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

                          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, 2003


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



                         Commission file number 0-11962

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


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



        Internal Revenue Service - Employer Identification No. 52-1311532

                 11200 Rockville Pike, Rockville, Maryland 20852

                                 (301) 468-9200


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



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

                        UNITS OF LIMITED PARTNER INTEREST


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



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

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

State issuer's revenues for its most recent fiscal year $1,964,473.

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

--------------------------------------------------------------------------------
<PAGE>


                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                        2003 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-9
Item 8.  Changes In and Disagreements With Accountants
           on Accounting and Financial Disclosure........................ II-9


                                    PART III

Item 9.  Directors and Executive Officers of the Registrant.............. III-1
Item 10. Executive Compensation.......................................... III-2
Item 11. Security Ownership of Certain Beneficial Owners and Management.. III-2
Item 12. Certain Relationships and Related Transactions.................. III-3
Item 13. Exhibits and Reports on Form 8-K................................ III-3
Item 14. Controls and Procedures......................................... III-4
Item 15. Principal Accountant Fees and Services.......................... III-5

Signatures............................................................... III-6
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 additional  limited partner  interest  through a public
offering  which  was  managed  by  Merrill  Lynch,  Pierce,  Fenner  and  Smith,
Incorporated. The Partnership closed the offering in January 1984 when it became
fully subscribed. As of December 31, 2003, 118 units of limited partner interest
had been abandoned.

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

     The  Partnership  was  formed  to  invest  in  real  estate,  which  is the
Partnership's  principal  business  activity,  by acquiring and holding  limited
partner interests in limited partnerships (Local Partnerships).  The Partnership
originally made investments in 37 Local  Partnerships.  As of December 31, 2003,
the Partnership  retained  investments in 18 Local  Partnerships.  Each of these
Local  Partnerships  owns  a  federal  or  state  government-assisted  apartment
complex, which provides housing principally to the elderly and/or to individuals
and families of low or moderate income, or a conventionally  financed  apartment
complex. The original objectives of these investments,  not necessarily in order
of importance, were to:

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

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

     The Local Partnerships in which the Partnership  invested were organized by
private  developers  who acquired  the sites,  or options  thereon,  applied for
mortgage financing and applicable  mortgage insurance and/or subsidies,  and who
generally  remain as the local general  partners in the Local  Partnerships.  In
most  cases,  the  local  general  partners  of the  Local  Partnerships  retain
responsibility for maintaining, operating and managing the projects. However, in
the event of death or non-compliance  with the Local  Partnerships'  partnership
agreements,  the local general  partner may be removed and replaced with another
local general partner or with an affiliate of the Partnership's Managing General
Partner.

     As a result of its investment in the Local  Partnerships,  the  Partnership
became the  principal  limited  partner in 37 (18  remaining  as of December 31,
2003) of these Local Partnerships. As a limited partner, the Partnership's legal
liability  for  obligations  of  the  Local   Partnerships  is  limited  to  its
investment.  In six (four remaining as of December 31, 2003) 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  18  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  marketplace  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, 2003, follows.

<TABLE>
<CAPTION>

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

                                                                                                  Units
                           Mortgage                                                           Authorized for      Expiration
 Name and Location        Payable at          Financed and/or Insured           Number of       Low Income            of
of Apartment Complex     12/31/03 (2)         and/or Subsidized Under          Rental Units     Subsidies        HAP Contract
--------------------     ------------     -------------------------------      ------------   --------------     ------------
<S>                      <C>              <C>                                  <C>            <C>                <C>
Arboretum Village        $12,230,025      Conventional                               308               0              --
 Lisle, IL

Bartley Manor                606,114      Federal Housing Administration              70              69           05/31/04 (3)(4)
 Superior, WI                              (FHA)/Section 236 of the National
                                           Housing Act (NHA)

Briar Crest I (4)            413,540      Federal National Mortgage                   53              53           09/30/04 (3)(4)
 Niles, MI                                 Association (FNMA)/Section 236
                                           of the NHA

Briar Crest II (4)           474,850      FNMA/Section 236 of the NHA                 49              49           09/30/04 (3)(4)
 Niles, MI

Heritage Estates I         2,312,926      Missouri Housing Development               228               0              --
 St. Louis, MO                             Agency (MHDA)/Section 221(d)
                                           (4) of the NHA

Heritage Estates II        1,905,613      MHDA/Section 221 (d)(4) of the             160               0              --
 St. Louis, MO                             NHA

Highland Manor             1,184,361      HUD                                        111             111           05/12/04 (5)
 Birmingham, AL

Lakewood Apts.               792,196      Rural Housing & Community                   50              50           07/31/04 (3)(4)
 Eufaula, AL                               Development Services (RHCD)

Meadow Lanes Apts.         1,365,173      Michigan State Housing Develop-            118               0                 --
 Holland, MI                               ment Authority/Section 236 of
                                           the NHA

Monterey/Hillcrest        14,157,848      Section 221(d)(4) of the NHA/FHA           300              60           12/13/04 (4)
 Waukesha, WI

Victorian Towers           4,719,558      New Jersey Housing and Mortgage            204              27           12/01/23
 Cape May, NJ                               Finance Agency/Section 8

</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
                           Mortgage                                                           Authorized for      Expiration
 Name and Location        Payable at          Financed and/or Insured           Number of       Low Income            of
of Apartment Complex     12/31/03 (2)         and/or Subsidized Under          Rental Units     Subsidies        HAP Contract
--------------------     ------------     -------------------------------      ------------   --------------     ------------
<S>                      <C>              <C>                                  <C>            <C>                <C>
Villa Mirage I           $ 1,882,958      California Housing Finance                 50              50            12/19/05
 Rancho Mirage, CA                          Agency (CHFA)/Section 8

Villa Mirage II            1,875,215      CHFA/Section 8                             48              48            10/15/15
 Rancho Mirage, CA

Village Green                270,932      FHA/Section 236 of FHA                     36              36            04/30/04 (3)(4)
 Reedsburg, WI

Village Square               365,490      FHA/Section 236 of FHA                     48              48            04/30/04 (3)(4)
 Barabou, WI

Village Squire I & II      8,354,044      Conventional                              377               0               --
 Canton, MI

Village Squire III         5,389,942      Conventional                              224               0               --
 Canton, MI

Windham Village            2,156,287      CHFA                                       50              44            10/31/15
 Santa Rosa, CA
                         -----------                                             ------          ------

Totals 18                $60,457,072                                              2,484             645
                         ===========                                             ======          ======
</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           2003    2002    2001   2000    1999       2003        2002         2001        2000        1999
--------------------           ----    ----    ----   ----    ----      -------    --------     --------    --------    --------
<S>                            <C>     <C>     <C>    <C>     <C>       <C>        <C>          <C>         <C>         <C>
Arboretum Village                93%    87%     88%    92%     93%      $ 9,498    $ 9,833      $ 9,883     $ 9,689     $ 9,338
 Lisle, IL

Bartley Manor                    97%    98%     96%   100%     93%        6,524      6,236        6,050       5,661       5,656
 Superior, WI

Briar Crest I                   100%    94%    100%   100%     96%        7,088      6,723        6,722       6,504       5,333
 Niles, MI

Briar Crest II                  100%    98%    100%   100%     94%        7,174      6,887        6,684       6,682       5,327
 Niles, MI

Heritage Estates I              100%   100%    100%   100%    100%        5,628      5,584        5,264       5,202       5,176
 St. Louis, MO

Heritage Estates II             100%   100%    100%   100%    100%        5,589      5,596        5,314       5,185       5,193
 St. Louis, MO

Highland Manor                  100%    97%    100%   100%    100%        7,073      7,033        6,805       6,616       6,515
 Birmingham, AL

Lakewood Apts.                  100%   100%    100%   100%    100%        4,820      4,572        4,509       4,525       4,305
 Eufaula, AL

Meadow Lanes Apts.               96%    95%     92%    95%     97%        6,622      6,443        6,361       6,318       6,216
 Holland, MI

Monterey/Hillcrest               97%    96%     99%    93%     96%        8,826      9,023        8,954       8,629       8,559
 Waukesha, WI

Victorian Towers                 99%    98%     96%    94%     96%        6,711      6,391        6,533       5,199       5,196
 Cape May, NJ

Villa Mirage I                   98%    97%     99%   100%    100%        9,697      9,430        9,599       9,685       9,522
 Rancho Mirage, C

Villa Mirage II                 100%    99%     99%   100%    100%        9,657      9,603        9,612       9,537       9,580
 Rancho Mirage, CA

</TABLE>

                                   (continued)

                                       I-5

<PAGE>
                                     PART I
                                     ------

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

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

                                                                                          Average Effective Annual
                                           Units Occupied As                                   Rental Per Unit
                                       Percentage of Total Units                             for the Years Ended
                                           As of December 31,                                    December 31,
 Name and Location             -----------------------------------      --------------------------------------------------------
of Apartment Complex           2003    2002    2001   2000    1999        2003       2002         2001        2000        1999
--------------------           ----    ----    ----   ----    ----      --------   --------     --------    --------    --------
<S>                            <C>     <C>     <C>    <C>     <C>       <C>        <C>          <C>         <C>         <C>
Village Green                   92%     95%    100%   100%     92%      $ 4,888    $ 4,472      $ 4,497     $ 4,120     $ 3,849
 Reedsburg, WI

Village Square                  86%     94%     92%    92%     83%        5,064      4,900        4,633       4,232       4,362
 Barabou, WI

Village Squire I & II           93%     96%     96%    97%     97%        6,591      6,593        6,785       6,550       6,152
 Canton, MI

Village Squire III              88%     95%     90%    98%     97%        6,513      6,518        6,670       6,511       6,199
 Canton, MI

Windham Village                100%    100%    100%   100%    100%       11,353     11,568       10,857      10,632      10,572
 Santa Rosa, CA
                               ---     ---     ---    ---     ---       -------    -------      -------     -------     -------

Totals(6) 18                    97%     97%     97%    98%     96%      $ 7,184    $ 7,078      $ 6,985     $ 6,749     $ 6,503
                               ===     ===     ===    ===     ===       =======    =======      =======     =======     =======
</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, 2003.

