<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549


                                    FORM 10-Q


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

                  For the Quarterly Period Ended JUNE 30, 2001

                         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, CALIF. 90211

                         Registrant's Telephone Number,
                       Including Area Code (310) 278-2191



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


                                Yes [X]    No  [ ]


<PAGE>   2



                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                               INDEX TO FORM 10-Q

                       FOR THE QUARTER ENDED JUNE 30, 2001




<TABLE>
<S>                                                                                     <C>
PART I.  FINANCIAL INFORMATION

         Item 1.  Financial Statements

                   Balance Sheets, June 30, 2001 and December 31, 2000................   1

                   Statements of Operations,
                          Six and Three Months Ended June 30, 2001 and 2000 ..........   2

                   Statement of Partners' Equity (Deficiency),
                          Six Months Ended June 30, 2001 .............................   3

                   Statements of Cash Flows,
                          Six Months Ended June 30, 2001 and 2000 ....................   4

                   Notes to Financial Statements .....................................   5

         Item 2.  Management's Discussion and Analysis of Financial
                          Condition and Results of Operations ........................   1


PART II.  OTHER INFORMATION

         Item 1.     Legal Proceedings................................................   13

         Item 6.     Exhibits and Reports on Form 8-K.................................   13

         Signatures ..................................................................   14
</TABLE>




<PAGE>   3



                       REAL ESTATE ASSOCIATES LIMITED III
                       (a California limited partnership)

                                 BALANCE SHEETS

                       JUNE 30, 2001 AND DECEMBER 31, 2000

                                     ASSETS

<TABLE>
<CAPTION>
                                                                            2001
                                                                         (Unaudited)          2000
                                                                         -----------       -----------
<S>                                                                      <C>               <C>
INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2)                             $ 1,179,188       $ 1,069,713

CASH AND CASH EQUIVALENTS                                                  5,645,683         5,655,763
                                                                         -----------       -----------

          TOTAL ASSETS                                                   $ 6,824,871       $ 6,725,476
                                                                         ===========       ===========


                                   LIABILITIES AND PARTNERS' EQUITY

LIABILITIES:
     Accounts payable                                                    $   186,285       $    15,294
                                                                         -----------       -----------



COMMITMENTS AND CONTINGENCIES (Notes 3 and 4)


PARTNERS' EQUITY (DEFICIENCY):
    General partners                                                        (132,591)         (131,875)
    Limited partners                                                       6,771,177         6,842,057
                                                                         -----------       -----------

                                                                           6,638,586         6,710,182
                                                                         -----------       -----------
           TOTAL LIABILITIES AND PARTNERS'
                EQUITY                                                   $ 6,824,871       $ 6,725,476
                                                                         ===========       ===========
</TABLE>



     The accompanying notes are integral part of these financial statements.

                                        1



<PAGE>   4


                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                            STATEMENTS OF OPERATIONS
            FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2001 AND 2000
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                       Six months    Three months     Six months     Three months
                                                         ended          ended            ended          ended
                                                     June 30, 2001   June 30, 2001   June 30, 2000   June 30, 2000
                                                     -------------   -------------   -------------   -------------
<S>                                                  <C>             <C>             <C>             <C>
INTEREST AND OTHER INCOME                              $ 118,850       $  49,772       $ 143,958       $  76,582
                                                       ---------       ---------       ---------       ---------

OPERATING EXPENSES:
       Legal and accounting                              217,613         201,313          67,417          33,000
       Management fees - general partner (Note 3)         64,645          32,322          64,645          32,322
       Administrative  (Note 3)                           39,588          29,226          37,000          25,765
                                                       ---------       ---------       ---------       ---------

             Total operating expenses                    321,846         262,861         169,062          91,087
                                                       ---------       ---------       ---------       ---------

LOSS FROM OPERATIONS                                    (202,996)       (213,089)        (25,104)        (14,505)

DISTRIBUTIONS FROM LIMITED
      PARTNERSHIPS RECOGNIZED AS
      INCOME (Note 2)                                     21,925               -          34,619               -

EQUITY IN INCOME OF LIMITED
      PARTNERSHIPS AND AMORTI-
       ZATION OF ACQUISITION
       COSTS (Note 2)                                    109,475          56,475          94,000          47,000
                                                       ---------       ---------       ---------       ---------

NET INCOME (LOSS)                                      $ (71,596)      $(156,614)      $ 103,515       $  32,495
                                                       =========       =========       =========       =========

NET INCOME (LOSS) PER LIMITED
     PARTNERSHIP INTEREST (Note 1)                     $      (6)      $     (14)      $       9       $       5
                                                       =========       =========       =========       =========
</TABLE>






     The accompanying notes are integral part of these financial statements.


