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


                          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, 2006


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



                         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 $664,566.

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

                        2006 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-6
Item 8.   Changes In and Disagreements With Accountants
            on Accounting and Financial Disclosure...................... II-6
Item 8A.  Controls and Procedures....................................... II-6
Item 8B.  Other Information............................................. II-7


                                    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-8


<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, 2006, 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, 2006,
the Partnership  retained  investments in six 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 (six  remaining as of December 31,
2006)  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 (zero  remaining  as of  December  31,  2006,  three
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 six
Local  Partnerships and was a general partner in the 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, 2006, 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        12/31/06 (2)        and/or Subsidized Under             Units        Subsidies       HAP Contract
--------------------        ------------    -------------------------------       ---------    --------------    ------------
<S>                         <C>             <C>                                   <C>          <C>               <C>
Meadow Lanes Apts.          $ 1,059,703     Michigan State Housing Develop-            118             0                 --
 Holland, MI                                 ment Authority/Section 236 of
                                             the NHA

Monterey/Hillcrest           13,562,387     Section 221(d)(4) of the NHA/FHA           300            60           04/23/24 (3)
 Waukesha, WI

Victorian Towers              4,435,679     New Jersey Housing and Mortgage            205            27           12/01/23
 Cape May, NJ                                 Finance Agency/Section 8

Villa Mirage I                1,444,606     California Housing Finance                  50            50           12/19/07 (3)(4)
 Rancho Mirage, CA                            Agency (CHFA)/Section 8

Villa Mirage II               1,652,954     CHFA/Section 8                              48            48           12/14/15
 Rancho Mirage, CA

Windham Village               1,508,302     CHFA                                        50            44           10/30/15
 Santa Rosa, CA
                            -----------                                             ------          ----
Totals (6 Properties)       $23,663,631                                                771           229
                            ===========                                             ======          ====
</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             2006    2005    2004   2003    2002      2006       2005         2004        2003        2002
--------------------             ----    ----    ----   ----    ----     -------   --------     --------    --------    --------
<S>                              <C>     <C>     <C>    <C>     <C>      <C>       <C>          <C>         <C>         <C>
Meadow Lanes Apts.                82%     96%     96%    96%     95%     $ 6,302   $ 6,257      $ 6,326     $ 6,622     $ 6,443
 Holland, MI

Monterey/Hillcrest                91%     95%     97%    97%     96%       8,785     8,461        8,490       8,826       9,023
 Waukesha, WI

Victorian Towers                  99%     98%    100%    99%     98%       7,272     7,067        6,970       6,711       6,391
 Cape May, NJ

Villa Mirage I                   100%     98%     98%    98%     97%      10,106    10,087       10,030       9,697       9,430
 Rancho Mirage, C

Villa Mirage II                   98%    100%    100%   100%     99%      10,083     9,960       10,011       9,657       9,603
 Rancho Mirage, CA

Windham Village                   98%     99%     98%   100%    100%      10,957    10,904       11,203      11,353      11,568
 Santa Rosa, CA
                                 ---     ---     ---    ---     ---      -------   -------      -------     -------     -------
Totals (6 Properties) (5)         95%     98%     98%    98%     98%     $ 8,918   $ 8,789      $ 8,838     $ 8,811     $ 8,743
                                 ===     ===     ===    ===     ===      =======   =======      =======     =======     =======
</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, 2006.
     (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 2007.
     (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, 2007, the  Partnership's  interest in Victorian Towers
Associates  was  transferred  to the  noteholder  in  full  satisfaction  of the
Partnership's  purchase  money  note.  See the notes to  consolidated  financial
statements for additional information concerning the transfer.

     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.

     On June 27,  2006,  the  properties  related to  Village  Squire I & II and
Village Squire III were sold. See the notes to consolidated financial statements
for additional information concerning the sale.

     On December 31, 2006, the Partnership's interest in Lakewood Apartments was
sold.  See  the  notes  to  consolidated  financial  statements  for  additional
information concerning the sale.

     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.

                                       I-3

<PAGE>
                                     PART I
                                     ------


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."

     The record  date for  voting was  November  1, 2005,  and the final  voting
deadline was January 20, 2006. The Managing  General  Partner  received  consent
from a majority in interest of the 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-4

<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  expired  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 April 3, 2007 there were approximately  3,952 registered holders
          of Units in the Partnership.

     (c)  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  properties  owned by Bartley
          Manor,  Village  Green  and  Village  Square.  On July 21,  2006,  the
          Partnership made a cash  distribution of $7,305,604 ($122 per unit) to
          Additional  Limited  Partners who were holders of record as of July 1,
          2006. The distribution consisted of proceeds received from the sale of
          the  Partnership's  interest in Arboretum Village and the sales of the
          properties known as Village Squire I & II and Village Squire III.

                                      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,  2006.  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 four
Local  Partnerships  which have cumulative losses in excess of the amount of the
Partnership's investments in those Local Partnerships.

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

     In September  2006, the Securities and Exchange  Commission  ("SEC") issued
Staff  Accounting  Bulletin  No.  108,  "Considering  the  Effects of Prior Year
Misstatements   when   Quantifying   Misstatements  in  Current  Year  Financial
Statements" ("SAB No. 108"). SAB No. 108 requires quantification of errors using
both  a  balance  sheet  approach  and  an  income  statement  approach  in  the
determination  of  materiality  in  relation to a  misstatement.  SAB No. 108 is
effective  the first  fiscal year ending after  November  15,  2006.  Management
believes SAB No. 108 will not have any impact on the Partnership.