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

     (4)  It is anticipated that the Local Partnership will extend its Section 8
          HAP contract for a one-year period at its expiration in 2004.

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

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


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

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

                                       I-6

<PAGE>
                                     PART I
                                     ------

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

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

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

     On December 30, 2003,  Walsh Park was sold.  See the notes to  consolidated
financial statements for additional information concerning the sale.

     Effective January 2, 2004, the Partnership's interest in Highland Manor was
transferred to the purchase  money  noteholders.  See the notes to  consolidated
financial statements for additional information concerning the transfer.


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

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


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

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


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 2003.

                                       I-7

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

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

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

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

          On May 22,  2003,  Equity  Resource  Fund XXII  (Equity)  initiated an
          unregistered  tender offer to purchase up to 1,200 of the  outstanding
          Units  in the  Partnership  at a price  of $100 per  Unit;  the  offer
          expired June 23, 2003.  Equity is not affiliated  with the Partnership
          or the Managing  General  Partner.  The price  offered was  determined
          solely at the discretion of Equity and does not necessarily  represent
          the fair market value of each Unit.

          On  April  30,  2003,  Peachtree  Partners  (Peachtree)  initiated  an
          unregistered tender offer to purchase up to approximately 4,000 of the
          outstanding  Units in the  Partnership at a price of $90 per Unit; the
          offer expired June 3, 2003. On January 1, 2002, Peachtree initiated an
          unregistered  tender  offer  to  purchase  up to four  percent  of the
          outstanding  Units in the Partnership at a price of $135 per Unit; the
          offer expired  February 8, 2002.  Peachtree is not affiliated with the
          Partnership or the Managing General  Partner.  The prices offered were
          determined   solely  at  the   discretion  of  Peachtree  and  do  not
          necessarily represent the fair market value of each Unit.

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

     (b)  As of March  23,  2004,  there  were  approximately  4,240  registered
          holders of Units in the Partnership.

     (c)  On September 11, 2002, the  Partnership  made a cash  distribution  of
          $37,054 to the  General  Partners  and  Initial  and  Special  Limited
          Partners.  The distribution was a result of cash resources accumulated
          from operations and distributions from Local Partnerships. A review of
          the  Partnership  Agreement  indicated  that these amounts should have
          been distributed in prior years when  distributions had been made only
          to  the  Additional  Limited  Partners.   On  December  2,  2002,  the
          Partnership  made a  cash  distribution  of  $111,340  to the  General
          Partners and Initial and Special Limited  Partners.  The  distribution
          was a  result  of  cash  resources  accumulated  from  operations  and
          distributions  from Local  Partnerships.  On  December  6,  2002,  the
          Partnership  made a cash  distribution of $3,592,920 ($60 per unit) to
          Additional  Limited Partners who were holders of record as of November
          1, 2002. The distribution  was a result of cash resources  accumulated
          from operations and distributions from Local Partnerships. On November
          13, 2003, the  Partnership  made a cash  distribution of $658,702 ($11
          per Unit) to Additional Limited Partners who were holders of record as
          of November 1, 2003, and a cash distribution of $20,373 to the General
          Partners.  The distribution was a result of cash resources accumulated
          from operations and distributions from Local Partnerships. On February
          26, 2004, the Partnership made a cash  distribution of $2,275,516 ($38
          per Unit) to Additional Limited Partners who were holders of record as
          of January 1, 2004. The distribution was a result of proceeds from the
          sale of Walsh Park.

                                      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  is  based on the  consolidated  financial  statements,  and
contains   information  that  may  be  considered  forward  looking,   including
statements regarding the effect of governmental regulations.  Actual results may
differ  materially from those  described in the forward  looking  statements and
will be affected by a variety of factors  including  national and local economic
conditions,  the  general  level of  interest  rates,  governmental  regulations
affecting  the  Partnership  and  interpretations  of  those  regulations,   the
competitive  environment in which the Partnership operates, and the availability
of working capital.

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

     The  Partnership has disclosed its selection and application of significant
accounting policies in Note 1 of the notes to consolidated  financial statements
included  in this  annual  report  on Form  10-KSB at  December  31,  2003.  The
Partnership accounts for its investments in partnerships (Local Partnerships) by
the equity  method  because the  Partnership  is a limited  partner in the Local
Partnerships.  As such the  Partnership  has no control over the  selection  and
application  of  accounting  policies,  or the use of  estimates,  by the  Local
Partnerships.  Environmental  and operational  trends,  events and uncertainties
that  might  affect the  properties  owned by the Local  Partnerships  would not
necessarily have a significant  impact on the  Partnership's  application of the
equity  method of  accounting,  since the equity  method has been  suspended for
eight Local  Partnerships in which the  Partnership's  investment  balances have
been reduced to zero.

                          New Accounting Pronouncement
                          ----------------------------

     In December  2003,  the Financial  Accounting  Standards  Board issued FASB
Interpretation  No. 46  (revised  December  2003) (FIN 46-R),  Consolidation  of
Variable  Interest  Entities.  FIN 46-R clarifies the  application of Accounting
Research Bulletin 51, Consolidated  Financial  Statements,  for certain entities
that do not  have  sufficient  equity  at risk for the  entity  to  finance  its
activities without additional  subordinated financial support from other parties
or in which equity  investors do not have the  characteristics  of a controlling
financial interest  ("variable interest  entities").  Variable interest entities
within  the  scope of FIN 46-R  will be  required  to be  consolidated  by their
primary  beneficiary.  The primary  beneficiary of a variable interest entity is
determined  to be the party that  absorbs a majority  of the  entity's  expected
losses,  receives a majority of its expected  returns,  or both. The Partnership
must apply the  provisions  of FIN 46-R to all  entities  subject to FIN 46-R no
later than the end of the first  reporting  period that ends after  December 15,
2004 (as of December  31,  2004,  for the  Partnership).  The  Managing  General
Partner is in the process of  determining  what impact,  if any, the adoption of
the provisions of FIN 46-R will have on the  Partnership's  financial  condition
and results of operations  related to the  Partnership's  investments in limited
partnerships (Local Partnerships).

                                     General
                                     -------

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

                                      II-2

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

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

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

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

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

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

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

                                      II-3

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

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

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

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

     There were no major changes in federal housing policy in 2003.

     Eight  properties in which the  Partnership  is invested as of December 31,
2003, have Section 8 HAP contracts which, as extended,  will expire in 2004. The
Section 8 HAP contracts cover all or most of the apartment units in seven of the
eight  properties.  The following chart presents  information  concerning  these
eight properties.

<TABLE>
<CAPTION>
                                                 Units             Original           Renewed
                                             Authorized for      Expiration of      Expiration of
                            Number of      Rental Assistance       Section 8          Section 8
     Property             Rental Units      Under Section 8      HAP Contract       HAP Contract
     --------             ------------     -----------------     -------------     --------------
     <S>                   <C>             <C>                   <C>               <C>
     Bartley Manor             70                 69                07/31/98          05/31/04 (2)
     Briar Crest I             53                 53                06/30/98          09/30/04 (2)
     Briar Crest II            49                 49                06/30/98          09/30/04 (2)
     Highland Manor           111                111                02/08/98          05/12/04 (1)
     Lakewood                  50                 50                08/01/99          07/31/04 (2)
     Monterey/Hillcrest       300                 60                12/13/03          12/13/04 (2)
     Village Green             36                 36                09/30/98          04/30/04 (2)
     Village Square            48                 48                09/30/98          04/30/04 (2)
                            -----              -----

          Total               717                476
                            =====              =====
</TABLE>

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

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

     As  of  December  31,  2003,  the  carrying  amount  of  the  Partnership's
investments in and advances to the eight Local  Partnerships  with Section 8 HAP
contracts expiring in 2004 was $3,520,256.

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

                                      II-4

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

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

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

     As of December 31, 2003, the Partnership had approximately  4,240 investors
who held a total of 59,882 units of additional  limited  partner  interest which
were  originally sold for the aggregate  amount of $59,882,000.  The Partnership
originally  made  investments  in 37 Local  Partnerships,  of which 18 remain at
December 31, 2003. The Partnership's liquidity, with unrestricted cash resources
of  $3,922,235  as of December  31,  2003,  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 23, 2003,  there
were no material commitments for capital expenditures.

     During  2003 and 2002,  the  Partnership  received  cash  distributions  of
$891,563 and $853,443, 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 $6,935,000,  plus aggregate  accrued  interest of $14,007,865,  as of
December  31,  2003,  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.  Under the extension  agreement,  documents  transferring  the
Partnership's  interest  in Audubon  Towers to the  noteholders  were  placed in
escrow.  Effective January 16, 2002, the Partnership's  interest was transferred
to the noteholders.

     The purchase money note related to Congress Plaza, in the principal  amount
of $500,000, matured on January 1, 1999, and was extended during 1999 to January
1, 2002. Under the extension agreement, documents transferring the Partnership's
interest in Congress Plaza to the noteholder  were placed in escrow.  On January
3, 2002, the Partnership's interest was transferred to the noteholder.

     The purchase  money notes related to Briar Hills and Indian  Hills,  in the
principal amounts of $403,100 and $277,000, respectively,  matured on January 1,
2002,  and were  extended  during 2002 to January 2, 2003.  Under the  extension
agreement, documents transferring the Partnership's interests in Briar Hills and
Indian Hills to the noteholders were placed in escrow. On February 24, 2003, the
Partnership's interests were transferred to the noteholders.

