<PAGE>   1
                                    FORM 10-Q
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997

                         COMMISSION FILE NUMBER 0-14457


                  NATIONAL HOUSING PARTNERSHIP REALTY FUND III
                        (A MARYLAND LIMITED PARTNERSHIP)
             (Exact name of registrant as specified in its charter)



            MARYLAND                                           52-1394972
  (State or other jurisdiction                              (I.R.S. Employer
of incorporation or organization)                          Identification No.)



                          8065 LEESBURG PIKE, SUITE 400
                             VIENNA, VIRGINIA 22182
                    (Address of principal executive offices)
                                   (Zip Code)


                                 (703) 394-2400
              (Registrant's telephone number, including area code)

                                 NOT APPLICABLE
              (Former name, former address and former fiscal year,
                         if changed since last report.)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
    -----           -----

<PAGE>   2



PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS

                  NATIONAL HOUSING PARTNERSHIP REALTY FUND III
                        (A MARYLAND LIMITED PARTNERSHIP)
                        STATEMENTS OF FINANCIAL POSITION


<TABLE>
<CAPTION>
                                                                             September 30,
                                                                                 1997          December 31,
                                                                              (Unaudited)          1996
                                                                                --------        ---------
<S>                                                                             <C>             <C>      
                                     ASSETS
                                     ------

Cash and cash equivalents                                                       $548,909        $ 140,782
Prepaid expenses (Note 3)                                                         21,562              -
Investments in and advances to Local Limited Partnerships (Note 2)                   -                -
                                                                                --------        ---------

                                                                                $570,471        $ 140,782
                                                                                ========        =========

                   LIABILITIES AND PARTNERS' EQUITY (DEFICIT)
                   ------------------------------------------

Liabilities:
     Administrative and reporting fee payable to General Partner (Note 3)       $    -          $ 533,737
     Accrued expenses                                                             28,500           39,095
                                                                                --------        ---------

                                                                                  28,500          572,832
                                                                                --------        ---------

Partners' equity (deficit):
     General Partner -- The National Housing Partnership (NHP)                   (89,830)         (99,570)
     Original Limited Partner -- 1133 Fifteenth Street Three Associates          (94,730)        (104,470)
     Other Limited Partners -- 11,500 investment units                           726,531         (228,010)
                                                                                --------        ---------

                                                                                 541,971         (432,050)
                                                                                --------        ---------

                                                                                $570,471        $ 140,782
                                                                                ========        =========
</TABLE>

                       See notes to financial statements.

                                       -1-


<PAGE>   3

                  NATIONAL HOUSING PARTNERSHIP REALTY FUND III
                        (A MARYLAND LIMITED PARTNERSHIP)
                            STATEMENTS OF OPERATIONS
                                   (UNAUDITED)



<TABLE>
<CAPTION>
                                                              Three Months Ended               Nine Months Ended
                                                                 September 30,                    September 30,
                                                           --------------------------       ------------------------
                                                              1997             1996            1997           1996
                                                           ----------       ---------       ----------      --------
                                                                                                            
<S>                                                        <C>              <C>               <C>           <C>       
REVENUES:                                                                                                   
    Share of income from Local Limited Partnership         $  357,860       $     -           $357,860      $    -   
    Distributions and repayments received in excess                                                         
      of investment in Local Limited Partnerships              16,310             -             32,008        18,362
    Interest income                                             6,642           1,567            9,342         7,628
                                                           ----------       ---------         --------      --------
                                                                                                            
                                                              380,812           1,567          399,210        25,990
                                                           ----------       ---------         --------      --------
                                                                                                            
COSTS AND EXPENSES:                                                                                         
    Administrative and reporting fees to                                                                    
      General Partner (Note 3)                                 21,562          21,562           64,686        64,686
    Other operating expenses                                   13,069          13,448           37,629        36,399
                                                           ----------       ---------         --------      --------
                                                                                                            
                                                               34,631          35,010          102,315       101,085
                                                           ----------       ---------         --------      --------
                                                                                                            
NET PROFIT (LOSS) BEFORE                                                                                    
   EXTRAORDINARY ITEM                                         346,181         (33,443)         296,895       (75,095)
                                                                                                            
EXTRAORDINARY ITEM - SHARE FROM                                                                             
    LOCAL LIMITED PARTNERSHIP OF                                                                            
    GAIN ON EXTINGUISHMENT OF DEBT                            677,126             -            677,126          -
                                                           ----------       ---------         --------      --------
                                                                                                            
NET PROFIT (LOSS)                                          $1,023,307       $ (33,443)        $974,021      $(75,095)
                                                           ==========       =========         ========      ========
                                                                                                            
NET PROFIT (LOSS) BEFORE EXTRAORDINARY                                                                      
   ITEM ASSIGNABLE TO LIMITED PARTNERS                     $  339,257       $ (32,775)        $290,957      $(73,593)
                                                                                                            