     In September  2006, the Financial  Accounts  Standards  Board (FASB) issued
SFAS No. 157, Fair Value Measurements ("SFAS No. 157"). SFAS No. 157 establishes
a formal framework for measuring fair value under generally accepted  accounting
principles.  Although SFAS No. 157 applies  (amends) the  provisions of existing
FASB  and  AICPA  pronouncements,  it  does  not  require  any  new  fair  value
measurements,  nor  does it  establish  valuation  standards.  SFAS  No.  157 is
effective for fiscal years  beginning  after  November 15, 2007.  Management has
determined that SFAS No. 157 will have no material impact to the Partnership.

                                     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.

                                      II-2

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


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

     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 and federal 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.

     The U. S. Department of Housing and Urban  Development  (HUD) subsidies are
provided  principally under Section 8 and 236 of the National Housing Act. Under
Section 8, the  government  pays to the  applicable  apartment  partnership  the
difference between market rental rates (determined in accordance with government
procedures)  and the rate the  government  deems  residents  can  afford.  Under
Section  236,  the  government  provides  interest  subsidies  directly  to  the
applicable apartment  partnership through a reduction in the property's mortgage
interest rate. In turn, the partnership  provides a  corresponding  reduction in
resident  rental rates.  In compliance  with the  requirements of Section 8, and
Section  236,  residents  are  screened for  eligibility  under HUD  guidelines.
Subsidies are provided under  contracts  between the federal  government and the
apartment partnerships that are renewed annually.

     Subsidy contracts for the investment  apartment properties are scheduled to
expire between 2007 and 2024. The Managing  General  Partner intends to seek the
renewal of expiring subsidy contracts, when appropriate, for its properties. HUD
has in the past  approved  new subsidy  contracts  on an annual  basis.  The HUD
contract  renewal  process  currently  provides  owners six options for renewing
their  section  8  contract  depending  upon  whether  the  owner  can  meet the
eligibility criteria.  Historically, we have met the criteria necessary to renew
our Section 8 contracts.

                                      II-3

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


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

     Villa  Mirage I has a Section 8 HAP  contract  which  expires  December 19,
2007.  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,  2006,  the  carrying  amount  of  the  Partnership's
investments in Local  Partnerships with Section 8 HAP contracts expiring in 2007
was $43,008.

     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.

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

     As of December 31, 2006, the Partnership had approximately  3,950 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 six remain at
December 31, 2006. The Partnership's liquidity, with unrestricted cash resources
of  $6,294,862  as of December  31,  2006,  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 April 3, 2007,  there
were no material commitments for capital expenditures.

     During  2006 and 2005,  the  Partnership  received  cash  distributions  of
$84,010 and $445,206, respectively, from the Local Partnerships.

     The  Partnership's  remaining  obligation with respect to its investment in
Victorian Towers  Associates  (Victorian  Towers),  in the form of a nonrecourse
purchase  money note having an aggregate  principal  balance of  $775,000,  plus
aggregate  accrued interest of $2,340,117,  as of December 31, 2006, was 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 note matured
January 1, 2007 and was not paid.

     The purchase  money note,  which was  nonrecourse to the  Partnership,  was
secured by the  Partnership's  interest in  Victorian  Towers.  The  Partnership
transferred its interest in Victorian Towers to the noteholder effective January
2, 2007 in full satisfaction of the purchase money note.

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

     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 35.0%,  as it will reflect  recapture of  depreciation  deductions
claimed in prior years. Additionally, the Partnership lost 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.

     Included  in  due on  investments  in  partnerships  is  $119,544  due to a
previous  owner  related to Meadow Lanes at December 31, 2006 and 2005;  accrued
interest  payable  thereon  was $33,976 at  December  31,  2006 and 2005.  These
amounts will be paid upon the occurrence of certain specific events, as outlined
in the note agreement.


                                      II-4

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


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

     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.

     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, 2006, net cash provided by investing  activities
was  adequate to support net cash used in  operating  activities.  Cash and cash
equivalents  increased  $228,458  during 2006,  primarily due to the receipts of
distributions  from  partnerships  and proceeds  received  from  disposition  of
investments in partnerships,  partially offset by the distribution to Additional
Limited  Partners.  For the years ended December 31, 2006 and December 31, 2005,
distributions  of $84,010 and $445,206,  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.

     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 properties owned by Bartley Manor,  Village Green and Village Square.  On
July 21, 2006, the Partnership made a cash  distribution of $7,305,604 ($122 per
unit) to  Additional  Limited  Partners who were holders of record as of July 1,
2006.  The  distribution  consisted  of proceeds  received  from the sale of the
Partnership's  interest in  Arboretum  Village  and the sales of the  properties
known as Village  Squire I & II and Village  Squire III.  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.

