<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, 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 JUNE 30, 1999

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

        Item 1. Financial Statements

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

                Statements of Operations,
                      Six and Three Months Ended June 30, 1999 and 1998 .............2

                Statement of Partners' Equity (Deficiency),
                      Six Months Ended June 30, 1999 ................................3

                Statements of Cash Flows,
                      Six Months Ended June 30, 1999 and 1998 .......................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, 1999 AND DECEMBER 31, 1998

                                     ASSETS

<TABLE>
<CAPTION>
                                                        1999
                                                     (Unaudited)               1998
                                                     ------------         ------------
<S>                                                  <C>                  <C>
INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2)         $    854,457         $    744,457

CASH AND CASH EQUIVALENTS (Note 1)                      5,569,653           11,331,803

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

          TOTAL ASSETS                               $  6,424,110         $ 14,026,790
                                                     ============         ============

                           LIABILITIES AND PARTNERS' EQUITY

LIABILITIES:
     Accounts payable                                $      1,357         $    308,747



COMMITMENTS AND CONTINGENCIES (Notes 3 and 4)

PARTNERS' EQUITY (DEFICIENCY):
    General partners                                     (134,749)             (61,795)
    Limited partners                                    6,557,502           13,779,838
                                                     ------------         ------------

                                                        6,422,753           13,718,043
                                                     ------------         ------------
           TOTAL LIABILITIES AND PARTNERS'

                EQUITY                               $  6,424,110         $ 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
                SIX AND THREE MONTHS ENDED JUNE 30, 1999 AND 1998
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                               Six months      Three months       Six months       Three months
                                                                 ended             ended             ended            ended
                                                             June 30, 1999     June 30, 1999     June 30, 1998     June 30, 1998
                                                             -------------     -------------     -------------     -------------
<S>                                                          <C>               <C>               <C>               <C>
INTEREST AND OTHER INCOME                                    $      96,974     $      59,365     $     250,180     $     125,341
                                                             -------------     -------------     -------------     -------------

OPERATING EXPENSES:
      Legal and accounting                                          78,298            44,084            61,160            37,481
      Management fees - general partner (Note 3)                    88,494            44,247           227,400           113,700
      Interest (Note 2)                                                 --                --            75,500            37,750
      Administrative  (Notes 2 and 3)                               69,257            31,735           373,542           164,464
                                                             -------------     -------------     -------------     -------------

            Total operating expenses                               236,049           120,066           737,602           353,395
                                                             -------------     -------------     -------------     -------------

LOSS FROM OPERATIONS                                              (139,075)          (60,701)         (487,422)         (228,054)

COST RELATED TO SALE OF LIMITED

      PARTNERSHIP INTEREST (Note 2)                               (379,348)

DISTRIBUTIONS FROM LIMITED
      PARTNERSHIPS RECOGNIZED AS
      INCOME (Note 2)                                               63,664            45,552           649,186           608,728

EQUITY IN INCOME OF LIMITED PARTNERSHIPS
      AND AMORTIZATION  OF ACQUISITION COSTS (Note 2)              110,000            55,000           128,000            64,000
                                                             -------------     -------------     -------------     -------------

NET (LOSS) INCOME                                            $    (344,759)    $      39,851     $     289,764     $     444,674
                                                             =============     =============     =============     =============

NET (LOSS) INCOME PER LIMITED
      PARTNERSHIP INTEREST (Note 1)                          $         (30)    $           5     $          25     $          39
                                                             =============     =============     =============     =============
</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 SIX MONTHS ENDED JUNE 30, 1999
                                   (Unaudited)

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

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

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

     Net loss for the six months
     ended June 30, 1999                           (3,448)            (341,311)            (344,759)
                                            -------------        -------------        -------------

EQUITY (DEFICIENCY),
     June 30, 1999                          $    (134,749)       $   6,557,502        $   6,422,753
                                            =============        =============        =============
</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 SIX MONTHS ENDED JUNE 30, 1999 AND 1998
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                              1999                 1998
                                                                          ------------         ------------
<S>                                                                       <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
      Net (loss) income                                                   $   (344,759)        $    289,764
      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                               (110,000)            (128,000)
          Increase in other assets                                                  --              (90,181)
          Decrease in interest and other payables                             (307,390)             116,759
                                                                          ------------         ------------

               Net cash (used in) provided by operating activities            (762,149)             188,342

CASH FLOWS FROM INVESTING ACTIVITIES:
      Sales proceeds                                                         1,950,530                   --

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

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                        (5,762,150)             188,342

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

CASH AND CASH EQUIVALENTS, end of period                                  $  5,569,653         $ 10,764,152
                                                                          ============         ============
</TABLE>



    The accompanying notes are integral part of these financial statements.