EXTRAORDINARY ITEM - GAIN FROM LOCAL                                                                        
   LIMITED PARTNERSHIP ON EXTINGUISHMENT                                                                    
   OF DEBT ASSIGNABLE TO LIMITED PARTNERS                     663,584             -            663,584           -
                                                           ----------       ---------         --------      --------
                                                                                                            
NET PROFIT (LOSS) ASSIGNABLE TO                                                                             
   LIMITED PARTNERS                                        $1,002,841       $ (32,775)        $954,541      $(73,593)
                                                           ==========       =========         ========      ========
                                                                                                            
NET PROFIT (LOSS) BEFORE EXTRAORDINARY                                                                      
   ITEM PER LIMITED PARTNERSHIP INTEREST                   $       29       $     (3)         $     25      $     (6)
                                                                                                            
EXTRAORDINARY ITEM - GAIN FROM LOCAL                                                                        
   LIMITED PARTNERSHIP ON EXTINGUISHMENT                                                                    
   DEBT PER LIMITED PARTNERSHIP INTEREST                           58             -                 58         -
                                                           ----------       ---------         --------      --------
                                                                                                            
NET PROFIT (LOSS) PER LIMITED                                                                               
   PARTNERSHIP INTEREST                                    $       87       $      (3)        $     83      $     (6)
                                                           ==========       =========         ========      ========
</TABLE>


                     See notes to financial statements.

                                       -2-
<PAGE>   4


                  NATIONAL HOUSING PARTNERSHIP REALTY FUND III
                        (A MARYLAND LIMITED PARTNERSHIP)
                     STATEMENT OF PARTNER'S EQUITY (DEFICIT)
                                   (UNAUDITED)



<TABLE>
<CAPTION>
                                           The National        1133
                                              Housing        Fifteenth     Other
                                            Partnership    Street Three   Limited
                                               (NHP)        Associates    Partners       Total
                                             --------       ---------     ---------     --------
<S>                                          <C>            <C>           <C>          <C>       
Deficit at January 1, 1997                   $(99,570)      $(104,470)    $(228,010)   $(432,050)

Net profit -- nine months ended
   September 30, 1997                           9,740           9,740       954,541      974,021
                                             --------       ---------     ---------     --------

Equity (deficit) at September 30, 1997       $(89,830)      $ (94,730)    $ 726,531     $541,971
                                             ========       =========     =========     ========

Percentage interest at September 30, 1997           1%              1%           98%         100%
                                             ========       =========     =========     ========
                                                   (A)             (B)           (C)
</TABLE>

(A)   General Partner
(B)   Original Limited Partner
(C)   Consists of 11,500 investment units of 0.008522% held by 921 investors



                       See notes to financial statements.

                                       -3-



<PAGE>   5


                  NATIONAL HOUSING PARTNERSHIP REALTY FUND III
                        (A MARYLAND LIMITED PARTNERSHIP)
                            STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                Nine Months Ended September 30,
                                                                -------------------------------
                                                                      1997           1996
                                                                  ----------       --------

<S>                                                               <C>              <C>   
CASH FLOWS FROM OPERATING ACTIVITIES:
     Distributions from Local Limited Partnerships                $1,034,986       $    -
     Distributions received in excess of investment in
       Local Limited Partnerships                                     15,698         18,362
     Payment of administrative and reporting fees to
       General Partner                                              (619,985)           -
     Interest received                                                 9,342          7,628
     Operating expenses paid                                         (48,224)       (48,109)
                                                                  ----------       --------

     Net cash provided by (used in) operating activities             391,817        (22,119)

CASH FLOWS FROM INVESTING ACTIVITIES:
     Repayment of advances to Local Limited Partnerships              16,310            -
                                                                  ----------       --------

NET INCREASE (DECREASE) IN CASH AND CASH
   EQUIVALENTS                                                       408,127        (22,119)

CASH AND CASH EQUIVALENTS, BEGINNING OF
   PERIOD                                                            140,782        164,374
                                                                  ----------       --------

CASH AND CASH EQUIVALENTS, END OF PERIOD                          $  548,909       $142,255
                                                                  ==========       ========

RECONCILIATION OF NET PROFIT (LOSS) TO NET CASH PROVIDED
  BY (USED IN) OPERATING ACTIVITIES:
      Net profit (loss)                                           $  974,021       $(75,095)
                                                                  ----------       --------
      Adjustments to reconcile net loss to net cash (used in)
        provided by operating activities:
           Repayment of advances to Local Limited Partnerships       (16,310)           -
           Distributions from Local Limited Partnerships           1,034,986            -
           Share of income from Local Limited Partnership           (357,860)           -
           Share of gain on extinguishment of debt                  (677,126)           -
           Increase in prepaid expenses                              (21,562)           -
           (Decrease) increase in administrative
                  and reporting fees payable                        (533,737)        64,686
           Decrease in accrued expenses                              (10,595)       (11,710)
                                                                  ----------       --------

           Total adjustments                                        (582,204)        52,976
                                                                  ----------       --------

     Net cash provided by (used in) operating activities          $  391,817       $(22,119)
                                                                  ==========       ========
</TABLE>



                       See notes to financial statements.

