--------------------------------------------------------------------------------
                          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, 2002


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



                         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 [ ]

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 $1,494,134.

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

                        2002 ANNUAL REPORT ON FORM 10-KSB

                                TABLE OF CONTENTS

                                                                          Page

                                     PART I

Item 1.  Business........................................................ I-1
Item 2.  Properties...................................................... I-7
Item 3.  Legal Proceedings............................................... I-7
Item 4.  Submission of Matters to a Vote of Security Holders............. I-7


                                     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-3
Item 7.  Financial Statements............................................ II-9
Item 8.  Changes In and Disagreements With Accountants
           on Accounting and Financial Disclosure........................ II-9


                                    PART III

Item 9.  Directors and Executive Officers of the Registrant.............. III-1
Item 10. Executive Compensation.......................................... III-2
Item 11. Security Ownership of Certain Beneficial Owners and Management.. III-2
Item 12. Certain Relationships and Related Transactions.................. III-3
Item 13. Exhibits and Reports on Form 8-K................................ III-3
Item 14. Controls and Procedures......................................... III-4

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

Certifications of Annual Report Pursuant to 18 U.S.C. Section 1350....... III-6

Financial Statements..................................................... III-11


<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 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.

     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 a limited
partner interest in limited partnerships (Local  Partnerships).  The Partnership
originally made investments in 37 Local  Partnerships.  As of December 31, 2002,
the Partnership  retained  investments in 21 Local  Partnerships.  Each of these
Local  Partnerships  owns  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, in
the event of non-compliance with the Local Partnerships' partnership agreements,
the local general partner may be removed and replaced 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 37 (21 as of December 31, 2002) of these
Local Partnerships.  As a limited partner, the Partnership's legal liability for
obligations of the Local Partnerships is limited to its investment. In six (four
as of December  31,  2002) 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 21 Local
Partnerships and the four intermediary partnerships.  The local general partners
and  affiliates  of the Managing  General  Partner may operate  other  apartment
complexes  which  may be in  competition  for  eligible  tenants  with the Local
Partnerships' apartment complexes.

                                       I-1

<PAGE>
                                     PART I
                                     ------

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

     Although each of the Local  Partnerships in which the Partnership  invested
owns an  apartment  complex  that must  compete in the market place for tenants,
interest subsidies and/or rent supplements from governmental  agencies generally
make it possible to offer certain of these 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,  except in specific  circumstances as described in Part II, Item 6,
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations.

                                       I-2

<PAGE>
                                     PART I
                                     ------

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

     A schedule of the apartment  complexes owned by Local Partnerships in which
the Partnership has an investment as of December 31, 2002, follows.

<TABLE>
<CAPTION>

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

                                                                                                  Units          Expiration
                           Mortgage                                                           Authorized for         of
 Name and Location        Payable at          Financed and/or Insured           Number of      Rental Asst.       Section 8
of Apartment Complex     12/31/02 (2)         and/or Subsidized Under          Rental Units    Under Sec. 8      HAP Contract
--------------------     ------------     -------------------------------      ------------   --------------     ------------
<S>                      <C>              <C>                                  <C>            <C>                <C>
Arboretum Village        $12,392,438      Conventional                              308               0               --
 Lisle, IL

Bartley Manor                645,217      Federal Housing Administration             70              69            05/31/03 (4)(5)
 Superior, WI                              (FHA)/Section 236 of the National
                                           Housing Act (NHA)

Briar Crest I (4)            447,088      Federal National Mortgage                  53              53            09/30/03 (4)(5)
 Niles, MI                                 Association (FNMA)/Section 236
                                           of the NHA

Briar Crest II (4)           503,812      FNMA/Section 236 of the NHA                49              49            09/30/03 (4)(5)
 Niles, MI

Briar Hills                  477,992      FNMA/Section 236 of the NHA                50              33            12/31/03 (7)
 South Haven, MI

Heritage Estates I         2,407,310      Missouri Housing Development              228               0               --
 St. Louis, MO                             Agency (MHDA)/Section 221(d)
                                          (4) of the NHA

Heritage Estates II        1,968,976      MHDA/Section 221 (d)(4) of the            160               0               --
 St. Louis, MO                             NHA

Highland Manor             1,243,412      HUD                                       111             111            05/12/04 (6)
 Birmingham, AL

Indian Hills                 437,039      FNMA/Section 236 of the NHA/               40              24            12/31/03 (8)
 Townhouses                                Section 8
 Dowagiac, MI

Lakewood Apts.               798,967      Rural Housing & Community                  50              50            07/31/04 (4)(5)
 Eufaula, AL                               Development Services (RHCD)

Meadow Lanes Apts.         1,454,962      Michigan State Housing Develop-           118               0                  --
 Holland, MI                               ment Authority/Section 236 of
                                           the NHA

Monterey/Hillcrest        12,837,205      Section 221(d)(4) of the NHA/FHA          300              60            12/13/03 (5)
 Waukesha, WI

Victorian Towers           4,799,007      NJHMFA/Section 8                          204              27            12/01/23
 Cape May, NJ

</TABLE>


                                   (continued)

                                       I-3

<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


                                                                                                  Units          Expiration
                           Mortgage                                                           Authorized for         of
 Name and Location        Payable at          Financed and/or Insured           Number of      Rental Asst.       Section 8
of Apartment Complex     12/31/02 (2)         and/or Subsidized Under          Rental Units    Under Sec. 8      HAP Contract
--------------------     ------------     -------------------------------      ------------   --------------     ------------
<S>                      <C>              <C>                                  <C>            <C>                <C>
Villa Mirage I           $ 1,945,372      CHFA/Section 8                             50              50            12/19/05
 Rancho Mirage, CA

Villa Mirage II            1,934,982      CHFA/Section 8                             48              48            10/15/15
 Rancho Mirage, CA

Village Green                287,097      FHA/Section 236 of FHA                     36              36            04/30/03 (4)(5)
 Reedsburg, WI

Village Square               387,296      FHA/Section 236 of FHA                     48              48            04/30/03 (4)(5)
 Barabou, WI

Village Squire I & II      8,481,618      Conventional                              377               0               --
 Canton, MI

Village Squire III         5,472,251      Conventional                              224               0               --
 Canton, MI

Walsh Park                 4,309,546      Illinois Housing Development              134             133            11/01/14
 Chicago, IL                               Administration

Windham Village            2,224,779      CHFA                                       50              44            10/31/15
 Santa Rosa, CA
                         -----------                                             ------          ------

Totals 21                $65,456,366                                              2,708             835
                         ===========                                             ======          ======

</TABLE>

                                   (continued)


                                       I-4

<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          2002   2001    2000    1999   1998       2002         2001        2000        1999       1998
--------------------          ----   ----    ----    ----   ----      -------     --------    --------    --------   --------
<S>                           <C>    <C>     <C>     <C>    <C>       <C>         <C>         <C>         <C>        <C>
Arboretum Village               87%    88%    92%     93%    95%      $ 9,833     $ 9,883     $ 9,689     $ 9,338    $ 9,238
 Lisle, IL

Bartley Manor                   98%    96%   100%     93%    93%        6,236       6,050       5,661       5,656      5,356
 Superior, WI

Briar Crest I                   94%   100%   100%     96%    97%        6,723       6,722       6,504       5,333      4,784
 Niles, MI

Briar Crest II                  98%   100%   100%     94%    96%        6,887       6,684       6,682       5,327      4,814
 Niles, MI

Briar Hills                     96%   100%    92%     92%    94%        6,261       6,007       6,055       4,465      4,461
 South Haven, MI

Heritage Estates I             100%   100%   100%    100%    99%        5,584       5,264       5,202       5,176      4,940
 St. Louis, MO

Heritage Estates II            100%   100%   100%    100%   100%        5,596       5,314       5,185       5,193      4,968
 St. Louis, MO

Highland Manor                  97%   100%   100%    100%    98%        7,033       6,805       6,616       6,515      7,584
 Birmingham, AL

Indian Hills                   100%   100%    95%    100%   100%        6,122       5,864       5,817       5,272      5,070
 Townhouses
 Dowagiac, MI

Lakewood Apts.                 100%   100%   100%    100%    98%        4,572       4,509       4,525       4,305      4,269
 Eufaula, AL

Meadow Lanes Apts.              95%    92%    95%     97%    98%        6,443       6,361       6,318       6,216      6,174
 Holland, MI

Monterey/Hillcrest              96%    99%    93%     96%    92%        9,023       8,954       8,629       8,559      8,992
 Waukesha, WI

Victorian Towers                98%    96%    94%     96%    99%        6,391       6,533       5,199       5,196      4,989
 Cape May, NJ

Villa Mirage I                  97%    99%   100%    100%   100%        9,430       9,599       9,685       9,522      9,699
 Rancho Mirage, C

Villa Mirage II                 99%    99%   100%    100%   100%        9,603       9,612       9,537       9,580      9,580
 Rancho Mirage, CA

</TABLE>

                                   (continued)

                                       I-5

<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          2002   2001    2000    1999   1998        2002        2001        2000        1999       1998
--------------------          ----   ----    ----    ----   ----      --------    --------    --------    --------   --------
<S>                           <C>    <C>     <C>     <C>    <C>       <C>         <C>         <C>         <C>        <C>
Village Green                  95%   100%    100%     92%    97%      $ 4,472     $ 4,497     $ 4,120     $ 3,849    $ 3,886
 Reedsburg, WI

Village Square                 94%    92%     92%     83%    94%        4,900       4,633       4,232       4,362      4,243
 Barabou, WI

Village Squire I & II          96%    96%     97%     97%    90%        6,593       6,785       6,550       6,152      5,902
 Canton, MI

Village Squire III             95%    90%     98%     97%    93%        6,518       6,670       6,511       6,199      5,820
 Canton, MI

Walsh Park                     99%   100%     99%     96%    99%       12,327      11,956      11,514       8,940     11,653
 Chicago, IL

Windham Village               100%   100%    100%    100%   100%       11,568      10,857      10,632      10,572     10,474
 Santa Rosa, CA
                              ---    ---     ---     ---    ---       -------     -------     -------     -------    -------

Totals(3) 21                   97%    97%     97%     96%    97%      $ 7,244     $ 7,122     $ 6,898     $ 6,463    $ 6,519
                              ===    ===     ===     ===    ===       =======     =======     =======     =======    =======
</TABLE>


(1)  All properties are multifamily housing complexes. No single tenant/resident
     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 of
     the Local Partnerships as of December 31, 2002.

(3)  The totals for the percentage of units  occupied and the average  effective
     annual rental per unit are based on a simple average.

(4)  The Section 8 HAP contract  expiration  date reflects an extension from the
     original expiration date, in accordance with Federal legislation.

(5)  It is anticipated that the Local  Partnership will extend its Section 8 HAP
     contract for a one-year period at its expiration in 2003.

(6)  Entered Mark-to-Market program in May 1998. The Section 8 HAP contract will
     be renewed annually.

