--------------------------------------------------------------------------------

                          U. S. SECURITIES AND EXCHANGE
                        COMMISSION Washington, D.C. 20549

                               ------------------



                                   FORM 10-KSB


                               ------------------



                 ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2005


                               ------------------



                         Commission file number 0-11962

                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
             Organized pursuant to the Laws of the State of Maryland


                               ------------------



        Internal Revenue Service - Employer Identification No. 52-1311532

                 11200 Rockville Pike, Rockville, Maryland 20852

                                 (301) 468-9200


                               ------------------



                Securities registered under Section 12(g) of the
                                 Exchange Act:

                        UNITS OF LIMITED PARTNER INTEREST


                               ------------------



Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 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 [ ]

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

Check if disclosure  of delinquent  filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure  will be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB [X]

State issuer's revenues for its most recent fiscal year $643,196.

The units of limited  partner  interest of the  registrant are not traded in any
market.  Therefore,  the units of limited partner  interest had neither a market
selling  price nor an average bid or asked price within the 60 days prior to the
date of this filing.

--------------------------------------------------------------------------------
<PAGE>



                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                        2005 ANNUAL REPORT ON FORM 10-KSB

                                TABLE OF CONTENTS





                                                                         Page

                                     PART I

Item 1.   Business....................................................... I-1
Item 2.   Properties..................................................... I-4
Item 3.   Legal Proceedings.............................................. I-4
Item 4.   Submission of Matters to a Vote of Security Holders............ I-4


                                     PART II

Item 5.   Market for the Registrant's Partnership Interests
            and Related Partnership Matters ............................. II-1
Item 6.   Management's Discussion and Analysis of Financial Condition
            and Results of Operations.................................... II-2
Item 7.   Financial Statements........................................... II-8
Item 8.   Changes In and Disagreements With Accountants
            on Accounting and Financial Disclosure....................... II-8
Item 8A.  Controls and Procedures........................................ II-8
Item 8B.  Other Information.............................................. II-9



                                    PART III

Item 9.   Directors and Executive Officers of the Registrant............. III-1
Item 10.  Executive Compensation......................................... III-1
Item 11.  Security Ownership of Certain Beneficial Owners and Management. III-2
Item 12.  Certain Relationships and Related Transactions................. III-3
Item 13.  Exhibits....................................................... III-3
Item 14.  Principal Accountant Fees and Services......................... III-4

Signatures............................................................... III-5

Report of Independent Registered Public Accounting Firm.................. III-6

Financial Statements..................................................... III-7



<PAGE>
                                     PART I
                                     ------

ITEM 1. BUSINESS
        --------

     Capital Realty  Investors-III  Limited  Partnership (the  Partnership) is a
limited  partnership which was formed under the Maryland Revised Uniform Limited
Partnership Act on June 27, 1983. On November 7, 1983, the Partnership commenced
offering 60,000 units of additional  limited partner  interest  through a public
offering  which  was  managed  by  Merrill  Lynch,  Pierce,  Fenner  and  Smith,
Incorporated. The Partnership closed the offering in January 1984 when it became
fully subscribed. As of December 31, 2005, 118 units of limited partner interest
had been abandoned.

     The General  Partners of the Partnership are C.R.I.,  Inc. (CRI),  which is
the  Managing  General  Partner,  and  current and former  shareholders  of CRI.
Services for the  Partnership  are performed by CRI, as the  Partnership  has no
employees of its own.

     The  Partnership  was  formed  to  invest  in  real  estate,  which  is the
Partnership's  principal  business  activity,  by acquiring and holding  limited
partner interests in limited partnerships (Local Partnerships).  The Partnership
originally made investments in 37 Local  Partnerships.  As of December 31, 2005,
the Partnership  retained  investments in 12 Local  Partnerships.  Each of these
Local Partnerships owns either a federal or state government-assisted  apartment
complex, which provides housing principally to the elderly and/or to individuals
and families of low or moderate income, or a conventionally  financed  apartment
complex. The original objectives of these investments,  not necessarily in order
of importance, were to:

     (i)  preserve and protect the Partnership's capital;
     (ii) provide,  during  the  early  years of the  Partnership's  operations,
          current tax  benefits to the  partners in the form of tax losses which
          the partners could use to offset income from other sources;
    (iii) provide capital  appreciation  through  increases in the value of the
          Partnership's   investments  and  increased  equity  through  periodic
          payments on the indebtedness on the apartment complexes; and
     (iv) provide  cash   distributions   from  sale  or   refinancing   of  the
          Partnership's  investments  and,  on  a  limited  basis,  from  rental
          operations.

See Part II, Item 6, Management's Discussion and Analysis of Financial Condition
and Results of  Operations,  for a discussion of factors  affecting the original
investment objectives.

     The Local Partnerships in which the Partnership  invested were organized by
private  developers  who acquired  the sites,  or options  thereon,  applied for
mortgage  financing and applicable  mortgage  insurance and/or subsidies and who
generally  remain as the local general  partners in the Local  Partnerships.  In
most  cases,  the  local  general  partners  of the  Local  Partnerships  retain
responsibility  for maintaining,  operating and managing the projects.  However,
under certain  circumstances,  the Local  Partnerships'  partnership  agreements
permit removal of the local general partner and  replacement  with another local
general  partner or with an  affiliate  of the  Partnership's  Managing  General
Partner.

     As a result of its investment in the Local  Partnerships,  the  Partnership
became the principal  limited partner in 31 (eight  remaining as of December 31,
2005)  Local  Partnerships.  As  a  limited  partner,  the  Partnership's  legal
liability  for  obligations  of  the  Local   Partnerships  is  limited  to  its
investment.  In another  six (four  remaining  as of  December  31,  2005) Local
Partnerships,  the  Partnership  invested as a limited  partner in  intermediary
partnerships  which,  in  turn,  invested  as  general  partners  in  the  Local
Partnerships. In most cases, an affiliate of the Managing General Partner of the
Partnership is also a general partner of the 12 Local  Partnerships and the four
intermediary  partnerships.  The local  general  partners and  affiliates of the
Managing  General Partner may operate other apartment  complexes which may be in
competition  for  eligible  tenants  with  the  Local  Partnerships'   apartment
complexes.

                                       I-1

<PAGE>
                                     PART I
                                     ------

ITEM 1. BUSINESS - Continued
        --------

     Although each of the Local  Partnerships in which the Partnership  invested
owns an  apartment  complex that must  compete in the  marketplace  for tenants,
interest subsidies and/or rent supplements from governmental  agencies generally
make it possible to offer certain of the dwelling units to eligible tenants at a
cost significantly below the market rate for comparable  conventionally financed
dwelling units.  Based on available data, the Managing  General Partner believes
there to be no material  risk of market  competition  in the  operations  of the
apartment   complexes   described  below  which  would   adversely   impact  the
Partnership.

     A schedule of the apartment  complexes owned by Local Partnerships in which
the Partnership has an investment as of December 31, 2005, follows.

<TABLE>
<CAPTION>

                            SCHEDULE OF APARTMENT COMPLEXES OWNED BY LOCAL PARTNERSHIPS
                             IN WHICH CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
                                               HAS AN INVESTMENT (1)

                                                                                 Number         Units
                              Mortgage                                             of       Authorized for     Expiration
 Name and Location           Payable at         Financed and/or Insured          Rental       Low Income           of
of Apartment Complex        12/31/05 (2)        and/or Subsidized Under          Units        Subsidies       HAP Contract
--------------------        ------------    -------------------------------     --------    --------------    ------------
<S>                         <C>             <C>                                 <C>         <C>               <C>
Arboretum Village           $11,870,981     Conventional                            308             0              --
 Lisle, IL

Heritage Estates I            2,110,318     Missouri Housing Development            228             0              --
 St. Louis, MO                               Agency (MHDA)/Section 221(d)
                                             (4) of the National Housing
                                             Act (NHA)

Heritage Estates II           1,770,092     MHDA/Section 221 (d)(4) of the          160             0              --
 St. Louis, MO                               NHA

Lakewood Apts.                  781,555     Rural Housing & Community                50            50           07/31/09 (3)
 Eufaula, AL                                 Development Services (RHCD)

Meadow Lanes Apts.            1,167,707     Michigan State Housing Develop-         118             0                 --
 Holland, MI                                 ment Authority/Section 236 of
                                             the NHA

Monterey/Hillcrest           13,772,111     Section 221(d)(4) of the NHA/FHA        300            60           04/23/24 (3)
 Waukesha, WI

Victorian Towers              4,538,567     New Jersey Housing and Mortgage         205            27           12/01/23
 Cape May, NJ                                 Finance Agency/Section 8

Villa Mirage I                1,735,630     California Housing Finance               50            50           12/19/06 (3)(4)
 Rancho Mirage, CA                            Agency (CHFA)/Section 8

Villa Mirage II               1,734,982     CHFA/Section 8                           48            48           12/14/15
 Rancho Mirage, CA

Village Squire I & II         8,065,536     Conventional                            377             0              --
 Canton, MI

Village Squire III            5,203,763     Conventional                            224             0              --
 Canton, MI

Windham Village               1,996,071     CHFA                                     50            44           10/30/15
 Santa Rosa, CA
                            -----------                                          ------          ----
Totals (12 Properties)      $54,747,313                                           2,118           279
                            ===========                                          ======          ====

</TABLE>

                                   (continued)

                                       I-2

<PAGE>
                                     PART I
                                     ------

ITEM 1. BUSINESS - Continued
        --------

<TABLE>
<CAPTION>
                                      SCHEDULE OF APARTMENT COMPLEXES OWNED BY LOCAL PARTNERSHIPS
                                       IN WHICH CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
                                                   HAS AN INVESTMENT (1) - Continued


                                                                                         Average Effective Annual
                                            Units Occupied As                                 Rental Per Unit
                                        Percentage of Total Units                          for the Years Ended
                                           As of December 31,                                  December 31,
 Name and Location               -----------------------------------     -------------------------------------------------------
of Apartment Complex             2005    2004    2003   2002    2001       2005      2004         2003        2002        2001
--------------------             ----    ----    ----   ----    ----     -------   --------     --------    --------    --------
<S>                              <C>     <C>     <C>    <C>     <C>      <C>       <C>          <C>         <C>         <C>
Arboretum Village                 93%     89%     93%    87%     88%     $ 9,425   $ 9,554      $ 9,498     $ 9,833     $ 9,883
 Lisle, IL

Heritage Estates I                95%    100%    100%   100%    100%       5,661     5,574        5,628       5,584       5,264
 St. Louis, MO

Heritage Estates II               95%    100%    100%   100%    100%       5,638     5,569        5,589       5,596       5,314
 St. Louis, MO

Lakewood Apts.                   100%    100%    100%   100%    100%       5,075     4,953        4,820       4,572       4,509
 Eufaula, AL

Meadow Lanes Apts.                96%     96%     96%    95%     92%       6,257     6,326        6,622       6,443       6,361
 Holland, MI

Monterey/Hillcrest                95%     97%     97%    96%     99%       8,461     8,490        8,826       9,023       8,954
 Waukesha, WI

Victorian Towers                  98%    100%     99%    98%     96%       7,067     6,970        6,711       6,391       6,533
 Cape May, NJ

Villa Mirage I                    98%     98%     98%    97%     99%      10,087    10,030        9,697       9,430       9,599
 Rancho Mirage, C

Villa Mirage II                  100%    100%    100%    99%     99%       9,960    10,011        9,657       9,603       9,612
 Rancho Mirage, CA

Village Squire I & II             91%     95%     93%    96%     96%       6,220     6,350        6,591       6,593       6,785
 Canton, MI

Village Squire III                85%     93%     88%    95%     90%       5,955     6,278        6,513       6,518       6,670
 Canton, MI

Windham Village                   99%     98%    100%   100%    100%      10,904    11,203       11,353      11,568      10,857
 Santa Rosa, CA
                                 ---     ---     ---    ---     ---      -------   -------      -------     -------     -------
Totals (12 Properties) (5)        95%     97%     97%    97%     97%     $ 7,559   $ 7,609      $ 7,625     $ 7,596     $ 7,528
                                 ===     ===     ===    ===     ===      =======   =======      =======     =======     =======
</TABLE>


     (1)  All properties are  multifamily  housing  complexes.  No single tenant
          rents 10% or more of the rentable square footage.  Residential  leases
          are  typically  one year or less in length,  with  varying  expiration
          dates,  and  substantially  all  rentable  space  is  for  residential
          purposes.
     (2)  The amounts  provided are the balances of first mortgage loans payable
          by the Local Partnerships as of December 31, 2005.
     (3)  The Section 8 HAP contract  expiration date reflects an extension from
          the original expiration date, in accordance with Federal legislation.
     (4)  It is anticipated that the Local Partnership will extend its Section 8
          HAP contract for a one-year period at its expiration in 2005.
     (5)  The  totals  for the  percentage  of units  occupied  and the  average
          effective annual rental per unit are based on a simple average.

     Effective January 2, 2004, the Partnership's interest in Highland Manor was
transferred to the purchase  money  noteholders.  See the notes to  consolidated
financial statements for additional information concerning the transfer.

     On November 4, 2004, the Partnership's interests in Briar Crest I and Briar
Crest II were sold. See the notes to the consolidated  financial  statements for
additional information concerning the sale.


                                       I-3

<PAGE>
                                     PART I
                                     ------

ITEM 1. BUSINESS - Continued
        --------

     On July 26, 2005,  the properties  related to Bartley Manor,  Village Green
and Village Square were sold. See the notes to consolidated financial statements
for additional information concerning the sale.

     On February 8, 2006, the Partnership's  interests in Heritage Estates I and
Heritage Estates II were transferred to the purchase money noteholders.  See the
notes to consolidated financial statements for additional information concerning
the sale.

     On March 1, 2006, the Partnership's interest in Arboretum Village was sold.
See the notes to consolidated  financial  statements for additional  information
concerning the sale.


ITEM 2. PROPERTIES
        ----------

     Through its ownership of limited partner  interests in Local  Partnerships,
Capital Realty Investors-III Limited Partnership indirectly holds an interest in
the  real  estate  owned by the  Local  Partnerships.  See  Part I,  Item 1, for
information concerning these properties.


ITEM 3. LEGAL PROCEEDINGS
        -----------------

     There are no material pending legal proceedings to which the Partnership is
a party.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
        ---------------------------------------------------

     On November 21, 2005, the  Partnership  filed a Definitive  Proxy Statement
pursuant to Section 14(a) of the Securities  Exchange Act of 1934, and mailed it
to limited partners to solicit consents for approval of the following:

     (1)  the sale of all of the Partnership's assets and the dissolution of the
          Partnership pursuant to a Plan of Liquidation and Dissolution, and the
          amendment of the Partnership's Limited Partnership Agreement to permit
          the  Managing  General  Partner,  CRI,  to be  eligible  to receive an
          increased  property  disposition  fee from the Partnership on the same
          basis as such fees may  currently be paid to Local  General  Partners,
          real estate  brokers or other third party  intermediaries  employed to
          sell  properties  in which the  Partnership  holds  interests,  to the
          extent that CRI markets and sells the Partnership's  assets instead of
          such persons (a "Disposition Fee"); and

     (2)  the amendment of the Partnership's  Limited  Partnership  Agreement to
          permit CRI to be eligible to receive a partnership  liquidation fee in
          the amount of $500,000,  payable only if the Managing  General Partner
          is  successful in  liquidating  all of the  Partnership's  investments
          within 48 months from the date the  liquidation  is approved  [January
          20, 2006], in recognition  that one or more of the properties in which
          the Partnership holds an interest might not be saleable to parties not
          affiliated  with the respective  Local  Partnership  due to the amount
          and/or  terms  of  their  current   indebtedness   (the   "Partnership
          Liquidation Fee").