                                       -4-



<PAGE>   6


                  NATIONAL HOUSING PARTNERSHIP REALTY FUND III
                        (A MARYLAND LIMITED PARTNERSHIP)
                          NOTES TO FINANCIAL STATEMENTS


(1)        ACCOUNTING POLICIES

           ORGANIZATION

           National Housing Partnership Realty Fund III (the "Partnership") is a
           limited partnership organized under the laws of the State of Maryland
           under the Maryland Revised Uniform Limited Partnership Act on May 10,
           1985. The Partnership was formed for the purpose of raising capital
           by offering and selling limited partnership interests and then
           investing in limited partnerships ("Local Limited Partnerships"),
           each of which owns and operates an existing rental housing project
           which is financed and/or operated with one or more forms of rental
           assistance or financial assistance from the U.S. Department of
           Housing and Urban Development ("HUD").

           The General Partner raised capital for the Partnership by offering
           and selling to additional limited partners 11,500 investment units at
           a price of $1,000 per unit. The Partnership acquired limited
           partnership interests ranging from 94.5% to 99% in twelve Local
           Limited Partnerships, which were organized to directly or indirectly
           own and operate existing rental housing projects.

           On June 3, 1997, Apartment Investment and Management Company, a
           Maryland corporation ("AIMCO" and, together with its subsidiaries and
           other controlled entities, the "AIMCO Group"), acquired all of the
           issued and outstanding capital stock of NHP Partners, Inc., a
           Delaware corporation ("NHP Partners"), and the AIMCO Group acquired
           all of the outstanding interests in NHP Partners Two Limited
           Partnership, a Delaware limited partnership ("NHP Partners Two"). The
           Acquisition was made pursuant to a Real Estate Acquisition Agreement,
           dated as of May 22, 1997 (the "Agreement"), by and among AIMCO, AIMCO
           Properties, L.P., a Delaware limited partnership (the "Operating
           Partnership"), Demeter Holdings Corporation, a Massachusetts
           corporation ("Demeter"), Phemus Corporation, a Massachusetts
           corporation ("Phemus"), Capricorn Investors, L.P., a Delaware limited
           partnership ("Capricorn"), J. Roderick Heller, III and NHP Partners
           Two LLC, a Delaware limited liability company ("NHP Partners Two
           LLC"). NHP Partners owns all of the outstanding capital stock of the
           National Corporation for Housing Partnerships, a District of Columbia
           corporation ("NCHP"), which is the general partner of The National
           Housing Partnership, a District of Columbia limited partnership (the
           "NHP Partnership"). Together, NCHP and NHP Partners Two own all of
           the outstanding partnership interests in the NHP Partnership. The NHP
           Partnership is the general partner of National Housing Partnership
           Realty Fund III (a Maryland Limited Partnership) (the "Registrant").
           As a result of these transactions, the AIMCO Group has acquired
           control of the general partner of the Registrant and, therefore, may
           be deemed to have acquired control of the Registrant.

           BASIS OF PRESENTATION

           The accompanying unaudited interim financial statements reflect all
           adjustments which are, in the opinion of management, necessary to a
           fair statement of the financial condition and results of operations
           for the interim periods presented. All such adjustments are of a
           normal and recurring nature.

           While the General Partner believes that the disclosures presented are
           adequate to make the information not misleading, it is suggested that
           these financial statements be read in conjunction with the financial
           statements and notes included in NHP Realty Fund III's Annual Report
           filed in Form 10-K for the year ended December 31, 1996.





                                      -5-


<PAGE>   7

                  NATIONAL HOUSING PARTNERSHIP REALTY FUND III
                        (A MARYLAND LIMITED PARTNERSHIP)
                          NOTES TO FINANCIAL STATEMENTS



(2)        INVESTMENTS IN AND ADVANCES TO LOCAL LIMITED PARTNERSHIPS

           The Partnership owns a 99% limited partnership interest in Brunswick
           Village Limited Partnership and 94.5% limited partnership interests
           (98% with respect to allocation of losses) in nine other Local
           Limited Partnerships. The Partnership also acquired a 99% limited
           partnership interest in Meadowood Townhouses I Limited Partnership
           and Meadowood Townhouses III Limited Partnership. These two Local
           Limited Partnerships each own a 99% limited partnership interest in
           an operating limited partnership which until the quarter ended
           September 30, 1997, held title to two and one rental housing
           properties, respectively (see Note 4). The Partnership's effective
           interest in these operating limited partnerships is 98.01%.

