<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549


                                    FORM 10-Q


   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                                   Act of 1934

                  For the Quarterly Period Ended MARCH 31, 1997

                         Commission File Number 2-68983

                       REAL ESTATE ASSOCIATES LIMITED III
                       (A California Limited Partnership)

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

                         9090 WILSHIRE BLVD., SUITE 201
                           BEVERLY HILLS, CALIF. 90211

                         Registrant's Telephone Number,
                       Including Area Code (310) 278-2191



Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.


                                Yes     X      No
                                      ----        ----


<PAGE>   2



                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                               INDEX TO FORM 10-Q

                      FOR THE QUARTER ENDED MARCH 31, 1997



<TABLE>
<CAPTION>
PART I.  FINANCIAL INFORMATION
<S>          <C>                                                                                               <C>
             Item 1.  Financial Statements

                      Balance Sheets, March 31, 1997 and December 31, 1996......................................1

                      Statements of Operations,
                              Three Months Ended March 31, 1997 and 1996 .......................................2

                      Statement of Partners' Equity (Deficiency),
                              Three Months Ended March 31, 1997 ................................................3

                      Statements of Cash Flows,
                              Three Months Ended March 31, 1997 and 1996 .......................................4

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

             Item 2.  Management's Discussion and Analysis of Financial
                              Condition and Results of Operations ..............................................9


PART II.  OTHER INFORMATION

             Item 1.    Legal Proceedings......................................................................10

             Item 6.    Exhibits and Reports on Form 8-K.......................................................10

             Signatures........................................................................................11
</TABLE>





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

                                 BALANCE SHEETS
                      MARCH 31, 1997 AND DECEMBER 31, 1996


                                     ASSETS

<TABLE>
<CAPTION>
                                                                        1997           1996
                                                                     (Unaudited)      (Audited)
                                                                     ------------    ------------
<S>                                                                  <C>             <C>         
INVESTMENTS IN LIMITED PARTNERSHIPS (Note 2)                         $  1,127,487    $  1,063,487

CASH AND CASH EQUIVALENTS (Note 1)                                      9,759,769       9,734,531

OTHER ASSETS                                                              135,000         135,000
                                                                     ------------    ------------

          TOTAL ASSETS                                               $ 11,022,256    $ 10,933,018
                                                                     ============    ============


                     LIABILITIES AND PARTNERS' EQUITY (DEFICIENCY)

LIABILITIES:
     Notes payable (Notes 3 and 6)                                   $  1,510,000    $  1,510,000
     Interest payable (Notes 3 and 6)                                     412,353         374,603
     Accounts payable                                                       6,297           7,450
                                                                     ------------    ------------

                                                                        1,928,650       1,892,053
                                                                     ------------    ------------

COMMITMENTS AND CONTINGENCIES (Notes 4 and 5)


PARTNERS' EQUITY (DEFICIENCY):
    General partners                                                     (108,040)       (108,566)
    Limited partners                                                    9,201,646       9,149,531
                                                                     ------------    ------------

                                                                        9,093,606       9,040,965
                                                                     ------------    ------------
           TOTAL LIABILITIES AND PARTNERS'
                EQUITY (DEFICIENCY)                                  $ 11,022,256    $ 10,933,018
                                                                     ============    ============
</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
                   THREE MONTHS ENDED MARCH 31, 1997 AND 1996

                                   (Unaudited)


<TABLE>
<CAPTION>
                                                          1997         1996
                                                       ---------    ---------
<S>                                                    <C>          <C>      
INTEREST AND OTHER INCOME                              $ 109,944    $  70,137
                                                       ---------    ---------

OPERATING EXPENSES:
          Legal and accounting                            31,095       41,467
          Management fees - general partner (Note 4)     113,700      113,710
          Interest (Note 3)                               37,750       37,750
          Administrative  (Note 4)                        19,799       14,404
                                                       ---------    ---------

                Total operating expenses                 202,344      207,331
                                                       ---------    ---------

