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


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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


                                    FORM 10-K

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



|X|  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934

                   For the fiscal year ended December 31, 2008

                                       or

|_|  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934

                         COMMISSION FILE NUMBER 0-11962

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

                          CAPITAL REALTY INVESTORS-III
                               LIMITED PARTNERSHIP

         Maryland                                        52-1311532
(State or other jurisdiction                (I.R.S. Employer Identification No.)
of incorporation or organization)

                 11200 Rockville Pike, Rockville, Maryland 20852

                                 (301) 468-9200

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

                        UNITS OF LIMITED PARTNER INTEREST

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

Indicate by check mark if the  Registrant is a well-known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act.
Yes      |_|      No       |X|

Indicate  by  check  mark if the  Registrant  is not  required  to file  reports
pursuant to Section 13 or 15(d) of the Act.
Yes      |_|      No       |X|

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.
Yes      |X|      No       |_|

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not 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-K or any amendment to this
Form 10-K |X|

Indicate by check mark whether the Registrant is a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer    |_|         Accelerated filer           |_|
Non-accelerated filer      |_|         Smaller reporting company   |X|

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

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.

                       DOCUMENTS INCORPORATED BY REFERENCE
 -------------------------------------------------------------------------------
<PAGE>


                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                         2008 ANNUAL REPORT ON FORM 10-K

                                TABLE OF CONTENTS





                                                                         Page
                                                                         ----

                                     PART I

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


                                     PART II

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


                                    PART III

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


                                     PART IV

Item 15.  Exhibits and Financial Statements.............................  IV-1

<PAGE>
                                     PART I
                                     ------

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

     Capital Realty  Investors-III  Limited  Partnership (the  Partnership) is a
limited  partnership which was formed under the Maryland Revised Uniform Limited
Partnership Act on June 27, 1983. On November 7, 1983, the Partnership commenced
offering 60,000 units of additional  limited partner  interest  through a public
offering managed by Merrill Lynch, Pierce, Fenner and Smith,  Incorporated.  The
Partnership closed the offering in January 1984 when it became fully subscribed.
As of  December  31,  2008,  118  units of  limited  partner  interest  had been
abandoned.

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

     The  Partnership  was  formed  to  invest  in  real  estate,  which  is the
Partnership's  principal  business  activity,  by acquiring and holding  limited
partner interests in limited partnerships (Local Partnerships).  The Partnership
originally made investments in 37 Local  Partnerships.  As of December 31, 2008,
the Partnership retained  investments in four Local Partnerships.  Each of these
Local Partnerships owns either a federal or state government-assisted  apartment
complex, which provides housing principally to the elderly and/or to individuals
and families of low or moderate income, or a conventionally  financed  apartment
complex. The original objectives of these investments,  not necessarily in order
of importance, were to:

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

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

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

     As a result of its investment in the Local  Partnerships,  the  Partnership
became the principal  limited  partner in 31 (four  remaining as of December 31,
2008)  Local  Partnerships.  As  a  limited  partner,  the  Partnership's  legal
liability  for  obligations  of  the  Local   Partnerships  is  limited  to  its
investment.  In another  six (zero  remaining  as of  December  31,  2008) Local
Partnerships,  the  Partnership  invested as a limited  partner in  intermediary
partnerships  which,  in  turn,  invested  as  general  partners  in  the  Local
Partnerships.  The local general partners and affiliates of the Managing General
Partner may operate other  apartment  complexes  which may be in competition for
eligible tenants with the Local Partnerships' apartment complexes.

                                       I-1

<PAGE>
                                     PART I
                                     ------

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

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

     A schedule of the apartment  complexes owned by Local Partnerships in which
the Partnership has an investment as of December 31, 2008, follows.

<TABLE>
<CAPTION>

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

                                                                                   Number         Units
                              Mortgage                                               of       Authorized for     Expiration
 Name and Location           Payable at         Financed and/or Insured            Rental       Low Income           of
of Apartment Complex        12/31/08 (2)        and/or Subsidized Under            Units        Subsidies       HAP Contract
--------------------        ------------    -------------------------------      ---------    --------------    ------------
<S>                         <C>             <C>                                  <C>          <C>               <C>
Meadow Lanes Apts.          $  822,686      Michigan State Housing Develop-           118             0                 --
 Holland, MI                                 ment Authority/Section 236 of
                                             the National Housing Act (NHA)

Monterey/Hillcrest           13,105,921     Section 221(d)(4) of the NHA/             300            60           04/23/24 (3)
 Waukesha, WI                                Federal Housing Administration

Villa Mirage I                1,444,324     California Housing Finance                 50            50           12/19/09 (3)(4)
 Rancho Mirage, CA                            Agency (CHFA)/Section 8

Villa Mirage II               1,472,043     CHFA/Section 8                             48            48           12/14/15
 Rancho Mirage, CA
                            -----------                                            ------          ----
Totals (4 Properties)       $16,844,974                                               516           158
                            ===========                                            ======          ====

</TABLE>

                                   (continued)

                                       I-2

<PAGE>
                                     PART I
                                     ------

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

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


                                                                                    Average Effective Annual
                                       Units Occupied As                                Rental Per Unit
                                  Percentage of Total Units                           for the Years Ended
                                      As of December 31,                                   December 31,
 Name and Location           -----------------------------------     -------------------------------------------------------
of Apartment Complex         2008    2007    2006   2005    2004      2008       2007         2006        2005        2004
--------------------         ----    ----    ----   ----    ----     -------   --------     --------    --------    --------
<S>                          <C>     <C>     <C>    <C>     <C>      <C>       <C>          <C>         <C>         <C>
Meadow Lanes Apts.            85%     89%     82%    96%     96%     $ 5,995   $ 6,194      $ 6,302     $ 6,257     $ 6,326
 Holland, MI

Monterey/Hillcrest            89%     91%     91%    95%     97%       8,982     8,816        8,785       8,461       8,490
 Waukesha, WI

Villa Mirage I               100%     97%    100%    98%     98%      10,413    10,157       10,106      10,087      10,030
 Rancho Mirage, C

Villa Mirage II              100%     95%     98%   100%    100%      10,499     9,642       10,083       9,960      10,011
 Rancho Mirage, CA
                             ---     ---     ---    ---     ---      -------   -------      -------     -------     -------
Totals (4 Properties) (5)     94%     93%     93%    97%     98%     $ 8,972   $ 8,702      $ 8,819     $ 8,691     $ 8,714
                             ===     ===     ===    ===     ===      =======   =======      =======     =======     =======
</TABLE>


     (1)  All properties are  multifamily  housing  complexes.  No single tenant
          rents 10% or more of the rentable square footage.  Residential  leases
          are  typically  one year or less in length,  with  varying  expiration
          dates,  and  substantially  all  rentable  space  is  for  residential
          purposes.
     (2)  The amounts  provided are the balances of first mortgage loans payable
          by the Local Partnerships as of December 31, 2008.
     (3)  The Section 8 HAP contract  expiration date reflects an extension from
          the original expiration date, in accordance with Federal legislation.
     (4)  It is anticipated that the Local Partnership will extend its Section 8
          HAP contract for a one-year period at its expiration.
     (5)  The  totals  for the  percentage  of units  occupied  and the  average
          effective annual rental per unit are based on a simple average.

     Effective January 2, 2007, the  Partnership's  interest in Victorian Towers
Associates  was  transferred  to the  noteholder  in  full  satisfaction  of the
Partnership's  purchase  money note.  See the notes to financial  statements for
additional information concerning the transfer.

     On October 31,  2007,  the  Partnership's  interest in Windham  Village was
sold.  See  the  notes  to  financial  statements  for  additional   information
concerning the sale.


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

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


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

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

                                       I-3

<PAGE>
                                     PART I
                                     ------


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 2007.

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

     No matters were submitted to a vote

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

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

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

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

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

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

</TABLE>


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

                                       I-4

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

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

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

         (b)      As of April 1, 2009 there were approximately 3,824 registered
                  holders of Units in the Partnership.

         (c)      No distributions were declared in the years 2008 and 2007.


