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

                          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, 2004


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



                         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 $4,424,192.

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

                        2004 ANNUAL REPORT ON FORM 10-KSB

                                TABLE OF CONTENTS

                                                                          Page
                                                                          ----

                                     PART I

Item 1.  Business........................................................ I-1
Item 2.  Properties...................................................... I-5
Item 3.  Legal Proceedings............................................... I-5
Item 4.  Submission of Matters to a Vote of Security Holders............. I-5


                                     PART II

Item 5.  Market for the Registrant's Partnership Interests
           and Related Partnership Matters .............................. II-1
Item 6.  Management's Discussion and Analysis of Financial Condition
           and Results of Operations..................................... II-2
Item 7.  Financial Statements............................................ II-8
Item 8.  Changes In and Disagreements With Accountants
           on Accounting and Financial Disclosure........................ II-8
Item 8A. Controls and Procedures......................................... II-8
Item 8B. Other Information............................................... 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........................................................ III-3
Item 14. Principal Accountant Fees and Services.......................... III-4

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

Report of Independent Registered Public Accounting Firm.................. III-6

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


<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, 2004, 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, 2004,
the Partnership  retained  investments in 15 Local  Partnerships.  Each of these
Local Partnerships owns either a federal or state government-assisted  apartment
complex, which provides housing principally to the elderly and/or to individuals
and families of low or moderate income, or a conventionally  financed  apartment
complex. The original objectives of these investments,  not necessarily in order
of importance, were to:

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

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

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

     As a result of its investment in the Local  Partnerships,  the  Partnership
became the  principal  limited  partner in 31 (11  remaining  as of December 31,
2004)  Local  Partnerships.  As  a  limited  partner,  the  Partnership's  legal
liability  for  obligations  of  the  Local   Partnerships  is  limited  to  its
investment.  In another  six (four  remaining  as of  December  31,  2004) 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 15 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.

                                       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, 2004, 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        12/31/04 (2)        and/or Subsidized Under          Rental Units     Subsidies       HAP Contract
--------------------        ------------    -------------------------------      ------------   --------------    ------------
<S>                         <C>             <C>                                  <C>            <C>               <C>
Arboretum Village           $12,058,124     Conventional                              308               0              --
 Lisle, IL

Bartley Manor                   564,186     Federal Housing Administration             70              69           05/31/05 (3)(4)
 Superior, WI                                (FHA)/Section 236 of the National
                                             Housing Act (NHA)

Heritage Estates I            2,219,763     Missouri Housing Development              228               0              --
 St. Louis, MO                               Agency (MHDA)/Section 221(d)
                                            (4) of the NHA

Heritage Estates II           1,843,218     MHDA/Section 221 (d)(4) of the            160               0              --
 St. Louis, MO                               NHA

Lakewood Apts.                  790,169     Rural Housing & Community                  50              50           07/31/09 (3)
 Eufaula, AL                                 Development Services (RHCD)

Meadow Lanes Apts.            1,269,262     Michigan State Housing Develop-           118               0                 --
 Holland, MI                                 ment Authority/Section 236 of
                                             the NHA

Monterey/Hillcrest           13,970,390     Section 221(d)(4) of the NHA/FHA          300              60           04/23/24 (3)
 Waukesha, WI

Victorian Towers              4,632,960     New Jersey Housing and Mortgage           205              27           12/01/23
 Cape May, NJ                                 Finance Agency/Section 8

Villa Mirage I                1,813,323     California Housing Finance                 50              50           12/19/05 (4)
 Rancho Mirage, CA                            Agency (CHFA)/Section 8

Villa Mirage II               1,808,795     CHFA/Section 8                             48              48           12/14/15
 Rancho Mirage, CA

Village Green                   253,598     FHA/Section 236 of FHA                     36              36           04/30/05 (3)(4)
 Reedsburg, WI

Village Square                  342,108     FHA/Section 236 of FHA                     48              48           04/30/05 (3)(4)
 Baraboo, WI

Village Squire I & II         8,215,649     Conventional                              377               0              --
 Canton, MI

Village Squire III            5,300,650     Conventional                              224               0              --
 Canton, MI

Windham Village               2,080,465     CHFA                                       50              44           10/30/15
 Santa Rosa, CA
                            -----------                                            ------          ------

Totals (15 Properties)      $57,162,660                                             2,272             432
                            ===========                                            ======          ======

</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


                                                                                       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           2004    2003    2002   2001    2000       2004        2003         2002        2001        2000
--------------------           ----    ----    ----   ----    ----      -------    --------     --------    --------    --------
<S>                            <C>     <C>     <C>    <C>     <C>       <C>        <C>          <C>         <C>         <C>
Arboretum Village                89%     93%    87%    88%     92%      $ 9,554    $ 9,498      $ 9,833     $ 9,883     $ 9,689
 Lisle, IL

Bartley Manor                    97%     97%    98%    96%    100%        6,884      6,524        6,236       6,050       5,661
 Superior, WI

Heritage Estates I              100%    100%   100%   100%    100%        5,574      5,628        5,584       5,264       5,202
 St. Louis, MO

Heritage Estates II             100%    100%   100%   100%    100%        5,569      5,589        5,596       5,314       5,185
 St. Louis, MO

Lakewood Apts.                  100%    100%   100%   100%    100%        4,953      4,820        4,572       4,509       4,525
 Eufaula, AL

Meadow Lanes Apts.               96%     96%    95%    92%     95%        6,326      6,622        6,443       6,361       6,318
 Holland, MI

Monterey/Hillcrest               97%     97%    96%    99%     93%        8,490      8,826        9,023       8,954       8,629
 Waukesha, WI

Victorian Towers                100%     99%    98%    96%     94%        6,970      6,711        6,391       6,533       5,199
 Cape May, NJ

Villa Mirage I                   98%     98%    97%    99%    100%       10,030      9,697        9,430       9,599       9,685
 Rancho Mirage, C

