<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, 1999

                         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 SEPTEMBER 30, 1999

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

        Item 1.  Financial Statements

                 Balance Sheets, September 30, 1999 and December 31, 1998................1

                 Statements of Operations,
                       Nine and Three Months Ended September 30, 1999 and 1998 ..........2

                 Statement of Partners' Equity (Deficiency),
                       Nine Months Ended September 30, 1999 .............................3

                 Statements of Cash Flows,
                       Nine Months Ended September 30, 1999 and 1998 ....................4

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

        Item 2.  Management's Discussion and Analysis of Financial
                        Condition and Results of Operations ............................12

PART II.  OTHER INFORMATION

        Item 1.   Legal Proceedings.....................................................16

        Item 6.   Exhibits and Reports on Form 8-K......................................16

        Signatures .....................................................................17
</TABLE>



<PAGE>   3

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                 BALANCE SHEETS

                    SEPTEMBER 30, 1999 AND DECEMBER 31, 1998

                                     ASSETS

<TABLE>
<CAPTION>
                                                            1999
                                                         (Unaudited)              1998
                                                         ------------         ------------
<S>                                                      <C>                  <C>
INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2)             $    868,228         $    744,457

CASH AND CASH EQUIVALENTS (Note 1)                          5,593,229           11,331,803

CASH DUE FROM ESCROW (Note 2)                                      --            1,950,530
                                                         ------------         ------------

          TOTAL ASSETS                                   $  6,461,457         $ 14,026,790
                                                         ============         ============

                             LIABILITIES AND PARTNERS' EQUITY

LIABILITIES:
     Accounts payable (Note 2)                           $         57         $    308,747
                                                         ------------         ------------


COMMITMENTS AND CONTINGENCIES (Notes 3 and 4)

PARTNERS' EQUITY (DEFICIENCY):
    General partners                                         (134,362)             (61,795)
    Limited partners                                        6,595,762           13,779,838
                                                         ------------         ------------

                                                            6,461,400           13,718,043
                                                         ------------         ------------
           TOTAL LIABILITIES AND PARTNERS' EQUITY        $  6,461,457         $ 14,026,790
                                                         ============         ============
</TABLE>



    The accompanying notes are integral part of these financial statements.



                                        1

<PAGE>   4

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                            STATEMENTS OF OPERATIONS
             NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                         Nine months        Three months        Nine months          Three months
                                                            ended               ended              ended               ended
                                                        Sept 30, 1999       Sept 30, 1999       Sept 30, 1998       Sept 30, 1998
                                                         -----------         -----------         -----------         -----------
<S>                                                      <C>                 <C>                 <C>                 <C>
INTEREST AND OTHER INCOME                                $   159,526         $    62,552         $   374,894         $   124,714
                                                         -----------         -----------         -----------         -----------

OPERATING EXPENSES:
       Legal and accounting                                   79,993               1,695              78,001              43,550
       Management fees - general partner (Note 3)            132,741              44,247             341,100             113,700
       Interest (Note 2)                                          --                  --             113,250              37,750
       Administrative  (Notes 2 and 3)                       100,772              32,962             573,853             173,602
                                                         -----------         -----------         -----------         -----------

            Total operating expenses                         313,506              78,904           1,106,204             368,602
                                                         -----------         -----------         -----------         -----------

LOSS FROM OPERATIONS                                        (153,980)            (16,352)           (731,310)           (243,888)

COST RELATED TO SALE OF LIMITED
      PARTNERSHIP INTEREST (Note 2)                         (380,795)

DISTRIBUTIONS FROM LIMITED
      PARTNERSHIPS RECOGNIZED AS
      INCOME (Note 2)                                         63,663                  --           1,733,146           1,083,961

EQUITY IN INCOME OF LIMITED PARTNERSHIPS
       AND AMORTIZATION OF ACQUISITION
       COSTS (Note 2)                                        165,000              55,000             192,000              64,000
                                                         -----------         -----------         -----------         -----------

NET (LOSS) INCOME                                        $  (306,112)        $    38,648         $ 1,193,836         $   904,073
                                                         ===========         ===========         ===========         ===========

NET (LOSS) INCOME PER LIMITED
     PARTNERSHIP INTEREST (Note 1)                       $       (27)        $         3         $       104         $        79
                                                         ===========         ===========         ===========         ===========
</TABLE>



The accompanying notes are integral part of these financial statements.