     The matters for which consent was solicited are collectively referred to as
the "Liquidation."

                                       I-4

<PAGE>
                                     PART I
                                     ------


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - Continued
        ---------------------------------------------------

     The record  date for  voting was  November  1, 2005,  and the final  voting
deadline was January 20, 2006. The Managing General Partner has received consent
from a majority of Limited  Partners for the liquidation of the  Partnership.  A
tabulation of votes received by the voting deadline follows.

<TABLE>
<CAPTION>
                                   FOR                     AGAINST                  ABSTAIN                  TOTAL
                           --------------------     --------------------     --------------------      -------------------
                           Units of                 Units of                 Units of                  Units of
                           limited                  limited                  limited                   limited
                           partner                  partner                  partner                   partner
Description                interest     Percent     interest     Percent     interest     Percent      Interest    Percent
-----------                --------     -------     --------     -------     --------     -------      --------    -------
<S>                        <C>          <C>         <C>          <C>         <C>          <C>          <C>         <C>
Sale, dissolution
  and increased
  Disposition Fee           34,464       57.55%      1,778        2.97%         250        0.42%        36,492     60.94%

$500,000 Partnership
  Liquidation Fee           30,535       50.99%      5,087        8.49%         860        1.44%        36,482     60.92%

</TABLE>

     There can be no assurance that the Liquidation  will be completed  pursuant
to the Plan of Liquidation and Dissolution.

                                       I-5

<PAGE>
                                     PART II
                                     -------

ITEM 5. MARKET FOR THE REGISTRANT'S PARTNERSHIP INTERESTS
        -------------------------------------------------
          AND RELATED PARTNERSHIP MATTERS
          -------------------------------

     (a)  There is no  established  market for the purchase and sale of units of
          additional  limited  partner  interest  (Units)  in  the  Partnership,
          although various informal  secondary market services exist. Due to the
          limited markets, however, investors may be unable to sell or otherwise
          dispose of their Units.

                            Registered Tender Offers
                            ------------------------

          On  March  15,  2006,   affiliates  of  MacKenzie,   Patterson  Fuller
          (Mackenzie)  initiated  a  registered  tender  offer to purchase up to
          12,000 of the outstanding  Units in the Partnership at a price of $200
          per  Unit.  The  offer  expires  April  21,  2006.  Mackenzie  is  not
          affiliated with the Partnership or the Managing General  Partner.  The
          price offered was determined solely at the discretion of Mackenzie and
          does not necessarily represent the fair market value of each Unit.

          In response to the Mackenzie  registered  tender  offer,  on March 23,
          2006, the Managing  General  Partner filed a Schedule  14D-9.  In that
          filing, the Managing General Partner recommended that Limited Partners
          reject  the  Mackenzie  offer  because  it viewed  the offer  price as
          inadequate.

     (b)  As of March 29, 2006 there were approximately 4,023 registered holders
          of Units in the Partnership.

     (c)  On February 26, 2004,  the  Partnership  made a cash  distribution  of
          $2,275,516  ($38 per Unit) to  Additional  Limited  Partners  who were
          holders of record as of January 1, 2004. The distribution consisted of
          proceeds  from the sale of Walsh  Park.  On  December  15,  2004,  the
          Partnership  made a cash  distribution of $3,053,982 ($51 per unit) to
          Additional  Limited Partners who were holders of record as of November
          1, 2004, and a cash  distribution  of $40,744 to the General  Partners
          and Initial and Special Limited Partners.  The distribution  consisted
          of cash resources  accumulated from operations and distributions  from
          Local  Partnerships,  and of  proceeds  received  from the sale of the
          Partnership's  interests  in Briar  Crest I and  Briar  Crest  II.  On
          December  6,  2005,  the  Partnership  made  a  cash  distribution  of
          $1,197,640  ($20 per unit) to  Additional  Limited  Partners  who were
          holders of record as of August 31, 2005. The distribution consisted of
          proceeds  received  from the sales of the  Partnership's  interests in
          Bartley Manor, Village Green and Village Square.

                                      II-1

<PAGE>
                                     PART II
                                     -------


ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        -------------------------------------------------
          CONDITION AND RESULTS OF OPERATIONS
          -----------------------------------

     Capital  Realty  Investors-III   Limited  Partnership's  (the  Partnership)
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations  section  is  based on the  consolidated  financial  statements,  and
contains   information  that  may  be  considered  forward  looking,   including
statements regarding the effect of governmental regulations.  Actual results may
differ  materially from those  described in the forward  looking  statements and
will be affected by a variety of factors  including  national and local economic
conditions,  the  general  level of  interest  rates,  governmental  regulations
affecting  the  Partnership  and  interpretations  of  those  regulations,   the
competitive  environment in which the Partnership operates, and the availability
of working capital.

                          Critical Accounting Policies
                          ----------------------------

     The  Partnership has disclosed its selection and application of significant
accounting policies in Note 1 of the notes to consolidated  financial statements
included  in this  annual  report  on Form  10-KSB at  December  31,  2005.  The
Partnership accounts for its investments in partnerships (Local Partnerships) by
the equity  method  because the  Partnership  is a limited  partner in the Local
Partnerships.  As such the  Partnership  has no control over the  selection  and
application  of  accounting  policies,  or the use of  estimates,  by the  Local
Partnerships.  Environmental  and operational  trends,  events and uncertainties
that  might  affect the  properties  owned by the Local  Partnerships  would not
necessarily have a significant  impact on the  Partnership's  application of the
equity  method of  accounting,  since the equity  method has been  suspended for
eight Local Partnerships which have cumulative losses in excess of the amount of
the Partnership's investments in those Local Partnerships.

                          New Accounting Pronouncement
                          ----------------------------

     In December  2003,  the Financial  Accounting  Standards  Board issued FASB
Interpretation  No. 46  (revised  December  2003) (FIN 46-R),  Consolidation  of
Variable  Interest  Entities.  FIN 46-R clarifies the  application of Accounting
Research Bulletin 51, Consolidated  Financial  Statements,  for certain entities
that do not  have  sufficient  equity  at risk for the  entity  to  finance  its
activities without additional  subordinated financial support from other parties
or in which equity  investors do not have the  characteristics  of a controlling
financial interest  ("variable interest  entities").  Variable interest entities
within  the  scope of FIN 46-R  will be  required  to be  consolidated  by their
primary  beneficiary.  The primary  beneficiary of a variable interest entity is
determined  to be the party that  absorbs a majority  of the  entity's  expected
losses,  receives  a  majority  of its  expected  returns,  or both.  The  Local
Partnerships  in which the  Partnership  invested were formed by  individuals or
entities  unrelated  to the  Partnership  or  its  affiliates.  The  Partnership
purchased  limited partner  interests in existing,  operating  partnerships with
unaffiliated  managing  general  partners.  An affiliate of the Managing General
Partner also purchased a general  partner  interest in the majority of the Local
Partnerships.  Neither the Partnership nor the affiliate of the Managing General
Partner  received  development  fees at or near  the  time  of  investment.  The
Managing  General  Partner has  evaluated  the Local  Partnerships  in which the
Partnership  is invested and has  determined  that the equity holders as a group
held  sufficient  equity at risk in the  operating  Local  Partnerships  and the
equity investors have the  characteristics of controlling  financial interest in
accordance  with the  provisions of FIN 46-R. The Managing  General  Partner has
therefore determined that the investments in Local Partnerships are not variable
interest  entities  subject  to  consolidation  by  the  Partnership  under  the
provisions of FIN 46-R.

                                      II-2

<PAGE>
                                     PART II
                                     -------


ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        -------------------------------------------------
          CONDITION AND RESULTS OF OPERATIONS - Continued
          -----------------------------------

                                     General
                                     -------

     The  Partnership  has invested,  through Local  Partnerships,  primarily in
federal or state  government-assisted  apartment  complexes  intended to provide
housing  to  low  and  moderate  income  tenants.   In  conjunction   with  such
governmental  assistance,  which  includes  federal  and/or  state  financing at
below-market  interest  rates  and  rental  subsidies,   certain  of  the  Local
Partnerships agreed to regulatory  limitations on (i) cash  distributions,  (ii)
use  of the  properties,  and  (iii)  sale  or  refinancing.  These  limitations
typically were designed to remain in place for the life of the mortgage.

     The original  investment  objectives of the  Partnership  primarily were to
deliver  tax  benefits,  as  well  as  cash  proceeds  upon  disposition  of the
properties,   through  the  Partnership's   investment  in  Local  Partnerships.
Regulatory  restrictions on cash  distributions  from the properties limited the
original projections of annual cash distributions from property operations.

     The original investment objectives of the Partnership have been affected by
the Tax Reform Act of 1986,  which  virtually  eliminated many of the incentives
for the new  construction or the sale of existing low income housing  properties
by limiting the use of passive loss  deductions.  Therefore,  C.R.I.,  Inc. (the
Managing General Partner) continues to concentrate on transferring the source of
investment  yield from tax  benefits  to cash flow  wherever  possible,  thereby
potentially enhancing the ability of the Partnership to share in the appreciated
value of the properties.

     The acquisition of interests in certain Local  Partnerships was paid for in
part by purchase  money notes of the  Partnership.  The purchase money notes are
nonrecourse obligations of the Partnership which typically matured 15 years from
the date of acquisition of the interest in a particular Local  Partnership,  and
are generally  secured by the  Partnership's  interest in the  respective  Local
Partnerships.

     The Managing  General Partner has sold, and will continue to sell,  certain
properties by utilizing  opportunities  presented by federal  affordable housing
legislation,  favorable financing terms and preservation incentives available to
tax credit and not-for-profit purchasers. Some of the rental properties owned by
the Local  Partnerships  are financed by state  housing  agencies.  The Managing
General Partner has sold or refinanced,  and will continue to sell or refinance,
certain  properties  pursuant to programs  developed  by these  agencies.  These
programs may include  opportunities to sell a property to a qualifying purchaser
who would agree to maintain the property as low to moderate income  housing,  or
to  refinance a property,  or to obtain  supplemental  financing.  The  Managing
General  Partner  continues to monitor  certain state housing  agency  programs,
and/or programs provided by certain lenders, to ascertain whether the properties
would  qualify  within the  parameters  of a given  program  and  whether  these
programs would provide an appropriate  economic  benefit to the limited partners
of the Partnership.

     Some of the rental properties owned by the Local Partnerships are dependent
on the receipt of  project-based  Section 8 Rental Housing  Assistance  Payments
(HAP)  provided by the U.S.  Department of Housing and Urban  Development  (HUD)
pursuant  to Section 8 HAP  contracts.  Current  legislation  allows all expired
Section 8 HAP contracts  with rents at less than 100% of fair market rents to be
renewed for up to one year.  Expiring  Section 8 HAP  contracts  with rents that
exceed  100% of fair market  rents  could be renewed for up to one year,  but at
rents  reduced  to 100% of fair  market  rents  (Mark-to-Market).  All  expiring
Section 8 HAP  contracts  with rents  exceeding  comparable  market  rents,  and
properties  with mortgage  loans insured by the Federal  Housing  Administration
(FHA), became subject to the Mark-to-Market legislation.


                                      II-3

<PAGE>
                                     PART II
                                     -------


ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        -------------------------------------------------
          CONDITION AND RESULTS OF OPERATIONS - Continued
          -----------------------------------


     Mark-to-Market (Mark-to-Market) implementation will reduce rental income at
properties that are currently subsidized at higher-than-market rental rates, and
will therefore lower cash flow available to meet mortgage payments and operating
expenses.  In some instances,  a property will be able to meet its existing debt
service  payments  after the  reduction  in rental  income.  In this  case,  the
property may enter the Mark-to-Market "Lite" program,  which would not require a
debt  restructuring.  In the  remaining  instances,  the  affected  property may
undergo  debt  restructuring  according  to terms  determined  by an  individual
property  and  operations  evaluation.  This would  involve  reducing  the first
mortgage loan balance to an amount  supportable  by the  property's  operations,
taking into account the property's  operating  expenses and reduced income.  The
balance  of the  amount  written  down from the  first  mortgage  loan  would be
converted to a non-performing but accruing (soft) second mortgage loan. When the
existing  first  mortgage  loan is bifurcated  into a first and second  mortgage
loan,  the  newly  created  second  mortgage  loan  will  accrue  interest  at a
below-market  rate.  The Internal  Revenue  Service issued a ruling in July 1998
that  concluded  that the  below-market  rate of  interest  would  not  generate
additional  ordinary  income.  Each property subject to  Mark-to-Market  will be
affected in a different  manner,  and it is very  difficult to predict the exact
form of restructuring,  or potential tax liabilities to the Limited Partners, at
this time. All properties,  upon entering the Mark-to-Market  program (excluding
Mark-to-Market  Lite),  are required to enter into an agreement  restricting the
property's use as affordable housing for 30 years.

     Finally, under HUD's "Mark-up-to-Market"  program, properties with expiring
Section 8 HAP  contracts  that are located in high-rent  areas as defined by HUD
are eligible for rent increases  which would be necessary to bring Section 8 HAP
contract rents into line with market rate rents.  For properties  that enter the
program and have interest rate  subsidized FHA loans,  the rents are adjusted to
take into  account  the  benefits  the  property is already  receiving  from the
below-market  interest rate by means of a HUD-determined  adjustment factor. The
purpose of this program is to provide  incentives to owners of  properties  with
expiring  Section 8 HAP contracts not to convert these properties to market rate
housing. In return for receiving market rate rents under Mark-up-to- Market, the
property  owner must enter into a five year  conditional  Section 8 HAP contract
with HUD,  subject  to the  annual  availability  of  funding  by  Congress.  In
addition,  property  owners who enter into the  Mark-up-to-Market  program  will
receive  increased  cash flow,  as the limited  dividend will be increased in an
amount equal to the increase in gross rental revenues.

     There were no major changes in federal housing policy in 2005.

     Villa  Mirage I has a Section 8 HAP  contract  which  expires  December 19,
2006.  The Section 8 HAP  contract  covers all of the  apartment  units in Villa
Mirage.  It is anticipated that the Local  Partnership will extend its Section 8
HAP contract for a one-year period at expiration.

     As  of  December  31,  2005,  the  carrying  amount  of  the  Partnership's
investments in Local  Partnerships with Section 8 HAP contracts expiring in 2006
was $142,694.

     The Managing  General  Partner  continues to seek  strategies  to deal with
affordable  housing  requirements.  While the Managing  General  Partner  cannot
predict the  outcome for any  particular  property  at this time,  the  Managing
General  Partner will  continue to work with the Local  Partnerships  to develop
strategies that maximize the benefits to investors.