     The purchase money note related to Highland Manor, in the principal  amount
of  $1,760,000,  matured  on January 1,  2004.  Effective  January 2, 2004,  the
Partnership's interest in Highland Manor was transferred to the noteholders.

     The maturity  dates of the purchase  money notes  related to the  following
properties were extended during 2003.

                                      II-5

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

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


                                               Original        Extended
     Property                 Principal        Maturity        Maturity
     --------                ----------        --------        --------

     Heritage Estates I      $2,600,000        01/01/99        01/01/04 (1)
     Heritage Estates II      1,800,000        01/01/99        01/01/04 (1)
     Victorian Towers           775,000 (2)    01/01/99        01/01/07

     (1)  Documents transferring the Partnership's interests in Heritage Estates
          I and Heritage  Estates II have been placed in escrow,  to be released
          to the noteholder upon receipt of notification  from the  noteholders.
          As of March 23, 2004, no notification has been received.
     (2)  Remaining principal, after a partial payment.

     The remaining  purchase money note, in the principal  amount of $1,760,000,
was previously extended to mature on January 1, 2004.

     The purchase money notes related to the following  properties were paid off
at a discount,  or the  collateral  that  secured  them was  transferred  to the
noteholders, during 2002, 2003, and through March 23, 2004.

     Property                 Principal            Date        Disposition
     --------                ----------        ------------    ------------

     Audubon Towers          $1,275,000        January 2002    Transferred
     Congress Plaza             500,000 (1)    January 2002    Transferred
     Briar Crest I              470,050        May 2002        Paid Off
     Briar Crest II             361,120        May 2002        Paid Off
     Briar Hills                403,100        February 2003   Transferred
     Indian Hills               277,000        February 2003   Transferred
     Highland Manor           1,760,000        January 2004    Transferred

     (1)  Remaining principal, after a partial payment.

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

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

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

                                      II-6

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

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

     The Managing General Partner continues 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 or other transfer
of the Partnership's  interest, the excess of the nonrecourse  indebtedness over
the  carrying  amount  of the  Partnership's  investment  in the  related  Local
Partnership  will result in a taxable gain. This gain will be taxable to Limited
Partners at a federal tax rate of up to 25.0%,  as it will reflect  recapture of
depreciation deductions claimed in prior years. 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 18 Local  Partnerships  in which  the  Partnership  is
invested as of December 31, 2003,  the two Local  Partnerships  with  associated
purchase  money notes which mature  through  December 31, 2004, and which remain
unpaid or unextended as of March 23, 2004, 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, 2003                23%                    $103,212
     December 31, 2002                20%                    $230,682


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

     The Partnership closely monitors its cash flow and liquidity position
in an effort to ensure that sufficient cash is available for operating
requirements. For the years ended December 31, 2003 and 2002, the receipt of
distributions from Local Partnerships and existing cash resources were adequate
to support operating cash requirements. Cash and cash equivalents decreased
$922,875 during 2003, as net cash used in operating activities, for the payment
of purchase money note principal (in conjunction with the extension of the
maturity date of the purchase money note related to Victorian Towers), and for
distributions to partners exceeded the receipt of distributions from Local
Partnerships. The primary uses of cash in operating activities were to pay
purchase money note interest, management and professional fees, and general and
administrative expenses. For the year ended December 31, 2003, $568,483 of the
distributions received were from Local Partnerships for which the Partnership's
carrying value is zero (equity method suspended). The Partnership expects to
receive a similar or lower amount of distributions from these Local Partnerships
in future years as more Section 8 HAP contracts approach expiration, should the
related properties enter the Mark-to-Market program with the resulting reduction
in rental revenue.

                                      II-7

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

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

     On September 11, 2002, the Partnership made a cash  distribution of $37,054
to the General  Partners  and Initial and  Special  Limited  Partners  from cash
resources accumulated from operations and distributions from Local Partnerships.
A review of the Partnership  Agreement  indicated that these amounts should have
been  distributed  in prior years when  distributions  had been made only to the
Additional  Limited  Partners.  On December 2, 2002, the Partnership made a cash
distribution  of $111,340 to General  Partners  and Initial and Special  Limited
Partners.  The  distribution  was a result of cash  resources  accumulated  from
operations and distributions from Local  Partnerships.  On December 6, 2002, the
Partnership made a cash  distribution of $3,592,920 ($60 per unit) to Additional
Limited  Partners  who were  holders  of  record as of  November  1,  2002.  The
distribution  was a result of cash  resources  accumulated  from  operations and
distributions  from Local  Partnerships.  On November 13, 2003, the  Partnership
made a cash  distribution  of  $658,702  ($11 per  Unit) to  Additional  Limited
Partners  who  were  holders  of  record  as of  October  1,  2003,  and a  cash
distribution of $20,373 to General  Partners.  The  distribution was a result of
cash  resources   accumulated  from  operations  and  distributions  from  Local
Partnerships.  On February 26, 2004, the Partnership made a cash distribution of
$2,275,516  ($38 per Unit) to  Additional  Limited  Partners who were holders of
record as of January 1, 2004. The distribution was a result of proceeds from the
sale of Walsh Park. The Managing  General  Partner  intends to retain all of the
Partnerships   remaining   undistributed   cash   pending   resolution   of  the
Partnership's outstanding purchase money notes and related accrued interest, and
for future working capital needs.

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

2003 Versus 2002
----------------

     The  Partnership's  net  income  for the  year  ended  December  31,  2003,
increased  from 2002,  primarily  due to gain on  disposition  of  investment in
partnership in 2003, a decrease in interest  expense due to lower purchase money
note balances and the reduction in the interest rate on the purchase  money note
related to Victorian Towers, a decrease in general and  administrative  expenses
related to fees paid in 2002 in conjunction  with the extensions of the purchase
money notes related to Briar Hills and Indian Hills,  and a nominal  decrease in
amortization of deferred costs.  Partially offsetting the increase in net income
were a decrease in gain on extinguishment of debt, a decrease in share of income
from  partnerships,  a decrease in  interest  revenue due to lower cash and cash
equivalent   balances  and  declining   interest  rates,   and  an  increase  in
professional  fees related to higher audit and legal fees. The decrease in share
of income from partnerships was primarily the result of an increase in operating
expenses at the properties related to four Local Partnerships.

     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, 2003 and 2002,  did not include  losses of $776,307  and  $409,615,
respectively.  Distributions of $568,171 and $501,281,  received from five Local
Partnerships   during  2003  and  2002,   were  recorded  as  increases  in  the
Partnership's share of income from partnerships in the year received.

                                    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.

                                      II-8

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

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

     The combined rental revenues for the Partnership's  remaining 18 properties
for the five years ended  December 31, 2003,  follow.  Combined  rental  revenue
amounts have been adjusted to reflect  property sales and interests  transferred
in 2003 and in prior years.

<TABLE>
<CAPTION>
                                                        For the years ended December 31,
                           ---------------------------------------------------------------------------------
                              2003             2002              2001               2000            1999
                           -----------      -----------       -----------       -----------      -----------
<S>                        <C>              <C>               <C>               <C>              <C>
Combined Rental
  Revenue                  $17,989,806      $17,960,331       $17,864,828       $17,176,739      $16,646,341

Annual Percentage
  Increase (Decrease)                  0.2%              0.5%               4.0%             3.2%

</TABLE>


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

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


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

          None.

                                                       II-9

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

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

     (a)  and (b)

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

     (a)  and (b)

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

William B. Dockser, 67, has been the Chairman of the Board and a Director of CRI
since 1974.  Prior to forming  CRI, he served as  President of Kaufman and Broad
Asset Management,  Inc., an affiliate of Kaufman and Broad,  Inc., which managed
publicly held limited  partnerships created to invest in low and moderate income
multifamily apartment properties.  Prior to joining Kaufman and Broad, he served
in various positions at HUD,  culminating in the post of Deputy FHA Commissioner
and Deputy Assistant Secretary for Housing Production and Mortgage Credit, where
he was responsible for all federally insured housing production programs. Before
coming to the Washington,  D.C., area, Mr. Dockser was a practicing  attorney in
Boston and served as a special  Assistant  Attorney General for the Commonwealth
of  Massachusetts.  He holds a Bachelor of Laws degree from Yale  University Law
School and a Bachelor of Arts degree, cum laude, from Harvard University.  He is
also a Director of CRIIMI MAE Inc. and CRIIMI, Inc.

H. William Willoughby,  57, 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.

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

     (d)  Involvement in certain legal proceedings.

          None.

                                      III-1

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

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

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

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


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

     (a)  Security ownership of certain beneficial owners.

          The following  table sets forth  certain  information  concerning  any
          person  (including any "group") who is known by the  Partnership to be
          the  beneficial  owner of more than five  percent  of the  issued  and
          outstanding  units of additional  limited partner  interest (Units) at
          March 23, 2004.

<TABLE>
<CAPTION>
                                                                      % of Total
             Name and Address             Amount and Nature          Units Issued
           of Beneficial Owner         of Beneficial Ownership      and Outstanding
           ---------------------       -----------------------      ---------------
           <S>                         <C>                          <C>
           Equity Resource Group,             9,949 Units                 16.6%
             Incorporated, et. al.
             44 Brattle Street
             Cambridge, MA 02138
</TABLE>

     (b)  Security ownership of management.

          The following  table sets forth  certain  information  concerning  all
          Units  beneficially  owned, as of March 23, 2004, by each director and
          by all  directors  and  officers  as a group of the  Managing  General
          Partner of the Partnership.

<TABLE>
<CAPTION>
                                                                      % of Total
              Name of                     Amount and Nature          Units Issued
          Beneficial Owner             of Beneficial Ownership      and Outstanding
          ----------------             -----------------------     ----------------
          <S>                          <C>                         <C>
          William B. Dockser                     None                    0.0%
          H. William Willoughby                  None                    0.0%
          All Directors and Officers
            as a Group (2 persons)               None                    0.0%
</TABLE>

     (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.  31.1 -  Certification  of  Principal  Executive  Officer,
          pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302
          of the Sarbanes-Oxley Act of 2002.