           Because the Partnership, as a limited partner, does not exercise
           control over the activities of the Local Limited Partnerships in
           accordance with the partnership agreements, these investments in
           Local Limited Partnerships are accounted for using the equity method.
           Thus, the investments (and the advances made to the Local Limited
           Partnerships as discussed below) are carried at cost less the
           Partnership's share of the Local Limited Partnerships' losses and
           distributions. However, because the Partnership is not legally liable
           for the obligations of the Local Limited Partnerships, and is not
           otherwise committed to provide additional support to them, it does
           not recognize losses once its investments, reduced for its share of
           losses and cash distributions, reach zero in each of the individual
           Local Limited Partnerships. As of December 31, 1996, investments in
           all twelve Local Limited Partnerships had been reduced to zero. As a
           result, the Partnership did not recognize $977,447 of losses from
           these twelve Local Limited Partnerships during the nine months ended
           September 30, 1996. During the nine months ended September 30, 1997,
           three properties owned by two Local Limited Partnerships were sold.
           As a result the Partnership recognized income of $357,860 from the
           gain on sale of Elden Terrace and an extraordinary gain of $677,126
           on the extinguishment of debt related to the sale of Meadowoods I and
           II. Both the gain on sale and the extraordinary gain were recorded
           after recognizing previously unrecognized losses of $568,164 and
           $2,347,585, respectively. The Partnership did not recognize $806,272
           of losses from the other ten Local Limited Partnerships during the
           nine months ended September 30, 1997. As of September 30, 1997 and
           December 31, 1996, the Partnership has not recognized a total of
           $12,171,874 and $14,281,351, respectively, of its allocated share of
           cumulative losses from the Local Limited Partnerships in which its
           investment is zero.

           Advances made by the Partnership to the individual Local Limited
           Partnerships are considered part of the Partnership's investment in
           Local Limited Partnerships. When advances are made, they are charged
           to operations as a loss on investment in the Local Limited
           Partnership using previously unrecognized cumulative losses. As
           discussed above, due to the cumulative losses incurred by the Local
           Limited Partnerships, the aggregate balance of investments in and
           advances to Local Limited Partnerships has been reduced to zero at
           September 30, 1997 and December 31, 1996. To the extent these
           advances are repaid by the Local Limited Partnerships in the future,
           the repayments will be credited as distribution and repayments
           received in excess of investment in Local Limited Partnerships. These
           advances are carried as a payable to the Partnership by the Local
           Limited Partnerships.

           No working capital advances occurred between the Partnership and the
           Local Limited Partnerships during the nine months ended September 30,
           1997 and 1996. Repayments of $16,310 and accrued interest of $5,178
           were made by two Local Limited Partnerships to the Partnership during
           the nine months ended September 30, 1997. No repayments were made
           during the nine months ended September 30, 1996. The combined amount
           carried as due to the Partnership by the Local Limited Partnerships
           was $522,159 as of September 30, 1997. Future advances made will be
           charged to operations; likewise, future repayments will be credited
           to operations.



                                      -6-


<PAGE>   8


                  NATIONAL HOUSING PARTNERSHIP REALTY FUND III
                        (A MARYLAND LIMITED PARTNERSHIP)
                          NOTES TO FINANCIAL STATEMENTS



           The following are combined statements of operations for the three and
           nine months ended September 30, 1997 and 1996, respectively, of the
           Local Limited Partnerships in which the Partnership has invested. The
           statements are compiled from financial statements of the Local
           Limited Partnerships, prepared on the accrual basis of accounting, as
           supplied by the management agents of the projects, and are unaudited.



                                      -7-

<PAGE>   9


                  NATIONAL HOUSING PARTNERSHIP REALTY FUND III
                        (A MARYLAND LIMITED PARTNERSHIP)
                          NOTES TO FINANCIAL STATEMENTS




<TABLE>
<CAPTION>
                                     COMBINED STATEMENTS OF OPERATIONS
                                     ---------------------------------

                                                    Three Months Ended         Nine Months Ended
                                                      September 30,              September 30,
                                                ------------------------    ------------------------
                                                   1997          1996          1997          1996
                                                ----------    ----------    ----------    ----------

<S>                                             <C>           <C>           <C>           <C>
Rental income                                   $1,650,247    $2,129,727    $5,969,307    $6,370,214
Other income                                       142,582       108,627       325,904       275,705
Gain on disposal of rental properties              939,814           -         939,814           -
                                                ----------    ----------    ----------    ----------

     Total income                                2,732,643     2,238,354     7,235,025     6,645,919
                                                ----------    ----------    ----------    ----------

Operating expenses                               1,267,697     1,549,288     4,261,324     4,464,866
Interest, taxes and insurance                      587,916       693,742     2,080,509     2,172,399
Depreciation                                       270,746       346,573       961,202     1,003,562
                                                ----------    ----------    ----------    ----------