LOSS FROM OPERATIONS                                     (92,400)    (137,194)

DISTRIBUTIONS FROM LIMITED
      PARTNERSHIPS RECOGNIZED AS
      INCOME (Note 2)                                     81,041       81,250

EQUITY IN INCOME OF LIMITED
      PARTNERSHIPS AND AMORTI-
       ZATION OF ACQUISITION
       COSTS (Note 2)                                     64,000      142,000
                                                       ---------    ---------

NET INCOME                                             $  52,641    $  86,056
                                                       =========    =========

NET INCOME PER LIMITED PARTNERSHIP
     INTEREST (Note 1)                                 $       5    $       8
                                                       =========    =========
</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)
                        THREE MONTHS ENDED MARCH 31, 1997

                                   (Unaudited)

<TABLE>
<CAPTION>
                                        General        Limited
                                        Partners       Partners      Total
                                        ----------    ----------   ----------
<S>                                     <C>           <C>          <C>       
PARTNERSHIP INTERESTS
      March 31, 1997                                      11,456
                                                      ==========


EQUITY (DEFICIENCY),
      January 1, 1997                   $ (108,566)   $9,149,531   $9,040,965

      Net income for the three months
      ended March 31, 1997                     526        52,115       52,641
                                        ----------    ----------   ----------

EQUITY (DEFICIENCY),
      March 31, 1997                    $ (108,040)   $9,201,646   $9,093,606
                                        ==========    ==========   ==========
</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
                   THREE MONTHS ENDED MARCH 31, 1997 AND 1996

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                          1997           1996
                                                                      -----------    -----------

CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                   <C>            <C>        
       Net income                                                     $    52,641    $    86,056
       Adjustments to reconcile net income to net cash provided by
         (used in) operating activities:
           Equity in income of limited partnerships and
               amortization of acquisition costs                          (64,000)      (142,000)
           Increase in other assets                                          --          (34,500)
           Increase in interest and other payables                         36,597         53,150
                                                                      -----------    -----------

                Net cash provided by (used in) operating activities        25,238        (37,294)
                                                                      -----------    -----------


NET INCREASE (DECREASE) IN CASH
       AND CASH EQUIVALENTS                                                25,238        (37,294)

CASH AND CASH EQUIVALENTS,
       BEGINNING OF PERIOD                                              9,734,531      9,028,963
                                                                      -----------    -----------

CASH AND CASH EQUIVALENTS,
       END OF PERIOD                                                  $ 9,759,769    $ 8,991,669
                                                                      ===========    ===========
</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

                                 MARCH 31, 1997


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, 1996. Accounting
                      measurements at interim dates inherently involve greater
                      reliance on estimates than at year end. The results of
                      operations for the interim period presented are not
                      necessarily indicative of the results for the entire year.

                      In the opinion of the Partnership, the accompanying
                      unaudited financial statements contain all adjustments
                      (consisting primarily of normal recurring accruals)
                      necessary to present fairly the financial position as of
                      March 31, 1997 and the results of operations and changes
                      in cash flows for the three months then ended.

                      The general partners have a 1 percent interest in profits
                      and losses of the Partnership. The limited partners have
                      the remaining 99 percent interest which is allocated in
                      proportion to their respective individual investments.
                      National Partnership Investments Corp. (NAPICO) is the
                      corporate general partner of the Partnership.

                      USE OF ESTIMATES

                      The preparation of financial statements in conformity with
                      generally accepted accounting principles requires
                      management to make estimates and assumptions that affect
                      the reported amounts of assets and liabilities and
                      disclosure of contingent assets and liabilities at the
                      date of the financial statements and reported amounts of
                      revenues and expenses during the reporting period. Actual
                      results could differ from those estimates.

                      METHOD OF ACCOUNTING FOR INVESTMENT IN LIMITED 
                      PARTNERSHIPS

                      The investment in limited partnerships is accounted for on
                      the equity method. Acquisition, selection and other costs
                      related to the acquisition of the projects are capitalized
                      as part of the investment account, and are being amortized
                      on a straight line basis over the estimated lives of the
                      underlying assets, which is generally 30 years.