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

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

          Exhibit No. 99 - Additional Exhibits.

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

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

     (b)  Reports on Form 8-K

     No reports on Form 8-K were filed  during the quarter  ended  December  31,
2003.


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

     In February 2004,  representatives  of the Managing  General Partner of the
Partnership  carried out an  evaluation of the  effectiveness  of the design and
operation of the Partnership's  disclosure controls and procedures,  pursuant to
Exchange Act Rules  13a-15 and 15d-15.  The  Managing  General  Partner does not
expect that the  Partnership's  disclosure  controls and procedures will prevent
all error and all fraud.  A control  system,  no matter how well  conceived  and
operated,  can provide only  reasonable  assurance  that the  objectives  of the
control system are met. Further, the design of a control system must reflect the
fact that there are resource  constraints,  and the benefits of controls must be
considered relative to their costs.  Because of the inherent  limitations in all
control systems,  no evaluation of controls can provide absolute  assurance that
all control issues have been detected.  These inherent  limitations  include the
realities that judgments in  decision-making  can be faulty, and that breakdowns
can occur  because  of simple  error or  mistake.  The  design of any  system of
controls also is based in part upon certain  assumptions about the likelihood of
future  events,  and there can be no  assurance  that any design will succeed in
achieving its stated goals under all  potential  future  conditions.  Over time,
controls may become inadequate  because of changes in conditions,  or the degree
of compliance  with the policies or procedures may  deteriorate.  Because of the
inherent  limitations in a cost-effective  control system,  misstatements due to
error or fraud  may  occur  and not be  detected.  Based  on the  February  2004
evaluation,  and subject to the foregoing,  the Principal  Executive Officer and
Principal Financial Officer concluded that the Partnership's disclosure controls
and  procedures are effective as of the end of the period covered by this report
to alert them in a timely  manner to any  material  information  relating to the
Partnership that must be included in the Partnership's periodic SEC filings, and
particularly during the period in which this report is being prepared.

                                      III-4

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

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

In  addition,  there  have  been no  significant  changes  in the  Partnership's
internal control over financial reporting that occurred during the Partnership's
most recent fiscal quarter that has materially affected, or is reasonably likely
to  materially  affect,  the  Partnership's   internal  control  over  financial
reporting.


ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES
         --------------------------------------

     During the years ended December 31, 2003 and 2002, the Partnership retained
Grant Thornton LLP to provide services as follows.

                                                Year Ended December 31,
                                              --------------------------
                                                2003              2002
                                              --------          --------

         Audit fees                           $102,800          $103,600
         Audit-related fees                         --                --
         Tax fees (1)                           22,500            20,500
         All other fees                             --                --
                                              --------          --------

             Total billed                     $125,300          $124,100
                                              ========          ========

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

     The Partnership has no directors or officers. The Board of Directors of the
Managing General Partner of the Partnership, serving as the audit committee, has
approved in advance  100% of the fees paid to, and  services  provided by, Grant
Thornton LLP. Prior to approving  Grant  Thornton LLP's  providing any non-audit
services,  the  Board  of  Directors  of the  Managing  General  Partner  of the
Partnership   would  assess  whether  the  provision  of  those  services  would
compromise Grant Thornton LLP's independence.  No such services were provided by
Grant Thornton LLP during the years ended December 31, 2003 and 2002.


                                      III-5

<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 23, 2004                         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 23, 2004                         by:  /s/ H. William Willoughby
--------------                              ------------------------------------
DATE                                        H. William Willoughby,
                                               Director, President,
                                               and Secretary



March 23, 2004                         by:  /s/ Michael J. Tuszka
--------------                              ------------------------------------
DATE                                        Michael J. Tuszka,
                                              Vice President
                                              and Chief Accounting Officer
                                              (Principal Financial Officer
                                              and Principal Accounting Officer)




                                      III-6

<PAGE>

                         REPORT OF INDEPENDENT CERTIFIED
                               PUBLIC ACCOUNTANTS



To the Partners
Capital Realty Investors-III Limited Partnership

     We have audited the  accompanying  consolidated  balance  sheets of Capital
Realty Investors-III Limited Partnership (a Maryland limited partnership), as of
December  31,  2003  and  2002,  and  the  related  consolidated  statements  of
operations,  changes  in  partners'  deficit  and cash  flows for the years then
ended.  These financial  statements are the  responsibility of the Partnership's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements  based on our audits.  We did not audit the  financial  statements of
certain Local  Partnerships.  The Partnership's share of income from these Local
Partnerships  constitutes  $625,972  and  $875,272  of  income in 2003 and 2002,
respectively,  included  in the  Partnership's  2003 and 2002  net  income.  The
financial  statements of these Local Partnerships were audited by other auditors
whose  reports  thereon  have been  furnished  to us, and our opinion  expressed
herein,   insofar  as  it  relates  to  the  amount  included  for  these  Local
Partnerships, is based solely upon the reports of the other auditors.

     We conducted our audits in accordance  with  auditing  standards  generally
accepted in the United States of America.  Those standards  require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial statement presentation.  We believe that our audits and the reports of
other auditors 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, 2003 and 2002,  and the  consolidated
results of its operations,  changes in partners' deficit, and its cash flows for
the years  then  ended,  in  conformity  with  accounting  principles  generally
accepted in the United States of America.

                                                            Grant Thornton LLP


Vienna, Virginia
March 17, 2004


                                      III-7

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                           CONSOLIDATED BALANCE SHEETS


                                     ASSETS

<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                      ----------------------------
                                                                                          2003            2002
                                                                                      ------------    ------------
<S>                                                                                   <C>             <C>
Investments in partnerships .......................................................   $  3,979,360    $  7,780,555
Investment in partnerships held for sale or transfer ..............................      1,891,124              --
Investment in partnerships held in escrow .........................................      1,186,240       1,755,262
Cash and cash equivalents .........................................................      3,922,235       4,845,110
Acquisition fees, principally paid to related parties,
  net of accumulated amortization of $271,878 and $369,168, respectively ..........        127,422         207,724
Property purchase costs,
  net of accumulated amortization of $244,200 and $338,684, respectively ..........        131,234         208,135
Sales proceeds receivable .........................................................      4,743,059              --
Other assets ......................................................................             53             112
                                                                                      ------------    ------------

      Total assets ................................................................   $ 15,980,727    $ 14,796,898
                                                                                      ============    ============



                        LIABILITIES AND PARTNERS' DEFICIT


Due on investments in partnerships ................................................   $  7,054,544    $  7,859,644
Accrued interest payable ..........................................................     14,041,841      15,339,616
Accounts payable and accrued expenses .............................................        387,300         152,707
                                                                                      ------------    ------------

      Total liabilities ...........................................................     21,483,685      23,351,967
                                                                                      ------------    ------------

Commitments and contingencies

Partners' deficit:

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

                                                                                        60,003,500      60,003,500

  Less:
    Accumulated distributions to partners .........................................    (12,700,760)    (12,021,685)
    Offering costs ................................................................     (6,156,933)     (6,156,933)
    Accumulated losses ............................................................    (46,648,765)    (50,379,951)
                                                                                      ------------    ------------

      Total partners' deficit .....................................................     (5,502,958)     (8,555,069)
                                                                                      ------------    ------------

      Total liabilities and partners' deficit .....................................   $ 15,980,727    $ 14,796,898
                                                                                      ============    ============

</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,
                                                                       --------------------------
                                                                          2003           2002
                                                                       -----------    -----------
<S>                                                                    <C>            <C>
Share of income from partnerships ..................................   $ 1,194,143    $ 1,379,260
                                                                       -----------    -----------

Other revenue and expenses:

  Revenue:
    Gain from extinguishment of debt ...............................       738,283      1,706,398
    Interest .......................................................        32,047        114,874
                                                                       -----------    -----------

                                                                           770,330      1,821,272
                                                                       -----------    -----------

  Expenses:
    Interest .......................................................       857,162      1,076,193
    Management fee .................................................       300,000        300,000
    General and administrative .....................................       271,687        419,181
    Professional fees ..............................................       131,289        120,333
    Amortization of deferred costs .................................        32,085         37,457
                                                                       -----------    -----------

                                                                         1,592,223      1,953,164
                                                                       -----------    -----------

      Total other revenue and expenses .............................      (821,893)      (131,892)
                                                                       -----------    -----------

Income before gain on disposition of investment in partnership .....       372,250      1,247,368

Gain on disposition of investment in partnership ...................     3,358,936             --
                                                                       -----------    -----------

Net income .........................................................   $ 3,731,186    $ 1,247,368
                                                                       ===========    ===========


Net income allocated to General Partners (1.51%) ...................   $    56,341    $    18,835
                                                                       ===========    ===========

Net income allocated to Initial and Special Limited Partners (1.49%)   $    55,595    $    18,586
                                                                       ===========    ===========

Net income allocated to Additional Limited Partners (97%) ..........   $ 3,619,250    $ 1,209,947
                                                                       ===========    ===========

Net income per unit of Additional Limited Partner Interest,
  based on 59,882 units outstanding ................................   $     60.44    $     20.21
                                                                       ===========    ===========
</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, 2002                        $(800,860)      $(790,920)        $(4,469,343)       $(6,061,123)

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

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

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

Partners' deficit, December 31, 2002                       (856,747)       (846,006)         (6,852,316)        (8,555,069)

  Net income                                                 56,341          55,595           3,619,250          3,731,186

  Distribution of $11.00 per unit
    of Additional Limited Partner Interest                       --              --            (658,702)          (658,702)

  Distribution to General Partners                          (20,373)             --                  --            (20,373)
                                                          ---------       ---------         -----------        -----------

