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

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



                                   FORM 10-KSB


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

                   For the fiscal year ended December 31, 2001


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



                         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 pursuant to Section 12(g) of
                                    the 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 $2,585,308.

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

                        2001 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-8


                                     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

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

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

Exhibit No. 99 b.
  Reports of Other Auditors.............................................. III-30


<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, 2001,
the Partnership  retained  investments in 23 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 (23 as of December 31, 2001) 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,  2001) 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 19 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, 2001, 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     12/31/01 (2)         and/or Subsidized Under          Rental Units    Under Sec. 8      HAP Contract
--------------------     ------------     -------------------------------      ------------   --------------     ------------
<S>                      <C>              <C>                                  <C>            <C>                <C>
Arboretum Village        $12,543,663      Conventional                            308              0                  --
 Lisle, IL

Audubon Towers             3,254,704      New Jersey Housing and Mortgage         124            124               02/11/20
 Audubon, NJ                               Finance Agency (NJHMFA)/8-HUD

Bartley Manor                681,682      Federal Housing Administration           70             69               05/31/02 (4)
 Superior, WI                              (FHA)/Section 236 of the National
                                           Housing Act (NHA)

Briar Crest I (4)            478,374      Federal National Mortgage                53             53               09/30/02 (4)(6)
 Niles, MI                                 Association (FNMA)/Section 236
                                           of the NHA

Briar Crest II (4)           530,822      FNMA/Section 236 of the NHA              49             49               09/30/02 (4)(6)
 Niles, MI

Briar Hills                  505,892      FNMA/Section 236 of the NHA              50             33               12/31/03 (4)
 South Haven, MI

Congress Plaza             2,144,778      Connecticut Housing Finance             101            100               02/28/04
 Bridgeport, CT                            Agency/FHA Section 231/U.S.
                                           Department of Housing and Urban
                                           Development (HUD)

Heritage Estates I         2,494,677      Missouri Housing Development            228              0                  --
 St. Louis, MO                             Agency (MHDA)/Section 221(d)
                                           (4) of the NHA

Heritage Estates II        2,027,774      MHDA/Section 221 (d)(4) of the          160              0                  --
 St. Louis, MO                             NHA

Highland Manor             1,292,033      HUD                                     111            111               05/12/04 (4)(5)
 Birmingham, AL

Indian Hills                 457,777      FNMA/Section 236 of the NHA/             40             24               12/31/03 (4)
 Townhouses                                Section 8
 Dowagiac, MI

Lakewood Apts.               806,393      Rural Housing & Community                50             50               07/31/04 (4)
 Eufaula, AL                               Development Services (RHCD)

Meadow Lanes Apts.         1,539,391      Michigan State Housing Develop-         118              0                     --
 Holland, MI                               ment Authority/Section 236 of
                                           the NHA

Monterey/Hillcrest        13,053,376      Section 221(d)(4) of the NHA/FHA        300             60               12/13/03
 Waukesha, WI

Victorian Towers           4,895,234      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     12/31/01 (2)         and/or Subsidized Under          Rental Units    Under Sec. 8      HAP Contract
--------------------     ------------     -------------------------------      ------------   --------------     ------------
<S>                      <C>              <C>                                  <C>            <C>                <C>
Villa Mirage I           $ 2,001,311      CHFA/Section 8                           50             50               12/01/05
 Rancho Mirage, CA

Villa Mirage II            1,988,763      CHFA/Section 8                           48             48               10/15/15
 Rancho Mirage, CA

Village Green                302,172      FHA/Section 236 of FHA                   36             36               04/30/02 (4)
 Reedsburg, WI

Village Square               407,632      FHA/Section 236 of FHA                   48             48               04/30/02 (4)
 Barabou, WI

Village Squire I & II      8,599,216      Conventional                            377              0                  --
 Canton, MI

Village Squire III         5,548,123      Conventional                            224              0                  --
 Canton, MI

Walsh Park                 4,500,002      Illinois Housing Development            134            134               11/01/14
 Chicago, IL                               Administration

Windham Village            2,286,133      CHFA                                     50             44               10/31/15
 Santa Rose, CA
                         -----------                                           ------         ------
Totals 23                $72,339,922                                            2,933          1,060
                         ===========                                           ======         ======

</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          2001   2000    1999    1998   1997       2001         2000        1999        1998       1997
--------------------          ----   ----    ----    ----   ----      -------     --------    --------    --------   --------
<S>                           <C>    <C>     <C>     <C>    <C>       <C>         <C>         <C>         <C>        <C>
Arboretum Village               88%   92%     93%     95%    94%      $ 9,883     $ 9,689     $  9,338    $  9,238   $  8,724
 Lisle, IL

Audubon Towers                  99%  100%    100%    100%   100%        9,119       9,159        9,158       9,161      9,166
 Audubon, NJ

Bartley Manor                   96%  100%     93%     93%    93%        6,050       5,661        5,656       5,356      5,313
 Superior, WI

Briar Crest I                  100%  100%     96%     97%   100%        6,722       6,504        5,333       4,784      5,012
 Niles, MI

Briar Crest II                 100%  100%     94%     96%   100%        6,684       6,682        5,327       4,814      4,986
 Niles, MI

Briar Hills                    100%   92%     92%     94%    96%        6,007       6,055        4,465       4,461      4,430
 South Haven, MI

Congress Plaza                 100%  100%    100%    100%   100%       10,536      10,527       10,534      10,535     10,511
 Bridgeport, CT

Heritage Estates I             100%  100%    100%     99%   100%        5,264       5,202        5,176       4,940      4,776
 St. Louis, MO

Heritage Estates II            100%  100%    100%    100%   100%        5,314       5,185        5,193       4,968      4,764
 St. Louis, MO

Highland Manor                 100%  100%    100%     98%    97%        6,805       6,616        6,515       7,584      9,188
 Birmingham, AL

Indian Hills                   100%   95%    100%    100%   100%        5,864       5,817        5,272       5,070      5,002
 Townhouses
 Dowagiac, MI

Lakewood Apts.                 100%  100%    100%     98%    98%        4,509       4,525        4,305       4,269      4,363
 Eufaula, AL

Meadow Lanes Apts.              92%   95%     97%     98%    93%        6,361       6,318        6,216       6,174      6,056
 Holland, MI

Monterey/Hillcrest              99%   93%     96%     92%    94%        8,954       8,629        8,559       8,992      8,745
 Waukesha, WI

Victorian Towers                96%   94%     96%     99%    97%        6,533       5,199        5,196       4,989      4,902
 Cape May, NJ

Villa Mirage I                  99%  100%    100%    100%   100%        9,599       9,685        9,522       9,699      9,671
 Rancho Mirage, CA

Villa Mirage II                 99%  100%    100%    100%   100%        9,612       9,537        9,580       9,580      9,600
 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          2001   2000    1999    1998   1997        2001        2000        1999        1998       1997
--------------------          ----   ----    ----    ----   ----      --------    --------    --------    --------   --------
<S>                           <C>    <C>     <C>     <C>    <C>       <C>         <C>         <C>         <C>        <C>
Village Green                 100%   100%     92%     97%    89%      $  4,497    $  4,120    $  3,849    $  3,886   $  3,764
 Reedsburg, WI

Village Square                 92%    92%     83%     94%    98%         4,633       4,232       4,362       4,243      4,275
 Barabou, WI

Village Squire I               96%    97%     97%     90%    92%         6,785       6,550       6,152       5,902      5,858
 & II
 Canton, MI

Village Squire III             90%    98%     97%     93%    96%         6,670       6,511       6,199       5,820      5,779
 Canton, MI

Walsh Park                    100%    99%     96%     99%    98%        11,956      11,514       8,940      11,653     11,301
 Chicago, IL

Windham Village               100%   100%    100%    100%   100%        10,857      10,632      10,572      10,474     10,438
 Santa Rose, CA
                              ---    ---     ---     ---    ---       --------    --------    --------    --------   --------
Totals(3) 23                   98%    98%     97%     97%    97%      $  7,357    $  7,154    $  6,757    $  6,808   $  6,810
                              ===    ===     ===     ===    ===       ========    ========    ========    ========   ========
</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, 2001.