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

2006 Versus 2005
----------------

     The Partnership recognized net income for the year ended December 31, 2006,
compared to net loss in 2005,  primarily due to gain from extinguishment of debt
related to the transfer of the Partnership's interests in Heritage Estates I and
Heritage  Estates  II in April 2006 and gain on  disposition  of  investment  in
partnerships  related  to the sale of the  Partnerships  interest  in  Arboretum
Village  in March  2006 and the sale of the  Village  Squire I & II and  Village
Squire III properties in June 2006.  Interest and other revenue increased due to
higher  interest  rates in 2006 and the receipt of additional  income related to
properties  sold  or  transferred.  Interest  expense  decreased  due to a lower
purchase  money  note  balance.  Share of  income  from  partnerships  decreased
primarily due to the cessation of income from  properties sold or transferred in
2006.  General and  administrative  expenses  increased  primarily due to higher
reimbursed payroll costs and printing cost relating to the proxy.

     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
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, 2006 and 2005,  did not include  losses of $416,752  and  $949,995,
respectively. Distributions of $72,475 and $398,719, received from four and four
Local  Partnerships  during  2006 and  2005,  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.

                                      II-5

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


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

                                    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 six properties
for the five years ended  December 31, 2006,  follow.  Combined  rental  revenue
amounts have been adjusted to reflect  property sales and interests  transferred
during 2006 and in prior years.

<TABLE>
<CAPTION>
                                                              For the years ended December 31,
                           ----------------------------------------------------------------------------------------------------
                              2006                 2005                   2004                   2003                  2002
                           ----------           -----------             ----------             ----------            ----------
<S>                        <C>          <C>     <C>           <C>       <C>           <C>      <C>           <C>     <C>
Combined Rental
  Revenue                  $6,407,014           $6,253,173              $6,264,212             $6,314,486            $6,281,601

Annual Percentage
  Increase (Decrease)                   2.5%                  (0.2)%                  (0.8%)                 (0.5%)

</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 2007,  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
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  2007
evaluation,  and subject to the foregoing,  the Principal  Executive Officer and

                                      II-6

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


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

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

     There has not been any information  required to be disclosed in a report on
Form 8-K during the quarter ended December 31, 2006,  but not reported,  whether
or not otherwise required by this Form 10-KSB at December 31, 2006.

                                      II-7

<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, 70, 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,  60, 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
          April 3, 2007.

<TABLE>
<CAPTION>
                                                                      % of Total
           Name and Address                Amount and Nature         Units Issued
          of Beneficial Owner           of Beneficial Ownership     and Outstanding
          -------------------           -----------------------     ---------------
          <S>                           <C>                         <C>
          Equity Resource                    12,271 Units                20.5%
            Investment, LLC
          44 Brattle Street
          Cambridge, MA 02138

</TABLE>


     (b)  Security ownership of management.

          The following  table sets forth  certain  information  concerning  all
          Units beneficially owned, as of April 3, 2007, by each director and by
          all directors and officers as a group of the Managing  General Partner
          of the Partnership.

<TABLE>
<CAPTION>
                                                                      % of Total
              Name of                      Amount and Nature         Units Issued
          Beneficial Owner              of Beneficial Ownership     and Outstanding
          ----------------              -----------------------    -----------------
          <S>                           <C>                        <C>
          William B. Dockser                     None                    0.0%
          H. William Willoughby                  None                    0.0%
          All Directors and Officers
            as a Group (2 persons)               None                    0.0%

</TABLE>

     (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.)


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

     During the years ended December 31, 2006 and 2005, the Partnership retained
Grant Thornton LLP to provide services as follows.

                                             Year Ended December 31,
                                          ------------------------------
                                            2006                  2005
                                          --------              --------

     Audit fees                           $140,044              $131,376
     Audit-related fees                         --                 --
     Tax fees (1)                           30,975                26,950
     All other fees                             --                    --
                                          --------              --------
          Total billed                    $171,019              $158,326
                                          ========              ========


     (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,
2006 and  2005,  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-IIILIMITED PARTNERSHIP
                             ---------------------------------------------------
                             (Registrant)

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



April 3, 2007                     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.


April 3, 2007                      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


The 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)  and
subsidiaries  (the Partnership) as of December 31, 2006 and 2005 and the related
consolidated  statements of operations,  changes in partners' (deficit) capital,
and cash flows for the years then  ended.  These  financial  statements  are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial  statements based on our audits.  We did not audit
the financial  statements of the Local  Partnerships in connection with our 2005
audit.  The  Partnership's   share  of  income  from  these  Local  Partnerships
constitutes  $(119,029) of loss included in the  Partnership's  2005 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
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 audit 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 financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by  management,  as well as evaluating the
overall  financial  statement  presentation.  We believe that our audits and the
reports of other auditors provide a reasonable basis for our opinion.

In our opinion,  the 2006 consolidated  financial  statements  referred to above
present  fairly,  in all material  respects,  the financial  position of Capital
Realty  Investors-III  Limited  Partnership and  subsidiaries as of December 31,
2006 and the results of their operations, changes in partners' (deficit) capital
and their cash flows for the year then  ended,  in  conformity  with  accounting
principles  generally  accepted in the United  States of America.  Also,  in our
opinion,  based  upon our  audit and the  reports  of other  auditors,  the 2005
consolidated  financial  statements  referred to above  present  fairly,  in all
material  respects,  the  financial  position  of Capital  Realty  Investors-III
Limited  Partnership and subsidiaries as of December 31, 2005 and the results of
their  operations,  changes in partners'  (deficit) capital and their cash flows
for the year then ended,  in conformity  with  accounting  principles  generally
accepted in the United States of America.

