<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, 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 JUNE 30, 1998


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

             Item 1.  Financial Statements

                      Balance Sheets, June 30, 1998 and December 31, 1997.......................................1

                      Statements of Operations,
                              Six and Three Months Ended June 30, 1998 and 1997 ................................2

                      Statement of Partners' Equity (Deficiency),
                              Six Months Ended June 30, 1998 ...................................................3

                      Statements of Cash Flows,
                              Six Months Ended June 30, 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

                       JUNE 30, 1998 AND DECEMBER 31, 1997

                                     ASSETS

<TABLE>
<CAPTION>
                                                                  1998                 
                                                              (Unaudited)              1997
                                                              ------------         ------------
<S>                                                           <C>                  <C>         
      INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2)            $  1,377,421         $  1,249,422

      CASH AND CASH EQUIVALENTS (Note 1)                        10,764,152           10,575,810

      OTHER ASSETS                                                 225,181              135,000
                                                              ------------         ------------

      TOTAL ASSETS                                            $ 12,366,754         $ 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)                          394,540              414,277
         Accounts payable                                          246,688              110,193
                                                              ------------         ------------

                                                                 2,151,228            2,034,470
                                                              ------------         ------------

      COMMITMENTS AND CONTINGENCIES (Notes 4 and 5)


      PARTNERS' EQUITY (DEFICIENCY):
         General partners                                          (96,820)             (99,718)
         Limited partners                                       10,312,346           10,025,480
                                                              ------------         ------------

                                                                10,215,526            9,925,762
                                                              ------------         ------------
      TOTAL LIABILITIES AND PARTNERS'
               EQUITY                                         $ 12,366,754         $ 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
                SIX AND THREE MONTHS ENDED JUNE 30, 1998 AND 1997
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                          Six months        Three months         Six months       Three months
                                                             ended              ended              ended              ended
                                                         June 30, 1998      June 30, 1998      June 30, 1997      June 30, 1997
                                                         -------------      -------------      -------------      -------------
<S>                                                      <C>                <C>                <C>                <C>          
INTEREST AND OTHER INCOME                                $     250,180      $     125,341      $     225,819      $     115,875
                                                         -------------      -------------      -------------      -------------

OPERATING EXPENSES:
         Legal and accounting                                   61,160             37,481             65,824             34,729
         Management fees - general partner (Note 4)            227,400            113,700            227,400            113,710
         Interest (Note 3)                                      75,500             37,750             75,500             37,750
         Administrative  (Notes 2 and 4)                       373,542            164,464             43,941             24,132
                                                         -------------      -------------      -------------      -------------

              Total operating expenses                         737,602            353,395            412,665            210,321
                                                         -------------      -------------      -------------      -------------

LOSS FROM OPERATIONS                                          (487,422)          (228,054)          (186,846)           (94,446)

DISTRIBUTIONS FROM LIMITED PARTNERSHIPS RECOGNIZED AS
   INCOME (Note 2)                                             649,186            608,728            952,912            871,871

EQUITY IN INCOME OF LIMITED PARTNERSHIPS AND
   AMORTIZATION OF ACQUISITION COSTS (Note 2)                  128,000             64,000            128,000             64,000
                                                         -------------      -------------      -------------      -------------

NET INCOME                                               $     289,764      $     444,674      $     894,066      $     841,425
                                                         =============      =============      =============      =============

NET INCOME PER LIMITED PARTNERSHIP INTEREST (Note 1)     $          25      $           5      $          78      $          73
                                                         =============      =============      =============      =============
</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 SIX MONTHS ENDED JUNE 30, 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 income for the six months
            ended June 30, 1998                        2,898             286,866            289,764
                                                 -----------         -----------        -----------

      EQUITY (DEFICIENCY),
            June 30, 1998                        $   (96,820)        $10,312,346        $10,215,526
                                                 ===========         ===========        ===========
</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 SIX MONTHS ENDED JUNE 30, 1998 AND 1997
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                   1998                 1997
                                                               ------------         ------------
<S>                                                            <C>                  <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
       Net income                                              $    289,764         $    894,066
       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)            (128,000)
           Increase in other assets                                 (90,181)                  --
           Increase in interest and other payables                  116,759                 (927)
                                                               ------------         ------------

             Net cash provided by operating activities              188,342              765,139
                                                               ------------         ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
       Distribution from limited partnership
         recognized as a return of investment                            --              120,000
                                                               ------------         ------------