Villa Mirage II                 100%    100%    99%    99%    100%       10,011      9,657        9,603       9,612       9,537
 Rancho Mirage, CA

Village Green                    92%    92%     95%   100%    100%        5,048    $ 4,888      $ 4,472     $ 4,497     $ 4,120
 Reedsburg, WI

Village Square                   90%    86%     94%    92%     92%        5,535      5,064        4,900       4,633       4,232
 Baraboo, WI

Village Squire I & II            95%    93%     96%    96%     97%        6,350      6,591        6,593       6,785       6,550
 Canton, MI

Village Squire III               93%    88%     95%    90%     98%        6,278      6,513        6,518       6,670       6,511
 Canton, MI

Windham Village                  98%   100%    100%   100%    100%       11,203     11,353       11,568      10,857      10,632
 Santa Rosa, CA
                               ----    ---     ---    ---     ---       -------    -------      -------     -------     -------

Totals (15 Properties) (5)       96%    96%     97%    96%     97%      $ 7,252    $ 7,199      $ 7,117     $ 7,035     $ 6,778
                               ====    ===     ===    ===     ===       =======    =======      =======     =======     =======

</TABLE>

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

     (2)  The amounts  provided are the balances of first mortgage loans payable
          by the Local Partnerships as of December 31, 2004.

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

                                       I-4

<PAGE>
                                     PART I
                                     ------

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

     (4)  It is anticipated that the Local Partnership will extend its Section 8
          HAP contract for a one-year period at its expiration in 2005.

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


     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,  the property  owned by 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.

     On November 4, 2004, the Partnership's interests in Briar Crest I and Briar
Crest II were sold. See the notes to the consolidated  financial  statements for
additional information concerning the sale.


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

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


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

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


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 2004.

                                       I-5

<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.  Peachtree  is not  affiliated  with the
          Partnership  or the Managing  General  Partner.  The price offered was
          determined  solely  at  the  discretion  of  Peachtree  and  does  not
          necessarily represent the fair market value of each Unit.

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

     (b)  As of March 30, 2005 there were approximately 4,203 registered holders
          of Units in the Partnership.

     (c)  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  and  Initial  and  Special  Limited
          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. On December 15, 2004, the Partnership  made a cash
          distribution  of  $3,053,982  ($51  per  unit) to  Additional  Limited
          Partners who were holders of record as of November 1, 2004, and a cash
          distribution  of $40,744  to the  General  Partners  and  Initial  and
          Special Limited Partners. The distribution consisted of cash resources
          accumulated from operations and distributions from Local Partnerships,
          and of proceeds received from the sale of the Partnership's  interests
          in Briar Crest I and Briar Crest II.

                                      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,  2004.  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 which have cumulative losses in excess of the amount of
the Partnership's investments in those Local Partnerships.

                          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  Managing
General Partner has evaluated the Partnership's  investments in partnerships and
has  determined  that  they  are  not  variable  interest  entities  subject  to
consolidation by the Partnership under the provisions of FIN 46-R. General

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

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

     The Managing  General Partner has sold, and will continue to sell,  certain
properties by utilizing  opportunities  presented by federal  affordable housing
legislation,  favorable financing terms and preservation incentives available to
tax credit and not-for-profit purchasers. Some of the rental properties owned by
the Local  Partnerships  are financed by state  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. 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 2004.

     Four  properties  in which the  Partnership  is invested as of December 31,
2004,  have  Section 8 HAP  contracts  which,  as extended,  will expire  before
December 31, 2005. The Section 8 HAP contracts cover all or substantially all of
the apartment  units in four of the  properties.  The following  chart  presents
information concerning these five properties.

<TABLE>
<CAPTION>
                                             Units             Original        Renewed
                                         Authorized for      Expiration of   Expiration of
                        Number of       Rental Assistance      Section 8       Section 8
     Property          Rental Units      Under Section 8     HAP Contract    HAP Contract
     --------          ------------     -----------------    -------------   -------------
     <S>               <C>              <C>                  <C>             <C>
     Bartley Manor          70                 69               07/31/98       05/31/05 (1)
     Villa Mirage I         50                 50               12/19/05 (1)
     Village Green          36                 36               09/30/98       04/30/05 (1)
     Village Square         48                 48               09/30/98       04/30/05 (1)
                          ----               ----

          Total            204                203
                          ====               ====
</TABLE>

     (1)  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,  2004,  the  carrying  amount  of  the  Partnership's
investments  in and advances to the four Local  Partnerships  with Section 8 HAP
contracts expiring in 2005 was $1,301,044.

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

                                      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, 2004, the Partnership had approximately  4,210 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 15 remain at
December 31, 2004. The Partnership's liquidity, with unrestricted cash resources
of  $6,320,138  as of December  31,  2004,  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 30, 2005,  there
were no material commitments for capital expenditures.

     During  2004 and 2003,  the  Partnership  received  cash  distributions  of
$661,508 and $891,563, respectively, from the Local Partnerships.

     The  Partnership's  obligations  with respect to its  investments  in Local
Partnerships,  in the  form  of  nonrecourse  purchase  money  notes  having  an
aggregate  principal  balance of $5,175,000,  plus aggregate accrued interest of
$12,014,895,  as of December 31, 2004, 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 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 purchase money notes related to the following  properties  have matured
and are in default.  Documents  transferring the Partnership's  interests in the
related  Local  Partnerships  have been placed in escrow,  to be released to the
noteholders  after  December 31, 2004, or upon their  request.  (As of March 30,
2005, the Partnership's interests had not yet been requested by, or released to,
the noteholders.)

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

     Heritage Estates I      $2,600,000          01/01/99        01/01/04
     Heritage Estates II      1,800,000          01/01/99        01/01/04


     The  purchase  money note  related to  Victorian  Towers,  in the  original
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.