                                      II-1

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


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        -------------------------------------------------
          CONDITION AND RESULTS OF OPERATIONS
          -----------------------------------

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

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

     The  Partnership has disclosed its selection and application of significant
accounting  policies in Note 1 of the notes to financial  statements included in
this annual report on Form 10-K at December 31, 2008. The  Partnership  accounts
for its investments in partnerships  (Local  Partnerships)  by the equity method
because the Partnership is a limited partner in the Local Partnerships.  As such
the  Partnership has no control over the selection and application of accounting
policies, or the use of estimates, by the Local Partnerships.  Environmental and
operational  trends,  events and uncertainties  that might affect the properties
owned by the Local  Partnerships would not necessarily have a significant impact
on the Partnership's  application of the equity method of accounting,  since the
equity  method  has been  suspended  for three  Local  Partnerships  which  have
cumulative  losses in excess of the amount of the  Partnership's  investments in
those Local Partnerships. The Partnership reviews property assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an  asset  may  not  be  fully  recoverable.  Recoverability  is  measured  by a
comparison of the carrying  amount of an asset to the estimated  future net cash
flows expected to be generated by the asset.  If an asset were  determined to be
impaired,  its basis would be adjusted to fair value through the  recognition of
an impairment loss.

                                     General
                                     -------

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

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

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

     The acquisition of interests in certain Local  Partnerships was paid for in
part by purchase  money notes of the  Partnership.  The purchase money notes are
nonrecourse  obligations of the  Partnership,  which typically  matured 15 years

                                      II-2

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


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        -------------------------------------------------
          CONDITION AND RESULTS OF OPERATIONS - Continued
          -----------------------------------

from the date of acquisition of the interest in a particular  Local  Partnership
and are generally secured by the Partnership's  interest in the respective Local
Partnerships.

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

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

     Subsidy contracts for the investment  apartment properties are scheduled to
expire through 2024. The Local Partnerships seek the renewal of expiring subsidy
contracts, when appropriate,  for their properties. HUD has in the past approved
new subsidy  contracts on an annual basis  subject to annual  appropriations  by
Congress. The initial HUD contract renewal process currently provides owners six
options for renewing  their Section 8 contract  depending upon whether the owner
can meet the eligibility criteria. Historically, the Local Partnerships in which
the  Partnership  is invested  have met the  criteria  necessary  to renew their
Section 8 contracts.

     Villa  Mirage I has a Section 8 HAP  contract  which  expires  December 19,
2009.  The Section 8 HAP  contract  covers all of the  apartment  units in Villa
Mirage.  It is anticipated that the Local  Partnership will extend its Section 8
HAP contract for a one-year period at expiration.

     As  of  December  31,  2008,  the  carrying  amount  of  the  Partnership's
investment in the Local  Partnership  with a Section 8 HAP contract  expiring in
2009 was $0.

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

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

     As of December 31, 2008, the Partnership had approximately  3,844 investors
who held a total of 59,882 units of additional  limited  partner  interest which
were  originally sold for the aggregate  amount of $59,882,000.  The Partnership
originally made  investments in 37 Local  Partnerships,  of which four remain at

                                      II-3

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


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        -------------------------------------------------
          CONDITION AND RESULTS OF OPERATIONS - Continued
          -----------------------------------

December 31, 2008. The Partnership's liquidity, with unrestricted cash resources
of  $5,229,267  as of December  31,  2008,  along with  anticipated  future cash
distributions  from the Local  Partnerships,  is expected to be adequate to meet
its current and anticipated  operating cash needs.  As of March 31, 2009,  there
were no material commitments for capital expenditures.

     During 2008 and 2007, the Partnership received cash distributions of $8,660
and $11,533, respectively, from the Local Partnerships.

     The purchase money note related to Victorian Towers  Associates  (Victorian
Towers),  in the original  principal  amount of $900,000,  matured on January 1,
1999,  and was  extended  during  2003  to  January  1,  2007.  The  Partnership
transferred its interest in Victorian Towers to the noteholder effective January
2, 2007 in full satisfaction of the purchase money note.

     Due on  investments  in  partnerships  includes  $119,544 due to a previous
owner related to Meadow Lanes II Associates  Ltd.  Dividend  Associates  (Meadow
Lanes  Apartments)  at December  31,  2008 and 2007;  accrued  interest  payable
thereon was $33,976 at December  31, 2008 and 2007.  These  amounts will be paid
upon  the  occurrence  of  certain  specific  events,  as  outlined  in the note
agreement.

     The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient  cash is available for operating  requirements.
For the year ended  December 31, 2008,  existing cash resources were adequate to
support  net cash  used in  operating  activities.  Cash  and  cash  equivalents
decreased  $598,316  during  2008,  primarily  due to  cash  used  in  operating
activities.  For the years  ended  December  31,  2008 and  December  31,  2007,
distributions  of $8,660 and $11,533,  respectively,  were  received  from Local
Partnerships.  The  Partnership  expects to receive a similar or lower amount of
distributions from these Local Partnerships in future years.

     The  Managing  General  Partner  currently  intends  to  retain  all of the
Partnership's  remaining  undistributed cash for operating cash reserves pending
further distributions under its Plan of Liquidation and Dissolution.

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

2008 Versus 2007
----------------

     The  Partnership  recognized net loss for the year ended December 31, 2008,
compared  to net  income  in  2007,  primarily  due to  decreases  in gain  from
extinguishment  of debt, gain on disposition of investment in  partnerships  and
interest  revenue,  partially  offset by an  increase  in share of  income  from
partnerships   and  decreases  in  general  and   administrative   expenses  and
professional  fees.  Interest  revenue  decreased  due to  lower  cash  and cash
equivalent  balances  and  rates in  2008.  Share of  income  from  partnerships
increased  due to higher  rental  revenue  and lower  operating  expenses at one
property  and an  advance  made  and  reduced  to zero for  financial  statement
purposes in 2007, partially offset by higher operating expenses at one property.
General and administrative  expenses decreased primarily due to lower reimbursed
payroll  costs.  Professional  fees are  lower due to a  reduction  in audit fee
expense associated with the timing of services provided.

     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, 2008 and 2007,  did not include  losses of $349,189  and  $380,095,
respectively.

                                      II-4

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


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        -------------------------------------------------
          CONDITION AND RESULTS OF OPERATIONS - Continued
          -----------------------------------

                                   Inflation
                                   ---------

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

     The  combined  rental  revenues  for  the   Partnership's   remaining  four
properties for the five years ended December 31, 2008,  follow.  Combined rental
revenue  amounts  have been  adjusted to reflect  property  sales and  interests
transferred during 2008 and in prior years.

<TABLE>
<CAPTION>
                                                         For the years ended December 31,
                               -----------------------------------------------------------------------------
                                  2008              2007             2006            2005            2004
                               -----------       ----------       ---------       ----------      ----------
<S>                            <C>         <S>   <C>        <C>   <C>        <C>  <C>       <C>   <C>
Combined Rental
  Revenue                      $4,426,527        $4,346,226       $4,368,345      $4,259,139      $4,275,322

Annual Percentage
  Increase (Decrease)                      1.8%             (0.5)%           2.6%           (0.4)%

</TABLE>


ITEM 8. FINANCIAL STATEMENTS
        --------------------

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


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
        ---------------------------------------------
          ON ACCOUNTING AND FINANCIAL DISCLOSURE
          --------------------------------------

     None.


ITEM 9A. CONTROLS AND PROCEDURES
         -----------------------

     In January 2009,  representatives  of the Managing  General  Partner of the
Partnership  carried out an  evaluation of the  effectiveness  of the design and
operation of the Partnership's  disclosure controls and procedures,  pursuant to
Exchange Act Rules  13a-15 and 15d-15.  The  Managing  General  Partner does not
expect that the  Partnership's  disclosure  controls and procedures will prevent
all error and all fraud.  A control  system,  no matter how well  conceived  and
operated,  can provide only  reasonable  assurance  that the  objectives  of the
control system are met. Further, the design of a control system must reflect the
fact that there are resource  constraints,  and the benefits of controls must be
considered relative to their costs.  Because of the inherent  limitations in all
control systems,  no evaluation of controls can provide absolute  assurance that
all control issues have been detected.  These inherent  limitations  include the
realities that judgments in  decision-making  can be faulty, and that breakdowns
can occur  because  of simple  error or  mistake.  The  design of any  system of
controls also is based in part upon certain  assumptions about the likelihood of
future  events,  and there can be no  assurance  that any design will succeed in
achieving its stated goals under all  potential  future  conditions.  Over time,
controls may become inadequate  because of changes in conditions,  or the degree
of compliance  with the policies or procedures may  deteriorate.  Because of the
inherent  limitations in a cost-effective  control system,  misstatements due to
error or fraud may  occur and not be  detected.  Based on such  evaluation,  our
principal  executive officer and principal financial officer have concluded that

                                      II-5

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


ITEM 9A. CONTROLS AND PROCEDURES - Continued
         -----------------------

as of December 31, 2008, our disclosure  controls and procedures  were effective
to ensure that (i) the information required to be disclosed by us in the reports
filed or submitted by us under the Securities  Exchange Act of 1934, as amended,
was  recorded,  processed,  summarized  or  reported  within  the  time  periods
specified in the SEC's rules and forms and (ii) such information was accumulated
and communicated to management,  including our principal  executive  officer and
principal  financial  officer,  to allow  timely  decisions  regarding  required
disclosure.  In  addition,  there  have  been  no  significant  changes  in  the
Partnership's internal control over financial reporting that occurred during the
Partnership's  most recent fiscal  quarter that has materially  affected,  or is
reasonably likely to materially affect, the Partnership's  internal control over
financial reporting.