NET INCREASE IN CASH AND CASH EQUIVALENTS                           188,342              885,139

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

CASH AND CASH EQUIVALENTS, END OF PERIOD                       $ 10,764,152         $ 10,619,670
                                                               ============         ============
</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

                                  JUNE 30, 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 June 30, 1998 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. 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)

                                  JUNE 30, 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)

                                  JUNE 30, 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 six months ended June 30, 1998:

<TABLE>
<S>                                                     <C>        
        Balance, beginning of period                    $ 1,249,421
        Amortization of acquisitions costs                  (27,000)
        Equity in income of limited partnerships            155,000
                                                        -----------

        Balance, end of period                          $ 1,377,421
                                                        ===========
</TABLE>

        The following are unaudited combined estimated statements of operations
        for the six and three months ended June 30, 1998 and 1997 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, 1998        June 30, 1998        June 30,1997          June 30, 1997
                                     -------------        -------------        -------------         -------------
<S>                                  <C>                  <C>                  <C>                   <C>          
        REVENUES
             Rental and other        $  11,586,000        $   5,793,000        $  11,194,000         $   5,597,000
                                     -------------        -------------        -------------         -------------

        EXPENSES
             Depreciation                1,836,000              918,000            1,878,000               939,000
             Interest                    3,464,000            1,732,000            3,514,000             1,757,000
             Operating                   6,026,000            3,013,000            6,218,000             3,109,000
                                     -------------        -------------        -------------         -------------

                                        11,326,000            5,663,000           11,610,000             5,805,000
                                     -------------        -------------        -------------         -------------

        NET (LOSS) INCOME            $     260,000        $     130,000        $    (416,000)        $    (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)

                                  JUNE 30, 1998


NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)

        Under recently adopted law and policy, HUD has determined not to renew
        housing assistance payments contracts ("HAP Contracts") on their
        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 the properties in which the limited partnerships have invested
        that are subject to HUD mortgages and which may be sold to the REIT as
        set forth below. The Partnership has incurred expenses in connection
        with this review by various third party professionals, including
        accounting, legal, valuation, structural review and engineering costs,
        which amounted to approximately $469,000 through June 30, 1998,
        including approximately $328,000 for the six months ended June 30, 1998,
        which are included in general and administrative expenses.

        A real estate investment trust ("REIT") organized by affiliates 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 partnership 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 partnership 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 June 30,
        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)

                                  JUNE 30, 1998


NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)

        A consent solicitation statement will 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
        proposed 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
        collateralized 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 proportionate amount of the mortgage loans related to the
        Partnership's interests in the capital accounts of the respective
        partnership. The management fee incurred for the six months ended June
        30, 1998 and 1997 was approximately $227,400.

        The Partnership reimburses NAPICO for certain expenses. The
        reimbursement paid to NAPICO was approximately $17,615 and $16,441 for
        the six months ended June 30, 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)

                                  JUNE 30, 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)

                                  JUNE 30, 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)

                                  JUNE 30, 1998


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

        RESULTS OF OPERATIONS (CONTINUED)


        Under recently adopted law and policy, HUD has determined not to renew
        housing assistance payments contracts ("HAP Contracts") on their
        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 the properties in which the limited partnerships have invested
        that are subject to HUD mortgages and which may be sold to the REIT as
        set forth below. The Partnership has incurred expenses in connection
        with this review by various third party professionals, including
        accounting, legal, valuation, structural review and engineering costs,
        which amounted to approximately $469,000 through June 30, 1998,
        including approximately $328,000 for the six months ended June 30, 1998,
        which are included in general and administrative expenses.

        A real estate investment trust ("REIT") organized by affiliates 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 partnership 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 partnership 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



                                       12
<PAGE>   15
                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                  JUNE 30, 1998


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

        RESULTS OF OPERATIONS (CONTINUED)

        of purchase transactions with other NAPICO affiliated partnerships. As
        of June 30, 1998, the REIT had completed buy-out negotiations with a
        majority of the general partners of the local limited partnerships.

        A consent solicitation statement will 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
        proposed transaction.



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<PAGE>   16
                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                  JUNE 30, 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)

                                  JUNE 30, 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:  8/14/98
                                          --------------------------------------

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



                                    Date:  8/14/98
                                          --------------------------------------



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