<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K
                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended     December 31, 1995
                              -----------------
Commission file number             1-12034
                              -----------------

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
--------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

               Delaware                                52-1551450
-----------------------------------------         ---------------------
     (State or other jurisdiction of                (I.R.S. Employer
     incorporation or organization)                Identification No.)

11200 Rockville Pike, Rockville, Maryland                 20852
-----------------------------------------         ---------------------
(Address of principal executive offices)                (Zip Code)

(Registrant's telephone number, including area code)     (301) 468-9200
                                                       ------------------
Securities registered pursuant to Section 12(b) of the Act:

                                                  Name of each exchange
     Title of each class                           on which registered
---------------------------------            -----------------------------
Beneficial Assignee Certificates                 American Stock Exchange

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

                                      NONE
--------------------------------------------------------------------------
                                (Title of class)

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

     As of March 15, 1996, 5,258,268 Series A Beneficial Assignee Certificates
(BACs) were outstanding and the aggregate market value of such BACs held by non-
affiliates of the Registrant on such date was $72,259,935.

                       DOCUMENTS INCORPORATED BY REFERENCE

 Form 10-K Parts                                  Document
------------------                 ---------------------------------------
I, II, III and IV                  1995 Annual Report to BAC Holders
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                         1995 ANNUAL REPORT ON FORM 10-K

                                TABLE OF CONTENTS

                                     PART I
                                     ------

                                                                   Page
                                                                   ----

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


                                     PART II
                                     -------

Item 5.   Market for the Registrant's Partnership
            Interests and Related Partnership Matters . . . .      II-1
Item 6.   Selected Financial Data . . . . . . . . . . . . . .      II-1
Item 7.   Management's Discussion and Analysis
            of Financial Condition and Results
            of Operations . . . . . . . . . . . . . . . . . .      II-1
Item 8.   Financial Statements and Supplementary Data . . . .      II-2
Item 9.   Changes in and Disagreements with Accountants
            on Accounting and Financial Disclosure  . . . . .      II-2


                                    PART III
                                    --------

Item 10.  Directors and Executive Officers
            of the Registrant . . . . . . . . . . . . . . . .      III-1
Item 11.  Executive Compensation  . . . . . . . . . . . . . .      III-2
Item 12.  Security Ownership of Certain Beneficial
            Owners and Management . . . . . . . . . . . . . .      III-3
Item 13.  Certain Relationships and Related Transactions  . .      III-4


                                     PART IV
                                     -------

Item 14.  Exhibits, Financial Statement Schedules and
            Reports on Form 8-K . . . . . . . . . . . . . . .      IV-1

Signatures  . . .   . . . . . . . . . . . . . . . . . . . . .      IV-3

Cross Reference Sheet . . . . . . . . . . . . . . . . . . . .      IV-4

Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . .      IV-5
<PAGE>

                                     PART I
                                     ------

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

     Development and Description of Business
     ---------------------------------------

          Information concerning the business of Capital Realty Investors Tax
     Exempt Fund III Limited Partnership (the Partnership) is contained in the
     1995 Annual Report to BAC Holders which contains Management's Discussion
     and Analysis of Financial Condition and Results of Operations and Notes 1,
     5 and 7 of the notes to consolidated financial statements.  The Annual
     Report is contained in Part IV (filed in response to Item 8 hereof), which
     is incorporated herein by reference.

     Employees
     ---------

          The Partnership has no employees.  Services are performed for the
     Partnership by affiliates of the General Partner and agents retained by
     them.

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

          Information concerning the properties of the Partnership is contained
     in the 1995 Annual Report to BAC Holders which contains Management's
     Discussion and Analysis of Financial Condition and Results of Operations
     and Notes 1 and 5 of the notes to consolidated financial statements.  The
     Annual Report is contained in Part IV (filed in response to Item 8 hereof),
     which is incorporated herein by reference.

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

          Reference is made to Note 8 of the notes to consolidated financial
     statements on page 55 of the 1995 Annual Report to BAC Holders, which is
     incorporated herein by reference.

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 1995.

















                                       I-1
<PAGE>
                                     PART II
                                    --------

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

     (a)  Market information.

          Reference is made to the Selected Financial Data on pages 1 through 3
     of the 1995 Annual Report to BAC Holders which is incorporated herein by
     reference.

     (b)  Number of Security Holders.