                                      II-4

<PAGE>
                                     PART II
                                     -------


ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        -------------------------------------------------
          CONDITION AND RESULTS OF OPERATIONS - Continued
          -----------------------------------

                          Financial Condition/Liquidity
                          -----------------------------

     As of December 31, 2005, the Partnership had approximately  4,030 investors
who held a total of 59,882 units of additional  limited  partner  interest which
were  originally sold for the aggregate  amount of $59,882,000.  The Partnership
originally  made  investments  in 37 Local  Partnerships,  of which 12 remain at
December 31, 2005. The Partnership's liquidity, with unrestricted cash resources
of  $6,066,404  as of December  31,  2005,  along with  anticipated  future cash
distributions  from the Local  Partnerships,  is expected to be adequate to meet
its current and anticipated  operating cash needs.  As of March 31, 2006,  there
were no material commitments for capital expenditures.

     During  2005 and 2004,  the  Partnership  received  cash  distributions  of
$445,206 and $661,508, respectively, from the Local Partnerships.

     The purchase money note related to Highland Manor, in the principal  amount
of  $1,760,000,  matured  on January 1,  2004.  Effective  January 2, 2004,  the
Partnership's interest in Highland Manor was transferred to the noteholders.

     The  Partnership's  obligations  with respect to its  investments  in Local
Partnerships,  in the  form  of (as of  December  31,  2005)  three  nonrecourse
purchase money notes having an aggregate  principal balance of $5,175,000,  plus
aggregate accrued interest of $12,502,256,  as of December 31, 2005, are payable
in full upon the earliest of: (i) sale or refinancing  of the  respective  Local
Partnership's  rental  property;  (ii) payment in full of the  respective  Local
Partnership's permanent loan; or (iii) maturity.

     The purchase money notes related to the following  properties  have matured
and are in default.  Documents  transferring the Partnership's  interests in the
related  Local  Partnerships  had been  placed in escrow,  to be released to the
noteholders  upon their request after  obtaining HUD consent.  As of February 8,
2006, the  Partnership's  interests were released to the  noteholders.  See Note
2.a. for information concerning the transfer.]

<TABLE>
<CAPTION>
                                           Accrued Interest
                                                 as of           Original    Extended
     Property                Principal     December 31, 2005     Maturity    Maturity
     --------               -----------    -----------------     --------    --------
     <S>                    <C>            <C>                   <C>         <C>
     Heritage Estates I     $2,600,000        $6,246,455         01/01/99    01/01/04
     Heritage Estates II     1,800,000        $3,945,240         01/01/99    01/01/04

</TABLE>

     The remaining  purchase money note related to Victorian  Towers  Associates
(Victorian  Towers) was  extended to January 1, 2007.  As of December  31, 2005,
principal  and  accrued   interest   balances  were  $775,000  and   $2,310,561,
respectively.  The remaining  purchase  money note,  which is nonrecourse to the
Partnership, is secured by the Partnership's interest in Victorian Towers. There
is no assurance that the underlying  property will have sufficient  appreciation
and equity to enable the Partnership to pay the purchase money note's  principal
and  accrued  interest  when  due.  If the  purchase  money  note is not paid in
accordance with its terms,  the Partnership  will either have to renegotiate the
terms of repayment or risk losing its partnership  interest in Victoria  Towers.
In the event that the purchase  money note  remains  unpaid upon  maturity,  the
noteholder  may have the right to  foreclose  on the  Partnership's  interest in
Victorian Towers.

     Included  in  due on  investments  in  partnerships  is  $119,544  due to a
previous  owner  related to Meadow  Lanes at both  December  31,  2005 and 2004;
accrued interest payable thereon was $33,976 at both December 31, 2005 and 2004.
These amounts will be paid upon the occurrence of certain  specific  events,  as
outlined in the note agreement.


                                      II-5

<PAGE>
                                     PART II
                                     -------


ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        -------------------------------------------------
          CONDITION AND RESULTS OF OPERATIONS - Continued
          -----------------------------------


     See  the  notes  to  consolidated   financial   statements  for  additional
information concerning purchase money notes.

     The  Partnership's  inability to pay the purchase  money note principal and
accrued interest balances when due, and the resulting  uncertainty regarding the
Partnership's  continued  ownership  interest in the related Local  Partnership,
does not adversely  impact the  Partnership's  financial  condition  because the
purchase  money note is  nonrecourse  and  secured  solely by the  Partnership's
interest in the related Local Partnerships.  Therefore, should the investment in
the Victorian Tower Local  Partnership not produce  sufficient  value to satisfy
the related purchase money note, the  Partnership's  exposure to loss is limited
because the amount of the  nonrecourse  indebtedness  of the  maturing  purchase
money note exceeds the carrying  amount of the  investment  in the related Local
Partnership.  Thus, even a complete loss of the  Partnership's  interest in this
Local  Partnership  would not have a material  adverse  impact on the  financial
condition of the Partnership.

     The Managing General Partner continues to investigate possible alternatives
to reduce the Partnership's debt obligations.  These alternatives include, among
others, retaining the cash available for distribution to meet the purchase money
note  requirements,  paying off the Victorian  Towers  purchase  money note at a
discounted price,  extending the due date of the Victorian Towers purchase money
note or selling the underlying real estate and using the Partnership's  share of
the  proceeds  to pay or buy down  the  Victorian  Towers  purchase  money  note
obligation.  Although the Managing General Partner has had some success applying
these  strategies in the past, the Managing  General  Partner cannot assure that
these  strategies  will be  successful  in the future.  If the Managing  General
Partner  is  unable  to  negotiate  an  extension  or  discounted  payoff of the
Victorian  Towers note, in the event that it remains unpaid upon  maturity,  the
noteholder may have the right to foreclose on the Partnership's  interest in the
related Local  Partnership.  In the event of a foreclosure  or other transfer of
the Partnership's interest, the excess of the nonrecourse  indebtedness over the
carrying amount of the Partnership's investment in the related Local Partnership
will result in a taxable gain. This gain will be taxable to Limited  Partners at
a federal tax rate of up to 25.0%, as it will reflect  recapture of depreciation
deductions claimed in prior years. Additionally,  the Partnership would lose its
investment in the Local Partnership and, likewise,  its share of any future cash
flow distributed by the Local Partnership from rental operations,  mortgage debt
refinancings, or the sale of the real estate.

     Of the 12 Local  Partnerships  in which the  Partnership was invested as of
December 31, 2005, the two Local  Partnerships  with  associated  purchase money
notes which have  matured and are in default as of December  31,  2005,  and for
which documents  transferring  the  Partnership's  interest in the related local
partnerships  had been  placed  in  escrow  and which  were  transferred  to the
noteholders as of February 8, 2006, represented the following percentages of the
Partnership's total distributions  received from Local Partnerships and share of
income from Local Partnerships for the immediately preceding two calendar years.

                             Percentage of Total        Partnership's Share of
         For the Year       Distributions Received           Income from
            Ended           from Local Partnerships       Local Partnerships
      -----------------     -----------------------     ---------------------

      December 31, 2005               32%                    $118,121
      December 31, 2004               21%                    $ 22,927


     The  Managing  General  Partner  continues  to  address  the  maturity  and
impending  maturity of the  Partnership's  remaining debt obligation and to seek
solutions that will provide the most favorable  outcome to the Limited Partners.
However, there can be no assurance that these strategies will be successful.

                                      II-6

<PAGE>
                                     PART II
                                     -------


ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        -------------------------------------------------
          CONDITION AND RESULTS OF OPERATIONS - Continued
          -----------------------------------


     The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient  cash is available for operating  requirements.
For the year ended  December  31, 2005,  existing  cash  resources  and net cash
provided  by  investing  activities  were  adequate  to support net cash used in
operating  activities  and  financing  activities.  Cash  and  cash  equivalents
decreased  $253,734  during  2005,  primarily  as a result of  distributions  to
Additional  Limited  Partners  in December  2005 and net cash used in  operating
activities,  partially  offset by sale  proceeds  received  relating  to Bartley
Manor,  Village Green and Village Square and the receipt of  distributions  from
Local Partnerships. For the years ended December 31, 2005 and December 31, 2004,
distributions of $445,206 and $661,508,  respectively,  were received from Local
Partnerships.  The  Partnership  expects to receive a similar or lower amount of
distributions  from these Local  Partnerships  in future years as more Section 8
HAP  contracts  approach  expiration,  should the related  properties  enter the
Mark-to-Market program with the resulting reduction in rental revenues.

     On  February  26,  2004,  the  Partnership  made  a  cash  distribution  of
$2,275,516  ($38 per Unit) to  Additional  Limited  Partners who were holders of
record as of January 1, 2004.  The  distribution  consisted of proceeds from the
sale  of  Walsh  Park.  On  December  15,  2004,  the  Partnership  made  a cash
distribution  of $3,053,982  ($51 per unit) to Additional  Limited  Partners who
were  holders of record as of  November  1,  2004,  and a cash  distribution  of
$40,744 to the General  Partners and Initial and Special Limited  Partners.  The
distributions  consisted  of cash  resources  accumulated  from  operations  and
distributions from Local Partnerships, and of proceeds received from the sale of
the Partnership's  interests in Briar Crest I and Briar Crest II. On December 6,
2005, the Partnership  made a cash  distribution of $1,197,640 ($20 per unit) to
Additional  Limited  Partners  who were holders of record as of August 31, 2005.
The  distribution   consisted  of  proceeds  received  from  the  sales  of  the
Partnership's  interests in Bartley Manor, Village Green and Village Square. The
Managing General Partner  currently  intends to retain all of the  Partnership's
remaining undistributed cash pending resolution of the Partnership's outstanding
purchase  money  note and  related  accrued  interest,  and for  operating  cash
reserves.  In March 2006, the  Partnership's  interest in Arboretum  Village was
sold. See Note 2.e.

                              Results of Operations
                              ---------------------

2005 Versus 2004
----------------

     The  Partnership  recognized net loss for the year ended December 31, 2005,
compared to net income for the year ended  December 31, 2004,  primarily  due to
decreases  in share of income from  partnerships,  gain from  extinguishment  of
debt, related to the transfer of the Partnership's interest in Highland Manor to
the  noteholders in 2004, and gain on disposition of investment in  partnerships
and  increases  in interest  expense,  general and  administrative  expenses and
professional  fees,  partially  offset by an increase in interest  revenue and a
decrease in  amortization  of deferred cost.  Share of income from  partnerships
decreased primarily due to a distribution  received at one property in 2004, but
not 2005, higher operating expense and depreciation and amortization expenses at
one property,  the sale of the Partnership's  interest in two properties in 2004
and the  sale of one  property  in 2005,  partially  offset  by lower  operating
expenses  at  one  property.   General  and  administrative  expenses  increased
primarily  due to higher  reimbursed  payroll costs in 2005.  Professional  fees
increased due to higher legal costs, related to the proxy, and higher audit fees
in  2005.  Interest  revenue  increased  in 2005  due to  higher  cash  and cash
equivalent balances, and higher rates.  Amortization of deferred costs decreased
due to the sales of Bartley Manor, Village Green and Village Square.

     For financial reporting purposes, the Partnership,  as a limited partner in
the Local  Partnerships,  does not record losses from the Local  Partnerships in
excess of its  investment  to the  extent  that the  Partnership  has no further


                                                       II-7

<PAGE>
                                     PART II
                                     -------


ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        -------------------------------------------------
          CONDITION AND RESULTS OF OPERATIONS - Continued
          -----------------------------------

obligation to advance funds or provide financing to the Local Partnerships. As a
result, the Partnership's  share of income from partnerships for the years ended
December 31, 2005 and 2004,  did not include  losses of $923,523  and  $563,424,
respectively. Distributions of $398,719 and $477,863, received from four and six
Local  Partnerships  during  2005 and  2004,  respectively,  and for  which  the
Partnership's carrying value is zero (equity method suspended), were recorded as
increases in the  Partnership's  share of income from  partnerships  in the year
received.

                                    Inflation
                                    ---------

     Inflation  allows for increases in rental  rates,  usually  offsetting  any
higher operating and replacement costs.  Furthermore,  inflation  generally does
not impact the fixed rate long-term financing under which the Partnership's real
property   investments   were  purchased.   Future  inflation  could  allow  for
appreciated values of the Local Partnerships' properties over an extended period
of time as rental revenue and replacement values gradually increase.

     The combined rental revenues for the Partnership's  remaining 12 properties
for the five years ended  December 31, 2005,  follow.  Combined  rental  revenue
amounts have been adjusted to reflect  property sales and interests  transferred
in 2005 and in prior years.

<TABLE>
<CAPTION>

                                                     For the years ended December 31,
                           --------------------------------------------------------------------------------------
                              2005                  2004              2003              2002             2001
                           -----------          -----------       -----------        -----------      -----------
<S>                        <C>          <C>     <C>         <C>   <C>           <C>  <C>         <C>  <C>
Combined Rental
  Revenue                  $15,281,544          $15,416,952       $15,601,806        $15,653,248      $15,617,849

Annual Percentage
  Increase (Decrease)                  (0.9)%              (1.2%)              (0.3%)            0.2%

</TABLE>


ITEM 7. FINANCIAL STATEMENTS
        --------------------

     The information required by this item is contained in Part III.


ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
        ---------------------------------------------
          ON ACCOUNTING AND FINANCIAL DISCLOSURE
          --------------------------------------

     None.


ITEM 8A. CONTROLS AND PROCEDURES
         -----------------------

     In February 2006,  representatives  of the Managing  General Partner of the
Partnership  carried out an  evaluation of the  effectiveness  of the design and
operation of the Partnership's  disclosure controls and procedures,  pursuant to
Exchange Act Rules  13a-15 and 15d-15.  The  Managing  General  Partner does not
expect that the  Partnership's  disclosure  controls and procedures will prevent
all error and all fraud.  A control  system,  no matter how well  conceived  and
operated,  can provide only  reasonable  assurance  that the  objectives  of the
control system are met. Further, the design of a control system must reflect the
fact that there are resource  constraints,  and the benefits of controls must be
considered relative to their costs.  Because of the inherent  limitations in all
control systems,  no evaluation of controls can provide absolute  assurance that
all control issues have been detected.  These inherent  limitations  include the
realities that judgments in  decision-making  can be faulty, and that breakdowns

                                      II-8

<PAGE>
                                     PART II
                                     -------


ITEM 8A. CONTROLS AND PROCEDURES - Continued
         -----------------------

can occur  because  of simple  error or  mistake.  The  design of any  system of
controls also is based in part upon certain  assumptions about the likelihood of
future  events,  and there can be no  assurance  that any design will succeed in
achieving its stated goals under all  potential  future  conditions.  Over time,
controls may become inadequate  because of changes in conditions,  or the degree
of compliance  with the policies or procedures may  deteriorate.  Because of the
inherent  limitations in a cost-effective  control system,  misstatements due to
error or fraud  may  occur  and not be  detected.  Based  on the  February  2006
evaluation,  and subject to the foregoing,  the Principal  Executive Officer and
Principal Financial Officer concluded that the Partnership's disclosure controls
and  procedures are effective as of the end of the period covered by this report
to alert them in a timely  manner to any  material  information  relating to the
Partnership that must be included in the Partnership's periodic SEC filings, and
particularly  during  the  period in which  this  report is being  prepared.  In
addition,  there have been no significant changes in the Partnership's  internal
control over financial  reporting that occurred  during the  Partnership's  most
recent fiscal quarter that has materially  affected,  or is reasonably likely to
materially affect, the Partnership's internal control over financial reporting.