(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 contract  expiration  date  reflects an  extension  from the
     original expiration date, in accordance with Federal legislation.

(5)  This property entered the Mark-to-Market program in May 1998. The Section 8
     HAP contract will be renewed annually.

(6)  Property has applied for Mark-up-to-Market.


     In  January  2000,  the   Partnership's   interest  in  Greeley  Manor  was
transferred to the purchase money noteholder.  See the notes to the consolidated
financial statements for additional information concerning the transfer.

     In April 2000, the Partnership transferred its interests in College Park to
the purchase  money  noteholders.  See the notes to the  consolidated  financial
statements for additional information concerning the transfer.

     In May  2000,  Rolling  Green at  Milford  was  sold.  See the notes to the
consolidated  financial  statements  for additional  information  concerning the
sale.

                                       I-6

<PAGE>
                                     PART I

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

     In June 2000, the purchase  money  noteholder  purchased the  Partnership's
interests in Winchester  Gardens.  See the notes to the  consolidated  financial
statements for additional information concerning the purchase.

     In  August  2000,  O'Farrell  was sold.  See the notes to the  consolidated
financial statements for additional information concerning the sale.

     In  October  2000,   Tyee  Apartments  was  sold.  See  the  notes  to  the
consolidated  financial  statements  for additional  information  concerning the
sale.

     In  October  2000,  Woodside  Village  was  sold.  See  the  notes  to  the
consolidated  financial  statements  for additional  information  concerning the
sale.

     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 noteholder.  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 removals
of the LGPs was proper and issued money  judgements  against both LGPs.  See the
notes  to the  consolidated  financial  statements  for  additional  information
concerning this matter.

                                       I-7

<PAGE>
                                     PART I


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

     In February,  2001, the  Partnership  and two  affiliates  were served in a
state court action for  declaratory  judgement 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 have been advised by plaintiff's
counsel  that they will be  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 2001

                                       I-8

<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.

          On  April  2,  2000,  Peachtree  Partners  (Peachtree)   initiated  an
          unregistered  tender  offer  to  purchase  approximately  2,900 of the
          outstanding  Units in the  Partnership at a price of $40 per Unit; the
          offer expired in May 2000. On January 1, 2002,  Peachtree initiated an
          unregistered  tender offer to purchase 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 prices offered were
          determined   solely  at  the   discretion  of  Peachtree  and  do  not
          necessarily represent the fair market value of each Unit.

          On  December  5,  2000,   Equity  Resources   Lexington  Fund  Limited
          Partnership  (Lexington)  initiated  an  unregistered  tender offer to
          purchase   approximately   1,470  of  the  outstanding  Units  in  the
          Partnership at a price of $40 per Unit;  the offer expired  January 3,
          2001.  Lexington is unaffiliated  with the Partnership or the Managing
          General  Partner.  The  price  offered  was  determined  solely at the
          discretion  of Lexington and does not  necessarily  represent the fair
          market value of each Unit.

          On  March  15,  2001,  Bond  Purchase,   L.L.C.  (Bond)  initiated  an
          unregistered  tender  offer  to  purchase  approximately  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  approximately  1,411 of the
          outstanding  Units in the Partnership at a price of $131 per Unit; the
          offer expired on 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.

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

          On May 11,  2001,  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.  The price
          offered was determined  solely at the discretion of Lexington and does
          not necessarily represent the fair market value of each Unit.

          In  response to the  Lexington  tender  offer,  on May 24,  2001,  the
          Managing  General Partner filed a Schedule 14D-9. In that filing,  the
          Managing General Partner  recommended that Limited Partners reject the
          Lexington offer because it viewed the offer price as inadequate.

                                      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 26, 2002 there were approximately 4,500 registered holders
          of Units in the Partnership.

     (c)  On November  6, 2000,  the  Partnership  made a cash  distribution  of
          $2,994,350  ($50.00 per Unit) to Additional  Limited Partners who were
          holders of record as of September 30, 2000;  this  distribution  was a
          result of the sales of O'Farrell Towers,  Tyee Apartments and Woodside
          Village.   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;  this  distribution
          was a  result  of  cash  resources  accumulated  from  operations  and
          distributions from Local Partnerships.

          The Partnership  received  distributions  of $1,305,576 and $1,844,791
          from Local Partnerships  during 2001 and 2000,  respectively.  Some of
          the Local Partnerships  operate under restrictions  imposed by certain
          federal  and/or state  government  agencies that limit the cash return
          available to the Partnership.

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

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

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

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

     The Managing General Partner has sold, and will continued 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.  The Managing General Partner intends
to  use  all  or  part  of the  Partnership's  net  proceeds  (after  a  partial
distribution to limited  partners) from the sales of properties to fund reserves
for paying at maturity, prepaying or purchasing prior to maturity, at a discount
where possible, currently outstanding purchase money notes. The Managing General
Partner believes that this represents an opportunity to reduce the Partnership's
long-term obligations.

     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

                                      II-3

<PAGE>
                                     PART II


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

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.

     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
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 2001.

                                      II-4

<PAGE>
                                     PART II


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

     Five  properties  in which the  Partnership  is invested as of December 31,
2001, have Section 8 HAP contracts which, as extended,  will expire in 2002. The
Section  8 HAP  contracts  cover  all or most  of the  apartment  units  in each
property.  The  following  chart  presents  information  concerning  these  five
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         05/31/02
         Briar Crest I                     53                 53                06/30/98         09/30/02
         Briar Crest II                    49                 49                06/30/98         09/30/02
         Village Green                     36                 36                09/30/98         04/30/02
         Village Square                    48                 48                09/30/98         04/30/02
                                        -----              -----
              Total                       256                255
                                        =====              =====
</TABLE>

     As  of  December  31,  2001,  the  carrying  amount  of  the  Partnership's
investments in Local  Partnerships with Section 8 HAP contracts expiring in 2002
was $2,576,582.

     The Managing  General  Partner  continues to seek  strategies  to deal with
affordable  housing policy.  Where  opportunities  exist,  the Managing  General
Partner will continue to work with the Local  Partnerships to develop strategies
that make economic sense.

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

     As of December 31, 2001 the Partnership had  approximately  4,600 investors
who subscribed to a total of 60,000 units of limited partnership interest in the
original amount of $60,000,000.  The Partnership  originally made investments in
37  Local   Partnerships,   of  which  23  remain  at  December  31,  2001.  The
Partnership's  liquidity,  with unrestricted cash resources of $11,317,373 as of
December 31, 2001, 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 26, 2002,  there are no material
commitments for capital expenditures.

