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


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

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



                                   FORM 10-KSB


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



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

                   For the fiscal year ended December 31, 2000


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



                         Commission file number 0-11962

                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP
             Organized pursuant to the Laws of the State of Maryland


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



        Internal Revenue Service - Employer Identification No. 52-1311532

                 11200 Rockville Pike, Rockville, Maryland 20852

                                 (301) 468-9200


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



           Securities registered pursuant to Section 12(g) of the Act:

                      UNITS OF LIMITED PARTNERSHIP INTEREST


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



Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Check if disclosure  of delinquent  filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure  will be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB [X]

State issuer's revenues for its most recent fiscal year $3,013,155.

The units of limited  partnership  interest of the  registrant are not traded in
any market.  Therefore,  the units of limited partnership interest had neither a
market  selling price nor an average bid or asked price within the 60 days prior
to the date of this filing.

--------------------------------------------------------------------------------
<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                        2000 ANNUAL REPORT ON FORM 10-KSB

                                TABLE OF CONTENTS


                                                                         PAGE

                                     PART I

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


                                     PART II

Item 5.  Market for the Registrant's Partnership Interests
            and Related Partnership Matters ............................. II-1
Item 6.  Management's Discussion and Analysis of Financial Condition
            and Results of Operations.................................... II-2
Item 7.  Financial Statements............................................ II-8
Item 8.  Changes in and Disagreements with Accountants
            on Accounting and Financial Disclosure....................... II-8


                                    PART III

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

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

Financial Statements..................................................... III-8



<PAGE>
                                     PART I


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

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

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

     The  Partnership  was  formed  to  invest  in  real  estate,  which  is the
Partnership's  principal business  activity,  by acquiring and holding a limited
partner interest in limited partnerships (Local  Partnerships).  The Partnership
originally made investments in 37 Local  Partnerships.  As of December 31, 2000,
the Partnership had  investments in 24 Local  Partnerships.  Each of these Local
Partnerships owns a federal or state government-assisted apartment complex which
provides  housing  principally to the elderly and/or to individuals and families
of low or moderate income, or a conventionally  financed apartment complex.  The
original   objectives  of  these  investments,   not  necessarily  in  order  of
importance, were to:

      (i) preserve and protect the Partnership's capital;
     (ii) provide,  during  the  early  years of the  Partnership's  operations,
          current tax  benefits to the  partners in the form of tax losses which
          the partners may 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 has 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, in
general, remain as the local general partners in the Local Partnerships. In most
cases, the local general partners of the Local Partnership retain responsibility
for developing, constructing,  maintaining, operating and managing the projects.
However, in the event of non-compliance with the Local Partnerships' partnership
agreements,  the local general  partner may be removed and replaced with another
local general partner or with an affiliate of the Partnership's Managing General
Partner.

     As a result of its investment in the Local  Partnerships,  the  Partnership
became the principal limited partner in 31 (20 as of December 31, 2000) of these
Local Partnerships.  As a limited partner, the Partnership's legal liability for
obligations of the Local Partnership is limited to its investment.  In six (four
as of December  31,  2000) Local  Partnerships,  the  Partnership  invested as a
limited partner in intermediary partnerships which, in turn, invested as general
partners in the Local Partnerships.  In most cases, an affiliate of the Managing
General  Partner of the  Partnership  is also a general  partner of the 20 Local
Partnerships and the four intermediary partnerships.  The local general partners
and  affiliates  of the Managing  General  Partner may operate  other  apartment
complexes  which  may be in  competition  for  eligible  tenants  with the Local
Partnerships' apartment complexes.

                                       I-1

<PAGE>
                                     PART I

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

     Although each of the Local  Partnerships in which the Partnership  invested
owns an  apartment  complex  that must  compete in the market place for tenants,
interest subsidies and/or rent supplements from governmental  agencies generally
make it possible to offer certain of these dwelling units to eligible tenants at
a cost  significantly  below  the  market  rate  for  comparable  conventionally
financed  dwelling units.  Based on available data, the Managing General Partner
believes there to be no material risk of market competition in the operations of
the  apartment  complexes  described  below  which  would  adversely  impact the
Partnership,  except in specific  circumstances as described in Part II, Item 6,
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations.

                                       I-2

<PAGE>
                                     PART I


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

     A schedule of the apartment  complexes owned by Local Partnerships in which
the Partnership has an investment as of December 31, 2000, follows.

<TABLE>
<CAPTION>

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

                                                                                                  Units          Expiration
                           Mortgage                                                           Authorized for         of
 Name and Location        Payable at          Financed and/or Insured           Number of      Rental Asst.       Section 8
OF APARTMENT COMPLEX     12/31/00 (2)         AND/OR SUBSIDIZED UNDER          RENTAL UNITS    UNDER SEC. 8      HAP CONTRACT
--------------------     ------------     -------------------------------      ------------   --------------     ------------
<S>                      <C>              <C>                                  <C>            <C>                <C>
Arboretum Village        $12,684,472      Conventional                            308              0                  --
 Lisle, IL

Audubon Towers             3,337,792      New Jersey Housing and Mortgage         124            124               02/11/20
 Audubon, NJ                               Finance Agency (NJHMFA)/8-HUD

Bartley Manor                715,689      Federal Housing Administration           70             69               05/31/01 (4)
 Superior, WI                              (FHA)/Section 236 of the National
                                           Housing Act (NHA)

Briar Crest I (4)            507,551      Federal National Mortgage                53             53               09/30/01 (4)(6)
 Niles, MI                                 Association (FNMA)/Section 236
                                           of the NHA

Briar Crest II (4)           556,011      FNMA/Section 236 of the NHA              49             49               09/30/01 (4)(6)
 Niles, MI

Briar Hills                  531,911      FNMA/Section 236 of the NHA              50             33               12/31/01 (4)
 South Haven, MI

Congress Plaza             2,197,638      Connecticut Housing Finance             101            100               02/28/04
 Bridgeport, CT                            Agency/FHA Section 231/U.S.
                                           Department of Housing and Urban
                                           Development (HUD)

Glen Agnes                 4,023,874      California Housing Finance              149            149               01/27/03
 Fresno, CA                                Agency (CHFA)

Heritage Estates I         2,575,548      Missouri Housing Development            228              0                  --
 St. Louis, MO                             Agency (MHDA)/Section 221(d)
                                           (4) of the NHA

Heritage Estates II        2,082,337      MHDA/Section 221 (d)(4) of the          160              0                  --
 St. Louis, MO                             NHA

Highland Manor             1,330,469      HUD                                     111            111               05/12/04 (4)(5)
 Birmingham, AL

Indian Hills                 477,117      FNMA/Section 236 of the NHA/             40             24               12/31/01 (4)
 Townhouses                                Section 8
 Dowagiac, MI

Lakewood Apts.               811,695      Rural Housing & Community                50             50               07/31/04 (4)
 Eufaula, AL                               Development Services (RHCD)

Meadow Lanes Apts.         1,618,778      Michigan State Housing Develop-         118              0                     --
 Holland, MI                               ment Authority/Section 236 of
                                           the NHA

Monterey/Hillcrest        13,253,975      Section 221(d)(4) of the NHA/FHA        300             60               12/13/03
 Waukesha, WI

Victorian Towers           5,154,843      NJHMFA/Section 8                        204             27               12/01/23
 Cape May, NJ

</TABLE>

                                   (continued)

                                       I-3

<PAGE>
                                     PART I


ITEM 1.  BUSINESS - Continued
         --------
<TABLE>
<CAPTION>

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


                                                                                                  Units          Expiration
                           Mortgage                                                           Authorized for         of
 Name and Location        Payable at          Financed and/or Insured           Number of      Rental Asst.       Section 8
OF APARTMENT COMPLEX     12/31/00 (2)         AND/OR SUBSIDIZED UNDER          RENTAL UNITS    UNDER SEC. 8      HAP CONTRACT
--------------------     ------------     -------------------------------      ------------   --------------     ------------
<S>                      <C>              <C>                                  <C>            <C>                <C>
Villa Mirage I           $ 2,051,449      CHFA/Section 8                           50             50               12/01/05
 Rancho Mirage, CA

Villa Mirage II            2,037,158      CHFA/Section 8                           48             48               10/15/15
 Rancho Mirage, CA

Village Green                316,318      FHA/Section 236 of FHA                   36             36               04/30/01 (4)
 Reedsburg, WI

Village Square               426,713      FHA/Section 236 of FHA                   48             48               04/30/01 (4)
 Barabou, WI

Village Squire I & II      8,707,617      Conventional                            377              0                  --
 Canton, MI

Village Squire III         5,618,064      Conventional                            224              0                  --
 Canton, MI

Walsh Park                 4,676,913      Illinois Housing Development            134            134               11/01/14
 Chicago, IL                               Administration

Windham Village            2,341,410      CHFA                                     50             44               10/31/15
 Santa Rose, CA
                         -----------                                           ------         ------

Totals 24                $78,035,342                                            3,082          1,209
                         ===========                                           ======         ======

</TABLE>

                                   (continued)

                                       I-4

<PAGE>
                                     PART I


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


                                                                                     Average Effective Annual
                                      Units Occupied As                                   Rental Per Unit
                                  Percentage of Total Units                             for the Years Ended
                                      AS OF DECEMBER 31,                                    DECEMBER 31,
                              ----------------------------------      -------------------------------------------------------
 Name and Location
OF APARTMENT COMPLEX          2000   1999    1998    1997   1996       2000         1999        1998        1997       1996
--------------------          ----   ----    ----    ----   ----      -------     --------    --------    --------   --------
<S>                           <C>    <C>     <C>     <C>    <C>       <C>         <C>         <C>         <C>        <C>
Arboretum Village              92%    93%     95%     94%    92%      $ 9,689     $  9,338    $  9,238    $  8,724   $  8,677
 Lisle, IL

Audubon Towers                100%   100%    100%    100%   100%        9,159        9,158       9,161       9,166      9,164
 Audubon, NJ

Bartley Manor                 100%    93%     93%     93%    98%        5,661        5,656       5,356       5,313      5,116
 Superior, WI

Briar Crest I                 100%    96%     97%    100%    98%        6,504        5,333       4,784       5,012      4,844
 Niles, MI

Briar Crest II                100%    94%     96%    100%   100%        6,682        5,327       4,814       4,986      4,950
 Niles, MI

Briar Hills                    92%    92%     94%     96%    94%        6,055        4,465       4,461       4,430      4,446
 South Haven, MI

Congress Plaza                100%   100%    100%    100%   100%       10,527       10,534      10,535      10,511     10,524
 Bridgeport, CT

Glen Agnes                     97%    98%     95%     95%    94%        7,774        7,836       7,634       7,623      7,654
 Fresno, CA

Heritage Estates I            100%   100%     99%    100%    98%        5,202        5,176       4,940       4,776      4,722
 St. Louis, MO

Heritage Estates II           100%   100%    100%    100%    94%        5,185        5,193       4,968       4,764      4,663
 St. Louis, MO

Highland Manor                100%   100%     98%     97%   100%        6,616        6,515       7,584       9,188      9,011
 Birmingham, AL

Indian Hills                   95%   100%    100%    100%    95%        5,817        5,272       5,070       5,002      4,847
 Townhouses
 Dowagiac, MI

Lakewood Apts.                100%   100%     98%     98%   100%        4,525        4,305       4,269       4,363      4,264
 Eufaula, AL

Meadow Lanes Apts.             95%    97%     98%     93%    96%        6,318        6,216       6,174       6,056      5,985
 Holland, MI

Monterey/Hillcrest             93%    96%     92%     94%    90%        8,629        8,559       8,992       8,745      8,742
 Waukesha, WI

Victorian Towers               94%    96%     99%     97%   100%        5,199        5,196       4,989       4,902      4,783
 Cape May, NJ

Villa Mirage I                100%   100%    100%    100%    98%        9,685        9,522       9,699       9,671      9,660
 Rancho Mirage, CA