ITEM 8B. OTHER INFORMATION
         -----------------

     Effective May 7, 2005,  the duties of the Principal  Financial  Officer and
Principal  Accounting  Officer  were assumed by the  President  of C.R.I.,  Inc.
("CRI"), the Managing General Partner of the Registrant,  H. William Willoughby.
Mr.  Willoughby has held the office of President since January 1990 and has also
served as a Director of CRI. He has no employment contract.

     On March 24, 2006, the Partnership filed a Current Report on Form 8-K dated
March 23, 2006, to report that, in March,  2005, the  Partnership's  interest in
Arboretum Village was sold, the Partnership is currently negotiating the sale of
the properties  related to Village Squire I & II and Village Squire III, and CRI
is working with potential  purchasers for the sales of Villa Mirage I and II and
Windham Village properties.

     In February  2006,  the  Partnership's  interests in Heritage  Estate I and
Heritage Estates II were transferred to the purchase money noteholders. In March
2006, the Partnership's interest in Arboretum Village was sold. See the notes to
the consolidated  financial statements for additional information concerning the
transfers and the sale.

                                      II-9

<PAGE>
                                    PART III
                                    --------


ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
        --------------------------------------------------

     (a)  and (b)

     The  Partnership has no directors,  executive  officers or employees of its
     own.

     (a)  and (b)

     The names,  ages and business  experience  of the  directors  and executive
     officers  of  C.R.I.,  Inc.  (CRI),  the  Managing  General  Partner of the
     Partnership, follow.

William B. Dockser, 69, has been the Chairman of the Board and a Director of CRI
since 1974.  Prior to forming  CRI, he served as  President of Kaufman and Broad
Asset Management,  Inc., an affiliate of Kaufman and Broad,  Inc., which managed
publicly held limited  partnerships created to invest in low and moderate income
multifamily apartment properties.  Prior to joining Kaufman and Broad, he served
in various positions at HUD,  culminating in the post of Deputy FHA Commissioner
and Deputy Assistant Secretary for Housing Production and Mortgage Credit, where
he was responsible for all federally insured housing production programs. Before
coming to the Washington,  D.C., area, Mr. Dockser was a practicing  attorney in
Boston and served as a special  Assistant  Attorney General for the Commonwealth
of  Massachusetts.  He holds a Bachelor of Laws degree from Yale  University Law
School and a Bachelor of Arts degree, cum laude, from Harvard University.

H. William Willoughby,  59, has been President,  Secretary and a Director of CRI
since January 1990,  and was Senior  Executive Vice  President,  Secretary and a
Director of CRI from 1974 to 1989.  Effective May 7, 2005, he assumed the duties
of Principal  Financial Officer and Principal  Accounting  Officer of CRI. He is
principally  responsible for the financial  management of CRI and its associated
partnerships.  Prior to joining CRI in 1974,  he was Vice  President  of Shelter
Corporation of America and a number of its subsidiaries dealing principally with
real  estate   development   and  equity   financing.   Before  joining  Shelter
Corporation,  he was a senior tax accountant with Arthur Andersen & Co. He holds
a Juris Doctor degree, a Master of Business Administration degree and a Bachelor
of  Science  degree in  Business  Administration  from the  University  of South
Dakota.

     (c)  There is no family relationship between any of the foregoing directors
          and executive officers.

     (d)  Involvement in certain legal proceedings.

          None.


ITEM 10. EXECUTIVE COMPENSATION
         ----------------------

     (a), (b), (c), (d), (e), (f), (g), and (h)

          The Partnership has no officers or directors.  However,  in accordance
          with  the  Partnership  Agreement,  and as  disclosed  in  the  public
          offering,  various  kinds of  compensation  and fees  were paid or are
          payable  to the  General  Partners  and their  affiliates.  Additional
          information  required  by  this  Item  10 is  incorporated  herein  by
          reference  to  Notes 3 and 4 of the  notes to  consolidated  financial
          statements contained in Part III.

                                      III-1

<PAGE>
                                    PART III
                                    --------

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
         -----------------------------------------------
           AND MANAGEMENT
           --------------

     (a)  Security ownership of certain beneficial owners.

          The following  table sets forth  certain  information  concerning  any
          person  (including any "group") who is known by the  Partnership to be
          the  beneficial  owner of more than five  percent  of the  issued  and
          outstanding  units of additional  limited partner  interest (Units) at
          March 31, 2006.

                                                                % of Total
          Name and Address           Amount and Nature         Units Issued
          of Beneficial Owner     of Beneficial Ownership     and Outstanding
          -------------------     -----------------------     ---------------

          Equity Resource               12,221 Units               20.4%
            Investment, LLC
          44 Brattle Street
          Cambridge, MA 02138

     (b)  Security ownership of management.

          The following  table sets forth  certain  information  concerning  all
          Units  beneficially  owned, as of March 31, 2006, by each director and
          by all  directors  and  officers  as a group of the  Managing  General
          Partner of the Partnership.

                                                                  % of Total
               Name of                   Amount and Nature       Units Issued
           Beneficial Owner           of Beneficial Ownership   and Outstanding
           -----------------          -----------------------   ---------------

           William B. Dockser                  None                 0.0%
           H. William Willoughby               None                 0.0%
           All Directors and Officers
             as a Group (2 persons)            None                 0.0%

     (c)  Changes in control.

          There exists no arrangement known to the Partnership, the operation of
          which may, at a subsequent date,  result in a change in control of the
          Partnership. There is a provision in the Limited Partnership Agreement
          which  allows,  under  certain  circumstances,  the  ability to change
          control.

                                      III-2

<PAGE>
                                    PART III
                                    --------

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
         ----------------------------------------------

     (a)  and (b)

          Transactions with management and others.

          The  Partnership  has no  directors  or  officers.  In  addition,  the
          Partnership  has  had no  transactions  with  individual  officers  or
          directors of the Managing  General  Partner of the  Partnership  other
          than any indirect interest such officers and directors may have in the
          amounts  paid to the Managing  General  Partner or its  affiliates  by
          virtue of their stock ownership in CRI. Item 10 of this report,  which
          contains  a  discussion  of the fees and  other  compensation  paid or
          accrued  by  the   Partnership  to  the  General   Partners  or  their
          affiliates,  is incorporated herein by reference.  Note 3 of the notes
          to  consolidated  financial  statements  contained in Part III,  which
          contains   disclosure   of  related   party   transactions,   is  also
          incorporated herein by reference.

     (c)  Certain business relationships.

          The  Partnership's  response to Item 12(a) is  incorporated  herein by
          reference.  In addition,  the Partnership has no business relationship
          with  entities of which the  officers  and  directors  of the Managing
          General Partner of the  Partnership are officers,  directors or equity
          owners other than as set forth in the  Partnership's  response to Item
          12(a).

     (d)  Transactions with promoters.

          Not applicable.


ITEM 13. EXHIBITS
         --------

          Index of  Exhibits  (Listed  according  to the number  assigned in the
          table in Item 601 of Regulation S-B.)

          Exhibit  No.  2 - Plan of  acquisition,  reorganization,  arrangement,
          liquidation, or succession.

          a.   Definitive  Proxy   Statement.   (Incorporated  by  reference  to
               Registrant's Definitive Proxy Statement dated November 21, 2005.)

          Exhibit No. 3 - Articles of Incorporation and bylaws

          a.   Certificate   of   Limited    Partnership   of   Capital   Realty
               Investors-III Limited Partnership.  (Incorporated by reference to
               Exhibit  No. 4 to  Registrant's  Registration  Statement  on Form
               S-11, as amended, dated October 24, 1983.)

          Exhibit No. 4 - Instruments  defining the rights of security  holders,
          including indentures.

          a.   Amended Certificate and Limited Partnership  Agreement of Capital
               Realty  Investors-III   Limited  Partnership.   (Incorporated  by
               reference to Exhibit No. 4 to Registrant's Registration Statement
               on Form S-11, as amended, dated October 24, 1983.)

                                      III-3

<PAGE>
                                    PART III
                                    --------

ITEM 13. EXHIBITS - Continued
         --------

          Exhibit No. 10 - Material Contracts.

          a.   Management  Services  Agreement  between CRI and  Capital  Realty
               Investors- III Limited Partnership. (Incorporated by reference to
               Exhibit No. 10(b) to Registrant's  Registration Statement on Form
               S-11, as amended, dated October 24, 1983.)

          Exhibit No. 31.1 - Certification of Principal Executive Officer,
                             pursuant to 18 U.S.C. Section 1350, as adopted
                             pursuant to Section 302 of the Sarbanes-Oxley Act
                             of 2002.

          Exhibit No. 31.2 - Certification of Principal Financial Officer,
                             pursuant to 18 U.S.C. Section 1350, as adopted
                             pursuant to Section 302 of the Sarbanes-Oxley Act
                             of 2002.

          Exhibit No. 32 -   Certification of Principal Executive Officer and
                             Principal Financial Officer, pursuant to 18 U.S.C.
                             Section 1350, as adopted pursuant to Section 906
                             of the Sarbanes-Oxley Act of 2002.

          Exhibit No. 99 - Additional Exhibits.

          a.   Prospectus   of  the   Partnership,   dated   November  7,  1983.
               (Incorporated by reference to Registrant's Registration Statement
               on Form S-11, as amended, dated October 24, 1983.)

          b.   Reports of other auditors relating to the audits of the financial
               statements  of  Local   Partnerships   in  which  Capital  Realty
               Investors-III Limited Partnership has invested.


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
         --------------------------------------

     During the years ended December 31, 2005 and 2004, the Partnership retained
Grant Thornton LLP to provide services as follows.

                             Year Ended December 31,
                           --------------------------
                             2005              2004
                           --------          --------

     Audit fees            $131,376          $115,000
     Audit-related fees          --                --
     Tax fees (1)            26,950            24,500
     All other fees              --                --
                           --------          --------
         Total billed      $158,326          $139,500
                           ========          ========


     (1) Preparation of Partnership federal and state tax returns.

     The Partnership has no directors or officers. The Board of Directors of the
Managing General Partner of the Partnership, serving as the audit committee, has
approved in advance  100% of the fees paid to, and  services  provided by, Grant
Thornton LLP. Prior to approving  Grant  Thornton LLP's  providing any non-audit
services,  the  Board  of  Directors  of the  Managing  General  Partner  of the
Partnership   would  assess  whether  the  provision  of  those  services  would
compromise  Grant  Thornton  LLP's  independence.  Grant  Thornton  LLP provided
partnership tax return preparation  services during the years ended December 31,
2005 and  2004,  which  services  it was  determined  did not  compromise  Grant
Thornton LLP's independence.

                                      III-4

<PAGE>
                                   SIGNATURES
                                   ----------


     In accordance  with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.


                             CAPITAL REALTY INVESTORS-III
                               LIMITED PARTNERSHIP
                             ---------------------------------------------------
                             (Registrant)

                             by:  C.R.I., Inc.
                                  ----------------------------------------------
                                  Managing General Partner



March 31, 2006                    by:  /s/ William B. Dockser
--------------                         -----------------------------------------
DATE                                   William B. Dockser,
                                       Director, Chairman of the Board,
                                         and Treasurer
                                         (Principal Executive Officer)


     In  accordance  with the Exchange Act, this report has been signed below by
the following  persons on behalf of the  registrant and in the capacities and on
the dates indicated.


March 31, 2006                    by:  /s/ H. William Willoughby
--------------                         -----------------------------------------
DATE                                   H. William Willoughby,
                                       Director, President, Secretary,
                                         Principal Financial Officer and
                                         Principal Account Officer



                                      III-5

<PAGE>



Report of Independent Registered Public Accounting Firm

Partners
Capital Realty Investors-III Limited Partnership.

We have audited the accompanying  consolidated  balance sheets of Capital Realty
Investors-III   Limited  Partnership  (a  Maryland  limited   partnership)  (the
Partnership)  as of  December  31, 2005 and 2004,  and the related  consolidated
statements of operations, changes in partners' (deficit) capital, and cash flows
for the years  then  ended.  These  consolidated  financial  statements  are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these  consolidated  financial  statements based on our audits. We
did  not  audit  the  financial  statements  of  the  Local  Partnerships.   The
Partnership's  share of income (loss) from these Local Partnerships  constitutes
$(119,029)  of loss in 2005,  and  $168,915  of income in 2004,  included in the
Partnership's  2005 net loss and 2004 net income.  The  financial  statements of
these Local  Partnerships  were audited by other auditors whose reports  thereon
have been  furnished  to us, and our  opinion  expressed  herein,  insofar as it
relates to the amount  included  for these Local  Partnerships,  is based solely
upon the reports of the other auditors.

We conducted our audits in accordance  with the Standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audits to  obtain  reasonable  assurance  about  whether  the
consolidated  financial  statements  are free from  material  misstatement.  The
Partnership  is not required to have, nor were we engaged to perform an audit of
its internal control over financial reporting. Our audits included consideration
of internal  control over  financial  reporting as a basis for  designing  audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Partnership's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the consolidated  financial statements,  assessing the accounting
principles  used,  and  significant  estimates  made by  management,  as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audits,  and the reports of other auditors,  provide a reasonable basis
for our opinion.

In our  opinion,  based upon our audits and the reports of other  auditors,  the
consolidated  financial  statements  referred to above  present  fairly,  in all
material  respects,  the  consolidated  financial  position  of  Capital  Realty
Investors-III  Limited  Partnership,  as of December 31, 2005 and 2004,  and the
consolidated results of its operations,  changes in partners' (deficit) capital,
and its cash flows for the years  then  ended,  in  conformity  with  accounting
principles generally accepted in the United States of America.

As described in Note 1 to the consolidated financial statements, the Partnership
has received limited partner approval of the  Partnership's  plan to sell all of
the  Partnership's  assets and  dissolve the  Partnership  pursuant to a Plan of
Liquidation and Dissolution. There can be no assurance that the Liquidation will
be completed pursuant to the Plan of Liquidation and Dissolution.


                                                  rant Thornton LLP

Vienna, Virginia
March 31, 2006


                                      III-6

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                           CONSOLIDATED BALANCE SHEETS


                                     ASSETS

<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                           ----------------------------
                                                                               2005            2004
                                                                           ------------    ------------
<S>                                                                        <C>             <C>
Investments in partnerships ............................................   $  2,435,672    $  2,418,162
Investment in partnerships held for sale or transfer ...................         94,947       1,066,955
Investment in partnerships held in escrow ..............................      1,043,041       1,068,937
Cash and cash equivalents ..............................................      6,066,404       6,320,138
Acquisition fees, principally paid to related parties,
  net of accumulated amortization of $108,273 and $264,120, respectively         36,175         104,674
Property purchase costs,
  net of accumulated amortization of $126,014 and $216,270, respectively         51,221         100,523
Sale proceeds receivable ...............................................         15,900            --
Other assets ...........................................................          6,060             236
                                                                           ------------    ------------

      Total assets .....................................................   $  9,749,420    $ 11,079,625
                                                                           ============    ============



                        LIABILITIES AND PARTNERS' DEFICIT


Due on investments in partnerships .....................................   $  5,294,544    $  5,294,544
Accrued interest payable ...............................................     12,536,232      12,048,871
Accounts payable and accrued expenses ..................................        177,565         163,689
                                                                           ------------    ------------

      Total liabilities ................................................     18,008,341      17,507,104
                                                                           ------------    ------------

Commitments and contingencies

Partners' deficit:

  Capital paid-in:
    General Partners ...................................................          2,000           2,000
    Limited Partners ...................................................     60,001,500      60,001,500
                                                                           ------------    ------------

                                                                             60,003,500      60,003,500

  Less:
    Accumulated distributions to partners ..............................    (19,268,642)    (18,071,002)
    Offering costs .....................................................     (6,156,933)     (6,156,933)
    Accumulated losses .................................................    (42,836,846)    (42,203,044)
                                                                           ------------    ------------

      Total partners' deficit ..........................................     (8,258,921)     (6,427,479)
                                                                           ------------    ------------

      Total liabilities and partners' deficit ..........................   $  9,749,420    $ 11,079,625
                                                                           ============    ============


</TABLE>


                   The accompanying notes are an integral part
                   of these consolidated financial statements.

