<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, 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 JUNE 30, 1997



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

         Item 1.  Financial Statements

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

                  Statements of Operations,
                          Six and Three Months Ended June 30, 1997 and 1996 ................................ 2

                  Statement of Partners' Equity (Deficiency),
                          Six Months Ended June 30, 1997 ................................................... 3

                  Statements of Cash Flows,
                          Six Months Ended June 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

                       JUNE 30, 1997 AND DECEMBER 31, 1996


                                     ASSETS

<TABLE>
<CAPTION>
                                                                           1997             1996
                                                                       ------------      ------------
                                                                        (Unaudited)       (Audited)

<S>                                                                    <C>               <C>         
INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2)                           $  1,071,487      $  1,063,487
 
CASH AND CASH EQUIVALENTS (Note 1)                                       10,619,670         9,734,531

OTHER ASSETS                                                                135,000           135,000
                                                                       ------------      ------------
          TOTAL ASSETS                                                 $ 11,826,157      $ 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)                                       358,708           374,603
     Accounts payable                                                        22,418             7,450
                                                                       ------------      ------------
                                                                          1,891,126         1,892,053
                                                                       ------------      ------------

COMMITMENTS AND CONTINGENCIES (Notes 4 and 5)


PARTNERS' EQUITY (DEFICIENCY):
    General partners                                                        (99,625)         (108,566)
    Limited partners                                                     10,034,656         9,149,531
                                                                       ------------      ------------

                                                                          9,935,031         9,040,965
                                                                       ------------      ------------
           TOTAL LIABILITIES AND PARTNERS' EQUITY (DEFICIENCY)         $ 11,826,157      $ 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

                SIX AND THREE MONTHS ENDED JUNE 30, 1997 AND 1996

                                   (Unaudited)

<TABLE>
<CAPTION>

                                                          Six months     Three months      Six months      Three months
                                                            ended           ended             ended            ended
                                                        June 30, 1997    June 30, 1997    June 30, 1996    June 30, 1996
                                                        -------------    -------------    -------------    -------------

<S>                                                      <C>              <C>              <C>              <C>        
INTEREST AND OTHER INCOME                                $   225,819      $   115,875      $   150,057      $    79,920
                                                         -----------      -----------      -----------      -----------

OPERATING EXPENSES:
          Legal and accounting                                65,824           34,729           70,120           35,969
          Management fees - general partner (Note 4)         227,400          113,710          227,410          113,700
          Interest (Note 3)                                   75,500           37,750           75,500           37,750
          Administrative  (Note 4)                            43,941           24,132           28,950           14,546
                                                         -----------      -----------      -----------      -----------
                Total operating expenses                     412,665          210,321          401,980          201,965
                                                         -----------      -----------      -----------      -----------

LOSS FROM OPERATIONS                                        (186,846)         (94,446)        (251,923)        (122,045)

DISTRIBUTIONS FROM LIMITED
      PARTNERSHIPS RECOGNIZED AS
      INCOME (Note 2)                                        952,912          871,871        1,033,251          952,001

EQUITY IN INCOME OF LIMITED
      PARTNERSHIPS AND AMORTI-
       ZATION OF ACQUISITION
       COSTS (Note 2)                                        128,000           64,000          284,000          142,000
                                                         -----------      -----------      -----------      -----------
NET INCOME                                               $   894,066      $   841,425      $ 1,065,328      $   971,956
                                                         ===========      ===========      ===========      ===========
NET INCOME PER LIMITED PARTNERSHIP INTEREST (Note 1)     $        78      $        73      $        93      $        85
                                                         ===========      ===========      ===========      ===========
</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)

                         SIX MONTHS ENDED JUNE 30, 1997

                                   (Unaudited)

<TABLE>
<CAPTION>

                                           General         Limited
                                          Partners         Partners         Total
                                        ------------     ------------    ------------

<S>                                     <C>              <C>             <C>        
PARTNERSHIP INTERESTS
      June 30, 1997                                           11,456
                                                         ===========