                                       2
<PAGE>   5


                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                   STATEMENT OF PARTNERS' EQUITY (DEFICIENCY)
                     FOR THE SIX MONTHS ENDED JUNE 30, 2001
                                   (Unaudited)



<TABLE>
<CAPTION>
                                         General          Limited
                                         Partners         Partners            Total
                                       ------------      -----------       ------------
<S>                                    <C>               <C>               <C>
PARTNERSHIP INTERESTS                                        11,456
                                                         ===========


EQUITY (DEFICIENCY),
      January 1, 2001                  $  (131,875)      $ 6,842,057       $ 6,710,182

      Net loss for the six months
      ended June 30, 2001                     (716)          (70,880)          (71,596)
                                       -----------       -----------       -----------

EQUITY (DEFICIENCY),
      June 30, 2001                    $  (132,591)      $ 6,771,177       $ 6,638,586
                                       ===========       ===========       ===========


</TABLE>
















     The accompanying notes are integral part of these financial statements.



                                       3
<PAGE>   6

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                            STATEMENTS OF CASH FLOWS
                 FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                                          2001              2000
                                                                      ------------     ------------
<S>                                                                   <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income (loss)                                                 $   (71,596)      $   103,515
    Adjustments to reconcile net income (loss) to net cash
      provided by (used in) operating activities:
        Equity in income of limited partnerships and
            amortization of acquisition costs                            (109,475)          (94,000)
        Decrease in due from affiliates                                         -             2,144
        Decrease in interest and other payables                           170,991               144
                                                                      -----------       -----------

             Net cash (used in) provided by operating activities          (10,080)           11,803

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                          5,655,763         5,571,366
                                                                      -----------       -----------

CASH AND CASH EQUIVALENTS, END OF PERIOD                              $ 5,645,683       $ 5,583,169
                                                                      ===========       ===========

</TABLE>








     The accompanying notes are integral part of these financial statements.


                                       4
<PAGE>   7



                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                          NOTES TO FINANCIAL STATEMENTS

                                  JUNE 30, 2001


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        GENERAL

        The information contained in the following notes to the financial
        statements is condensed from that which would appear in the annual
        audited financial statements; accordingly, the financial statements
        included herein should be reviewed in conjunction with the financial
        statements and related notes thereto contained in the Real Estate
        Associates Limited III (the "Partnership") annual report for the year
        ended December 31, 2000. Accounting measurements at interim dates
        inherently involve greater reliance on estimates than at year end. The
        results of operations for the interim periods presented are not
        necessarily indicative of the results for the entire year.

        In the opinion of the Partnership, the accompanying unaudited financial
        statements contain all adjustments (consisting primarily of normal
        recurring accruals) necessary to present fairly the financial position
        as of June 30, 2001 and the results of operations and changes in cash
        flows for the six and three months then ended.

        The general partners have a 1 percent interest in profits and losses of
        the Partnership. The limited partners have the remaining 99 percent
        interest which is allocated in proportion to their respective individual
        investments. National Partnership Investments Corp. (NAPICO) is the
        managing general partner of the Partnership. Casden Properties Inc. owns
        a 95.25% economic interest in NAPICO, with the balance owned by Casden
        Investment Corporation ("CIC"). CIC, which is wholly owned by Alan I.
        Casden, owns 95% of the voting common stock of NAPICO.

        BASIS OF PRESENTATION

        The accompanying financial statements have been prepared in conformity
        with accounting principles generally accepted in the United States of
        America.

