<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 MARCH 31, 1998

                         Commission File Number 0-10673

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A California Limited Partnership)

                  I.R.S. Employer Identification No. 95-3547611

                         9090 WILSHIRE BLVD., SUITE 201
                           BEVERLY HILLS, 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 MARCH 31, 1998


<TABLE>
<CAPTION>


PART I.  FINANCIAL INFORMATION
<S>                                                                                       <C>

           Item 1.  Financial Statements

                    Balance Sheets, March 31, 1998 and December 31, 1997 .................. 1
  
                    Statements of Operations,
                          Three Months Ended March 31, 1998 and 1997 ...................... 2

                    Statement of Partners' Equity (Deficiency),
                          Three Months Ended March 31, 1998 ............................... 3

                    Statements of Cash Flows,
                          Three Months Ended March 31, 1998 and 1997 ...................... 4

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

           Item 2.  Management's Discussion and Analysis of Financial
                        Condition and Results of Operations ...............................11


PART II.  OTHER INFORMATION

           Item 1.   Legal Proceedings ....................................................14

           Item 6.   Exhibits and Reports on Form 8-K .....................................14

           Signatures .....................................................................15
</TABLE>





<PAGE>   3
                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                 BALANCE SHEETS

                      MARCH 31, 1998 AND DECEMBER 31, 1997

                                     ASSETS
<TABLE>
<CAPTION>

                                                         1998                 1997
                                                     (Unaudited)          (Audited)
                                                     ------------         ------------

<S>                                                  <C>                  <C>         
INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2)         $  1,313,422         $  1,249,422

CASH AND CASH EQUIVALENTS (Note 1)                     10,448,785           10,575,810

OTHER ASSETS                                              189,561              135,000
                                                     ------------         ------------

      TOTAL ASSETS                                   $ 11,951,768         $ 11,960,232
                                                     ============         ============


             LIABILITIES AND PARTNERS' EQUITY

LIABILITIES:
   Notes payable (Notes 3 and 6)                     $  1,510,000         $  1,510,000
   Interest payable (Notes 3 and 6)                       452,027              414,277
   Accounts payable                                       218,889              110,193
                                                     ------------         ------------

                                                        2,180,916            2,034,470
                                                     ------------         ------------

COMMITMENTS AND CONTINGENCIES (Notes 4 and 5)


PARTNERS' EQUITY (DEFICIENCY):
   General partners                                      (101,267)             (99,718)
   Limited partners                                     9,872,119           10,025,480
                                                     ------------         ------------

                                                        9,770,852            9,925,762
                                                     ------------         ------------
      TOTAL LIABILITIES AND PARTNERS'
         EQUITY                                      $ 11,951,768         $ 11,960,232
                                                     ============         ============
</TABLE>



     The accompanying notes are integral part of these financial statements.
<PAGE>   4


                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                            STATEMENTS OF OPERATIONS
               FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
                                   (Unaudited)


<TABLE>
<CAPTION>

                                                           1998               1997
                                                         ---------         ---------

<S>                                                      <C>               <C>      
INTEREST AND OTHER INCOME                                $ 124,839         $ 109,944
                                                         ---------         ---------

OPERATING EXPENSES:
       Legal and accounting                                 61,429            31,095
       Management fees - general partner (Note 4)          113,700           113,700
       Interest (Note 3)                                    37,750            37,750
       Administrative  (Note 4)                            171,328            19,799
                                                         ---------         ---------

           Total operating expenses                        384,207           202,344
                                                         ---------         ---------

LOSS FROM OPERATIONS                                      (259,368)          (92,400)

DISTRIBUTIONS FROM LIMITED
   PARTNERSHIPS RECOGNIZED AS
   INCOME (Note 2)                                          40,458            81,041

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

NET INCOME                                               $(154,910)        $  52,641
                                                         =========         =========

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


     The accompanying notes are integral part of these financial statements.
<PAGE>   5
                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                   STATEMENTS OF PARTNERS' EQUITY (DEFICIENCY)
                    FOR THE THREE MONTHS ENDED MARCH 31, 1998
                                   (Unaudited)


<TABLE>
<CAPTION>

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

<S>                                      <C>                  <C>                  <C>         
PARTNERSHIP INTERESTS                                              11,456
                                                             ============


EQUITY (DEFICIENCY),
    January 1, 1998                      $    (99,718)        $ 10,025,480         $  9,925,762

    Net loss for the three months
    ended March 31, 1998                       (1,549)            (153,361)            (154,910)
                                         ------------         ------------         ------------