     Total expenses                              2,126,359     2,589,603     7,303,035     7,640,827
                                                ----------    ----------    ----------    ----------

Net profit (loss) before extraordinary item        606,284      (351,249)      (68,010)     (994,908)

Extraordinary Item - Gain on
   extinguishment of debt                        3,281,574           -       3,281,574           -
                                                ----------    ----------    ----------    ----------

     Net profit (loss)                          $3,887,858    $ (351,249)   $3,213,564    $ (994,908)
                                                ==========    ==========    ==========    ==========

National Housing Partnership Realty
   Fund III share of profits (losses)           $3,806,468    $ (346,021)   $3,144,464    $ (977,447)
                                                ==========    ==========    ==========    ==========
</TABLE>


(3)        TRANSACTIONS WITH THE GENERAL PARTNER

           During the nine month periods ended September 30, 1997 and 1996, the
           Partnership accrued administrative and reporting fees payable to the
           General Partner in the amount of $64,686 for services provided to the
           Partnership. The Partnership paid the General Partner $619,985 for
           these fees and accrued but unpaid fees from prior years during the
           nine months ended September 30, 1997. The Partnership has not made
           any payments to the General Partner for these fees during the nine
           months ended September 30, 1996. The amount of fees due the General
           Partner by the Partnership was $533,737 December 31, 1996, while at
           September 30, 1997 the Partnership has prepaid the General Partner
           $21,562 representing the fees for the three months ending December
           31, 1997.

           Accrued administrative and reporting fees payable to the General
           Partner are paid as cash flow permits or from proceeds generated from
           the sale or refinancing of one or more of the underlying properties
           of the Local Limited Partnerships.

(4)        DISPOSAL OF RENTAL PROPERTIES



                                      -8-

<PAGE>   10


                  NATIONAL HOUSING PARTNERSHIP REALTY FUND III
                        (A MARYLAND LIMITED PARTNERSHIP)
                          NOTES TO FINANCIAL STATEMENTS


           On May 2, 1996, Meadowood Townhouses I Local Limited Partnership
           entered into an Agreement of Sale with Community Preservation and
           Development Corporation, to sell its two properties, Meadowood
           Townhouses I and II pursuant to the terms of Low Income Housing
           Preservation and Resident Homeownership Act of 1990 ("LIHPRHA"). The
           purchase price was based on the properties' Transfer Preservation
           Value, as approved by the United States Department of Housing and
           Urban Development ("HUD"). During the six months ended June 30, 1997,
           funding was approved for the sale of Meadowood Townhouses I and II,
           and final settlement occurred on July 15, 1997. Total LIHPRHA grant
           money received for the properties was $3,336,388, comprised of
           $1,558,253 for Meadowoods Townhouses I and $1,778,135 for Meadowood
           Townhouses II. The holders of the deferred acquisition notes were
           repaid from a portion of the LIHPRHA grant money at an agreed upon
           discounted amount. The mortgage notes were assumed by the purchaser.
           During the quarter ended September 30, 1997 the Partnership received
           net proceeds from the sale of $677,126. The Partnership's share of
           the gain from this transaction has been recorded in the accompanying
           statements of operations for the three and nine months ended
           September 30, 1997 as an extraordinary item-gain on extinguishment of
           debt.

           In addition, during the six months ended June 30, 1997, Elden Limited
           Partnership entered into an Agreement of Sale with Southport
           Financial Services, Inc., to sell its property, Elden Terrace
           Apartments. The purchase price for the sale was $2,241,667, which is
           $375,000 above the mortgage note of $1,866,667. Southport Financial
           Services, Inc. also assumed the deferred acquisition note and accrued
           interest totaling $3,505,225 due to the note holders. Final
           settlement occurred on July 31, 1997. During the quarter ended
           September 30, 1997 the Partnership received net proceeds from the
           sale of $357,860. The Partnership's share of the gain from this
           transaction has been recorded in the accompanying statements of
           operations for the three and nine months ended September 30, 1997 as
           the Partnership's share of income from Local Limited Partnership.



                                      -9-

<PAGE>   11




ITEM 2 -  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
          RESULTS OF OPERATIONS

                  NATIONAL HOUSING PARTNERSHIP REALTY FUND III
                        (A MARYLAND LIMITED PARTNERSHIP)



The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements in certain circumstances. Certain information
included in this Report and other Partnership filings (collectively "SEC
Filings") under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended (as well as information communicated orally or
in writing between the dates of such SEC Filings) contains or may contain
information that is forward looking, including statements regarding the effect
of government 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, terms of governmental regulations that affect the Partnership
and interpretations of those regulations, the competitive environment in which
the properties owned by the Local Limited Partnerships operate, the availability
of working capital and dispositions of properties owned by the Partnership.

