<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 SEPTEMBER 30, 1997

                         Commission File Number 2-68983

                       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 SEPTEMBER 30, 1997

<TABLE>
<CAPTION>
<S>                                                                                         <C>

PART I.  FINANCIAL INFORMATION

           Item 1.  Financial Statements

                  Balance Sheets, September 30, 1997 and December 31, 1996..................1

                  Statements of Operations,
                        Nine and Three Months Ended September 30, 1997 and 1996 ............2

                  Statement of Partners' Equity (Deficiency),
                        Nine Months Ended September 30, 1997 ...............................3

                  Statements of Cash Flows,
                        Nine Months Ended September 30, 1997 and 1996 ......................4

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

           Item 2.  Management's Discussion and Analysis of Financial
                        Condition and Results of Operations ................................9


PART II.  OTHER INFORMATION

           Item 1.  Legal Proceedings......................................................10

           Item 6.  Exhibits and Reports on Form 8-K.......................................10

           Signatures   ...................................................................11
</TABLE>
<PAGE>   3
                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                 BALANCE SHEETS

                    SEPTEMBER 30, 1997 AND DECEMBER 31, 1996


<TABLE>
<CAPTION>
                                     ASSETS

                                                                 1997            1996
                                                              (Unaudited)      (Audited)
                                                             ------------    ------------
<S>                                                          <C>             <C>         
INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2)                 $  1,214,259    $  1,063,487

CASH AND CASH EQUIVALENTS (Note 1)                             10,605,486       9,734,531

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

     TOTAL ASSETS                                            $ 11,954,745    $ 10,933,018
                                                             ============    ============


             LIABILITIES AND PARTNERS' EQUITY (DEFICIENCY)

LIABILITIES:
  Notes payable (Notes 3 and 6)                              $  1,510,000    $  1,510,000
  Interest payable (Notes 3 and 6)                                396,458         374,603
  Accounts payable                                                 45,724           7,450
                                                             ------------    ------------

                                                                1,952,182       1,892,053
                                                             ------------    ------------

COMMITMENTS AND CONTINGENCIES (Notes 4 and 5)


PARTNERS' EQUITY (DEFICIENCY):
  General partners                                                (98,950)       (108,566)
  Limited partners                                             10,101,513       9,149,531
                                                             ------------    ------------

                                                               10,002,563       9,040,965
                                                             ------------    ------------
     TOTAL LIABILITIES AND PARTNERS'
     EQUITY (DEFICIENCY)                                     $ 11,954,745    $ 10,933,018
                                                             ============    ============
</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

             NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                        Nine months     Three months     Nine months     Three months
                                                           ended           ended           ended            ended
                                                       Sept. 30, 1997  Sept. 30, 1997   Sept. 30, 1996  Sept. 30, 1996
                                                       --------------  --------------   --------------  --------------
<S>                                                    <C>             <C>              <C>             <C>           
INTEREST AND OTHER INCOME                              $     351,310   $      125,491   $     233,569   $       83,512
                                                       -------------   --------------   -------------   --------------

OPERATING EXPENSES:
         Legal and accounting                               130,797           50,267         131,985           54,550
         Management fees - general partner (Note 4)         341,100          113,700         341,100          113,700
         Interest (Note 3)                                  113,250           37,750         113,250           37,750
         Administrative  (Note 4)                            69,477           25,537          43,271           14,321
                                                       -------------   --------------   -------------   --------------

             Total operating expenses                       654,624          227,254         629,606          220,321
                                                       -------------   --------------   -------------   --------------

LOSS FROM OPERATIONS                                       (303,314)        (101,763)       (396,037)        (136,809)

DISTRIBUTIONS FROM LIMITED
      PARTNERSHIPS RECOGNIZED AS
      INCOME (Note 2)                                     1,072,912          -             1,033,251          -

EQUITY IN INCOME OF LIMITED
      PARTNERSHIPS AND AMORTI-
       ZATION OF ACQUISITION
       COSTS (Note 2)                                       192,000           64,000         426,000          142,000
                                                       -------------   --------------   -------------   --------------

NET INCOME (LOSS)                                      $     961,598   $      (37,763)  $   1,063,214   $        5,191
                                                       =============   ==============   =============   ==============

NET INCOME (LOSS) PER LIMITED
     PARTNERSHIP INTEREST (Note 1)                     $          84   $           (3)  $          93   $            0
                                                       =============   ==============   =============   ==============
</TABLE>



         The accompanying notes are integral part of these financial statements.