(7)  On  February  24,  2003,  the  Partnership's  interest  in Briar  Hills was
     transferred  to  the  purchase  money  noteholder.  See  the  notes  to the
     consolidated financial statements for additional information concerning the
     transfer.

(8)  On February  24,  2003,  the  Partnership's  interest  in Indian  Hills was
     transferred  to  the  purchase  money  noteholder.  See  the  notes  to the
     consolidated financial statements for additional information concerning the
     transfer.


     On December 11, 2001, the Partnership  sold its interest in Glen Agnes. See
the notes to the consolidated  financial  statements for additional  information
concerning the sale.

     On  January 3, 2002,  the  Partnership's  interest  in  Congress  Plaza was
transferred to the purchase money noteholder.  See the notes to the consolidated
financial statements for additional information concerning the transfer.

     On January 16,  2002,  the  Partnership's  interest  in Audubon  Towers was
transferred to the purchase money noteholders. See the notes to the consolidated
financial statements for additional information concerning the transfer.

                                       I-6

<PAGE>
                                     PART I
                                     ------

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

     On  February  24,  2003,  the  Partnership's  interest  in Briar  Hills was
transferred to the purchase money noteholders. See the notes to the consolidated
financial statements for additional information concerning the transfer.

     On February  24,  2003,  the  Partnership's  interest  in Indian  Hills was
transferred to the purchase money noteholders. See the notes to the consolidated
financial statements for additional information concerning the transfer.


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 Partnership.  See Part I, Item
1 for information concerning these properties.


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

     In late 1999, the removed local general partner and the other local general
partner  (collectively,  the  "LGPs"),  and the sole  shareholder  of the former
initiated  lawsuits  seeking to compel the dissolution of the Villa Mirage I and
II Local Partnerships and the sale of their respective properties.  Both actions
were stayed while the disputes moved to arbitration in accordance with the Local
Partnership  Agreements.  In August 2000, the LGPs  voluntarily  dismissed their
claims in both the state court and the arbitration  actions,  without prejudice.
The Partnership and its affiliate maintained their claims for an accounting. The
arbitration  hearings took place in January 2001. In April 2001, an  arbitration
award in favor of Village Mirage I and Villa Mirage II found that the removal of
the LGPs was proper and issued money judgments  against both LGPs. See the notes
to the consolidated  financial statements for additional  information concerning
this matter.

     In February,  2001, the  Partnership  and two  affiliates  were served in a
state court action for  declaratory  judgment and damages in  connection  with a
purchase  money  note  allegedly  assigned  to  the  plaintiff  secured  by  the
Partnership's  interests  in Woodside  Village.  When that  property was sold in
October 2000, the original payee (and then managing partner of Woodside Village)
agreed to  indemnify  the  Partnership  for any  claims in  connection  with the
purchase money notes. The original payee (which is also a defendant) settled the
lawsuit with no liability to the Partnership.  See the notes to the consolidated
financial statements for additional information concerning this matter.

     In December 2001, the Partnership,  its affiliate,  C.R.H.C.,  Incorporated
(CRHC), and the Winchester Gardens Local Partnership were served with a wrongful
death action. The Partnership and CRHC were dismissed as defendants because they
sold their  partnership  interests in  Winchester  Gardens prior to the date the
claim arose.


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

     No matters were  submitted to a vote of security  holders during the fourth
quarter of 2002.

                                       I-7

<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 May 11, 2001,  Equity Resource  Lexington Fund Limited  Partnership
          (Lexington)  initiated  a  registered  tender  offer to purchase up to
          12,000 of the outstanding  Units in the Partnership at a price of $100
          per Unit;  the offer expired June 8, 2001. On May 17, 2002,  Lexington
          initiated  a  registered  tender  offer to purchase up to 6,000 of the
          outstanding  Units in the Partnership at a price of $100 per Unit; the
          offer  expired  June 17,  2002.  Lexington  is  unaffiliated  with the
          Partnership or the Managing General  Partner.  The prices offered were
          determined   solely  at  the   discretion  of  Lexington  and  do  not
          necessarily represent the fair market value of each Unit.

          In response to the  Lexington  registered  tender  offers,  on May 24,
          2001, and May 28, 2002, the Managing  General  Partner filed Schedules
          14D-9. In those filings, the Managing General Partner recommended that
          Limited  Partners  reject the Lexington  offers  because it viewed the
          offer prices as inadequate.

                           Unregistered Tender Offers
                           --------------------------

          On  March  15,  2001,  Bond  Purchase,   L.L.C.  (Bond)  initiated  an
          unregistered  tender offer to purchase 2,980 of the outstanding  Units
          in the Partnership at a price of $53 per Unit; the offer expired April
          30, 2001. On October 9, 2001,  Bond initiated an  unregistered  tender
          offer to purchase 1,411 of the outstanding Units in the Partnership at
          a price of $131  per  Unit;  the  offer  expired  November  30,  2001.
          (However,  transfers of  outstanding  Units due to sales  transactions
          were not being recognized by the Partnership between July 17, 2001 and
          December 31, 2001; see the final  paragraph of this Item 5.a.) Bond is
          unaffiliated with the Partnership or the Managing General Partner. The
          prices offered were determined solely at the discretion of Bond and do
          not necessarily represent the fair market value of each Unit.

          On  January 1,  2002,  Peachtree  Partners  (Peachtree)  initiated  an
          unregistered  tender  offer  to  purchase  up to four  percent  of the
          outstanding  Units in the Partnership at a price of $135 per Unit; the
          offer expired  February 8, 2002.  Peachtree is  unaffiliated  with the
          Partnership  or the Managing  General  Partner.  The price offered was
          determined  solely  at  the  discretion  of  Peachtree  and  does  not
          necessarily represent the fair market value of each Unit.

          The Managing  General Partner did not express any opinion and remained
          neutral  toward the  unregistered  tender  offers for the  purchase of
          Units described above.

                                      II-1

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


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

          During 2001, a number of investors sold their Units in the Partnership
          to other investors as a result of the tender offers  described  above.
          If more  than  five  percent  of the  total  outstanding  Units in the
          Partnership  are transferred due to sale in any one calendar year (not
          counting certain exempt transfers),  the Partnership could be taxed as
          a  "publicly  traded   partnership,"   with  potentially   severe  tax
          implications for the Partnership and its investors.  Specifically, the
          Partnership could be taxed as a corporation and, if so, the income and
          losses from the  Partnership  would no longer be  considered a passive
          activity. From January 1, 2001, through July 16, 2001, the Partnership
          received  sale  transfer  requests  for  approximately   4.9%  of  the
          outstanding Units. Accordingly, to remain within the five percent safe
          harbor,  effective July 16, 2001, the Managing  General Partner halted
          recognition  of any transfers  that would exceed the safe harbor limit
          through  December  31,  2001.  As a result,  transfers of Units due to
          sales transactions were not recognized by the Partnership between July
          17, 2001 and December 31, 2001. The halt was lifted effective  January
          1, 2002.

     (b)  As of March 27, 2003 there were 4,335  registered  holders of Units in
          the Partnership.

     (c)  On November 16, 2001,  the  Partnership  made a cash  distribution  of
          $598,820  ($10  per  Unit) to  Additional  Limited  Partners  who were
          holders of record as of October 1, 2001. The distribution was a result
          of cash resources  accumulated from operations and distributions  from
          Local Partnerships. On September 11, 2002, the Partnership made a cash
          distribution  of $37,054  to the  General  Partners  and  Initial  and
          Special  Limited  Partners.  The  distribution  was a  result  of cash
          resources  accumulated  from operations and  distributions  from Local
          Partnerships.  A review of the  Partnership  Agreement  indicated that
          these  amounts  should  have  been  distributed  in prior  years  when
          distributions  had been made only to the Additional  Limited Partners.
          On December  2, 2002,  the  Partnership  made a cash  distribution  of
          $111,340 to the  General  Partners  and  Initial  and Special  Limited
          Partners.  The distribution was a result of cash resources accumulated
          from operations and distributions from Local Partnerships. On December
          6, 2002, the Partnership  made a cash  distribution of $3,592,920 ($60
          per unit) to Additional Limited Partners who were holders of record as
          of November 1, 2002. The  distribution  was a result of cash resources
          accumulated from operations and distributions from Local Partnerships.

                                      II-2

<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 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.

                                     General
                                     -------

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

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

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

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

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


                                      II-3

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


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

     Mark-to-Market (M2M) implementation will reduce rental income at properties
that are currently  subsidized  at  higher-than-market  rental  rates,  and will
therefore  lower cash flow  available to meet  mortgage  payments and  operating
expenses.  In some instances,  a property will be able to meet its existing debt
service  payments  after the  reduction  in rental  income.  In this  case,  the
property  may enter  the M2M  "Lite"  program  which  would  not  require a debt
restructuring.  In the remaining  instances,  the affected  property may undergo
debt restructuring  according to terms determined by an individual  property and
operations  evaluation.  This would  involve  reducing the first  mortgage  loan
balance to an amount  supportable  by the  property's  operations,  taking  into
account the property's operating expenses and reduced income. The balance of the
amount  written down from the first  mortgage  loan would be converted to a non-
performing but accruing  (soft) second  mortgage  loan.  When the existing first
mortgage loan is bifurcated  into a first and second  mortgage  loan,  the newly
created  second  mortgage  loan will  accrue  interest at a  below-market  rate;
however,  the  Internal  Revenue  Service  issued a  ruling  in July  1998  that
concluded that the below-market  rate of interest would not generate  additional
ordinary  income.  Each property  subject to M2M will be affected in a different
manner, and it is very difficult to predict the exact form of restructuring,  or
potential tax liabilities to the Limited Partners, at this time. All properties,
upon entering the M2M program  (excluding M2M Lite),  are required to enter into
an agreement restricting the property's use as affordable housing for 30 years.

     Finally, under HUD's "Mark-up-to-Market"  program, properties with expiring
Section 8 HAP  contracts  that are located in high-rent  areas as defined by HUD
are eligible for rent increases  which would be necessary to bring Section 8 HAP
contract  rents in line with market rate rents.  For  properties  that enter the
program and have interest rate  subsidized FHA loans,  the rents are adjusted to
take into  account  the  benefits  the  property is already  receiving  from the
below-market  interest rate by means of a HUD-determined  adjustment factor. The
purpose of this program is to provide  incentives to owners of  properties  with
expiring  Section 8 HAP contracts not to convert these properties to market rate
housing.

     In return for  receiving  market  rate rents under  Mark-up-to-Market,  the
property  owner must enter into a five year  conditional  Section 8 HAP contract
with HUD,  subject  to the  annual  availability  of  funding  by  Congress.  In
addition,  property  owners who enter into the  Mark-up-to-  Market program will
receive  increased  cash flow,  as the limited  dividend will be increased in an
amount equal to the increase in gross rental revenues.

     There have been no major changes in federal housing policy in 2002.

                                      II-4

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


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

     Eight  properties in which the  Partnership  is invested as of December 31,
2002, have Section 8 HAP contracts which, as extended,  will expire in 2003. The
Section 8 HAP contracts cover all or most of the apartment units in seven of the
eight  properties.  The following chart presents  information  concerning  these
eight properties.