                                      III-7

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                                 For the years ended
                                                                                     December 31,
                                                                              --------------------------
                                                                                  2005          2004
                                                                              -----------    -----------
<S>                                                                           <C>            <C>
Share of income from partnerships .........................................   $   454,923    $   734,942
                                                                              -----------    -----------

Other revenue and expenses:

  Revenue:
    Gain from extinguishment of debt ......................................          --        3,625,416
    Interest ..............................................................       188,273         63,834
                                                                              -----------    -----------

                                                                                  188,273      3,689,250
                                                                              -----------    -----------

  Expenses:
    Interest ..............................................................       626,286        625,647
    Management fee ........................................................       300,000        300,000
    General and administrative ............................................       298,243        242,449
    Professional fees .....................................................       181,992        137,928
    Amortization of deferred costs ........................................        22,853         25,825
                                                                              -----------    -----------

                                                                                1,429,374      1,331,849
                                                                              -----------    -----------

      Total other revenue and expenses ....................................    (1,241,101)     2,357,401
                                                                              -----------    -----------

(Loss) income before gain on disposition of investment in partnerships
  and impairment loss .....................................................      (786,178)     3,092,343

Gain on disposition of investment in partnerships,
  net of disposition fees .................................................       152,376      2,080,020

Impairment loss ...........................................................          --         (726,642)
                                                                              -----------    -----------

Net (loss) income .........................................................   $  (633,802)   $ 4,445,721
                                                                              ===========    ===========


Net (loss) income allocated to General Partners (1.51%) ...................   $    (9,570)   $    67,130
                                                                              ===========    ===========

Net (loss) income allocated to Initial and Special Limited Partners (1.49%)   $    (9,444)   $    66,241
                                                                              ===========    ===========

Net (loss) income allocated to Additional Limited Partners (97%) ..........   $  (614,788)   $ 4,312,350
                                                                              ===========    ===========

Net (loss) income per unit of Additional Limited Partner Interest,
  based on 59,882 units outstanding .......................................   $    (10.27)   $     72.01
                                                                              ===========    ===========

</TABLE>

                   The accompanying notes are an integral part
                   of these consolidated financial statements.

                                      III-8

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

             CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT

<TABLE>
<CAPTION>
                                                                  Initial and
                                                                    Special          Additional
                                                   General          Limited           Limited
                                                   Partners         Partners          Partners            Total
                                                  ----------      -----------       ------------       -----------
<S>                                               <C>             <C>               <C>                <C>
Partner's deficit, January 1, 2004                $(810,661)      $(800,529)        $(3,891,768)       $(5,502,958)

  Net income                                         67,130          66,241           4,312,350          4,445,721

  Distribution to General Partners
    and Initial and Special Limited Partners        (20,508)        (20,236)                 --            (40,744)

  Distribution of $89.00 per unit
    of Additional Limited Partner Interest               --              --          (5,329,498)        (5,329,498)
                                                  ---------       ---------         -----------        -----------


Partner's deficit, December 31, 2004               (764,039)       (754,524)         (4,908,916)        (6,427,479)
                                                  ---------       ---------         -----------        -----------

  Net loss                                           (9,570)         (9,444)           (614,788)          (633,802)

  Distribution of $20.00 per unit
    of Additional Limited Partner Interest               --              --          (1,197,640)        (1,197,640)
                                                  ---------       ---------         -----------        -----------

Partners' deficit, December 31, 2005              $(773,609)      $(763,968)        $(6,721,344)       $(8,258,921)
                                                  =========       =========         ===========        ===========
</TABLE>

                   The accompanying notes are an integral part
                   of these consolidated financial statements.

                                      III-9

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                   For the years ended
                                                                                       December 31,
                                                                               --------------------------
                                                                                  2005           2004
                                                                               -----------    -----------
<S>                                                                            <C>            <C>
Cash flows from operating activities:
  Net (loss) income ........................................................   $  (633,802)   $ 4,445,721

  Adjustments to reconcile net (loss) income to net cash used in operating
    activities:
    Share of income from partnerships ......................................      (454,923)      (734,942)
    Amortization of deferred costs .........................................        22,853         25,825
    Gain from extinguishment of debt .......................................          --       (3,625,416)
    Gain on disposition of investment in partnerships,
      net of disposition fees ..............................................      (152,376)    (2,080,020)
    Impairment loss ........................................................          --          726,642

    Changes in assets and liabilities:
      Increase in accrued interest receivable on advances to partnerships ..           109           (114)
      (Increase) decrease in other assets ..................................        (5,824)          (183)
      Increase in accrued interest payable .................................       626,286        625,647
      Payment of purchase money note interest ..............................      (138,925)      (190,038)
      Increase in accounts payable and accrued expenses ....................        13,876         10,347
                                                                               -----------    -----------

        Net cash used in operating activities ..............................      (722,726)      (796,531)
                                                                               -----------    -----------

Cash flows from investing activities:
     Receipt of distributions from partnerships ............................       445,206        661,508
     Collection of sales proceeds receivable ...............................          --        4,743,059
     Proceeds from disposition of investment in partnerships ...............     1,239,926      3,348,196
     Disposition fees paid to related party ................................       (50,000)      (322,857)
     Additional sales proceeds .............................................          --          166,270
     Advance to Local Partnership ..........................................          --          (31,500)
     Collection of advance to Local Partnership ............................        31,500           --
                                                                               -----------    -----------

        Net cash provided by investing activities ..........................     1,666,632      8,564,676
                                                                               -----------    -----------


Cash flows from financing activities:
  Distributions to General Partners and Initial and Special Limited Partners          --          (40,744)
  Distributions to Additional Limited Partners .............................    (1,197,640)    (5,329,498)
                                                                               -----------    -----------

        Net cash used in financing activities ..............................    (1,197,640)    (5,370,242)
                                                                               -----------    -----------


Net (decrease) increase in cash and cash equivalents .......................      (253,734)     2,397,903

Cash and cash equivalents, beginning of year ...............................     6,320,138      3,922,235
                                                                               -----------    -----------

Cash and cash equivalents, end of year .....................................   $ 6,066,404    $ 6,320,138
                                                                               ===========    ===========

</TABLE>
                   The accompanying notes are an integral part
                   of these consolidated financial statements.

                                     III-10

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     a.   Organization
          ------------

          Capital Realty Investors-III Limited Partnership (the Partnership) was
     formed under the Maryland  Revised Uniform Limited  Partnership Act on June
     27,  1983,  and shall  continue  until  December 31,  2037,  unless  sooner
     dissolved in accordance with the terms of the Partnership  Agreement.  (See
     Note 1.m., below, for discussion of the  Partnership's  Plan of Liquidation
     and  Dissolution.)  The  Partnership was formed to invest in real estate by
     acquiring and holding  limited  partner  interests in limited  partnerships
     (Local   Partnerships)   which   own   and   operate   federal   or   state
     government-assisted apartment properties, which provide housing principally
     to the elderly or to individuals and families of low or moderate income, or
     conventionally financed apartment properties, located throughout the United
     States.

          The General Partners of the Partnership are C.R.I.,  Inc. (CRI), which
     is the Managing  General  Partner,  and current and former  shareholders of
     CRI. The Initial  Limited  Partner is  Rockville  Pike  Associates  Limited
     Partnership-III,  a limited  partnership  which  includes  certain  current
     officers and former employees of CRI or its affiliates. The Special Limited
     Partner  had  been  Two  Broadway  Associates  II,  a  limited  partnership
     comprised of an affiliate and employees of Merrill Lynch, Pierce,  Fenner &
     Smith, Incorporated.  Effective January 1, 2002, Two Broadway Associates II
     transferred its interest to MLH Merger Corporation and three individuals.

          The  Partnership  sold 60,000  units at $1,000 per unit of  additional
     limited partner interest through a public offering. The offering period was
     terminated in January  1984. As of December 31, 2005,  118 units of limited
     partner interest had been abandoned.

     b.   Method of accounting
          --------------------

          The consolidated  financial statements of the Partnership are prepared
     on the accrual basis of accounting in conformity with accounting principles
     generally accepted in the United States of America.

     c.   Principles of consolidation
          ---------------------------

          These consolidated  financial  statements include the accounts of four
     intermediary  limited  partnerships  which  have  invested  in  four  Local
     Partnerships  which own and operate  government-assisted  or conventionally
     financed apartment  properties.  All activity between the four intermediary
     limited   partnerships   and  the   Partnership   has  been  eliminated  in
     consolidation.

     d.   Investments in partnerships
          ---------------------------

          The investments in Local  Partnerships  (see Note 2) are accounted for
     by the equity method because the  Partnership  is a limited  partner in the
     Local  Partnerships or intermediary  partnerships.  Under this method,  the
     carrying amount of the investments in Local  Partnerships is (i) reduced by
     distributions  received and (ii) increased or reduced by the  Partnership's
     share of earnings or losses, respectively, of the Local Partnerships. As of
     December 31, 2005 and 2004, the Partnership's share of cumulative losses of
     nine  and  nine  of the  Local  Partnerships  exceeded  the  amount  of the
     Partnership's  investments in those Local  Partnerships  by $11,244,422 and
     $10,320,899,  respectively. Since the Partnership has no further obligation


                                     III-11

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

     to advance  funds or provide  financing  to these Local  Partnerships,  the
     excess  losses have not been  reflected  in the  accompanying  consolidated
     financial statements. Distributions of $398,719 and $477,863, received from
     four and six Local Partnerships during 2005 and 2004, respectively, and for
     which the Partnership's  carrying value is zero (equity method  suspended),
     were  recorded  as  increases  in the  Partnership's  share of income  from
     partnerships in the year received.

          Costs incurred in connection  with acquiring  these  investments  have
     been  capitalized and are being amortized  using the  straight-line  method
     over the  estimated  useful  lives  of the  properties  owned by the  Local
     Partnerships.

     e.   Investment in partnerships held for sale or transfer
          ----------------------------------------------------

          Due to the possible sale of the  properties  related to Village Squire
     Apartments  (Village  Squire  I & II) and  Village  Squire  Apartments  III
     (Village Squire III), as further  discussed in Note 2.a., the Partnership's
     investment in these Local  Partnerships  was  reclassified to investment in
     partnerships  held for sale or  transfer in the  accompanying  consolidated
     balance  sheet at December 31,  2005.  Due to the 2006 sale of the property
     related to Arboretum Villages Limited Partnership  (Arboretum Village), the
     Partnership's  investment  in the Local  Partnership  was  reclassified  to
     investment in  partnerships  held for sale or transfer in the  accompanying
     consolidated   balance  sheet  at  December  31,  2005.  The  Partnership's
     investment  in the  Bartley  Manor  Limited  Partnership  (Bartley  Manor),
     Village Green of Wisconsin Limited Partnership  (Village Green) and Village
     Square Limited (Village Square)  properties,  as further  discussed in Note
     2.a.,  were  reclassified  to investment in  partnerships  held for sale or
     transfer in the  accompanying  consolidated  balance  sheet at December 31,
     2004.  Assets held for sale or transfer are not recorded in excess of their
     estimated net realizable value.

     f.   Investment in partnerships held in escrow
          -----------------------------------------

          During April 2003, documents  transferring the Partnership's  interest
     in  Heritage  Estates I and  Heritage  Estates II to the  noteholders  were
     placed in  escrow,  as  further  discussed  in Note 2.a.  Accordingly,  the
     Partnership's  investment in this Local  Partnership  was  reclassified  to
     investment in partnerships held in escrow in the accompanying  consolidated
     balance   sheets  at  December  31,  2005  and  2004.  The  interests  were
     transferred  to the assignees  effective  February 8, 2006.  Assets held in
     escrow are not recorded in excess of their estimated net realizable value.

     g.   Cash and cash equivalents
          -------------------------

          Cash and cash equivalents  consist of all money market funds, time and
     demand  deposits,  and repurchase  agreements  with original  maturities of
     three months or less.

     h.   Offering costs
          --------------

          The Partnership incurred certain costs in connection with the offering
     and selling of units of additional  limited  partner  interest.  Such costs
     were recorded as a reduction of partners' capital when incurred.

                                     III-12

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

     i.   Income taxes
          ------------

          For federal and state income tax purposes, each partner reports on his
     or her  personal  income tax  return his or her share of the  Partnership's
     income or loss as determined  for tax purposes.  Accordingly,  no provision
     has been made for income taxes in these consolidated financial statements.

     j.   Use of estimates
          -----------------

          In preparing  consolidated  financial  statements in  conformity  with
     accounting  principles  generally accepted in the United States of America,
     the Partnership is required to make estimates and  assumptions  that affect
     the  reported  amounts  of assets and  liabilities  and the  disclosure  of
     contingent assets and liabilities at the date of the consolidated financial
     statements,  and of revenues and  expenses  during the  reporting  periods.
     Actual results could differ from those estimates.

     k.   Fair value of financial instruments
          -----------------------------------

          The consolidated  financial  statements  include  estimated fair value
     information  as of December 31, 2005, as required by Statement of Financial
     Accounting Standards No. 107 (SFAS No. 107), Disclosure About Fair Value of
     Financial   Instruments.   Such   information,   which   pertains   to  the
     Partnership's  financial  instruments  (primarily cash and cash equivalents
     and purchase money notes),  is based on the  requirements set forth in SFAS
     No. 107 and does not purport to represent  the  aggregate net fair value of
     the Partnership.

          The  consolidated  balance  sheet  carrying  amounts for cash and cash
     equivalents approximate estimated fair values of such assets.