Villa Mirage II               100%   100%    100%    100%    98%        9,537        9,580       9,580       9,600      9,702
 Rancho Mirage, CA

</TABLE>

                                   (continued)

                                       I-5

<PAGE>
                                     PART I


ITEM 1.  BUSINESS - Continued
         --------
<TABLE>
<CAPTION>

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


                                                                                     Average Effective Annual
                                      Units Occupied As                                  Rental Per Unit
                                  Percentage of Total Units                            for the Years Ended
                                      AS OF DECEMBER 31,                                   DECEMBER 31,
                              ----------------------------------      -------------------------------------------------------
 Name and Location
OF APARTMENT COMPLEX          2000   1999    1998    1997   1996        2000        1999        1998        1997       1996
--------------------          ----   ----    ----    ----   ----      --------    --------    --------    --------   --------
<S>                           <C>    <C>     <C>     <C>    <C>       <C>         <C>         <C>         <C>        <C>
Village Green                 100%    92%     97%     89%    98%      $  4,120    $  3,849    $  3,886    $  3,764   $  3,744
 Reedsburg, WI

Village Square                 92%    83%     94%     98%    95%         4,232       4,362       4,243       4,275      4,023
 Barabou, WI

Village Squire I               97%    97%     90%     92%    91%         6,550       6,152       5,902       5,858      5,898
 & II
 Canton, MI

Village Squire III             98%    97%     93%     96%    94%         6,511       6,199       5,820       5,779      5,813
 Canton, MI

Walsh Park                     99%    96%     99%     98%    99%        11,514       8,940      11,653      11,301     11,083
 Chicago, IL

Windham Village               100%   100%    100%    100%   100%        10,632      10,572      10,474      10,438     10,439
 Santa Rose, CA
                              ---    ---     ---     ---    ---       --------    --------    --------    --------   --------

Totals(3) 24                   98%    97%     97%     97%    97%      $  7,180    $  6,802    $  6,843    $  6,844   $  6,781
                              ===    ===     ===     ===    ===       ========    ========    ========    ========   ========
</TABLE>

(1)  All properties are multifamily housing complexes. No single tenant/resident
     rents 10% or more of the rentable  square footage.  Residential  leases are
     typically one year or less in length,  with varying  expiration  dates, and
     substantially all rentable space is for residential purposes.

(2)  The amounts  provided are the balances of first  mortgage  loans payable of
     the Local Partnerships as of December 31, 2000.

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

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

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

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


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

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

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

                                       I-6

<PAGE>
                                     PART I


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

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

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

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

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

     Subject to regulatory  approval,  the  Partnership  intends to transfer its
interests in Glen Agnes for $25,000 and the  assumption  of the  purchase  money
note.  See the notes to the  consolidated  financial  statements  for additional
information concerning the transfer.


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

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


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

     In November  1999,  the holder of the  purchase  money note related to Glen
Agnes filed an action to  foreclose on the  Partnership's  interest in the Local
Partnership.  See  the  notes  to  the  consolidated  financial  statements  for
additional information concerning the purchase money note.

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

     In February,  2001, the  Partnership  and two  affiliates  were served in a
state court action for  declaratory  judgement and damages in connection  with a
purchase money note allegedly assigned to the plaintiff secured by its interests
in Woodside  Village.  That  Property  was sold in October 2000 and the original
payee agreed to indemnify the  Partnership for any claims in connection with the
purchase  money  notes.  Counsel for the original  payee (also a  defendant)  is
currently  representing  the  Partnership.  See the  notes  to the  consolidated
financial statements for additional information concerning this matter.


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 2000.

                                       I-7

<PAGE>
                                     PART II


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

     (a)  There is no established  market for the purchase and sale of interests
          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  interests  in the
          Partnership.

          On  April  2,  2000,  Peachtree  Partners  (Peachtree)   initiated  an
          unregistered  tender  offer  to  purchase  approximately  2,900 of the
          outstanding units of additional limited  partnership  interest (Units)
          in the  Partnership  at a price of $40 per Unit.  The offer expired in
          May 2000. Peachtree is unaffiliated with the Managing General Partner.
          The price offered was determined solely at the discretion of Peachtree
          and does not necessarily represent the fair market value of each Unit.

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

          On  March  15,  2001,  Bond  Purchase,   L.L.C.  (Bond)  initiated  an
          unregistered  tender  offer  to  purchase  approximately  2,980 of the
          outstanding  Units in the  Partnership at a price of $53 per Unit. The
          offer expires April 30, 2001. Bond is  unaffiliated  with the Managing
          General  Partner.  The  price  offered  was  determined  solely at the
          discretion of Bond and does not necessarily  represent the fair market
          value of each Unit.

          The Managing General Partner has not expressed,  and does not express,
          any opinion and remains  neutral  toward any offer for the purchase of
          Units such as those described above.

     (b)  As of March 28, 2001 there were approximately 4,900 registered holders
          of Units in the Partnership.

     (c)  On November 12, 1999,  the  Partnership  made a cash  distribution  of
          $599,070  ($10.00  per Unit) to  Additional  Limited  Partners  out of
          available cash flow. On November 6, 2000, the Partnership  made a cash
          distribution  of $2,994,350  ($50.00 per Unit) to  Additional  Limited
          Partners,  to  holders  of  record  as  of  September  30,  2000.  The
          distribution  was a result  of the  sales of  O'Farrell  Towers,  Tyee
          Apartments and Woodside Village.

          The Partnership  received  distributions  of $1,844,791 and $1,069,289
          from the Local Partnerships during 2000 and 1999,  respectively.  Some
          of the  Local  Partnerships  operate  under  restrictions  imposed  by
          certain federal and/or state  government  agencies that limit the cash
          return available to the Partnership.

                                      II-1

<PAGE>
                                     PART II


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

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

                                     GENERAL
                                     -------

     The  Partnership  has invested,  through Local  Partnerships,  primarily in
federal  or  state  government-assisted  apartment  complexes  (the  properties)
intended to provide housing to low and moderate  income tenants.  In conjunction
with such governmental assistance, which includes federal and/or state financing
at  below-market  interest rates and rental  subsidies,  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, the Managing General
Partner  continues to concentrate on transferring the source of investment yield
from tax benefits to cash flow wherever possible,  thereby potentially enhancing
the  ability  of the  Partnership  to  share  in the  appreciated  value  of the
properties.

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

     C.R.I., Inc. (the Managing General Partner) has sold, and will continued to
sell,  certain  properties  by  utilizing  opportunities  presented  by  federal
affordable  housing  legislation,  favorable  financing  terms and  preservation
incentives available to tax credit and not-for-profit  purchasers.  The Managing
General  Partner  intends to use all or part of the  Partnership's  net proceeds
(after a partial  distribution to limited partners) from the sales of properties
to fund  reserves  for paying at  maturity,  prepaying  or  purchasing  prior to
maturity,  at a discount where possible,  currently  outstanding  purchase money
notes. The Managing General Partner believes that this represents an opportunity
to reduce the Partnership's long-term obligations.

     Some of the rental properties owned by the Local  Partnerships are financed
by state housing agencies.  The Managing General Partner has sold or refinanced,
and will continue to sell or refinance,  certain properties pursuant to programs
developed by these agencies.  These programs may include opportunities to sell a
property to a qualifying  purchaser  who would agree to maintain the property as
low to moderate income housing, or to refinance a property, or to

                                      II-2

<PAGE>
                                     PART II


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

obtain supplemental financing. The Managing General Partner continues to monitor
certain state  housing  agency  programs,  and/or  programs  provided by certain
lenders, to ascertain whether the properties would qualify within the parameters
of a given  program and whether  these  programs  would  provide an  appropriate
economic benefit to the limited partners of the Partnership.

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

     Mark-to-Market  implementation will reduce rental income at properties that
are currently subsidized at higher-than-market  rental rates, and will therefore
lower cash flow available to meet mortgage payments and operating expenses. Each
affected property may undergo debt  restructuring  according to terms determined
by an individual property and operations  evaluation.  This may involve reducing
the first mortgage loan balance to an amount supportable by the property, taking
into account the property's  operating  expenses and reduced income. The balance
of the amount  written down from the first  mortgage loan will be converted to a
non-performing but accruing (soft) second mortgage loan.

     Seven  properties in which the  Partnership  is invested as of December 31,
2000, may be affected by the Mark-to-Market  program,  since they have Section 8
HAP  contracts  which,  as  extended,  will  expire in 2001.  The  Section 8 HAP
contracts  cover  all or  substantially  all  of the  apartment  units  in  each
property.  Two properties have applied to participate in the Mark-up-to-  Market
program discussed further herein.  Rents studies on two properties whose Section
8 HAP contracts  expired in 2000  indicate  Section 8 HAP rents are in excess of
fair market rents,  and therefore these  properties will most likely apply for a
one-year  renewal of their  respective  Section 8 HAP  contracts.  However,  the
Mark-to-Market  program is currently set to expire in September,  2001, so there
can be no assurance of what may happen  thereafter.  The Section 8 HAP contracts
on the remaining  three  properties  are also expected to be renewed during 2001
for another one- year period.

<TABLE>
<CAPTION>
                                                           Units             Original           Renewed
                                                       Authorized for      Expiration of      Expiration of
                                       Number of      Rental Assistance      Section 8          Section 8
         PROPERTY                     RENTAL UNITS     UNDER SECTION 8     HAP CONTRACT       HAP CONTRACT
         --------                     ------------    -----------------    -------------     --------------
         <S>                          <C>             <C>                  <C>               <C>
         Bartley Manor                     70                69               07/31/98         05/31/01      (2)
         Briar Crest I                     53                53               06/30/98         09/30/01      (1)
         Briar Crest II                    49                49               06/30/98         09/30/01      (1)
         Briar Hills                       50                33               09/30/98         12/31/01      (2)
         Indian Hills Townhouses           40                24               09/30/98         12/31/01      (2)
         Village Green                     36                36               09/30/98         04/30/01      (2)
         Village Square                    48                48               09/30/98         04/30/01      (2)
                                        -----             -----

              Total                       346               312
                                        =====             =====
</TABLE>

         (1)  Property has applied for Mark-up-to-Market.
         (2)  Renewed/expected to be renewed for one year.

     With the  uncertainty of continued  project-based  subsidies for properties
with expiring  Section 8 HAP contracts,  there is no assurance that these rental
properties  will be able to  maintain  the rental  income and  occupancy  levels
necessary to pay operating costs and debt service. As a

                                      II-3

<PAGE>
                                     PART II


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

result,  it is not  possible  to predict  the impact on the Local  Partnerships'
operations and the resulting  impact on the  Partnership's  investments in Local
Partnerships  at this time. As of December 31, 2000, the carrying  amount of the
Partnership's  investments  in Local  Partnerships  with Section 8 HAP contracts
expiring in or 2001 was $4,672,860.

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

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

     The Managing General Partner is considering new strategies to deal with the
ever changing  environment  of affordable  housing  policy.  The Section 236 and
Section  221(d)(3)  mortgage loans may be eligible for pre-payment in their 18th
year or later.  Properties  with  expiring  Section 8 HAP  contracts  may become
convertible to market-rate  apartment  properties.  Currently,  few lenders will
provide  financing  either to prepay  existing  mortgage loans of these types or
provide  additional  funds to allow a property  to convert to market rate units.
Where  opportunities  exist,  the Managing General Partner will continue to work
with the Local  Partnerships to develop  strategies that make economic sense for
all parties involved.

                          FINANCIAL CONDITION/LIQUIDITY
                          -----------------------------

     As of December 31, 2000 the Partnership had  approximately  5,100 investors
who subscribed to a total of 60,000 units of limited partnership interest in the
original amount of $60,000,000.  The Partnership  originally made investments in
37  Local   Partnerships,   of  which  24  remain  at  December  31,  2000.  The
Partnership's  liquidity,  with unrestricted cash resources of $12,356,321 as of
December 31, 2000, 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 28, 2001,  there are no material
commitments for capital expenditures.