     During  2001 and 2000,  the  Partnership  received  cash  distributions  of
$1,305,576 and $1,844,791, 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 $10,346,270,  plus aggregate  accrued interest of $22,996,132,  as of
December  31,  2001,  are  payable  in full upon the  earliest  of:  (i) sale or
refinancing of the respective Local Partnership's rental property;  (ii) payment
in full of the respective Local Partnership's permanent loan; or (iii) maturity.

     The purchase money 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. The Partnership placed in escrow an assignment of its interest
in  the  Local  Partnership  to  the  noteholders.  On  January  16,  2002,  the
Partnership's  interest was transferred to the noteholders.  However,  it may be
necessary to obtain New Jersey  Housing and Mortgage  Finance  Agency and/or the
Local General Partner's consent to the assignment before it is deemed final.

                                      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 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 the following  properties  have matured
and have not been paid or extended as of March 26, 2002.

         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
         Briar Crest I                         470,050            01/01/02
         Briar Crest II                        361,120            01/01/02
         Briar Hills                           403,100            01/01/02
         Indian Hills                          277,000            01/01/02

     The purchase money notes related to the following  properties were paid off
at a discount,  or were transferred to the  noteholders,  during 2000, 2001, and
through March 26, 2002.

<TABLE>
<CAPTION>

         Property                            Principal                Date              Disposition
         --------                           ----------            ------------          -----------
         <S>                                <C>                   <C>                   <C>
         Greeley Manor                      $  734,500            January 2000          Transferred
         Bartley Manor                         700,000            January 2000          Paid Off
         Village Green                         275,000            January 2000          Paid Off
         Village Square                        390,000            January 2000          Paid Off
         College Park                          880,000            April 2000            Transferred
         Rolling Green at Milford            2,250,000            May 2000              Paid Off
         Winchester Gardens                  1,700,000            June 2000             Transferred via sale
         O'Farrell                             322,236            August 2000           Paid Off
         Tyee Apartments                     1,305,000            October 2000          Paid Off
         Woodside Village                    3,335,000            October 2000          Paid Off
         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

</TABLE>


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

     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 noteholder may have the right to foreclose on
the Partnership's interest in the related Local Partnership.

                                      II-6

<PAGE>
                                     PART II


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

     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 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. See note 2.a. of the notes to consolidated financial statements for
a discussion of an impairment loss relating to the  Partnership's  investment in
Indian Hills.

     The following  chart presents  information  related to purchase money notes
which have matured,  have been  extended to mature,  or are scheduled to mature,
through December 31, 2002, and which remain unpaid or unextended as of March 26,
2002.  Excluded from the following  chart are purchase money notes which matured
through December 31, 2001, and which have been paid off, cancelled,  or extended
on or before March 26, 2002.

<TABLE>
<CAPTION>
                                                                         Aggregate
                                               Aggregate                  Accrued                  Carrying Amount
                                               Principal                  Interest                 of Partnership's
                   Number of                    Balance                   Balance                  Investments in
   Purchase        Underlying                    as of                     as of                   Underlying Local
  Money Note         Local       Percentage     December    Percentage    December    Percentage   Partnerships as of    Percentage
   Maturity       Partnerships    of Total      31, 2001     of Total     31, 2001     of Total    December 31, 2001      of Total
---------------   ------------   ----------    -----------  ---------    ----------   ----------   ------------------    ----------
<S>               <C>            <C>           <C>          <C>          <C>          <C>          <C>                   <C>
1st Quarter 1999        3            13%       $ 5,300,000        51%    $10,534,432       46%        $ 1,180,105              8%
1st Quarter 2002        4            17%         1,511,270        15%      3,702,581       16%          2,521,713             16%
                     ----          ----        -----------     -----     -----------     ----         -----------           ----
Total through
 12/31/2002             7            30%       $ 6,811,270        66%    $14,237,013       62%        $ 3,701,818             24%
                     ====          ====        ===========     =====     ===========     ====         ===========           ====

Total, Local
  Partnerships         23 (2)       100%       $10,346,270(1)    100%    $22,996,132(1)   100%        $15,686,273 (3)        100%
                     ====          ====        ===========     =====     ===========     ====         ===========           ====
</TABLE>

(1)  Does not include amounts payable to a local general partner.
(2)  Ten  of  the  23  Local  Partnerships  have  related  purchase  money  note
     obligations.
(3)  Includes  $6,703,946  for  the  partnerships   reported  as  investment  in
     partnerships held in escrow and $1,623,459 for the partnerships reported as
     investment in partnerships  held for transfer on the  consolidated  balance
     sheet at December 31, 2001.


     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

                                      II-7

<PAGE>
                                     PART II


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

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 23 Local Partnerships in which the Partnership is invested as of December
31, 2001,  the seven Local  Partnerships  with  associated  purchase money notes
which mature through  December 31, 2002 and which remain unpaid or unextended as
of March 26, 2002,  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, 2001                 14%                    $336,694
     December 31, 2000                  9%                    $273,054

     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.

     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, 2001 and 2000,  the receipt of  distributions
from Local  Partnerships  was adequate to support  operating cash  requirements.
Cash  and cash  equivalents  decreased  during  2001 as cash  used in  operating
activities,  and  cash  used  to pay off a  purchase  money  note  and to make a
distribution to Additional  Limited  Partners on November 16, 2001 was in excess
of cash  distributions  received from partnerships and of proceeds received from
disposition of investments in partnerships.

     On November 6, 2000, the Partnership made a cash distribution of $2,994,350
($50.00 per Unit) to Additional  Limited  Partners who were holders of record as
of September 30, 2000; this  distribution was a result of the sales of O'Farrell
Towers,  Tyee  Apartments  and  Woodside  Village.  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;  this
distribution  was a result of cash  resources  accumulated  from  operations and
distributions from Local  Partnerships.  The Managing General Partner intends to
reserve all of the Partnership's  remaining  undistributed cash for the possible
repayment,  prepayment or retirement of the Partnership's  outstanding  purchase
money notes related to the Local Partnerships.

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

2001 Versus 2000
----------------

     The Partnership's net income for the year ended December 31, 2001 decreased
from the corresponding  period in 2000 primarily due to extraordinary  gain from
extinguishment  of debt and gain on disposition  of investments in  partnerships
related to ten Local  Partnerships  in 2000,  which  gains were  larger than the
corresponding amounts related to three Local Partnerships in 2001.  Contributing
to  the  decrease  in net  income  were a  decrease  in  share  of  income  from
partnerships  due to the  cessation  of share of income from Local  Partnerships
sold in 2000 and a decrease in interest revenue, primarily due to lower interest
rates in 2001. Offsetting the decrease in net income were a decrease in interest
expense due to lower  purchase  money note  balances,  a decrease in general and
administrative  expenses  primarily due to lower  reimbursed  payroll  costs,  a
decrease  in  professional  fees due to lower  legal  fees,  and a  decrease  in
amortization  of deferred  costs related to the  disposition  of  investments in
partnerships in 2000.

                                      II-8

<PAGE>
                                     PART II


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

     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, 2001 and 2000 did not include  losses of  $403,190  and  $778,232,
respectively.  Distributions  of $491,057 and  $576,037,  received from five and
seven Local Partnerships during 2001 and 2000, respectively, were offset against
the respective  years'  recorded  losses because these amounts were in excess of
the Partnership's investment.