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

      Net income for the six months
      ended June 30, 1997                     8,941          885,125         894,066
                                        -----------      -----------     -----------
EQUITY (DEFICIENCY),
      June 30, 1997                     $   (99,625)     $10,034,656     $ 9,935,031
                                        ===========      ===========     ===========
</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

                     SIX MONTHS ENDED JUNE 30, 1997 AND 1996

                                   (Unaudited)

<TABLE>
<CAPTION>

                                                                  1997              1996
                                                              ------------      ------------
<S>                                                           <C>               <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
       Net income                                             $    894,066      $  1,065,328
       Adjustments to reconcile net income to net cash
         provided by operating activities
           Equity in income of limited partnerships and
               amortization of acquisition costs                  (128,000)         (284,000)
           Increase in other assets                                      -           (34,500)
           Decrease in interest and other payables                    (927)          (36,602)
                                                              ------------      ------------
                Net cash provided by operating activities          765,139           710,226
                                                              ------------      ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
       Distribution from limited partnership
          recognized as a return of investment                     120,000            41,228
                                                              ------------      ------------

NET INCREASE IN CASH AND CASH EQUIVALENTS                          885,139           751,454

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                   9,734,531         9,028,963
                                                              ------------      ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                      $ 10,619,670      $  9,780,417
                                                              ============      ============
</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, 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 June 30, 1997 and the results of operations for the six and three months
     then ended and changes in cash flows for the six 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)

                                  JUNE 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)

                                  JUNE 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 six months ended June 30, 1997:

<TABLE>
     <S>                                                         <C>
     Balance, beginning of period                                $1,063,487
     Amortization of acquisitions costs                              (2,000)
     Distribution recognized as a return of capital                (120,000)
     Equity in income of limited partnerships                       130,000
                                                                 ----------
     Balance, end of period                                      $1,071,487
                                                                 ==========
</TABLE>

     The following are unaudited combined estimated statements of operations for
     the six months ended June 30, 1997 and 1996 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, 1997     June 30, 1997     June 30, 1996    June 30, 1996
                                     -------------     -------------     -------------    -------------
<S>                                   <C>              <C>               <C>              <C>         
REVENUES
     Rental and other                 $11,194,000      $  5,597,000      $ 11,042,000     $  5,521,000
                                      -----------      ------------      ------------     ------------

EXPENSES
     Depreciation                       1,878,000           939,000         1,752,000          876,000
     Interest                           3,514,000         1,757,000         3,458,000        1,729,000
     Operating                          6,218,000         3,109,000         5,820,000        2,910,000
                                      -----------      ------------      ------------     ------------
                                       11,610,000         5,805,000        11,030,000        5,515,000
                                      -----------      ------------      ------------     ------------
NET INCOME                            $  (416,000)     $   (208,000)     $     12,000     $      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 its
     Portfolio that are subject to governmental mortgage and rental subsidy
     programs. The Partnership has begun to incur expenses in connection with 
     this review by various third party professionals. Amounts incurred to date
     are not material to the operating results of the Partnership.

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.

                                        7


<PAGE>   10


                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                                  JUNE 30, 1997


NOTE 3 - NOTES PAYABLES (CONTINUED)

     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 six months ended June 30,
     1997 and 1996 was approximately $227,000.

     The Partnership reimburses NAPICO for certain expenses. The reimbursement
     paid to NAPICO was approximately $16,000 and $15,000 for the six months
     ended June 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)

                                  JUNE 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 its
     Portfolio that are subject to governmental mortgage and rental subsidy
     programs. The Partnership has begun to incur expenses in connection with 
     this review by various third party professionals. Amounts incurred to date
     are not material to the operating results of the Partnership.

     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)

                                  JUNE 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)

                                  JUNE 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
 

                                 Date:
                                      -----------------------------------------


                                 By:
                                      -----------------------------------------
                                      Bruce Nelson
                                      President


                                 Date:
                                      -----------------------------------------



                                 By:
                                      -----------------------------------------
                                      Charles H. Boxenbaum
                                      Chief Executive Officer    
        

                                 Date:
                                      -----------------------------------------


                                       11