<TABLE>
<CAPTION>
                                                            Units              Original           Renewed
                                                        Authorized for       Expiration of      Expiration of
                                       Number of       Rental Assistance       Section 8          Section 8
         Property                     Rental Units      Under Section 8      HAP Contract       HAP Contract
         --------                     ------------     -----------------     -------------     --------------
         <S>                          <C>              <C>                   <C>               <C>
         Bartley Manor                     70                 69                07/31/98         05/31/03
         Briar Crest I                     53                 53                06/30/98         09/30/03
         Briar Crest II                    49                 49                06/30/98         09/30/03
         Briar Hills (1)                   50                 33                09/30/97         12/31/03
         Indian Hills (2)                  40                 24                09/30/97         12/31/03
         Monterey/Hillcrest               300                 60                12/13/03               --
         Village Green                     36                 36                09/30/98         04/30/03
         Village Square                    48                 48                09/30/98         04/30/03
                                        -----              -----

              Total                       646                372
                                        =====              =====
</TABLE>

(1)      On February 24,  2003,  the  Partnership's  interest in Briar Hills was
         transferred  to the  purchase  money  noteholder.  See the notes to the
         consolidated financial statements for additional information concerning
         the transfer.

(2)      On February 24, 2003,  the  Partnership's  interest in Indian Hills was
         transferred  to the  purchase  money  noteholder.  See the notes to the
         consolidated financial statements for additional information concerning
         the transfer.

     The  carrying  amount  of the  Partnership's  investments  in the six Local
Partnerships (excluding Briar Hills and Indian Hills, in which the Partnership's
interests  were  transferred  in  February  2003) with  Section 8 HAP  contracts
expiring in 2003 was $2,736,072.

     The Managing  General  Partner  continues to seek  strategies  to deal with
affordable housing policy. 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 benefits to investors.

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

     As of December 31, 2002 the  Partnership had 4,335 investors who subscribed
to a total of 60,000  units of  limited  partnership  interest  in the  original
amount of $60,000.  The  Partnership  originally  made  investments  in 37 Local
Partnerships,  of which 21  remain  at  December  31,  2002.  The  Partnership's
liquidity,  with  unrestricted  cash  resources of $4,845,110 as of December 31,
2002,  along  with  anticipated   future  cash   distributions  from  the  Local
Partnerships,  is expected  to be  adequate to meet its current and  anticipated
operating cash needs. As of March 27, 2003,  there were no material  commitments
for capital expenditures.

     During  2002 and 2001,  the  Partnership  received  cash  distributions  of
$853,443 and $1,305,576, respectively, from the Local Partnerships.

     The  Partnership's  obligations  with respect to its  investments  in Local
Partnerships,  in the form of purchase money notes having an aggregate principal
balance of $7,740,100,  plus aggregate  accrued  interest of $15,305,640,  as of
December  31,  2002,  are  payable  in full upon the  earliest  of:  (i) sale or
refinancing of the respective Local Partnership's rental property;  (ii) payment
in full of the respective Local Partnership's permanent loan; or (iii) maturity.

                                      II-5

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


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

     The purchase money note related to Audubon Towers,  in the principal amount
of  $1,275,000,  matured on January 1, 1999,  and was  extended  during  2000 to
January 15, 2001.  Under the extension  agreement,  documents  transferring  the
Partnership's  interest  in Audubon  Towers to the  noteholders  were  placed in
escrow. On January 16, 2002, the  Partnership's  interest was transferred to the
noteholders.

     The purchase money note related to Congress Plaza, in the principal  amount
of $500,000, matured on January 1, 1999, and was extended during 1999 to January
1, 2002. Under the extension agreement, documents transferring the Partnership's
interest in Congress Plaza to the noteholder  were placed in escrow.  In January
2002, the Partnership's interest was transferred to the noteholder.

     The purchase  money notes related to Briar Hills and Indian  Hills,  in the
principal amount of $403,100 and $277,000,  respectively,  matured on January 1,
2002,  and were  extended  during 2002 to January 2, 2003.  Under the  extension
agreement, documents transferring the Partnership's interests in Briar Hills and
Indian Hills to the  noteholders  were placed in escrow.  In February  2003, the
Partnership's interests were transferred to the noteholders.

     The purchase money notes related to the following  properties were extended
during 2002.

                                       Original      Extended
         Property        Principal     Maturity      Maturity
         --------        ---------     --------      --------
         Briar Hills     $403,100      01/01/02      01/02/03 (see below)
         Indian Hills     277,000      01/01/02      01/02/03 (see below)

     The purchase money notes related to the following  properties  have matured
and have not been paid or extended as of March 27, 2003.

         Property                            Principal         Maturity
         --------                           ----------         --------
         Heritage Estates I                 $2,600,000         01/01/99
         Heritage Estates II                 1,800,000         01/01/99
         Victorian Towers                      900,000         01/01/99

     The purchase money notes related to the following  properties were paid off
at a discount,  or the  collateral  that  secured  them was  transferred  to the
noteholders, during 2001, 2002, and through March 27, 2003.

         Property            Principal        Date          Disposition
         --------           ----------    -------------     ------------
         Glen Agnes         $  850,000    December 2001     Transferred via sale
         Meadow Lanes          650,000    December 2001     Paid Off
         Audubon Towers      1,275,000    January 2002      Transferred
         Congress Plaza        500,000    January 2002      Transferred
         Briar Crest I         470,050    May 2002          Paid Off
         Briar Crest II        361,120    May 2002          Paid Off
         Briar Hills           403,100    February 2003     Transferred
         Indian Hills          277,000    February 2003     Transferred

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


                                      II-6

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


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

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

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

     The  Managing  General  Partner  is  continuing  to  investigate   possible
alternatives to reduce the Partnership's  debt obligations.  These  alternatives
include, among others, retaining the cash available for distribution to meet the
purchase money note  requirements,  paying off certain purchase money notes at a
discounted  price,  extending  the due dates of certain  purchase  money  notes,
refinancing the respective properties' underlying debt or selling the underlying
real estate and using the Partnership's share of the proceeds to pay or buy down
certain purchase money note  obligations.  Although the Managing General Partner
has had some success applying these strategies in the past, the Managing General
Partner cannot assure that these strategies will be successful in the future. If
the Managing  General  Partner is unable to negotiate an extension or discounted
payoff,  in the event that the purchase money notes remain unpaid upon maturity,
the noteholders may have the right to foreclose on the Partnership's interest in
the related Local Partnerships. In the event of a foreclosure, the excess of the
nonrecourse   indebtedness   over  the  carrying  amount  of  the  Partnership's
investment  in the related Local  Partnership  would be deemed  cancellation  of
indebtedness income, which would be taxable to Limited Partners at a federal tax
rate  of  up  to  38.6%.  Additionally,  in  the  event  of a  foreclosure,  the
Partnership  would lose its investment in the Local  Partnership and,  likewise,
its share of any future  cash flow  distributed  by the Local  Partnership  from
rental operations,  mortgage debt refinancings,  or the sale of the real estate.
Of the 21 Local Partnerships in which the Partnership is invested as of December
31, 2002,  the three Local  Partnerships  with  associated  purchase money notes
which mature through  December 31, 2003 and which remain unpaid or unextended as
of March 27, 2003,  represented the following  percentages of the  Partnership's
total  distributions  received from Local  Partnerships and share of income from
Local Partnerships for the immediately preceding two calendar years.

                             Percentage of Total        Partnership's Share of
        For the Year       Distributions Received            Income from
           Ended           from Local Partnerships        Local Partnerships
     -----------------     -----------------------      ----------------------
     December 31, 2002               20%                     $230,682
     December 31, 2001               13%                     $122,587

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


                                      II-7

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


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

     The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient  cash is available for operating  requirements.
For the years ended  December  31, 2002 and 2001,  the receipt of  distributions
from Local  Partnerships  (and  existing cash reserves in 2002) were adequate to
support  operating cash  requirements.  Cash and cash  equivalents  decreased by
$6,472,263 during 2002, as cash was used to pay off two purchase money notes and
related  interest,  and to make  distributions to partners,  and as cash used in
operating activities exceeded the receipt of distributions from partnerships.

     On November 16, 2001, the Partnership made a cash  distribution of $598,820
($10 per Unit) to Additional  Limited  Partners who were holders of record as of
October 1, 2001. The  distribution  was a result of cash  resources  accumulated
from  operations and  distributions  from Local  Partnerships.  On September 11,
2002,  the  Partnership  made a cash  distribution  of  $37,054  to the  General
Partners and Initial and Special Limited Partners. The distribution was a result
of cash  resources  accumulated  from  operations and  distributions  from Local
Partnerships. A review of the Partnership Agreement indicated that these amounts
should have been  distributed  in prior years when  distributions  had been made
only to the Additional  Limited  Partners.  On December 2, 2002, the Partnership
made a cash distribution of $111,340 to General Partners and Initial and Special
Limited  Partners.  The distribution was a result of cash resources  accumulated
from operations and distributions from Local Partnerships.  On December 6, 2002,
the  Partnership  made a cash  distribution  of  $3,592,920  ($60  per  unit) to
Additional  Limited  Partners who were holders of record as of November 1, 2002.
The distribution was a result of cash resources  accumulated from operations and
distributions from Local  Partnerships.  The Managing General Partner intends to
retain all of the Partnerships  remaining  undistributed cash pending resolution
of the  Partnership's  outstanding  purchase  money  notes and  related  accrued
interest, and for future working capital needs.

                              Results of Operations

2002 Versus 2001
----------------

     The  Partnership's  net  income  for the  year  ended  December  31,  2002,
decreased from the corresponding  period in 2001, primarily due to a decrease in
share of income from  Partnerships  related to increased  operating  expenses at
three properties, the cessation of income from two properties transferred during
2002,  and a decrease  in grant  funding at one  property.  Contributing  to the
decrease in net income  were gain from  extinguishment  of debt  related to four
Local  Partnerships  in 2002  which  was less than the  corresponding  gain from
extinguishment of debt related to two Local  Partnerships in 2001, a decrease in
interest  revenue related to lower cash and cash  equivalent  balances and lower
interest rates in 2002, and an increase in general and administrative  expenses,
primarily due to fees paid in 2002 in conjunction with the discounted payoffs of
the purchase money notes related to Briar Crest I and Briar Crest II.  Partially
offsetting the decrease in net income were a decrease in interest expense due to
lower  purchase  money note  balances,  a loss on  disposition of investments in
partnerships recognized in 2001 but not in 2002, a decrease in professional fees
related to lower legal fees, and a nominal  decrease in amortization of deferred
costs.

     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, 2002 and 2001,  did not include  losses of $409,615  and  $403,190,
respectively.  Distributions of $501,281 and $491,057,  received from five Local
Partnerships  during  both 2002 and 2001,  were offset  against  the  respective
years' recorded losses because these amounts were in excess of the Partnership's
investment.

                                      II-8

<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 21 properties
for the five years ended  December 31, 2002,  follow.  Combined  rental  revenue
amounts have been adjusted to reflect  property sales and interests  transferred
in 2002 and in prior years.