     During  2000 and 1999,  the  Partnership  received  cash  distributions  of
$1,844,791 and $1,069,289, respectively, from the Local Partnerships.

     The  Partnership's  obligations  with respect to its  investments  in Local
Partnerships,  in the form of purchase money notes having an aggregate principal
balance of $11,846,270,  plus aggregate  accrued interest of $25,005,020,  as of
December  31,  2000,  are  payable  in full upon the  earliest  of:  (i) sale or
refinancing of the respective Local Partnership's rental property;  (ii) payment
in full of the respective Local Partnership's permanent loan; or (iii) maturity.

     The purchase money note related to Audubon Towers,  in the principal amount
of  $1,275,000,  matured on January 1, 1999,  and was  extended  during  2000 to
January 15, 2001. The Partnership placed in escrow an assignment of its interest
in the Local  Partnership  to the  noteholders,  but as of March 28,  2001,  the
interest remained in escrow.

                                      II-4

<PAGE>
                                     PART II


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

     The purchase money notes related to the following  properties  have matured
and have not been paid or extended.

         PROPERTY                   PRINCIPAL      MATURITY
         --------                   ----------     --------
         Heritage Estates I         $2,600,000     01/01/99
         Heritage Estates II         1,800,000     01/01/99
         Victorian Towers              900,000     01/01/99
         Meadow Lanes                  650,000     02/28/99
         Glen Agnes                    850,000     06/30/99
         Audubon Towers              1,275,000     01/15/01

     The purchase money notes related to the following  properties were paid off
at a discount, or were transferred to the noteholders, during 2000.

<TABLE>
<CAPTION>

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


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

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

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

     The following  chart presents  information  related to purchase money notes
which have matured,  have been  extended to mature,  or are scheduled to mature,
through December 31, 2001, and which remain unpaid or unextended as of March 28,
2001.  Excluded from the following  chart are purchase money notes which matured
through December 31, 2000, and which have been paid off, cancelled,  or extended
on or before March 28, 2001.

                                      II-5

<PAGE>
                                     PART II


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

                                                                         Aggregate
                                               Aggregate                  Accrued                  Carrying Amount
                                               Principal                  Interest                 of Partnership's
                   Number of                    Balance                   Balance                  Investments in
   Purchase        Underlying                    as of                     as of                   Underlying Local
  Money Note         Local       Percentage     December    Percentage    December    Percentage   Partnerships as of    Percentage
(PMN) MATURITY    PARTNERSHIPS    OF TOTAL      31, 2000     OF TOTAL     31, 2000     OF TOTAL    DECEMBER 31, 2000      OF TOTAL
--------------    ------------   ----------    -----------  ---------    ----------   ----------   ------------------    ----------
<S>               <C>            <C>           <C>          <C>          <C>          <C>          <C>                   <C>
1st Quarter 1999        4            17%       $ 5,950,000        50%    $11,354,013       45%        $ 2,853,360             17%
2nd Quarter 1999        1             4%           850,000         7%      1,769,911        7%          1,326,372              8%
1st Quarter 2001        1             4%         1,275,000        11%      3,730,321       15%          4,971,063             30%
                     ----          ----        -----------     -----     -----------     ----         -----------           ----

Total through
 12/31/2001             6            25%       $ 8,075,000        68%    $16,854,245       67%        $ 9,150,795 (3)         55%
                     ====          ====        ===========     =====     ===========     ====         ===========           ====

Total, Local
  Partnerships         24 (2)       100%       $11,846,270(1)    100%    $25,005,020(1)   100%        $16,756,019 (3)        100%
                     ====          ====        ===========     =====     ===========     ====         ===========           ====
</TABLE>

(1)  Does not include amounts payable to a local general partner.
(2)  Twelve  of the 24 Local  Partnerships  have  related  purchase  money  note
     obligations.
(3)  Includes   $4,971,063  for  the  partnership   reported  as  investment  in
     partnership  held in escrow on the  consolidated  balance sheet at December
     31, 2000.

     The  Managing  General  Partner  is  continuing  to  investigate   possible
alternatives to reduce the Partnership's  debt obligations.  These  alternatives
include, among others, retaining the cash available for distribution to meet the
purchase money note  requirements,  paying off certain purchase money notes at a
discounted  price,  extending  the due dates of certain  purchase  money  notes,
refinancing the respective properties' underlying debt or selling the underlying
real estate and using the Partnership's share of the proceeds to pay or buy down
certain purchase money note  obligations.  Although the Managing General Partner
has had some success applying these strategies in the past, the Managing General
Partner cannot assure that these strategies will be successful in the future. If
the Managing  General  Partner is unable to negotiate an extension or discounted
payoff,  in the event that the purchase money notes remain unpaid upon maturity,
the noteholders may have the right to foreclose on the Partnership's interest in
the related Local Partnerships. In the event of a foreclosure, the excess of the
nonrecourse   indebtedness   over  the  carrying  amount  of  the  Partnership's
investment  in the related Local  Partnership  would be deemed  cancellation  of
indebtedness income, which would be taxable to Limited Partners at a federal tax
rate  of  up  to  39.6%.  Additionally,  in  the  event  of a  foreclosure,  the
Partnership  would lose its investment in the Local  Partnership and,  likewise,
its share of any future  cash flow  distributed  by the Local  Partnership  from
rental operations,  mortgage debt refinancings,  or the sale of the real estate.
Of the 24 Local Partnerships in which the Partnership is invested as of December
31, 2000, the six Local Partnerships with associated  purchase money notes which
mature  through  December 31, 2001 and which remain  unpaid or  unextended as of
March 28, 2001, represented the following percentages of the Partnership's total
distributions  received from Local  Partnerships  and share of income from Local
Partnerships for the immediately preceding two calendar years.

                             Percentage of Total         Partnership's Share of
        For the Year       Distributions Received            Income from
           ENDED           FROM LOCAL PARTNERSHIPS        LOCAL PARTNERSHIPS
     -----------------     -----------------------      ----------------------

     December 31, 2000               13%                     $344,809
     December 31, 1999               19%                     $489,631

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

     The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient  cash is available for operating  requirements.
For the years ended December 31,

                                      II-6

<PAGE>
                                     PART II


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

2000 and 1999, the receipt of distributions from Local Partnerships was adequate
to support  operating cash  requirements.  Cash and cash  equivalents  increased
during 2000 as the receipt of distributions  from  partnerships was in excess of
net cash used in  operating  activities,  and as proceeds  from  disposition  of
investments in partnerships was in excess of cash used to pay off purchase money
notes and to make distributions to Additional Limited Partners.

     On November 12, 1999, the Partnership made a cash  distribution of $599,070
($10.00 per Unit) to Additional  Limited Partners out of available cash flow. On
November 6, 2000, the Partnership made a cash distribution of $2,994,350 ($50.00
per Unit) to Additional  Limited Partners,  to holders of record as of September
30, 2000. The distribution was a result of the sales of O'Farrell  Towers,  Tyee
Apartments and Woodside Village. The Managing General Partner intends to reserve
all  of  the  Partnership's   remaining  undistributed  cash  for  the  possible
repayment,  prepayment or retirement of the Partnership's  outstanding  purchase
money notes related to the Local Partnerships.

                              RESULTS OF OPERATIONS
                              ---------------------

2000 VERSUS 1999
----------------

     The Partnership recognized net income for the year ended December 31, 2000,
as compared to net loss for the year ended  December 31, 1999,  primarily due to
extraordinary gain from extinguishment of debt related to the discounted payoffs
of purchase  money notes related to Bartley Manor Limited  Partnership  (Bartley
Manor),  Village Square Limited  (Village  Square),  Roberts Milford  Associates
(Rolling Green),  Tyee Associates (Tyee Apartments) and Woodside Village Limited
Partnership  (Woodside Village),  the transfers of partnership  interests to the
purchase money  noteholders  related to Greeley Manor Company  (Greeley  Manor),
College Park Limited (College Park) and New Winchester Gardens, Ltd. (Winchester
Gardens),  and the gain on disposition of investment in partnerships  related to
Rolling Green,  O'Farrell  Towers  Associates  (O'Farrell),  Tyee Apartments and
Woodside  Village,  all as discussed in the notes to the consolidated  financial
statements.  Contributing to net income were an increase in share of income from
partnerships,  a decrease in interest  expense  related to lower  purchase money
note  balances  as a result  of  payments  and the  extinguishment  of debt,  an
increase in interest income due to generally  higher balances and interest rates
in 2000,  an extension fee which was paid in 1999 but not in 2000 and a decrease
in  amortization  of deferred costs related to the disposition of investments in
partnerships.  Offsetting the increase in the  Partnership's  net income were an
increase in  professional  fees related to legal fees for the Villa Mirage I and
II  litigation,  as  discussed  in  the  notes  to  the  consolidated  financial
statements, and an increase in general and administrative expenses due to higher
reimbursed payroll costs.

     For financial reporting purposes, the Partnership,  as a limited partner in
the Local  Partnerships,  does not record losses from the Local  Partnerships in
excess of its  investment  to the  extent  that the  Partnership  has no further
obligation to advance funds or provide financing to the Local Partnerships. As a
result, the Partnership's  share of income from partnerships for the years ended
December  31, 2000 and 1999 did not include  losses of  $778,232  and  $958,378,
respectively.  The Partnership's net loss recognized from the Local Partnerships
is  generally  expected  to decrease in  subsequent  years as the  Partnership's
investments  in  the  Local  Partnerships  are  reduced  to  zero.  Accordingly,
excludable losses are generally expected to increase.  Distributions of $576,037
and $324,528  received from seven and eight Local  Partnerships  during 2000 and
1999,  respectively,  were offset against the respective  years' recorded losses
because these amounts were in excess of the Partnership's investment.

                                      II-7

<PAGE>
                                     PART II


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

                                    INFLATION
                                    ---------

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

     The combined rental revenues for the Partnership's  remaining 24 properties
for the five years ended  December 31, 2000,  follow.  Combined  rental  revenue
amounts have been adjusted to reflect  property sales and interests  transferred
in 2000 and prior years.

<TABLE>
<CAPTION>

                                                     FOR THE YEARS ENDED DECEMBER 31,
                       ---------------------------------------------------------------------------------------------------
                          2000                  1999                  1998                  1997                  1996
                       -----------           -----------           -----------           -----------           -----------
<S>                    <C>                   <C>                   <C>                   <C>                   <C>
Combined Rental
  Revenue              $22,612,464           $21,645,398           $21,795,643           $21,565,790           $21,440,554

Annual Percentage
  Increase (decrease)                 4.5%                 (0.7%)                1.1%                   0.6%

</TABLE>


ITEM 7.  FINANCIAL STATEMENTS
         --------------------

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


ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ------------------------------------------------
           ACCOUNTING AND FINANCIAL DISCLOSURE
           -----------------------------------

     None.

                                      II-8

<PAGE>
                                    PART III


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

     (a)  and (b)

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

     (a)  and (b)

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

William B. Dockser, 64, has been the Chairman of the Board and a Director of CRI
since 1974.  Prior to forming  CRI, he served as  President of Kaufman and Broad
Asset Management,  Inc., an affiliate of Kaufman and Broad,  Inc., which managed
publicly held limited  partnerships created to invest in low and moderate income
multifamily apartment properties.  Prior to joining Kaufman and Broad, he served
in various positions at HUD,  culminating in the post of Deputy FHA Commissioner
and Deputy Assistant Secretary for Housing Production and Mortgage Credit, where
he was responsible for all federally insured housing production programs. Before
coming to the Washington,  D.C., area, Mr. Dockser was a practicing  attorney in
Boston and served as a special  Assistant  Attorney General for the Commonwealth
of  Massachusetts.  He holds a Bachelor of Laws degree from Yale  University Law
School and a Bachelor of Arts degree, cum laude, from Harvard University.  He is
also Chairman of the Board and a Director of CRIIMI MAE Inc. and CRIIMI, Inc.