LIQUIDITY AND CAPITAL RESOURCES

The properties in which the Partnership has invested, through its investments in
the Local Limited Partnerships, receive one or more forms of assistance from
Federal, state or local governments or agencies. As a result, the Local Limited
Partnerships' ability to transfer funds either to the Partnership or among
themselves in the form of cash distributions, loans or advances is generally
restricted by these government-assistance programs. These restrictions, however,
are not expected to impact the Partnership's ability to meet its cash
obligations.

For the past several years, various proposals have been advanced by HUD,
Congress and others proposing the restructuring of HUD's rental assistance
programs under Section 8 of the United States Housing Act of 1937 ("Section 8"),
under which 603 units, 35 percent of the total units owned by the properties in
which the Partnership has invested, receive rental subsidies. On October 27,
1997, the President signed into law the Multifamily Assisted Housing Reform and
Affordability Act of 1997 (the "1997 Housing Act"). Under the 1997 Housing Act,
certain properties assisted under Section 8, with rents above market levels and
financed with HUD-insured mortgage loans, will be restructured by reducing
subsidized rents to market levels, thereby reducing rent subsidies, and lowering
required debt service costs as needed to ensure financial viability at the
reduced rents and rent subsidies. The 1997 Housing Act retains project-based
subsidies for most properties (properties in rental markets with limited supply,
properties serving the elderly, and certain other properties). The 1997 Housing
Act phases out project-based subsidies on selected properties servicing families
not located in rental markets with limited supply, converting such subsidies to
a tenant-based subsidy. Under a tenant-based system, rent vouchers would be
issued to qualified tenants who then could elect to reside at properties of
their choice, provided such tenants have the financial ability to pay the
difference between the selected properties' monthly rent and the value of the
vouchers, which would be established based on HUD's regulated fair market rent
for the relevant geographical areas. The 1997 Housing Act provides that
properties will begin the restructuring process in Federal fiscal year 1999
(beginning October 1, 1998), and that HUD will issue final regulations
implementing 1997 Housing Act on or before October 27, 1998. With respect to
Housing Assistance Payments Contracts ("HAP Contracts") expiring before October
1, 1998, Congress has elected to renew them for one-year terms, generally at
existing rents, so long as the properties remain in compliance with the HAP
Contracts. While the Partnership does not expect the provisions of the 1997
Housing Act to result in a significant number of tenants relocating from
properties owned by the Local Limited Partnerships, there can be no assurance
that the provisions will not significantly affect the operations of the
properties of the Local Limited Partnerships. Furthermore,



                                      -10-

<PAGE>   12


                  NATIONAL HOUSING PARTNERSHIP REALTY FUND III
                        (A MARYLAND LIMITED PARTNERSHIP)
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS



there can be no assurance that other changes in Federal housing subsidy policy
will not occur. Any such changes could have an adverse effect on the operations
of the Partnership.

Net cash provided by operations for the nine months ended September 30, 1997 was
$391,817 as compared to net cash used in operations of $22,119 for the nine
months ended September 30, 1996. The change in cash provided by/used in
operations resulted primarily from an increase in distributions from Local
Limited Partnerships of $1,034,986 resulting from the sales of three properties,
partially offset by an increase in the payment of administrative and reporting
fees to the General Partner of $619,985 during the nine months ended September
30, 1997, compared to the nine months ended September 30, 1996.

No working capital advances occurred between the Partnership and the Local
Limited Partnerships during the nine months ended September 30, 1997 and 1996.
Repayments of $16,310 and accrued interest of $5,178 were made by two Local
Limited Partnerships to the Partnership during the nine months ended September
30, 1997. No repayments were made during the nine months ended September 30,
1996. The combined amount carried as due to the Partnership by the Local Limited
Partnerships was $522,159 as of September 30, 1997. Future advances made will be
charged to operations; likewise, future repayments will be credited to
operations.

Distributions received from Local Limited Partnerships represent the
Partnership's proportionate share of the excess cash available for distribution
from the Local Limited Partnerships. As a result of the use of the equity method
of accounting for the Partnership's investments, as of December 31, 1996,
investments in all twelve Local Limited Partnerships had been reduced to zero.
For these investments, cash distributions received are recorded in income as
distributions received in excess of investment in Local Limited Partnerships.
During the nine months ended September 30, 1997 and 1996, cash distributions of
$15,698 and $18,362, respectively, were received from two Local Limited
Partnerships. In addition, during the nine months ended September 30, 1997 the
Partnership received $1,034,986 in distributions from two Local Limited
Partnerships resulting from proceeds from the disposal of their rental
properties. The receipt of distributions in the future is dependent upon the
operations of the underlying properties of the Local Limited Partnerships to
generate sufficient cash for distribution in accordance with applicable HUD
regulations.

Cash and cash equivalents of $548,909 on hand at September 30, 1997, plus any
distributions from the underlying operations of the combined Local Limited
Partnerships, is expected to adequately fund the operations of the Partnership
in the current year. However, there can be no assurance that future
distributions will be adequate to fund the operations beyond the current year.