                                       2
<PAGE>   5
                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                   STATEMENTS OF PARTNERS' EQUITY (DEFICIENCY)

                      NINE MONTHS ENDED SEPTEMBER 30, 1997

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                       General            Limited
                                                      Partners            Partners             Total
                                                     ----------        -------------       ------------
         <S>                                       <C>                 <C>                 <C>         
         PARTNERSHIP INTERESTS
             September 30, 1997                                              11,456
                                                                       ============


         EQUITY (DEFICIENCY),
               January 1, 1997                     $  (108,566)        $  9,149,531        $  9,040,965

             Net income for the nine months
             ended September 30, 1997                    9,616              951,982             961,598
                                                   -----------         ------------        ------------

         EQUITY (DEFICIENCY),
             September 30, 1997                    $   (98,950)        $ 10,101,513        $ 10,002,563
                                                   ===========         ============        ============
</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

                  NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996

                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                            1997               1996
                                                                        -------------       ------------
<S>                                                                     <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
      Net income                                                        $    961,598        $  1,063,204
      Adjustments to reconcile net income to net cash
        provided by operating activities
        Equity in income of limited partnerships and
        amortization of acquisition costs                                   (192,000)          (426,000)
        Increase in other assets                                             -                  (39,200)
        Increase (decrease) in interest and other payables                    60,129            (10,320)
                                                                        ------------        -----------

          Net cash provided by operating activities                          829,727            587,684
                                                                        ------------        -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Distribution from limited partnership
      recognized as a return of investment                                    41,228             81,089
                                                                        ------------        -----------


NET INCREASE IN CASH AND CASH EQUIVALENTS                                    870,955            668,773

CASH AND CASH EQUIVALENTS,
      BEGINNING OF PERIOD                                                  9,734,531          9,028,963
                                                                        ------------        -----------

CASH AND CASH EQUIVALENTS,
      END OF PERIOD                                                     $ 10,605,486        $ 9,697,736
                                                                        ============        ===========
</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

                               SEPTEMBER 30, 1997


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, 1996.
      Accounting measurements at interim dates inherently involve greater
      reliance on estimates than at year end. The results of operations for the
      interim period 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 September 30, 1997 and the results of operations for the nine and three
      months then ended and changes in cash flows for the nine 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
      corporate general partner of the Partnership.

      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 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 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 the periods presented.



                                       5
<PAGE>   8
                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               SEPTEMBER 30, 1997

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

      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 one high credit
      quality institution. 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 adopted Statement of Financial Accounting Standards No.
      121, Account for the Improvement of Long-Lived Assets and for Long-Lived
      Assets To Be Disposed Of as of January 1, 1996 without a significant
      effect on its financial statements. 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 26 limited
      partnerships. In addition, the Partnership holds a general partner
      interest in REA. NAPICO is also a general partner in REA. REA, in turn,
      holds limited partner interests in six additional limited partnerships. In
      total, therefore, the Partnership holds interest, either directly or
      indirectly including through REA, 32 partnerships which own residential
      rental projects consisting of 3,062 apartment units. The mortgage loans of
      these projects are insured by various governmental agencies.

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



                                       6
<PAGE>   9
                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               SEPTEMBER 30, 1997


NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)

      Equity in losses of limited partnerships is recognized in the financial
      statements until the limited partnership investment account is reduced to
      a zero balance. Losses incurred after the limited partnership investment
      account is reduced to zero are not recognized.