ITEM 9B. OTHER INFORMATION
         -----------------

     There has not been any information  required to be disclosed in a report on
Form 8-K during the quarter ended December 31, 2008,  but not reported,  whether
or not otherwise required by this Form 10-K at December 31, 2008.

     Certain  states may assert claims  against the  Partnership  for failure to
withhold and remit state income tax on operating  profit or where the sale(s) of
property in which the Partnership was invested failed to produce sufficient cash
proceeds  with  which to pay the state tax and/or to pay  statutory  partnership
filing fees. The  Partnership is unable to quantify the amount of such potential
claims at this time. The Partnership has consistently  advised its Partners that
they  should  consult  with their tax  advisors  as to the  necessity  of filing
non-resident  returns in such states with  respect to their  proportional  taxes
due.

                                      II-6

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


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
         --------------------------------------------------

     (a) and (b)

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

     (a) and (b)

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

William B. Dockser, 72, has been the Chairman of the Board and a Director of CRI
since 1974.  Prior to forming  CRI, he served as  President of Kaufman and Broad
Asset Management,  Inc., an affiliate of Kaufman and Broad,  Inc., which managed
publicly held limited  partnerships created to invest in low and moderate income
multifamily apartment properties.  Prior to joining Kaufman and Broad, he served
in various positions at HUD,  culminating in the post of Deputy FHA Commissioner
and Deputy Assistant Secretary for Housing Production and Mortgage Credit, where
he was responsible for all federally insured housing production programs. Before
coming to the Washington,  D.C., area, Mr. Dockser was a practicing  attorney in
Boston and served as a special  Assistant  Attorney General for the Commonwealth
of  Massachusetts.  He holds a Bachelor of Laws degree from Yale  University Law
School and a Bachelor of Arts degree, cum laude, from Harvard University.

H. William Willoughby,  62, has been President,  Secretary and a Director of CRI
since January 1990,  and was Senior  Executive Vice  President,  Secretary and a
Director of CRI from 1974 to 1989.  Effective May 7, 2005, he assumed the duties
of Principal  Financial Officer and Principal  Accounting  Officer of CRI. He is
principally  responsible for the financial  management of CRI and its associated
partnerships.  Prior to joining CRI in 1974,  he was Vice  President  of Shelter
Corporation of America and a number of its subsidiaries dealing principally with
real  estate   development   and  equity   financing.   Before  joining  Shelter
Corporation,  he was a senior tax accountant with Arthur Andersen & Co. He holds
a Juris Doctor degree, a Master of Business Administration degree and a Bachelor
of  Science  degree in  Business  Administration  from the  University  of South
Dakota.

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

     (d)  Involvement in certain legal proceedings.

          None.


ITEM 11. EXECUTIVE COMPENSATION
         ----------------------

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

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

                                      III-1

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


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
         -----------------------------------------------
           AND MANAGEMENT
           --------------

     (a)  Security ownership of certain beneficial owners.

          The following  table sets forth  certain  information  concerning  any
          person  (including any "group") who is known by the  Partnership to be
          the  beneficial  owner of more than five  percent  of the  issued  and
          outstanding  units of additional  limited partner  interest (Units) at
          April 1, 2009.

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

          Equity Resource                 12,376 Units              20.7%
            Investments, LLC
          44 Brattle Street
          Cambridge, MA 02138

          Peachtree Partners
            & Affiliates
          P. O. Box 47638
          Phoenix, AZ 85068                3,567 Units              6.0%

     (b)  Security ownership of management.

          The following  table sets forth  certain  information  concerning  all
          Units  beneficially  owned, as of March 31, 2009, by each director and
          by all  directors  and  officers  as a group of the  Managing  General
          Partner of the Partnership.

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

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

     (c)  Changes in control.

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

                                      III-2

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


ITEM 13. 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  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 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
         --------------------------------------

     During the years ended December 31, 2008 and 2007, the Partnership retained
Grant Thornton LLP to provide services as follows.

                                            Year Ended December 31,
                                          ---------------------------
                                            2008               2007
                                          --------           --------

      Audit fees                          $112,900           $150,644
      Audit-related fees                        --                 --
      Tax fees (1)                          16,000             32,950
      All other fees                            --                 --
                                          --------           --------
          Total billed                    $128,900           $183,594
                                          ========           ========

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

     The Partnership has no directors or officers. The Board of Directors of the
Managing General Partner of the Partnership, serving as the audit committee, has
approved in advance  100% of the fees paid to, and  services  provided by, Grant
Thornton LLP. Prior to approving  Grant  Thornton LLP's  providing any non-audit
services,  the  Board  of  Directors  of the  Managing  General  Partner  of the
Partnership   would  assess  whether  the  provision  of  those  services  would
compromise  Grant  Thornton  LLP's  independence.  Grant  Thornton  LLP provided
partnership tax return preparation  services during the years ended December 31,
2008 and  2007,  which  services  it was  determined  did not  compromise  Grant
Thornton LLP's independence.

                                      III-3

<PAGE>
                                     PART IV
                                     -------


ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS
         ---------------------------------

1.   Financial Statements

     a.   The following documents are included as part of this report:

          (1)  Financial Statements

               Report of Independent Registered Public Accounting Firm
               Balance Sheets
               Statements of Operations
               Statements of Changes in Partners' (Deficit) Capital
               Statements of Cash Flows
               Notes to Financial Statements

          (2)  Financial Statement Schedules

               None.

          (3)  Exhibits

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

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

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

               Exhibit No. 3 - Articles of Incorporation and bylaws

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

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

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

               Exhibit No. 10 - Material Contracts.

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

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


                                      IV-1

<PAGE>
                                     PART IV
                                     -------


ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS - Continued
         ---------------------------------

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

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

               Exhibit No. 99 - Additional Exhibits.

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


                                      IV-2

<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



April 1, 2009                         by:  /s/ William B. Dockser
--------------                              ------------------------------------
DATE                                        William B. Dockser,
                                            Director, Chairman of the Board,
                                              and Treasurer
                                             (Principal Executive Officer)


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


March 31, 2009                         by:  /s/ H. William Willoughby
--------------                              ------------------------------------
DATE                                        H. William Willoughby,
                                            Director, President, Secretary,
                                              Principal Financial Officer and
                                              Principal Account Officer

                                      IV-3

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                          INDEX TO FINANCIAL STATEMENTS



                                                                           Page
                                                                           ----

Financial Statements of Capital Realty Investors-III Limited Partnership

Report of Independent Registered Public Accounting Firm..................  IV-5
Balance Sheets as of December 31, 2008 and 2007..........................  IV-6
Statements of Operations for the Years Ended
  December 31, 2008, 2007 and 2006.......................................  IV-7
Statements of Changes in Partners' Deficit for the Years Ended
  December 31, 2008, 2007 and 2006.......................................  IV-8
Statements of Cash Flows for the Years Ended
  December 31, 2008, 2007 and 2006.......................................  IV-9
Notes to Financial Statements............................................  IV-10


                                      IV-4

<PAGE>





Report of Independent Registered Public Accounting Firm


The Partners
Capital Realty Investors-III Limited Partnership


We have audited the accompanying  balance sheets of Capital Realty Investors-III
Limited  Partnership (a Maryland limited  partnership)  (the  Partnership) as of
December 31, 2008 and 2007, and the related statements of operations,  partners'
(deficit)  capital,  and cash  flows for each of the three  years in the  period
ended December 31, 2008. 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 conducted our audits in accordance  with the Standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audits to  obtain  reasonable  assurance  about  whether  the
financial statements are free from material misstatement. The Partnership is not
required  to have,  nor were we  engaged  to  perform  an audit of its  internal
control over financial reporting.  Our audit included  consideration of internal
control over financial  reporting as a basis for designing audit procedures that
are appropriate in the  circumstances,  but not for the purpose of expressing an
opinion  on  the  effectiveness  of  the  Partnership's  internal  control  over
financial  reporting.  Accordingly,  we express no such  opinion.  An audit also
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by  management,  as well as evaluating the
overall financial statement  presentation.  We believe that our audits provide a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial  position of Capital Realty  Investors-III
Limited  Partnership  as of December  31, 2008 and 2007,  and the results of its
operations  and its cash flows for each of the three  years ended  December  31,
2008, in conformity with accounting  principles generally accepted in the United
States of America.