H. William Willoughby,  54, has been President,  Secretary and a Director of CRI
since  January 1990 and was Senior  Executive  Vice  President,  Secretary and a
Director  of CRI  from  1974 to  1989.  He is  principally  responsible  for the
financial  management of CRI and its associated  partnerships.  Prior to joining
CRI in 1974,  he was Vice  President  of Shelter  Corporation  of America  and a
number of its subsidiaries  dealing principally with real estate development and
equity  financing.  Before  joining  Shelter  Corporation,  he was a senior  tax
accountant with Arthur  Andersen & Co. He holds a Juris Doctor degree,  a Master
of Business  Administration  degree and a Bachelor of Science degree in Business
Administration  from the  University of South Dakota.  He is also a Director and
executive officer of CRIIMI MAE Inc. and CRIIMI, Inc.

Susan R. Campbell,  42, is Executive Vice President and Chief Operating Officer.
Prior to joining CRI in March 1985,  she was a budget analyst for the B. F. Saul
Advisory  Company.  She holds a Bachelor of Science  degree in General  Business
from the University of Maryland.

Melissa Cecil Lackey, 45, is Senior Vice President and General Counsel. Prior to
joining CRI in 1990,  she was associated  with the firms of Zuckerman,  Spaeder,
Goldstein,  Taylor & Kolker in  Washington,  D.C.  and  Hirsch &  Westheimer  in
Houston,  Texas. She holds a Juris Doctor degree from the University of Virginia
School of Law and a Bachelor of Arts degree from the College of William & Mary.

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

     (d)  Involvement in certain legal proceedings.

          None.

                                      III-1

<PAGE>
                                    PART III


ITEM 10. EXECUTIVE COMPENSATION
         ----------------------

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

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


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         ---------------------------------------------------
           MANAGEMENT
           ----------

     (a)  Security ownership of certain beneficial owners.

          The following  table sets forth  certain  information  concerning  any
          person  (including any "group") who is known to the  Partnership to be
          the  beneficial  owner of more than five  percent  of the  issued  and
          outstanding units of additional limited  partnership  interest (Units)
          at March 28, 2001.

            Name and Address               Amount and Nature       % of total
          OF BENEFICIAL OWNER           OF BENEFICIAL OWNERSHIP   UNITS ISSUED
          -------------------           -----------------------   ------------

          Equity Resources Group,              5,494 units            9.2%
            Incorporated, et. al.
            14 Story Street
            Cambridge, MA 02138

     (b)  Security ownership of management.

          The following  table sets forth  certain  information  concerning  all
          Units  beneficially  owned, as of March 28, 2001, by each director and
          by all  directors  and  officers  as a group of the  Managing  General
          Partner of the Partnership.

              Name of                      Amount and Nature       % of total
          BENEFICIAL OWNER              OF BENEFICIAL OWNERSHIP   UNITS ISSUED
          ----------------              -----------------------   ------------

          William B. Dockser                    None                   0%
          H. William Willoughby                 None                   0%
          All Directors and Officers
            as a Group (4 persons)              None                   0%

     (c)  Changes in control.

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

                                      III-2

<PAGE>
                                    PART III


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

     (a) and (b)

          Transactions with management and others.

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

     (c)  Certain business relationships.

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

     (d)  Transactions with promoters.

          Not applicable.


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

     (a)  INDEX OF  EXHIBITS  (Listed  according  to the number  assigned in the
          ------------------  table in Item 601 of Regulation S-B.)

          Exhibit No. 3 - Articles of Incorporation and bylaws

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

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

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

                                      III-3

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


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

          Exhibit No. 10 - Material Contracts.

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

          Exhibit No. 99 - Additional Exhibits.

          a.   Prospectus of the Partnership,  dated May 6, 1983.  (Incorporated
               by reference to Registrant's Registration Statement on Form S-11,
               as amended, dated October 24, 1983.)

     (b)  REPORTS ON FORM 8-K
          -------------------

          No reports on Form 8-K were filed  during the quarter  ended  December
          31, 2000.

                                      III-4

<PAGE>
                                   SIGNATURES


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



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

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




MARCH 28, 2001                        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 28, 2001                         by:  /S/ H. WILLIAM WILLOUGHBY
--------------                              ------------------------------------
DATE                                        H. William Willoughby,
                                              Director, President,
                                             and Secretary




MARCH 28, 2001                         by:  /S/ MICHAEL J. TUSZKA
--------------                              ------------------------------------
DATE                                        Michael J. Tuszka,
                                              Vice President
                                              and Chief Accounting Officer
                                              (Principal Financial Officer
                                              and Principal Accounting Officer)




                                      III-5

<PAGE>
                         REPORT OF INDEPENDENT CERTIFIED
                               PUBLIC ACCOUNTANTS



To the Partners
Capital Realty Investors-III Limited Partnership


     We  have  audited  the  consolidated   balance  sheets  of  Capital  Realty
Investors-III  Limited  Partnership  (a  Maryland  limited  partnership)  as  of
December  31,  2000  and  1999,  and  the  related  consolidated  statements  of
operations,  changes in  partners'  deficit  and cash flows for the years  ended
December 31, 2000 and 1999. These financial statements are the responsibility of
the  Partnership's  management.  Our  responsibility is to express an opinion on
these financial  statements based on our audits.  We did not audit the financial
statements of certain Local Partnerships. The Partnership's share of income from
these Local Partnerships constitutes $1,653,017 and $1,458,560 of income in 2000
and 1999, respectively, included in the Partnership's net income in 2000 and net
loss in 1999. The financial  statements of these Local Partnerships were audited
by other  auditors  whose  reports  thereon  have been  furnished to us, and our
opinion expressed herein, insofar as it relates to the amount included for these
Local Partnerships, is based solely upon the reports of the other auditors.

     We conducted our audits in accordance  with  auditing  standards  generally
accepted in the United States.  Those standards require that we plan and perform
the audit to obtain reasonable  assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.  An
audit also includes  assessing the accounting  principles  used and  significant
estimates  made by  management,  as well as  evaluating  the  overall  financial
statement  presentation.  We believe that our audits provide a reasonable  basis
for our opinion.

     In our  opinion,  based upon our audits and the reports of other  auditors,
the  financial  statements  referred to above  present  fairly,  in all material
respects,  the consolidated  financial position of Capital Realty  Investors-III
Limited  Partnership  as of  December  31,  2000 and  1999 and the  consolidated
results of its operations,  changes in partners'  deficit and cash flows for the
years ended December 31, 2000 and 1999, in conformity with accounting principles
generally accepted in the United States.

                                               Grant Thornton LLP


Vienna, VA
March 22, 2001


                                      III-6

<PAGE>
               REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

                           LOCAL PARTNERSHIPS IN WHICH

                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                                  HAS INVESTED*



*    The  reports  of   independent   certified   public   accountants  -  Local
     Partnerships in which Capital Realty Investors-III  Limited Partnership has
     invested  were filed in paper format  under Form SE on March 28,  2001,  in
     accordance  with  the  Securities  and  Exchange  Commission's   continuing
     hardship exemption granted January 5, 2001.

                                      III-7

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                           CONSOLIDATED BALANCE SHEETS


                                     ASSETS

<TABLE>
<CAPTION>
                                                                                                DECEMBER 31,
                                                                                      ----------------------------
                                                                                          2000            1999
                                                                                      ------------    ------------
<S>                                                                                   <C>             <C>
Investments in partnerships .......................................................   $ 11,784,956    $ 19,683,671
Investment in partnerships held for sale ..........................................           --         1,285,964
Investment in partnerships held in escrow .........................................      5,011,886       1,267,871
Cash and cash equivalents .........................................................     12,356,321      10,045,683
Acquisition fees, principally paid to related parties,
  net of accumulated amortization of $367,233 and $472,235, respectively ..........        278,889         415,398
Property purchase costs,
  net of accumulated amortization of $358,778 and $431,180, respectively ..........        293,543         401,342
Other assets ......................................................................          5,040            --
                                                                                      ------------    ------------

      Total assets ................................................................   $ 29,730,635    $ 33,099,929
                                                                                      ============    ============



                        LIABILITIES AND PARTNERS' DEFICIT


Due on investments in partnerships ................................................   $ 11,965,814    $ 21,540,464
Accrued interest payable ..........................................................     25,038,996      49,549,160
Accounts payable and accrued expenses .............................................        143,243         168,467
                                                                                      ------------    ------------

      Total liabilities ...........................................................     37,148,053      71,258,091
                                                                                      ------------    ------------


Commitments and contingencies

Partners' capital (deficit):

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

                                                                                        60,003,500      60,003,500

  Less:
    Accumulated distributions to partners .........................................     (7,681,551)     (4,687,201)
    Offering costs ................................................................     (6,156,933)     (6,156,933)
    Accumulated losses ............................................................    (53,582,434)    (87,317,528)
                                                                                      ------------    ------------

      Total partners' deficit .....................................................     (7,417,418)    (38,158,162)
                                                                                      ------------    ------------

      Total liabilities and partners' deficit .....................................   $ 29,730,635    $ 33,099,929
                                                                                      ============    ============
</TABLE>

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

                                      III-8

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                  For the years ended
                                                                                       DECEMBER 31,
                                                                              ----------------------------
                                                                                  2000            1999
                                                                              ------------    ------------
<S>                                                                           <C>             <C>
Share of income from partnerships .........................................   $  2,386,939    $  1,778,488
                                                                              ------------    ------------

Other revenue and expenses:

  Revenue:
    Interest and other income .............................................        626,216         505,503
                                                                              ------------    ------------


  Expenses:
    Interest ..............................................................      2,600,481       3,802,599
    Management fee ........................................................        300,000         300,000
    General and administrative ............................................        268,805         253,844
    Extension fee .........................................................           --           150,000
    Professional fees .....................................................        220,225         100,773
    Amortization of deferred costs ........................................         49,293          61,075
                                                                              ------------    ------------

                                                                                 3,438,804       4,668,291
                                                                              ------------    ------------

      Total other revenue and expenses ....................................     (2,812,588)     (4,162,788)
                                                                              ------------    ------------

Loss before gain on disposition of investments in partnerships ............       (425,649)     (2,384,300)

Gain on disposition of investments in partnerships ........................     11,642,175            --
                                                                              ------------    ------------

Income (loss) before extraordinary gain from extinguishment of debt .......     11,216,526      (2,384,300)

Extraordinary gain from extinguishment of debt ............................     22,518,568         167,774
                                                                              ------------    ------------

Net income (loss) .........................................................   $ 33,735,094    $ (2,216,526)
                                                                              ============    ============



Net income (loss) allocated to General Partners (1.51%) ...................   $    509,400    $    (33,470)
                                                                              ============    ============


Net income (loss) allocated to Initial and Special Limited Partners (1.49%)   $    502,653    $    (33,026)
                                                                              ============    ============


Net income (loss) allocated to Additional Limited Partners (97%) ..........   $ 32,723,041    $ (2,150,030)
                                                                              ============    ============


Net income (loss) per unit of Additional Limited Partnership Interest
  based on 60,000 units outstanding .......................................   $     545.38    $     (35.83)
                                                                              ============    ============
</TABLE>

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

                                      III-9

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

             CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT


<TABLE>
<CAPTION>
                                                                      Initial and
                                                                        Special            Additional
                                                   General              Limited             Limited
                                                   PARTNERS             PARTNERS            PARTNERS               TOTAL
                                                 -----------          -----------         ------------         ------------
<S>                                              <C>                  <C>                 <C>                  <C>
Partners' deficit, January 1, 1999               $(1,306,312)         $(1,289,678)        $(32,746,576)        $(35,342,566)

  Net loss                                           (33,470)             (33,026)          (2,150,030)          (2,216.526)