EQUITY (DEFICIENCY),
     March 31, 1998                      $   (101,267)        $  9,872,119         $  9,770,852
                                         ============         ============         ============
</TABLE>



     The accompanying notes are integral part of these financial statements.
<PAGE>   6
                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                            STATEMENTS OF CASH FLOWS
               FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                     1998               1997
                                                                 ------------         ------------
<S>                                                              <C>                  <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
      Net income                                                 $   (154,910)        $     52,641
      Adjustments to reconcile net income to net cash
        provided by operating activities:
          Equity in income of limited partnerships and
            amortization of acquisition costs                        (64,000)             (64,000)
          Increase in other assets                                   (54,561)                  --
          Increase in interest and other payable                      146,446               36,597
                                                                 ------------         ------------

               Net cash (used in) provided by
                 operating activities                                (127,025)              25,238
                                                                 ------------         ------------


NET (DECREASE) INCREASE IN CASH
      AND CASH EQUIVALENTS                                           (127,025)              25,238

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                     10,575,810            9,734,531
                                                                 ------------         ------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                         $ 10,448,785         $  9,759,769
                                                                 ============         ============
</TABLE>


     The accompanying notes are integral part of these financial statements.
<PAGE>   7



                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                          NOTES TO FINANCIAL STATEMENTS

                                 MARCH 31, 1998


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, 1997.
      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 March 31, 1998 and the results of operations and changes in cash flows
      for the three months then ended.

      The general partners have a 1 percent interest in profits and losses of
      the Partnership. The limited partners have the remaining 99 percent
      interest which is allocated in proportion to their respective individual
      investments. National Partnership Investments Corp. (NAPICO) is the
      corporate general partner of the Partnership. NAPICO is a wholly owned
      subsidiary of Casden Investment Corporation, which is wholly owned by Alan
      I. Casden.

      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)

                                 MARCH 31, 1998


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 two high credit
      quality institutions. Such cash and cash equivalents are in excess of the
      FDIC insurance limit.

      INCOME TAXES

      No provision has been made for income taxes in the accompanying financial
      statements since such taxes, if any, are the liability of the individual
      partners

      IMPAIRMENT OF LONG-LIVED ASSETS

      The Partnership reviews long-lived assets to determine if there has been
      any permanent impairment whenever events or changes in circumstances
      indicate that the carrying amount of the asset may not be recoverable. If
      the sum of the expected future cash flows is less than the carrying amount
      of the assets, the Partnership recognizes an impairment loss.

NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS

      The Partnership holds limited partnership interests in 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 the United States Department of Housing and
      Urban Development ("HUD") or state 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)

                                 MARCH 31, 1998


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 three months ended March 31, 1998:
<TABLE>
<CAPTION>

      <S>                                             <C>        
      Balance, beginning of period                    $ 1,249,421
      Amortization of acquisitions costs                  (13,500)
      Equity in income of limited partnerships             77,500
                                                      -----------
      Balance, end of period                          $ 1,313,422
                                                      ===========
</TABLE>

      The following are unaudited combined estimated statements of operations
      for the three months ended March 31, 1998 and 1997 for the limited
      partnerships in which the Partnership has investments:
<TABLE>
<CAPTION>

                                  Three months         Three months
                                      ended                ended
                                 March 31, 1998       March 31, 1997
                                   -----------        -----------
      <S>                          <C>                <C>        
      REVENUES
           Rental and other        $ 5,793,000        $ 5,597,000
                                   -----------        -----------

      EXPENSES
           Depreciation                918,000            939,000
           Interest                  1,732,000          1,757,000
           Operating                 3,013,000          3,109,000
                                   -----------        -----------

                                     5,663,000          5,805,000
                                   -----------        -----------

      NET (LOSS) INCOME            $   130,000        $  (208,000)
                                   ===========        ===========
</TABLE>

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



                                        7

<PAGE>   10


                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                                 MARCH 31, 1998


NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)