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


/s/ Grant Thornton LLP


McLean, Virginia
March 31, 2009

                                      IV-5

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                                 BALANCE SHEETS


                                     ASSETS

<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                      ----------------------------
                                                                                          2008             2007
                                                                                      ------------    ------------
<S>                                                                                   <C>             <C>
Investments in partnerships .......................................................   $  2,543,918    $  2,502,406
Cash and cash equivalents .........................................................      5,229,267       5,827,583
Acquisition fees, principally paid to related parties,
  net of accumulated amortization of $65,847 and $63,275, respectively ............         11,308          13,880
Property purchase costs,
  net of accumulated amortization of $39,532 and $37,916, respectively ............          8,950          10,566
Other assets ......................................................................          5,645          24,035
                                                                                      ------------    ------------

      Total assets ................................................................   $  7,799,088    $  8,378,470
                                                                                      ============    ============



                        LIABILITIES AND PARTNERS' DEFICIT


Due on investments in partnerships ................................................   $    119,544    $    119,544
Accrued interest payable ..........................................................         33,976          33,976
Accounts payable and accrued expenses .............................................        339,199         440,732
                                                                                      ------------    ------------

      Total liabilities ...........................................................        492,719         594,252
                                                                                      ------------    ------------

Commitments and contingencies

Partners' deficit:

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

                                                                                        60,003,500      60,003,500

  Less:
    Accumulated distributions to partners .........................................    (26,573,905)    (26,573,905)
    Offering costs ................................................................     (6,156,933)     (6,156,933)
    Accumulated losses ............................................................    (19,966,293)    (19,488,444)
                                                                                      ------------    ------------

      Total partners' capital .....................................................      7,306,369       7,784,218
                                                                                      ------------    ------------

      Total liabilities and partners' capital .....................................   $  7,799,088    $  8,378,470
                                                                                      ============    ============
</TABLE>

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

                                      IV-6

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                 For the years ended
                                                                                      December 31,
                                                                     --------------------------------------------
                                                                         2008            2007            2006
                                                                     ------------    ------------    ------------
<S>                                                                  <C>             <C>             <C>
Share of income from partnerships ................................   $     59,468    $     37,785    $     95,628
                                                                     ------------    ------------    ------------

Other revenue and expenses:

  Revenue:
    Gain from extinguishment of debt .............................           --         3,096,290      13,610,976
    Interest and other ...........................................        156,074         237,275         568,938
                                                                     ------------    ------------    ------------

                                                                          156,074       3,333,565      14,179,914
                                                                     ------------    ------------    ------------

  Expenses:
    General and administrative ...................................        267,577         358,376         447,941
    Management fee ...............................................        300,000         300,000         300,000
    Professional fees ............................................        112,330         190,080         184,852
    Amortization of deferred costs ...............................          4,188          17,192          10,484
    Interest .....................................................           --               232         104,696
                                                                     ------------    ------------    ------------

                                                                          684,095         865,880       1,047,973
                                                                     ------------    ------------    ------------

      Total other revenue and expenses ...........................       (528,021)      2,467,685      13,131,941
                                                                     ------------    ------------    ------------

(Loss) income before gain on disposition of investment in
  partnerships and impairment loss ...............................       (468,553)      2,505,470      13,227,569

Gain on disposition of investment in partnerships,
  net of disposition fees ........................................           --           260,209       7,617,744

Impairment loss ..................................................         (9,296)       (262,590)           --
                                                                     ------------    ------------    ------------

Net (loss) income ................................................   $   (477,849)   $  2,503,089    $ 20,845,313
                                                                     ============    ============    ============


Net (loss) income allocated to General Partners (1.51%) ..........   $     (7,216)   $     37,797    $    314,764
                                                                     ============    ============    ============

Net (loss) income allocated to Initial and
  Special Limited Partners (1.49%) ...............................   $     (7,120)   $     37,296    $    310,595
                                                                     ============    ============    ============

Net (loss) income allocated to Additional Limited Partners (97%) .   $   (463,513)   $  2,427,996    $ 20,219,954
                                                                     ============    ============    ============

Net (loss) income per unit of Additional Limited Partner Interest,
  based on 59,882 units outstanding ..............................   $      (7.74)   $      40.55    $     337.66
                                                                     ============    ============    ============
</TABLE>

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

                                      IV-7

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   STATEMENTS OF CHANGES IN PARTNERS' DEFICIT

<TABLE>
<CAPTION>
                                                                 Initial and
                                                                   Special        Additional
                                                   General         Limited         Limited
                                                   Partners        Partners        Partners         Total
                                                 ------------    ------------    ------------    ------------
<S>                                              <C>             <C>             <C>             <C>
Partner's deficit, January 1, 2006 ...........   $   (773,609)   $   (763,968)   $ (6,721,344)   $ (8,258,921)

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

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

Partners' (deficit) capital, December 31, 2006       (458,845)       (453,373)      6,193,006       5,280,788
                                                 ------------    ------------    ------------    ------------

  Net income .................................         37,797          37,296       2,427,996       2,503,089

  Abandoned units ............................           --              --               341             341
                                                 ------------    ------------    ------------    ------------

Partners' (deficit) capital, December 31, 2007       (421,048)       (416,077)      8,621,343       7,784,218

  Net loss ...................................         (7,216)         (7,120)       (463,513)       (477,849)
                                                 ------------    ------------    ------------    ------------

Partners' (deficit) capital, December 31, 2008   $   (428,264)   $   (423,197)   $  8,157,830    $  7,306,369
                                                 ============    ============    ============    ============
</TABLE>

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

                                      IV-8

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                         For the years ended
                                                                                             December 31,
                                                                             --------------------------------------------
                                                                                 2008            2007           2006
                                                                             ------------    ------------    ------------
<S>                                                                          <C>             <C>             <C>
Cash flows from operating activities:
  Net (loss) income ......................................................   $   (477,849)   $  2,503,089    $ 20,845,313

  Adjustments to reconcile net (loss) income to net cash used in operating
    activities:
    Share of income from partnerships ....................................        (59,468)        (37,785)        (95,628)
    Amortization of deferred costs .......................................          4,188          17,192          10,484
    Gain from extinguishment of debt .....................................           --        (3,096,290)    (13,610,976)
    Gain on disposition of investment in partnerships,
      net of disposition fees ............................................           --          (260,209)     (7,617,744)
    Impairment loss ......................................................          9,296         262,590            --

    Changes in assets and liabilities:
      Decrease (increase) in other assets ................................         18,390         207,064        (225,039)
      Increase in accrued interest payable ...............................           --               232         104,696
      Payment of purchase money note interest ............................           --              --           (12,818)
      (Decrease) increase in accounts payable and accrued expenses .......       (101,533)       (184,321)        447,488
                                                                             ------------    ------------    ------------

        Net cash used in operating activities ............................       (606,976)       (588,438)       (154,224)
                                                                             ------------    ------------    ------------

Cash flows from investing activities:
  Proceeds from disposition of investment in partnerships ................           --           231,412       9,373,376
  Collection of sales proceeds receivable ................................           --           132,873          15,900
  Receipt of distributions from partnerships .............................          8,660          11,533          84,010
  Disposition fees paid to related party .................................           --              --        (1,785,000)
  Sale transaction fees payable ..........................................           --          (255,000)           --
  Advance to Local Partnership ...........................................           --           (35,745)       (150,000)
  Collection of advance to Local Partnership .............................           --            35,745         150,000
                                                                             ------------    ------------    ------------

        Net cash provided by investing activities ........................          8,660         120,818       7,688,286
                                                                             ------------    ------------    ------------


Cash flows from financing activities:
  Distributions to Additional Limited Partners ...........................           --               341      (7,305,604)
                                                                             ------------    ------------    ------------


Net (decrease) increase in cash and cash equivalents .....................       (598,316)       (467,279)        228,458

Cash and cash equivalents, beginning of year .............................      5,827,583       6,294,862       6,066,404
                                                                             ------------    ------------    ------------

Cash and cash equivalents, end of year ...................................   $  5,229,267    $  5,827,583    $  6,294,862
                                                                             ============    ============    ============
</TABLE>

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

                                      IV-9

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

          The  Partnership  sold 60,000  units at $1,000 per unit of  additional
     limited partner interest through a public offering. The offering period was
     terminated in January  1984. As of December 31, 2008,  118 units of limited
     partner interest had been abandoned.