<TABLE>
<CAPTION>
                                                       For the years ended December 31,
                       -------------------------------------------------------------------------------------------------
                          2002                  2001                  2000                  1999                  1998
                       -----------           -----------           -----------           -----------           -----------
<S>                    <C>                   <C>                   <C>                   <C>                   <C>
Combined Rental
  Revenue              $20,170,032           $20,001,827           $19,255,087           $18,278,390           $18,458,251

Annual Percentage
  Increase (Decrease)                0.8%                  3.9%                  5.3%                  (1.0)%

</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.

                                      II-9

<PAGE>
                                    PART III


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

     (a)  and (b)

          The  Partnership has no directors,  executive  officers or significant
          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, 66, 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.  He is
also a Director of CRIIMI MAE Inc. and CRIIMI, Inc.

H. William Willoughby,  56, 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.  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.

Susan R. Campbell, 44, was Executive Vice President and Chief Operating Officer.
Prior to joining CRI in March 1985,  she was a budget analyst for the B. F. Saul
Advisory  Company.  She holds a Bachelor of Science  degree in General  Business
from the University of Maryland.  Ms. Campbell  resigned her position  effective
March 29, 2002.

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

     (d)  Involvement in certain legal proceedings.

          None.

                                      III-1

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


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 Item 10
     is  incorporated  herein  by  reference  to  Notes 3 and 4 of the  notes to
     consolidated financial statements contained in 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 to the  Partnership to be
          the  beneficial  owner of more than five  percent  of the  issued  and
          outstanding  units of additional  limited partner  interest (Units) at
          March 27, 2003.

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

           Equity Resource Group,             9,199 Units               15.4%
             Incorporated, et. al.
             14 Story Street
             Cambridge, MA 02138

     (b)  Security ownership of management.

          The following  table sets forth  certain  information  concerning  all
          Units  beneficially  owned, as of March 27, 2003, by each director and
          by all  directors  and  officers  as a group of the  Managing  General
          Partner of the Partnership.

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

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

     (c)  Changes in control.

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

                                     III-2

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


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

     (a)  and (b)

          Transactions with management and others.

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

     (c)  Certain business relationships.

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

     (d)  Transactions with promoters.

          Not applicable.


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
         --------------------------------

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

          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 AND REPORTS ON FORM 8-K - 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. 99 - Additional Exhibits.

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

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

          c.   Certification of Periodic Financial Report.

     (b)  Reports on Form 8-K

     No reports on Form 8-K were filed  during the quarter  ended  December  31,
2002.


ITEM 14. CONTROLS AND PROCEDURES
         -----------------------

     In February 2003,  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-14 and 15d-14.  Based on that  evaluation,  the Principal
Executive   Officer  and  Principal   Financial   Officer   concluded  that  the
Partnership's  disclosure controls and procedures are effective 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. In addition,  there
have been no significant  changes in the  Partnership's  internal controls or in
other factors that could  significantly  affect internal controls  subsequent to
the date of the most recent evaluation.


                                      III-4

<PAGE>
                                   SIGNATURES


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



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

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




March 27, 2003                         by:  /s/ William B. Dockser
--------------                              ------------------------------------
DATE                                        William B. Dockser,
                                              Director, Chairman of the Board,
                                              and Treasurer
                                              (Principal Executive Officer)


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


March 27, 2003                         by:  /s/ H. William Willoughby
--------------                              ------------------------------------
DATE                                        H. William Willoughby,
                                              Director, President,
                                              and Secretary




March 27, 2003                         by:  /s/ Michael J. Tuszka
--------------                              ------------------------------------
DATE                                        Michael J. Tuszka,
                                              Vice President
                                              and Chief Accounting Officer
                                              (Principal Financial Officer
                                              and Principal Accounting Officer)


                                      III-5

<PAGE>
                         CERTIFICATION OF ANNUAL REPORT
                       Pursuant to 18 U.S.C. Section 1350,
      as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


         I, Michael J. Tuszka, certify that:

         1.       I have  reviewed  this annual report on Form 10-KSB of CAPITAL
                  REALTY INVESTORS-III LIMITED PARTNERSHIP;

         2.       Based on my knowledge, this annual report does not contain any
                  untrue  statement  of a  material  fact  or  omit  to  state a
                  material fact necessary to make the statements  made, in light
                  of the  circumstances  under which such  statements were made,
                  not  misleading  with  respect to the  period  covered by this
                  annual report;

         3.       Based on my  knowledge,  the financial  statements,  and other
                  financial  information included in this annual report,  fairly
                  present in all  material  respects  the  financial  condition,
                  results of operations  and cash flows of the registrant as of,
                  and for, the periods presented in this annual report;

         4.       The   registrant's   other   certifying   officer  and  I  are
                  responsible  for  establishing   and  maintaining   disclosure
                  controls  and  procedures  (as defined in  Exchange  Act Rules
                  13a-14 and 15d-14) for the registrant and have:

         a)       designed  such  disclosure  controls and  procedures to ensure
                  that  material   information   relating  to  the   registrant,
                  including its consolidated  subsidiaries,  is made known to us
                  by others  within  those  entities,  particularly  during  the
                  period in which this annual report is being prepared;

         b)       evaluated the  effectiveness  of the  registrant's  disclosure
                  controls and  procedures  as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

         c)       presented  in this  annual  report our  conclusions  about the
                  effectiveness of the disclosure  controls and procedures based
                  on our evaluation as of the Evaluation Date;

         5.       The  registrant's   other   certifying   officer  and  I  have
                  disclosed,  based  on  our  most  recent  evaluation,  to  the
                  registrant's   auditors   and  the  audit   committee  of  the
                  registrant's  board of directors  (or persons  performing  the
                  equivalent functions):

         a)       all  significant  deficiencies  in the design or  operation of
                  internal   controls   which   could   adversely   affect   the
                  registrant's ability to record, process,  summarize and report
                  financial  data  and  have  identified  for  the  registrant's
                  auditors any material weaknesses in internal controls; and

         b)       any fraud,  whether or not material,  that involves management
                  or  other  employees  who  have  a  significant  role  in  the
                  registrant's internal controls; and


                                      III-6

<PAGE>



         6.       The registrant's other certifying officer and I have indicated
                  in this annual report whether there were  significant  changes
                  in  internal   controls  or  in  other   factors   that  could
                  significantly  affect internal controls subsequent to the date
                  of  our  most  recent  evaluation,  including  any  corrective
                  actions with regard to significant  deficiencies  and material
                  weaknesses.


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

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



March 28, 2003                           by:  /s/ Michael J. Tuszka
--------------                                ----------------------------------
DATE                                          Michael J. Tuszka,
                                                Vice President
                                                and Chief Accounting Officer
                                                (Principal Financial Officer)


     This  certification  is made solely for purpose of 18 U.S.C.  Section 1350,
subject  to the  knowledge  standard  contained  therein,  and not for any other
purpose.

                                      III-7

<PAGE>
                         CERTIFICATION OF ANNUAL REPORT
                       Pursuant to 18 U.S.C. Section 1350,
      as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


         I, William B. Dockser, certify that:

         1.       I have  reviewed  this annual report on Form 10-KSB of CAPITAL
                  REALTY INVESTORS-III LIMITED PARTNERSHIP;

         2.       Based on my knowledge, this annual report does not contain any
                  untrue  statement  of a  material  fact  or  omit  to  state a
                  material fact necessary to make the statements  made, in light
                  of the  circumstances  under which such  statements were made,
                  not  misleading  with  respect to the  period  covered by this
                  annual report;

         3.       Based on my  knowledge,  the financial  statements,  and other
                  financial  information included in this annual report,  fairly
                  present in all  material  respects  the  financial  condition,
                  results of operations  and cash flows of the registrant as of,
                  and for, the periods presented in this annual report;

         4.       The   registrant's   other   certifying   officer  and  I  are
                  responsible  for  establishing   and  maintaining   disclosure
                  controls  and  procedures  (as defined in  Exchange  Act Rules
                  13a-14 and 15d-14) for the registrant and have:

         a)       designed  such  disclosure  controls and  procedures to ensure
                  that  material   information   relating  to  the   registrant,
                  including its consolidated  subsidiaries,  is made known to us
                  by others  within  those  entities,  particularly  during  the
                  period in which this annual report is being prepared;

         b)       evaluated the  effectiveness  of the  registrant's  disclosure
                  controls and  procedures  as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

         c)       presented  in this  annual  report our  conclusions  about the
                  effectiveness of the disclosure  controls and procedures based
                  on our evaluation as of the Evaluation Date;

         5.       The  registrant's   other   certifying   officer  and  I  have
                  disclosed,  based  on  our  most  recent  evaluation,  to  the
                  registrant's   auditors   and  the  audit   committee  of  the
                  registrant's  board of directors  (or persons  performing  the
                  equivalent functions):


         a)       all  significant  deficiencies  in the design or  operation of
                  internal   controls   which   could   adversely   affect   the
                  registrant's ability to record, process,  summarize and report
                  financial  data  and  have  identified  for  the  registrant's
                  auditors any material weaknesses in internal controls; and

         b)       any fraud,  whether or not material,  that involves management
                  or  other  employees  who  have  a  significant  role  in  the
                  registrant's internal controls; and


                                      III-8

<PAGE>


         6.       The registrant's other certifying officer and I have indicated
                  in this annual report whether there were  significant  changes
                  in  internal   controls  or  in  other   factors   that  could
                  significantly  affect internal controls subsequent to the date
                  of  our  most  recent  evaluation,  including  any  corrective
                  actions with regard to significant  deficiencies  and material
                  weaknesses.


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

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



March 28, 2003                           by:  /s/ William B. Dockser
--------------                                ----------------------------------
DATE                                          William B. Dockser,
                                                Director, Chairman of the Board,
                                                and Treasurer
                                                (Principal Executive Officer)


     This  certification  is made solely for purpose of 18 U.S.C.  Section 1350,
subject  to the  knowledge  standard  contained  therein,  and not for any other
purpose.

                                      III-9

<PAGE>



                         REPORT OF INDEPENDENT CERTIFIED
                               PUBLIC ACCOUNTANTS



To 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), as of
December  31,  2002  and  2001,  and  the  related  consolidated  statements  of
operations,  changes  in  partners'  deficit  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
certain Local  Partnerships.  The Partnership's share of income from these Local
Partnerships  constitutes  $875,272 and  $1,631,240  of income in 2002 and 2001,
respectively, included in the Partnership's 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  auditing  standards  generally
accepted in the United States of America.  Those standards  require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes 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  provide  a
reasonable basis for our opinion.

     In our  opinion,  based upon our audits and the reports of other  auditors,
the  financial  statements  referred to above  present  fairly,  in all material
respects,  the consolidated  financial position of Capital Realty  Investors-III
Limited  Partnership  as of  December  31, 2002 and 2001,  and the  consolidated
results of its operations,  changes in partners' deficit, and its cash flows for
the years  then  ended,  in  conformity  with  accounting  principles  generally
accepted in the United States of America.