        USE OF ESTIMATES

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



                                       5
<PAGE>   8

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                                  JUNE 30, 2001



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

        METHOD OF ACCOUNTING FOR INVESTMENT IN LIMITED PARTNERSHIPS

        The investment in limited partnerships is 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 (LOSS) PER LIMITED PARTNERSHIP INTEREST

        Net income (loss) per limited partnership interest was computed by
        dividing the limited partners' share of net income (loss) by the number
        of limited partnership interests outstanding during the year. The number
        of limited partnership interests was 11,456 for the periods 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 with high
        credit quality institutions. Such cash and cash equivalents are in
        excess of the FDIC insurance limit.

        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.

        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.

NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS

        The Partnership holds limited partnership interests in 12 limited
        partnerships, located in 7 different states. The limited partnerships as
        of June 30, 2001 own 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>   9

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                                  JUNE 30, 2001


NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)

        The Partnership, as a limited partner, is entitled to between 94.9
        percent and 99 percent of the profits and losses of the limited
        partnerships. 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 partnership 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 in the aggregate approximately $17,800,000 and
        $17,460,000 as of March 31, 2001 and December 31, 2000, 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 investment in limited partnerships for
        the six months ended June 30, 2001:

<TABLE>
<S>                                                            <C>
        Balance, beginning of period                           $1,069,713
        Equity in income of limited partnerships                  109,475
                                                               ----------

        Balance, end of period                                 $1,179,188
                                                               ==========
</TABLE>


                                       7
<PAGE>   10

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                                  JUNE 30, 2001


NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)

        The following are unaudited combined estimated statements of operations
        for the six and three months ended June 30, 2001 and 2000 for the
        limited partnerships in which the Partnership has investments:

<TABLE>
<CAPTION>
                                    Six months         Three months        Six months       Three months
                                       ended               ended              ended             ended
                                   June 30, 2001       June 30, 2001      June 30, 2000     June 30, 2000
                                   -------------       -------------      -------------     -------------
<S>                                <C>                 <C>                <C>               <C>
        REVENUES
             Rental and other         $3,292,000       $1,646,000           $3,262,000        $1,631,000
                                      ----------       ----------           ----------        ----------

        EXPENSES
             Depreciation                640,000          320,000              632,000           316,000
             Interest                    900,000          450,000              894,000           447,000
             Operating                 2,006,000        1,003,000            1,892,000           946,000
                                      ----------       ----------           ----------       -----------

                                       3,546,000        1,773,000            3,418,000         1,709,000
                                      ----------       ----------           ----------       -----------

        NET LOSS                      $ (254,000)      $ (127,000)          $ (156,000)      $   (78,000)
                                      ==========       ==========           ==========       ===========
</TABLE>

        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 may be the case under existing HAP Contracts. The
        payments under the renewed HAP Contracts may not 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


                                       8
<PAGE>   11

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                                  JUNE 30, 2001



NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)

        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.

        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.

        On December 30, 1998, after obtaining the consents of the limited
        partners, the Partnership sold its limited partnership interests in 20
        local limited partnerships to subsidiaries of Casden Properties Inc. The
        sale resulted in cash proceeds to the Partnership of $1,950,000 which
        was collected in 1999. 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.

NOTE 3 - MANAGEMENT FEE AND EXPENSES DUE TO GENERAL PARTNER

        Under the terms of the Restated Certificate and Agreement of Limited
        Partnership, the Partnership is obligated to NAPICO for an annual
        management fee approximately equal to .4 percent of the invested assets.
        Invested assets are defined as the costs of acquiring project interests,
        including the proportionate amount of the mortgage loans related to the
        Partnership's interests in the capital accounts of the respective
        partnership. The management fee incurred for the six months ended June
        30, 2001 and 2000 was approximately $64,645.

        The Partnership reimburses NAPICO for certain expenses. The expense
        incurred to NAPICO was approximately $7,121 and $5,937 for the six
        months ended June 30, 2001 and 2000, respectively, and is included in
        administrative expenses.

NOTE 4 - CONTINGENCIES

        On August 27, 1998, two investors holding an aggregate of eight units of
        limited partnership interests in the Partnership 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


                                       9
<PAGE>   12

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                                  JUNE 30, 2001


NOTE 4 - CONTINGENCIES (CONTINUED)

        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
        Casden Properties Inc., which was organized by an affiliate of NAPICO.
        The plaintiffs seek equitable relief, as well as compensatory damages
        and litigation related costs. On August 4, 1999, one investor holding
        one unit of limited partnership interest in Housing Programs Limited
        (another affiliated partnership in which NAPICO is the managing general
        partner) commenced a virtually identical action in the United States
        District Court for the Central District of California against the
        Partnership, NAPICO and certain other affiliated entities. NAPICO, the
        managing general partner of such partnerships, and the other defendants
        believe that the plaintiffs' claims are without merit and are contesting
        the actions vigorously.