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

          The  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.   Investments in partnerships
          ---------------------------

          The investments in Local  Partnerships  (see Note 2) are accounted for
     by the equity method because the  Partnership  is a limited  partner in the
     Local  Partnerships.   Under  this  method,  the  carrying  amount  of  the
     investments in Local Partnerships is (i) reduced by distributions  received
     and (ii)  increased  or reduced by the  Partnership's  share of earnings or
     losses,  respectively,  of the Local Partnerships.  As of December 31, 2008
     and 2007, the  Partnership's  share of cumulative losses for two and two of
     the Local Partnerships exceeded the amount of the Partnership's investments
     in those Local  Partnerships  by $9,181,015 and  $8,831,826,  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 financial statements.

          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.

                                      IV-10

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS


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

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

          Due to the possible sales of the properties  related to Villa Mirage I
     and Villa Mirage II, as further  discussed in Note 2.e., the  Partnership's
     investments in these Local  Partnerships  have been  reclassified  to asset
     held for sale or transfer in the  accompanying  balance  sheets at December
     31, 2008 and  December  31,  2007.  When  investments  are  reclassifed  to
     investment in partnerships  held for sale or transfer,  amortization of the
     acquisition fees and property purchase costs are discontinued.  Assets held
     for sale or  transfer  are not  recorded in excess of their  estimated  net
     realizable value.

     e.   Cash and cash equivalents
          -------------------------

          Cash and cash  equivalents  consist of money  market  funds,  time and
     demand  deposits,  and repurchase  agreements  with original  maturities of
     three months or less. Interest income is recognized as earned.

     f.   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 financial statements.

     g.   Use of estimates
          ----------------

          In  preparing  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  financial  statements,  and of
     revenues and expenses  during the reporting  periods.  Actual results could
     differ from those estimates.

     h.   Fair value of financial instruments
          -----------------------------------

          In September  2006,  the  Financial  Accounts  Standards  Board (FASB)
     issued SFAS No. 157, Fair Value Measurements ("SFAS No. 157"). SFAS No. 157
     establishes  a formal  framework  for  measuring  fair value under US GAAP.
     Although SFAS No. 157 applies  (amends) the provisions of existing FASB and
     AICPA pronouncements,  it does not require any new fair value measurements,
     nor does it establish  valuation  standards.  SFAS No. 157 is effective for
     fiscal years  beginning after November 15, 2007. We adopted the recognition
     and  disclosure  provisions  of SFAS  No.  157  for  financial  assets  and
     financial   liabilities  and  for  nonfinancial   assets  and  nonfinancial
     liabilities  that are  re-measured at least annually  effective  January 1,
     2008.  The  adoption  did  not  have a  material  impact  on our  financial
     position,  results of operations or cash flows. In accordance with FSP SFAS
     No. 157-2,  "Effective  Date of FASB Statement No. 157", we are required to
     adopt the provisions of SFAS No. 157 for all other nonfinancial  assets and
     nonfinancial  liabilities  effective  January 1, 2009 and do not expect the
     adoption to have a material  impact on our financial  position,  results of
     operations or cash flows.

          SFAS No. 157 establishes a hierarchy for inputs used in measuring fair
     value as follows:

                                      IV-11

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

     1.   Level 1 Inputs -- quoted prices in active markets for identical assets
          of liabilities.
     2.   Level 2 Inputs -- observe  inputs  other than quoted  prices in active
          markets for identical assets and liabilities.
     3.   Level 3 Inputs -- unobservable inputs.

          In certain cases,  the inputs used to measure fair value may fall into
     different levels of the fair value hierarchy. In such cases, for disclosure
     purposes,  the level within which the fair value measurement is categorized
     is based on the lowest  level input that is  significant  to the fair value
     measurement.

          The  balance  sheet  carrying  amount  for cash  and cash  equivalents
     approximates their fair value.

     i.   Impairment analysis
          -------------------

          The Partnership reviews property assets for impairment whenever events
     or changes in  circumstances  indicate that the carrying amount of an asset
     may not be fully recoverable. Recoverability is measured by a comparison of
     the  carrying  amount of an asset to the  estimated  future  net cash flows
     expected to be generated by the asset.  If an asset were  determined  to be
     impaired, its basis would be adjusted to fair value through the recognition
     of an impairment loss.

     j.   Definitive Proxy Statement
          --------------------------

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

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

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

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

          The record date for voting was November 1, 2005,  and the final voting
     deadline was January 20, 2006.  The Managing  General  Partner has received

                                      IV-12

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

     consent from a majority of the Limited  Partners for the liquidation of the
     Partnership. A tabulation of votes received by the voting deadline follows.

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

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

</TABLE>

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

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

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

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

          In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
     for Financial  Assets and Financial  Liabilities  Including an Amendment of
     FASB Statement No. 115" ("SFAS No. 159"). This standard permits entities to
     choose to measure many  financial  instruments  and certain  other items at
     fair value and is  effective  for the first  fiscal  year  beginning  after
     November 15, 2007. We did not make this fair value election when we adopted
     SFAS No. 159 effective January 1, 2008, and, therefore,  it did not have an
     impact on our financial position, results of operations, or cash flows.


2.   INVESTMENTS IN PARTNERSHIPS

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

          As of December 31, 2008 and 2007, the Partnership held limited partner
     interests  in four Local  Partnerships  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.

          Due on investments in partnerships includes $119,544 due to a previous
     owner  related  to Meadow  Lanes at  December  31,  2008 and 2007;  accrued
     interest  payable thereon was $33,976 at December 31, 2008 and 2007.  These
     amounts will be paid upon the  occurrence of certain  specific  events,  as
     outlined in the note agreement.

          The  purchase  money  note  related to  Victorian  Towers had a stated
     interest rate of 3.06%,  which had been reduced by agreement.  The purchase
     money note was nonrecourse, but its terms provided for payment in full upon
     the  earliest  of:  (i)  sale  or  refinancing  of  the  respective   Local
     Partnership's rental property; (ii) payment in full of the respective Local

                                      IV-13

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

     Partnership's  permanent loan; or (iii)  maturity.  The purchase money note
     was extended to mature  January 1, 2007.  As of January 2, 2007,  principal
     and accrued interest  balances were $775,000 and $2,340,349,  respectively.
     The  Partnership's  interest in  Victorian  Towers was  transferred  to the
     noteholder  in full  satisfaction  of the  purchase  money  note  effective
     January 2, 2007.

          Interest  expense  on the  Partnership's  purchase  money note for the
     years ended  December 31, 2008,  2007 and 2006,  was $0, $232 and $104,696,
     respectively.

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

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

          In April 2003,  the Managing  General  Partner and the purchase  money
     noteholders agreed to extend the maturity dates of the purchase money notes
     related to Heritage  Estates I and Heritage  Estates II to January 1, 2004.
     In conjunction  therewith,  on April 4, 2003,  documents  transferring  the
     Partnership's  interests in Heritage Estates I and Heritage Estates II were
     placed in escrow,  to be released to the  noteholders  in the event of non-
     payment at maturity.  The noteholders  obtained regulatory consents for the
     transfers and the  conveyance  instruments  were released from escrow as of
     February 8, 2006. The transfer resulted in gain from extinguishment of debt
     of  $13,610,976  for  financial  statement  purposes  in 2006,  and gain of
     $13,034,619  for federal tax purposes in 2006.  At December  31, 2006,  the
     Partnership  accrued $116,595 for a cash  distribution  received in January
     2007 which was recorded as other income for financial  statement  purposes,
     and which  increased  the gain  mentioned  above.  At March 31,  2007,  the
     Partnership   accrued   $98,686  and  reduced   other  income  for  a  cash
     distribution paid to the noteholders in April 2007.