                                    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 23 properties
for the five years ended  December 31, 2001,  follow.  Combined  rental  revenue
amounts have been adjusted to reflect  property sales and interests  transferred
in 2001 and prior years.

<TABLE>
<CAPTION>
                                                       For the years ended December 31,
                       ---------------------------------------------------------------------------------------------------
                          2001                  2000                  1999                  1998                  1997
                       -----------           -----------           -----------           -----------           -----------
<S>                    <C>                   <C>                   <C>                   <C>                   <C>
Combined Rental
  Revenue              $22,196,711           $21,454,093           $20,477,822           $20,658,209           $20,429,980

Annual Percentage
  Increase (decrease)                3.5%                  4.8%                  (0.9%)                 1.1%

</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, 65, 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 Chairman of the Board and a Director of CRIIMI MAE Inc. and CRIIMI, Inc.

H. William Willoughby,  55, 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.  He is also a Director and
executive officer of CRIIMI MAE Inc. and CRIIMI, Inc.

Susan R. Campbell,  43, is 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  has  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  in these  sections  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 26, 2002.

          Name and Address                Amount and Nature         % of total
          of Beneficial Owner          of Beneficial Ownership     Units issued
          -------------------          -----------------------     ------------

          Equity Resources Group,             7,304 Units              12.2%
            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 26, 2002, 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 (3 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. (This information
               begins at page III-30.)

     (b)  Reports on Form 8-K

     No reports on Form 8-K were filed  during the quarter  ended  December  31,
2001.

                                      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 26, 2002                         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 26, 2002                          by:  /s/ H. William Willoughby
--------------                               -----------------------------------
DATE                                         H. William Willoughby,
                                               Director, President,
                                               and Secretary




March 26, 2002                          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>
                         REPORT OF INDEPENDENT CERTIFIED
                               PUBLIC ACCOUNTANTS



To the Partners
Capital Realty Investors-III Limited Partnership


     We  have  audited  the  consolidated   balance  sheets  of  Capital  Realty
Investors-III  Limited  Partnership  (a  Maryland  limited  partnership)  as  of
December  31,  2001  and  2000,  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  $1,631,240 and $1,653,017 of income in 2001 and 2000,
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,  2001 and  2000 and the  consolidated
results of its operations,  changes in partners'  deficit and 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 15, 2002


                                      III-6

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                           CONSOLIDATED BALANCE SHEETS


                                     ASSETS

<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                                      ----------------------------
                                                                                          2001            2000
                                                                                      ------------    ------------
<S>                                                                                   <C>             <C>
Investments in partnerships .......................................................   $  7,358,868    $ 11,784,956
Investment in partnerships held for transfer ......................................      1,650,645            --
Investment in partnerships held in escrow .........................................      6,765,444       5,011,886
Cash and cash equivalents .........................................................     11,317,373      12,356,321
Acquisition fees, principally paid to related parties,
  net of accumulated amortization of $349,938 and $367,233, respectively ..........        226,954         278,889
Property purchase costs,
  net of accumulated amortization of $320,457 and $358,778, respectively ..........        226,363         293,543
Other assets ......................................................................            378           5,040
                                                                                      ------------    ------------

      Total assets ................................................................   $ 27,546,025    $ 29,730,635
                                                                                      ============    ============



                        LIABILITIES AND PARTNERS' DEFICIT


Due on investments in partnerships ................................................   $ 10,465,814    $ 11,965,814
Accrued interest payable ..........................................................     23,030,108      25,038,996
Accounts payable and accrued expenses .............................................        111,226         143,243
                                                                                      ------------    ------------

      Total liabilities ...........................................................     33,607,148      37,148,053
                                                                                      ------------    ------------

Commitments and contingencies

Partners' capital (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 .........................................     (8,280,371)     (7,681,551)
    Offering costs ................................................................     (6,156,933)     (6,156,933)
    Accumulated losses ............................................................    (51,627,319)    (53,582,434)
                                                                                      ------------    ------------

      Total partners' deficit .....................................................     (6,061,123)     (7,417,418)
                                                                                      ------------    ------------

      Total liabilities and partners' deficit .....................................   $ 27,546,025    $ 29,730,635
                                                                                      ============    ============

</TABLE>

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

                                      III-7

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                                    For the years ended
                                                                                        December 31,
                                                                               ----------------------------
                                                                                  2001             2000
                                                                               -----------     ------------
<S>                                                                            <C>             <C>
Share of income from partnerships ..........................................   $  2,153,901    $  2,386,939
                                                                               ------------    ------------

Other revenue and expenses:

  Revenue:
    Interest and other income ..............................................        431,407         626,216
                                                                               ------------    ------------


  Expenses:
    Interest ...............................................................      1,671,904       2,600,481
    Management fee .........................................................        300,000         300,000
    General and administrative .............................................        239,168         268,805
    Professional fees ......................................................        193,317         220,225
    Amortization of deferred costs .........................................         42,561          49,293
                                                                               ------------    ------------

                                                                                  2,446,950       3,438,804
                                                                               ------------    ------------

      Total other revenue and expenses .....................................     (2,015,543)     (2,812,588)
                                                                               ------------    ------------

Gain (loss) before (loss) gain on disposition of investments in partnerships
  and extraordinary gain from extinguishment of debt .......................        138,358        (425,649)

(Loss) gain on disposition of investments in partnerships ..................       (301,904)     11,642,175
                                                                               ------------    ------------

(Loss) income before extraordinary gain from extinguishment of debt ........       (163,546)     11,216,526

Extraordinary gain from extinguishment of debt .............................      2,118,661      22,518,568
                                                                               ------------    ------------

Net income .................................................................   $  1,955,115    $ 33,735,094
                                                                               ============    ============



Net income allocated to General Partners (1.51%) ...........................   $     29,522    $    509,400
                                                                               ============    ============


Net income allocated to Initial and Special Limited Partners (1.49%) .......   $     29,131    $    502,653
                                                                               ============    ============


Net income allocated to Additional Limited Partners (97%) ..................   $  1,896,462    $ 32,723,041
                                                                               ============    ============


Net income per unit of Additional Limited Partner Interest
  based on 60,000 units outstanding ........................................   $      31.61    $     545.38
                                                                               ============    ============
</TABLE>


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

                                      III-8

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

             CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT


<TABLE>
<CAPTION>
                                                                      Initial and
                                                                        Special            Additional
                                                   General              Limited             Limited
                                                   Partners             Partners            Partners               Total
                                                 -----------          -----------         ------------         ------------
<S>                                              <C>                  <C>                 <C>                  <C>
Partners' deficit, January 1, 2000               $(1,339,782)         $(1,322,704)        $(35,495,676)        $(38,158,162)

  Net income                                         509,400              502,653           32,723,041           33,735,094

  Distribution of $50.00 per unit
    of Additional Limited Partner Interest                --                   --           (2,994,350)          (2,994,350)
                                                 -----------          -----------         ------------         ------------

Partners' deficit, December 31, 2000                (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)
                                                 ===========          ===========         ============         ============
</TABLE>

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

                                      III-9

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                      For the years ended
                                                                                          December 31,
                                                                                  ----------------------------
                                                                                      2001            2000
                                                                                  ------------    ------------
<S>                                                                               <C>             <C>
Cash flows from operating activities:
  Net income ..................................................................   $  1,955,115    $ 33,735,094