                                      III-6

<PAGE>





As described in Note A to the 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.


                                                          Grant Thornton LLP


McLean, Virginia
April 3, 2007

                                      III-7

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                           CONSOLIDATED BALANCE SHEETS


                                     ASSETS

<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                      ----------------------------
                                                                                          2006            2005
                                                                                      ------------    ------------
<S>                                                                                   <C>             <C>
Investments in partnerships .......................................................   $  2,404,280    $  2,435,672
Investment in partnerships held for sale or transfer ..............................         82,730          94,947
Investment in partnerships held in escrow .........................................           --         1,043,041
Cash and cash equivalents .........................................................      6,294,862       6,066,404
Acquisition fees, principally paid to related parties,
  net of accumulated amortization of $60,703 and $108,273, respectively ...........         16,451          36,175
Property purchase costs,
  net of accumulated amortization of $36,300 and $126,014, respectively ...........         12,183          51,221
Sale proceeds receivable ..........................................................        132,873          15,900
Other assets ......................................................................        231,099           6,060
                                                                                      ------------    ------------

      Total assets ................................................................   $  9,174,478    $  9,749,420
                                                                                      ============    ============



                        LIABILITIES AND PARTNERS' DEFICIT


Due on investments in partnerships ................................................   $    894,544    $  5,294,544
Accrued interest payable ..........................................................      2,374,093      12,536,232
Accounts payable and accrued expenses .............................................        625,053         177,565
                                                                                      ------------    ------------

      Total liabilities ...........................................................      3,893,690      18,008,341
                                                                                      ------------    ------------

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 .........................................    (26,574,246)    (19,268,642)
    Offering costs ................................................................     (6,156,933)     (6,156,933)
    Accumulated losses ............................................................    (21,991,533)    (42,836,846)
                                                                                      ------------    ------------

      Total partners' capital (deficit) ...........................................      5,280,788      (8,258,921)
                                                                                      ------------    ------------

      Total liabilities and partners' capital (deficit) ...........................   $  9,174,478    $  9,749,420
                                                                                      ============    ============
</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 OPERATIONS

<TABLE>
<CAPTION>
                                                                                 For the years ended
                                                                                     December 31,
                                                                              -------------------------
                                                                                  2006         2005
                                                                              -----------   -----------
<S>                                                                           <C>           <C>
Share of income from partnerships .........................................   $    95,628   $   454,923
                                                                              -----------   -----------

Other revenue and expenses:

  Revenue:
    Gain from extinguishment of debt ......................................    13,610,976          --
    Interest and other ....................................................       568,938       188,273
                                                                              -----------   -----------

                                                                               14,179,914       188,273
                                                                              -----------   -----------

  Expenses:
    Interest ..............................................................       104,696       626,286
    Management fee ........................................................       300,000       300,000
    General and administrative ............................................       447,941       298,243
    Professional fees .....................................................       184,852       181,992
    Amortization of deferred costs ........................................        10,484        22,853
                                                                              -----------   -----------

                                                                                1,047,973     1,429,374
                                                                              -----------   -----------

      Total other revenue and expenses ....................................    13,131,941    (1,241,101)
                                                                              -----------   -----------

Income (loss) before gain on disposition of investment in partnerships ....    13,227,569      (786,178)

Gain on disposition of investment in partnerships,
  net of disposition fees .................................................     7,617,744       152,376
                                                                              -----------   -----------

Net income (loss) .........................................................   $20,845,313   $  (633,802)
                                                                              ===========   ===========


Net income (loss) allocated to General Partners (1.51%) ...................   $   314,764   $    (9,570)
                                                                              ===========   ===========

Net income (loss) allocated to Initial and Special Limited Partners (1.49%)   $   310,595   $    (9,444)
                                                                              ===========   ===========

Net income (loss) allocated to Additional Limited Partners (97%) ..........   $20,219,954   $  (614,788
                                                                              ===========   ===========

Net income (loss) per unit of Additional Limited Partner Interest,
  based on 59,882 units outstanding .......................................   $    337.66   $    (10.27)
                                                                              ===========   ===========

</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 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, 2005                  $(764,039)      $(754,524)        $(4,908,916)       $(6,427,479)

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

  Distribution to General Partners

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


Partner's deficit, December 31, 2005                 (773,609)       (763,968)         (6,721,344)        (8,258,921)

  Net income                                          314,764         310,595          20,219,954         20,845,313

  Distribution of $122.00 per unit
    of Additional Limited Partner Interest                 --              --          (7,305,604)        (7,305,604)
                                                    ---------       ---------         -----------        -----------

Partners' (deficit) capital, December 31, 2006      $(458,845)      $(453,373)        $ 6,193,006        $ 5,280,788
                                                    =========       =========         ===========        ===========
</TABLE>

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

                                     III-10

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                 For the years ended
                                                                                     December 31,
                                                                             ----------------------------
                                                                                 2006           2005
                                                                             ------------    ------------
<S>                                                                          <C>             <C>
Cash flows from operating activities:
  Net income (loss) ......................................................   $ 20,845,313    $   (633,802)