                                        2

<PAGE>   5

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                   STATEMENTS OF PARTNERS' EQUITY (DEFICIENCY)
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                 General              Limited
                                                 Partners             Partners              Total
                                               ------------         ------------         ------------
<S>                                            <C>                  <C>                  <C>
PARTNERSHIP INTERESTS                                                     11,444
                                                                    ============

EQUITY (DEFICIENCY),
       January 1, 1999                         $    (61,795)        $ 13,779,838         $ 13,718,043

       Distribution for the nine months
       ended September 30, 1999                     (69,506)          (6,881,025)          (6,950,531)

       Net loss for the nine months
       ended September 30, 1999                      (3,061)            (303,051)            (306,112)
                                               ------------         ------------         ------------

EQUITY (DEFICIENCY),
       September 30, 1999                      $   (134,362)        $  6,595,762         $  6,461,400
                                               ============         ============         ============
</TABLE>



    The accompanying notes are integral part of these financial statements.



                                        3

<PAGE>   6

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                            STATEMENTS OF CASH FLOWS
              FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                             1999                 1998
                                                                         ------------         ------------
<S>                                                                      <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net (loss) income                                                   $   (306,112)        $  1,193,836
     Adjustments to reconcile net income to net cash (used in)
       provided by operating activities:
         Equity in income of limited partnerships and
             amortization of acquisition costs                               (165,000)            (192,000)
         Increase in other assets                                                  --              (90,181)
         Decrease in interest and other payables                             (308,690)              (5,096)
                                                                         ------------         ------------

              Net cash (used in) provided by operating activities            (779,802)             906,559
                                                                         ------------         ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Sales proceeds                                                         1,950,530                   --
     Distributions from limited partnerships
        recognized as a return of investment                                   41,229               81,089
                                                                         ------------         ------------

              Net cash provided by investing activities                     1,991,759               81,089
                                                                         ------------         ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Distribution to partners                                              (6,950,531)                  --
                                                                         ------------         ------------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                       (5,738,574)             987,648
                                                                         ------------         ------------

CASH AND CASH EQUIVALENTS, beginning of period                             11,331,803           10,575,810
                                                                         ------------         ------------

CASH AND CASH EQUIVALENTS, end of period                                 $  5,593,229         $ 11,563,458
                                                                         ============         ============

SUPPLEMENTAL DISCLOSURE OF
  CASH FLOW INFORMATION:

     Cash paid during the period for interest                            $         --         $    127,042
                                                                         ============         ============
</TABLE>



    The accompanying notes are integral part of these financial statements.



                                        4
<PAGE>   7

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                          NOTES TO FINANCIAL STATEMENTS

                               SEPTEMBER 30, 1999

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, 1998. 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,
1999 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. Casden Properties Inc. owns a 95.25% economic interest in NAPICO,
with the balance owned by Casden Investment Corporation ("CIC"). CIC, which is
wholly owned by Alan I. Casden, owns 95% of the voting common stock of NAPICO.

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.



                                        5

<PAGE>   8

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               SEPTEMBER 30, 1999

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NET INCOME (LOSS) PER LIMITED PARTNERSHIP INTEREST

Net income (loss) per limited partnership interest was computed by dividing the
limited partners' share of net income (loss) by the number of limited
partnership interests outstanding during the year. The number of limited
partnership interests was 11,444 for the periods presented.

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 12 limited partnerships
as of September 30, 1999, after selling its interests in 20 limited partnerships
in 1998. The limited partnerships as of September 30, 1999 own residential low
income rental projects consisting of 1,181 apartment units. The mortgage loans
of these projects are payable to or 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.



                                        6

<PAGE>   9

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               SEPTEMBER 30, 1999

NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)

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

Distributions from limited partnerships are recognized as a reduction of capital
until the investment balance has been reduced to zero. Subsequent distributions
received are recognized as income.