                                       Grant Thornton LLP


Vienna, Virginia
March 20, 2003

                                     III-10

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                           CONSOLIDATED BALANCE SHEETS


                                     ASSETS
<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                                      ----------------------------
                                                                                          2002            2001
                                                                                      ------------    ------------
<S>                                                                                   <C>             <C>
Investments in partnerships .......................................................   $  7,780,555    $  7,358,868
Investment in partnerships held for transfer ......................................             --       1,650,645
Investment in partnerships held in escrow .........................................      1,755,262       6,765,444
Cash and cash equivalents .........................................................      4,845,110      11,317,373
Acquisition fees, principally paid to related parties,
  net of accumulated amortization of $369,168 and $349,938, respectively ..........        207,724         226,954
Property purchase costs,
  net of accumulated amortization of $338,684 and $320,457, respectively ..........        208,135         226,363
Other assets ......................................................................            112             378
                                                                                      ------------    ------------

      Total assets ................................................................   $ 14,796,898    $ 27,546,025
                                                                                      ============    ============



                        LIABILITIES AND PARTNERS' DEFICIT


Due on investments in partnerships ................................................   $  7,859,644    $ 10,465,814
Accrued interest payable ..........................................................     15,339,616      23,030,108
Accounts payable and accrued expenses .............................................        152,707         111,226
                                                                                      ------------    ------------

      Total liabilities ...........................................................     23,351,967      33,607,148
                                                                                      ------------    ------------

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 .........................................    (12,021,685)     (8,280,371)
    Offering costs ................................................................     (6,156,933)     (6,156,933)
    Accumulated losses ............................................................    (50,379,951)    (51,627,319)
                                                                                      ------------    ------------

      Total partners' deficit .....................................................     (8,555,069)     (6,061,123)
                                                                                      ------------    ------------

      Total liabilities and partners' deficit .....................................   $ 14,796,898    $ 27,546,025
                                                                                      ============    ============
</TABLE>

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

                                     III-11

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                           For the years ended
                                                                               December 31,
                                                                       --------------------------
                                                                          2002           2001
                                                                       -----------    -----------
<S>                                                                    <C>            <C>
Share of income from partnerships ..................................   $ 1,379,260    $ 2,153,901
                                                                       -----------    -----------

Other revenue and expenses:

  Revenue:
    Gain from extinguishment of debt ...............................     1,706,398      2,118,661
    Interest .......................................................       114,874        431,407
                                                                       -----------    -----------

                                                                         1,821,272      2,550,068
                                                                       -----------    -----------

  Expenses:
    Interest .......................................................     1,076,193      1,671,904
    Management fee .................................................       300,000        300,000
    General and administrative .....................................       419,181        239,168
    Professional fees ..............................................       120,333        193,317
    Amortization of deferred costs .................................        37,457         42,561
                                                                       -----------    -----------

                                                                         1,953,164      2,446,950
                                                                       -----------    -----------

      Total other revenue and expenses .............................      (131,892)       103,118
                                                                       -----------    -----------

Income before loss on disposition of investments in partnerships ...     1,247,368      2,257,019

Loss on disposition of investments in partnerships .................            --       (301,904)
                                                                       -----------    -----------

Net income .........................................................   $ 1,247,368    $ 1,955,115
                                                                       ===========    ===========


Net income allocated to General Partners (1.51%) ...................   $    18,835    $    29,522
                                                                       ===========    ===========

Net income allocated to Initial and Special Limited Partners (1.49%)   $    18,586    $    29,131
                                                                       ===========    ===========

Net income allocated to Additional Limited Partners (97%) ..........   $ 1,209,947    $ 1,896,462
                                                                       ===========    ===========

Net income per unit of Additional Limited Partner Interest,
  based on 60,000 units outstanding ................................   $     20.17    $     31.61
                                                                       ===========    ===========
</TABLE>

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

                                     III-12

<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>
Partners' deficit, January 1, 2001                        $(830,382)      $(820,051)        $(5,766,985)       $(7,417,418)

  Net income                                                 29,522          29,131           1,896,462          1,955,115

  Distribution of $10.00 per unit
    of Additional Limited Partner Interest                       --              --            (598,820)          (598,820)
                                                          ---------       ---------         -----------        -----------

Partners' deficit, December 31, 2001                       (800,860)       (790,920)         (4,469,343)        (6,061,123)

  Net income                                                 18,835          18,586           1,209,947          1,247,368

  Distribution of $60.00 per unit
    of Additional Limited Partner Interest                       --              --          (3,592,920)        (3,592,920)

  Distributions to General Partners
    and Initial and Special Limited Partners                (74,722)        (73,672)                 --           (148,394)
                                                          ---------       ---------         -----------        -----------

Partners' deficit, December 31, 2002                      $(856,747)      $(846,006)        $(6,852,316)       $(8,555,069)
                                                          =========       =========         ===========        ===========
</TABLE>


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

                                     III-13

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                       For the years ended
                                                                                            December 31,
                                                                                  ----------------------------
                                                                                     2002             2001
                                                                                  ------------    ------------
<S>                                                                               <C>             <C>
Cash flows from operating activities:
  Net income ..................................................................   $  1,247,368    $  1,955,115

  Adjustments to reconcile net income to net cash used in operating activities:
    Share of income from partnerships .........................................     (1,379,260)     (2,153,901)
    Amortization of deferred costs ............................................         37,457          42,561
    Loss on disposition of investments in partnerships ........................             --         301,904
    Gain from extinguishment of debt ..........................................     (1,706,398)     (2,118,661)

    Changes in assets and liabilities:
      Advances made to Local Partnerships, net ................................           (485)             --
      Decrease in other assets ................................................            266           4,662
      Increase in accrued interest payable ....................................      1,076,193       1,671,904
      Payment of purchase money note interest .................................       (340,424)       (301,193)
      Increase (decrease) in accounts payable and accrued expenses ............         41,481         (32,017)
                                                                                  ------------    ------------

        Net cash used in operating activities .................................     (1,023,802)       (629,626)
                                                                                  ------------    ------------


Cash flows from investing activities:
  Receipt of distributions from partnerships ..................................        853,443       1,305,576
  Proceeds from disposition of investments in partnerships, net ...............             --         383,922
                                                                                  ------------    ------------

        Net cash provided by investing activities .............................        853,443       1,689,498
                                                                                  ------------    ------------


Cash flows from financing activities:
  Payoff of purchase money notes and related interest .........................     (2,560,590)     (1,500,000)
  Distributions to General Partners and Initial and Special Limited Partners ..       (148,394)             --
  Distributions to Additional Limited Partners ................................     (3,592,920)       (598,820)
                                                                                  ------------    ------------

        Net cash used in financing activities .................................     (6,301,904)     (2,098,820)
                                                                                  ------------    ------------

Net decrease in cash and cash equivalents .....................................     (6,472,263)     (1,038,948)

Cash and cash equivalents, beginning of year ..................................     11,317,373      12,356,321
                                                                                  ------------    ------------

Cash and cash equivalents, end of year ........................................   $  4,845,110    $ 11,317,373
                                                                                  ============    ============


Supplemental disclosure of cash flow information:
  Cash paid during the year for interest ......................................   $  2,069,844    $  1,151,193
                                                                                  ============    ============
</TABLE>

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

                                     III-14

<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 Partnership Agreement. The Partnership was
     formed to invest in real estate by acquiring and holding a limited  partner
     interest in limited partnerships (Local Partnerships) which own and operate
     federal or state  government-assisted or conventionally  financed apartment
     properties  located  throughout  the United States,  which provide  housing
     principally  to  the  elderly  or to  individuals  and  families  of low or
     moderate income.

          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 is 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.

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

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

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

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

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

          The investments in Local  Partnerships  (see Note 2) are accounted for
     by the equity method because the  Partnership  is a limited  partner in the
     Local  Partnerships or intermediary  partnerships.  Under this method,  the
     carrying amount of the investments in Local  Partnerships is (i) reduced by
     distributions  received and (ii) increased or reduced by the  Partnership's
     share of earnings or losses, respectively, of the Local Partnerships. As of
     December 31, 2002 and 2001, the Partnership's share of cumulative losses of
     seven  and  six  of the  Local  Partnerships  exceeded  the  amount  of the
     Partnership's  investments  in those Local  Partnerships  by $9,039,716 and
     $8,695,304,  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.  As of December 31, 2002, the Partnership's  maximum
     loss exposure  related to its investments in partnerships is limited to the
     remaining balance of $9,508,629.

                                     III-15

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

     As of December 31, 2002 and 2001, cumulative cash distributions of $580,301
     and $491,057,  respectively, have been received from the Local Partnerships
     for which the Partnership's carrying value is zero. These distributions are
     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 transfer
          --------------------------------------------

          Due to the possible  transfer of the  Partnerships  interests in Briar
     Hills  and  Indian  Hills,   as  further   discussed  in  Note  2.a.,   the
     Partnership's  investment in these Local  Partnerships  was reclassified to
     investment  in   partnerships   held  for  transfer  in  the   accompanying
     consolidated  balance sheet at December 31, 2001.  Assets held for transfer
     are not recorded in excess of their estimated net realizable value.

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

          In July 1999,  documents  transferring the  Partnership's  interest in
     Audubon  Towers 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 sheet at December 31, 2001.
     In May 1999, documents  transferring the Partnership's interest in Congress
     Plaza 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  sheet at December 31, 2001. In
     March and April 2002, documents transferring the Partnership's interests in
     Briar Hills and Indian Hills to the noteholders  were placed in escrow,  as
     further discussed in Note 2.a. Accordingly, the Partnership's investment in
     these Local  Partnerships  was  reclassified  to investment in partnerships
     held in escrow in the accompanying  consolidated  balance sheet at December
     31,  2002.  Assets  held in  escrow  are not  recorded  in  excess of their
     estimated net realizable value.

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

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

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

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

                                     III-16

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

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

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

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

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

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

          The consolidated  financial  statements  include  estimated fair value
     information  as of December 31, 2002, 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 the purchase money notes,  either  individually or in the
     aggregate,  due to:  (i) the lack of an  active  market  for  this  type of
     financial  instrument,  (ii) the  variable  nature of  purchase  money note
     interest  payments  as a result  of  fluctuating  cash  flow  distributions
     received from the related Local Partnerships, and (iii) the excessive costs
     associated with an independent appraisal of the purchase money notes.

     l.   New accounting pronouncements
          -----------------------------

          In  June  2001,  the  Financial   Accounting  Standards  Board  issued
     Statement  of  Financial  Accounting  Standards  No.  142 (SFAS  No.  142),
     Goodwill  and  Other  Intangible   Assets,   which  supercedes   Accounting
     Principles Board Opinion No. 17, Intangible Assets. SFAS No. 142 eliminates
     the  current   requirement  to  amortize   goodwill  and   indefinite-lived
     intangible  assets,  addresses the amortization of intangible assets with a
     defined life,  and addresses the  impairment  testing and  recognition  for
     goodwill  and  intangible  assets.  SFAS No. 142 will apply to goodwill and
     intangible assets arising from transactions  completed before and after the
     Statement's effective date. SFAS No. 142 is effective for fiscal year 2002.
     The  adoption  of SFAS  No.  142  did not  have a  material  effect  on the
     financial position or results of operations of the Partnership.