                      NET INCOME PER LIMITED PARTNERSHIP INTEREST

                      Net income per limited partnership interest was computed
                      by dividing the limited partners' share of net income by
                      the number of limited partnership interests outstanding
                      during the year. The number of limited partnership
                      interests was 11,456 for the periods presented.


                                        5
<PAGE>   8




                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                                 MARCH 31, 1997


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

                      CASH AND CASH EQUIVALENTS

                      Cash and cash equivalents consist of cash and bank
                      certificates of deposit with an original maturity of three
                      months or less. The Partnership has its cash and cash
                      equivalents on deposit primarily with one high credit
                      quality institution. 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 adopted Statement of Financial Accounting
                      Standards No. 121, Account for the Improvement of
                      Long-Lived Assets and for Long-Lived Assets To Be Disposed
                      Of as of January 1, 1996 without a significant effect on
                      its financial statements. 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 AND ADVANCES TO LIMITED PARTNERSHIPS

                      The Partnership holds limited partnership interests in 26
                      limited partnerships. In addition, the Partnership holds a
                      general partner interest in REA. NAPICO is also a general
                      partner in REA. REA, in turn, holds limited partner
                      interests in six additional limited partnerships. In
                      total, therefore, the Partnership holds interest, either
                      directly or indirectly including through REA, 32
                      partnerships which own residential rental projects
                      consisting of 3,062 apartment units. The mortgage loans of
                      these projects are insured by various governmental
                      agencies.

                      The Partnership, as a limited partner, is entitled to
                      between 75 percent and 99 percent of the profits and
                      losses of the limited partnerships it has invested in
                      directly. The Partnership is also entitled to 99.9 percent
                      of the profits and losses of REA. REA holds a 99 percent
                      interest in each of the limited partnerships in which it
                      has invested.



                                        6



<PAGE>   9



                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                                 MARCH 31, 1997


NOTE 2 - INVESTMENTS IN AND ADVANCES TO 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 as of March 31, 1997:
<TABLE>
<CAPTION>
                      <S>                                                                         <C>       
                      Balance, beginning of period                                                $1,063,487
                      Amortization of acquisitions costs                                              (1,000)
                      Equity in income of limited partnerships                                        65,000
                                                                                                  ----------

                      Balance, end of period                                                      $1,127,487
                                                                                                  ==========
</TABLE>

                      The following are unaudited combined estimated statements
                      of operations for the three months ended March 31, 1997
                      and 1996 for the limited partnerships in which the
                      Partnership has investments:

<TABLE>
<CAPTION>
                                                                                       1997           1996
                                                                                   -----------    -----------
REVENUES
<S>                                                                                <C>            <C>        
     Rental and other                                                              $ 5,597,000    $ 5,521,000
                                                                                   -----------    -----------
                                                                                   
EXPENSES                                                                           
     Depreciation                                                                      939,000        876,000
     Interest                                                                        1,757,000      1,729,000
     Operating                                                                       3,109,000      2,910,000
                                                                                   -----------    -----------
                                                                                     5,805,000      5,515,000
                                                                                   -----------    -----------
                                                                                   
NET INCOME                                                                         $  (208,000)   $     6,000
                                                                                   ===========    ===========
</TABLE>
                                                                          
       NAPICO, or one of its affiliates, is the general partner and property
       management agent for certain of the limited partnerships included above.

NOTE 3 - NOTES PAYABLES

       Certain of the Partnership's investments involved purchases of
       partnership interests from partners who subsequently withdrew from the
       operating partnerships. The Partnership is obligated on non-recourse
       notes payable of $1,510,000, bearing interest at 10 percent, to the
       sellers of the partnership interests.