      Under recent adopted law and policy, HUD has determined not to renew
      housing assistance payments contracts ("HAP Contracts") on a long term
      basis on the existing terms. In connection with renewals of the HAP
      Contracts under such new law and policy, the amount of rental assistance
      payments under renewed HAP Contracts will be based on market rentals
      instead of above market rentals, which was generally the case under
      existing HAP Contracts. As a result, existing HAP Contracts that are
      renewed in the future on projects insured by the Federal Housing
      Administration of HUD ("FHA") will not provide sufficient cash flow to
      permit owners of properties to meet the debt service requirements of these
      existing FHA-insured mortgages. In order to address the reduction in
      payments under HAP Contracts as a result of this new policy, the
      Multi-family Assisted Housing Reform and Affordability Act of 1997
      ("MAHRAA"), which was adopted in October 1997, provides for the
      restructuring of mortgage loans insured by the FHA with respect to
      properties subject to HAP Contracts that have been renewed under the new
      policy. The restructured loans will be held by the current lender or
      another lender. Under MAHRAA, an FHA-insured mortgage loan can be
      restructured to reduce the annual debt service on such loan. There can be
      no assurance that the Partnership will be permitted to restructure its
      mortgage indebtedness pursuant to the new HUD rules implementing MAHRAA or
      that the Partnership would choose to restructure such mortgage
      indebtedness if it were eligible to participate in the MAHRAA program. It
      should be noted that there are uncertainties as to the economic impact on
      the Partnership of the combination of the reduced payments under the HAP
      Contracts and the restructuring of the existing FHA-insured mortgage loans
      under MAHRAA. Accordingly, the General Partners are unable to predict with
      certainty their impact on the Partnership's future cash flow.

      As a result of the foregoing, the Partnership is undergoing an extensive
      review of properties for disposition to the REIT as set forth below, 
      refinancing or re-engineering alternatives for the properties in which 
      the limited partnerships have invested and are subject to HUD mortgage 
      and rental subsidy programs. The Partnership has incurred expenses in 
      connection with this review by various third party professionals, 
      including accounting, legal, valuation, structural and engineering costs, 
      which amounted to approximately $337,000 as of March 31, 1998, including 
      approximately $196,000 for the three months ended March 31, 1998.

      A real estate investment trust ("REIT") organized by an affiliate of
      NAPICO has advised the Partnership that it intends to make a proposal to
      purchase from the Partnership certain of the limited partnership interests
      held for investment by the Partnership.

      The REIT proposes to purchase such limited partner interests for cash,
      which it plans to raise in connection with a private placement of its
      equity securities. The purchase is subject to, among other things, (i)
      consummation of such private placement by the REIT; (ii) the purchase of
      the general partner interests in the local limited partnerships by the
      REIT; (iii) the approval of HUD and certain state housing finance
      agencies; (iv) the consent of the limited partners to the sale of the
      local limited partnership interests held for investment by REAL III; and
      (v) the consummation of a minimum number of purchase transactions with
      other NAPICO affiliated partnerships. As of March 31, 1998, the REIT had
      completed buy-out negotiations with a majority of the general partners of
      the local limited partnerships.


                                        8

<PAGE>   11


                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                                 MARCH 31, 1998


NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)

      A proxy is contemplated to be sent to the limited partners setting forth
      the terms and conditions of the purchase of the limited partners'
      interests held for investment by the Partnership, together with certain
      amendments to the Partnership Agreement and other disclosures of various
      conflicts of interest in connection with the transaction.

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 three months ended March
      31, 1998 and 1997 was approximately $113,700.

      The Partnership reimburses NAPICO for certain expenses. The reimbursement
      paid to NAPICO was approximately $8,800 and $7,800 for the three months
      ended March 31, 1998 and 1997, 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.

      The Partnership has assessed the potential impact of the Year 2000
      computer systems issue on its operations. The Partnership believes that no
      significant actions are required to be taken by the Partnership to address
      the issue and that the impact of the Year 2000 computer systems issue will
      not materially affect the Partnership's future operating results or
      financial condition.


                                        9

<PAGE>   12


                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                                 MARCH 31, 1998


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.


                                       10

<PAGE>   13



                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                 MARCH 31, 1998


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 the
      Partnership's 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. 

      The Partnership accounts for its investments in the local limited
      partnerships on the equity method, thereby adjusting its investment
      balance by its proportionate share of the income or loss of the local
      limited partnerships. Losses incurred after the limited partnership
      investment account is reduced to zero are not recognized in accordance
      with the equity accounting method.

      Distributions received from limited partnerships are recognized as return
      of capital until the investment balance has been reduced to zero or to a
      negative amount equal to future capital contributions required. Subsequent
      distributions received are recognized as income. Overall distributions
      from limited partnerships continue to be favorable. This primarily is due,
      to improved operating results at several of the properties.

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

      The Partnership is obligated on non-recourse notes payable of $1,510,000
      which bear interest at 10 percent per annum and have principal maturities
      ranging from June 2020 to March 2024. The notes and related interest are
      payable from cash flow generated from operations of the related rental
      properties as defined in the notes. These obligations are collateralized
      by the Partnership's investments in the limited partnerships. Unpaid
      interest is due at maturity of the notes. Because no payments have been
      made on these notes, interest expense has remained constant for each of
      the three years.