  Adjustments to reconcile net income to net cash used in operating activities:
    Share of income from partnerships .........................................     (2,153,901)     (2,386,939)
    Amortization of deferred costs ............................................         42,561          49,293
    Amortization of discount on purchase money notes ..........................           --            19,873
    (Loss) gain on disposition of investments in partnerships .................        301,904     (11,642,175)
    Extraordinary gain from extinguishment of debt ............................     (2,118,661)    (22,518,568)

    Changes in assets and liabilities:
      Decrease (increase) in other assets .....................................          4,662          (5,040)
      Increase in accrued interest payable ....................................      1,671,904       2,580,608
      Payment of purchase money note interest .................................       (301,193)       (469,554)
      Decrease in accounts payable and accrued expenses .......................        (32,017)        (25,224)
                                                                                  ------------    ------------

        Net cash used in operating activities .................................       (629,626)       (662,632)
                                                                                  ------------    ------------


Cash flows from investing activities:
  Receipt of distributions from partnerships ..................................      1,305,576       1,844,791
  Proceeds from disposition of investments in partnerships ....................        383,922      14,864,089
                                                                                  ------------    ------------

        Net cash provided by investing activities .............................      1,689,498      16,708,880
                                                                                  ------------    ------------


Cash flows from financing activities:
  Payoff of purchase money notes and related interest .........................     (1,500,000)    (10,741,260)
  Distributions to Additional Limited Partners ................................       (598,820)     (2,994,350)
                                                                                  ------------    ------------

        Net cash used in financing activities .................................     (2,098,820)    (13,735,610)
                                                                                  ------------    ------------

Net (decrease) increase in cash and cash equivalents ..........................     (1,038,948)      2,310,638

Cash and cash equivalents, beginning of year ..................................     12,356,321      10,045,683
                                                                                  ------------    ------------

Cash and cash equivalents, end of year ........................................   $ 11,317,373    $ 12,356,321
                                                                                  ============    ============


Supplemental disclosure of cash flow information:
  Cash paid during the period for interest ....................................   $  1,151,193    $  5,715,229
                                                                                  ============    ============
</TABLE>

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

                                     III-10

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     ------------------------------------------

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

          Capital Realty Investors-III Limited Partnership (the Partnership) was
     formed under the Maryland  Revised Uniform Limited  Partnership Act on June
     27,  1983 and  shall  continue  until  December  31,  2037,  unless  sooner
     dissolved in accordance with the 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.

          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 of the Local  Partnerships.  As of December 31,
     2001 and 2000,  the  Partnership's  share of  cumulative  losses of six and
     seven of the Local  Partnerships  exceeded the amount of the  Partnership's
     investments  in those Local  Partnerships  by  $8,695,304  and  $8,485,429,
     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, 2001 and 2000, cumulative cash distributions
     of $491,057 and $576,037,  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.


                                     III-11

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
     ------------------------------------------

          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 were 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  noteholder  were  placed  in  escrow,  as  further
     discussed  in  Note  2.a.  The  Partnership's   investment  in  this  Local
     Partnership was  reclassified to investment in partnerships  held in escrow
     in the  accompanying  consolidated  balance sheets at December 31, 2001 and
     2000. In January 2002,  the  Partnership's  interest in Congress  Plaza was
     transferred to the noteholder. 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.  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.

     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.

                                     III-12

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
     ------------------------------------------

     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, 2001, as required by Statement of Financial
     Accounting  Standards  (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 pronouncement
          ----------------------------

          In  June  2001,  the  Financial   Accounting  Standards  Board  issued
     Statement of Financial  Accounting  Standards  No. 142 (SFAS No. 142 or the
     Statement),  "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,  however,  earlier  application  is  permitted.  The
     General Partner  believes that the adoption of SFAS No. 142 will not have a
     material  impact on the financial  position or the results of operations of
     the Partnership.

                                     III-13

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS
     ---------------------------

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

          As of December 31, 2001 and 2000, the Partnership held limited partner
     interests  in 23  and  24  Local  Partnerships,  respectively,  which  were
     organized to develop, construct, own, maintain and operate rental apartment
     properties  which  provide  housing   principally  to  the  elderly  or  to
     individuals and families of low or moderate income.  The remaining  amounts
     due on investments in the Local Partnerships follow.

                                                         December 31,
                                                -----------------------------
                                                   2001              2000
                                                -----------       -----------

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

          Purchase money notes due in:
            1999                                  5,300,000         6,800,000
            2001                                  1,275,000         1,275,000
            2002                                  2,011,270         2,011,270
            2004                                  1,760,000         1,760,000
                                                -----------       -----------

                Subtotal                         10,465,814        11,965,814
                                                -----------       -----------

          Accrued interest payable               22,030,108        25,038,996
                                                -----------       -----------
                Total                           $33,495,922       $37,004,810
                                                ===========       ===========

          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 12%, certain of which are compounded  annually.  The purchase
     money  notes  are  payable  in full  upon  the  earliest  of:  (i)  sale or
     refinancing of the respective Local  Partnership's  rental  property;  (ii)
     payment in full of the respective  Local  Partnership's  permanent loan; or
     (iii) maturity.

          The purchase  money 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. The Partnership placed in escrow an assignment of
     its interest in the Local  Partnership to the  noteholders.  On January 16,
     2002,  the  Partnership's  interest  was  transferred  to the  noteholders.
     However,  it may be  necessary  to obtain New Jersey  Housing and  Mortgage
     Finance Agency and/or the Local General Partner's consent to the assignment
     before it is deemed final.

          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.

                                     III-14

<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 26, 2002.

         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
         Briar Crest I                         470,050            01/01/02
         Briar Crest II                        361,120            01/01/02
         Briar Hills                           403,100            01/01/02
         Indian Hills                          277,000            01/01/02

          The purchase money notes related to the following properties were paid
     off at a discount,  or were  transferred to the  noteholders,  during 2000,
     2001, and through March 26, 2002.

<TABLE>
<CAPTION>

         Property                            Principal                Date              Disposition
         --------                           ----------            ------------          -----------
         <S>                                <C>                   <C>                   <C>
         Greeley Manor                      $  734,500            January 2000          Transferred
         Bartley Manor                         700,000            January 2000          Paid Off
         Village Green                         275,000            January 2000          Paid Off
         Village Square                        390,000            January 2000          Paid Off
         College Park                          880,000            April 2000            Transferred
         Rolling Green at Milford            2,250,000            May 2000              Paid Off
         Winchester Gardens                  1,700,000            June 2000             Transferred via sale
         O'Farrell                             322,236            August 2000           Paid Off
         Tyee Apartments                     1,305,000            October 2000          Paid Off
         Woodside Village                    3,335,000            October 2000          Paid Off
         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
</TABLE>

          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
     noteholder 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  each  of  the  related  Local
     Partnerships,  except for Indian Hills, as further  discussed below.  Thus,
     even a complete loss of the Partnership's

                                     III-15

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued
     ---------------------------

     interest  in one of these  Local  Partnerships  would  not have a  material
     adverse impact on the financial condition of the Partnership. See below for
     a discussion of an impairment loss relating to the Partnership's investment
     in Indian Hills.

          The following  chart  presents  information  related to purchase money
     notes which have matured, have been extended to mature, or are scheduled to
     mature, through December 31, 2002, and which remain unpaid or unextended as
     of March 26, 2002.  Excluded  from the following  chart are purchase  money
     notes which  matured  through  December 31, 2001,  and which have been paid
     off, cancelled, or extended on or before March 26, 2002.