      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 nine months ended September 30, 1997:

<TABLE>
<CAPTION>
      <S>                                                                        <C>
      Balance, beginning of period                                               $1,063,487
      Amortization of acquisitions costs                                             (3,000)
      Distribution recognized as a return of capital                                (41,228)
      Equity in income of limited partnerships                                      195,000
                                                                                 ----------

      Balance, end of period                                                     $1,214,259
                                                                                 ==========
</TABLE>

      The following are unaudited combined estimated statements of operations
      for the nine months ended September 30, 1997 and 1996 for the limited
      partnerships in which the Partnership has investments:

<TABLE>
<CAPTION>
                                Nine months     Three months       Nine months    Three months
                                  ended            ended             ended           ended
                              Sept. 30, 1997   Sept. 30, 1997    Sept. 30, 1996  Sept. 30, 1996
                              --------------   --------------    --------------  --------------
       <S>                    <C>                <C>              <C>              <C>       
       REVENUES
            Rental and other  $16,791,000        $5,597,000       $16,563,000      $5,521,000
                              -----------        ----------       -----------      ----------

       EXPENSES
            Depreciation        2,817,000           939,000         2,628,000         876,000
            Interest            5,271,000         1,757,000         5,187,000       1,729,000
            Operating           9,327,000         3,109,000         8,730,000       2,910,000
                             ------------       -----------      ------------      ----------
                               17,415,000         5,805,000        16,545,000       5,515,000
                              -----------       -----------       -----------      ----------

       NET (LOSS) INCOME     $   (624,000)      $  (208,000)    $      18,000      $    6,000
                             ============       ===========     =============      ==========
</TABLE>

       NAPICO, or one of its affiliates, is the general partner and property
       management agent for certain of the limited partnerships included above.

       The Partnership is undergoing an extensive review of disposition,
       refinancing or re-engineering alternatives for the properties in which it
       has invested. The Partnership has began to incur expenses in connection
       with this review by various third party professionals, which amounted to
       $56,348 for the nine months ended September 30, 1997.



                                       7

<PAGE>   10
                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               SEPTEMBER 30, 1997

NOTE 3 - NOTES PAYABLES

       Certain of the Partnership's investments involved purchases of
       partnership interests from partners who subsequently withdrew from the
       operating partnerships. The Partnership is obligated on non-recourse
       notes payable of $1,510,000, bearing interest at 10 percent, to the
       sellers of the partnership interests.

       These notes are payable by the Partnership through REA, and have
       principal maturity dates in June 2020 and March 2024 or upon the sale or
       refinancing of the underlying partnership properties. These notes and the
       related interest are collaterized by REA's investment in the respective
       limited partnerships and are payable only out of cash distributions from
       the investee partnerships, as defined in the notes. Unpaid interest is
       due at maturity of the notes.

NOTE 4 - 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 porportionate 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 nine months ended
       September 30, 1997 and 1996 was approximately $341,000.

       The Partnership reimburses NAPICO for certain expenses. The reimbursement
       paid to NAPICO was approximately $24,400 and $24,300 for the nine months
       ended September 30, 1997 and 1996, respectively, and is included in
       administrative expenses.

NOTE 5 - CONTINGENCIES

       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 6 - 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
<PAGE>   11
                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                               SEPTEMBER 30, 1997


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.

       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
       corporate general partner. Operating expenses did not vary significantly
       for the periods presented.

       The Partnership is undergoing an extensive review of disposition,
       refinancing or re-engineering alternatives for the properties in which it
       has invested. The Partnership has began to incur expenses in connection
       with this review by various third party professionals, which amounted to
       $56,348 for the nine months ended September 30, 1997.

       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 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.



                                       9
<PAGE>   12
                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                               SEPTEMBER 30, 1997


PART II.  OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

       The corporate 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 7 of regulation
S-K.



                                       10
<PAGE>   13
                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                               SEPTEMBER 30, 1997


                                   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




                                         _______________________________________
                                         Bruce Nelson
                                         President


                                   Date:________________________________________





                                         _______________________________________
                                         Charles H. Boxenbaum
                                         Chief Executive Officer



                                   Date:________________________________________



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