          The  Partnership has determined that it is not practicable to estimate
     the fair value of  purchase  money  notes,  either  individually  or in the
     aggregate,  due to:  (i) the lack of an  active  market  for  this  type of
     financial  instrument,  (ii) the  variable  nature of  purchase  money note
     interest  payments  as a result  of  fluctuating  cash  flow  distributions
     received from the related Local Partnerships, and (iii) the excessive costs
     associated with an independent appraisal of the purchase money notes.

     l.   New accounting pronouncement
          ----------------------------

          In December 2003, the Financial Accounting Standards Board issued FASB
     Interpretation No. 46 (revised December 2003) (FIN 46-R),  Consolidation of
     Variable  Interest   Entities.   FIN  46-R  clarifies  the  application  of
     Accounting Research Bulletin 51,  Consolidated  Financial  Statements,  for
     certain entities that do not have sufficient  equity at risk for the entity
     to finance its activities without additional subordinated financial support
     from  other  parties  or  in  which  equity   investors  do  not  have  the
     characteristics  of a controlling  financial interest  ("variable  interest
     entities"). Variable interest entities within the scope of FIN 46-R will be
     required  to be  consolidated  by their  primary  beneficiary.  The primary
     beneficiary  of a variable  interest  entity is  determined to be the party
     that  absorbs a  majority  of the  entity's  expected  losses,  receives  a
     majority of its expected returns,  or both. The Local Partnerships in which
     the Partnership  invested were formed by individuals or entities  unrelated
     to the Partnership or its affiliates.  The  Partnership  purchased  limited
     partner  interests in existing,  operating  partnerships  with unaffiliated


                                     III-13

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

     managing  general  partners.  An affiliate of the Managing  General Partner
     also  purchased a general  partner  interest  in the  majority of the Local
     Partnerships.  Neither the  Partnership  nor the  affiliate of the Managing
     General  Partner  received   development  fees  at  or  near  the  time  of
     investment.   The  Managing   General   Partner  has  evaluated  the  Local
     Partnerships  in which the  Partnership is invested and has determined that
     the  equity  holders  as a  group  held  sufficient  equity  at risk in the
     operating   Local   Partnerships   and  the  equity   investors   have  the
     characteristics  of controlling  financial  interest in accordance with the
     provisions  of  FIN  46-R.  The  Managing  General  Partner  has  therefore
     determined  that the  investments  in Local  Partnerships  are not variable
     interest  entities subject to  consolidation  by the Partnership  under the
     provisions of FIN 46-R.

     m.   Definitive Proxy Statement
          --------------------------

          On  November  21,  2005,  the  Partnership  filed a  Definitive  Proxy
     Statement pursuant to Section 14(a) of the Securities Exchange Act of 1934,
     and mailed it to limited  partners to solicit  consents for approval of the
     following:

     (1)  the sale of all of the Partnership's assets and the dissolution of the
          Partnership pursuant to a Plan of Liquidation and Dissolution, and the
          amendment of the Partnership's Limited Partnership Agreement to permit
          the  Managing  General  Partner,  CRI,  to be  eligible  to receive an
          increased  property  disposition  fee from the Partnership on the same
          basis as such fees may  currently be paid to Local  General  Partners,
          real estate  brokers or other third party  intermediaries  employed to
          sell  properties  in which the  Partnership  holds  interests,  to the
          extent that CRI markets and sells the Partnership's  assets instead of
          such persons (a "Disposition Fee"); and

     (2)  the amendment of the Partnership's  Limited  Partnership  Agreement to
          permit CRI to be eligible to receive a partnership  liquidation fee in
          the amount of $500,000,  payable only if the Managing  General Partner
          is  successful in  liquidating  all of the  Partnership's  investments
          within 48 months from the date the  liquidation  is approved  [January
          20, 2006], in recognition  that one or more of the properties in which
          the Partnership holds an interest might not be saleable to parties not
          affiliated  with the respective  Local  Partnership  due to the amount
          and/or  terms  of  their  current   indebtedness   (the   "Partnership
          Liquidation Fee").

     The matters for which consent was solicited are collectively referred to as
     the "Liquidation."

          The record date for voting was November 1, 2005,  and the final voting
     deadline was January 20, 2006.  The Managing  General  Partner has received
     consent  from a majority of Limited  Partners  for the  liquidation  of the
     Partnership. A tabulation of votes received by the voting deadline follows.

<TABLE>
<CAPTION>

                                   FOR                    AGAINST                   ABSTAIN                   TOTAL
                           --------------------     --------------------    ---------------------      -------------------
                           Units of                 Units of                 Units of                  Units of
                           limited                  limited                  limited                   limited
                           partner                  partner                  partner                   partner
Description                interest     Percent     interest     Percent     interest     Percent      Interest    Percent
-----------                --------     -------     --------     -------     --------     -------      --------    -------
<S>                        <C>          <C>         <C>          <C>         <C>          <C>          <C>         <C>
Sale, dissolution
  and increased
  Disposition Fee           34,464       57.55%      1,778        2.97%         250        0.42%        36,492     60.94%

$500,000 Partnership
  Liquidation Fee           30,535       50.99%      5,087        8.49%         860        1.44%        36,482     60.92%

</TABLE>

                                     III-14

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

          There  can be no  assurance  that the  Liquidation  will be  completed
     pursuant to the Plan of Liquidation and Dissolution.


2.   INVESTMENTS IN PARTNERSHIPS

     a.   Due on investments in partnerships and accrued interest payable
          ---------------------------------------------------------------

          As of December 31, 2005 and 2004, the Partnership held limited partner
     interests  in 12  and  15  Local  Partnerships,  respectively,  which  were
     organized to develop, construct, own, maintain and operate rental apartment
     properties  which  provide  housing   principally  to  the  elderly  or  to
     individuals and families of low or moderate income.  The remaining  amounts
     due on investments in the Local Partnerships follow.

                                                        December 31,
                                              -------------------------------
                                                 2005                2004
                                              -----------         -----------

           Due to local general partners:     $   119,544         $   119,544

           Purchase money notes due in:
             2004                               4,400,000           4,400,000
             2007                                 775,000             775,000
                                              -----------         -----------

                 Subtotal                       5,294,544           5,294,544
                                              -----------         -----------

           Accrued interest payable            12,536,232          12,048,871
                                              -----------         -----------
                 Total                        $17,830,776         $17,343,415
                                              ===========         ===========

          The  amounts  due to  local  general  partners  will be paid  upon the
     occurrence of certain specific events,  as outlined in the respective Local
     Partnership's partnership agreement.

          The purchase  money note related to Highland  Manor,  in the principal
     amount of  $1,760,000,  matured on January  1, 2004.  Effective  January 2,
     2004, the  Partnership's  interest in Highland Manor was transferred to the
     noteholders.

          The one remaining  purchase  money note (secured by the  Partnership's
     interest in  Victorian  Towers) has a stated  interest  rate of 3.06%.  The
     purchase  money note is  nonrecourse,  but its terms provide for payment in
     full upon the earliest of: (i) sale or refinancing of the respective  Local
     Partnership's rental property; (ii) payment in full of the respective Local
     Partnership's permanent loan; or (iii) maturity.

          The purchase  money notes  related to the  following  properties  have
     matured  and  are in  default.  Documents  transferring  the  Partnership's
     interests in the related Local  Partnerships had been placed in escrow,  to
     be released to the  noteholders  upon their  request  after  obtaining  HUD
     consent. As of February 8, 2006, the Partnership's  interests were released
     to the noteholders.

<TABLE>
<CAPTION>

                                                Accrued Interest
                                                      as of           Original     Extended
         Property                 Principal     December 31, 2005     Maturity     Maturity
         --------                -----------    -----------------     --------     --------
         <S>                     <C>            <C>                   <C>          <C>
         Heritage Estates I      $2,600,000        $6,246,455         01/01/99     01/01/04
         Heritage Estates II      1,800,000        $3,945,240         01/01/99     01/01/04

</TABLE>

          The  remaining   purchase  money  note  related  to  Victorian  Towers
     Associates  (Victorian  Towers)  was  extended  to January  1, 2007.  As of
     December 31, 2005,  principal and accrued  interest  balances were $775,000
     and $2,310,561,  respectively.  The remaining purchase money note, which is


                                     III-15

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2. INVESTMENTS IN PARTNERSHIPS - Continued

     nonrecourse to the Partnership, is secured by the Partnership's interest in
     Victorian Towers.  There is no assurance that the underlying  property will
     have  sufficient  appreciation  and equity to enable the Partnership to pay
     the purchase money note's  principal and accrued  interest when due. If the
     purchase  money  note  is not  paid  in  accordance  with  its  terms,  the
     Partnership  will either have to renegotiate the terms of repayment or risk
     losing its partnership  interest in Victorian Towers. In the event that the
     purchase money note remains unpaid upon maturity,  the noteholders may have
     the right to foreclose on the Partnership's interest in Victorian Towers.

          Included in due on  investments in  partnerships  is $119,544 due to a
     previous  owner related to Meadow Lanes at both December 31, 2005 and 2004;
     accrued  interest payable thereon was $33,976 at both December 31, 2005 and
     2004.  These  amounts will be paid upon the  occurance of certain  specific
     events, as outlined in the note agreement.

          The  Partnership's  inability to pay the purchase money note principal
     and accrued  interest  balances  when due,  and the  resulting  uncertainty
     regarding the  Partnership's  continued  ownership  interest in the related
     Local  Partnership,  does not adversely impact the Partnership's  financial
     condition because the purchase money note is nonrecourse and secured solely
     by the Partnership's interest in the related Local Partnerships. Therefore,
     should the investment in the Victorian Towers Local Partnership not produce
     sufficient   value  to  satisfy  the  related   purchase  money  note,  the
     Partnership's  exposure  to loss  is  limited  because  the  amount  of the
     nonrecourse  indebtedness  of the maturing  purchase money note exceeds the
     carrying amount of the investment in the related Local  Partnership.  Thus,
     even  a  complete  loss  of  the  Partnership's   interest  in  this  Local
     Partnership  would not have a  material  adverse  impact  on the  financial
     condition of the Partnership.

          The  Managing  General  Partner  continues  to  investigate   possible
     alternatives  to  reduce  the   Partnership's   debt   obligations.   These
     alternatives  include,  among  others,  retaining  the cash  available  for
     distribution to meet the purchase money note  requirements,  paying off the
     Victorian Towers purchase money note at a discounted  price,  extending the
     due  date of the  Victorian  Towers  purchase  money  note or  selling  the
     underlying real estate and using the Partnership's share of the proceeds to
     pay or buy  down  the  Victoria  Towers  purchase  money  note  obligation.
     Although the Managing  General Partner has had some success  applying these
     strategies in the past,  the Managing  General  Partner  cannot assure that
     these strategies will be successful in the future.  If the Managing General
     Partner is unable to negotiate an  extension  or  discounted  payoff of the
     Victorian  Towers note, in the event that it remains  unpaid upon maturity,
     the  noteholder  may  have  the  right to  foreclose  on the  Partnership's
     interest in the related Local Partnership. In the event of a foreclosure or
     other transfer of the Partnership's interest, the excess of the nonrecourse
     indebtedness  over the carrying amount of the  Partnership's  investment in
     the related Local Partnership will result in a taxable gain. This gain will
     be taxable to Limited  Partners at a federal tax rate of up to 25.0%, as it
     will reflect recapture of depreciation  deductions  claimed in prior years.
     Additionally,  the  Partnership  would  lose its  investment  in the  Local
     Partnership and, likewise, its share of any future cash flow distributed by
     the Local Partnership from rental  operations,  mortgage debt refinancings,
     or the sale of the real estate.  Of the 12 Local  Partnerships in which the
     Partnership   was  invested  as  of  December  31,  2005,   the  two  Local
     Partnerships  with  associated  purchase money notes which have matured and
     are in default,  and for which  documents  transferring  the  Partnership's
     interest in the related  local  partnerships  had been placed in escrow and
     which  were  transferred  to  the  noteholders  as  of  February  8,  2006,
     represented   the  following   percentages  of  the   Partnership's   total
     distributions  received  from Local  Partnerships  and share of income from
     Local Partnerships for the immediately preceding two calendar years.

                                     III-16

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2. INVESTMENTS IN PARTNERSHIPS - Continued


                              Percentage of Total       Partnership's Share of
        For the Year        Distributions Received           Income from
           Ended            from Local Partnerships       Local Partnerships
     -----------------      -----------------------     ----------------------

     December 31, 2005                32%                    $118,121
     December 31, 2004                21%                    $ 22,927


          The  Managing  General  Partner  continues to address the maturity and
     impending  maturity of the  Partnership's  remaining debt obligation and to
     seek solutions that will provide the most favorable  outcome to the Limited
     Partners.  However, there can be no assurance that these strategies will be
     successful.

          Interest  expense on the  Partnership's  purchase  money notes for the
     years  ended  December  31,  2005 and  2004,  was  $626,286  and  $625,647,
     respectively.  The accrued  interest payable on the purchase money notes of
     $12,502,256 and $12,014,895 as of December 31, 2005 and 2004, respectively,
     is due on the  respective  maturity  dates of the  purchase  money notes or
     earlier, in some instances, if (and to the extent of a portion thereof) the
     related Local  Partnership has  distributable  net cash flow, as defined in
     the relevant Local Partnership agreement.

                   Heritage Estates I and Heritage Estates II
                   ------------------------------------------

          The  Partnership  defaulted  on its  purchase  money notes  related to
     Heritage  Estates  Associates  Phase I  (Heritage  Estates I) and  Heritage
     Estates  Associates Phase II (Heritage Estates II) on January 1, 1999, when
     the notes matured and were not paid. The default amount included  aggregate
     principal and accrued interest of $2,600,000 and $4,357,413,  respectively,
     for Heritage  Estates I and  aggregate  principal  and accrued  interest of
     $1,800,000 and  $2,689,917,  respectively,  for Heritage  Estates II. As of
     February  8,  2006,  principal  and  accrued  interest  of  $2,600,000  and
     $6,283,849  respectively,  for  Heritage  Estates  I,  and  $1,800,000  and
     $3,970,168, respectively, for Heritage Estates II, were due.

          In April 2003,  the Managing  General  Partner and the purchase  money
     noteholders agreed to extend the maturity dates of the purchase money notes
     related to Heritage  Estates I and Heritage  Estates II to January 1, 2004.
     In conjunction  therewith,  on April 4, 2003,  documents  transferring  the
     Partnership's  interests in Heritage Estates I and Heritage Estates II were
     placed  in  escrow,  to be  released  to the  noteholders  in the  event of
     non-payment at maturity.  The noteholders  obtained regulatory consents for
     the transfers and the conveyance  instruments  were released from escrow as
     of February 8, 2006.  The transfer will result in gain from  extinguishment
     of debt of approximately  $13.6 million for financial statement purposes in
     2006, and in  cancellation of indebtedness  income of  approximately  $12.9
     million for federal tax purposes in 2006.

          The Partnership's basis in the Local Partnerships,  along with the net
     unamortized  amount of acquisition fees and property purchase costs,  which
     totaled  $1,043,041  and  $1,068,937  as of  December  31,  2005 and  2004,
     respectively,  has been  reclassified to investment in partnerships held in
     escrow in the accompanying consolidated balance sheets.

                                     III-17

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2. INVESTMENTS IN PARTNERSHIPS - Continued

                                 Highland Manor
                                 --------------

          The  Partnership  and the holders of the purchase  money notes (in the
     original principal amount of $1,760,000) related to Highland Manor extended
     the  maturity  date  thereof  from  January  1, 1999 to  January  1,  2004.
     Effective January 2, 2004, the Partnership's interest in Highland Manor was
     transferred to the noteholders.  The transfer of the Partnership's interest
     to the noteholders  resulted in total gain from  extinguishment  of debt of
     $3,625,416 for financial statement purposes in 2004, and in a total gain of
     $3,842,001 for federal income tax purposes in 2004.