<TABLE>
<CAPTION>
                                                                         Aggregate
                                               Aggregate                  Accrued                  Carrying Amount
                                               Principal                  Interest                 of Partnership's
                   Number of                    Balance                   Balance                  Investments in
    Purchase       Underlying                    as of                     as of                   Underlying Local
   Money Note        Local       Percentage     December    Percentage    December    Percentage   Partnerships as of    Percentage
    Maturity      Partnerships    of Total      31, 2001     of Total     31, 2001     of Total    December 31, 2001      of Total
----------------  ------------   ----------    -----------  ---------    ----------   ----------   ------------------    ----------
<S>               <C>            <C>           <C>          <C>          <C>          <C>          <C>                   <C>
1st Quarter 1999        3            13%       $ 5,300,000        51%    $10,534,432       46%        $ 1,180,105              8%
1st Quarter 2002        4            17%         1,511,270        15%      3,702,581       16%          2,521,713             16%
                     ----          ----        -----------     -----     -----------     ----         -----------           ----

Total through
 12/31/2002             7            30%       $ 6,811,270        66%    $14,237,013       62%        $ 3,701,818             24%
                     ====          ====        ===========     =====     ===========     ====         ===========           ====

Total, Local
  Partnerships         23 (2)       100%       $10,346,270(1)    100%    $22,996,132(1)   100%        $15,686,273 (3)        100%
                     ====          ====        ===========     =====     ===========     ====         ===========           ====
</TABLE>

(1)  Does not include amounts payable to a local general partner.
(2)  Ten  of  the  23  Local  Partnerships  have  related  purchase  money  note
     obligations.
(3)  Includes  $6,703,946  for  the  partnerships   reported  as  investment  in
     partnerships held in escrow and $1,623,459 for the partnerships reported as
     investment in partnerships  held for transfer on the  consolidated  balance
     sheet at December 31, 2001.


          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 23 Local Partnerships
     in which the  Partnership  is invested as of December 31,  2001,  the seven
     Local  Partnerships  with  associated  purchase  money notes  which  mature
     through  December 31, 2002,  and which remain  unpaid or  unextended  as of
     March 26, 2002, represented the following percentages

                                     III-16

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued
     ---------------------------

     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, 2001                 14%                    $336,694
     December 31, 2000                  9%                    $273,054


          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,  2001 and 2000 was  $1,671,904  and  $2,600,481,
     respectively.  The accrued  interest payable on the purchase money notes of
     $22,996,132 and $25,005,020 as of December 31, 2001 and 2000, 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 noteholder 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 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  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  at  final   maturity.   On  January  16,  2002,  the
     Partnership's interest in Audubon Towers was transferred to the noteholder.
     However,  it may be  necessary  to obtain New Jersey  Housing and  Mortgage
     Finance Agency and/or the Local General Partner's consent to the assignment
     before it is deemed final.  The transfer of the  Partnership's  interest in
     Audubon  Towers to the  noteholder  will result in gain on  disposition  of
     investments in partnerships and in extraordinary  gain from  extinguishment
     of debt for financial statement purposes in 2002, and in a gain for federal
     tax purposes in 2002.

          Due to  the  transfer  of  the  Partnership's  interest  in the  Local
     Partnership  to the  noteholder,  the  Partnership's  basis  in  the  Local
     Partnership,  along  with net  unamortized  acquisition  fees and  property
     purchase  costs,  which  totaled  $5,122,372  as of  December  31, 2001 and
     $5,011,886 as of December 31, 2000, respectively, had been reclassified to

                                     III-17

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued
     ---------------------------

     investment in partnerships held in escrow in the accompanying  consolidated
     balance sheets.

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

          The  Partnership  defaulted  on its  purchase  money notes  related to
     Bartley Manor Limited Partnership  (Bartley Manor),  Village Square Limited
     Partnership  (Village  Square)  and  Village  Green  of  Wisconsin  Limited
     (Village Green) on October 1, 1999,  when the notes,  as extended,  reached
     maturity  and  were  not  paid.  The  default  amounts  included  aggregate
     principal and accrued interest of $1,365,000 and $2,427,685,  respectively.
     Aggregate accrued interest at December 31, 1999 was $2,474,810.  In January
     2000,  the  Partnership  paid off the notes at a discount.  The  discounted
     payoff  resulted  in  extraordinary  gain  from  extinguishment  of debt of
     $2,865,417 for financial statement purposes in 2000, and in cancellation of
     indebtedness income of $2,865,417 for federal tax purposes in 2000.

           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  amount  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. As of March 26, 2002,
     principal and accrued  interest of $470,050 and  $1,135,356,  respectively,
     for Briar Crest I, principal and accrued interest of $361,120 and $881,275,
     respectively,  for Briar  Crest  II,  principal  and  accrued  interest  of
     $403,100 and  $1,027,050,  respectively  for Briar Hills and  principal and
     accrued interest of $277,000 and $708,744,  respectively,  for Indian Hills
     were  due.  The  Partnership  has made an offer to the  noteholders  at the
     respective  properties for a discounted payoff of the purchase money notes.
     On December 10, 2001, the noteholders  rejected the offers. As of March 26,
     discussion  regarding  the  payoffs of the Briar Crest I and Briar Crest II
     purchase money notes  continue.  There is no assurance that a payoff of the
     purchase money notes will occur.

          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   $1,650,177,
     respectively, as of December 31, 2001, have been reclassified to investment
     in partnerships held for transfer in the accompanying  consolidated balance
     sheet.  At the  time  of  such  reclassification,  an  impairment  loss  of
     $660,826,  relating to the  Partnership's  investment in Indian Hills,  was
     recognized.

                                  College Park
                                  ------------

          The  Partnership  defaulted  on its  purchase  money notes  related to
     College  Park  Limited  (College  Park) on January 1, 1999,  when the notes
     matured and were not paid. The default amount included aggregate  principal
     and  accrued  interest  of  $880,000  and  $1,622,642,   respectively.  The
     Partnership  attempted to negotiate with the noteholder of record to extend
     the maturity dates of the purchase money notes for five years, but

                                     III-18

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued
     ---------------------------

     received no response.  In March 1999, the Partnership  received notice of a
     collection  action  on the  purchase  money  notes by two  individuals  who
     claimed to be the  noteholders.  The Partnership  retained local counsel to
     defend the lawsuit. On July 26, 1999, the Partnership  received notice that
     the plaintiffs  moved to dismiss their  lawsuit.  On September 7, 1999, the
     Partnership  received notice that a new collection action had been filed in
     the proper jurisdiction of Mississippi. The purported noteholders indicated
     that they would not agree to settle the action.  Accordingly,  to avoid the
     expense of further litigation,  in April 2000, the Partnership  transferred
     its interests in the Local  Partnership to the  noteholders in exchange for
     cancellation of the indebtedness. The release of the Partnership's purchase
     money note  obligation as a result of the  Partnership's  loss of ownership
     interest in College Park resulted in extraordinary gain from extinguishment
     of debt of $1,415,213  for  financial  statement  purposes in 2000,  and in
     total income of $3,036,164 for federal tax purposes in 2000.

                                 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. 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  will  result  in gain on
     disposition of investments in partnerships and in  extraordinary  gain from
     extinguishment of debt for financial  statement  purposes in 2002, and in a
     gain for federal tax purposes in 2002.