                                     III-17

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

          In August  2001,  the  Financial  Accounting  Standards  Board  issued
     Statement  of  Financial  Accounting  Standards  No.  144 (SFAS  No.  144),
     Accounting for the Impairment or Disposal of Long-Lived Assets. Among other
     provisions,  SFAS No. 144 sets forth the six criteria, all of which must be
     met,  before a long-lived  asset to be sold shall be classified as held for
     sale.  SFAS is effective for fiscal year 2002. The adoption of SFAS No. 144
     did not have a  material  effect on the  financial  position  or results of
     operations of the Partnerships.

          In  April  2002,  the  Financial  Accounting  Standards  Board  issued
     Statement  of  Financial  Accounting  Standards  No.  145 (SFAS  No.  145),
     Recission of FASB  Statements No. 4, 44, and 64, .... SFAS No. 145 rescinds
     Statement of Financial Accounting Standards No. 4, which required all gains
     and losses from  extinguishment  of debt to be aggregated and, if material,
     classified as an extraordinary item. Accordingly,  gain from extinguishment
     of debt previously  reported as  extraordinary  for the year ended December
     31, 2001, has been reclassified in the accompanying statement of operations
     for that period to conform to the presentation required by SFAS No. 145.

          In January 2003, the Financial  Accounting Standards Board issued FASB
     Interpretation  No.  46  (FIN  46),   Consolidation  of  Variable  Interest
     Entities.  FIN 46 clarifies the application of Accounting Research Bulletin
     51,  Consolidated  Financial  Statements,  for certain entities that do not
     have  sufficient  equity at risk for the entity to finance  its  activities
     without additional  subordinated financial support from other parties or in
     which equity  investors do not have the  characteristics  of a  controlling
     financial  interest  ("variable  interest  entities").   Variable  interest
     entities  within the scope of FIN 46 will be required to be consolidated by
     their primary  beneficiary.  The primary beneficiary of a variable interest
     entity  is  determined  to be the party  that  absorbs  a  majority  of the
     entity's expected losses,  receives a majority of its expected returns,  or
     both. FIN 46 applies  immediately  to variable  interest  entities  created
     after  January  31,  2003,  and to variable  interest  entities in which an
     enterprise  obtains an  interest  after that date.  It applies in the first
     fiscal year or interim  period  beginning  after June 15, 2003, to variable
     interest  entities in which an enterprise holds a variable interest that it
     acquired  before  February 1, 2003. The Managing  General Partner is in the
     process of determining what impact,  if any, the adoption of the provisions
     of FIN 46 will have on the Partnership's financial condition and results of
     operations related to the Partnership's  investments in Local Partnerships,
     and has  complied  with  the  disclosure  requirements  of FIN 46 in  these
     consolidated financial statements.


2.   INVESTMENTS IN PARTNERSHIPS

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

          As of December 31, 2002 and 2001, the Partnership held limited partner
     interests  in 21  and  23  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.

                                     III-18

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

<TABLE>
<CAPTION>
                                                                            December 31,
                                                                  ---------------------------------
                                                                     2002                  2001
                                                                  -----------           -----------
                 <S>                                              <C>                   <C>
                  Due to local general partners:                  $   119,544           $   119,544

                  Purchase money notes due in:
                    1999                                            5,300,000             5,300,000
                    2001                                                   --             1,275,000
                    2002                                                   --             1,331,170
                    2003                                              680,100               680,100
                    2004                                            1,760,000             1,760,000
                                                                  -----------           -----------

                        Subtotal                                    7,859,644            10,465,814
                                                                  -----------           -----------

                  Accrued interest payable                         15,339,616            23,030,108
                                                                  -----------           -----------

                        Total                                     $23,199,260           $33,495,922
                                                                  ===========           ===========
</TABLE>


          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 remaining  purchase money notes have stated interest rates ranging
     from 5.57% to 9%,  certain of which are compounded  annually.  The purchase
     money notes are non- recourse,  but their terms provide for payment in full
     upon the  earliest  of: (i) sale or  refinancing  of the  respective  Local
     Partnership's rental property; (ii) payment in full of the respective Local
     Partnership's permanent loan; or (iii) maturity.

          The purchase  money note related to Audubon  Towers,  in the principal
     amount of $1,275,000,  matured on January 1, 1999, and was extended  during
     2000  to  January  15,  2001.  Under  the  extension  agreement,  documents
     transferring   the   Partnership's   interest  in  Audubon  Towers  to  the
     noteholders were placed in escrow.  On January 16, 2002, the  Partnership's
     interest was transferred to the noteholders.

          The purchase  money note related to Congress  Plaza,  in the principal
     amount of $500,000,  matured on January 1, 1999,  and was  extended  during
     1999  to  January  1,  2002.  Under  the  extension  agreement,   documents
     transferring the Partnership's interest in Congress Plaza to the noteholder
     were placed in escrow.  In January  2002,  the  Partnership's  interest was
     transferred to the noteholder.

          The purchase  money notes related to Briar Hills and Indian Hills,  in
     the  principal  amount of $403,100 and $277,000,  respectively,  matured on
     January 1, 2002,  and were extended  during 2002 to January 2, 2003.  Under
     the extension agreement, documents transferring the Partnership's interests
     in Briar Hills and Indian Hills to the  noteholders  were placed in escrow.
     In February  2003,  the  Partnership's  interests  were  transferred to the
     noteholders.

                                     III-19

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

          The purchase  money notes  related to the  following  properties  have
     matured and have not been paid or extended as of March 27, 2003.

     Property                            Principal          Maturity
     --------                           ----------          --------
     Heritage Estates I                 $2,600,000          01/01/99 (1)
     Heritage Estates II                 1,800,000          01/01/99 (1)
     Victorian Towers                      900,000          01/01/99 (1)

     (1)  Agreement in principle to extend to January 1, 2004. See below.

          The purchase money notes related to the following properties were paid
     off at a discount,  or the collateral  that secured them was transferred to
     the noteholders, during 2001, 2002, and through March 27, 2003.

     Property           Principal         Date        Disposition
     --------          ----------     -------------   -----------
     Glen Agnes        $  850,000     December 2001   Transferred via sale
     Meadow Lanes         650,000     December 2001   Paid Off
     Audubon Towers     1,275,000     January 2002    Transferred
     Congress Plaza       500,000     January 2002    Transferred
     Briar Crest I        470,050     May 2002        Paid Off
     Briar Crest II       361,120     May 2002        Paid Off
     Briar Hills          403,100     February 2003   Transferred
     Indian Hills         277,000     February 2003   Transferred

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

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

          The Managing  General  Partner is continuing to  investigate  possible
     alternatives  to  reduce  the   Partnership's   debt   obligations.   These
     alternatives  include,  among  others,  retaining  the cash  available  for
     distribution  to meet the  purchase  money  note  requirements,  paying off
     certain purchase money notes at a discounted price, extending the due dates
     of

                                     III-20

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

     certain  purchase  money  notes,  refinancing  the  respective  properties'
     underlying  debt or  selling  the  underlying  real  estate  and  using the
     Partnership's  share of the  proceeds to pay or buy down  certain  purchase
     money note obligations.  Although the Managing General Partner has had some
     success applying these strategies in the past, the Managing General Partner
     cannot assure that these  strategies  will be successful in the future.  If
     the  Managing  General  Partner  is unable to  negotiate  an  extension  or
     discounted payoff, in the event that the purchase money notes remain unpaid
     upon  maturity,  the  noteholders  may have the right to  foreclose  on the
     Partnership's interest in the related Local Partnerships. In the event of a
     foreclosure,  the excess of the nonrecourse  indebtedness over the carrying
     amount of the  Partnership's  investment in the related  Local  Partnership
     would be deemed cancellation of indebtedness income, which would be taxable
     to Limited Partners at a federal tax rate of up to 38.6%. Additionally,  in
     the event of a foreclosure,  the  Partnership  would lose its investment in
     the Local  Partnership  and,  likewise,  its share of any future  cash flow
     distributed by the Local Partnership from rental operations,  mortgage debt
     refinancings,  or the sale of the real estate. Of the 21 Local Partnerships
     in which the  Partnership  is invested as of December 31,  2002,  the three
     Local  Partnerships  with  associated  purchase  money notes  which  mature
     through  December 31, 2003,  and which remain  unpaid or  unextended  as of
     March 27, 2003,  represented the following percentages of the Partnership's
     total  distributions  received from Local  Partnerships and share of income
     from Local Partnerships for the immediately preceding two calendar years.

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

     December 31, 2002                20%                   $230,682
     December 31, 2001                13%                   $122,587

          The  Managing  General  Partner  continues to address the maturity and
     impending  maturity of its debt obligations 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,  2002 and 2001 was  $1,076,193  and  $1,671,904,
     respectively.  The accrued  interest payable on the purchase money notes of
     $15,305,640 and $22,996,132 as of December 31, 2002 and 2001, 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.

                                 Audubon Towers
                                 --------------

          The  Partnership  defaulted  on its  purchase  money  note  related to
     Audubon Towers Limited Partnership (Audubon Towers) on January 1, 1999 when
     the note matured and was not paid.  The default amount  included  principal
     and accrued interest of $1,275,000 and $3,272,276,  respectively. In August
     1999, the  Partnership  and the  noteholders  agreed to extend the maturity
     date of the purchase  money note to June 30, 2000,  in exchange for payment
     of a fee not applicable to the note balance.  In June 2000, the Partnership
     made a payment,  applicable to the purchase  money note balance,  extending
     the maturity  date to January 15, 2001.  The maturity  date could have been
     further  extended  through  January  2,  2003,  had  the  Partnership  paid
     additional sums prior to January 15, 2001, but the

                                     III-21

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

     Partnership  chose not to make the large extension payment as it saw little
     chance to sell the  property  and  recoup  its  investment  in the two year
     period.   Under  the  extension  agreement,   documents   transferring  the
     Partnership's  interest in Audubon Towers to the noteholders were placed in
     escrow to be released to the  noteholders  upon the earlier of (i) a future
     default by the  Partnership on the purchase money note, or (ii) the failure
     to pay the  balance  of the  purchase  money  note at final  maturity.  The
     noteholders requested and received the assignment on January 16, 2002.