                                Victorian Towers
                                ----------------

          The  Partnership  defaulted  on its  purchase  money  note  related to
     Victorian  Towers on  January 1, 1999,  when the note  matured  and was not
     paid.  The  default  amount  included  principal  and  accrued  interest of
     $900,000 and  $1,710,560,  respectively.  Subsequent  thereto,  the parties
     extended the maturity date to January 1, 2004.  In June 2003,  the Managing
     General Partner and the purchase money noteholder  agreed to further extend
     the maturity date of the purchase money note related to Victorian Towers to
     January 1, 2007, and to reduce its interest rate effective as of January 1,
     2003. At the time of the agreement, the Partnership made a $125,000 payment
     to the purchase  money  noteholder to be applied to the purchase money note
     principal.

     b.   Interests  in  profits,  losses and cash  distributions  made by Local
          ----------------------------------------------------------------------
            Partnerships
            ------------

          The Partnership has a 97.01% to 98.99% interest in profits, losses and
     cash  distributions  (as  restricted  by various  federal and state housing
     agencies)  (collectively,  the  "Agencies") of each Local  Partnership.  An
     affiliate  of the Managing  General  Partner of the  Partnership  is also a
     general  partner  of each Local  Partnership  or the  intermediary  limited
     partnership which invested in the Local  Partnership.  As stipulated by the
     Local  Partnerships'  partnership  agreements,  the Local  Partnerships are
     required to make annual cash  distributions from surplus cash flow, if any.
     During 2005 and 2004,  the  Partnership  received cash  distributions  from
     rental operations of the Local Partnerships totaling $445,206 and $661,508,
     respectively.   As  of  December  31,  2005  and  2004,   five  and  eight,
     respectively,  of the Local  Partnerships  had  aggregate  surplus cash, as
     defined by their respective regulatory Agencies, in the amounts of $206,145
     and  $243,750,  respectively,  which may be available for  distribution  in
     accordance with their respective regulatory Agencies' regulations.

          The cash  distributions  to the Partnership from the operations of the
     Local  Partnerships  may be  limited  by the  Agencies'  regulations.  Such
     regulations limit annual cash  distributions to a percentage of the owner's
     equity investment in a rental property.  Funds in excess of those which may
     be distributed to owners are generally  required to be placed in a residual
     receipts  account  held by the  governing  state or federal  agency for the
     benefit of the  property.  In addition,  local  general  partners  have the
     authority to withhold funds if needed for property  repairs,  improvements,
     or other property needs.

          Upon sale or refinancing  of a property owned by a Local  Partnership,
     or upon the  liquidation  of a Local  Partnership,  the proceeds  from such
     sale,  refinancing or liquidation  shall be distributed in accordance  with
     the  respective   provisions  of  each  Local   Partnership's   partnership
     agreement.  In  accordance  with such  provisions,  the  Partnership  would
     receive  from such  proceeds  its  respective  percentage  interest  of any


                                     III-18

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2. INVESTMENTS IN PARTNERSHIPS - Continued

     remaining  proceeds,  after payment of (i) all debts and liabilities of the
     Local Partnership and certain other items,  (ii) the Partnership's  capital
     contributions   plus  certain   specified   amounts  as  outlined  in  each
     partnership  agreement,  and (iii) certain special distributions to general
     partners and related entities of the Local Partnership.

     c.   Advance to Local Partnership
          ----------------------------

                  In December 2004, the Partnership advanced $31,500 to Village
         Square Limited (Village Square) to provide the Local Partnership with
         funds required to correct code violations at the property. In July
         2005, the advance was repaid to the Partnership. The amount is included
         in investments in partnerships held for sale or transfer in the
         accompanying consolidated balance sheet at December 31, 2004.

     d.   Property matters
          ----------------

                Bartley Manor, Village Green, and Village Square
                ------------------------------------------------

          On July 26, 2005,  the  properties  related to Bartley  Manor  Limited
     Partnership  (Bartley Manor),  Village Green of Wisconsin Ltd.  Partnership
     (Village  Green) and Village  Square were sold.  Cash proceeds  received in
     2005 by the Partnership totaled $1,239,926.  The sales resulted in net gain
     on disposition of  investments  in  partnerships  of $152,376 for financial
     statement  purposes and $1,342,655 for federal income tax purposes in 2005.
     The  Partnership  accrued  $15,900 at December  31, 2005 for sale  proceeds
     receivable  related to these sales, which amounts were received in February
     2006. In accordance with the terms of the Partnership Agreement,  in August
     2005, the Managing  General  Partner was paid a disposition  fee of $50,000
     related  to the  sale.  The fee was  netted  against  the  related  gain on
     disposition of investment in partnerships.

          The  Partnership's  basis in the  Bartley  Manor,  Village  Green  and
     Village  Square,  along  with  unamortized  acquisition  fees and  property
     purchase costs, totaling $1,066,955,  which is net of an impairment loss of
     $726,642 related to Bartley Manor, at December 31, 2004 was reclassified to
     investment in  partnerships  held for sale or transfer in the  accompanying
     consolidated balance sheet at that date.

                              Briar Crest I and II
                              --------------------

          On  November  4, 2004,  the  Partnership's  interests  in Briar  Crest
     Apartments I (Briar Crest I) and Briar Crest Apartments II (Briar Crest II)
     were sold to  affiliates  of the Local  General  Partner of the  respective
     Local  Partnerships.  Cash  proceeds  received  in 2004 by the  Partnership
     totaled  $3,348,196.  The  sale  resulted  in net  gain on  disposition  of
     investments in partnerships of $1,913,750 for financial  statement purposes
     and $2,887,001 for federal income tax purposes in 2004. In accordance  with
     the terms of the Partnership  Agreement,  the Managing  General Partner was
     paid a disposition fee of $88,899 related to the sale of the  Partnership's
     interests  in Briar Crest I and Briar Crest II. The fee was netted  against
     the related gain on disposition of investment in partnerships.

                                     III-19

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2. INVESTMENTS IN PARTNERSHIPS - Continued

                                   Walsh Park
                                   ----------

          On May 19, 2003, the local  managing  general  partner  entered into a
     contract for the sale of the property owned by Walsh Park Associates (Walsh
     Park). On December 30, 2003, Walsh Park was sold. Cash proceeds received by
     the  Partnership in January 2004 totaled  $4,743,059.  The sale resulted in
     gain on  disposition  of  investment  in  partnerships  of  $3,358,936  for
     financial statement purposes and $5,975,776 for federal income tax purposes
     in 2003.  Additional  proceeds  received by the Partnership in 2004 totaled
     $166,270, resulting in gain on disposition of investment in partnerships of
     $166,270 for financial  statement  purposes and $31,684 for federal  income
     tax  purposes  in 2004.  In  accordance  with the terms of the  Partnership
     Agreement,  in  January  2004  the  Managing  General  Partner  was  paid a
     disposition  fee of  $233,958  related to the sale,  which was  accrued and
     netted   against  the  related  gain  on   disposition  of  investments  in
     partnerships at December 31, 2003.

     e.   Assets held for sale
          --------------------

                                Arboretum Village
                                -----------------

          On March 1, 2006, the Partnership's  interest in Arboretum Village was
     sold.  The sale will result in net gain on  disposition  of  investments in
     partnerships of approximately $5.7 million for financial statement purposes
     in 2006 and approximately  $14.8 million for federal income tax purposes in
     2006. In accordance with the terms of the Partnership  Agreement,  in March
     2006,  the  Managing  General  Partner  will be paid a  disposition  fee of
     $975,000  related to the sale.  The fee will be netted  against the related
     gain on disposition of investment in partnerships.

          The  Partnership's  basis in  Arboretum  Village,  along  with the net
     unamortized  amount of acquisition fees and property purchase costs,  which
     totaled  $40,218 at December 31, 2005, has been  reclassified to investment
     in partnerships held for sale or transfer in the accompanying  consolidated
     balance sheet at that date.

                          Village Squire I & II and III
                          -----------------------------

          The  Partnership is currently  negotiating  the sale of the properties
     related  to  Village  Squire I & II and  Village  Squire  III.  The sale is
     scheduled to close in May 2006.  There is no  assurance  that a sale of the
     properties will occur.

          Due to the possible sale of the properties related to Village Squire I
     & II  and  Village  Squire  III,  the  Partnership's  basis  in  the  Local
     Partnerships, along with the net unamortized amount of acquisition fees and
     property  purchase costs,  which totaled $54,729 at December 31, 2005, have
     been  reclassified to investment in partnerships  held for sale or transfer
     in the accompanying consolidated balance sheets at that date.

     f.   Summarized financial information
          --------------------------------

          Combined balance sheets and combined  statements of operations for the
     twelve  Local  Partnerships  in which the  Partnership  is  invested  as of
     December 31, 2005,  follow.  The  information  is presented  separately for
     three Local Partnerships  which have investment basis (equity method),  and
     for nine Local  Partnerships for which the Partnership's  carrying value is
     zero (equity method suspended).

                                     III-20

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2. INVESTMENTS IN PARTNERSHIPS - Continued

<TABLE>
<CAPTION>
                             COMBINED BALANCE SHEETS
                                December 31, 2005

                                                          Equity
                                                          Method            Suspended            Total
                                                       ------------        ------------       ------------
     <S>                                               <C>                 <C>                <C>
     Number of Local Partnerships                           3                   9                  12
                                                            =                   =                  ==

     Rental property, at cost, net of
       accumulated depreciation of
       $8,080,266 $45,807,229, and
       $53,887,495, respectively                       $  3,378,742        $ 21,151,116       $ 24,529,858
     Land                                                   980,078           6,754,608          7,734,686
     Other assets                                         2,323,083           6,107,371          8,430,454
                                                       ------------        ------------       ------------

         Total assets                                  $  6,681,903        $ 34,013,095       $ 40,694,998
                                                       ============        ============       ============


     Mortgage notes payable                            $  4,673,429        $ 50,073,884       $ 54,747,313
     Other liabilities                                      344,997           4,431,936          4,776,933
     Due to general partners                                998,745           1,285,809          2,284,554
                                                       ------------        ------------       ------------

         Total liabilities                                6,017,171          55,791,629         61,808,800

     Partners' capital (deficit)                            664,732         (21,778,534)       (21,113,802)
                                                       ------------        ------------       ------------

         Total liabilities and partners'
           capital (deficit)                           $  6,681,903        $ 34,013,095       $ 40,694,998
                                                       ============        ============       ============

</TABLE>

                        COMBINED STATEMENTS OF OPERATIONS
                      For the year ended December 31, 2005

<TABLE>
<CAPTION>
                                                          Equity
                                                          Method            Suspended            Total
                                                       ------------        ------------       ------------
     <S>                                               <C>                 <C>                <C>
     Number of Local Partnerships                           3                   9                  12
                                                            =                   =                  ==

     Revenue:
       Rental                                          $  2,144,781        $ 13,136,763       $ 15,281,544
       Other                                                201,889             815,156          1,017,045
                                                       ------------        ------------       ------------

         Total revenue                                    2,346,670          13,951,919         16,298,589
                                                       ------------        ------------       ------------

     Expenses:
       Operating and other                                1,575,171           9,145,943         10,721,114
       Interest                                             329,148           3,445,556          3,774,704
       Depreciation and amortization                        412,986           2,294,396          2,707,382
                                                       ------------        ------------       ------------

         Total expenses                                   2,317,305          14,885,895         17,203,200
                                                       ------------        ------------       ------------

     Net income (loss)                                 $     29,365        $   (933,976)      $   (904,611)
                                                       ============        ============       ============

     Cash distributions                                $    46,487 (1)     $    398,719       $   445,206
                                                       ===========         ============       ===========

     Cash distributions recorded as reduction
       of investments in partnerships                  $    46,487 (1)     $         --       $    46,487
                                                       ===========         ============       ===========

     Cash distributions recorded as income             $        --         $    398,719       $   398,719

     Partnership's share of Local Partnership
       net income (loss)                                    56,204 (2)               --            56,204
                                                       -----------         ------------       -----------

     Share of income from partnerships                 $    56,204         $    398,719       $   454,923
                                                       ===========         ============       ===========
</TABLE>

     (1)  Includes Bartley Manor sold in July 2005.
     (2)  Includes Bartley Manor,  Village Green and Village Square sold in July
          2005.

                                     III-21

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2. INVESTMENTS IN PARTNERSHIPS - Continued

          Combined balance sheets and combined  statements of operations for the
     fifteen  Local  Partnerships  in which the  Partnership  was invested as of
     December 31, 2004, follow. The information is presented  separately for six
     Local  Partnerships  which have investment basis (equity  method),  and for
     nine Local Partnerships for which the Partnership's  carrying value is zero
     (equity method suspended).

                             COMBINED BALANCE SHEETS
                                December 31, 2004

<TABLE>
<CAPTION>
                                                          Equity
                                                          Method            Suspended            Total
                                                       ------------        ------------       ------------
     <S>                                               <C>                 <C>                <C>
     Number of Local Partnerships                           6                  9                   15
                                                            =                  =                   ==

     Rental property, at cost, net of
       accumulated depreciation of
       $10,523,573, $43,552,353, and
       $54,075,926, respectively                       $  4,618,862        $ 23,026,137       $ 27,644,999
     Land                                                 1,722,314           6,754,339          8,476,653
     Other assets                                         2,755,081           6,375,052          9,130,133
                                                       ------------        ------------       ------------

         Total assets                                  $  9,096,257        $ 36,155,528       $ 45,251,785
                                                       ============        ============       ============


     Mortgage notes payable                            $  6,085,695        $ 51,076,965       $ 57,162,660
     Other liabilities                                      567,195           4,342,351          4,909,546
     Due to general partners                                967,947           1,174,891          2,142,838
                                                       ------------        ------------       ------------

         Total liabilities                                7,620,837          56,594,207         64,215,044

     Partners' capital (deficit)                          1,475,420         (20,438,679)       (18,963,259)
                                                       ------------        ------------       ------------

         Total liabilities and partners'
           capital (deficit)                           $  9,096,257        $ 36,155,528       $ 45,251,785
                                                       ============        ============       ============
</TABLE>

                                     III-22

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2. INVESTMENTS IN PARTNERSHIPS - Continued

                        COMBINED STATEMENTS OF OPERATIONS
                      For the year ended December 31, 2004

<TABLE>
<CAPTION>
                                                           Equity
                                                           Method            Suspended            Total
                                                        -----------         -----------        -----------
      <S>                                               <C>                 <C>                <C>
      Number of Local Partnerships                           8 (1)              9                   17
                                                             =                  =                   ==

      Revenue:
        Rental                                          $ 3,692,510         $13,277,894        $16,970,404
        Other                                               173,660             590,562            764,222
                                                        -----------         -----------        -----------

          Total revenue                                   3,866,170          13,868,456         17,734,626
                                                        -----------         -----------        -----------

      Expenses:
        Operating and other                               2,677,660           8,730,996         11,408,656
        Interest                                            311,436           3,477,333          3,788,769
        Depreciation and amortization                       616,055           2,246,265          2,862,320
                                                        -----------         -----------        -----------

          Total expenses                                  3,605,151          14,454,594         18,059,745
                                                        -----------         -----------        -----------

      Net income (loss)                                 $   261,019         $  (586,138)       $  (325,119)
                                                        ===========         ===========        ===========

      Cash distributions                                $   123,746         $   477,863        $   601,609 (2)
                                                        ===========         ===========        ===========

      Cash distributions recorded as reduction
        of investments in partnerships                  $   123,746         $        --        $   123,746
                                                        ===========         ===========        ===========

      Cash distributions recorded as income             $        --         $   477,863        $   477,863

      Partnership's share of Local Partnership
        net income                                          257,079                  --            257,079
                                                        -----------         -----------        -----------

      Share of income from partnerships                 $   257,079         $   477,863        $   734,942
                                                        ===========         ===========        ===========
</TABLE>


     (1)  Includes  information for Briar Crest I and Briar Crest II, which were
          sold in November 2004.
     (2)  Does  not  include  a late  distribution  in the  amount  of  $59,899,
          received  in May 2004,  from  Highland  Manor  which  was  transferred
          January 2, 2004.