          Due to  the  transfer  of  the  Partnership's  interest  in the  Local
     Partnership  to the  noteholder,  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, has been
     reclassified  to  investments  in  partnerships   held  in  escrow  in  the
     accompanying consolidated balance sheet.

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

          The  Partnership  defaulted on its purchase money note related to Glen
     Agnes  Associates  (Glen  Agnes) on June 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,  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 extraordinary  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.

                                     III-19

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued
     ---------------------------

                                  Greeley Manor
                                  -------------

          The  Partnership  defaulted  on its  purchase  money  note  related to
     Greeley  Manor  Company  (Greeley  Manor)  on  August 1, 1999 when the note
     matured and was not paid. The default amount included principal and accrued
     interest of $734,500 and $1,365,808, respectively. On October 15, 1999, the
     Partnership  and the  noteholder  agreed to extend the maturity date of the
     purchase money note to January 3, 2000, in exchange for a partial principal
     payment.   Under  the  extension  agreement,   documents  transferring  the
     Partnership's  interest in Greeley Manor 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 3, 2000.
     In  January  2000,   the  documents  were  released  from  escrow  and  the
     Partnership's  interest in Greeley Manor was transferred to the noteholder.
     The release of the Partnership's purchase money note obligation as a result
     of the Partnership's  loss of ownership  interest in Greeley Manor resulted
     in extraordinary gain from extinguishment of debt of $864,624 for financial
     statement  purposes in 2000, and in total income of approximately  $999,437
     for federal tax purposes in 2000.

                   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  26,  2002,   principal  and  accrued   interest  of  $2,600,000  and
     $5,270,507,  respectively,  for  Heritage  Estates  I, and  $1,800,000  and
     $3,315,309,  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 will be obtained.

                                 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 and 2002, the Partnership  made the annual payment as agreed under the
     extension documents.

                                     III-20

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued
     ----------------------------

                                 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.

          The note purchase resulted in extraordinary  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.

                                    O'Farrell
                                    ---------

          O'Farrell Towers Associates (O'Farrell) sold its property on August 4,
     2000.  Proceeds  received by the Partnership from the sale of this property
     were used to pay off, at a discount,  the purchase  money notes  related to
     O'Farrell.  The  sale of  O'Farrell  resulted  in gain  on  disposition  of
     investments in  partnerships of $2,539,157 and in  extraordinary  gain from
     extinguishment  of debt of $280,096  for  financial  statement  purposes in
     2000,  and in total income of $9,261,700  for federal tax purposes in 2000.
     The Managing General Partner was paid a disposition fee of $244,000 for the
     sale of O'Farrell on August 4, 2000.

                            Rolling Green at Milford
                            ------------------------

          On May 31, 2000,  the Rolling Green at Milford  property was sold. The
     entire net sale  proceeds  to the  Partnership  were used to pay off,  at a
     discount,  the Partnership's purchase money note obligation related to this
     property.  The  sale  resulted  in gain on  disposition  of  investment  in
     partnership of $4,306,006 and in extraordinary gain from  extinguishment of
     debt of $594,897 for  financial  statement  purposes in 2000,  and in total
     income of $8,764,435 for federal tax purposes in 2000. (A  distribution  of
     surplus cash was made by the local managing  general partner  subsequent to
     the sale date, in September 2000. Substantially all of the distribution was
     applied to the purchase money note  obligation  with the effect of reducing
     the extraordinary gain from extinguishment of debt previously  recognized.)
     The Managing  General Partner of the Partnership  and/or its affiliates did
     not receive any fees relating to the sale.

                                 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

                                     III-21

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued
     ---------------------------

     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 26,
     2002,  principal and accrued  interest of $900,000 and $2,113,470 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.

                               Winchester Gardens
                               ------------------

          The  Partnership  defaulted on its purchase money notes related to New
     Winchester Gardens, Ltd. (Winchester Gardens) on December 31, 1997 when the
     notes matured and were not paid. The default amount included  principal and
     accrued  interest of $1,700,000 and $2,995,648,  respectively.  On April 7,
     1998,  the  Partnership  was served with a complaint  by the holders of the
     purchase money notes suing the  Partnership,  the Managing  General Partner
     and CRHC, Incorporated (CRHC) (CRHC is an affiliate of the Managing General
     Partner), for damages and seeking foreclosure on the Partnership's interest
     in the  Local  Partnership.  On July 29,  1998,  the  parties  agreed  to a
     settlement  which extended the maturity date of the purchase money notes to
     January 31, 2001.  In  connection  with this  settlement,  the  Partnership
     granted the noteholders an option during the period January 1, 2000 through
     June 30, 2000 to purchase  the  Partnership's  and CRHC's  interests in the
     Local Partnership for an amount equal to the outstanding  principal balance
     of the  purchase  money  notes plus  accrued  interest.  On June 23,  2000,
     pursuant to the option agreement, the noteholder purchased the interests in
     Winchester  Gardens in  exchange  for  purchase  money note  principal  and
     accrued interest of $1,700,000 and $3,579,026,  respectively,  resulting in
     extraordinary gain from  extinguishment of debt of $5,233,404 for financial
     statement  purposes in 2000,  and in total income of $7,374,334 for federal
     tax purposes in 2000.

          In December 2001, the Partnership,  its affiliate,  CRHC, Incorporated
     and the Winchester Gardens Local  Partnership,  were served with a wrongful
     death action.  The  Partnership  and CRHC have been advised by  plaintiff's
     counsel that they will be dismissed as  defendants  because they sold their
     partnership  interests in  Winchester  Gardens  prior to the date the claim
     arose.

                                     III-22

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued
     ---------------------------

                                Woodside Village
                                ----------------

          The  Partnership  defaulted on its two purchase money notes related to
     Woodside Village Limited Partnership (Woodside Village) on February 1, 1999
     when the notes  matured  and were not paid.  The  default  amount  included
     aggregate  principal  and accrued  interest of $3,335,000  and  $7,407,102,
     respectively.  On October 13, 2000, Woodside Village 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 $2,969,350 and in
     extraordinary gain from  extinguishment of debt of $7,778,612 for financial
     statement  purposes in 2000, and in total income of $13,018,337 for federal
     tax  purposes in 2000.  The  Managing  General  Partner of the  Partnership
     received a fee equal to 1.75% of the sale price,  or $151,200,  relating to
     the sale.

          In February, 2001, the Partnership and two affiliates were served in a
     state court action for declaratory judgement 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.

          On May 23, 2001, the Partnership  received additional proceeds related
     to the  sale.  This  resulted  in gain on  disposition  of  investments  in
     partnerships of $215,010 for financial  statement  purposes in 2001, and in
     total income of $215,010 for federal tax purposes in 2001.

     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 2001 and 2000, the Partnership  received cash distributions from the
     rental  operations of the Local  Partnerships  of $1,293,123 and $1,844,791
     respectively. As of December 31, 2001 and 2000, 19 and 20, respectively, of
     the Local  Partnerships  had  aggregate  surplus  cash, as defined by their
     respective   regulatory   Agencies,   in  the  amounts  of  $1,304,999  and
     $1,333,333,  respectively,  which  may be  available  for  distribution  in
     accordance with their respective regulatory Agencies' regulations.