  Partner's deficit, December 31, 2003                    $(820,779)      $(790,411)        $(3,891,768)       $(5,502,958)
                                                          =========       =========         ===========        ===========

</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,
                                                                                  ---------------------------
                                                                                     2003            2002
                                                                                  -----------     -----------
<S>                                                                               <C>             <C>
Cash flows from operating activities:
  Net income ..................................................................   $  3,731,186    $  1,247,368

  Adjustments to reconcile net income to net cash used in operating activities:
    Share of income from partnerships .........................................     (1,194,143)     (1,379,260)
    Amortization of deferred costs ............................................         32,085          37,457
    Gain on disposition of investment in partnership ..........................     (3,358,936)             --
    Gain from extinguishment of debt ..........................................       (738,283)     (1,706,398)

    Changes in assets and liabilities:
      Advances made to Local Partnerships, net ................................             --            (485)
      Decrease in other assets ................................................             59             266
      Increase in accrued interest payable ....................................        857,162       1,076,193
      Payment of purchase money note interest .................................       (339,807)       (340,424)
      Increase in accounts payable and accrued expenses .......................            314          41,481
                                                                                  ------------    ------------

        Net cash used in operating activities .................................     (1,010,363)     (1,023,802)
                                                                                  ------------    ------------


Cash flows from investing activities:
  Receipt of distributions from partnerships ..................................        891,563         853,443
                                                                                  ------------    ------------


Cash flows from financing activities:
  Payment of purchase money note principal ....................................       (125,000)             --
  Payoff of purchase money notes and related interest .........................             --      (2,560,590)
  Distributions to General Partners and Initial and Special Limited Partners ..        (20,373)       (148,394)
  Distributions to Additional Limited Partners ................................       (658,702)     (3,592,920)
                                                                                  ------------    ------------

        Net cash used in financing activities .................................       (804,075)     (6,301,904)
                                                                                  ------------    ------------


Net decrease in cash and cash equivalents .....................................       (922,875)     (6,472,263)

Cash and cash equivalents, beginning of year ..................................      4,845,110      11,317,373
                                                                                  ------------    ------------

Cash and cash equivalents, end of year ........................................   $  3,922,235    $  4,845,110
                                                                                  ============    ============


Supplemental disclosure of cash flow information:
  Cash paid during the year for interest ......................................   $    339,807    $  2,069,844
                                                                                  ============    ============

  Non-cash investing activity:
    Net proceeds from disposition
    of investment in partnership,
    accrued in 2003, collected in 2004 ........................................   $  4,508,780    $         --
                                                                                  ============    ============

</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  limited  partner
     interests  in  limited  partnerships  (Local  Partnerships)  which  own and
     operate federal or state  government-assisted  apartment  properties  which
     provide  housing  principally to the elderly or to individuals and families
     of low or moderate income, or conventionally  financed apartments,  located
     throughout the United States.

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

          The  Partnership  sold 60,000  units at $1,000 per unit of  additional
     limited partner interest through a public offering. The offering period was
     terminated in January  1984. As of December 31, 2003,  118 units of limited
     partner interest had been abandoned.

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

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

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

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

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

          The investments in Local  Partnerships  (see Note 2) are accounted for
     by the equity method because the  Partnership  is a limited  partner in the
     Local  Partnerships or intermediary  partnerships.  Under this method,  the
     carrying amount of the investments in Local  Partnerships is (i) reduced by
     distributions  received and (ii) increased or reduced by the  Partnership's
     share of earnings or losses, respectively, of the Local Partnerships. As of
     December 31, 2003 and 2002, the Partnership's share of cumulative losses of
     seven of the Local  Partnerships  exceeded the amount of the  Partnership's
     investments  in those Local  Partnerships  by  $9,757,475  and  $9,039,716,
     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.  Distributions  of $568,171 and  $501,281,  received  from five
     Local  Partnerships  during 2003and 2002, were recorded as increases in the
     Partnership's share of income from partnerships in the year received.

                                     III-12

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

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

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

          Due to the possible sale or transfer of the Partnership's interests in
     Briar Crest I, Briar Crest II, and Highland Manor, as further  discussed in
     Note 2.a., the  Partnership's  investment in these Local  Partnerships  was
     reclassified to investment in partnerships held for sale or transfer in the
     accompanying  consolidated  balance sheet at December 31, 2003. Assets held
     for sale or  transfer  are not  recorded in excess of their  estimated  net
     realizable value.

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

          During March and April 2002, documents  transferring the Partnership's
     interests in Briar Hills and Indian Hills to the noteholders were placed in
     escrow,  as further discussed in Note 2.a.  Accordingly,  the Partnership's
     investment in these Local  Partnerships  was  reclassified to investment in
     partnerships held in escrow in the accompanying  consolidated balance sheet
     at December 31, 2002.

          During April 2003, documents  transferring the Partnership's  interest
     in  Heritage  Estates I and  Heritage  Estates II to the  noteholders  were
     placed in  escrow,  as  further  discussed  in Note 2.a.  Accordingly,  the
     Partnership's  investment in this Local  Partnership  was  reclassified  to
     investment in partnerships held in escrow in the accompanying  consolidated
     balance sheet at December 31, 2003.  Assets held in escrow are not recorded
     in excess of their estimated net realizable value.

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

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

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

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

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

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

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

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

          The consolidated  financial  statements  include  estimated fair value
     information  as of December 31, 2003, as required by Statement of Financial
     Accounting Standards No. 107 (SFAS No. 107), Disclosure About Fair Value of
     Financial   Instruments.   Such   information,   which   pertains   to  the
     Partnership's  financial  instruments  (primarily cash and cash equivalents
     and purchase money notes),  is based on the  requirements set forth in SFAS
     No. 107 and does not purport to represent  the  aggregate net fair value of
     the Partnership.

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

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

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

          In December 2003, the Financial Accounting Standards Board issued FASB
     Interpretation No. 46 (revised December 2003) (FIN 46-R),  Consolidation of
     Variable  Interest   Entities.   FIN  46-R  clarifies  the  application  of
     Accounting Research Bulletin 51,  Consolidated  Financial  Statements,  for
     certain entities that do not have sufficient  equity at risk for the entity
     to finance its activities without additional subordinated financial support
     from  other  parties  or  in  which  equity   investors  do  not  have  the
     characteristics  of a controlling  financial interest  ("variable  interest
     entities"). Variable interest entities within the scope of FIN 46-R will be
     required  to be  consolidated  by their  primary  beneficiary.  The primary
     beneficiary  of a variable  interest  entity is  determined to be the party
     that  absorbs a  majority  of the  entity's  expected  losses,  receives  a
     majority of its expected  returns,  or both. The Partnership must apply the
     provisions  of FIN 46-R to all  entities  subject to FIN 46-R no later than
     the end of the first reporting period that ends after December 15, 2004 (as
     of December 31, 2004, for the Partnership) to variable interest entities or
     potential  variable  interest  entities  in  which  an  enterprise  holds a
     variable  interest that it acquired  before  February 1, 2003. The Managing
     General Partner is in the process of determining  what impact,  if any, the
     adoption  of the  provisions  of FIN 46-R will have upon the  Partnership's
     financial  condition and results of operations related to the Partnership's
     investments in limited partnerships (Local Partnerships),  and has complied
     with  the  disclosure  requirements  of  FIN  46-R  in  these  consolidated
     financial  statements.  As of December 31, 2003, the Partnership's  maximum
     loss exposure  related to its investments in partnerships is limited to the
     remaining balance of $7,056,724.

                                     III-14

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS

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

          As of December 31, 2003 and 2002, the Partnership held limited partner
     interests  in 18  and  21  Local  Partnerships,  respectively,  which  were
     organized to develop, construct, own, maintain and operate rental apartment
     properties  which  provide  housing   principally  to  the  elderly  or  to
     individuals and families of low or moderate income.  The remaining  amounts
     due on investments in the Local Partnerships follow.

                                                       December 31,
                                              -----------------------------
                                                 2003              2002
                                              -----------       -----------

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

     Purchase money notes due in:
       1999                                            --           900,000
       2003                                            --           680,100
       2004                                     6,160,000         6,160,000
       2007                                       775,000                --
                                              -----------       -----------

           Subtotal                             7,054,544         7,859,644
                                              -----------       -----------

     Accrued interest payable                  14,041,841        15,339,616
                                              -----------       -----------

           Total                              $21,096,385       $23,199,260
                                              ===========       ===========

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

          The remaining  purchase money notes have stated interest rates ranging
     from 3.06% to 9%,  certain of which are compounded  annually.  The purchase
     money notes are non- recourse,  but their terms provide for payment in full
     upon the  earliest  of: (i) sale or  refinancing  of the  respective  Local
     Partnership's rental property; (ii) payment in full of the respective Local
     Partnership's permanent loan; or (iii) maturity.

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

          The purchase  money note related to Congress  Plaza,  in the principal
     amount of $500,000,  matured on January 1, 1999,  and was  extended  during
     1999  to  January  1,  2002.  Under  the  extension  agreement,   documents
     transferring the Partnership's interest in Congress Plaza to the noteholder
     were placed in escrow. On January 3, 2002, the  Partnership's  interest was
     transferred to the noteholder.

          The purchase money note related to Victorian  Towers, in the principal
     amount of $900,000,  matured on January 1, 1999,  and was  extended  during
     2003 to January 1, 2007. At the time of extension,  the Partnership  made a
     $125,000 payment to the noteholder, which was applied to the purchase money
     note principal.

                                     III-15

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

          The purchase  money notes related to Briar Hills and Indian Hills,  in
     the principal  amounts of $403,100 and $277,000,  respectively,  matured on
     January 1, 2002,  and were extended  during 2002 to January 2, 2003.  Under
     the extension agreement, documents transferring the Partnership's interests
     in Briar Hills and Indian Hills to the  noteholders  were placed in escrow.
     On February 24, 2003, the  Partnership's  interests were transferred to the
     noteholders.