  Distribution of $10.00 per unit of
    Additional Limited Partnership Interest               --                   --             (599,070)            (599,070)
                                                 -----------          -----------         ------------         ------------

Partners' deficit, December 31, 1999              (1,339,782)          (1,322,704)         (35,495,676)         (38,158,162)

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

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

Partners' deficit, December 31, 2000             $  (830,382)         $  (820,051)        $ (5,766,985)        $ (7,417,418)
                                                 ===========          ===========         ============         ============
</TABLE>

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

                                     III-10

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                        For the years ended
                                                                             DECEMBER 31,
                                                                     -----------------------------
                                                                        2000             1999
                                                                     ------------    -------------
<S>                                                                  <C>             <C>
Cash flows from operating activities:
  Net income (loss) ..............................................   $ 33,735,094    $ (2,216,526)

  Adjustments to reconcile net income (loss) to net cash
    used in operating activities:
    Share of income from partnerships ............................     (2,386,939)     (1,778,488)
    Amortization of deferred costs ...............................         49,293          61,075
    Amortization of discount on purchase money notes .............         19,873            --
    Gain on disposition of investments in partnerships ...........    (11,642,175)           --
    Extraordinary gain from extinguishment of debt ...............    (22,518,568)       (167,774)

    Changes in assets and liabilities:
      (Increase) decrease in other assets ........................         (5,040)          5,982
      Increase in accrued interest payable .......................      2,580,608       3,802,599
      Payment of purchase money note interest ....................       (469,554)       (417,328)
      (Decrease) increase in accounts payable and accrued expenses        (25,224)         26,618
                                                                     ------------    ------------

        Net cash used in operating activities ....................       (662,632)       (683,842)
                                                                     ------------    ------------


Cash flows from investing activities:
  Receipt of distributions from partnerships .....................      1,844,791       1,069,289
  Proceeds from disposition of investments in partnerships .......     14,864,089            --
                                                                     ------------    ------------

        Net cash provided by investing activities ................     16,708,880       1,069,289
                                                                     ------------    ------------


Cash flows from financing activities:
  Payoff of purchase money notes and related interest ............    (10,741,260)       (370,000)
  Payment of purchase money note principal .......................           --          (275,000)
  Distributions to Additional Limited Partners ...................     (2,994,350)       (599,070)
  Release of investment held in escrow ...........................           --           100,000
                                                                     ------------    ------------

        Net cash used in financing activities ....................    (13,735,610)     (1,144,070)
                                                                     ------------    ------------

Net increase (decrease) in cash and cash equivalents .............      2,310,638        (758,623)

Cash and cash equivalents, beginning of year .....................     10,045,683      10,804,306
                                                                     ------------    ------------

Cash and cash equivalents, end of year ...........................   $ 12,356,321    $ 10,045,683
                                                                     ============    ============


Supplemental disclosure of cash flow information:
  Cash paid during the period for interest .......................   $  5,715,229    $    590,621
                                                                     ============    ============

</TABLE>

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

                                     III-11

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     a.   ORGANIZATION
          ------------

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

          The General Partners of the Partnership are C.R.I.,  Inc. (CRI), which
     is the Managing  General  Partner,  and current and former  shareholders of
     CRI. The Initial  Limited  Partner is  Rockville  Pike  Associates  Limited
     Partnership-III,  a limited  partnership  which  includes  certain  current
     officers and former employees of CRI or its affiliates. The Special Limited
     Partner is Two Broadway Associates II, a limited  partnership  comprised of
     an  affiliate  and  employees  of Merrill  Lynch,  Pierce,  Fenner & Smith,
     Incorporated.

          The  Partnership  sold 60,000  units at $1,000 per unit of  additional
     limited partnership interest through a public offering. The offering period
     was terminated in January 1984.

     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.

     c.   PRINCIPLES OF CONSOLIDATION
          ---------------------------

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

     d.   INVESTMENTS IN PARTNERSHIPS
          ---------------------------

          The investments in Local  Partnerships  (see Note 2) are accounted for
     by the equity method because the  Partnership  is a limited  partner in the
     Local  Partnerships.   Under  this  method,  the  carrying  amount  of  the
     investments  in and  advances  to  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, 2000 and 1999, the Partnership's share of cumulative losses of
     seven and  eight,  respectively,  of the Local  Partnerships  exceeded  the
     amount of the  Partnership's  investments  in those Local  Partnerships  by
     $8,485,429  and  $9,736,465,  respectively.  Since the  Partnership  has no
     further  obligation  to advance  funds or provide  financing to these Local
     Partnerships, the excess losses have not been reflected in the accompanying
     consolidated  financial  statements.  As of  December  31,  2000 and  1999,
     cumulative cash


                                     III-12

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

     distributions  of $576,037 and $324,528,  respectively,  have been received
     from the Local  Partnerships for which the Partnership's  carrying value is
     zero. These  distributions  are recorded as increases in the  Partnership's
     share of income from partnerships.

          Costs incurred in connection  with acquiring  these  investments  have
     been  capitalized and are being amortized  using the  straight-line  method
     over the  estimated  useful  lives  of the  properties  owned by the  Local
     Partnerships.

     e.   INVESTMENT IN PARTNERSHIPS HELD FOR SALE
          ----------------------------------------

          Due to the  impending  transfer of its interest in College  Park,  and
     sale of O'Farrell, as discussed in Note 2.a., the Partnership's  investment
     in these Local  Partnerships was reclassified to investment in partnerships
     held for sale in the  accompanying  balance  sheet at  December  31,  1999.
     Assets  held for sale are not  recorded  in excess of their  estimated  net
     realizable value.

     f.   INVESTMENT IN PARTNERSHIPS HELD IN ESCROW
          -----------------------------------------

          In July 1999,  documents  transferring the  Partnership's  interest in
     Audubon  Towers to the  noteholder  were placed in escrow,  as discussed in
     Note 2.a.  The  Partnership's  investment  in this  Local  Partnership  was
     reclassified  as an  investment  in  partnership  held  in  escrow  in  the
     accompanying  balance  sheet at December 31,  2000.  In October  1999,  the
     documents  transferring the Partnership's  interest in Greeley Manor to the
     noteholder   were  placed  in  escrow,   as  discussed  in  Note  2.a.  The
     Partnership's  investment in this Local  Partnership was reclassified as an
     investment in partnership held in escrow in the accompanying  balance sheet
     at December 31,  1999.  Assets held in escrow are not recorded in excess of
     their estimated net realizable value.

     g.   CASH AND CASH EQUIVALENTS
          -------------------------

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

     h.   OFFERING COSTS
          --------------

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

     i.   INCOME TAXES
          ------------

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

                                     III-13

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

     j.   USE OF ESTIMATES
          ----------------

          In  preparing  financial  statements  in  conformity  with  accounting
     principles  generally  accepted in the United  States,  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  period.  Actual  results could differ from
     those estimates.

     k.   FAIR VALUE OF FINANCIAL INSTRUMENTS
          -----------------------------------

          The accompanying  financial  statements  include  estimated fair value
     information  as of December 31, 2000, as required by Statement of Financial
     Accounting  Standards  (SFAS)  No.  107,  "Disclosure  About  Fair Value of
     Financial   Instruments."   Such   information,   which   pertains  to  the
     Partnership's  financial  instruments  (primarily cash and cash equivalents
     and purchase money notes),  is based on the  requirements set forth in SFAS
     No. 107 and does not purport to represent  the  aggregate net fair value of
     the Partnership.

          The  balance  sheet  carrying  amounts  for cash and cash  equivalents
     approximate estimated fair values of such assets.

          The  Partnership has determined that it is not practicable to estimate
     the fair value of the purchase money notes,  either  individually or in the
     aggregate,  due to:  (i) the lack of an  active  market  for  this  type of
     financial  instrument,  (ii) the  variable  nature of  purchase  money note
     interest  payments  as a result  of  fluctuating  cash  flow  distributions
     received from the related Local Partnerships, and (iii) the excessive costs
     associated with an independent appraisal of the purchase money notes.


2.   INVESTMENTS IN PARTNERSHIPS

     a.   DUE ON INVESTMENTS IN PARTNERSHIPS AND ACCRUED INTEREST PAYABLE
          ---------------------------------------------------------------

          As of December 31, 2000 and 1999, the Partnership held limited partner
     interests  in 24  and  31  Local  Partnerships,  respectively,  which  were
     organized to develop, construct, own, maintain and operate rental apartment
     properties  which  provide  housing   principally  to  the  elderly  or  to
     individuals and families of low or moderate income.  The remaining  amounts
     due on investments in the Local Partnerships follow.

                                     III-14

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

                                                         DECEMBER 31,
                                              ---------------------------------
                                                 2000                  1999
                                              -----------           -----------

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

          Purchase money notes due in:
            1999                                6,800,000            13,685,000
            2000                                       --             2,009,500
            2001                                1,275,000             1,700,000
            2002                                2,011,270             2,011,270
            2003                                       --               506,288
            2004                                1,760,000             1,760,000
            Thereafter                                 --               322,326

          Less:  unamortized discount                  --              (573,464)
                                              -----------           -----------

                 Subtotal                      11,965,814            21,540,464
                                              -----------           -----------

          Accrued interest payable             25,005,020            49,515,184
                                              -----------           -----------

                 Total                        $36,970,834           $71,055,648
                                              ===========           ===========


          The  amounts  due to  local  general  partners  will be paid  upon the
     occurrence of certain specific events,  as outlined in the respective Local
     Partnership's partnership agreement.

          The purchase money notes have stated interest rates ranging from 5.57%
     to 12%, certain of which are compounded annually. Unamortized discounts are
     based on an imputed  interest rate of 15% to reflect market  interest rates
     which prevailed when the notes were issued. The resulting discount has been
     recorded by the Partnership and is being amortized to interest expense over
     the  life of the  respective  purchase  money  notes  using  the  effective
     interest  method.  The  purchase  money  notes are payable in full upon the
     earliest of: (i) sale or refinancing of the respective Local  Partnership's
     rental property; (ii) payment in full of the respective Local Partnership's
     permanent loan; or (iii) maturity.

          The purchase  money note related to Audubon  Towers,  in the principal
     amount of $1,275,000,  matured on January 1, 1999, and was extended  during
     2000 to January 15, 2001. The Partnership placed in escrow an assignment of
     its interest in the Local  Partnership to the noteholders,  but as of March
     28, 2001, the interest remained in escrow.

          The purchase  money notes  related to the  following  properties  have
     matured and have not been paid or extended.

          PROPERTY                       PRINCIPAL              MATURITY
          --------                      ----------              --------

          Heritage Estates I            $2,600,000              01/01/99
          Heritage Estates II            1,800,000              01/01/99
          Victorian Towers                 900,000              01/01/99
          Meadow Lanes                     650,000              02/28/99
          Glen Agnes                       850,000              06/30/99
          Audubon Towers                 1,275,000              01/15/01

          The purchase money notes related to the following properties were paid
     off at a discount, or were transferred to the noteholders, during 2000.


                                     III-15

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

<TABLE>
<CAPTION>

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

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

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

          The following  chart  presents  information  related to purchase money
     notes which have matured, have been extended to mature, or are scheduled to
     mature, through December 31, 2001, and which remain unpaid or unextended as
     of March 28, 2001.  Excluded  from the following  chart are purchase  money
     notes which  matured  through  December 31, 2000,  and which have been paid
     off, cancelled, or extended on or before March 28, 2001.