The following is a summary of the investment in limited partnerships for the
nine months ended September 30, 1999:

<TABLE>
<S>                                                             <C>
Balance, beginning of period                                    $ 744,457
Amortization of acquisitions costs                                 (3,000)
Distribution recognized as a return of capital                    (41,229)
Equity in income of limited partnerships                          168,000
                                                                ---------

Balance, end of period                                          $ 868,228
                                                                =========
</TABLE>

The following are unaudited combined estimated statements of operations for the
nine and three months ended September 30, 1999 and 1998 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, 1999       Sept. 30, 1999       Sept. 30, 1998      Sept. 30, 1998
                            --------------       --------------       --------------      --------------
<S>                         <C>                  <C>                  <C>                 <C>
REVENUES
     Rental and other        $  6,168,000         $  2,056,000         $ 17,379,000        $  5,793,000
                             ------------         ------------         ------------        ------------

EXPENSES
     Depreciation               1,224,000              408,000            2,754,000             918,000
     Interest                   1,680,000              560,000            5,196,000           1,732,000
     Operating                  3,345,000            1,115,000            9,039,000           3,013,000
                             ------------         ------------         ------------        ------------

                                6,249,000            2,083,000           16,989,000           5,663,000
                             ------------         ------------         ------------        ------------

    Net (loss) income        $    (81,000)        $    (27,000)        $    390,000        $    130,000
                             ============         ============         ============        ============
</TABLE>



                                        7

<PAGE>   10

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               SEPTEMBER 30, 1999

NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)

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

Under recent adopted law and policy, the United States Department of Housing and
Urban Development ("HUD") has determined not to renew the Housing Assistance
Payment ("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. The payments under the renewed HAP Contracts are
not expected to be in an amount that would provide sufficient cash flow to
permit owners of properties subject to HAP Contracts to meet the debt service
requirements of existing loans insured by the Federal Housing Administration of
HUD ("FHA") unless such mortgage loans are restructured. 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 the Section 8
program. Under MAHRAA, an FHA-insured mortgage loan can be restructured into a
first mortgage loan which will be amortized on a current basis and a low
interest second mortgage loan payable to FHA which will only be payable on
maturity of the first mortgage loan. This restructuring results in a reduction
in annual debt service payable by the owner of the FHA-insured mortgage loan and
is expected to result in an insurance payment from FHA to the holder of the FHA-
insured loan due to the reduction in the principal amount. MAHRAA also phases
out project-based subsidies on selected properties serving families not located
in rental markets with limited supply, converting such subsidies to a
tenant-based subsidy.

MAHRAA provides that properties begin the restructuring process in federal
fiscal year 1999 (beginning October 1, 1998). On September 11, 1998, HUD issued
interim regulations implementing MAHRAA and final regulations are expected to be
issued in 1999. With respect to the local limited partnerships' expiring HAP
Contracts, it is expected that the HAP payments will be reduced or terminated
pursuant to the terms of MAHRAA.

When the HAP Contracts are subject to renewal, there can be no assurance that
the local limited partnerships in which the Partnership has an investment will
be permitted to restructure its mortgage indebtedness under MAHRAA. In addition,
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 is uncertain.



                                        8

<PAGE>   11


                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               SEPTEMBER 30, 1999

NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)

As a result of the foregoing, the Partnership in 1997 undertook an extensive
review of disposition, 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 $767,974 through December 31, 1998, including approximately $511,000 for the
nine months ended September 30, 1998. Additional costs amounting to
approximately $46,000 were incurred in the first quarter of 1999. Accounts
payable at December 31, 1998 includes approximately $168,000 of such costs.

On December 30, 1998, the Partnership sold its limited partnership interests in
20 local limited partnerships to Affiliates of Casden Properties Inc. ("CPI
Affiliates"). The sale resulted in cash proceeds to the Partnership of
$1,950,530 and a net gain of $2,647,716, after deducting selling costs. The cash
proceeds were held in escrow at December 31, 1998 and were collected in 1999. In
March 1999, the Partnership made cash distributions of $6,881,025 to the limited
partners and $69,506 to the general partners, which included using proceeds from
the sale of the partnership interests. Additional selling costs of $379,349 were
incurred in 1999 related to the sale of limited partnership interests in 1998.

CPI Affiliates purchased such limited partner interests for cash, which it
raised in connection with a private placement of its equity securities. The
purchase was subject to, among other things, (i) the purchase of the general
partner interests in the local limited partnerships by Casden Properties Inc.;
(ii) the approval of HUD and certain state housing finance agencies; and (iii)
the consent of the limited partners to the sale of the local limited partnership
interests held for investment by the Partnership.