          The purchase  money note related to Highland  Manor,  in the principal
     amount of  $1,760,000,  matured on January  1, 2004.  Effective  January 2,
     2004, the  Partnership's  interest in Highland Manor was transferred to the
     noteholders.

          The  maturity  dates  of  the  purchase  money  notes  related  to the
     following properties were extended during 2003.

                                                 Original       Extended
     Property                Principal           Maturity       Maturity
     --------                ----------          --------       --------

     Heritage Estates I      $2,600,000          01/01/99       01/01/04 (1)
     Heritage Estates II      1,800,000          01/01/99       01/01/04 (1)
     Victorian Towers           775,000 (2)      01/01/99       01/01/07

     (1)  Documents transferring the Partnership's interests in Heritage Estates
          I and Heritage  Estates II have been placed in escrow,  to be released
          to the noteholder upon receipt of notification  from the  noteholders.
          As of March 23, 2004, no notification has been received.
     (2)  Remaining principal, after a partial payment.

          The  remaining  purchase  money  note,  in  the  principal  amount  of
     $1,760,000, was previously extended to mature on January 1, 2004.

          The purchase money notes related to the following properties were paid
     off at a discount,  or the collateral  that secured them was transferred to
     the noteholders, during 2002, 2003, and through March 23, 2004.

     Property            Principal              Date          Disposition
     --------            ---------           ------------     -----------
     Audubon Towers      $1,275,000          January 2002     Transferred
     Congress Plaza         500,000 (1)      January 2002     Transferred
     Briar Crest I          470,050          May 2002         Paid Off
     Briar Crest II         361,120          May 2002         Paid Off
     Briar Hills            403,100          February 2003    Transferred
     Indian Hills           277,000          February 2003    Transferred
     Highland Manor       1,760,000          January 2004     Transferred

     (1)  Remaining principal, after a partial payment.

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

                                     III-16

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

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

          The  Managing  General  Partner  continues  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 or other transfer of the Partnership's  interest, the excess of
     the nonrecourse  indebtedness over the carrying amount of the Partnership's
     investment in the related Local  Partnership will result in a taxable gain.
     This gain will be taxable to Limited  Partners  at a federal tax rate of up
     to 25.0%, as it will reflect recapture of depreciation  deductions  claimed
     in  prior  years.  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 18 Local  Partnerships in which the Partnership
     is  invested as of  December  31,  2003,  the two Local  Partnerships  with
     associated purchase money notes which mature through December 31, 2004, and
     which remain  unpaid or unextended  as of March 23, 2004,  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, 2003              23%                       $103,212
     December 31, 2002              20%                       $230,682

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

                                     III-17

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

          Interest  expense on the  Partnership's  purchase  money notes for the
     years  ended  December  31, 2003 and 2002,  was  $857,162  and  $1,076,193,
     respectively.  The accrued  interest payable on the purchase money notes of
     $14,007,865 and $15,305,640 as of December 31, 2003 and 2002, respectively,
     is due on the  respective  maturity  dates of the  purchase  money notes or
     earlier, in some instances, if (and to the extent of a portion thereof) the
     related Local  Partnership has  distributable  net cash flow, as defined in
     the relevant Local Partnership agreement.

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

          The  Partnership  defaulted  on its  purchase  money  note  related to
     Audubon Towers Limited Partnership (Audubon Towers) on January 1, 1999 when
     the note matured and was not paid.  The default amount  included  principal
     and accrued interest of $1,275,000 and $3,272,276,  respectively. In August
     1999, the  Partnership  and the  noteholders  agreed to extend the maturity
     date of the purchase  money note to June 30, 2000,  in exchange for payment
     of a fee not applicable to the note balance.  In June 2000, the Partnership
     made a payment,  applicable to the purchase  money note balance,  extending
     the maturity  date to January 15, 2001.  The maturity  date could have been
     further  extended  through  January  2,  2003,  had  the  Partnership  paid
     additional sums prior to January 15, 2001, but the Partnership chose not to
     make the  large  extension  payment  as it saw  little  chance  to sell the
     property  and  recoup  its  investment  in the two year  period.  Under the
     extension agreement,  documents  transferring the Partnership's interest in
     Audubon Towers to the  noteholders  were placed in escrow to be released to
     the noteholders upon the earlier of (i) a future default by the Partnership
     on the purchase  money note,  or (ii) the failure to pay the balance of the
     purchase  money  note at final  maturity.  The  noteholders  requested  and
     received the assignment on January 16, 2002.

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

                                     III-18

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

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

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

          On May 13, 2002, the Partnership  paid off the Briar Crest I and Briar
     Crest II notes at a discount.  The discounted payoffs resulted in gain from
     extinguishment of debt of $169,353 and $133,097 for Briar Crest I and Briar
     Crest II,  respectively,  for financial  statement purposes in 2002, and in
     cancellation  of  indebtedness  income of $169,353  and  $133,097 for Briar
     Crest I and Briar Crest II, respectively, for federal tax purposes in 2002.
     The Managing General Partner is currently negotiating to sell its interests
     in Briar Crest I and Briar Crest II. There is no  assurance  that a sale of
     the Partnership's interests will occur.

          Due to the possible sale of the Partnership's interests in Briar Crest
     I and Briar Crest II, the net  unamortized  acquisition  fees and  property
     purchase  costs,  which  totaled  $1,268,061  at  December  31,  2003,  was
     reclassified to investment in partnerships held for sale or transfer in the
     accompanying consolidated balance sheet.

          In late March and early April 2002, the  noteholders  agreed to extend
     the maturity  date of the Briar Hills and Indian Hills notes until  January
     2, 2003. At that time, the  Partnership put assignments of its interests in
     Briar  Hills and Indian  Hills in escrow.  Accordingly,  the  Partnership's
     basis  in  Briar  Hills  and  Indian  Hills,  along  with  net  unamortized
     acquisition fees and property  purchases costs,  which totaled $744,234 and
     $1,011,028  as of December  31, 2002,  respectively,  was  reclassified  to
     investment in partnerships held in escrow in the accompanying  consolidated
     balance sheet at December 31, 2002. On February 24, 2003, the Partnership's
     interests  in  Briar  Hills  and  Indian  Hills  were  transferred  to  the
     noteholders.  The transfer of the Partnership's interest to the noteholders
     resulted in gain from  extinguishment  of debt of  $733,677  and $4,606 for
     Briar  Hills  and  Indian  Hills,  respectively,  for  financial  statement
     purposes in 2003,  and in a total gain of  $1,503,595  and  $1,214,130  for
     Briar Hills and Indian  Hills,  respectively,  for federal tax  purposes in
     2003.

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

          The  Partnership  defaulted  on its  purchase  money  note  related to
     Kapetan Associates Limited Partnership (Congress Plaza) on January 1, 1999,
     when the  note  matured  and was not  paid.  The  default  amount  included
     principal and accrued interest of $775,000 and $2,162,200, respectively. On
     May 19,  1999,  the  Partnership  and the  noteholder  agreed to extend the
     maturity  date of the purchase  money note to January 1, 2002,  in exchange
     for a partial principal payment.  Under the extension agreement,  documents
     transferring the Partnership's interest in Congress Plaza to the noteholder
     were placed in escrow to be released to the noteholder  upon the earlier of
     (i) a future default by the Partnership on the purchase money note, or (ii)
     the  failure  to pay the  balance of the  purchase  money note on or before
     January 1, 2002. In January 2002,  the  Partnership's  interest in Congress
     Plaza was transferred to the noteholder.  The transfer of the Partnership's
     interest  in  Congress  Plaza  to the  noteholder  resulted  in  gain  from
     extinguishment  of debt of $1,267,929 for financial  statement  purposes in
     2002, and in a total gain of $2,345,627 for federal tax purposes in 2002.

                                     III-19

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

                   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. In April
     2003,  the  Managing  General  Partner and the purchase  money  noteholders
     agreed to extend the maturity  dates of the purchase money notes related to
     Heritage Estates I and Heritage Estates II to January 1, 2004.

          On April 4, 2003, documents  transferring the Partnership's  interests
     in Heritage Estates I and Heritage Estates II were placed in escrow,  to be
     released to the noteholder in the event of non-payment at maturity.  Due to
     the impending transfer of the Partnership's interests in Heritage Estates I
     and Heritage Estates II to the noteholders,  the Partnership's basis in the
     Local  Partnerships,  along with the net unamortized  acquisition  fees and
     property purchase costs,  which totaled $1,186,240 as of December 31, 2003,
     has been  reclassified to investment in partnerships  held in escrow in the
     accompanying  consolidated  balance sheet at December 31, 2003. As of March
     23, 2004,  the  Partnership's  interests  had not yet been  released to the
     noteholder.

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

          The  Partnership  and the holders of the purchase  money notes (in the
     original principal amount of $1,760,000) related to Highland Manor, Limited
     (Highland  Manor) have  extended the maturity  date thereof from January 1,
     1999 to January 1, 2004,  subject to the  noteholders'  right to accelerate
     the  maturity  date  upon  nine  months'  notice.  In  connection  with the
     extension,  in  addition  to  the  payments  required  to be  made  to  the
     noteholders by the Partnership from cash flow  distributions  from Highland
     Manor, the Partnership agreed to make annual payments to the noteholders on
     January 15th of each calendar year commencing  January 15, 2000. On October
     23, 1998,  the  Partnership  made a payment of interest,  which was held in
     escrow,  along with the purchase money note modification  documents,  until
     January  1999,  at which time the funds were  released to the  noteholders.
     This payment has been,  and  subsequent  payments will be, applied first to
     payment of accrued interest, and thereafter to principal.  In January 2000,
     2001, 2002 and 2003 the Partnership made the annual payment as agreed under
     the  extension  documents.  Effective  January 2, 2004,  the  Partnership's
     interest in Highland Manor was transferred to the noteholders. The transfer
     resulted in gain on disposition of investment in partnerships of $3,620,416
     to be reported in 2004 for financial statement purposes,  and of $3,837,000
     to be reported in 2004 for federal income tax purposes.