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

                                      II-5

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


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

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

     The  Partnership's  inability  to pay  certain of the  purchase  money note
principal and accrued interest balances when due, and the resulting  uncertainty
regarding the Partnership's  continued  ownership  interest in the related Local
Partnerships,  does not adversely impact the Partnership's  financial  condition
because the  purchase  money  notes are  nonrecourse  and secured  solely by the
Partnership's interest in the related Local Partnerships.  Therefore, should the
investment in any of the Local  Partnerships  with 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  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.

     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,  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
15 Local  Partnerships  in which the  Partnership is invested as of December 31,
2004, the two Local Partnerships with associated purchase money notes which have
matured as of  December  31,  2004,  and for which  documents  transferring  the
Partnership's  interest in the related  local  partnerships  have been placed in
escrow and which remain unpaid or  unextended as of March 30, 2005,  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, 2004                 21%                    $ 22,927
      December 31, 2003                 23%                    $103,212

                                      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  address  the  maturity  and
impending  maturity of the Partnership's  remaining 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 year ended December 31, 2004, net cash provided by investing  activities
was  adequate to support net cash used in  operating  activities  and  financing
activities.   Cash  and  cash  equivalents  increased  $2,397,903  during  2004,
primarily due to collection of sale proceeds  related to Walsh Park and proceeds
received from the  disposition  of investment in  partnerships  related to Briar
Crest I and Briar Crest II. For the year ended  December 31,  2004,  $477,863 of
the  distributions   received  were  from  Local   Partnerships  for  which  the
Partnership's  carrying  value was zero at  December  31,  2004  (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 revenues.

     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 General  Partners and
Initial and Special Limited Partners.  The distributions were the 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. On December 15, 2004, the  Partnership  made a cash  distribution of
$3,053,982  ($51 per unit) to  Additional  Limited  Partners who were holders of
record as of November 1, 2004, and a cash distribution of $40,744 to the General
Partners and Initial and Special Limited Partners.  The distributions  consisted
of cash  resources  accumulated  from  operations and  distributions  from Local
Partnerships,  and of  proceeds  received  from  the  sale of the  Partnership's
interests  in Briar Crest I and Briar  Crest II. The  Managing  General  Partner
currently  intends to retain all of the  Partnership's  remaining  undistributed
cash pending  resolution of the Partnership's  outstanding  purchase money notes
and related accrued interest, and for operating cash reserves.

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

2004 Versus 2003
----------------

     The  Partnership's  net  income  for the  year  ended  December  31,  2004,
increased from 2003, primarily due to an increase in gain from extinguishment of
debt,  partially  offset by a decrease in gain on  disposition  of investment in
partnerships and by the  recognition,  in 2004, of an impairment loss related to
Bartley Manor. Share of income from partnerships decreased in 2004 primarily due
to the sale of Walsh Park in 2003, a reduction in cash distributions recorded as
income from two properties  (equity method suspended) and reductions in share of
income from three properties, two of which were sold during 2004, and a decrease
in rental revenue and an increase in operating  expenses at the third  property.
Interest  revenue  increased  in the  year  2004  due to  higher  cash  and cash
equivalent balances and higher rates.  Interest expense decreased due to a lower
balance due on  investments  in  partnerships  as the result of the  transfer of
Highland Manor in January 2004.  General and  administrative  expenses decreased
primarily due to lower reimbursed payroll costs. Professional fees increased due
to higher audit  expenses.  Amortization  of deferred costs decreased due to the
reclassification  during 2004 of three investments to investment in partnerships
held for sale or transfer.

                                      II-7

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


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

     For financial reporting purposes, the Partnership,  as a limited partner in
the Local  Partnerships,  does not record losses from the Local  Partnerships in
excess of its  investment  to the  extent  that the  Partnership  has no further
obligation to advance funds or provide financing to the Local Partnerships. As a
result, the Partnership's  share of income from partnerships for the years ended
December 31, 2004 and 2003,  did not include  losses of $563,424  and  $776,307,
respectively. Distributions of $477,863 and $568,171, received from six and five
Local  Partnerships  during  2004 and  2003,  respectively,  and for  which  the
Partnership's carrying value is zero (equity method suspended), 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.

     The combined rental revenues for the Partnership's  remaining 15 properties
for the five years ended  December 31, 2004,  follow.  Combined  rental  revenue
amounts have been adjusted to reflect  property sales and interests  transferred
in 2004 and in prior years.

<TABLE>
<CAPTION>

                                                        For the years ended December 31,
                           ------------------------------------------------------------------------------------------
                              2004                  2003                  2002               2001            2000
                           -----------          -----------            -----------       -----------      -----------
<S>                        <C>                  <C>                    <C>               <C>              <C>
Combined Rental
  Revenue                  $16,346,265          $16,477,534            $16,485,887       $16,425,646      $15,770,240

Annual Percentage
  Increase (Decrease)                 (0.8)%                 (0.1)%                 0.4%             4.2%

</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.


ITEM 8A. CONTROLS AND PROCEDURES
         -----------------------

     In February 2005,  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


                                      II-8

<PAGE>
                                     PART II


ITEM 8A. CONTROLS AND PROCEDURES - Continued
         -----------------------

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  2005
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.  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 8B. OTHER INFORMATION
         -----------------

     There has not been any information  required to be disclosed in a report on
Form 8-K during the quarter ended December 31, 2004,  but not reported,  whether
or not otherwise required by this Form 10-KSB at December 31, 2004.

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

H. William Willoughby,  58, 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 30, 2005.

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

          Equity Resource Group,             10,320 Units            17.2%
            Incorporated, et. al.
          44 Brattle Street
          Cambridge, MA 02138

     (b)  Security ownership of management.

          The following  table sets forth  certain  information  concerning  all
          Units  beneficially  owned, as of March 30, 2005, by each director and
          by all  directors  and  officers  as a group of the  Managing  General
          Partner of the Partnership.