<TABLE>
<CAPTION>
                                                                         Aggregate
                                               Aggregate                  Accrued                  Carrying Amount
                                               Principal                  Interest                 of Partnership's
                   Number of                    Balance                   Balance                  Investments in
   Purchase        Underlying                    as of                     as of                   Underlying Local
  Money Note         Local       Percentage     December    Percentage    December    Percentage   Partnerships as of    Percentage
(PMN) MATURITY    PARTNERSHIPS    OF TOTAL      31, 2000     OF TOTAL     31, 2000     OF TOTAL    DECEMBER 31, 2000      OF TOTAL
--------------    ------------   ----------    -----------  ---------    ----------   ----------   ------------------    ----------
<S>               <C>            <C>           <C>          <C>          <C>          <C>          <C>                   <C>
1st Quarter 1999        4            17%       $ 5,950,000        50%    $11,354,013       45%        $ 2,853,360             17%
2nd Quarter 1999        1             4%           850,000         7%      1,769,911        7%          1,326,372              8%
1st Quarter 2001        1             4%         1,275,000        11%      3,730,321       15%          4,971,063             30%
                     ----          ----        -----------     -----     -----------     ----         -----------           ----

Total through
 12/31/2001             6            25%       $ 8,075,000        68%    $16,854,245       67%        $ 9,150,795 (3)         55%
                     ====          ====        ===========     =====     ===========     ====         ===========           ====

Total, Local
  Partnerships         24 (2)       100%       $11,846,270(1)    100%    $25,005,020(1)   100%        $16,756,019 (3)        100%
                     ====          ====        ===========     =====     ===========     ====         ===========           ====
</TABLE>

                                     III-16

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

     (1)  Does not include amounts payable to a local general partner.
     (2)  Twelve of the 24 Local  Partnerships  have related purchase money note
          obligations.
     (3)  Includes  $4,971,063  for the  partnership  reported as  investment in
          partnership  held in  escrow  on the  consolidated  balance  sheet  at
          December 31, 2000.

          The Managing  General  Partner is continuing to  investigate  possible
     alternatives  to  reduce  the   Partnership's   debt   obligations.   These
     alternatives  include,  among  others,  retaining  the cash  available  for
     distribution  to meet the  purchase  money  note  requirements,  paying off
     certain purchase money notes at a discounted price, extending the due dates
     of certain  purchase money notes,  refinancing  the respective  properties'
     underlying  debt or  selling  the  underlying  real  estate  and  using the
     Partnership's  share of the  proceeds to pay or buy down  certain  purchase
     money note obligations.  Although the Managing General Partner has had some
     success applying these strategies in the past, the Managing General Partner
     cannot assure that these  strategies  will be successful in the future.  If
     the  Managing  General  Partner  is unable to  negotiate  an  extension  or
     discounted payoff, in the event that the purchase money notes remain unpaid
     upon  maturity,  the  noteholders  may have the right to  foreclose  on the
     Partnership's interest in the related Local Partnerships. In the event of a
     foreclosure,  the excess of the nonrecourse  indebtedness over the carrying
     amount of the  Partnership's  investment in the related  Local  Partnership
     would be deemed cancellation of indebtedness income, which would be taxable
     to Limited Partners at a federal tax rate of up to 39.6%. Additionally,  in
     the event of a foreclosure,  the  Partnership  would lose its investment in
     the Local  Partnership  and,  likewise,  its share of any future  cash flow
     distributed by the Local Partnership from rental operations,  mortgage debt
     refinancings,  or the sale of the real estate. Of the 24 Local Partnerships
     in which the Partnership is invested as of December 31, 2000, the six Local
     Partnerships  with  associated  purchase  money notes which mature  through
     December 31, 2001 and which  remain  unpaid or  unextended  as of March 28,
     2001,  represent  the  following  percentages  of the  Partnership's  total
     distributions  received  from Local  Partnerships  and share of income from
     Local Partnerships for the immediately preceding two calendar years.

                                 Percentage of Total     Partnership's Share of
             For the Year      Distributions Received         Income from
                ENDED          FROM LOCAL PARTNERSHIPS     LOCAL PARTNERSHIPS
          -----------------    -----------------------   ----------------------

          December 31, 2000              13%                     $344,809
          December 31, 1999              19%                     $489,631


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

          Interest  expense on the  Partnership's  purchase  money notes for the
     years ended  December  31,  2000 and 1999 was  $2,600,481  and  $3,802,599,
     respectively.  The accrued  interest payable on the purchase money notes of
     $25,005,020 and $49,515,184 as of December 31, 2000 and 1999, respectively,
     is due on the  respective  maturity  dates of the  purchase  money notes or
     earlier, in some instances, if (and to the extent of a portion thereof) the
     related Local  Partnership has  distributable  net cash flow, as defined in
     the relevant Local Partnership agreement.

                                     III-17

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

                                 AUDUBON TOWERS
                                 --------------

          The  Partnership  defaulted  on its  purchase  money  note  related to
     Audubon Towers Limited Partnership (Audubon Towers) on January 1, 1999 when
     the note matured and was not paid.  The default amount  included  principal
     and accrued interest of $1,275,000 and $3,272,276,  respectively. In August
     1999, the Partnership and the noteholder agreed to extend the maturity date
     of the purchase  money note to June 30, 2000,  in exchange for payment of a
     fee not applicable to the note balance.  In June 2000, the Partnership made
     a payment,  applicable to the purchase  money note  balance,  extending the
     maturity  date to  January  15,  2001.  The  maturity  date could have been
     further  extended  through  January  2,  2003,  had  the  Partnership  paid
     additional sums prior to January 15, 2001, but the Partnership chose not to
     make the  large  extension  payment  as it saw  little  chance  to sell the
     property  and  recoup  its  investment  in the next two  years.  Under  the
     extension agreement,  documents  transferring the Partnership's interest in
     Audubon  Towers to the  noteholder  were placed in escrow to be released to
     the noteholder  upon the earlier of (i) a future default by the Partnership
     on the purchase  money note,  or (ii) the failure to pay the balance of the
     purchase  money  note  at  final  maturity.  As  of  March  28,  2001,  the
     Partnership has not been notified by the escrow agent as to the disposition
     of the Partnership's interest in Audubon Towers.

          Due to the  possible  transfer  of the  Partnership's  interest in the
     Local Partnership to the noteholders,  the Partnership's basis in the Local
     Partnership,  along  with net  unamortized  acquisition  fees and  property
     purchase costs,  which totaled $5,011,886 as of December 31, 2000, has been
     reclassified   to  investment  in   partnership   held  in  escrow  in  the
     accompanying consolidated balance sheet at December 31, 2000.

                 BARTLEY MANOR, VILLAGE SQUARE AND VILLAGE GREEN
                 -----------------------------------------------

          The  Partnership  defaulted  on its  purchase  money notes  related to
     Bartley Manor Limited Partnership  (Bartley Manor),  Village Square Limited
     Partnership  (Village  Square)  and  Village  Green  of  Wisconsin  Limited
     (Village Green) on October 1, 1999,  when the notes,  as extended,  reached
     maturity  and  were  not  paid.  The  default  amounts  included  aggregate
     principal and accrued interest of $1,365,000 and $2,427,685,  respectively.
     Aggregate accrued interest at December 31, 1999 was $2,474,810.  In January
     2000,  the  Partnership  paid off the notes at a discount.  The  discounted
     payoff  resulted  in  extraordinary  gain  from  extinguishment  of debt of
     $2,865,417 for financial statement purposes in 2000, and in cancellation of
     indebtedness  income of approximately $3.0 million for federal tax purposes
     in 2000.

                                  COLLEGE PARK
                                  ------------

          The  Partnership  defaulted  on its  purchase  money notes  related to
     College  Park  Limited  (College  Park) on January 1, 1999,  when the notes
     matured and were not paid. The default amount included aggregate  principal
     and  accrued  interest  of  $880,000  and  $1,622,642,   respectively.  The
     Partnership  attempted to negotiate with the noteholder of record to extend
     the maturity dates of the purchase money notes for five years, but received
     no response. In March 1999, the Partnership received notice of a collection
     action on the purchase money notes by two individuals who claimed to be the
     noteholders.  The Partnership retained local counsel to defend the lawsuit.
     On July 26, 1999, the Partnership received notice that the plaintiffs moved
     to dismiss their lawsuit.  On September 7, 1999, the  Partnership  received
     notice that a new collection action had been

                                     III-18

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

     filed in the proper jurisdiction of Mississippi.  The purported noteholders
     indicated that they would not agree to settle the action.  Accordingly,  to
     avoid the expense of further  litigation,  in April 2000,  the  Partnership
     transferred  its interests in the Local  Partnership to the  noteholders in
     exchange  for  cancellation  of  the  indebtedness.   The  release  of  the
     Partnership's   purchase   money  note   obligation  as  a  result  of  the
     Partnership's  loss of  ownership  interest  in College  Park  resulted  in
     extraordinary gain from  extinguishment of debt of $1,415,213 for financial
     statement  purposes in 2000,  and in total income of $3,036,164 for federal
     tax purposes in 2000.

                                 CONGRESS PLAZA
                                 --------------

          The  Partnership  defaulted  on its  purchase  money  note  related to
     Kapetan Associates Limited Partnership  (Congress Plaza) on January 1, 1999
     when the  note  matured  and was not  paid.  The  default  amount  included
     principal and accrued interest of $775,000 and $2,162,200, respectively. On
     May 19,  1999,  the  Partnership  and the  noteholder  agreed to extend the
     maturity  date of the purchase  money note to January 1, 2002,  in exchange
     for a partial principal payment.  Under the extension agreement,  documents
     transferring the Partnership's interest in Congress Plaza to the noteholder
     were placed in escrow to be released to the noteholder  upon the earlier of
     (i) a future default by the Partnership on the purchase money note, or (ii)
     the  failure  to pay the  balance of the  purchase  money note on or before
     January 1, 2002.

                                   GLEN AGNES
                                   ----------

          The  Partnership  defaulted on its purchase money note related to Glen
     Agnes  Associates  (Glen  Agnes) on June 30, 1999 when the note matured and
     was not paid. The default amount included principal and accrued interest of
     $850,000 and $1,597,852,  respectively. As of March 28, 2001, principal and
     accrued interest of $850,000 and $1,797,259, respectively, were due.

          In November 1999,  the noteholder  filed an action to foreclose on the
     Partnership's interest in the Local Partnership. Counsel for the noteholder
     have  failed to respond  to the  Partnership's  queries,  but have taken no
     further  action in the  litigation.  In the  meantime,  an affiliate of the
     noteholder  offered to  purchase  the  Partnership's  interest in the Local
     Partnership  for a combination  of cash and the  assumption of the purchase
     money  note.  Any  transfer  of the  Partnership's  interest  in the  Local
     Partnership  would have to be approved by the  California  Housing  Finance
     Agency. There is no assurance that such approval will be obtained,  or that
     a transfer will take place.

                                  GREELEY MANOR
                                  -------------

          The  Partnership  defaulted  on its  purchase  money  note  related to
     Greeley  Manor  Company  (Greeley  Manor)  on  August 1, 1999 when the note
     matured and was not paid. The default amount included principal and accrued
     interest of $734,500 and $1,365,808, respectively. On October 15, 1999, the
     Partnership  and the  noteholder  agreed to extend the maturity date of the
     purchase money note to January 3, 2000, in exchange for a partial principal
     payment.   Under  the  extension  agreement,   documents  transferring  the
     Partnership's  interest in Greeley Manor to the  noteholder  were placed in
     escrow to be  released to the  noteholder  upon the earlier of (i) a future
     default by the  Partnership on the purchase money note, or (ii) the failure
     to pay the balance of the purchase money note on or before January 3, 2000.
     In January 2000, the documents were released from escrow

                                     III-19

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

     and the  Partnership's  interest in Greeley  Manor was  transferred  to the
     noteholder. The release of the Partnership's purchase money note obligation
     as a result of the  Partnership's  loss of  ownership  interest  in Greeley
     Manor  resulted  in  extraordinary  gain  from  extinguishment  of  debt of
     $864,624 for financial  statement  purposes in 2000, and in total income of
     approximately $999,437 for federal tax purposes in 2000.