          Due  to  the  impending  transfer  of the  Partnership's  interest  in
     Highland Manor, the net unamortized  acquisition fees and property purchase
     costs,  which totaled  $623,063 at December 31, 2003, was  reclassified  to
     investments in partnerships  held for sale or transfer in the  accompanying
     consolidated balance sheet.

                                     III-20

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

                                   Victorian
                                   ---------

          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.  Subsequent
     thereto,  the parties extended the maturity date for a period until January
     1, 2004. In June 2003, the Managing  General Partner and the purchase money
     noteholder agreed to further extend the maturity date of the purchase money
     note  related to  Victorian  Towers to  January 1, 2007,  and to reduce its
     interest  rate  effective  as of  January  1,  2003.  At  the  time  of the
     agreement,  the Partnership  made a $125,000  payment to the purchase money
     noteholder, to be applied to the purchase money note principal.

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

          The Partnership has a 97.01% to 98.99% interest in profits, losses and
     cash  distributions  (as  restricted  by various  federal and state housing
     agencies)  (collectively,  the  Agencies)  of each  Local  Partnership.  An
     affiliate  of the Managing  General  Partner of the  Partnership  is also a
     general  partner  of each Local  Partnership  or the  intermediary  limited
     partnership which invested in the Local  Partnership.  As stipulated by the
     Local  Partnership's  partnership  agreements,  the Local  Partnerships are
     required to make annual cash  distributions from surplus cash flow, if any.
     During 2003 and 2002,  the  Partnership  received cash  distributions  from
     rental  operations  of the Local  Partnerships  of $891,563  and  $853,443,
     respectively. As of December 31, 2003 and 2002, 12 and 14, respectively, of
     the Local  Partnerships  had  aggregate  surplus  cash, as defined by their
     respective  regulatory  Agencies,  in the amounts of $425,420 and $714,694,
     respectively,  which may be available for  distribution  in accordance with
     their respective regulatory Agencies' regulations.

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

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

     c.   Advance to Local Partnership
          ----------------------------

          In July  2003,  the  Partnership  advanced  $51,175  to Pebble  Valley
     Housing Partners  (Monterey and Hillcrest  Apartments) to pay up-front fees
     and expenses  related to the  refinancing of the first mortgage debt on the
     two  properties.  The  advance  was  repaid to the  Partnership  out of the
     refinancing proceeds at closing in December 2003.



                                                      III-21

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

     d.   Property matters
          ----------------

                                   Walsh Park
                                   ----------

          On May 19, 2003, the local  managing  general  partner  entered into a
     contract for the sale of the property owned by Walsh Park Associates (Walsh
     Park). On December 30, 2003, Walsh Park was sold; cash proceeds received by
     the  Partnership  totaled   $4,743,059.   The  sale  resulted  in  gain  on
     disposition  of investment  in  partnerships  of  $3,358,936  for financial
     statement  purposes and $5,975,776 for federal income tax purposes in 2003.
     In accordance with the terms of the Partnership Agreement,  in January 2004
     the Managing General Partner was paid a disposition fee of $233,958 related
     to the sale,  which was netted  against the related gain on  disposition of
     investments in partnerships at December 31, 2003.

     e.   Summarized financial information
          --------------------------------

          Combined balance sheets and combined  statements of operations for the
     18 Local  Partnerships  in which the Partnership is invested as of December
     31,  2003,  follow.  The  information  is  presented  for  those  ten Local
     Partnerships  which have investment  basis (equity  method),  and for those
     eight Local Partnerships for which the Partnership's carrying value is zero
     (equity method suspended).

<TABLE>
<CAPTION>
                                              COMBINED BALANCE SHEETS
                                                 December 31, 2003

                                                               Equity
                                                               Method          Suspended            Total
                                                            ------------      ------------       ------------
          <S>                                               <C>               <C>                <C>
          Number of Local Partnerships                           10               8                   18
                                                                 ==               =                   ==

          Rental property, at cost, net of
            accumulated depreciation of
            $17,630,823 $38,479,553, and
            $56,110,376, respectively                       $ 10,934,983      $ 22,090,325       $ 33,025,308
          Land                                                 2,914,048         5,907,833          8,821,881
          Other assets                                         4,589,853         6,320,992         10,910,845
                                                            ------------      ------------       ------------

              Total assets                                  $ 18,438,884      $ 34,319,150       $ 52,758,034
                                                            ============      ============       ============


          Mortgage notes payable                            $ 10,781,957      $ 49,675,115       $ 60,457,072
          Other liabilities                                      693,470         3,925,514          4,618,984
          Due to general partners                                937,152         1,134,082          2,071,234
                                                            ------------      ------------       ------------

              Total liabilities                               12,412,579        54,734,711         67,147,290

          Partners' capital (deficit)                          6,026,305       (20,415,561)       (14,389,256)
                                                            ------------      ------------       ------------

              Total liabilities and partners'
                capital (deficit)                           $ 18,438,884      $ 34,319,150       $ 52,758,034
                                                            ============      ============       ============
</TABLE>



                                                      III-22

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

<TABLE>
<CAPTION>
                                         COMBINED STATEMENTS OF OPERATIONS
                                       For the year ended December 31, 2003

                                                               Equity
                                                               Method   (1)    Suspended            Total
                                                            -----------       -----------        -----------
          <S>                                               <C>               <C>                <C>
          Number of Local Partnerships                           11               8                   19
                                                                 ==               =                   ==

          Revenue:
            Rental                                          $ 7,506,146       $12,158,189        $19,664,335
            Other                                               457,198           559,067          1,016,265
                                                            -----------       -----------        -----------

              Total revenue                                   7,963,344        12,717,256         20,680,600
                                                            -----------       -----------        -----------

          Expenses:
            Operating and other                               5,001,019         7,537,806         12,538,825
            Interest                                            964,272         3,569,042          4,533,314
            Depreciation and amortization                     1,362,751         2,333,835          3,696,586
                                                            -----------       -----------        -----------

              Total expenses                                  7,328,042        13,440,683         20,768,725
                                                            -----------       -----------        -----------

          Net income (loss)                                 $   635,302       $  (723,427)       $   (88,125)
                                                            ===========       ===========        ===========

          Cash distributions                                $   323,080       $   568,483        $   891,563
                                                            ===========       ===========        ===========

          Cash distributions recorded as reduction
            of investments in partnerships                  $   323,080       $       312        $   323,392
                                                            ===========       ===========        ===========

          Cash distributions recorded as income             $        --       $   568,171        $   568,171

          Partnership's share of Local Partnership
            net income                                          623,977             1,995 (1)        625,972
                                                            -----------       -----------        -----------

          Share of income from partnerships                 $   623,977       $   570,166        $ 1,194,143
                                                            ===========       ===========        ===========
</TABLE>


          (1)  Includes  information for Walsh Park through the date of the sale
               of the property in December 2003.
          (2)  Represents Partnership's share of income from a Local Partnership
               for which the  Partnership's  carrying  value is zero,  but which
               does not have unallowable losses.

          Combined balance sheets and combined  statements of operations for the
     21 Local  Partnerships  in which the Partnership is invested as of December
     31, 2002, follow.  The information is presented  separately for those Local
     Partnerships  which have investment  basis (equity  method),  and for those
     Local  Partnerships  for which  the  Partnership's  carrying  value is zero
     (equity method suspended).


                                     III-23

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

<TABLE>
<CAPTION>
                                              COMBINED BALANCE SHEETS
                                                 December 31, 2002

                                                               Equity
                                                               Method          Suspended            Total
                                                            -----------       -----------        -----------
         <S>                                                <C>               <C>                <C>
         Number of Local Partnerships                            13               8                   21
                                                                 ==               =                   ==

         Rental property, at cost, net of
           accumulated depreciation of
           $22,627,619 $36,488,090, and
           $59,115,709, respectively                        $ 15,816,974      $ 23,723,542       $ 39,540,516
         Land                                                  3,421,432         5,891,582          9,313,014
         Other assets                                          6,535,934         5,108,975         11,644,909
                                                            ------------      ------------       ------------

             Total assets                                   $ 25,774,340      $ 34,724,099       $ 60,498,439
                                                            ============      ============       ============


         Mortgage notes payable                             $ 16,515,119      $ 48,941,247       $ 65,456,366
         Other liabilities                                     1,115,790         3,797,106          4,912,896
         Due to general partners                                 918,441         1,093,274          2,011,715
                                                            ------------      ------------       ------------

             Total liabilities                                18,549,350        53,831,627         72,380,977

         Partners' capital (deficit)                           7,224,990       (19,107,528)       (11,882,538)
                                                            ------------      ------------       ------------

             Total liabilities and partners'
               capital (deficit)                            $ 25,774,340      $ 34,724,099       $ 60,498,439
                                                            ============      ============       ============
</TABLE>

                                         COMBINED STATEMENTS OF OPERATIONS
                                       For the year ended December 31, 2002
<TABLE>
<CAPTION>
                                                               Equity
                                                               Method          Suspended            Total
                                                            -----------       -----------        -----------
         <C>                                                <C>               <C>                <C>
         Number of Local Partnerships                            13               8                   21
                                                                 ==               =                   ==

         Revenue:
           Rental                                           $ 7,917,195       $12,252,837        $20,170,032
           Other                                                473,090           463,795            936,885
                                                            -----------       -----------        -----------

             Total revenue                                    8,390,285        12,716,632         21,106,917
                                                            -----------       -----------        -----------

         Expenses:
           Operating and other                                5,138,274         7,295,047         12,433,321
           Interest                                           1,005,451         3,592,783          4,598,234
           Depreciation and amortization                      1,436,423         2,097,287          3,533,710
                                                            -----------       -----------        -----------

             Total expenses                                   7,580,148        12,985,117         20,565,265
                                                            -----------       -----------        -----------

         Net income (loss)                                  $   810,137       $  (268,485)       $   541,652
                                                            ===========       ===========        ===========

         Cash distributions                                 $   257,527       $   595,916        $   853,443
                                                            ===========       ===========        ===========

         Cash distributions recorded as reduction
           of investments in partnerships                   $   257,527       $    94,635        $   352,162
                                                            ===========       ===========        ===========

         Cash distributions recorded as income              $        --       $   501,281        $   501,281

         Partnership's share of Local Partnership
           net income                                           796,251            79,020 (1)        875,271

         Miscellaneous                                               --             2,708              2,708
                                                            -----------       -----------        -----------

         Share of income from partnerships                  $   796,251       $   583,009        $ 1,379,260
                                                            ===========       ===========        ===========
</TABLE>

          (1)  Represents Partnership's share of income from a Local Partnership
               for which the  Partnership's  carrying  value is zero,  but which
               does not have unallowable losses.