                                       11

<PAGE>   14


                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                 MARCH 31, 1998


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

      RESULTS OF OPERATIONS (CONTINUED)

      Under recent adopted law and policy, HUD has determined not to renew
      housing assistance payments contracts ("HAP Contracts") on a long term
      basis on the existing terms. In connection with renewals of the HAP
      Contracts under such new law and policy, the amount of rental assistance
      payments under renewed HAP Contracts will be based on market rentals
      instead of above market rentals, which was generally the case under
      existing HAP Contracts. As a result, existing HAP Contracts that are
      renewed in the future on projects insured by the Federal Housing
      Administration of HUD ("FHA") will not provide sufficient cash flow to
      permit owners of properties to meet the debt service requirements of these
      existing FHA-insured mortgages. In order to address the reduction in
      payments under HAP Contracts as a result of this new policy, the
      Multi-family Assisted Housing Reform and Affordability Act of 1997
      ("MAHRAA"), which was adopted in October 1997, provides for the
      restructuring of mortgage loans insured by the FHA with respect to
      properties subject to HAP Contracts that have been renewed under the new
      policy. The restructured loans will be held by the current lender or
      another lender. Under MAHRAA, an FHA-insured mortgage loan can be
      restructured to reduce the annual debt service on such loan. There can be
      no assurance that the Partnership will be permitted to restructure its
      mortgage indebtedness pursuant to the new HUD rules implementing MAHRAA or
      that the Partnership would choose to restructure such mortgage
      indebtedness if it were eligible to participate in the MAHRAA program. It
      should be noted that there are uncertainties as to the economic impact on
      the Partnership of the combination of the reduced payments under the HAP
      Contracts and the restructuring of the existing FHA-insured mortgage loans
      under MAHRAA. Accordingly, the General Partners are unable to predict with
      certainty their impact on the Partnership's future cash flow.

      As a result of the foregoing, the Partnership is undergoing an extensive
      review of properties for disposition to the REIT as set forth below, 
      refinancing or re-engineering alternatives for the properties in which 
      the limited partnerships have invested and are subject to HUD mortgage 
      and rental subsidy programs. The Partnership has incurred expenses in 
      connection with this review by various third party professionals, 
      including accounting, legal, valuation, structural and engineering costs, 
      which amounted to approximately $337,000 as of March 31, 1998, including 
      approximately $196,000 in general and administrative expenses for the 
      three months ended March 31, 1998.

      A real estate investment trust ("REIT") organized by an affiliate of
      NAPICO has advised the Partnership that it intends to make a proposal to
      purchase from the Partnership certain of the limited partnership interests
      held for investment by the Partnership.

      The REIT proposes to purchase such limited partner interests for cash,
      which it plans to raise in connection with a private placement of its
      equity securities. The purchase is subject to, among other things, (i)
      consummation of such private placement by the REIT; (ii) the purchase of
      the general partner interests in the local limited partnerships by the
      REIT; (iii) the approval of HUD and certain state housing finance
      agencies; (iv) the consent of the limited partners to the sale of the
      local limited partnership interests held for investment by REAL III; and
      (v) the consummation of a minimum number of purchase transactions with
      other NAPICO affiliated partnerships. As of March 31, 1998, the REIT had
      completed buy-out negotiations with a majority of the general partners of
      the local limited partnerships.

                                       12

<PAGE>   15


                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                 MARCH 31, 1998


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

      RESULTS OF OPERATIONS (CONTINUED)

      A proxy is contemplated to be sent to the limited partners setting forth
      the terms and conditions of the purchase of the limited partners'
      interests held for investment by the Partnership, together with certain
      amendments to the Partnership Agreement and other disclosures of various
      conflicts of interest in connection with the transaction.


                                       13

<PAGE>   16



                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                 MARCH 31, 1998


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.



                                       14

<PAGE>   17


                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                 MARCH 31, 1998


                                   SIGNATURES


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

                       REAL ESTATE ASSOCIATES LIMITED III
                       (a California limited partnership)

                        By:  National Partnership Investments Corp.
                             General Partner


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


                        Date: May 18, 1998
                              --------------



                             /s/ CHARLES H. BOXENBAUM
                             ----------------------------------------
                             Charles H. Boxenbaum
                             Chief Executive Officer



                        Date: May 18, 1998
                              --------------


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