                   HERITAGE ESTATES I AND HERITAGE ESTATES II
                   ------------------------------------------

          The  Partnership  defaulted  on the  purchase  money notes  related to
     Heritage  Estates  Associates  Phase I  (Heritage  Estates I) and  Heritage
     Estates  Associates Phase II (Heritage  Estates II) on January 1, 1999 when
     the notes matured and were not paid. The default amount included  aggregate
     principal and accrued interest of $2,600,000 and $4,357,413,  respectively,
     for Heritage  Estates I and  aggregate  principal  and accrued  interest of
     $1,800,000 and  $2,689,917,  respectively,  for Heritage  Estates II. As of
     March  28,  2001,   principal  and  accrued   interest  of  $2,600,000  and
     $5,001,533,  respectively,  for  Heritage  Estates  I, and  $1,800,000  and
     $3,116,018,  respectively,  for Heritage  Estates II were due. The Managing
     General Partner and the purchase money noteholders have agreed in principle
     to extend  the  maturity  dates of the  purchase  money  notes  related  to
     Heritage  Estates I and  Heritage  Estates II to  January 1, 2004,  and the
     noteholders are currently  reviewing documents to implement the extensions.
     There is no assurance that extensions will be obtained.

                                 HIGHLAND MANOR
                                 --------------

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

                               LAKEWOOD APARTMENTS
                               -------------------

          The  Partnership  defaulted  on its  purchase  money notes  related to
     Eufaula Apartments,  Limited (Lakewood  Apartments) on January 1, 1999 when
     the notes matured and were not paid. The default amount included  aggregate
     principal and accrued interest of $364,481 and $169,468,  respectively.  On
     February 5, 1999,  the  Partnership  paid off, at a discount,  the purchase
     money notes related to Lakewood Apartments.  The discounted payoff resulted
     in extraordinary gain from extinguishment of debt of $167,774 for financial
     statement  purposes in 1999, and in cancellation of indebtedness  income of
     approximately $180,000 for federal tax purposes in 1999.

                                     III-20

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

                                 MEADOW LANES II
                                 ---------------

          The Partnership defaulted on its purchase money note related to Meadow
     Lanes II Limited Dividend Housing  Associates (Meadow Lanes II) on February
     28,  1999  when the note  matured  and was not  paid.  The  default  amount
     included  principal  and  accrued  interest  of  $650,000  and  $1,250,201,
     respectively.  As of March 28,  2001,  principal  and  accrued  interest of
     $650,000  and  $1,437,124,  respectively,  were  due.  The  Partnership  is
     currently  attempting  to  negotiate  with the  noteholder  to  extend  the
     maturity  date of the purchase  money note.  There is no assurance  that an
     extension will be obtained.

                                    O'FARRELL
                                    ---------

          The local  managing  general  partner of O'Farrell  Towers  Associates
     (O'Farrell)  received an offer for the  purchase of the  property,  and the
     parties  executed a sale  contract  dated as of October  12,  1999,  with a
     closing date of August 4, 2000.  Proceeds  received by the Partnership from
     the sale of this property were used to pay off, at a discount, the purchase
     money notes related to O'Farrell. The sale of O'Farrell resulted in gain on
     disposition  of investments in  partnerships  of $2,539,157,  extraordinary
     gain  from  extinguishment  of debt of  $280,096  for  financial  statement
     purposes in 2000, and total income of approximately  $9,261,700 for federal
     tax purposes in 2000. The Managing  General  Partner was paid a disposition
     fee of $244,000 for the sale of O'Farrell on August 4, 2000.

                            ROLLING GREEN AT MILFORD
                            ------------------------

          The Managing General Partner  successfully  negotiated an extension of
     the maturity date of the purchase  money notes  related to Roberts  Milford
     Associates (Rolling Green) from August 31, 1999 to February 28, 2001. These
     notes  had an  aggregate  original  principal  amount  of  $2,250,000.  The
     maturity  date was further  extended  to August 31, 2003  because the Local
     Partnership  refinanced  its mortgage  loan prior to the  expiration of the
     first extension,  which further extension was provided for in the extension
     agreement.  The Partnership's share of the proceeds from the refinancing of
     the property's  first mortgage loan was applied  against the purchase money
     note principal.

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

                                 TYEE APARTMENTS
                                 ---------------

          The Partnership  defaulted on its purchase money notes related to Tyee
     Associates (Tyee Apartments) on February 1, 1999 when the notes matured and
     were not paid. The default amount included aggregate  principal and accrued
     interest of $1,305,000 and

                                     III-21

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

     $3,312,902,  respectively. On October 13, 2000, Tyee Apartments was sold. A
     portion  of the  sale  proceeds  was used to pay off,  at a  discount,  the
     Partnership's purchase money note obligations related to this property. The
     sale resulted in gain on  disposition of  investments  in  partnerships  of
     $1,827,662  and in  extraordinary  gain  from  extinguishment  of  debt  of
     $3,486,305 for financial statement purposes in 2000, and in total income of
     $5,629,456 for federal tax purposes in 2000. The Managing  General  Partner
     of the  Partnership  received  a fee equal to 1.16% of the sale  price,  or
     $48,911, relating to the sale.

                                VICTORIAN TOWERS
                                ----------------

          The  Partnership  defaulted  on its  purchase  money  note  related to
     Victorian Towers Associates  (Victorian Towers) on January 1, 1999 when the
     note matured and was not paid.  The default amount  included  principal and
     accrued interest of $900,000 and $1,710,560,  respectively. As of March 28,
     2001,  principal and accrued  interest of $900,000 and $1,989,524 were due.
     The Managing  General  Partner  reached an agreement in principle  with the
     noteholder  to extend the maturity  date of the  purchase  money note until
     January 1, 2004, and is awaiting execution of the related documents.  There
     is no assurance that an extension of the maturity date will be finalized.

                               WINCHESTER GARDENS
                               ------------------

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

                                WOODSIDE VILLAGE
                                ----------------

          The  Partnership  defaulted on its two purchase money notes related to
     Woodside Village Limited Partnership (Woodside Village) on February 1, 1999
     when the notes  matured  and were not paid.  The  default  amount  included
     aggregate  principal  and accrued  interest of $3,335,000  and  $7,407,102,
     respectively.  On October 13, 2000, Woodside Village was sold. A portion of
     the sale  proceeds  was used to pay off, at a discount,  the  Partnership's
     purchase money note obligations related to this property. The sale resulted
     in  estimated  gain  on  disposition  of  investments  in  partnerships  of
     $2,969,350  and in  extraordinary  gain  from  extinguishment  of  debt  of
     $7,778,612 for financial statement

                                     III-22

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

     purposes  in 2000,  and in total  income of  $13,018,337  for  federal  tax
     purposes in 2000. The Managing General Partner of the Partnership  received
     a fee equal to 1.75% of the sale price, or $151,200, relating to the sale.

          In February, 2001, the Partnership and two affiliates were served in a
     state court action for declaratory judgement and damages in connection with
     a purchase  money note allegedly  assigned to the plaintiff  secured by its
     interests in Woodside  Village.  That Property was sold in October 2000 and
     the original  payee agreed to indemnify the  Partnership  for any claims in
     connection  with the purchase  money notes.  Counsel for the original payee
     (also a defendant) is currently representing the Partnership.

     b.   INTERESTS IN PROFITS, LOSSES AND CASH DISTRIBUTIONS MADE BY LOCAL
          -----------------------------------------------------------------
            PARTNERSHIPS
            ------------

          The Partnership  has a 96% to 98.99%  interest in profits,  losses and
     cash  distributions  (as  restricted  by various  federal and state housing
     agencies)  (collectively,  the  Agencies)  of each  Local  Partnership.  An
     affiliate  of the Managing  General  Partner of the  Partnership  is also a
     general  partner  of each Local  Partnership  or the  intermediary  limited
     partnership  which invests in the Local  Partnership.  As stipulated by the
     Local  Partnership's  partnership  agreements,  the Local  Partnerships are
     required to make annual cash  distributions from surplus cash flow, if any.
     During 2000 and 1999, the Partnership  received cash distributions from the
     rental  operations of the Local  Partnerships  of $1,844,791 and $1,069,289
     respectively. As of December 31, 2000 and 1999, 20 and 25, respectively, of
     the Local  Partnerships  had  aggregate  surplus  cash, as defined by their
     respective   regulatory   Agencies,   in  the  amounts  of  $1,333,333  and
     $2,177,856,  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
     rental  properties  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.

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

     c.   PROPERTY MATTERS
          ----------------

                                    O'FARRELL
                                    ---------

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


                                     III-23

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

                            ROLLING GREEN AT MILFORD
                            ------------------------

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

                                 TYEE APARTMENTS
                                 ---------------

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

                       VILLA MIRAGE I AND VILLA MIRAGE II
                       ----------------------------------

          The Partnership's  affiliate,  C.R.H.C.,  Incorporated (CRHC), removed
     the Local Managing  General Partner (LMGP) of both Villa Mirage I and Villa
     Mirage  II in  December  1999,  due  to its  failure  to  address  problems
     identified  in the 1998 audited  financial  statements  of those lower tier
     partnerships,  including overpayments to itself and its affiliated property
     management  company.  The  removed  LMGP and its  shareholder  and  another
     unrelated local general partner filed lawsuits  against the Partnership and
     CRHC with  respect  to both  Villa  Mirage I and II  seeking,  among  other
     things,  an accounting and dissolution of the  partnerships and damages for
     alleged breaches of the respective  partnership  agreements (for refusal to
     approve proposed sales of the properties).  The lawsuits did not purport to
     enjoin  or  reverse  the  removals  of the  LMGP.  Subsequently,  the  same
     plaintiffs  filed  injunction  actions  seeking  to compel the sales of the
     properties  owned by Villa Mirage I and II. Both lawsuits were stayed while
     the disputes  were to be resolved by  arbitration  in  accordance  with the
     respective  Local  Partnership  agreements.  In August 2000, the plaintiffs
     dismissed their litigation and arbitration  claims without  prejudice,  but
     CRHC  and  the  Partnership   maintained  their  arbitration   claims.  The
     arbitration  hearing  was held in January  2001.  A ruling is  expected  by
     mid-April 2001.

                                WOODSIDE VILLAGE
                                ----------------

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

     d.   AFFORDABLE HOUSING LEGISLATION
          ------------------------------

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

          Mark-to-Market  implementation will reduce rental income at properties
     that are currently subsidized at higher-than-market  rental rates, and will
     therefore lower cash flow available to meet mortgage payments and operating
     expenses.  Each affected property may undergo debt restructuring  according
     to terms determined by an individual property and

                                     III-24

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

     operations  evaluation.  This may involve  reducing the first mortgage loan
     balance to an amount  supportable by the property,  taking into account the
     property's operating expenses and reduced income. The balance of the amount
     written  down  from  the  first  mortgage  loan  will  be  converted  to  a
     non-performing but accruing (soft) second mortgage loan.

          Seven  properties in which the  Partnership is invested as of December
     31, 2000, may be affected by the  Mark-to-Market  program,  since they have
     Section 8 HAP  contracts  which,  as  extended,  will  expire in 2001.  The
     Section 8 HAP  contracts  cover all or  substantially  all of the apartment
     units in each property.  Two properties  have applied to participate in the
     Mark-up-to-Market  program discussed  further herein.  Rents studies on two
     properties whose Section 8 HAP contracts expired in 2000 indicate HAP rents
     are in excess of fair market rents,  and therefore  these  properties  will
     most likely apply for a one- year renewal of their respective Section 8 HAP
     contracts.  However, the Mark-to-Market  program is currently set to expire
     in  September,  2001,  so there  can be no  assurance  of what  may  happen
     thereafter.  The Section 8 HAP contracts on the remaining three  properties
     are also expected to be renewed during 2001 for another one-year period.