                                     III-24

<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
               -----------------------------------------------------------------
                 (loss) income to taxable income
                 -------------------------------

          For federal income tax purposes,  the Local  Partnerships  report on a
     basis whereby: (i) certain revenue and the related assets are recorded when
     received rather than when earned; (ii) certain costs are expensed when paid
     or  incurred  rather  than  capitalized  and  amortized  over the period of
     benefit;  and (iii) a shorter life is used to compute  depreciation  on the
     property as permitted by 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
     (loss) income reflected above to taxable income follows.

<TABLE>
<CAPTION>
                                                                                     For the years ended
                                                                                         December 31,
                                                                             --------------------------------
                                                                                 2003                 2002
                                                                             -----------           ----------
          <S>                                                                <C>                   <C>
          Financial statement net (loss) income                              $  (88,125)           $  541,652

          Adjustments:
            Additional book depreciation,
              net of depreciation on construction period expenses
              capitalized for financial statement purposes                    2,432,959             2,586,317

            Amortization for financial statement purposes
              not deducted for income tax purposes                              258,274                20,709

            Miscellaneous, net                                                 (397,081)              125,975
                                                                             ----------            ----------

          Taxable income                                                     $2,206,027            $3,274,653
                                                                             ==========            ==========
</TABLE>


3.   RELATED PARTY TRANSACTIONS

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

     In accordance with the terms of the Partnership Agreement,  the Partnership
is obligated to reimburse the Managing  General  Partner for its direct expenses
in connection  with managing the  Partnership.  For the years ended December 31,
2003 and 2002, the Partnership paid $229,726 and $224,747,  respectively, to the
Managing General Partner as direct  reimbursement of expenses incurred on behalf
of the Partnership.  Such expenses are included in the accompanying consolidated
statements of operations as general and administrative expenses.

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

                                     III-25

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3.   RELATED PARTY TRANSACTIONS - Continued

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

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

For each of the years ended December 31, 2003 and 2002, the Partnership paid the
Managing General Partner a Management Fee of $300,000.

     The Managing General Partner and/or its affiliates may receive a fee of not
more than two percent of the sales price of an investment in a Local Partnership
or the property it owns,  payable under certain  conditions  upon the sale of an
investment in a Local  Partnership  or the property it owns.  The payment of the
fee is subject to certain  restrictions,  including the achievement of a certain
level of sales  proceeds and making  certain  minimum  distributions  to limited
partners.  No  such  fee was  earned  by the  Managing  General  Partner  or its
affiliates  for the years ended December 31, 2003 and 2002. In January 2004, the
Managing General Partner was paid a disposition fee of $233,958  relating to the
sale of Walsh Park on December  30,  2003.  The fee was accrued at December  31,
2003,  and was netted  against the related gain on  disposition of investment in
partnership.


4.   PARTNERSHIP PROFITS AND LOSSES, AND DISTRIBUTIONS

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

     (i)  to the payment of debts and liabilities of the Partnership  (including
          all expenses of the  Partnership  incident to the sale or refinancing)
          other than loans or other debts and  liabilities of the Partnership to
          any partner or any affiliate; such debts and liabilities,  in the case
          of a  non-liquidating  distribution,  to be only those  which are then
          required  to be paid  or,  in the  judgment  of the  Managing  General
          Partner, required to be provided for;
     (ii) to the  establishment  of any  reserves  which  the  Managing  General
          Partner  deems  reasonably  necessary  for  contingent,  unmatured  or
          unforeseen liabilities or obligations of the Partnership;
     (iii)to each  partner  in an amount  equal to the  positive  balance in his
          capital  account as of the date of the sale or  refinancing,  adjusted
          for operations and  distributions to that date, but before  allocation
          of any profits for tax purposes realized from such sale or refinancing
          and allocated pursuant to the Partnership Agreement;
     (iv) to the limited  partners (A) an aggregate amount of proceeds from sale
          or  refinancing  and all prior  sales or  refinancings  equal to their
          capital contributions,  without reduction for prior cash distributions
          other than prior distributions of sale and refinancing proceeds,  plus
          (B) an  additional  amount  equal to a cumulative  non-compounded  six
          percent  return  on  each  limited  partners'  capital   contribution,
          reduced,  but not below  zero,  by (1) an  amount  equal to 50% of the
          losses for tax  purposes  plus tax credits  allocated  to such limited
          partner  and (2)  distributions  of net  cash  flow  to  each  limited
          partner,  such  return,  losses  for tax  purposes  and net cash  flow
          distributions  commencing  on the  first day of the month in which the
          capital contribution was made;

                                     III-26

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4.   PARTNERSHIP PROFITS AND LOSSES, AND DISTRIBUTIONS - Continued


     (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.  In
January  2004,  the  Managing  General  Partner  was paid a  disposition  fee of
$233,958  relating to the sale of Walsh Park on December 30,  2003.  The fee was
accrued at  December  31,  2003,  and was netted  against  the  related  gain on
disposition of investment in partnership.

     Pursuant to the Partnership Agreement, all cash available for distribution,
as defined, shall be distributed,  not less frequently than annually, 97% to the
Additional  Limited  Partners,  1% to the Special Limited Partner,  0.49% to the
Initial Limited Partner and 1.51% to the General Partners,  after payment of the
Management  Fee (see Note 3), as  specified  in the  Partnership  Agreement.  On
September 11, 2002, the Partnership  made a cash  distribution of $37,054 to the
General Partners and Initial and Special Limited Partners.  The distribution was
a result of cash resources  accumulated from operations and  distributions  from
Local Partnerships.  A review of the Partnership  Agreement indicated that these
amounts should have been distributed in prior years when  distributions had been
made only to Additional  Limited Partners.  On December 2, 2002, the Partnership
made a cash  distribution  of $111,340 to the General  Partners  and Initial and
Special  Limited  Partners.  The  distribution  was a result  of cash  resources
accumulated  from  operations  and  distributions  from Local  Partnerships.  On
December 6, 2002, the  Partnership  made a cash  distribution of $3,592,920 ($60
per  unit) to  Additional  Limited  Partners  who were  holders  of record as of
November 1, 2002. The  distribution  was a result of cash resources  accumulated
from operations and distributions from Local Partnerships. On November 13, 2003,
the  Partnership  made a  cash  distribution  of  $658,702  ($11  per  Unit)  to
Additional  Limited  Partners who were holders of record as of November 1, 2003,
and a cash distribution of $20,373 to the General Partners. The distribution was
a result of cash resources  accumulated from operations and  distributions  from
Local  Partnerships.   On  February  26,  2004,  the  Partnership  made  a  cash
distribution  of $2,275,516  ($38 per Unit) to Additional  Limited  Partners who
were holders of record as of January 1, 2004. The  distribution  was a result of
proceeds from the sale of Walsh Park.

                                                      III-27

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4.   PARTNERSHIP PROFITS AND LOSSES, AND DISTRIBUTIONS - Continued

     As defined in the Partnership Agreement, after the payment of distributions
described in the previous  paragraph,  after the  establishment  of any reserves
deemed  necessary  by the  Managing  General  Partner  and after  payment of the
Management Fee, the Partnership had no remaining cash available for distribution
for the years ended  December 31, 2003 and 2002.  The Managing  General  Partner
currently  intends to retain all of the  Partnership's  remaining  undistributed
cash for the possible  repayment,  prepayment or retirement of the Partnership's
outstanding  purchase money notes and related  accrued  interest  related to the
Local Partnerships, and for operating cash reserves.


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

     For  federal  income  tax  purposes,  the  Partnership  reports  on a basis
whereby:  (i) certain expenses are amortized rather than expensed when incurred;
(ii) certain costs are  amortized  over a shorter  period for tax  purposes,  as
permitted by 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 examination and, therefore, possible adjustment by the IRS.

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

<TABLE>
<CAPTION>
                                                                                   For the years ended
                                                                                       December 31,
                                                                             --------------------------------
                                                                                2003                  2002
                                                                             ----------            ----------
<S>                                                                          <C>                   <C>
Financial statement net income                                               $3,731,186            $1,247,368

Adjustment:
  Differences between financial statement net income
   and taxable income related to the Partnership's equity
   in the Local Partnerships' income or losses                                5,621,466             7,661,052

  Costs amortized over a shorter period for income tax purposes                  32,085                41,326
                                                                             ----------            ----------

Taxable income                                                               $9,384,737            $8,949,746
                                                                             ==========            ==========
</TABLE>


                                      # # #


                                     III-28

<PAGE>
                                EXHIBIT No. 99 b.

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





                                     III-29