  Adjustments to reconcile net income (loss) to net cash used in operating
    activities:
    Share of income from partnerships ....................................        (95,628)       (454,923)
    Amortization of deferred costs .......................................         10,484          22,853
    Gain from extinguishment of debt .....................................    (13,610,976)           --
    Gain on disposition of investment in partnerships,
      net of disposition fees ............................................     (7,617,744)       (152,376)

    Changes in assets and liabilities:
      Increase in accrued interest receivable on advances to partnerships            --               109
      Increase in other assets ...........................................       (225,039)         (5,824)
      Increase in accrued interest payable ...............................        104,696         626,286
      Payment of purchase money note interest ............................        (12,818)       (138,925)
      Increase in accounts payable and accrued expenses ..................        447,488          13,876
                                                                             ------------    ------------

        Net cash used in operating activities ............................       (154,224)       (722,726)
                                                                             ------------    ------------

Cash flows from investing activities:
  Receipt of distributions from partnerships .............................         84,010         445,206
  Collection of sales proceeds receivable ................................         15,900            --
  Proceeds from disposition of investment in partnerships ................      9,373,376       1,239,926
  Disposition fees paid to related party .................................     (1,785,000)        (50,000)
  Advance to Local Partnership ...........................................       (150,000)           --
  Collection of advance to Local Partnership .............................        150,000          31,500
                                                                             ------------    ------------

        Net cash provided by investing activities ........................      7,688,286       1,666,632
                                                                             ------------    ------------


Cash flows from financing activities:
  Distributions to Additional Limited Partners ...........................     (7,305,604)     (1,197,640)
                                                                             ------------    ------------


Net increase (decrease) in cash and cash equivalents .....................        228,458        (253,734)

Cash and cash equivalents, beginning of year .............................      6,066,404       6,320,138
                                                                             ------------    ------------

Cash and cash equivalents, end of year ...................................   $  6,294,862    $  6,066,404
                                                                             ============    ============

</TABLE>

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

                                     III-11

<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, 2006,  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
          ---------------------------

          The Partnership had invested in three intermediary limited partnership
     which  invested  in  four  Local  Partnerships  which  owned  and  operated
     government-assisted or conventionally financed apartment properties. During
     the year  ended  December  31,  2006,  the  Partnership  sold or  otherwise
     transferred its interests in these intermediary limited  partnerships.  The
     Partnership's share of the intermediary limited  partnership's  activity is
     reflected in accompanying  consolidated  financial  statements  through the
     date of sale or transfer.  All  activity  between the  Partnership  and the
     intermediary  limited  partnerships has been eliminated in the accompanying
     consolidated financial statements.

     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.   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, 2006
     and 2005, the Partnership's  share of cumulative losses of four and nine of


                                     III-12

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

     the Local Partnerships exceeded the amount of the Partnership's investments
     in those Local  Partnerships by $9,993,531 and  $11,244,422,  respectively.
     Since the Partnership has no further obligation 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 $72,475 and  $398,719,  received from four and four Local
     Partnerships  during  2006  and  2005,  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 transfer of the Partnership's  interest in Victorian Towers
     Associates   (Victoria  Towers)  effective  January  2,  2007,  as  further
     discussed  in  Note  2.a.,  the  Partnership's   investment  in  the  Local
     Partnership has been reclassified to asset held for sale or transfer in the
     accompanying  balance sheet at December 31, 2006.  Due to the possible sale
     of the Partnership's  interest in Windham  Associates  Limited  Partnership
     (Windham  Village),  as further  discussed in Note 2.e., the  Partnership's
     investment in the Local Partnership has been reclassified to asset held for
     sale or transfer in the  accompanying  balance  sheet at December 31, 2006.
     Due to the possible sales of the  properties  related to Villa Mirage I and
     Villa  Mirage II, as further  discussed  in Note  2.e.,  the  Partnership's
     investments in these Local  Partnerships  have been  reclassified  to asset
     held for sale or transfer in the accompanying balance sheet at December 31,
     2006. 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.d., 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. In June 2006, the properties related to
     Village  Squire I & II and  Village  Squire III were sold.  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  interest in Arboretum Village was sold in March 2006. 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. 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.

                                     III-13

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

     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. Interest income is recognized as earned.

     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.

     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.

                                     III-14

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

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

          In September  2006,  the Securities  and Exchange  Commission  ("SEC")
     issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior
     Year Misstatements when Quantifying Misstatements in Current Year Financial
     Statements" ("SAB No. 108"). SAB No. 108 requires  quantification of errors
     using both a balance sheet approach and an income statement approach in the
     determination of materiality in relation to a misstatement.  SAB No. 108 is
     effective the first fiscal year ending after November 15, 2006.  Management
     believes SAB No. 108 will not have any impact on the Partnership.

          In September  2006,  the  Financial  Accounts  Standards  Board (FASB)
     issued SFAS No. 157, Fair Value Measurements ("SFAS No. 157"). SFAS No. 157
     establishes a formal  framework for  measuring  fair value under  generally
     accepted accounting principles.  Although SFAS No. 157 applies (amends) the
     provisions of existing FASB and AICPA  pronouncements,  it does not require
     any new fair value measurements, nor does it establish valuation standards.
     SFAS No. 157 is effective  for fiscal years  beginning  after  November 15,
     2007.  Management  has  determined  that SFAS No. 157 will have no material
     impact to the Partnership.