National Corporation for Housing Partnerships was a significant participant in
the drafting and passage of LIHPRHA. LIHPRHA creates a procedure under which
owners of properties assisted under the HUD Section 236 or 221(d)(3) program may
be eligible to receive financial incentives in return for agreeing to extend
their property's use as low income housing. The appropriation for the Department
of Housing and Urban Development (which administers LIHPRHA) for the 1997 fiscal
year was insufficient to meet program demand. As part of this appropriation,
Congress directed HUD to suspend processing of any property which had not
received approval of a sale or refinancing under LIHPRHA as of the date of
enactment of the appropriation, which occurred on September 26, 1996. Brunswick
Village and Meadowood I, II and III all received approval to be sold under the
program within the requisite time frame. During the six months ended June 30,
1997, funds were allocated for the sale of Meadowoods I and II and on July 15,
1997, final settlement occurred, as further discussed below. However, funds were
not allocated for the sale of Brunswick Village and Meadowoods III, which was
required so that these transactions could close. Congress did not allocate any
funds for LIHPRHA as part of the 1998 fiscal year Federal budget and the General
Partner does not expect LIHPRHA to receive any funding from Congress in the
future. The



                                      -11-






<PAGE>   13


                  NATIONAL HOUSING PARTNERSHIP REALTY FUND III
                        (A MARYLAND LIMITED PARTNERSHIP)
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS


General Partner is currently investigating other sale or refinancing
opportunities for these properties, but there can be no assurance that these
efforts will be successful. If unsuccessful, this could have a substantially
negative impact on the Partnership's future available capital resources.

All of the Local Limited Partnerships in which the Partnership has invested
carry deferred acquisition notes due the original owner of each Property. The
deferred acquisition notes related to Meadowood Townhouses I and III reached
final maturity in April 1996 and April 1997, respectively. All other notes will
reach final maturity during 1999. These notes are secured by both the
Partnership's and the General Partner's interests in the Local Limited
Partnerships. In the event of a default on the notes, the note holders would be
able to assume the General Partner's and the Partnership's interests in the
Local Limited Partnerships. There can be no assurance that the General Partner
will be successful in extending or restructuring the deferred acquisition notes
as they mature.

On May 2, 1996, Meadowood Townhouses I Local Limited Partnership entered into an
Agreement of Sale with Community Preservation and Development Corporation, to
sell its two properties, Meadowood Townhouses I and II pursuant to the terms of
Low Income Housing Preservation and Resident Homeownership Act of 1990
("LIHPRHA"). The purchase price was based on the properties' Transfer
Preservation Value, as approved by HUD. During the six months ended June 30,
1997, funding was approved for the sale of Meadowood Townhouses I and II, and
final settlement occurred on July 15, 1997. Total LIHPRHA grant money received
for the properties was $3,336,388, comprised of $1,558,253 for Meadowoods
Townhouses I and $1,778,135 for Meadowood Townhouses II. The holders of the
deferred acquisition notes were repaid from a portion of the LIHPRHA grant money
at an agreed upon discounted amount. The mortgage notes were assumed by the
purchaser. During the quarter ended September 30, 1997 the Partnership received
net proceeds from the sale of $677,126. The Partnership's share of the gain from
this transaction has been recorded in the accompanying statements of operations
for the three and nine months ended September 30, 1997 as an extraordinary item
- gain on extinguishment of debt. The sale may generate taxable income to the
Partnership's investors possibly without any distributable cash. The specific
impact of the tax consequences is dependent upon each specific partner's
individual tax situation.

In connection with the proposed sale of Meadowoods Townhouses III, a 
Forbearance Agreement had been executed which extended the maturity date of the
deferred acquisition notes made by the Local Limited Partner. Under the terms
of this agreement, the initial period of forbearance expired on April 30, 1997
and a further extension of forbearance would have been granted until December
31, 1997 if funding for such closing had been approved by HUD. Funding for the
sale of Meadowood Townhouses III was not approved by April 30, 1997, and an
extension of forbearance until January 2, 1998, was granted to permit the Local
Limited Partnership to submit an alternative plan to the note holders, and to
negotiate and close such plan. In consideration for the initial period of
extension of forbearance, the Local Limited Partnership shall pay solely from
their share of the net sale proceeds received at closing, an extension fee
equal to 1% of the aggregate amount of principal due on the notes. The Local
Limited Partnership shall have no liability for the extension fee if closing of
the sales does not occur.