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

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

     (c)  Changes in control.

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

                                      III-2

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

ITEM 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
         --------

          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 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES - 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.


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

     During the years ended December 31, 2004 and 2003, the Partnership retained
Grant Thornton LLP to provide services as follows.

                                            Year Ended December 31,
                                          --------------------------
                                            2004              2003
                                          --------          --------

         Audit fees                       $115,000          $105,500
         Audit-related fees                     --                --
         Tax fees (1)                       24,500            22,500
         All other fees                         --                --
                                          --------          --------

             Total billed                 $139,500          $128,000
                                          ========          ========

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

     The Partnership has no directors or officers. The Board of Directors of the
Managing General Partner of the Partnership, serving as the audit committee, has
approved in advance  100% of the fees paid to, and  services  provided by, Grant
Thornton LLP. Prior to approving  Grant  Thornton LLP's  providing any non-audit
services,  the  Board  of  Directors  of the  Managing  General  Partner  of the
Partnership   would  assess  whether  the  provision  of  those  services  would
compromise  Grant  Thornton  LLP's  independence.  Grant  Thornton  LLP provided
partnership tax return preparation  services during the years ended December 31,
2004 and  2003,  which  services  it was  determined  did not  compromise  Grant
Thornton LLP's independence.

                                      III-4

<PAGE>
                                   SIGNATURES


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


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

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



March 30, 2005                         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 30, 2005                         by:  /s/ H. William Willoughby
--------------                              ------------------------------------
DATE                                        H. William Willoughby,
                                              Director, President,
                                              and Secretary



March 30, 2005                         by:  /s/ Michael J. Tuszka
--------------                              ------------------------------------
DATE                                        Michael J. Tuszka,
                                              Vice President
                                              and Chief Accounting Officer
                                              (Principal Financial Officer
                                              and Principal Accounting Officer)




                                      III-5

<PAGE>



Report of Independent Registered Public Accounting Firm


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)  (the
Partnership)  as of  December  31, 2004 and 2003,  and the related  consolidated
statements of operations, changes in partners' (deficit) capital, and cash flows
for the years  then  ended.  These  consolidated  financial  statements  are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these  consolidated  financial  statements based on our audits. We
did  not  audit  the  financial  statements  of  the  Local  Partnerships.   The
Partnership's share of income from these Local Partnerships constitutes $168,915
and  $625,972  of  income  in  2004  and  2003,  respectively,  included  in the
Partnership's 2004 and 2003 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 the Standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audits to  obtain  reasonable  assurance  about  whether  the
consolidated  financial  statements  are free from  material  misstatement.  The
Partnership  is not required to have, nor were we engaged to perform an audit of
its internal control over financial reporting. Our audits included consideration
of internal  control over  financial  reporting as a basis for  designing  audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Partnership's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the consolidated  financial statements,  assessing the accounting
principles  used  and  significant  estimates  made  by  management,  as well as
evaluating the overall consolidated 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
consolidated  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, 2004 and 2003,  and the
consolidated  results of its operations,  changes in partners' (deficit) capital
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 23, 2005



                                      III-6

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                           CONSOLIDATED BALANCE SHEETS


                                     ASSETS

<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                      ----------------------------
                                                                                          2004            2003
                                                                                      ------------    ------------
<S>                                                                                   <C>             <C>
Investments in partnerships .......................................................   $  2,418,162    $  3,979,360
Investment in partnerships held for sale or transfer ..............................      1,066,955       1,891,124
Investment in partnerships held in escrow .........................................      1,068,937       1,186,240
Cash and cash equivalents .........................................................      6,320,138       3,922,235
Acquisition fees, principally paid to related parties,
  net of accumulated amortization of $264,120 and $271,878, respectively ..........        104,674         127,422
Property purchase costs,
  net of accumulated amortization of $216,270 and $244,200, respectively ..........        100,523         131,234
Sales proceeds receivable .........................................................             --       4,743,059
Other assets ......................................................................            236              53
                                                                                      ------------    ------------

      Total assets ................................................................   $ 11,079,625    $ 15,980,727
                                                                                      ============    ============



                        LIABILITIES AND PARTNERS' DEFICIT


Due on investments in partnerships ................................................   $  5,294,544    $  7,054,544
Accrued interest payable ..........................................................     12,048,871      14,041,841
Accounts payable and accrued expenses .............................................        163,689         387,300
                                                                                      ------------    ------------

      Total liabilities ...........................................................     17,507,104      21,483,685
                                                                                      ------------    ------------

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 .........................................    (18,071,002)    (12,700,760)
    Offering costs ................................................................     (6,156,933)     (6,156,933)
    Accumulated losses ............................................................    (42,203,044)    (46,648,765)
                                                                                      ------------    ------------

      Total partners' deficit .....................................................     (6,427,479)     (5,502,958)
                                                                                      ------------    ------------

      Total liabilities and partners' deficit .....................................   $ 11,079,625    $ 15,980,727
                                                                                      ============    ============
</TABLE>

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

                                      III-7

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                          For the years ended
                                                                              December 31,
                                                                       --------------------------
                                                                          2004           2003
                                                                       -----------    -----------
<S>                                                                    <C>            <C>
Share of income from partnerships ..................................   $   734,942    $ 1,194,143
                                                                       -----------    -----------

Other revenue and expenses:

  Revenue:
    Gain from extinguishment of debt ...............................     3,625,416        738,283
    Interest .......................................................        63,834         32,047
                                                                       -----------    -----------

                                                                         3,689,250        770,330
                                                                       -----------    -----------

  Expenses:
    Interest .......................................................       625,647        857,162
    Management fee .................................................       300,000        300,000
    General and administrative .....................................       242,449        271,687
    Professional fees ..............................................       137,928        131,289
    Amortization of deferred costs .................................        25,825         32,085
                                                                       -----------    -----------

                                                                         1,331,849      1,592,223
                                                                       -----------    -----------