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

          The  Partnership  defaulted  on its  purchase  money  note  related to
     Victorian  Towers on  January 1, 1999,  when the note  matured  and was not
     paid.  The  default  amount  included  principal  and  accrued  interest of
     $900,000 and  $1,710,560,  respectively.  Subsequent  thereto,  the parties
     extended the maturity date to January 1, 2004.  In June 2003,  the Managing
     General Partner and the purchase money noteholder  agreed to further extend
     the maturity date of the purchase money note related to Victorian Towers to
     January 1, 2007, and to reduce its interest rate effective as of January 1,
     2003. At the time of the agreement, the Partnership made a $125,000 payment
     to the purchase  money  noteholder to be applied to the purchase money note
     principal.  On January 1, 2007,  the purchase  money note was not paid. The
     noteholder  accepted the  assignment of the  Partnership's  interest in the
     Local  Partnership  effective  January 2, 2007 in full  satisfaction of the
     note.  The  transfer  resulted  in  gain  from  extinguishment  of  debt of
     $3,096,290 for financial  statement purposes in 2007 and gain of $6,728,601
     for federal tax purposes.

                                      IV-14

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS


2. INVESTMENTS IN PARTNERSHIPS - Continued

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

          The Partnership has a 98.00% to 98.99% interest in profits, losses and
     cash  distributions  (as  restricted  by various  federal and state housing
     agencies)  (collectively,  the  "Agencies") of each Local  Partnership.  An
     affiliate  of the Managing  General  Partner of the  Partnership  is also a
     general  partner  of each Local  Partnership.  As  stipulated  by the Local
     Partnerships'  partnership agreements,  the Local Partnerships are required
     to make annual cash  distributions  from surplus cash flow, if any.  During
     2008 and 2007,  the  Partnership  received cash  distributions  from rental
     operations  of  the  Local   Partnerships   totaling  $8,660  and  $11,533,
     respectively. As of December 31, 2008 and 2007, three of four and three and
     five,  respectively,  of the Local Partnerships had aggregate surplus cash,
     as defined  by their  respective  regulatory  Agencies,  in the  amounts of
     $103,976  and   $133,828,   respectively,   which  may  be  available   for
     distribution  in  accordance  with their  respective  regulatory  Agencies'
     regulations.

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

          Upon sale or refinancing  of a property owned by a Local  Partnership,
     or upon the  liquidation  of a Local  Partnership,  the proceeds  from such
     sale,  refinancing or liquidation  shall be distributed in accordance  with
     the  respective   provisions  of  each  Local   Partnership's   partnership
     agreement.  In  accordance  with such  provisions,  the  Partnership  would
     receive  from such  proceeds  its  respective  percentage  interest  of any
     remaining  proceeds,  after payment of (i) all debts and liabilities of the
     Local Partnership and certain other items,  (ii) the Partnership's  capital
     contributions   plus  certain   specified   amounts  as  outlined  in  each
     partnership  agreement,  and (iii) certain special distributions to general
     partners and related entities of the Local Partnership.

     c.   Advances to Local Partnerships
          ------------------------------

          In May 2007,  the  Partnership  advanced  $35,745 to  Windham  Village
     Limited Partnership (Windham Village) to provide the Local Partnership with
     funds for  operating  expenses.  For  financial  reporting  purposes,  this
     advance was reduced to zero by the Partnership as a result of losses at the
     Local  Partnership  level.  In October 2007,  the advance was repaid to the
     Partnership.

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

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

          On November 8, 2006, contracts for the sales of the Villa Mirage I and
     Villa Mirage II properties were signed. The contracts have been extended to
     June 30, 2009. Due to the possible sale of the properties  related to Villa
     Mirage  I and  Villa  Mirage  II,  the  Partnership's  basis  in the  Local
     Partnerships,  along with net  unamortized  acquisition  fees and  purchase
     property costs,  which totaled $0 as of both December 31, 2008 and December

                                      IV-15

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

     31, 2007, have been  reclassified to assets held for sale or transfer.  Net
     capitalized  acquisition  fees and property  purchase costs were reduced to
     zero at December 31, 2007. At December 31, 2007,  the  Partnership  accrued
     transaction fees payable relating to the sale of the properties of $255,000
     which are  included in  impairment  loss in the  accompanying  statement of
     operations  at December 31, 2007.  There is no assurance  that the sales of
     the properties will occur.

     e.   Completed sales
          ---------------

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

          On March 1, 2006,  the  Partnership's  interest in  Arboretum  Village
     Limited  Partnership  (Arboretum  Village)  was sold.  Gross cash  proceeds
     received by the Partnership  totaled  $6,988,753.  The sale resulted in net
     gain on  disposition  of  investments  in  partnerships  of $5,677,535  for
     financial statement purposes in 2006 and $15,031,712 for federal income tax
     purposes.  In accordance  with the terms of the Partnership  Agreement,  in
     March 2006,  the Managing  General  Partner was paid a  disposition  fee of
     $975,000  related to the sale.  The fee was netted against the related gain
     on disposition of investment in  partnerships.  During the first quarter of
     2007,  the  Partnership  recorded  gain on  disposition  of  investment  in
     partnerships of $296,000 for financial  statement  purposes for funds which
     had been held in reserve during 2006.

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

          On June 27, 2006, the properties  related to Village Squire I & II and
     Village  Squire  III were  sold.  Gross cash  proceeds  distributed  to the
     Partnership at December 31, 2006 totaled  $2,990,786.  The sale resulted in
     gain on  disposition  of  investments  in  partnerships  of $1,948,765  for
     financial  statement  purposes in 2006 and gain of $12,425,791  for federal
     income  tax  purposes.  In  accordance  with the  terms of the  Partnership
     Agreement,   in  July  2006,  the  Managing  General  Partner  was  paid  a
     disposition  fee of $810,000  related to the sale.  The fee was accrued and
     netted   against  the  related  gain  on   disposition   of  investment  in
     partnerships  at June 30,  2006.  At December  31,  2006,  the  Partnership
     accrued $132,873 for additional  proceeds received in March 2007, which was
     recorded as gain on disposition of investment in partnerships for financial
     statement  purposes,  and which increased the gain mentioned above.  During
     the first quarter of 2007, the  Partnership  reduced gain on disposition of
     investments in partnerships by $97,358 for additional  expenses relating to
     the sales.  During  the third  quarter of 2007,  the  Partnership  received
     $8,044  which is included  in other  income in the  accompanying  financial
     statements at September 30, 2007.

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

          On October 31, 2007, the Partnership's interest in Windham Village was
     sold.  The sale  resulted  in net gain on  disposition  of  investments  in
     partnerships  of  $61,567  for  financial  statement  purposes  and gain of
     $1,510,419 for federal tax purposes.

                                      IV-16

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

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

          Combined balance sheets and combined  statements of operations for the
     four Local Partnerships in which the Partnership is invested as of December
     31, 2008,  follow.  The  information is presented  separately for one Local
     Partnership which has investment basis (equity method), and for three Local
     Partnerships  for which the  Partnership's  carrying  value is zero (equity
     method suspended).

<TABLE>
<CAPTION>
                                         COMBINED BALANCE SHEETS
                                            December 31, 2008

                                                          Equity
                                                          Method          Suspended           Total
                                                       ------------      ------------      ------------
     <S>                                               <C>               <C>               <C>
     Number of Local Partnerships                           1                 3                 4
                                                            =                 =                 =

     Rental property, at cost, net of
       accumulated depreciation of
       $3,691,830 $19,142,608, and
       $22,834,438, respectively                       $  1,423,564      $  3,633,812      $  5,057,376
     Land                                                   168,760         2,108,943         2,277,703
     Other assets                                         1,858,873         1,795,775         3,654,648
                                                       ------------      ------------      ------------

         Total assets                                  $  3,451,197      $  7,538,530      $ 10,989,727
                                                       ============      ============      ============


     Mortgage notes payable                            $    822,686      $ 16,022,288      $ 16,844,974
     Other liabilities                                       78,000         1,398,701         1,476,701
     Due to general partners                                     --         2,429,270         2,429,270
                                                       ------------      ------------      ------------

         Total liabilities                                  900,686        19,850,259        20,750,945

     Partners' capital (deficit)                          2,550,511       (12,311,729)       (9,761,218)
                                                       ------------      ------------      ------------

         Total liabilities and partners'
           capital (deficit)                           $  3,451,197      $  7,538,530      $ 10,989,727
                                                       ============      ============      ============
</TABLE>

<TABLE>
<CAPTION>
                                       COMBINED STATEMENTS OF OPERATIONS
                                     For the year ended December 31, 2008

                                                          Equity
                                                          Method          Suspended           Total
                                                       ------------      ------------      ------------
     <S>                                               <C>               <C>               <C>
     Number of Local Partnerships                           1                 3                 4
                                                            =                 =                 =

     Revenue:
       Rental                                          $    707,396      $  3,719,131      $  4,426,527
       Other                                                129,588           215,564           345,152
                                                       ------------      ------------      ------------

         Total revenue                                      836,984         3,934,695         4,771,679
                                                       ------------      ------------      ------------

     Expenses:
       Operating and other                                  636,645         2,415,147         3,051,792
       Interest                                             (42,225)        1,014,252           972,027
       Depreciation and amortization                        191,368           848,625         1,039,993
                                                       ------------      ------------      ------------

         Total expenses                                     785,788         4,278,024         5,063,812
                                                       ------------      ------------      ------------

     Net income (loss)                                 $     51,196      $   (343,329)     $   (292,133)
                                                       ============      ============      ============

     Cash distributions                                $      8,660      $         --      $      8,660
                                                       ============      ============      ============

     Share of income from partnerships                 $     50,172      $      9,296      $     59,468
                                                       ============      ============      ============
</TABLE>

                                      IV-17

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

          Combined balance sheets and combined  statements of operations for the
     four  Local  Partnerships  in which  the  Partnership  was  invested  as of
     December 31, 2007, follow. The information is presented  separately for one
     Local  Partnerships  which has investment  basis (equity  method),  and for
     three Local Partnerships for which the Partnership's carrying value is zero
     (equity method suspended).