          All of the cash distributions recorded as income are included in share
     of income from  partnerships on the  consolidated  statements of operations
     for  the  respective  years,  and are  recorded  as  cash  receipts  on the
     respective  consolidated  balance sheets. Cash distributions  recorded as a
     reduction of the related  investment  are recorded as cash  receipts on the
     respective  consolidated balance sheets, and are recorded as a reduction of
     investments in partnerships,  also on the respective  consolidated  balance
     sheets.

     g.   Reconciliation of the Local Partnerships' financial
          ---------------------------------------------------
            statement net (loss) income to taxable income
            ---------------------------------------------

          For federal income tax purposes,  the Local  Partnerships  report on a
     basis whereby: (i) certain revenue and the related assets are recorded when
     received rather than when earned; (ii) certain costs are expensed when paid
     or  incurred  rather  than  capitalized  and  amortized  over the period of
     benefit;  and (iii) a shorter life is used to compute  depreciation  on the
     property as permitted by Internal Revenue Service (IRS) Regulations.  These
     returns are subject to examination and,  therefore,  possible adjustment by
     the IRS.

                                     III-23

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2. INVESTMENTS IN PARTNERSHIPS - Continued

          A reconciliation of the Local  Partnerships'  financial  statement net
     loss reflected above to taxable income follows.

                                                   For the years ended
                                                        December 31,
                                               ------------------------------
                                                  2005                  2004
                                               ----------           ----------

     Financial statement net loss              $ (904,611)          $ (325,119)

     Differences between financial statement
       and tax depreciation, amortization,
       and miscellaneous differences            2,044,814            1,880,524
                                               ----------           ----------
     Taxable income                            $1,140,203           $1,555,405
                                               ==========           ==========


3.   RELATED PARTY TRANSACTIONS

     In accordance with the terms of the Partnership Agreement,  the Partnership
paid the  Managing  General  Partner a fee for services in  connection  with the
review, selection,  evaluation,  negotiation and acquisition of the interests in
the Local  Partnerships.  The fee amounted to $1,200,000,  which is equal to two
percent  of  the  Additional  Limited  Partners'  capital  contributions  to the
Partnership.  The  acquisition fee was capitalized and is being amortized over a
30-year period using the straight-line method.

     In accordance with the terms of the Partnership Agreement,  the Partnership
is obligated to reimburse the Managing  General  Partner for its direct expenses
in connection  with managing the  Partnership.  For the years ended December 31,
2005 and 2004, the Partnership paid $244,499 and $180,932,  respectively, to the
Managing General Partner as direct  reimbursement of expenses incurred on behalf
of the  Partnership.  Such  expenses are included in general and  administrative
expenses in the accompanying consolidated statements of operations.

     In accordance with the terms of the Partnership Agreement,  the Partnership
is obligated to pay the Managing General Partner an annual incentive  management
fee (Management  Fee), after all other expenses of the Partnership are paid. The
amount of the  Management  Fee shall be equal to 0.25% of  invested  assets,  as
defined  in  the   Partnership   Agreement,   and  shall  be  payable  from  the
Partnership's  cash available for  distribution,  as defined in the  Partnership
Agreement, as of the end of each calendar year, as follows:

     (i)  First,  on  a  monthly  basis  as  an  operating  expense  before  any
          distributions  to limited partners in the amount computed as described
          in the Partnership  Agreement,  provided that such annual amount shall
          not be greater than $300,000; and

     (ii) Second,  after  distributions to the limited partners in the amount of
          one percent of the gross proceeds of the offering, the balance of such
          0.25% of invested assets.

For each of the years ended December 31, 2005 and 2004, the Partnership paid the
Managing General Partner a Management Fee of $300,000.

                                     III-24

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3.   RELATED PARTY TRANSACTIONS - Continued

     The Managing General Partner and/or its affiliates may receive a fee of not
more than two percent of the sales price of an investment in a Local Partnership
or the property it owns,  payable under certain  conditions  upon the sale of an
investment in a Local  Partnership  or the property it owns.  The payment of the
fee is subject to certain  restrictions,  including the achievement of a certain
level of sales  proceeds and making  certain  minimum  distributions  to limited
partners. In accordance with the terms of the Partnership Agreement,  in January
2004 the  Managing  General  Partner  was  paid a  disposition  fee of  $233,958
relating to the sale of Walsh Park on December 30, 2003.  The fee was accrued at
December 31, 2003,  and was netted  against the related gain on  disposition  of
investment in  partnerships.  In November 2004 the Managing  General Partner was
paid a  disposition  fee of  $88,899  related  to the sale of the  Partnership's
interests  in Briar Crest I and Briar  Crest II. The fee was netted  against the
related gain on disposition of investment in  partnerships.  In August 2005, the
Managing  General  Partner was paid a disposition  fee of $50,000 related to the
sales of Bartley  Manor,  Village  Green and  Village  Square,  which was netted
against the related gain on disposition of investment in partnerships.  In March
2006, the Managing  General  Partner will be paid a disposition  fee of $975,000
related to the sale of the Partnership's  interest in Arboretum Village in March
2006, which will be netted against the related gain on disposition of investment
in partnerships.  The Liquidation Proxy authorized an increased  disposition fee
to the Managing General Partner under the terms set forth therein.


4. PARTNERSHIP PROFITS AND LOSSES, AND DISTRIBUTIONS

     All profits and losses prior to the first date on which Additional  Limited
Partners were admitted were allocated 98.49% to the Initial Limited Partners and
1.51% to the General Partners. Upon admission of the Special Limited Partner and
the Additional  Limited  Partners,  the interest of the Initial Limited Partners
was reduced to 0.49%.  The net proceeds  resulting  from the  liquidation of the
Partnership  or the  Partnership's  share of the net  proceeds  from any sale or
refinancing of the Local  Partnerships or their rental  properties which are not
reinvested shall be distributed and applied as follows:

     (i)  to the payment of debts and liabilities of the Partnership  (including
          all expenses of the  Partnership  incident to the sale or refinancing)
          other than loans or other debts and  liabilities of the Partnership to
          any partner or any affiliate; such debts and liabilities,  in the case
          of a  non-liquidating  distribution,  to be only those  which are then
          required  to be paid  or,  in the  judgment  of the  Managing  General
          Partner, required to be provided for;

     (ii) to the  establishment  of any  reserves  which  the  Managing  General
          Partner  deems  reasonably  necessary  for  contingent,  unmatured  or
          unforeseen liabilities or obligations of the Partnership;

    (iii) to each  partner in an amount  equal to the  positive  balance in his
          capital  account as of the date of the sale or  refinancing,  adjusted
          for operations and  distributions to that date, but before  allocation
          of any profits for tax purposes realized from such sale or refinancing
          and allocated pursuant to the Partnership Agreement;

     (iv) to the limited  partners (A) an aggregate amount of proceeds from sale
          or  refinancing  and all prior  sales or  refinancings  equal to their
          capital contributions,  without reduction for prior cash distributions
          other than prior distributions of sale and refinancing proceeds,  plus
          (B) an  additional  amount  equal to a cumulative  non-compounded  six
          percent  return  on  each  limited  partners'  capital   contribution,
          reduced,  but not below  zero,  by (1) an  amount  equal to 50% of the
          losses for tax  purposes  plus tax credits  allocated  to such limited


                                     III-25

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4.   PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS - Continued

          partner  and (2)  distributions  of net  cash  flow  to  each  limited
          partner,  such  return,  losses  for tax  purposes  and net cash  flow
          distributions  commencing  on the  first day of the month in which the
          capital contribution was made;
     (v)  to the repayment of any unrepaid loans theretofore made by any partner
          or any affiliate to the Partnership for Partnership obligations and to
          the  payment  of any  unpaid  amounts  owing to the  General  Partners
          pursuant to the Partnership Agreement;
     (vi) to the General Partners in the amount of their capital contributions;
    (vii) thereafter, for their services to the Partnership, in equal shares to
          certain general partners (or their  designees),  whether or not any is
          then a general  partner,  an aggregate fee of one percent of the gross
          proceeds resulting from (A) such sale (if the proceeds are from a sale
          rather than a refinancing) and (B) any prior sales from which such one
          percent fee was not paid to the General  Partners or their  designees;
          and,  [Messrs.  Willoughby  and Dockser waived their share of any such
          deferred fee in the Liquidation Proxy.]
   (viii) the  remainder,  12% to the General  Partners (or their  assignees),
          three  percent to the Special  Limited  Partner and 85% to the Initial
          and Additional Limited Partners (or their assignees).

     Fees payable to certain general  partners (or their  designees) under (vii)
above,  together  with  all  other  property  disposition  fees  and  any  other
commissions or fees payable upon the sale of apartment properties,  shall not in
the aggregate  exceed the lesser of the  competitive  rate or six percent of the
sale price of the apartment properties.

     The Managing General Partner and/or its affiliates may receive a fee of not
more than two percent of the sale price of an investment in a Local  Partnership
or the property it owns,  payable under certain  conditions  upon the sale of an
investment in a Local  Partnership  or the property it owns.  The payment of the
fee is subject to certain  restrictions,  including the achievement of a certain
level of sales  proceeds and making  certain  minimum  distributions  to limited
partners. In accordance with the terms of the Partnership Agreement,  in January
2004 the  Managing  General  Partner  was  paid a  disposition  fee of  $233,958
relating to the sale of Walsh Park on December 30, 2003.  The fee was accrued at
December 31, 2003,  and was netted  against the related gain on  disposition  of
investment in  partnerships.  In November 2004 the Managing  General Partner was
paid a  disposition  fee of  $88,899  related  to the sale of the  Partnership's
interests  in Briar Crest I and Briar  Crest II. The fee was netted  against the
related gain on disposition of investment in  partnerships.  In August 2005, the
Managing  General  Partner was paid a disposition  fee of $50,000 related to the
sales of Bartley  Manor,  Village  Green and  Village  Square,  which was netted
against the related gain on disposition of investment in partnerships.  In March
2006, the Managing  General  Partner will be paid a disposition  fee of $975,000
related to the sale of the Partnership's  interest in Arboretum Village in March
2006, which will be netted against the related gain on disposition of investment
in partnerships.  The Liquidation Proxy authorized an increased  disposition fee
to the Managing General Partner under the terms set forth therein.

     Pursuant to the Partnership Agreement, all cash available for distribution,
as defined, shall be distributed,  not less frequently than annually, 97% to the
Additional  Limited  Partners,  1% to the Special Limited Partner,  0.49% to the
Initial Limited Partner and 1.51% to the General Partners,  after payment of the
Management  Fee (see Note 3), as  specified  in the  Partnership  Agreement.  On
February 26, 2004, the Partnership  made a cash  distribution of $2,275,516 ($38
per  Unit) to  Additional  Limited  Partners  who were  holders  of record as of
January 1, 2004. The  distribution  consisted of proceeds from the sale of Walsh

                                     III-26

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4.   PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS - Continued

Park.  On  December  15,  2004,  the  Partnership  made a cash  distribution  of
$3,053,982  ($51 per unit) to  Additional  Limited  Partners who were holders of
record as of November 1, 2004, and a cash distribution of $40,744 to the General
Partners and Initial and Special Limited Partners. The distribution consisted of
cash  resources   accumulated  from  operations  and  distributions  from  Local
Partnerships,  and of  proceeds  received  from  the  sale of the  Partnership's
interests  in Briar  Crest I and Briar  Crest  II.  On  December  6,  2005,  the
Partnership made a cash  distribution of $1,197,640 ($20 per unit) to Additional
Limited  Partners  who were  holders  of  record  as of  August  31,  2005.  The
distribution  consisted of proceeds received from the sales of the Partnership's
interests in Bartley Manor, Village Green and Village Square.

     As defined in the Partnership Agreement, after the payment of distributions
described in the previous  paragraph,  after the  establishment  of any reserves
deemed  necessary  by the  Managing  General  Partner  and after  payment of the
Management Fee, the Partnership had no remaining cash available for distribution
for the years ended  December 31, 2005 and 2004.  The Managing  General  Partner
currently  intends to retain all of the  Partnership's  remaining  undistributed
cash for the possible  repayment,  prepayment or retirement of the Partnership's
outstanding  purchase money notes and related  accrued  interest  related to the
Local Partnerships, and for operating cash reserves.


5.   RECONCILIATION OF THE PARTNERSHIP'S FINANCIAL STATEMENT NET INCOME
       TO TAXABLE INCOME

     For  federal  income  tax  purposes,  the  Partnership  reports  on a basis
whereby:  (i) certain expenses are amortized rather than expensed when incurred;
(ii) certain costs are  amortized  over a shorter  period for tax  purposes,  as
permitted by IRS  Regulations,  and (iii)  certain  costs are  amortized  over a
longer period for tax purposes. The Partnership records its share of losses from
its  investments  in limited  partnerships  for federal  income tax  purposes as
reported on the Local Partnerships'  federal income tax returns (see Note 2.f.),
including  losses in excess of related  investment  amounts.  These  returns are
subject to examination and, therefore, possible adjustment by the IRS.

     A reconciliation of the Partnership's financial statement net (loss) income
to taxable income follows.

<TABLE>
<CAPTION>
                                                                         For the years ended
                                                                             December 31,
                                                                     -----------------------------
                                                                        2005               2004
                                                                     ----------         ----------
<S>                                                                  <C>                <C>
Financial statement net (loss) income                                $ (633,802)        $4,445,721

Adjustments:
  Differences between financial statement net income
   and taxable income related to the Partnership's equity
   in the Local Partnerships' income or losses                          829,269          1,471,638

  Differences between financial statement gain and taxable gain
    from the sale or transfer of properties                             992,542            967,088

  Costs amortized over a shorter period for income tax purposes          22,853             25,825
                                                                     ----------         ----------
Taxable income                                                       $1,210,862         $6,910,272
                                                                     ==========         ==========
</TABLE>
                                     III-27

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


6.   SUBSEQUENT EVENT

     In February  2006,  the  Partnership's  interests in Heritage  Estate I and
Heritage Estates II were transferred to the purchase money noteholders. See Note
2.a. Due on investments in partnerships and accrued interest payable (above) for
information regarding the transfer. In March 2006, the Partnership's interest in
Arboretum  Village  was  sold.  See  Note  2.e.  Assets  for  sale  (above)  for
information regarding the sale.

                                      # # #


                                     III-28

<PAGE>
                                EXHIBIT No. 99 b.

Reports of other auditors relating to the audits of the financial  statements of
Local Partnerships in which Capital Realty Investors-III Limited Partnership has
invested.