In August 1998, a consent solicitation statement was 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. Prior to the
sale of the partnership interests, the consents of the limited partners to the
sale and amendments to the Partnership Agreement were obtained.

Until the sale of the partnership interests on December 30, 1998, the
Partnership was obligated on non-recourse notes payable of $1,510,000 which bore
interest at 10 percent per annum and had principal maturities ranging from June
2020 to March 2024. The notes and related interest



                                        9

<PAGE>   12

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               SEPTEMBER 30, 1999

NOTE 2 - INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)

were payable from cash flow generated from operations of the related rental
properties as defined in the notes. These obligations were collateralized by the
Partnership's investments in the limited partnerships. Unpaid interest was due
at maturity of the notes. The Partnership was relieved of these notes and
related accrued interest in connection with the sale of the partnership
interests.

NOTE 3 - 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 nine months ended September 30, 1999 and 1998 was approximately $133,000 and
$341,000, respectively.

The Partnership reimburses NAPICO for certain expenses. The reimbursement paid
to NAPICO was approximately $12,400 and $26,400 for the nine months ended
September 30, 1999 and 1998, respectively, and is included in administrative
expenses.

NOTE 4 - CONTINGENCIES

On August 27, 1998, two investors holding an aggregate of eight units of limited
partnership interests in the Partnership and two investors holding an aggregate
of five units of limited partnership interest in Real Estate Associates Limited
VI (an affiliated partnership in which NAPICO is the managing general partner)
commenced an action in the United States District Court for the Central District
of California against the Partnership, NAPICO and certain other affiliated
entities. The complaint alleges that the defendants breached their fiduciary
duty to the limited partners of certain NAPICO managed partnerships and made
materially false and misleading statements in the consent solicitation
statements sent to the limited partners of such partnerships relating to
approval of the transfer of partnership interests in limited partnerships,
owning certain of the properties, to CPI Affiliates. The plaintiffs seek
equitable relief, as well as compensatory damages and litigation related costs.
On August 4, 1999, one investor holding one unit of limited partnership interest
in Housing Programs Limited commenced a virtually identical action in the United
States District Court for the Central District of California against the
Partnership, NAPICO and certain other affiliated entities. The managing general
partner of such NAPICO managed partnerships and the other defendants believe
that the plaintiffs' claims are without merit and intend to contest the actions
vigorously.



                                       10

<PAGE>   13

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                               SEPTEMBER 30, 1999

NOTE 4 - CONTINGENCIES (CONTINUED)

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.

NOTE 5 - 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. The carrying amount of assets and liabilities
reported on the balance sheets that require such disclosure approximates fair
value due to their short-term maturity.



                                       11

<PAGE>   14

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                               SEPTEMBER 30, 1999

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. The Partnership made a distribution to investors on March 12, 1999,
using proceeds from the disposition of its investments in certain limited
partnerships.

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.



                                       12

<PAGE>   15

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                               SEPTEMBER 30, 1999

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

RESULTS OF OPERATIONS (CONTINUED)

Until the sale of the partnership interests on December 30, 1998, the
Partnership was obligated on non-recourse notes payable of $1,510,000 which bore
interest at 10 percent per annum and had principal maturities ranging from June
2020 to March 2024. The notes and related interest were payable from cash flow
generated from operations of the related rental properties as defined in the
notes. These obligations were collateralized by the Partnership's investments in
the limited partnerships. Unpaid interest was due at maturity of the notes. The
Partnership was relieved of these notes and related accrued interest in
connection with the sale of the partnership interests.

Under recent adopted law and policy, the United States Department of Housing and
Urban Development ("HUD") has determined not to renew the Housing Assistance
Payment ("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. The payments under the renewed HAP Contracts are
not expected to be in an amount that would provide sufficient cash flow to
permit owners of properties subject to HAP Contracts to meet the debt service
requirements of existing loans insured by the Federal Housing Administration of
HUD ("FHA") unless such mortgage loans are restructured. 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 the Section 8
program. Under MAHRAA, an FHA-insured mortgage loan can be restructured into a
first mortgage loan which will be amortized on a current basis and a low
interest second mortgage loan payable to FHA which will only be payable on
maturity of the first mortgage loan. This restructuring results in a reduction
in annual debt service payable by the owner of the FHA-insured mortgage loan and
is expected to result in an insurance payment from FHA to the holder of the FHA-
insured loan due to the reduction in the principal amount. MAHRAA also phases
out project-based subsidies on selected properties serving families not located
in rental markets with limited supply, converting such subsidies to a
tenant-based subsidy.