     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  in  interest  of the  Limited  Partners  for the
     liquidation  of the  Partnership.  A  tabulation  of votes  received by the
     voting deadline follows.


                                     III-15

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

<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.

     m.   Allocation of net income (loss)
          -------------------------------

          Net  income  (loss)  is  allocated  based  on  respective  partnership
     interest or units outstanding. The Partnership has no dilutive interests.


2.   INVESTMENTS IN PARTNERSHIPS

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

          As of December 31, 2006 and 2005, the Partnership held limited partner
     interests in six and twelve 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,
                                                 -----------------------------
                                                    2006              2005
                                                 -----------       -----------

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

          Purchase money notes due in:
            2004                                          --         4,400,000
            2007                                     775,000           775,000
                                                 -----------       -----------
                Subtotal                             894,544         5,294,544
                                                 -----------       -----------
          Accrued interest payable                 2,374,093        12,536,232
                                                 -----------       -----------
                Total                            $ 3,268,637       $17,830,776
                                                 ===========       ===========


          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  Victorian  Towers had a stated
     interest rate of 3.06%.  The purchase money note was  nonrecourse,  but its
     terms  provided  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 note was extended to mature January 1,
     2007. As of December 31, 2006, principal and accrued interest balances were
     $775,000  and  $2,340,117,  respectively.  The  Partnership's  interest  in
     Victorian Towers was transferred to the noteholder in full  satisfaction of
     the purchase money note effective January 2, 2007.

                                     III-16

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

          Upon the transfer of the  Partnership's  interest in Victorian  Towers
     effective January 2, 2007, 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 is taxable to Limited
     Partners  at  a  federal  tax  rate  of  up  to  35.0%.  Additionally,  the
     Partnership lost 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.

          Included in due on  investments in  partnerships  is $119,544 due to a
     previous  owner  related to Meadow  Lanes at  December  31,  2006 and 2005;
     accrued interest payable thereon was $33,976 at December 31, 2006 and 2005.
     These amounts will be paid upon the occurrence of certain  specific events,
     as outlined in the note agreement.

          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,  2006 and  2005,  was  $104,696  and  $626,286,
     respectively.  The accrued  interest payable on the purchase money notes of
     $2,340,117 and $12,502,256 as of December 31, 2006 and 2005,  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 resulted in gain from extinguishment of debt
     of  $13,610,976  for  financial  statement  purposes  in 2006,  and gain of
     $13,034,619  for federal tax purposes in 2006.  At December  31, 2006,  the
     Partnership  accrued $116,595 for a cash  distribution  received in January
     2007 which is recorded as other income for  financial  statement  purposes,
     and which increased the gain mentioned above.


                                     III-17

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

                                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.  On January 1, 2007,  the purchase  money note was not paid. The
     noteholder  accepted the  assignment of the  Partnership's  interest in the
     Local  Partnership  effective  January 2, 2007 in full  satisfaction of the
     note.  The  transfer  will  result in gain from  extinguishment  of debt of
     $3,096,290   for  financial   statement   purposes  in  2007  and  gain  of
     approximately $5.1 million to be reported in 2007 for federal tax purposes.

          The  Partnership's  basis  in  Victorian  Towers,  along  with the net
     unamortized  amount of acquisition fees and purchase property costs,  which
     totaled  $19,059 at December 31, 2006, has been  reclassified to investment
     in partnerships held for sale or transfer in the accompanying balance sheet
     at that date.

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

          The Partnership has a 98.00% 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.  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
     2006 and 2005,  the  Partnership  received cash  distributions  from rental
     operations  of  the  Local  Partnerships  totaling  $84,010  and  $445,206,
     respectively.   As  of  December   31,  2006  and  2005,   five  and  five,
     respectively,  of the Local  Partnerships  had  aggregate  surplus cash, as
     defined by their respective regulatory Agencies, in the amounts of $361,310
     and  $206,145,  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
     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.

                                     III-18

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

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

          In March 2006,  the  Partnership  advanced  $150,000 to Village Squire
     Apartments  (Village Squire I & II) and (Village Squire III) to provide the
     Local Partnership with funds to pay outstanding  accounts payable.  In July
     2006, the advance was repaid to the Partnership.

     d.   Completed sales
          ---------------

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

          On March 1, 2006, the Partnership's  interest in Arboretum Village was
     sold. Gross cash proceeds received by the Partnership  totaled  $6,988,753.
     The sale resulted in net gain on disposition of investments in partnerships
     of $5,677,535 for financial  statement purposes in 2006 and $15,031,712 for
     federal  income  tax  purposes.   In  accordance  with  the  terms  of  the
     Partnership Agreement, in March 2006, the Managing General Partner was paid
     a  disposition  fee of  $975,000  related  to the sale.  The fee was 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,  was  reclassified  to investment in
     partnerships  held for sale or  transfer in the  accompanying  consolidated
     balance sheet at that date.

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

          On July 26,  2005,  the  properties  owned by  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.