<TABLE>
<CAPTION>
                                                           Units             Original           Renewed
                                                       Authorized for      Expiration of      Expiration of
                                       Number of      Rental Assistance      Section 8          Section 8
         PROPERTY                     RENTAL UNITS     UNDER SECTION 8     HAP CONTRACT       HAP CONTRACT
         --------                     ------------    -----------------    -------------     --------------
         <S>                          <C>             <C>                  <C>               <C>
         Bartley Manor                     70                69               07/31/98         05/31/01      (2)
         Briar Crest I                     53                53               06/30/98         09/30/01      (1)
         Briar Crest II                    49                49               06/30/98         09/30/01      (1)
         Briar Hills                       50                33               09/30/98         12/31/01      (2)
         Indian Hills Townhouses           40                24               09/30/98         12/31/01      (2)
         Village Green                     36                36               09/30/98         04/30/01      (2)
         Village Square                    48                48               09/30/98         04/30/01      (2)
                                        -----             -----

              Total                       346               312
                                        =====             =====
</TABLE>

         (1)  Property has applied for Mark-up-to-Market.
         (2)  Renewed/expected to be renewed for one year.

          With  the  uncertainty  of  continued   project-based   subsidies  for
     properties  with expiring  Section 8 HAP  contracts,  there is no assurance
     that these rental properties will be able to maintain the rental income and
     occupancy  levels  necessary to pay operating costs and debt service.  As a
     result, it is not possible to predict the impact on the Local Partnerships'
     operations  and the resulting  impact on the  Partnership's  investments in
     Local  Partnerships  at this time.  As of December 31,  2000,  the carrying
     amount of the Partnership's  investments in Local Partnerships with Section
     8 HAP contracts expiring in or 2001 was $4,672,860.

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

                                     III-25

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

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

     e.   SUMMARIZED FINANCIAL INFORMATION
          --------------------------------

          Combined balance sheets and combined  statements of operations for the
     24 and 31 Local  Partnerships  in which the  Partnership  is invested as of
     December 31, 2000 and 1999, respectively, follow. The combined statement of
     operations for the year ended December 31, 2000,  include  information  for
     seven Local Partnerships through the dates of sale or transfer.

                             COMBINED BALANCE SHEETS

                                                             DECEMBER 31,
                                                    --------------------------
                                                        2000          1999
                                                    ------------  ------------

     Rental property, at cost, net of accumulated
       depreciation of $60,410,264 and
       $81,091,462, respectively                    $ 51,926,200  $ 75,945,135
     Land and land improvements                        9,977,655    13,570,306
     Other assets                                     16,201,657    20,908,627
                                                    ------------  ------------

           Total assets                             $ 78,105,512  $110,424,068
                                                    ============  ============



     Mortgage notes payable                         $ 78,035,342  $104,804,254
     Other liabilities                                 7,570,775     9,718,955
                                                    ------------  ------------

           Total liabilities                          85,606,117   114,523,209

     Partners' deficit                                (7,500,605)   (4,099,141)
                                                    ------------  ------------

           Total liabilities and partners'
             deficit                                $ 78,105,512  $110,424,068
                                                    ============  ============


                        COMBINED STATEMENTS OF OPERATIONS

                                                       For the years ended
                                                           DECEMBER 31,
                                                    -------------------------
                                                        2000         1999
                                                    -----------   -----------

     Revenue:
       Rental                                       $27,288,524   $30,406,116
       Interest                                         699,757       635,738
       Other                                          1,125,724     1,345,584
                                                    -----------   -----------

           Total revenue                             29,114,005    32,387,438
                                                    -----------   -----------

     Expenses:
       Operating                                     17,030,872    18,840,503
       Interest                                       6,225,612     7,204,038
       Depreciation                                   4,664,747     5,186,672
       Amortization                                     384,496        85,919
                                                    -----------   -----------

            Total expenses                           28,305,727    31,317,132
                                                    -----------   -----------

     Net income                                     $   808,278   $ 1,070,306
                                                    ===========   ===========


                                     III-26

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

     f.   RECONCILIATION OF THE LOCAL PARTNERSHIPS' FINANCIAL STATEMENT
          -------------------------------------------------------------
            NET INCOME TO TAXABLE INCOME
            ----------------------------

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

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

                                                           For the years ended
                                                                DECEMBER 31,
                                                         -----------------------
                                                            2000         1999
                                                         ----------   ----------

     Financial statement net income                      $  808,278   $1,070,306

     Adjustments:
       Difference in tax depreciation using accelerated
         methods, net of depreciation on construction
         period expenses capitalized for financial
         statement purposes                               3,075,416    2,228,567

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

       Miscellaneous, net                                   445,152       97,192
                                                         ----------   ----------

     Taxable income                                      $4,377,042   $3,444,261
                                                         ==========   ==========


3.   RELATED PARTY TRANSACTIONS

     In accordance with the terms of the Partnership Agreement,  the Partnership
paid the  Managing  General  Partner a fee for services in  connection  with the
review, selection,  evaluation,  negotiation and acquisition of the interests in
the Local  Partnerships.  The fee amounted to $1,200,000,  which is equal to two
percent  of  the  Additional  Limited  Partners'  capital  contributions  to the
Partnership.  The  acquisition fee was capitalized and is being amortized over a
30-year period using the straight-line method.

     In accordance with the terms of the Partnership Agreement,  the Partnership
is obligated to reimburse the Managing  General  Partner for its direct expenses
in connection  with managing the  Partnership.  For the years ended December 31,
2000 and 1999, the Partnership paid $239,666 and $188,024,  respectively, to the
Managing General Partner as direct  reimbursement of expenses incurred on behalf
of the Partnership.  Such expenses are included in the accompanying consolidated
statements of operations as general and administrative expenses.

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

                                     III-27

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3.   RELATED PARTY TRANSACTIONS

     (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, 2000 and 1999, the Partnership paid the
Managing General Partner a Management Fee of $300,000.

     The Managing General Partner and/or its affiliates may receive a fee of not
more than two percent of the sales price of an investment in a Local Partnership
or the property it owns,  payable under certain  conditions  upon the sale of an
investment in a Local  Partnership  or the property it owns.  The payment of the
fee is subject to certain  restrictions,  including the achievement of a certain
level of sales  proceeds and making  certain  minimum  distributions  to limited
partners.  No  such  fee was  earned  by the  Managing  General  Partner  or its
affiliates for the year ended December 31, 1999. For the year ended December 31,
2000, the Managing  General  Partner was paid (i) a disposition  fee of $244,000
relating to the sale of O'Farrell on August 4, 2000;  (ii) a disposition  fee of
$48,911  relating  to the  sale  of  Tyee  on  October  13,  2000;  and  (iii) a
disposition  fee of  $151,200  relating  to the sale of  Woodside on October 13,
2000.


4.   PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS

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

      (i) to the payment of debts and liabilities of the Partnership  (including
          all expenses of the  Partnership  incident to the sale or refinancing)
          other than loans or other debts and  liabilities of the Partnership to
          any partner or any affiliate; such debts and liabilities,  in the case
          of a  non-liquidating  distribution,  to be only those  which are then
          required  to be paid  or,  in the  judgment  of the  Managing  General
          Partner, required to be provided for;
     (ii) to the  establishment  of any  reserves  which  the  Managing  General
          Partner  deems  reasonably  necessary  for  contingent,  unmatured  or
          unforeseen liabilities or obligations of the Partnership;
    (iii) to each  partner  in an amount  equal to the  positive  balance in his
          capital  account as of the date of the sale or  refinancing,  adjusted
          for operations and  distributions to that date, but before  allocation
          of any profits for tax purposes realized from such sale or refinancing
          and allocated pursuant to the Partnership Agreement;
     (iv) to the limited  partners (A) an aggregate amount of proceeds from sale
          or  refinancing  and all prior  sales or  refinancings  equal to their
          capital contributions,  without reduction for prior cash distributions
          other than prior distributions of sale and refinancing proceeds,  plus
          (B) an additional amount

                                     III-28

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4.   PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS - Continued

          equal to a cumulative noncompounded 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,
   (viii) the  remainder,  12% to the General  Partners (or their  assignees),
          three  percent to the Special  Limited  Partner and 85% to the Initial
          and Additional Limited Partners (or their assignees).

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

     The Managing General Partner and/or its affiliates may receive a fee of not
more than two percent of the sales price of an investment in a Local Partnership
or the  property  it owns.  The fee would  only be  payable  upon the sale of an
investment in a Local  Partnership  or the property it owns and would be subject
to certain  restrictions,  including the achievement of a certain level of sales
proceeds and making certain minimum  distributions to limited partners.  No such
fee was earned by the Managing  General  Partner or its  affiliates for the year
ended  December 31,  1999.  For the year ended  December 31, 2000,  the Managing
General  Partner  was paid (i) a  disposition  fee of  $244,000  for the sale of
O'Farrell on August 4, 2000;  (ii) a disposition  fee of $48,911 for the sale of
Tyee on October 13, 2000;  and (iii) a disposition  fee of $151,200 for the sale
of Woodside on October 13, 2000.

     Pursuant to the Partnership Agreement, all cash available for distribution,
as defined, shall be distributed,  not less frequently than annually, 97% to the
Additional Limited Partners,  one percent to the Special Limited Partner,  0.49%
to the Initial Limited Partner and 1.51% to the General Partners,  after payment
of the Management Fee (see Note 3), as specified in the  Partnership  Agreement.
On November 6, 2000,  the  Partnership  made a cash  distribution  of $2,994,350
($50.00 per Unit) to  Additional  Limited  Partners,  to holders of record as of
September 30, 2000;  this  distribution  was a result of the sales of O'Farrell,
Tyee Apartments and Woodside Village. On November 12, 1999, the Partnership made
a cash  distribution  of  $599,070  ($10.00  per  Unit)  to  Additional  Limited
Partners,  to holders of record as of October  1, 1999,  out of  available  cash
flow.

     As defined in the Partnership Agreement, after the payment of distributions
to Additional Limited Partners as described in the previous paragraph, after the
establishment  of any reserves deemed  necessary by the Managing General Partner
and after payment of the Management Fee,

                                     III-29

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4.   PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS - Continued

the Partnership had no remaining cash available for  distribution  for the years
ended  December  31, 2000 and 1999.  The  Managing  General  Partner  intends to
reserve all of the Partnership's  remaining  undistributed cash for the possible
repayment,  prepayment or retirement of the Partnership's  outstanding  purchase
money notes related to the Local Partnerships.


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

     For  federal  income  tax  purposes,  the  Partnership  reports  on a basis
whereby:  (i) certain expenses are amortized rather than expensed when incurred;
(ii) certain costs are  amortized  over a shorter  period for tax  purposes,  as
permitted by IRS  Regulations,  and (iii)  certain  costs are  amortized  over a
longer period for tax purposes. The Partnership records its share of losses from
its  investments  in limited  partnerships  for federal  income tax  purposes as
reported on the Local Partnerships'  federal income tax returns (see Note 2.f.),
including  losses in excess of related  investment  amounts.  These  returns are
subject to audit and,  therefore,  possible  adjustment by the IRS. In addition,
adjustments  arising  from the  amortization  of discount  on the  Partnership's
purchase money notes for financial  reporting purposes are eliminated for income
tax purposes (see Note 2.a.).

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

<TABLE>
<CAPTION>
                                                                         For the years ended
                                                                              DECEMBER 31,
                                                                      --------------------------
                                                                          2000          1999
                                                                      -----------    -----------
<S>                                                                   <C>            <C>
Financial statement net income (loss)                                 $33,735,094    $(2,216,526)

Adjustments:
  Differences between taxable income (loss) and financial statement
    net income (loss) related to the Partnership's equity
    in the Local Partnerships' income or losses                        18,261,556      1,618,242

  Costs amortized over a shorter period for income tax purposes            45,298         66,275

  Effect of amortization of discount on purchase money notes
    for financial statement purposes                                       27,264        372,880
                                                                      -----------    -----------

Taxable income (loss)                                                 $52,069,212    $  (159,129)
                                                                      ===========    ===========
</TABLE>


                                      # # #


                                     III-30