MAHRAA provides that properties begin the restructuring process in federal
fiscal year 1999 (beginning October 1, 1998). On September 11, 1998, HUD issued
interim regulations implementing MAHRAA and final regulations are expected to be
issued in 1999. With respect to the local limited partnerships' expiring HAP
Contracts, it is expected that the HAP payments will be reduced or terminated
pursuant to the terms of MAHRAA.



                                       13

<PAGE>   16

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                               SEPTEMBER 30, 1999

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

RESULTS OF OPERATIONS (CONTINUED)

When the HAP Contracts are subject to renewal, there can be no assurance that
the local limited partnerships in which the Partnership has an investment will
be permitted to restructure its mortgage indebtedness under MAHRAA. In addition,
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 is uncertain.

As a result of the foregoing, the Partnership in 1997 undertook an extensive
review of disposition, 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 $767,974 through December 31, 1998, including approximately $511,000 for the
nine months ended September 30, 1998. Additional costs amounting to
approximately $46,000 were incurred in the first quarter of 1999. Accounts
payable at December 31, 1998 includes $168,000 of such costs.

On December 30, 1998, the Partnership sold its limited partnership interests in
20 local limited partnerships to Affiliates of Casden Properties Inc. ("CPI
Affiliates"). The sale resulted in cash proceeds to the Partnership of
$1,950,530 and a net gain of $2,647,716, after deducting selling costs. The cash
proceeds were held in escrow at December 31, 1998 and were collected in 1999. In
March 1999, the Partnership made cash distributions of $6,881,025 to the limited
partners and $69,506 to the general partners, which included using proceeds from
the sale of the partnership interests. Additional selling costs of $379,349 were
incurred in 1999 related to the sale of limited partnership interests in 1998.

CPI Affiliates purchased such limited partner interests for cash, which it
raised in connection with a private placement of its equity securities. The
purchase was subject to, among other things, (i) the purchase of the general
partner interests in the local limited partnerships by Casden Properties Inc.;
(ii) the approval of HUD and certain state housing finance agencies; and (iii)
the consent of the limited partners to the sale of the local limited partnership
interests held for investment by the Partnership.



                                       14

<PAGE>   17

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                               SEPTEMBER 30, 1999

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

RESULTS OF OPERATIONS (CONTINUED)

In August 1998, a consent solicitation statement was 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. Prior to the
sale of the partnership interests, the consents of the limited partners to the
sale and amendments to the Partnership Agreement were obtained.



                                       15

<PAGE>   18

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                               SEPTEMBER 30, 1999

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On August 27, 1998, two investors holding an aggregate of eight units of limited
partnership interests in the Partnership and two investors holding an aggregate
of five units of limited partnership interest in Real Estate Associates Limited
VI (an affiliated partnership in which NAPICO is the managing general partner)
commenced an action in the United States District Court for the Central District
of California against the Partnership, NAPICO and certain other affiliated
entities. The complaint alleges that the defendants breached their fiduciary
duty to the limited partners of certain NAPICO managed partnerships and made
materially false and misleading statements in the consent solicitation
statements sent to the limited partners of such partnerships relating to
approval of the transfer of partnership interests in limited partnerships,
owning certain of the properties, to CPI Affiliates. The plaintiffs seek
equitable relief, as well as compensatory damages and litigation related costs.
On August 4, 1999, one investor holding one unit of limited partnership interest
in Housing Programs Limited commenced a virtually identical action in the United
States District Court for the Central District of California against the
Partnership, NAPICO and certain other affiliated entities. The managing general
partner of such NAPICO managed partnerships and the other defendants believe
that the plaintiffs' claims are without merit and intend to contest the actions
vigorously.

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.



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<PAGE>   19

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                               SEPTEMBER 30, 1999

                                   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., its General Partner

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

                                        Date:   November 17, 1999
                                             -----------------------------------

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

                                        Date:   November 17, 1999
                                             -----------------------------------



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