<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, 1996

                         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, 1996


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

            Item 1.  Financial Statements

                     Balance Sheets, September 30, 1996 and December 31, 1995   . . . . . . . . . . . . . . 1

                     Statements of Operations,
                            Nine and Three Months Ended September 30, 1996 and 1995   . . . . . . . . . . . 2

                     Statement of Partners' Equity (Deficiency),
                            Nine Months Ended September 30, 1996    . . . . . . . . . . . . . . . . . . . . 3

                     Statements of Cash Flows,
                            Nine Months Ended September 30, 1996 and 1995   . . . . . . . . . . . . . . . . 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, 1996 AND DECEMBER 31, 1995


                                     ASSETS


<TABLE>
<CAPTION>
                                                        1996             1995
                                                     (Unaudited)       (Audited)  
                                                    -------------    -------------
<S>                                                 <C>              <C>
INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2)        $  1,275,487     $    930,576

CASH AND CASH EQUIVALENTS (Note 1)                     9,697,736        9,028,963

SHORT TERM INVESTMENTS (Note 1)                          125,000          125,000
 
OTHER ASSETS                                             139,700          100,500 
                                                    -------------    -------------

          TOTAL ASSETS                              $ 11,237,923     $ 10,185,039
                                                    =============    =============


              LIABILITIES AND PARTNERS' EQUITY (DEFICIENCY)

LIABILITIES:
     Notes payable (Notes 3 and 6)                  $  1,510,000     $  1,510,000
     Interest payable (Notes 3 and 6)                    336,854          344,762
     Accounts payable                                     10,979           13,391 
                                                    -------------    -------------

                                                       1,857,833        1,868,153 
                                                    -------------    -------------

COMMITMENTS AND CONTINGENCIES (Notes 4 and 5)


PARTNERS' EQUITY (DEFICIENCY):
    General partners                                    (105,175)        (115,807)
    Limited partners                                   9,485,265        8,432,693 
                                                    -------------    -------------

                                                       9,380,090        8,316,886 
                                                    -------------    -------------
           TOTAL LIABILITIES AND PARTNERS'
                EQUITY (DEFICIENCY)                 $ 11,237,923     $ 10,185,039
                                                    =============    =============
</TABLE>


The accompanying notes are an integral part of these financial statements.





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<PAGE>   4
                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                            STATEMENTS OF OPERATIONS

                 NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995

                                  (Unaudited)


<TABLE>
<CAPTION>
                                          Nine months    Three months       Nine months      Three months
                                            ended           ended              ended            ended
                                        Sept 30, 1996    Sept 30, 1996     Sept 30, 1995    Sept 30, 1995 
                                       ---------------  ---------------   ---------------  ---------------
<S>                                      <C>               <C>              <C>             <C>
INTEREST AND OTHER INCOME                 $   233,569       $   83,512       $   191,140      $    67,632 
                                          ------------      -----------      ------------     ------------

OPERATING EXPENSES:
     Legal and accounting                     131,985           54,550            109,490           37,577
     Management fees - general partner        341,110          113,700            341,100          113,700
     Interest (Note 3)                        113,250           37,750            113,250           37,750
     Administrative  (Note 4)                  43,271           14,321             68,060           26,135 
                                          ------------      -----------       ------------     ------------

        Total operating expenses              629,616          220,321            631,900          215,162 
                                          ------------      -----------       ------------     ------------

LOSS FROM OPERATIONS                         (396,047)        (136,809)          (440,760)        (147,530)

DISTRIBUTIONS FROM LIMITED
      PARTNERSHIPS RECOGNIZED
      AS INCOME (Note 2)                    1,033,251             -             1,071,422          115,593

EQUITY IN INCOME OF LIMITED
      PARTNERSHIPS AND AMORTI-
       ZATION OF ACQUISITION
       COSTS (Note 2)                         426,000          142,000            510,000          170,000 
                                          ------------      -----------       ------------     ------------

NET INCOME                                $ 1,063,204       $    5,191        $ 1,140,662      $   138,063
                                          ============      ===========       ============     ============

NET INCOME PER LIMITED
     PARTNERSHIP
     INTEREST (Note 1)                    $        93       $     -           $      100       $        12
                                          ============      ===========       ===========      ============
</TABLE>


The accompanying notes are an integral part of these financial statements.





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

                   STATEMENT OF PARTNERS' EQUITY (DEFICIENCY)

                      NINE MONTHS ENDED SEPTEMBER 30, 1996

                                  (Unaudited)


<TABLE>
<CAPTION>
                                       General         Limited
                                       Partners        Partners            Total     
                                     -----------     -------------     --------------
<S>                                  <C>             <C>               <C>
PARTNERSHIP INTERESTS
   September 30, 1996                                      11,456
                                                     =============


EQUITY (DEFICIENCY),
   January 1, 1996                   $ (115,807)     $  8,432,693      $   8,316,886

   Net income for the nine months
   ended September 30, 1996              10,632         1,052,572          1,063,204 
                                     -----------     -------------     --------------

EQUITY (DEFICIENCY),
   September 30, 1996                $ (105,175)     $  9,485,265      $   9,380,090
                                     ===========     =============     ==============
</TABLE>


The accompanying notes are an integral part of these financial statements.