          Due to the  anticipated  difficulty  in dealing with the local general
     partner,   the  Partnership  offered  the  noteholders  an  alternative  to
     accepting  the  assignment  of the  Partnership's  interest in its entirety
     during the first  quarter of 2002.  The  alternative  would be to  transfer
     one-half of the  Partnership's  interest in Audubon  Towers in exchange for
     one-half  of the  then  outstanding  balance  of the  purchase  money  note
     principal  and  accrued  interest  effective  January  16,  2002,  with the
     remaining  one-half of the  Partnership's  interest in Audubon Towers to be
     transferred  on  January  16,  2003.  The  Partnership  believed  that  the
     alternative  might assist the  noteholders  in obtaining  the  unaffiliated
     general partner's consent to admit them to the Local Partnership,  since it
     would avoid a tax  termination of the Local  Partnership.  The  noteholders
     indicated  interest in restructuring the assignment in this manner, but did
     not make a final  decision  pending  further  negotiations  with the  local
     general partner.  Therefore, the Partnership's financial statements for the
     first and second  quarters  of 2002  reflected  a 50%  transfer  in Audubon
     Towers effective January 16, 2002.  However,  in July 2002, the noteholders
     advised the  Partnership  that they had determined that  restructuring  the
     assignment  would not help with their  admission to the Local  Partnership.
     Accordingly,  the Partnership's  consolidated  financial statements reflect
     the transfer of the remaining 50% of its interest in Audubon  Towers,  with
     an effective  date of January 16, 2002, in the third  quarter of 2002.  The
     transfer of the Partnership's interest in Audubon Towers to the noteholders
     resulted  in gain from  extinguishment  of debt of $136,018  for  financial
     statement  purposes in 2002,  and in a total gain of $4,778,423 for federal
     tax purposes in 2002.

           Briar Crest I, Briar Crest II, Briar Hills and Indian Hills
           -----------------------------------------------------------

          The  Partnership  defaulted  on its purchase  money notes  relating to
     Briar Crest  Apartments I (Briar Crest I), Briar Crest Apartments II (Briar
     Crest II), Briar Hills Townhouses (Briar Hills) and Indian Hills Townhouses
     (Indian  Hills) on  January 1, 2002,  when the notes  matured  and were not
     paid.  The default  amounts  included  principal  and  accrued  interest of
     $470,050 and  $1,120,218,  respectively,  for Briar Crest I,  principal and
     accrued  interest of $361,120 and $869,742,  respectively,  for Briar Crest
     II,   principal   and  accrued   interest  of  $403,100   and   $1,013,666,
     respectively,  for Briar  Hills,  and  principal  and  accrued  interest of
     $277,000 and $699,542, respectively, for Indian Hills.

          On May 13, 2002, the Partnership  paid off the Briar Crest I and Briar
     Crest II notes at a discount.  The discounted payoffs resulted in gain from
     extinguishment of debt of $169,353 and $133,097 for Briar Crest I and Briar
     Crest II,  respectively,  for financial  statement purposes in 2002, and in
     cancellation  of  indebtedness  income of $169,353  and  $133,097 for Briar
     Crest I and Briar Crest II, respectively, for federal tax purposes in 2002.

                                     III-22

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

          Due to the possible  transfer of the  Partnership's  interest in Briar
     Hills and Indian Hills to the noteholders,  the Partnership's  basis in the
     Local  Partnerships,  along  with  net  unamortized  acquisition  fees  and
     property purchase costs, which totaled $661,294 and $989,351, respectively,
     as of December 31, 2001,  were  reclassified  to investment in partnerships
     held  for  transfer  in the  accompanying  consolidated  balance  sheet  at
     December 31, 2001. At the time of such reclassification, an impairment loss
     of $660,826,  relating to the Partnership's investment in Indian Hills, was
     recognized.  In late March and early April 2002, the noteholders  agreed to
     extend the  maturity  date of the Briar Hills and Indian  Hills notes until
     January 2, 2003.  At that time,  the  Partnership  put  assignments  of its
     interests  in Briar  Hills and  Indian  Hills in escrow.  Accordingly,  the
     Partnership's  basis  in Briar  Hills  and  Indian  Hills,  along  with net
     unamortized  acquisition fees and property  purchases costs,  which totaled
     $744,234  and  $1,011,028  as  of  December  31,  2002,  respectively,  was
     reclassified  to  investment  in   partnerships   held  in  escrow  in  the
     accompanying  consolidated  balance sheet at December 31, 2002. On February
     24, 2003, the Partnership's  interests in Briar Hills and Indian Hills were
     transferred to the noteholders.  The transfer of the Partnership's interest
     to the  noteholders  will  result  in gain from  extinguishment  of debt of
     approximately  $700,000  and  $5,000  for  Briar  Hills and  Indian  Hills,
     respectively, for financial statement purposes in 2003, and in cancellation
     of indebtedness income of approximately $1,500,000 and $1,200,000 for Briar
     Hills and Indian Hills, respectively, for federal tax purposes in 2003.

                                 Congress Plaza
                                 --------------

          The  Partnership  defaulted  on its  purchase  money  note  related to
     Kapetan Associates Limited Partnership  (Congress Plaza) on January 1, 1999
     when the  note  matured  and was not  paid.  The  default  amount  included
     principal and accrued interest of $775,000 and $2,162,200, respectively. On
     May 19,  1999,  the  Partnership  and the  noteholder  agreed to extend the
     maturity  date of the purchase  money note to January 1, 2002,  in exchange
     for a partial principal payment.  Under the extension agreement,  documents
     transferring the Partnership's interest in Congress Plaza to the noteholder
     were placed in escrow to be released to the noteholder  upon the earlier of
     (i) a future default by the Partnership on the purchase money note, or (ii)
     the  failure  to pay the  balance of the  purchase  money note on or before
     January  1,  2002.  Accordingly,  the  Partnership's  basis  in  the  Local
     Partnership,  along  with net  unamortized  acquisition  fees and  property
     purchase  costs,  which  totaled  $1,643,072  as of December 31, 2001,  was
     reclassified  to  investments  in  partnerships   held  in  escrow  in  the
     accompanying  consolidated  balance  sheet at December 31, 2001. In January
     2002, the  Partnership's  interest in Congress Plaza was transferred to the
     noteholder. The transfer of the Partnership's interest in Congress Plaza to
     the noteholder  resulted in gain from  extinguishment of debt of $1,267,929
     for financial statement purposes in 2002, and in a total gain of $2,345,627
     for federal tax purposes in 2002.

                                   Glen Agnes
                                   ----------

          The  Partnership  defaulted on its purchase money note related to Glen
     Agnes  Associates  (Glen Agnes) on September 30, 1999 when the note matured
     and was not  paid.  The  default  amount  included  principal  and  accrued
     interest of $850,000 and $1,597,852, respectively.

          In November 1999,  the noteholder  filed an action to foreclose on the
     Partnership's interest in the Local Partnership. Counsel for the noteholder
     failed to respond to the Partnership's  queries, but took no further action
     in the litigation. On December 11, 2001,

                                     III-23

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

     an affiliate of the noteholder purchased the Partnership's  interest in the
     Local  Partnership  for a  combination  of cash and the  assumption  of the
     purchase  money  note,  resulting  in gain from  extinguishment  of debt of
     $1,467,421 for financial statement purposes in 2001, and in total income of
     $5,489,130 for federal tax purposes in 2001.

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

          The  Partnership  defaulted  on the  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
     March  27,  2003,   principal  and  accrued   interest  of  $2,600,000  and
     $5,533,024,  respectively,  for  Heritage  Estates  I, and  $1,800,000  and
     $3,466,511,  respectively,  for Heritage  Estates II were due. The Managing
     General Partner and the purchase money  noteholders  agreed in principle to
     extend the maturity  dates of the purchase  money notes related to Heritage
     Estates I and Heritage  Estates II to January 1, 2004, and the  noteholders
     are currently reviewing documents to implement the extensions.  There is no
     assurance that extensions of the maturity dates will be finalized.

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

          The  Partnership  and the holders of the purchase  money notes (in the
     original principal amount of $1,760,000) related to Highland Manor, Limited
     (Highland  Manor) have  extended the maturity  date thereof from January 1,
     1999 to January 1, 2004,  subject to the  noteholders'  right to accelerate
     the  maturity  date  upon  nine  months'  notice.  In  connection  with the
     extension,  in  addition  to  the  payments  required  to be  made  to  the
     noteholders by the Partnership from cash flow  distributions  from Highland
     Manor, the Partnership agreed to make annual payments to the noteholders on
     January 15th of each calendar year commencing  January 15, 2000. On October
     23, 1998,  the  Partnership  made a payment of interest,  which was held in
     escrow,  along with the purchase money note modification  documents,  until
     January  1999,  at which time the funds were  released to the  noteholders.
     This payment has been,  and  subsequent  payments will be, applied first to
     payment of accrued interest, and thereafter to principal.  In January 2000,
     2001, 2002 and 2003 the Partnership made the annual payment as agreed under
     the extension documents.

                                 Meadow Lanes II
                                 ---------------

          The Partnership defaulted on its purchase money note related to Meadow
     Lanes II Limited Dividend Housing  Associates (Meadow Lanes II) on February
     28,  1999  when the note  matured  and was not  paid.  The  default  amount
     included  principal  and  accrued  interest  of  $650,000  and  $1,250,201,
     respectively. On December 13, 2001, the Partnership purchased the interests
     of all except one of the holders of the note, aggregating approximately 97%
     in  interest  of the note.  It  deposited  a  proportionate  amount for the
     remaining  2.9% of the note in escrow,  with an  agreement  that one of the
     former  noteholders  indemnify the  Partnership for any amount in excess of
     the escrowed funds if the  outstanding  noteholder  claims a greater amount
     for the sale of her interest.  Accordingly,  the Partnership deems the note
     to have been purchased and cancelled.

                                     III-24

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

          The note  purchase  resulted  in gain from  extinguishment  of debt of
     $651,240 for financial  statement  purposes in 2001, and in cancellation of
     indebtedness income of $651,240 for federal tax purposes in 2001.

                                 Tyee Apartments
                                 ---------------

          The Partnership  defaulted on its purchase money notes related to Tyee
     Associates (Tyee Apartments) on February 1, 1999 when the notes matured and
     were not paid. The default amount included aggregate  principal and accrued
     interest of $1,305,000 and $3,312,902,  respectively.  On October 13, 2000,
     Tyee  Apartments  was sold. A portion of the sale  proceeds was used to pay
     off, at a  discount,  the  Partnership's  purchase  money note  obligations
     related to this  property.  The sale  resulted  in gain on  disposition  of
     investments in  partnerships of $1,827,662 and in  extraordinary  gain from
     extinguishment  of debt of $3,486,305 for financial  statement  purposes in
     2000,  and in total income of $5,629,456  for federal tax purposes in 2000.
     The Managing  General  Partner of the  Partnership  received a fee equal to
     1.16% of the sale price, or $48,911, relating to the sale.

          On May 23, 2001, the Partnership  received additional proceeds related
     to the  sale.  This  resulted  in gain on  disposition  of  investments  in
     partnerships of $143,912 for financial  statement  purposes in 2001, and in
     total income of $143,912 for federal tax purposes in 2001.

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

          The  Partnership  defaulted  on its  purchase  money  note  related to
     Victorian Towers Associates  (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. As of March 27,
     2003,  principal and accrued  interest of $900,000 and $2,238,441 were due.
     The Managing  General  Partner  reached an agreement in principle  with the
     noteholder  to extend the maturity  date of the  purchase  money note until
     January 1, 2004, and is awaiting execution of the related documents.  There
     is no assurance that an extension of the maturity date will be finalized.