                                        7



<PAGE>   10



                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                                 MARCH 31, 1997


NOTE 3 - NOTES PAYABLES (CONTINUED)

                      These notes are payable by the Partnership through REA,
                      and have principal maturity dates in June 2020 and March
                      2024 or upon the sale or refinancing of the underlying
                      partnership properties. These notes and the related
                      interest are collaterized by REA's investment in the
                      respective limited partnerships and are payable only out
                      of cash distributions from the investee partnerships, as
                      defined in the notes. Unpaid interest is due at maturity
                      of the notes.

NOTE 4 - MANAGEMENT FEE AND EXPENSES DUE TO GENERAL PARTNER

                      Under the terms of the Restated Certificate and Agreement
                      of Limited Partnership, the Partnership is obligated to
                      NAPICO for an annual management fee approximately equal to
                      .4 percent of the invested assets. Invested assets are
                      defined as the costs of acquiring project interests,
                      including the porportionate amount of the mortgage loans
                      related to the Partnership's interests in the capital
                      accounts of the respective partnership. The management fee
                      incurred for the three months ended March 31, 1997 and
                      1996 was approximately $113,700.

                      The Partnership reimburses NAPICO for certain expenses.
                      The reimbursement paid to NAPICO was approximately $7,836
                      and $7,482 for the three months ended March 31, 1997 and
                      1996, respectively, and is included in administrative
                      expenses.

NOTE 5 - CONTINGENCIES

                      The corporate general partner of the Partnership is
                      involved in various lawsuits arising from transactions in
                      the ordinary course of business. In the opinion of
                      management and the corporate general partner, the claims
                      will not result in any material liability to the
                      Partnership.

NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS

                      Statement of Financial Accounting Standards No. 107,
                      "Disclosure about Fair Value of Financial Instruments,"
                      requires disclosure of fair value information about
                      financial instruments, when it is practicable to estimate
                      that value. The notes payable are collateralized by the
                      Partnership's investments in the investee limited
                      partnerships and are payable only out of cash
                      distributions from the investee partnerships. The
                      operations generated by the investee limited partnerships
                      are subject to various government rules, regulations and
                      restrictions which make it impracticable to estimate the
                      fair value of the notes payable and related accrued
                      interest. The carrying amount of other assets and
                      liabilities reported on the balance sheets that require
                      such disclosure approximates fair value due to their
                      short-term maturity.


                                        8



<PAGE>   11



                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                 MARCH 31, 1997


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.

                      RESULTS OF OPERATIONS

                      Partnership revenues consist primarily of interest income
                      earned on certificates of deposit and other temporary
                      investment of funds not required for investment in local
                      partnerships.

                      Operating expenses consist primarily of recurring general
                      and administrative expenses and professional fees for
                      services rendered to the Partnership. In addition, an
                      annual Partnership management fee in an amount equal to .4
                      percent of investment assets is payable to the corporate
                      general partner. Operating expenses did not vary
                      significantly for the periods presented.

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

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

                      Except for certificates of deposit and money market funds,
                      the Partnership's investments are entirely interests in
                      other limited partnerships owning government assisted
                      projects. 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.



                                        9



<PAGE>   12



                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                 MARCH 31, 1997


PART II.  OTHER INFORMATION

ITEM 1.               LEGAL PROCEEDINGS

                      The corporate general partner is involved in various
lawsuits. None of these are related to REAL III.


ITEM 6.               EXHIBITS AND REPORTS ON FORM 8-K

                      (a)       No exhibits are required per the provision of 
Item 7 of regulation S-K.



                                       10



<PAGE>   13


                       REAL ESTATE ASSOCIATES LIMITED III
                       (A CALIFORNIA LIMITED PARTNERSHIP)

                                 MARCH 31, 1997


                                   SIGNATURES


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


                                  REAL ESTATE ASSOCIATES LIMITED III
                                  (a California limited partnership)

                                  By:    National Partnership Investments Corp.
                                         General Partner


                                  Date:
                                       --------------------------------


                                  By:
                                       --------------------------------
                                         Bruce Nelson
                                         President


                                  Date:
                                       --------------------------------


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


                                  Date:
                                       --------------------------------

                                       11