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

                            STATEMENTS OF CASH FLOWS

                 NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995

                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                1996                 1995   
                                                            -------------      -------------
<S>                                                         <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                               $  1,063,204       $  1,140,662
   Adjustments to reconcile net income to net cash
     provided by operating activities:
       Equity in income of limited partnerships and
           amortization of acquisition costs                    (426,000)          (510,000)
       Increase in other assets                                  (39,200)              (500)
       Decrease in interest and other payables                   (10,320)           (42,710)
                                                            -------------      -------------

            Net cash provided by operating activities            587,684            587,452 
                                                            -------------      -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Distribution from limited partnership
       recognized as a return of investment                       81,089            296,833
   Decrease in short term investments                             -               1,021,022 
                                                            -------------      -------------

            Net cash provided by investing activities             81,089          1,317,855 
                                                            -------------      -------------


NET INCREASE IN CASH AND CASH EQUIVALENTS                        668,773          1,905,307

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                 9,028,963          7,209,247 
                                                            -------------      -------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                    $  9,697,736       $  9,114,554
                                                            =============      =============
</TABLE>

The accompanying notes are an integral part of these financial statements.





                                       4
<PAGE>   7
                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                         NOTES TO FINANCIAL STATEMENTS

                               SEPTEMBER 30, 1996


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, 1995.  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, 1996 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 and selection fees and other costs related to the
         acquisition of the projects have been capitalized to the investment
         account.

         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, 1996


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.

         SHORT TERM INVESTMENTS

         Short term investments consist of bank certificates of deposit and
         other securities with original maturities ranging from more than three
         months to twelve months.  The fair value of these securities, which
         have been classified as held for sale, approximates their carrying
         value.

         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

NOTE 2 - INVESTMENTS IN AND ADVANCES TO 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.

         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.





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

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               SEPTEMBER 30, 1996


NOTE 2 - INVESTMENTS IN AND ADVANCES TO LIMITED PARTNERSHIPS (CONTINUED)

         The following is a summary of the investment in limited partnerships
         as of September 30, 1996:

<TABLE>
         <S>                                                                                     <C>
         Balance, beginning of period                                                            $  930,576
         Amortization of acquisitions costs                                                          (6,000)
         Cash distribution recognized as return of investment                                       (81,089)
         Equity in income of limited partnerships                                                   432,000
                                                                                                 ----------

         Balance, end of period                                                                  $1,275,487
                                                                                                 ==========
</TABLE>

         The following are unaudited combined estimated statements of
         operations for the nine and three months ended September 30, 1996 and
         1995 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, 1996       Sept. 30, 1996      Sept. 30, 1995     Sept. 30, 1995
                                    --------------       --------------      --------------    ---------------
         <S>                       <C>                   <C>                  <C>                <C>
         REVENUES
              Rental and other       $16,563,000           $5,521,000          $16,155,000       $5,385,000
                                     -----------           ----------          -----------       ----------

         EXPENSES
              Depreciation             2,628,000              876,000            2,775,000          925,000
              Interest                 5,187,000            1,729,000            5,307,000        1,769,000
              Operating                8,730,000            2,910,000            8,802,000        2,934,000
                                     -----------           ----------          -----------       ----------
                                      16,545,000            5,515,000           16,884,000        5,628,000
                                     -----------           ----------          -----------       ----------

         NET INCOME (LOSS)           $    18,000           $    6,000          $  (729,000)      $ (243,000)
                                     ===========           ==========          ===========       ========== 
</TABLE>

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

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
         September 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.





                                       7
<PAGE>   10
                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               SEPTEMBER 30, 1996


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, 1996 and 1995 was $341,110.

         The Partnership reimburses NAPICO for certain expenses.  The
         reimbursement paid to NAPICO was  approximately $24,000 and $22,000
         for the nine months ended September 30, 1996 and 1995, respectively,
         and is included in administrative expenses.

NOTE 5 - CONTINGENCIES

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

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, 1996


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.

         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 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.  Available cash is
         invested in these funds earning interest as reflected in the
         statements of operations.  These investments are converted to cash to
         meet obligations as they arise.





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

                               SEPTEMBER 30, 1996


PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         The corporate general partner is a plaintiff or defendant in several
         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.





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

                               SEPTEMBER 30, 1996


                                   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:                                    
                                   -----------------------------------
                                   Shawn Horwitz
                                   Executive Vice President and
                                   Chief Financial Officer




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