      Total other revenue and expenses .............................     2,357,401       (821,893)
                                                                       -----------    -----------

Income before gain on disposition of investment in partnerships
  and impairment loss ..............................................     3,092,343        372,250

Gain on disposition of investment in partnerships ..................     2,080,020      3,358,936

Impairment loss ....................................................      (726,642)            --
                                                                       -----------    -----------

Net income .........................................................   $ 4,445,721    $ 3,731,186
                                                                       ===========    ===========


Net income allocated to General Partners (1.51%) ...................   $    67,130    $    56,341
                                                                       ===========    ===========

Net income allocated to Initial and Special Limited Partners (1.49%)   $    66,241    $    55,595
                                                                       ===========    ===========

Net income allocated to Additional Limited Partners (97%) ..........   $ 4,312,350    $ 3,619,250
                                                                       ===========    ===========

Net income per unit of Additional Limited Partner Interest,
  based on 59,882 units outstanding ................................   $     72.01    $     60.44
                                                                       ===========    ===========
</TABLE>

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

                                      III-8

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

             CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT

<TABLE>
<CAPTION>
                                                                         Initial and
                                                                            Special          Additional
                                                           General          Limited           Limited
                                                           Partners         Partners          Partners            Total
                                                          ----------      -----------       ------------       -----------
<S>                                                       <C>             <C>               <C>                <C>
Partners' deficit, January 1, 2003                        $(856,747)      $(846,006)        $(6,852,316)       $(8,555,069)

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

  Distribution to General Partners
    and Initial and Special Limited Partners                (10,255)        (10,118)                 --            (20,373)

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

  Partner's deficit, December 31, 2003                     (810,661)       (800,529)         (3,891,768)        (5,502,958)

  Net income                                                 67,130          66,241           4,312,350          4,445,721

  Distribution to General Partners
    and Initial and Special Limited Partners                (20,508)        (20,236)                 --            (40,744)

  Distribution of $51.00 per unit
    of Additional Limited Partner Interest                       --              --          (5,329,498)        (5,329,498)
                                                          ---------       ---------         -----------        -----------

  Partner's deficit, December 31, 2004                    $(764,039)      $(754,524)        $(4,908,916)       $(6,427,479)
                                                          =========       =========         ===========        ===========
</TABLE>

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

                                      III-9

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                     For the years ended
                                                                                         December 31,
                                                                                  --------------------------
                                                                                     2004           2003
                                                                                  -----------    -----------
<S>                                                                               <C>            <C>
Cash flows from operating activities:
  Net income ..................................................................   $ 4,445,721    $ 3,731,186

  Adjustments to reconcile net income to net cash used in operating activities:
    Share of income from partnerships .........................................      (734,942)    (1,194,143)
    Amortization of deferred costs ............................................        25,825         32,085
    Gain from extinguishment of debt ..........................................    (3,625,416)      (738,283)
    Gain on disposition of investment in partnerships .........................    (2,080,020)    (3,358,936)
    Impairment loss ...........................................................       726,642             --

    Changes in assets and liabilities:
      Increase in accrued interest receivable on advances to partnerships .....          (114)            --
      (Increase) decrease in other assets .....................................          (183)            59
      Increase in accrued interest payable ....................................       625,647        857,162
      Payment of purchase money note interest .................................      (190,038)      (339,807)
      Increase in accounts payable and accrued expenses .......................        10,347            314
                                                                                  -----------    -----------

        Net cash used in operating activities .................................      (796,531)    (1,010,363)
                                                                                  -----------    -----------

Cash flows from investing activities:
     Receipt of distributions from partnerships ...............................       661,508        891,563
     Collection of sales proceeds receivable ..................................     4,743,059             --
     Proceeds from disposition of investment in partnerships ..................     3,348,196             --
     Disposition fees paid to related party ...................................      (322,857)            --
     Additional sales proceeds ................................................       166,270             --
     Advance to Local Partnership .............................................       (31,500)            --
                                                                                  -----------    -----------

        Net cash provided by investing activities .............................     8,564,676        891,563
                                                                                  -----------    -----------


Cash flows from financing activities:
  Payment of purchase money note principal ....................................            --       (125,000)
  Distributions to General Partners and Initial and Special Limited Partners ..       (40,744)       (20,373)
  Distributions to Additional Limited Partners ................................    (5,329,498)      (658,702)
                                                                                  -----------    -----------

        Net cash used in financing activities .................................    (5,370,242)      (804,075)
                                                                                  -----------    -----------


Net increase (decrease) in cash and cash equivalents ..........................     2,397,903       (922,875)

Cash and cash equivalents, beginning of year ..................................     3,922,235      4,845,110
                                                                                  -----------    -----------

Cash and cash equivalents, end of year ........................................   $ 6,320,138    $ 3,922,235
                                                                                  ===========    ===========
</TABLE>

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

                                     III-10

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

          The  Partnership  sold 60,000  units at $1,000 per unit of  additional
     limited partner interest through a public offering. The offering period was
     terminated in January  1984. As of December 31, 2004,  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, 2004 and 2003, the Partnership's share of cumulative losses of
     nine  and  seven of the  Local  Partnerships  exceeded  the  amount  of the
     Partnership's  investments in those Local  Partnerships  by $10,320,899 and
     $9,757,475,  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 $477,863 and $568,171, received from
     six and five Local Partnerships during 2004 and 2003, respectively, and for
     which the Partnership's  carrying value is zero (equity method  suspended),
     were  recorded  as  increases  in the  Partnership's  share of income  from
     partnerships in the year received.