In the absence of a LIHPRHA sale, the Partnership's continued ownership in
Meadowood Townhouses III Local Limited Partnerships is dependent on their
successful efforts to negotiate further amendments of the terms of the note and
the related sale and forbearance agreements. The General Partner is currently
investigating alternative sales or refinancing opportunities or a further
modification of the Forbearance Agreement. Upon expiration of the forbearance
period with extensions, if an additional extension, sale or refinancing is not
negotiated with the note holders, the Partnership shall cause title to the
Partnership's interest in the Local Limited Partnership to be conveyed to the
note holders. If title to the Local Limited Partnership interest is conveyed to
the note holder, the Partnership will not receive any future benefits from the
underlying Properties, and taxable income will be generated and flow to the
Partnership's 

                                      -12-
<PAGE>   14


                  NATIONAL HOUSING PARTNERSHIP REALTY FUND III
                        (A MARYLAND LIMITED PARTNERSHIP)
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS


investors without any distributable cash. The specific impact of the tax
consequences is dependent upon each specific partner's individual tax situation.

During the six months ended June 30, 1997, Elden Limited Partnership entered
into an Agreement of Sale with Southport Financial Services, Inc., to sell its
property, Elden Terrace Apartments. The purchase price for the sale was
$2,241,667, which is $375,000 above the mortgage note of $1,866,667. In
addition, Southport Financial Services, Inc., assumed the deferred acquisition
note and accrued interest totaling $3,505,225 from the note holders. Final
settlement occurred on July 31, 1997. During the quarter ended September 30,
1997 the Partnership received net proceeds from the sale of $357,860. The
Partnership's share of the gain from this transaction has been recorded in the
accompanying statements of operations for the three and nine months ended
September 30, 1997 as the Partnership's share of income from Local Limited
Partnership. The sale may generate taxable income to the Partnership's investors
possibly without any distributable cash. The specific impact of the tax
consequences is dependent upon each specific partner's individual tax situation.

RESULTS OF OPERATIONS

The Partnership has invested as a limited partner in twelve Local Limited
Partnerships which operate thirteen rental housing properties. In prior years,
results of operations of NHP Realty Fund III were significantly impacted by the
Partnership's share of the losses of the Local Limited Partnerships. These
losses included depreciation and accrued deferred acquisition note interest
expense which are non-cash in nature. Because the investments in and advances to
Local Limited Partnerships have been reduced to zero, the Partnership's share of
the operations of the Local Limited Partnerships is no longer being recorded.
During the nine months ended September 30, 1997, three properties owned by two
Local Limited Partnerships were sold. As a result the Partnership recognized
income of $357,860 from the gain on sale of Elden Terrace and an extraordinary
gain of $677,126 on the extinguishment of debt related to the sale of Meadowoods
I and II. Both the gain on sale and the extraordinary gain were recorded after
recognizing previously unrecognized losses of $568,164 and $2,347,585,
respectively. The Partnership did not recognize $806,272 of losses from the
other ten Local Limited Partnerships during the nine months ended September 30,
1997. As of September 30, 1997 and December 31, 1996, the Partnership has not
recognized a total of $12,171,874 and $14,281,351, respectively, of its
allocated share of cumulative losses from the Local Limited Partnerships in
which its investment is zero.

The Partnership's had a net profit of $974,021 for the nine months ended
September 30, 1997 compared to a net loss of $75,095 for the nine months ended
September 30, 1996. Net profit per unit of limited partnership interest was $83
for for the nine months ended September 30, 1997 compared to a net loss per unit
of $6 for the nine months ended September 30, 1997 for the 11,500 units
outstanding throughout both periods. The change in net profit/loss was primarily
due to the Partnership recognizing its share of income from Local Limited
Partnerships of $357,860 resulting from the sale of Elden Terrace and a gain on
extinguishment of debt of $677,126 resulting from the sale of Meadowoods I and
II during the nine months ended September 30, 1997. The Partnership did not
recognize $806,272 of its allocated share of losses from the other ten Local
Limited Partnerships for the nine months ended September 30, 1997, as the
Partnership's net carrying basis in these Partnerships had been previously
reduced to zero. The Partnership's share of losses before extraordinary item
from the Local Limited Partnerships, if not limited to its investment account
balance, would have decreased $873,153 between periods, primarily due to the
gain on sale of Elden Terrace during 1997.

PART II - OTHER INFORMATION

ITEM 6  -    EXHIBITS AND REPORTS ON FORM 8-K


                                      -13-
<PAGE>   15

                  NATIONAL HOUSING PARTNERSHIP REALTY FUND III
                        (A MARYLAND LIMITED PARTNERSHIP)
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS


           (a)       Exhibits

                     Exhibit No.

                     27        Financial Data Schedule



                                      -14-
<PAGE>   16

                                   SIGNATURES



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



                          NATIONAL HOUSING PARTNERSHIP REALTY FUND III
                          --------------------------------------------
                          (Registrant)


                          By:    The National Housing Partnership,
                                 its sole General Partner


                          By:    National Corporation for Housing
                                 Partnerships, its sole General Partner



November 14, 1997         By:               /s/
                                 ----------------------------------------------
                                 Jeffrey J. Ochs
                                 As Vice President and Chief Accounting Officer


                                      -15-