                               Lakewood Apartments
                               -------------------

          On December 31, 2006, the Partnership's interest in Eufaula Apartments
     Ltd.  (Lakewood  Apartments)  was  sold.  The  sale  resulted  in  loss  on
     disposition of investment in partnerships of $8,556 for financial statement
     purposes in 2006 and  $626,894 of gain for federal tax  purposes.  In March
     2007,  the  Partnership  received a cash  distribution  of $8,678  which is
     accrued  and  included  in  other  income  in  the  accompanying  financial
     statements at December 31, 2006.

                                     III-19

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

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

          On June 27, 2006, the properties  related to Village Squire I & II and
     Village  Squire  III were  sold.  Gross cash  proceeds  distributed  to the
     Partnership at December 31, 2006 totaled  $2,990,786.  The sale resulted in
     gain on  disposition  of  investments  in  partnerships  of $1,948,765  for
     financial statement purposes in 2006 and $12,425,791 for federal income tax
     purposes.  In accordance  with the terms of the Partnership  Agreement,  in
     July 2006,  the  Managing  General  Partner was paid a  disposition  fee of
     $810,000  related to the sale.  The fee was accrued and netted  against the
     related gain on disposition of investment in partnerships at June 30, 2006.

          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,  was  reclassified  to investment in
     partnerships  held for sale or  transfer in the  accompanying  consolidated
     balance sheet at that date.

     e.   Assets held for sale or transfer
          --------------------------------

                       Villa Mirage I and Villa Mirage II
                       ----------------------------------

          On November 8, 2006, contracts for the sales of the Villa Mirage I and
     Villa Mirage II  properties  were signed.  Due to the possible  sale of the
     properties related to Villa Mirage I and Villa Mirage II, the Partnership's
     basis in the Local  Partnerships,  along with net  unamortized  acquisition
     fees and  purchase  property  costs,  which  totaled  $49,417  and  $6,594,
     respectively, as of December 31, 2006, have been reclassified to asset held
     for sale or transfer in the accompanying  balance sheet at that date. There
     is no assurance that the sales of the properties will occur.

                                 Windham Village
                                 ---------------

          On August  18,  2006,  a  contract  for the sale of the  Partnership's
     interest in Windham  Village was signed.  Due to the  possible  sale of the
     Partnership's  interest in Windham Village,  the Partnership's basis in the
     Local Partnership, along with net unamortized acquisition fees and property
     purchase  costs,  which  totaled  $7,660 as of December 31, 2006,  has been
     reclassified to investment in partnerships held for sale or transfer in the
     accompanying  balance sheet at that date. There is no assurance that a sale
     of the Partnership's interest in Windham Village will occur.

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

          Combined balance sheets and combined  statements of operations for the
     six Local  Partnerships in which the Partnership is invested as of December
     31, 2006,  follow.  The  information is presented  separately for two Local
     Partnerships  which have  investment  basis (equity  method),  and for four
     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


                                              COMBINED BALANCE SHEETS
                                                 December 31, 2006

<TABLE>
<CAPTION>
                                                         Equity
                                                         Method           Suspended             Total
                                                      ------------       ------------        ------------
          <S>                                         <C>                <C>                 <C>
          Number of Local Partnerships                     2                 4                    6
                                                           =                 =                    =
          Rental property, at cost, net of
            accumulated depreciation of
            $5,985,836, $22,983,879, and
            $28,969,715, respectively                 $  1,919,924       $  9,622,971        $ 11,542,895
          Land                                             432,415          2,636,331           3,068,746
          Other assets                                   2,022,633          3,412,176           5,434,809
                                                      ------------       ------------        ------------
              Total assets                            $  4,374,972       $ 15,671,478        $ 20,046,450
                                                      ============       ============        ============


          Mortgage notes payable                      $  2,504,309       $ 21,159,322        $ 23,663,631
          Other liabilities                                434,928          3,263,765           3,698,693
          Due to general partners                        1,029,543          1,256,511           2,286,054
                                                      ------------       ------------        ------------
              Total liabilities                          3,968,780         25,679,598          29,648,378

          Partners' capital (deficit)                      406,192        (10,008,120)         (9,601,928)
                                                      ------------       ------------        ------------
              Total liabilities and partners'
                capital (deficit)                     $  4,374,972       $ 15,671,478        $ 20,046,450
                                                      ============       ============        ============
</TABLE>

                                           COMBINED STATEMENTS OF OPERATIONS
                                         For the year ended December 31, 2006

<TABLE>
<CAPTION>
                                                         Equity
                                                         Method           Suspended             Total
                                                      ------------       ------------        ------------
          <S>                                         <C>                <C>                 <C>
          Number of Local Partnerships                     2                 4                    6
                                                           =                 =                    =
          Revenue:
            Rental                                    $  1,248,975       $  5,158,039        $  6,407,014
            Other                                          141,051            258,929             399,980
                                                      ------------       ------------        ------------
              Total revenue                              1,390,026          5,416,968           6,806,994
                                                      ------------       ------------        ------------

          Expenses:
            Operating and other                            914,376          3,549,550           4,463,926
            Interest                                       136,085          1,167,256           1,303,341
            Depreciation and amortization                  314,515          1,117,567           1,432,082
                                                      ------------       ------------        ------------
              Total expenses                             1,364,976          5,834,373           7,199,349
                                                      ------------       ------------        ------------
          Net income (loss)                           $     25,050       $   (417,405)       $   (392,355)
                                                      ============       ============        ============

          Cash distributions                          $     11,535       $     14,971        $     26,506
                                                      ============       ============        ============

          Cash distributions recorded as reduction
            of investments in partnerships            $     11,535       $         --        $     11,535
                                                      ============       ============        ============

          Cash distributions recorded as income       $        --        $     72,475 (1)    $     72,475

          Partnership's share of Local Partnership
            net income (loss)                              122,839            (99,686)             23,153
                                                      ------------       ------------        ------------
          Share of income from partnerships           $    122,839       $    (27,211)       $     95,628
                                                      ============       ============        ============

</TABLE>

          (1)  Includes  Arboretum  Village  sold in  March  2006  and  Lakewood
               Apartments sold in December 2006.