                                     III-11

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

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

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

          Due to the  possible  sale of the Bartley  Manor  Limited  Partnership
     (Bartley Manor),  Village Green of Wisconsin Limited  Partnership  (Village
     Green) and Village Square Limited (Village Square)  properties,  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,
     2004. 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 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 sheets at December 31, 2004 and 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-12

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

     j.   Use of estimates

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

     k.   Fair value of financial instruments

          The consolidated  financial  statements  include  estimated fair value
     information  as of December 31, 2004, 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 Managing General Partner has
     evaluated the  Partnership's  investment in partnerships and has determined
     that they are not variable  interest  entities  subject to consolidation by
     the Partnership under the provisions of FIN 46-R.


                                     III-13

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS

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

          As of December 31, 2004 and 2003, the Partnership held limited partner
     interests  in15  and  18  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,
                                                  ----------------------------
                                                     2004             2003
                                                  -----------      -----------

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

          Purchase money notes due in:
            2004                                    4,400,000        6,160,000
            2007                                      775,000          775,000
                                                  -----------      -----------

                Subtotal                            5,294,544        7,054,544
                                                  -----------      -----------

          Accrued interest payable                 12,048,871       14,041,841
                                                  -----------      -----------

                Total                             $17,343,415      $21,096,385
                                                  ===========      ===========


          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%. The purchase money notes are nonrecourse, 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 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 purchase  money notes  related to the  following  properties  have
     matured  and  are in  default.  Documents  transferring  the  Partnership's
     interests in the related Local  Partnerships have been placed in escrow, to
     be released to the  noteholders  after  December  31,  2004,  or upon their
     request.  (As of March 30, 2005,  the  Partnership's  interests had not yet
     been requested by, or released to, the noteholders.)

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

          Heritage Estates I     $2,600,000         01/01/99        01/01/04
          Heritage Estates II     1,800,000         01/01/99        01/01/04


                                     III-14

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

          The purchase money note related to Victorian  Towers,  in the original
     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.

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

          The Partnership's  inability to pay certain of the purchase money note
     principal  and  accrued  interest  balances  when  due,  and the  resulting
     uncertainty regarding the Partnership's continued ownership interest in the
     related Local  Partnerships,  does not adversely  impact the  Partnership's
     financial  condition  because the purchase money notes are  nonrecourse and
     secured  solely  by  the  Partnership's   interest  in  the  related  Local
     Partnerships.  Therefore,  should  the  investment  in  any  of  the  Local
     Partnerships  with  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.  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  interest in the  related  Local  Partnership  will result in
     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 related Local
     Partnership and, likewise, its share of any future cash flow distributed by
     the  related  Local  Partnership  from  rental  operations,  mortgage  debt
     refinancings, or the sale of the real estate.

          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


                                                      III-15

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

     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,  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 15 Local Partnerships
     in which the Partnership is invested as of December 31, 2004, the two Local
     Partnerships  with  associated  purchase money notes which have matured and
     are in default,  and for which  documents  transferring  the  Partnership's
     interest in the related local  partnerships  have been placed in escrow and
     which remain  unpaid or unextended  as of March 30, 2005,  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, 2004                21%                     $ 22,927
     December 31, 2003                23%                     $103,212

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

          Interest  expense on the  Partnership's  purchase  money notes for the
     years  ended  December  31,  2004 and  2003,  was  $625,647  and  $857,162,
     respectively.  The accrued  interest payable on the purchase money notes of
     $12,014,895 and $14,007,865 as of December 31, 2004 and 2003, 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.

                          Briar Hills and Indian Hills
                          ----------------------------

          The  Partnership  defaulted  on its purchase  money notes  relating to
     Briar Hills Townhouses  (Briar Hills) and Indian Hills  Townhouses  (Indian
     Hills) on January 1, 2002,  when the notes  matured  and were not paid.  In
     April 2002, the noteholders agreed to extend the maturity date of the Briar
     Hills and Indian Hills notes until  January 2, 2003.  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 interests
     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.

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

          The  Partnership  defaulted  on its  purchase  money notes  related to
     Heritage  Estates  Associates  Phase I  (Heritage  Estates I) and  Heritage
     Estates  Associates Phase II (Heritage Estates II) on January 1, 1999, when
     the notes matured and were not paid. The default amount included  aggregate
     principal and accrued interest of $2,600,000 and $4,357,413,  respectively,
     for Heritage  Estates I and  aggregate  principal  and accrued  interest of
     $1,800,000 and  $2,689,917,  respectively,  for Heritage  Estates II. As of
     March  30,  2005,   principal  and  accrued   interest  of  $2,600,000  and
     $6,082,276,  respectively,  for  Heritage  Estates  I, and  $1,800,000  and
     $3,793,837, respectively, for Heritage Estates II, were due.

                                     III-16

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

          In April 2003,  the Managing  General  Partner and the purchase  money
     noteholders agreed to extend the maturity dates of the purchase money notes
     related to Heritage  Estates I and Heritage  Estates II to January 1, 2004.
     In conjunction  therewith,  on April 4, 2003,  documents  transferring  the
     Partnership's  interests in Heritage Estates I and Heritage Estates II were
     placed  in  escrow,  to be  released  to the  noteholders  in the  event of
     non-payment at maturity.

          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  amount of acquisition fees and property purchase costs,  which
     totaled  $1,068,937 and $1,186,240 as of December 31, 2004 and December 31,
     2003,  respectively,  has been  reclassified  to investment in partnerships
     held in escrow in the accompanying consolidated balance sheets. As of March
     30, 2005,  the  Partnership's  interests had not yet been  requested by, or
     released to, the noteholders.

                                 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) extended the maturity date thereof from January 1, 1999 to
     January 1, 2004.  Effective January 2, 2004, the Partnership's  interest in
     Highland  Manor was  transferred  to the  noteholders.  The transfer of the
     Partnership's  interest  to the  noteholders  resulted  in total  gain from
     extinguishment  of debt of $3,625,416 for financial  statement  purposes in
     2004,  and in a total gain of $3,842,001 for federal income tax purposes in
     2004.