        The corporate general partner of the Partnership is involved in various
        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.

NOTE 5 - 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. The carrying amounts of assets
        and liabilities reported on the balance sheets that require such
        disclosure approximate fair value due to their short-term maturity.



                                       10
<PAGE>   13

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                  JUNE 30, 2001


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS

        LIQUIDITY AND CAPITAL RESOURCES

        The Partnership's primary sources of funds include interest income
        earned from investing available cash and distributions from limited
        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 limited partners in any material amount. The Partnership made a
        distribution to investors in June 30, 2001, previously using proceeds
        from the disposition of its investments in certain limited partnerships.

        RESULTS OF OPERATIONS

        Partnership revenues consist primarily of interest income earned on
        certificates of deposit and other temporary investment of funds not
        required for investment in local partnerships.

        Operating expenses consist primarily of recurring general and
        administrative expenses and professional fees for services rendered to
        the Partnership. In addition, an annual Partnership management fee in an
        amount equal to .4 percent of investment assets is payable to the
        managing general partner.

        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. Losses incurred after the limited partnership
        investment account is reduced to zero are not recognized in accordance
        with the equity accounting method.

        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. Overall
        distributions from limited partnerships continue to be favorable. This
        primarily is due, to improved operating results at several of the
        properties.

        Except for certificates of deposit and money market funds, the
        Partnership's investments are entirely interests in other limited
        partnerships owning government assisted projects. Funds temporarily not
        required for such investments in projects are invested in certificate of
        deposit and money market funds which provide substantial amounts of
        interest as reflected in the statement of operations. These investments
        are converted to cash to meet obligations as they arise. The Partnership
        intends to continue investing available funds in this manner.



                                       11
<PAGE>   14

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                  JUNE 30, 2001


ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

        RESULTS OF OPERATIONS (CONTINUED)

        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 may be the case under existing HAP Contracts. The
        payments under the renewed HAP Contracts may not 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.

        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.

        On December 30, 1998, after obtaining the consents of the limited
        partners, the Partnership sold its limited partnership interests in 20
        local limited partnerships to subsidiaries of Casden Properties Inc. The
        sale resulted in cash proceeds to the Partnership of $1,950,530 which
        was collected in 1999. 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.



                                       12
<PAGE>   15


                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                  JUNE 30, 2001


PART II.  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

        On August 27, 1998, two investors holding an aggregate of eight units of
        limited partnership interests in the Partnership 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 Casden Properties
        Inc., which was organized by an affiliate of NAPICO. The plaintiffs seek
        equitable relief, as well as compensatory damages and litigation related
        costs. On August 4, 1999, one investor holding one unit of limited
        partnership interest in Housing Programs Limited (another affiliated
        partnership in which NAPICO is the managing general partner) commenced a
        virtually identical action in the United States District Court for the
        Central District of California against the Partnership, NAPICO and
        certain other affiliated entities. NAPICO, the managing general partner
        of such partnerships, and the other defendants believe that the
        plaintiffs' claims are without merit and are contesting the actions
        vigorously.

        The managing general partner is involved in various lawsuits. None of
        these are related to REAL III.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

        (a) No exhibits are required per the provision of Item 6 of regulation
            S-K and no reports on Form 8-K were filed during the quarter ended
            June 30, 2001.



                                       13
<PAGE>   16

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                  JUNE 30, 2001


                                   SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                               REAL ESTATE ASSOCIATES LIMITED III
                               (a California limited partnership)

                               By:    National Partnership Investments Corp.
                                      General Partner



                                      /s/ BRUCE NELSON
                                      -----------------------------
                                      Bruce Nelson
                                      President


                               Date:   August 14, 2001
                                      -----------------------------


                                      /s/ BRIAN H. SHUMAN
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                                      Brian H. Shuman
                                      Chief Financial Officer



                                 Date:  August 14, 2001
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