                                       4
<PAGE>   7

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                          NOTES TO FINANCIAL STATEMENTS

                                  JUNE 30, 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 June 30, 1999 and the results of operations and changes in cash
        flows for the six and 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. 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

                                  JUNE 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 by the number of
        limited partnership interests outstanding during the year. The number of
        limited partnership interests was 11,456 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 June 30, 1999, after selling its interests in 20
        limited partnerships in 1998. The limited partnerships as of June 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

                                  JUNE 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 six months ended June 30, 1999:

<TABLE>
<S>                                                                  <C>
        Balance, beginning of period                                 $ 744,457
        Amortization of acquisitions costs                              (2,000)
        Equity in income of limited partnerships                       112,000
                                                                     ---------
        Balance, end of period                                       $ 854,457
                                                                     =========
</TABLE>

        The following are unaudited combined estimated statements of operations
        for the six and three months ended June 30, 1999 and 1998 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, 1999        June 30, 1999        June 30,1998        June 30, 1998
                                     -------------        -------------        -------------       -------------
<S>                                  <C>                  <C>                  <C>                 <C>
        REVENUES
             Rental and other        $   4,112,000        $   2,056,000        $  11,586,000       $   5,793,000
                                     -------------        -------------        -------------       -------------

        EXPENSES
             Depreciation                  816,000              408,000            1,836,000             918,000
             Interest                    1,120,000              560,000            3,464,000           1,732,000
             Operating                   2,230,000            1,115,000            6,026,000           3,013,000
                                     -------------        -------------        -------------       -------------

                                         4,166,000            2,083,000           11,326,000           5,663,000
                                     -------------        -------------        -------------       -------------

        NET (LOSS) INCOME            $     (54,000)       $     (27,000)       $     260,000       $    (130,000)
                                     =============        =============        =============       =============
</TABLE>




                                       7
<PAGE>   10

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                          NOTES TO FINANCIAL STATEMENTS

                                  JUNE 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

                                  JUNE 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 $327,533 for the six months ended
        June 30, 1998.

        On December 30, 1998, the Partnership sold its limited partnership
        interests in 20 local limited partnerships to subsidiaries of Casden
        Properties Inc. The sale resulted in cash proceeds to the Partnership of
        $1,950,000 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 $69,505 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.

        Casden Properties Inc. 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
        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.



                                       9
<PAGE>   12

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                          NOTES TO FINANCIAL STATEMENTS

                                  JUNE 30, 1999

        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 six months ended June
        30, 1999 and 1998 was approximately $88,494 and $227,400, respectively.

        The Partnership reimburses NAPICO for certain expenses. The
        reimbursement paid to NAPICO was approximately $8,000 and $16,000 for
        the six months ended June 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 Real Estate Associates Limited III (an
        affiliated partnership in which NAPICO is the managing general partner)
        and two investors holding an aggregate of five units of limited
        partnership interest in Real Estate Associates Limited VI (another
        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
        Casden Properties Inc., which was organized by an affiliate of NAPICO.
        The plaintiffs seek equitable relief, as well as compensatory damages
        and litigation related costs. 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 action
        vigorously.

        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.



                                       10
<PAGE>   13

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                          NOTES TO FINANCIAL STATEMENTS

                                  JUNE 30, 1999

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)

                                  JUNE 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
        distributions to investors in June 30, 1999, previously 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.

        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



                                       12
<PAGE>   15

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                  JUNE 30, 1999

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

        RESULTS OF OPERATIONS (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.

        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.



                                       13
<PAGE>   16

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                  JUNE 30, 1999

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

        RESULTS OF OPERATIONS (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 $327,533 for the six months ended
        June 30, 1998.

        On December 30, 1998, the Partnership sold its limited partnership
        interests in 20 local limited partnerships to subsidiaries of Casden
        Properties Inc. 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 $69,505 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.

        Casden Properties Inc. 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.



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<PAGE>   17


                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                  JUNE 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 Real Estate Associates Limited III (an
        affiliated partnership in which NAPICO is the managing general partner)
        and two investors holding an aggregate of five units of limited
        partnership interest in Real Estate Associates Limited VI (another
        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
        Casden Properties Inc., which was organized by an affiliate of NAPICO.
        The plaintiffs seek equitable relief, as well as compensatory damages
        and litigation related costs. 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 action
        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>   18

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                  JUNE 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. General Partner


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

                                        Date:    August 13, 1999
                                             -----------------------------------


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

                                        Date:    August 13, 1999
                                             -----------------------------------



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