          Due to the  anticipated  transfer  of the  Partnership's  interest  in
     Highland Manor, the  Partnership's  basis in the Local  Partnership,  along
     with the net unamortized  amount of acquisition fees and property  purchase
     costs,  which totaled  $623,063 at December 31, 2003, was  reclassified  to
     investment in  partnerships  held for sale or transfer in the  accompanying
     consolidated balance sheet at that date.

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

          The  Partnership  defaulted  on its  purchase  money  note  related to
     Victorian Towers Associates (Victorian Towers) on January 1, 1999, when the
     note matured and was not paid.  The default amount  included  principal and
     accrued  interest  of $900,000  and  $1,710,560,  respectively.  Subsequent
     thereto, the parties extended the maturity date to January 1, 2004. In June
     2003, the Managing General Partner and the purchase money noteholder agreed
     to further  extend the maturity date of the purchase  money note related to
     Victorian  Towers to  January  1, 2007,  and to reduce  its  interest  rate
     effective  as of  January  1,  2003.  At the  time  of the  agreement,  the
     Partnership made a $125,000 payment to the purchase money noteholder, to be
     applied to the purchase money note principal.

                                     III-17

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

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

          The Partnership has a 97.02% 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  Partnerships'  partnership  agreements,  the Local  Partnerships are
     required to make annual cash  distributions from surplus cash flow, if any.
     During 2004 and 2003,  the  Partnership  received cash  distributions  from
     rental operations of the Local Partnerships totaling $661,508 and $891,563,
     respectively. As of December 31, 2004 and 2003, eight and 12, respectively,
     of the Local  Partnerships had aggregate  surplus cash, as defined by their
     respective  regulatory  Agencies,  in the amounts of $243,750 and $425,420,
     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 December 2004, the Partnership  advanced  $31,500 to Village Square
     to provide  the Local  Partnership  with  funds  required  to correct  code
     violations  at the  property.  The amount is  included  in  investments  in
     partnerships  held for sale or  transfer in the  accompanying  consolidated
     balance sheet at December 31, 2004. (See Note 2.d., below.)

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

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

          In March 2005,  contracts  for the sale of the  properties  related to
     Bartley  Manor,  Village Green and Village  Square were signed.  Due to the
     possible sale of the properties related to the Partnership's investments in
     Bartley Manor, Village Green and Village Square, the Partnership's basis in
     the  Local  Partnerships,  along  with  unamortized  acquisition  fees  and
     property purchase costs, which totaled $1,066,955 net of an impairment loss
     of $726,642  related to Bartley Manor,  was  reclassified to investments in
     partnerships  held for sale or  transfer in the  accompanying  consolidated
     balance sheet at December 31, 2004.


                                     III-18

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

                              Briar Crest I and II
                              --------------------

          On November 4, 2004, the Partnership's  interests in Briar Crest I and
     Briar Crest II were sold to affiliates of the Local General  Partner of the
     respective Local  Partnerships.  Cash proceeds  received by the Partnership
     totaled $3,348,196. The sale resulted in gain on disposition of investments
     in  partnerships  of  $1,913,750  for  financial   statement  purposes  and
     $2,887,001 for federal income tax purposes in 2004. In accordance  with the
     terms of the Partnership Agreement, the Managing General Partner was paid a
     disposition  fee of  $88,899  related  to  the  sale  of the  Partnership's
     interests  in Briar Crest I and Briar Crest II. The fee was netted  against
     the related gain on disposition of investment in partnerships.

          Due to the  impending  sale of the  Partnership's  interests  in Briar
     Crest  I  and  Briar  Crest  II,  the  Partnership's  basis  in  the  Local
     Partnerships, along with the net unamortized amount of acquisition fees and
     property purchase costs,  which totaled $1,268,061 as of December 31, 2003,
     was reclassified to investment in partnerships held for sale or transfer in
     the accompanying consolidated balance sheets at that date.

                               Monterey/Hillcrest
                               ------------------

          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.

                                   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 in January 2004 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.  Additional  proceeds  received by the Partnership in 2004 totaled
     $166,270, resulting in gain on disposition of investment in partnerships of
     $166,270 for financial  statement  purposes and $31,684 for federal  income
     tax  purposes  in 2004.  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  accrued and
     netted   against  the  related  gain  on   disposition  of  investments  in
     partnerships at December 31, 2003.

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

          The  interest  of  the  Partnership's   affiliated   General  Partner,
     C.R.H.C.,  Incorporated, in Windham Associates Limited Partnership (Windham
     Village)  increased  0.99  percent  as a result  of the  death of the local
     general partner during the first quarter of 2003 (so the Local  Partnership
     could  maintain a one percent  general  partner).  The former local general
     partner's  estate became a special  limited partner with a smaller share of
     ownership  interest  in  Windham  Village  of 0.01  percent.  However,  the
     economic  interest of the former local general partner's estate will remain
     at one percent.

                                     III-19

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

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

          Combined balance sheets and combined  statements of operations for the
     15 Local  Partnerships  in which the Partnership is invested as of December
     31, 2004,  follow.  The  information is presented  separately for six Local
     Partnerships  which have  investment  basis (equity  method),  and for nine
     Local  Partnerships  for which  the  Partnership's  carrying  value is zero
     (equity method suspended).