<TABLE>
<CAPTION>
                                          COMBINED BALANCE SHEETS
                                             December 31, 2007

                                                   Equity
                                                   Method           Suspended           Total
                                                ------------       ------------      ------------
      <S>                                       <C>                <C>               <C>
      Number of Local Partnerships                   1                  3                 4
                                                     =                  =                 =

      Rental property, at cost, net of
        accumulated depreciation of
        $3,551,542 $18,296,826, and
        $21,848,368, respectively               $  1,456,474       $  4,450,817      $  5,907,291
      Land                                           168,760          1,833,799         2,002,559
      Other assets                                 1,874,668          2,059,022         3,933,690
                                                ------------       ------------      ------------

          Total assets                          $  3,499,902       $  8,343,638      $ 11,843,540
                                                ============       ============      ============


      Mortgage notes payable                    $    944,841       $ 16,513,189      $ 17,458,030
      Other liabilities                               46,909          1,441,187         1,488,096
      Due to general partners                             --          2,357,662         2,357,662
                                                ------------       ------------      ------------

          Total liabilities                          991,750         20,312,038        21,303,788

      Partners' capital (deficit)                  2,508,152        (11,968,400)       (9,460,248)
                                                ------------       ------------      ------------

          Total liabilities and partners'
            capital (deficit)                   $  3,499,902       $  8,343,638      $ 11,843,540
                                                ============       ============      ============

</TABLE>

                                      IV-18

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

<TABLE>
<CAPTION>
                                    COMBINED STATEMENTS OF OPERATIONS
                                    For the year ended December 31, 2007

                                                          Equity
                                                          Method          Suspended           Total
                                                       ------------      ------------      ------------
     <S>                                               <C>               <C>               <C>
     Number of Local Partnerships                           1                 3                 4
                                                            =                 =                 =

     Revenue:
       Rental                                          $    730,879      $  3,615,347      $  4,346,226
       Other                                                126,793           222,702           349,495
                                                       ------------      ------------      ------------

         Total revenue                                      857,672         3,838,049         4,695,721
                                                       ------------      ------------      ------------

     Expenses:
       Operating and other                                  591,086         2,387,105         2,978,191
       Interest                                             (34,931)        1,059,413         1,024,482
       Depreciation and amortization                        189,619           812,647         1,002,266
                                                       ------------      ------------      ------------

         Total expenses                                     745,774         4,259,165         5,004,939
                                                       ------------      ------------      ------------

     Net income (loss)                                 $    111,898      $   (421,116)     $   (309,218)
                                                       ============      ============      ============

     Cash distributions                                $     11,535      $         --      $     11,535
                                                       ============      ============      ============

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


     Partnership's share of Local Partnership
       net income (loss)                               $    109,660      $    (35,418)     $     74,242

     Advance to Local Partnership                                --           (36,457)(1)       (36,457)(1)
                                                       ------------      ------------      ------------

     Share of income (loss) from partnerships          $    109,660      $    (71,875)     $     37,785
                                                       ============      ============      ============
</TABLE>

     (1)  Windham Village sold October 2007.


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


                                      IV-19

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

<TABLE>
<CAPTION>
                                           COMBINED BALANCE SHEETS
                                              December 31, 2006

                                                    Equity
                                                    Method           Suspended          Total
                                                 ------------       ------------     ------------
     <S>                                         <C>                <C>              <C>
     Number of Local Partnerships                     2                 4                 6
                                                      =                 =                 =

     Rental property, at cost, net of
       accumulated depreciation of
       $5,985,836, $22,983,879, and
       $28,969,715, respectively                 $  1,919,924       $  9,622,971     $ 11,542,895
     Land                                             432,415          2,636,331        3,068,746
     Other assets                                   2,022,633          3,412,176        5,434,809
                                                 ------------       ------------     ------------

         Total assets                            $  4,374,972       $ 15,671,478     $ 20,046,450
                                                 ============       ============     ============


     Mortgage notes payable                      $  2,504,309       $ 21,159,322     $ 23,663,631
     Other liabilities                                434,928          3,263,765        3,698,693
     Due to general partners                        1,029,543          1,256,511        2,286,054
                                                 ------------       ------------     ------------

         Total liabilities                          3,968,780         25,679,598       29,648,378

     Partners' capital (deficit)                      406,192        (10,008,120)      (9,601,928)
                                                 ------------       ------------     ------------

         Total liabilities and partners'
           capital (deficit)                     $  4,374,972       $ 15,671,478     $ 20,046,450
                                                 ============       ============     ============
</TABLE>

<TABLE>
<CAPTION>
                                    COMBINED STATEMENTS OF OPERATIONS
                                    For the year ended December 31, 2006

                                                    Equity
                                                    Method           Suspended          Total
                                                 ------------       ------------     ------------
     <S>                                         <C>                <C>              <C>
     Number of Local Partnerships                     2                 4                 6
                                                      =                 =                 =

     Revenue:
       Rental                                    $  1,248,975       $  5,158,039     $  6,407,014
       Other                                          141,051            258,929          399,980
                                                 ------------       ------------     ------------

         Total revenue                              1,390,026          5,416,968        6,806,994
                                                 ------------       ------------     ------------

     Expenses:
       Operating and other                            914,376          3,549,550        4,463,926
       Interest                                       136,085          1,167,256        1,303,341
       Depreciation and amortization                  314,515          1,117,567        1,432,082
                                                 ------------       ------------     ------------

         Total expenses                             1,364,976          5,834,373        7,199,349
                                                 ------------       ------------     ------------

     Net income (loss)                           $     25,050       $   (417,405)    $   (392,355)
                                                 ============       ============     ============

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

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

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

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

</TABLE>

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


                                      IV-20

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

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

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

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

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

<TABLE>
<CAPTION>
                                                             For the years ended
                                                                  December 31,
                                                ---------------------------------------------
                                                   2008               2007            2006
                                                ----------        ----------       ----------
     <S>                                        <C>               <C>              <C>
     Financial statement net loss               $ (292,133)       $ (309,218)      $ (392,355)

     Differences between financial statement
       and tax depreciation, amortization,
       and miscellaneous differences               814,671           704,399        1,001,215
                                                ----------        ----------       ----------

     Taxable income                             $  522,538        $  395,181       $  608,860
                                                ==========        ==========       ==========

</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 or its  affiliates  for
direct expenses in connection with managing the Partnership. For the years ended
December 31, 2008,  2007 and 2006, the Partnership  paid $232,958,  $284,844 and
$350,154,  respectively,  as direct reimbursement of expenses incurred on behalf
of the  Partnership.  Such  expenses are included in general and  administrative
expenses in the accompanying statements of operations.

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

                                      IV-21

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                          NOTES TO 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, 2008,  2007 and 2006,  the  Partnership
paid the Managing General Partner a Management Fee of $300,000.