          The cash  distributions  to the Partnership from the operations of the
     Local  Partnerships  may be  limited  by the  Agencies'  regulations.  Such
     regulations limit annual cash  distributions to a percentage of the owner's
     equity investment in a rental property.  Funds in excess of those which may
     be distributed to owners are generally  required to be placed in a residual
     receipts  account  held by the  governing  state or federal  agency for the
     benefit of the property.

                                     III-23

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued
     ---------------------------

          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.

                                    O'Farrell
                                    ---------

          On August  4,  2000,  O'Farrell  was sold.  See Note 2.a.  hereof  for
     further information concerning this sale.

                            Rolling Green at Milford
                            ------------------------

          On May 31,  2000,  Rolling  Green at Milford  was sold.  See Note 2.a.
     hereof for further information concerning this sale.

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

          On October 13, 2000,  Tyee  Apartments was sold. 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

                                     III-24

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued
     ---------------------------

     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.

                                Woodside Village
                                ----------------

          On October 13, 2000,  Woodside  Village was sold. See Note 2.a. hereof
     for further information concerning this sale.

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

          Combined balance sheets and combined  statements of operations for the
     23 and 24 Local  Partnerships  in which the  Partnership  is invested as of
     December 31, 2001 and 2000, respectively, follow. The combined statement of
     operations for the year ended December 31, 2001,  includes  information for
     one Local Partnership  through the date of sale. The combined  statement of
     operations for the year ended December 31, 2000,  includes  information for
     seven Local Partnerships through the dates of sale or transfer.

                             COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                            December 31,
                                                                 ---------------------------------
                                                                     2001                  2000
                                                                 -----------           -----------
     <S>                                                         <C>                   <C>
     Rental property, at cost, net of accumulated depreciation
       of $61,279,227 and $60,410,264, respectively              $46,773,992           $51,926,200
     Land and land improvements                                    9,570,034             9,977,655
     Other assets                                                 16,589,611            16,201,657
                                                                 -----------           -----------

           Total assets                                          $72,933,637           $78,105,512
                                                                 ===========           ===========


     Mortgage notes payable                                      $72,339,922           $78,035,342
     Other liabilities                                             7,445,124             7,570,775
                                                                 -----------           -----------

           Total liabilities                                      79,785,046            85,606,117

     Partners' deficit                                            (6,851,409)           (7,500,605)
                                                                 -----------           -----------
           Total liabilities and partners' deficit               $72,933,637           $78,105,512
                                                                 ===========           ===========
</TABLE>


                        COMBINED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                       For the years ended
                                                                            December 31,
                                                                 ---------------------------------
                                                                    2001                  2000
                                                                 -----------           -----------
     <S>                                                         <C>                   <C>
     Revenue:
       Rental                                                    $23,248,528           $27,288,524
       Interest                                                      524,605               699,757
       Other                                                         959,209             1,125,724
                                                                 -----------           -----------

           Total revenue                                          24,732,342            29,114,005
                                                                 -----------           -----------

     Expenses:
       Operating                                                  13,983,633            17,030,872
       Interest                                                    5,317,016             6,225,612
       Depreciation                                                3,918,728             4,664,747
       Amortization                                                   64,227               384,496
                                                                 -----------           -----------

            Total expenses                                        23,283,604            28,305,727
                                                                 -----------           -----------
     Net income                                                  $ 1,448,738           $   808,278
                                                                 ===========           ===========
</TABLE>


                                     III-25

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued
     ---------------------------

     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  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,
                                                                             ---------------------------------
                                                                                2001                  2000
                                                                             ----------            ----------
          <S>                                                                <C>                   <C>
          Financial statement net income                                     $1,448,738            $  808,278

          Adjustments:
            Difference in tax depreciation using accelerated methods,
              net of depreciation on construction period expenses
              capitalized for financial statement purposes                    2,899,000             3,075,416

            Amortization for financial statement purposes
              not deducted for income tax purposes                               22,059                48,196

            Miscellaneous, net                                                   28,712               445,152
                                                                             ----------            ----------
          Taxable income                                                     $4,398,509            $4,377,042
                                                                             ==========            ==========
</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,
2001 and 2000, the Partnership paid $177,885 and $239,666,  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:

                                     III-26

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3.   RELATED PARTY TRANSACTIONS - Continued
     --------------------------

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

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

For each of the years ended December 31, 2001 and 2000, 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. For the year ended December 31, 2000, the Managing General Partner was
paid (i) a  disposition  fee of $244,000  relating to the sale of  O'Farrell  on
August 4, 2000; (ii) a disposition  fee of $48,911  relating to the sale of Tyee
on October 13, 2000;  and (iii) a  disposition  fee of $151,200  relating to the
sale of  Woodside on October 13,  2000.  No such fee was earned by the  Managing
General Partner or its affiliates for the year ended December 31, 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

                                     III-27

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4.   PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS - Continued
     ------------------------------------------------

               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;
         (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.  For the
year ended  December  31,  2000,  the  Managing  General  Partner was paid (i) a
disposition fee of $244,000 relating to the sale of O'Farrell on August 4, 2000;
(ii) a  disposition  fee of $48,911  relating to the sale of Tyee on October 13,
2000; and (iii) a disposition  fee of $151,200  relating to the sale of Woodside
on October 13, 2000. No such fee was earned by the Managing  General  Partner or
its affiliates for the year ended December 31, 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 6, 2000,  the  Partnership  made a cash  distribution  of $2,994,350
($50.00 per Unit) to Additional  Limited  Partners who were holders of record as
of September 30, 2000; this  distribution was a result of the sales of O'Farrell
Towers,  Tyee  Apartments  and  Woodside  Village.  On November  16,  2001,  the
Partnership made a cash distribution of $598,820 ($10.00 per Unit) to Additional
Limited  Partners  who were  holders  of  record as of  October  1,  2001;  this
distribution  was a result of cash  resources  accumulated  from  operations and
distributions from Local Partnerships.

                                     III-28

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4.   PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS - Continued
     ------------------------------------------------

     As defined in the Partnership Agreement, after the payment of distributions
to Additional Limited Partners 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, 2001 and 2000. The
Managing General Partner intends to reserve all of the  Partnership's  remaining
undistributed cash for the possible  repayment,  prepayment or retirement of the
Partnership's   outstanding   purchase   money   notes   related  to  the  Local
Partnerships.


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 audit and,  therefore,  possible  adjustment by the IRS. In addition,
adjustments  arising  from the  amortization  of discount  on the  Partnership's
purchase money notes for financial  reporting purposes are eliminated for income
tax purposes (see Note 2.a.).

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

<TABLE>
<CAPTION>
                                                                    For the years ended
                                                                         December 31,
                                                                  -------------------------
                                                                      2001         2000
                                                                  -----------   -----------
<S>                                                               <S>           <S>
Financial statement net income ................................   $ 1,955,115   $33,735,094

Adjustments:
  Differences between financial statement net income
   and taxable income related to the Partnership's
   equity in the Local Partnerships' income or losses .........     6,747,212    18,261,556

  Costs amortized over a shorter period for income tax purposes        42,561        45,298

  Effect of amortization of discount on purchase money notes
    for financial statement purposes ..........................         4,287        27,264
                                                                  -----------   -----------
Taxable income ................................................   $ 8,749,175   $52,069,212
                                                                  ===========   ===========
</TABLE>



                                      # # #


                                     III-29

<PAGE>

                               EXHIBIT No. 99 b.


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



                                     III-30