,245      1,746,180      1,811,425      1,224,423    1981-1982
  La Follette, Tennessee
Vicente Geigel Polanco Apts         80      2,565,944        107,685      2,978,537      3,086,222      1,810,186    1981-1982
  Issabela, Puerto Rico
Vista De Jagueyes                   73      2,556,515        102,554      3,281,328      3,383,882      2,135,904    1981-1982
  Aguas Buenas, Puerto Rico
Westgate Apartments                 72      1,027,917         80,000      1,482,979      1,562,979        782,017    1980-1981
  Albertville, Alabama
Additional basis of real estate
due to REAL III's capital
contribution to investee limited
partnership                                                   84,671      2,649,036      2,733,707      1,852,058
                                 -----    -----------    -----------    -----------    -----------    -----------
TOTAL                            1,181    $30,089,186    $ 1,383,752    $44,817,687    $46,201,439     32,492,148
                                 =====    ===========    ===========    ===========    ===========    ===========
</TABLE>


(A) This project was completed when REAL III entered the local partnership.


<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.

Prior to December 30, 1998, NAPICO was a wholly owned subsidiary of Casden
Investment Corporation ("CIC"), which is wholly owned by Alan I. Casden. On
December 30, 1998, Casden Properties Operating Partnership, L.P. (the "Operating
Partnership"), a majority owned subsidiary of Casden Properties Inc., a real
estate investment trust organized by Alan I. Casden, purchased a 95.25% economic
interest in NAPICO. 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, 69, 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, 47, 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, 53, Chairman of Casden Properties Inc. and 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. He also became
the Chairman of the Board of Casden Properties Inc. in 1998. Previously, 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



<PAGE>   39

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.

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, 55, 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. He also became the President of Casden Properties Inc.
in 1998. 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.

PAUL PATIERNO, 42, Chief Financial Officer.

Mr. Patierno joined NAPICO in 1998 and is responsible for its financial affairs,
as well as the limited partnerships sponsored by it. From 1995 until joining
NAPICO in September 1998, Mr. Patierno was a senior manager in the affordable
housing group of Altschuler, Melvoin and Glasser LLP, a national public
accounting firm. From 1990 to 1995, he practiced public accounting with a firm
specializing in real estate syndication. Mr. Patierno received his bachelor of
science degree in accounting from California State University at Northridge, and
is a member of the American Institute of Certified Public Accountants and the
California Society of Certified Public Accountants.

PATRICIA W. TOY, 69, 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, 38, 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



<PAGE>   40


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.

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, 1998, 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>          <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, 1998.

The Partnership reimburses NAPICO for certain expenses. The reimbursement to
NAPICO was $35,231, $35,227 and $32,176 in 1998, 1997 and 1996, respectively,
and is included in operating expenses.

Prior to the sale of certain partnership interests on December 30, 1998, an
affiliate of NAPICO was the general partner in one of the limited partnerships
in which the Partnership has an investment, and another affiliate received
property management fees of approximately 5 percent of its revenue. The
affiliate received property management fees of $16,128, $17,408 and $16,128 in
1998, 1997 and 1996, respectively.

On December 30, 1998, the Partnership sold its limited partnership interests in
20 local limited partnerships, with a carrying value of $988,570, to the
Operating Partnership. The sale resulted in net proceeds to the Partnership of
$1,950,530 and a net gain of $2,647,716, after being relieved of notes and
interest payable of $1,947,962 and incurring selling cost of $262,206. In March
1999, the Partnership made cash distributions of $6,881,025 to the limited
partners and $69,505 to the general partners, which included using proceeds from
the sale of the partnership interests.

The Operating Partnership purchased such limited partner interests for cash,
which it raised in connection with a private placement of its equity securities.
The purchase was subject to, among other things, (i) the purchase of the general
partner interests in the local limited partnerships by the Operating
Partnership; (ii) the approval of HUD and certain state housing finance
agencies; and (iii) the consent of the limited partners to the sale of the local
limited partnership interests held for investment by the Partnership.

In August 1998, a consent solicitation statement was 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 proposed transaction. Prior to the
sale of the partnership interests, the consents of the limited partners to the
sale and amendments to the Partnership Agreement were obtained.

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, 1998 and 1997.

Statements of Operations for the years ended December 31, 1998, 1997 and 1996.

Statements of Partners' Equity (Deficiency) for the years ended December 31,
1998, 1997 and 1996.


Statements of Cash Flow for the years ended December 31, 1998, 1997 and 1996.

Notes to Financial Statements.



<PAGE>   42

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, 1998, 1997 and
1996.

Schedule III - Real estate and accumulated depreciation, December 31, 1998.

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.

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 relating to an unsolicited offer to buy units of
        limited partnership interests (the "Units"), as discussed below, was
        filed with the Securities and Exchange Commission during the quarter
        ended September 30, 1998.

        On June 26, 1998, Bond Purchase, L.L.C. (the "Buyer") made an
        unsolicited tender offer to buy a certain number of Units in the
        Partnership for a price of $312 per Unit. The Buyer did not contact the
        Corporate General Partner prior to commencing its tender offer. By
        letter dated July 15, 1998, the Corporate General Partner advised
        limited partners that it had determined not to take a position with
        respect to the tender offer but cautioned limited partners to consider
        certain items before determining whether to tender their Units to the
        Buyer.




<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.
          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/ PAUL PATIERNO
-----------------------------------
Paul Patierno
Chief Financial Officer