     Until January 22, 2006, when the Liquidation  Proxy authorized an increased
disposition  fee to the  Managing  General  Partner  under  the  terms set forth
therein,  the Managing General Partner and/or its affiliates had been authorized
to  receive  a fee of not  more  than  two  percent  of the  sales  price  of an
investment in a Local Partnership or the property it owns, payable under certain
conditions upon the sale of an investment in a Local Partnership or the property
it owns.  The  payment  of the fee has been  subject  to  certain  restrictions,
including  the  achievement  of a certain  level of sales  proceeds  and  making
certain minimum  distributions to limited partners. In accordance with the terms
of a Definitive  Proxy  Statement for the  Liquidation  and  Dissolution  of the
Partnership, which was approved on January 20, 2006, by holders of a majority of
the Units of Limited Partner Interest,  the Managing General Partner may receive
property  disposition  fees from the  Partnership on the same basis as such fees
may be paid to Local General Partners,  real estate brokers or other third party
intermediaries employed to sell Partnership  properties,  to the extent that CRI
markets  and sells the  Partnership's  properties  instead of such  persons.  In
addition, the Managing General Partner may receive a partnership liquidation fee
in the amount of  $500,000,  payable  only if the  Managing  General  Partner is
successful in liquidating all of the Partnership's  investments within 48 months
from the date the  liquidation  is approved  [January 20, 2006],  in recognition
that one or more of the  properties in which the  Partnership  holds an interest
might not be  saleable  to parties  not  affiliated  with the  respective  Local
Partnership  due to the amount  and/or terms of their current  indebtedness.  In
March  2006 after the  increased  disposition  fee was  approved,  the  Managing
General  Partner was paid a disposition  fee of $975,000  related to the sale of
the Partnership's  interest in Arboretum Village in March 2006, which was netted
against the related gain on disposition of investment in  partnerships.  In July
2006,  the  Managing  General  Partner  was paid a  disposition  fee of $810,000
related to the sales of Village  Squire I & II and Village Squire III, which was
netted against the related gain on disposition of investment in partnerships.


4.   PARTNERSHIP PROFITS AND LOSSES, AND DISTRIBUTIONS

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

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


                                      IV-22

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS


4.   PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS - Continued

     (ii) to the  establishment  of any  reserves  which  the  Managing  General
          Partner  deems  reasonably  necessary  for  contingent,  unmatured  or
          unforeseen liabilities or obligations of the Partnership;
    (iii) to each  partner in an amount  equal to the  positive  balance in his
          capital  account as of the date of the sale or  refinancing,  adjusted
          for operations and  distributions to that date, but before  allocation
          of any profits for tax purposes realized from such sale or refinancing
          and allocated pursuant to the Partnership Agreement;
     (iv) to the limited  partners (A) an aggregate amount of proceeds from sale
          or  refinancing  and all prior  sales or  refinancings  equal to their
          capital contributions,  without reduction for prior cash distributions
          other than prior distributions of sale and refinancing proceeds,  plus
          (B) an  additional  amount  equal to a cumulative  non-compounded  six
          percent  return  on  each  limited  partners'  capital   contribution,
          reduced,  but not below  zero,  by (1) an  amount  equal to 50% of the
          losses for tax  purposes  plus tax credits  allocated  to such limited
          partner  and (2)  distributions  of net  cash  flow  to  each  limited
          partner,  such  return,  losses  for tax  purposes  and net cash  flow
          distributions  commencing  on the  first day of the month in which the
          capital contribution was made;
     (v)  to the repayment of any unrepaid loans theretofore made by any partner
          or any affiliate to the Partnership for Partnership obligations and to
          the  payment  of any  unpaid  amounts  owing to the  General  Partners
          pursuant to the Partnership Agreement;
     (vi) to the General Partners in the amount of their capital contributions;
    (vii) thereafter, for their services to the Partnership, in equal shares to
          certain general partners (or their  designees),  whether or not any is
          then a general  partner,  an aggregate fee of one percent of the gross
          proceeds resulting from (A) such sale (if the proceeds are from a sale
          rather than a refinancing) and (B) any prior sales from which such one
          percent fee was not paid to the General  Partners or their  designees;
          and,  [Messrs.  Willoughby  and Dockser waived their share of any such
          deferred fee in the Liquidation Proxy.]
   (viii) the  remainder,  12% to the General  Partners (or their  assignees),
          three  percent to the Special  Limited  Partner and 85% to the Initial
          and Additional Limited Partners (or their assignees).

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

     Until January 22, 2006, when the Liquidation  Proxy authorized an increased
disposition  fee to the  Managing  General  Partner  under  the  terms set forth
therein,  the Managing General Partner and/or its affiliates had been authorized
to  receive  a fee of not  more  than  two  percent  of the  sales  price  of an
investment in a Local Partnership or the property it owns, payable under certain
conditions upon the sale of an investment in a Local Partnership or the property
it owns.  The  payment  of the fee has been  subject  to  certain  restrictions,
including  the  achievement  of a certain  level of sales  proceeds  and  making
certain minimum  distributions to limited partners. In accordance with the terms
of a Definitive  Proxy  Statement for the  Liquidation  and  Dissolution  of the
Partnership, which was approved on January 20, 2006, by holders of a majority of
the Units of Limited Partner Interest,  the Managing General Partner may receive

                                      IV-23

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS


4.   PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS - Continued

property  disposition  fees from the  Partnership on the same basis as such fees
may be paid to Local General Partners,  real estate brokers or other third party
intermediaries employed to sell Partnership  properties,  to the extent that CRI
markets  and sells the  Partnership's  properties  instead of such  persons.  In
addition, the Managing General Partner may receive a partnership liquidation fee
in the amount of  $500,000,  payable  only if the  Managing  General  Partner is
successful in liquidating all of the Partnership's  investments within 48 months
from the date the  liquidation  is approved  [January 20, 2006],  in recognition
that one or more of the  properties in which the  Partnership  holds an interest
might not be  saleable  to parties  not  affiliated  with the  respective  Local
Partnership  due to the amount  and/or terms of their current  indebtedness.  In
March 2006,  after the  increased  disposition  fee was  approved,  the Managing
General  Partner was paid a disposition  fee of $975,000  related to the sale of
the Partnership's  interest in Arboretum Village in March 2006, which was netted
against the related gain on disposition of investment in  partnerships.  In July
2006,  the  Managing  General  Partner  was paid a  disposition  fee of $810,000
related to the sales of Village  Squire I & II and Village Squire III, which was
netted against the related gain in disposition of investment in partnerships.

     Pursuant to the Partnership Agreement, all cash available for distribution,
as defined, shall be distributed,  not less frequently than annually, 97% to the
Additional  Limited  Partners,  1% to the Special Limited Partner,  0.49% to the
Initial Limited Partner and 1.51% to the General Partners,  after payment of the
Management Fee (see Note 3), as specified in the Partnership Agreement.

     As defined in the Partnership Agreement, after the payment of distributions
described in the previous  paragraph,  after the  establishment  of any reserves
deemed  necessary  by the  Managing  General  Partner  and after  payment of the
Management Fee, the Partnership had no remaining cash available for distribution
for the years ended  December 31, 2008 and 2007.  The Managing  General  Partner
currently  intends to retain all of the  Partnership's  remaining  undistributed
cash for operating cash reserves.


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

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

                                      IV-24

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                          NOTES TO FINANCIAL STATEMENTS


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

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

<TABLE>
<CAPTION>
                                                                            For the years ended
                                                                                December 31,
                                                              ----------------------------------------------
                                                                  2008              2007             2006
                                                              -----------       -----------      -----------
<S>                                                           <C>               <C>              <C>
Financial statement net (loss) income                         $  (477,849)      $ 2,503,089      $20,845,313

Adjustments:
  Differences between financial statement net income
    and taxable income related to the Partnership's
    equity in the Local Partnerships' income or losses
    and accrued expenses                                          472,365           315,721         (264,377)

  Differences between financial statement
    gain and taxable gain from the sale or
    transfer of properties                                             --         5,258,931       19,890,296

  Costs amortized over a shorter period
    for income tax purposes                                         4,188            16,767           10,484
                                                              -----------       -----------      -----------
Taxable (loss) income                                         $    (1,296)      $ 8,094,508      $40,481,716
                                                              ===========       ===========      ===========

</TABLE>


6.   CASH CONCENTRATION RISK

     Financial   instruments  that   potentially   subject  the  Partnership  to
concentrations of risk consist primarily of cash. The Partnership  maintains six
cash  accounts.  As of December  31,  2008,  the  uninsured  portion of the cash
balances was $5,450,830.

<TABLE>
<CAPTION>

                             Number of      Bank Balance     Insured      Uninsured
        Bank                 Accounts         12/31/08       12/31/08      12/31/08
----------------------       --------       ------------     --------     ----------
<S>                          <C>            <C>              <C>          <C>
Dreyfus Inst Preferred
  Money Market Fund              2          $5,348,000       $0           $5,348,000

Dreyfus Inst Preferred
  Prime Shares                   1          $101,256         $0           $101,256

SunTrust Bank                    3          $21,719          $20,145      $1,574

</TABLE>

                                      # # #

                                      IV-25