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

          The Partnership has a 97.01% to 98.99% interest in profits, losses and
     cash  distributions  (as  restricted  by various  federal and state housing
     agencies)  (collectively,  the  Agencies)  of each  Local  Partnership.  An
     affiliate  of the Managing  General  Partner of the  Partnership  is also a
     general  partner  of each Local  Partnership  or the  intermediary  limited
     partnership which invested in the Local  Partnership.  As stipulated by the
     Local  Partnership's  partnership  agreements,  the Local  Partnerships are
     required to make annual cash  distributions from surplus cash flow, if any.
     During 2002 and 2001, the Partnership  received cash distributions from the
     rental  operations of the Local  Partnerships  of $853,443 and  $1,305,576,
     respectively. As of December 31, 2002 and 2001, 14 and 19, respectively, of
     the Local  Partnerships  had  aggregate  surplus  cash, as defined by their
     respective  regulatory Agencies, in the amounts of $714,694 and $1,304,999,
     respectively,  which may be available for  distribution  in accordance with
     their respective regulatory Agencies' regulations.

                                     III-25

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

          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.

     c.   Property matters
          ----------------

                                   Glen Agnes
                                   ----------

          On December 11, 2001, the partnership sold its interest in Glen Agnes.
     See Note 2.a. hereof for further information concerning this sale.

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

          The Partnership's  affiliate,  C.R.H.C.,  Incorporated (CRHC), removed
     one of the Local  Managing  General  Partners  (LMGP) of Villa Mirage I and
     Villa Mirage II in December  1999,  due to its failure to address  problems
     identified  in the 1998 audited  financial  statements  of those lower tier
     partnerships,  including overpayments to itself and its affiliated property
     management  company.  The  removed  LMGP and its  shareholder  and  another
     unrelated local general partner filed lawsuits  against the Partnership and
     CRHC with  respect  to both  Villa  Mirage I and II  seeking,  among  other
     things,  an accounting and dissolution of the  partnerships and damages for
     alleged breaches of the respective  partnership  agreements (for refusal to
     approve proposed sales of the properties).  The lawsuits did not purport to
     enjoin  or  reverse  the  removals  of the  LMGP.  Subsequently,  the  same
     plaintiffs  filed  injunction  actions  seeking  to compel the sales of the
     properties  owned by Villa Mirage I and II. Both lawsuits were stayed while
     the disputes  were to be resolved by  arbitration  in  accordance  with the
     respective  Local  Partnership  agreements.  In August 2000, the plaintiffs
     dismissed their litigation and arbitration  claims without  prejudice,  but
     CRHC  and  the  Partnership   maintained  their  arbitration   claims.  The
     arbitration hearing was held in January 2001. In April 2001, an arbitration
     award in favor of Villa  Mirage I, Villa  Mirage II and  another  unrelated
     partnership  found that the  removals of the LMGP (and the other  unrelated
     local general partner) were proper and ordered the former to pay $59,678 to
     Villa Mirage I, $9,522 to Villa Mirage II, and both LMGPs to reimburse  the
     local  partnerships for certain  arbitration fees and costs.  Liens for the
     collection  of these  awards  were  filed in  California.  One of the Local
     Managing General Partners  subsequently paid his judgment in exchange for a
     lien release.

                                     III-26

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

     d.   Summarized financial information
          --------------------------------

          Combined balance sheets and combined  statements of operations for the
     21 and 23 Local  Partnerships  in which the  Partnership  is invested as of
     December 31, 2002 and 2001, respectively, follow. The combined statement of
     operations for the year ended December 31, 2002,  includes  information for
     two  Local  Partnerships  through  the  dates  of  transfer.  The  combined
     statement of  operations  for the year ended  December  31, 2001,  includes
     information for one Local Partnership through the date of sale.

<TABLE>
<CAPTION>


                                              COMBINED BALANCE SHEETS

                                                                                       December 31,
                                                                             ---------------------------------
                                                                                 2002                  2001
                                                                             -----------           -----------
          <S>                                                                <C>                   <C>
          Rental property, at cost, net of accumulated depreciation
            of $59,115,709 and $61,279,227, respectively                     $ 39,540,516          $46,773,992
          Land and land improvements                                            9,313,014            9,570,034
          Other assets                                                         11,644,909           16,589,611
                                                                             ------------          -----------

                Total assets                                                 $ 60,498,439          $72,933,637
                                                                             ============          ===========


          Mortgage notes payable                                             $ 65,456,366          $72,339,922
          Other liabilities                                                     6,924,611            7,445.124
                                                                             ------------          -----------

                Total liabilities                                              72,380,977           79,785,046

          Partners' deficit                                                   (11,882,538)          (6,851,409)
                                                                             ------------          -----------

                Total liabilities and partners' deficit                      $ 60,498,439          $72,933,637
                                                                             ============          ===========

</TABLE>

                        COMBINED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                   For the years ended
                                                                                       December 31,
                                                                             ---------------------------------
                                                                                 2002                 2001
                                                                             -----------           -----------
          <S>                                                                <C>                   <C>
          Revenue:
            Rental                                                           $20,170,032           $23,248,528
            Interest                                                             197,505               524,605
            Other                                                                739,380               959,209
                                                                             -----------           -----------

                Total revenue                                                 21,106,917            24,732,342
                                                                             -----------           -----------

          Expenses:
            Operating                                                         12,433,321            13,983,633
            Interest                                                           4,598,234             5,317,016
            Depreciation                                                       3,470,833             3,918,728
            Amortization                                                          62,877                64,227
                                                                             -----------           -----------

                 Total expenses                                               20,565,265            23,283,604
                                                                             -----------           -----------

          Net income                                                         $   541,652           $ 1,448,738
                                                                             ===========           ===========
</TABLE>

     e.   Reconciliation of the Local Partnerships' financial
          ---------------------------------------------------
            statement net 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

                                     III-27

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

     amortized  over the period of benefit;  and (iii) a shorter life is used to
     compute  depreciation  on the  property as  permitted  by Internal  Revenue
     Service (IRS)  Regulations.  These returns are subject to examination  and,
     therefore, possible adjustment by the IRS.

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

<TABLE>
<CAPTION>
                                                                                  For the years ended
                                                                                      December 31,
                                                                             --------------------------------
                                                                                2002                  2001
                                                                             ----------            ----------
          <S>                                                                <C>                   <C>
          Financial statement net income                                     $  541,652            $1,448,738

          Adjustments:
            Difference in tax depreciation using accelerated methods,
              net of depreciation on construction period expenses
              capitalized for financial statement purposes                    2,586,317             2,899,000

            Amortization for financial statement purposes
              not deducted for income tax purposes                               20,709                22,059

            Miscellaneous, net                                                  125,975                28,712
                                                                             ----------            ----------

          Taxable income                                                     $3,274,653            $4,398,509
                                                                             ==========            ==========
</TABLE>


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,  2002 and 2001,  the  Partnership  paid  $224,747  and
     $177,885,   respectively,   to  the  Managing  General  Partner  as  direct
     reimbursement  of  expenses  incurred  on behalf of the  Partnership.  Such
     expenses  are  included  in the  accompanying  consolidated  statements  of
     operations as general and administrative expenses.

          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.

                                     III-28

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3.   RELATED PARTY TRANSACTIONS - Continued

For each of the years ended December 31, 2002 and 2001, the Partnership paid the
Managing General Partner a Management Fee of $300,000.

     The Managing General Partner and/or its affiliates may receive a fee of not
more than two percent of the sales price of an investment in a Local Partnership
or the property it owns,  payable under certain  conditions  upon the sale of an
investment in a Local  Partnership  or the property it owns.  The payment of the
fee is subject to certain  restrictions,  including the achievement of a certain
level of sales  proceeds and making  certain  minimum  distributions  to limited
partners.  No  such  fee was  earned  by the  Managing  General  Partner  or its
affiliates for the years ended December 31, 2002 and 2001.


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-29

<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,

   (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
sales price of the apartment properties.

     The Managing General Partner and/or its affiliates may receive a fee of not
more than two percent of the sales price of an investment in a Local Partnership
or the  property  it owns.  The fee would  only be  payable  upon the sale of an
investment in a Local  Partnership  or the property it owns and would be subject
to certain  restrictions,  including the achievement of a certain level of sales
proceeds and making certain minimum  distributions to limited partners.  No such
fee was earned by the Managing  General  Partner or its affiliates for the years
ended December 31, 2002 and 2001.

     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,  one percent 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 November 16, 2001, the Partnership made a cash  distribution of $598,820 ($10
per  Unit) to  Additional  Limited  Partners  who were  holders  of record as of
October 1, 2001. The  distribution  was a result of cash  resources  accumulated
from  operations and  distributions  from Local  Partnerships.  On September 11,
2002,  the  Partnership  made a cash  distribution  of  $37,054  to the  General
Partners and Initial and Special Limited Partners. The distribution was a result
of cash  resources  accumulated  from  operations and  distributions  from Local
Partnerships. A review of the Partnership Agreement indicated that these amounts
should have been  distributed  in prior years when  distributions  had been made
only to Additional Limited Partners. On December 2, 2002, the Partnership made a
cash  distribution  of $111,340 to the General  Partners and Initial and Special
Limited  Partners.  The distribution was a result of cash resources  accumulated
from operations and distributions from Local Partnerships.  On December 6, 2002,
the  Partnership  made a cash  distribution  of  $3,592,920  ($60  per  unit) to
Additional  Limited  Partners who were holders of record as of November 1, 2002.
The distribution was a result of cash resources  accumulated from operations and
distributions from Local Partnerships.

     As defined in the Partnership Agreement, after the payment of distributions
as described in the previous paragraph,  after the establishment of any reserves
deemed  necessary  by the  Managing  General  Partner  and after  payment of the
Management Fee, the Partnership had no remaining cash available for distribution
for the years ended  December 31, 2002 and 2001.  The Managing  General  Partner
intends to retain all of the Partnership's  remaining undistributed cash for the
possible  repayment,  prepayment or retirement of the Partnership's  outstanding
purchase  money  notes  and  related  accrued  interest  related  to  the  Local
Partnerships, and for future working capital needs.


                                     III-30

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

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

<TABLE>
<CAPTION>
                                                                                   For the years ended
                                                                                       December 31,
                                                                             --------------------------------
                                                                                2002                  2001
                                                                             ----------            ----------
<S>                                                                          <C>                   <C>
Financial statement net income                                               $1,247,368            $1,955,115

Adjustments:
  Differences between financial statement net income
   and taxable income related to the Partnership's equity
   in the Local Partnerships' income or losses                                7,661,052             6,747,212

  Costs amortized over a shorter period for income tax purposes                  41,326                46,848
                                                                             ----------            ----------

Taxable income                                                               $8,949,746            $8,749,175
                                                                             ==========            ==========

</TABLE>

                                      # # #


                                     III-31

<PAGE>
                                EXHIBIT No. 99 b.

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



                                     III-32