                                     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
     twelve  Local  Partnerships  in which the  Partnership  was  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).


                                              COMBINED BALANCE SHEETS
                                                 December 31, 2005

<TABLE>
<CAPTION>
                                                         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>



                                     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, 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.


          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  Code  and  the  underlying
     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,
                                                 ----------------------------
                                                    2006               2005
                                                 ----------        ----------

     Financial statement net loss                $ (392,355)       $ (904,611)

     Differences between financial statement
       and tax depreciation, amortization,
       and miscellaneous differences              1,001,215         2,044,814
                                                 ----------        ----------
     Taxable income                              $  608,860        $1,140,203
                                                 ==========        ==========


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,
2006 and 2005, the Partnership paid $350,154 and $244,499,  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, 2006 and 2005, the Partnership paid the
Managing General Partner a Management Fee of $300,000.

     Until January 22, 2006, when the Liquidation  Proxy authorized an increased
disposition  fee to the  Managing  General  Partner  under  the  terms set forth
therein,  the Managing General Partner and/or its affiliates had been authorized
to  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 has been  subject  to  certain  restrictions,

                                     III-24

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3.   RELATED PARTY TRANSACTIONS - Continued

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 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,  after the increased
disposition  fee  was  approved,   the  Managing  General  Partner  was  paid  a
disposition fee of $975,000 related to the sale of the Partnership's interest in
Arboretum  Village in March 2006,  which was netted  against the related gain on
disposition of investment in  partnerships.  In July 2006, the Managing  General
Partner was paid a disposition  fee of $810,000  related to the sales of Village
Squire I & II and Village  Squire III, which was netted against the related gain
in disposition of investment in partnerships.


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
          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;

                                     III-25

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4.   PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS - Continued

    (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.

     Until January 22, 2006, when the Liquidation  Proxy authorized an increased
disposition  fee to the  Managing  General  Partner  under  the  terms set forth
therein,  the Managing General Partner and/or its affiliates had been authorized
to  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 has been  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 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,  after the increased
disposition  fee  was  approved,   the  Managing  General  Partner  was  paid  a
disposition fee of $975,000 related to the sale of the Partnership's interest in
Arboretum  Village in March 2006,  which was netted  against the related gain on
disposition of investment in  partnerships.  In July 2006, the Managing  General
Partner was paid a disposition  fee of $810,000  related to the sales of Village
Squire I & II and Village  Squire III, which was netted against the related gain
in disposition of investment in partnerships.

     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
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
properties owned by Bartley Manor, Village Green and Village Square. On July 21,
2006, the Partnership made a cash  distribution of $7,305,604 ($122 per unit) to
Additional  Limited  Partners who were holders of record as of July 1, 2006. The
distribution  consisted of proceeds  received from the sale of the Partnership's
interest in Arboretum  Village and the sales of the properties  known as Village
Squire I & II and Village Squire III.

     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


                                     III-26

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4.   PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS - Continued

for the years ended  December 31, 2006 and 2005.  The Managing  General  Partner
currently  intends to retain all of the  Partnership's  remaining  undistributed
cash for the possible  repayment or retirement of the Partnership's  outstanding
purchase  money  note  and  related  accrued   interest  related  to  the  Local
Partnership, 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 the Internal  Revenue Code and  underlying  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 income (loss)
to taxable income follows.

<TABLE>
<CAPTION>
                                                                          For the years ended
                                                                              December 31,
                                                                      -----------------------------
                                                                          2006              2005
                                                                      -----------       -----------
<S>                                                                   <C>               <C>
Financial statement net income (loss)                                 $20,845,313       $  (633,802)

Adjustments:
  Differences between financial statement net income
   and taxable income related to the Partnership's equity
   in the Local Partnerships' income or losses                           (264,377)          829,269

  Differences between financial statement gain and taxable gain
    from the sale or transfer of properties                            19,890,296           992,542

  Costs amortized over a shorter period for income tax purposes            10,484            22,853
                                                                      -----------       -----------
Taxable income                                                        $40,481,716       $ 1,210,862
                                                                      ===========       ===========
</TABLE>


Cash concentration risk
-----------------------

     Financial  instruments that potentially  subject the Fund to concentrations
of credit risk consist  primarily of cash. The corporation  maintains three cash
accounts  with the same bank.  The balances  are insured by the Federal  Deposit
Insurance  Corporation  up to $100,000.  As of December 31, 2006,  the uninsured
portion of the cash balances was $6,560,704.

                                      # # #



                                     III-27

<PAGE>
                                EXHIBIT No. 99 b.

None.