<TABLE>
<CAPTION>
                                              COMBINED BALANCE SHEETS
                                                 December 31, 2004

                                                               Equity
                                                               Method          Suspended            Total
                                                            ------------      ------------       ------------
          <S>                                               <C>               <C>                <C>
          Number of Local Partnerships                           6                9                   15
                                                                 =                =                   ==

          Rental property, at cost, net of
            accumulated depreciation of
            $10,523,573, $43,552,353, and
            $54,075,926, respectively                       $  4,618,862      $ 23,026,137       $ 27,644,999
          Land                                                 1,722,314         6,754,339          8,476,653
          Other assets                                         2,755,081         6,375,052          9,130,133
                                                            ------------      ------------       ------------

              Total assets                                  $  9,096,257      $ 36,155,528       $ 45,251,785
                                                            ============      ============       ============


          Mortgage notes payable                            $  6,085,695      $ 51,076,965       $ 57,162,660
          Other liabilities                                      567,195         4,342,351          4,909,546
          Due to general partners                                967,947         1,174,891          2,142,838
                                                            ------------      ------------       ------------

              Total liabilities                                7,620,837        56,594,207         64,215,044

          Partners' capital (deficit)                          1,475,420       (20,438,679)       (18,963,259)
                                                            ------------      ------------       ------------
              Total liabilities and partners'
                capital (deficit)                           $  9,096,257      $ 36,155,528       $ 45,251,785
                                                            ============      ============       ============

</TABLE>
                                     III-20

<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, 2004

                                                               Equity
                                                               Method          Suspended            Total
                                                            -----------       -----------        -----------
          <S>                                               <C>               <C>                <C>
          Number of Local Partnerships                           8 (1)            9                   17
                                                                 =                =                   ==

          Revenue:
            Rental                                          $ 3,692,510       $13,277,894        $16,970,404
            Other                                               173,660           590,562            764,222
                                                            -----------       -----------        -----------

              Total revenue                                   3,866,170        13,868,456         17,734,626
                                                            -----------       -----------        -----------

          Expenses:
            Operating and other                               2,677,660         8,730,996         11,408,656
            Interest                                            311,436         3,477,333          3,788,769
            Depreciation and amortization                       616,055         2,246,265          2,862,320
                                                            -----------       -----------        -----------

              Total expenses                                  3,605,151        14,454,594         18,059,745
                                                            -----------       -----------        -----------

          Net income (loss)                                 $   261,019       $  (586,138)       $  (325,119)
                                                            ===========       ===========        ===========

          Cash distributions                                $   123,746       $   477,863        $   601,609 (2)
                                                            ===========       ===========        ===========

          Cash distributions recorded as reduction
            of investments in partnerships                  $   123,746       $        --        $   123,746
                                                            ===========       ===========        ===========

          Cash distributions recorded as income             $        --       $   477,863        $   477,863

          Partnership's share of Local Partnership
            net income                                          257,079                --            257,079
                                                            -----------       -----------        -----------

          Share of income from partnerships                 $   257,079       $   477,863        $   734,942
                                                            ===========       ===========        ===========
</TABLE>


          (1)  Includes  information for Briar Crest I and Briar Crest II, which
               were  sold  in  November  2004.  (2)  Does  not  include  a  late
               distribution in the amount of $59,899, received in May 2004, from
               Highland Manor which was transferred January 2, 2004.

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

                                     III-21

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

<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 (2)        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.

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

     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.

                                     III-23

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.   INVESTMENTS IN PARTNERSHIPS - Continued

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

                                                       For the years ended
                                                            December 31,
                                                    -------------------------
                                                        2004          2003
                                                    ----------     ----------

          Financial statement net loss              $ (325,119)    $  (88,125)

          Differences between financial statement
            and tax depreciation, amortization,
            and miscellaneous differences            1,880,524      2,294,152
                                                    ----------     ----------

          Taxable income                            $1,555,405     $2,206,027
                                                    ==========     ==========


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,
2004 and 2003, the Partnership paid $180,932 and $229,726,  respectively, to the
Managing General Partner as direct  reimbursement of expenses incurred on behalf
of the  Partnership.  Such  expenses are included in general and  administrative
expenses in the accompanying consolidated statements of operations.

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

     (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, 2004 and 2003, the Partnership paid the
Managing General Partner a Management Fee of $300,000.

                                     III-24

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3.   RELATED PARTY TRANSACTIONS - Continued

     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. In accordance with the terms of the Partnership Agreement,  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  partnerships.  In accordance  with the terms of the  Partnership
Agreement,  in November 2004 the Managing General Partner was paid a disposition
fee of $88,899 related to the sale of the Partnership's interests in Briar Crest
I and Briar Crest II.


4.   PARTNERSHIP PROFITS AND LOSSES, AND DISTRIBUTIONS

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

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

                                     III-25

<PAGE>
                CAPITAL REALTY INVESTORS-III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4.   PARTNERSHIP PROFITS AND LOSSES AND DISTRIBUTIONS - Continued

     (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
sale 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 sale 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. In accordance with the terms of the Partnership Agreement,  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  partnerships.  In accordance  with the terms of the  Partnership
Agreement,  in November 2004 the Managing General Partner was paid a disposition
fee of $88,899 related to the sale of the Partnership's interests in Briar Crest
I and Briar Crest II.

     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
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 and Initial
and Special Limited  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. On December 15, 2004, the  Partnership  made a cash  distribution of
$3,053,982  ($51 per unit) to  Additional  Limited  Partners who were holders of
record as of November 1, 2004, and a cash distribution of $40,744 to the General
Partners and Initial and Special Limited Partners. The distribution consisted of
cash  resources   accumulated  from  operations  and  distributions  from  Local
Partnerships,  and of  proceeds  received  from  the  sale of the  Partnership's
interests in Briar Crest I and Briar Crest II.

                                     III-26

<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, 2004 and 2003.  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,
                                                                     ----------------------------
                                                                        2004              2003
                                                                     ----------        ----------
<S>                                                                  <C>               <C>
Financial statement net income                                       $4,445,721        $3,731,186

Adjustments:
  Differences between financial statement net income
   and taxable income related to the Partnership's equity
   in the Local Partnerships' income or losses                        1,471,638         5,621,466

  Differences between financial statement gain and taxable gain
    from the sale or transfer of properties                             967,088                --

  Costs amortized over a shorter period for income tax purposes          25,825            32,085
                                                                     ----------        ----------

Taxable income                                                       $6,910,272        $9,384,737
                                                                     ==========        ==========
</TABLE>

                                      # # #


                                     III-27

<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.