          As of March 15, 1996, there were approximately 6,200 registered
     holders of BACs in the Partnership.

     (c)  Distributions.

          Reference is made to the Selected Financial Data on pages 1 through 3
     of the 1995 Annual Report to BAC Holders which is incorporated herein by
     reference.

          See Management's Discussion and Analysis of Financial Condition and
     Results of Operations contained in the 1995 Annual Report to BAC Holders,
     which is incorporated herein by reference, for information regarding the
     sources of funds used for cash distributions and for a discussion of
     factors which may affect the Partnership's ability to maintain cash
     distributions at current levels.

ITEM 6.   SELECTED FINANCIAL DATA
          -----------------------

          Reference is made to Selected Financial Data on pages 1 through 3 of
     the 1995 Annual Report to BAC Holders, which is incorporated herein by
     reference.


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

          Reference is made to Management's Discussion and Analysis of Financial
     Condition and Results of Operations on pages 4 through 24 of the 1995
     Annual Report to BAC Holders, which is incorporated herein by reference.
















                                      II-1
<PAGE>
                                     PART II
                                     -------

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
          -------------------------------------------

          Reference is made to pages 25 through 29 of the 1995 Annual Report to
     BAC Holders for the financial statements of the registrant, which are
     incorporated herein by reference.  See also Item 14 of this report for
     information concerning financial statements and financial statement
     schedules.

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

     None.














































                                      II-2
<PAGE>
                                    PART III
                                    --------

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

(a), (b) and
  (c)          The Partnership has no directors, executive officers or
               significant employees of its own.
(a), (b), (c)
  and (e)      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, are as follows:

William B. Dockser, 59, has been the Chairman of the Board of CRI and a Director
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 a
number of publicly held limited partnerships created to invest in low and
moderate income multifamily apartment complexes.  For a period of 2-1/2 years
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
Washington, Mr. Dockser was a practicing attorney in Boston and also was a
special Assistant Attorney General for the Commonwealth of Massachusetts.  He
holds a Bachelor of Laws degree from Yale University Law School and a Bachelor
of Arts degree, cum laude, from Harvard University.  He is also Chairman of the
Board of CRIIMI MAE Inc., CRIIMI, Inc. and CRI Liquidating REIT, Inc.

H. William Willoughby, 49, President, Secretary and a Director of CRI since
January 1990 and 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 & Company.  He holds a Juris Doctorate degree, a Master of
Business Administration degree and a Bachelor of Science degree in Business
Administration from the University of South Dakota.  He is also a Director and
executive officer of CRIIMI MAE Inc., CRIIMI, Inc. and CRI Liquidating REIT,
Inc.

Richard J. Palmer, 44, Senior Vice President-Chief Financial Officer. Prior to
joining CRI in 1983 as Director of Tax Policy, he was a Tax Manager at Grant
Thornton (formerly Alexander Grant & Company).  He also served in the Tax and
Audit Departments of Peat, Marwick, Main and Company (formerly Peat, Marwick,
Mitchell and Company) prior to his seven years at Grant Thornton.  He holds a
Bachelor of Business Administration degree from the Florida Atlantic University
and is also a Certified Public Accountant.















                                      III-1
<PAGE>
                                    PART III
                                    --------


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

Ronald W. Thompson, 49, Group Executive Vice President-Hotel Asset Management.
Prior to joining CRI in 1985, he was employed at the Hyatt Organization where he
most recently served as the General Manager of the Hyatt Regency in Flint,
Michigan.  During his nine year tenure with Hyatt, he held senior management
positions with the Hyatt Regency in Dearborn, Michigan, the Hyatt in Richmond,
Virginia, the Hyatt in Winston-Salem, North Carolina and the Hyatt Regency in
Atlanta, Georgia.  Before joining Hyatt, Mr. Thompson worked in London, England
for the English Tourist Board as well as holding management positions in Europe,
Australia, and New Zealand in the hotel industry.  Mr. Thompson received his
education in England where he received a business degree in Hotel Administration
from Winston College.

Susan R. Campbell, 37, Senior Vice President-CRI Realty Services.  Prior to
joining CRI in March 1985, she was a budget analyst for the B. F. Saul Advisory
Company.  She holds a Bachelor of Science degree in General Business from the
University of Maryland.

Melissa Cecil Lackey, 40, Senior Vice President and General Counsel.  Prior to
joining CRI in 1990, she was associated with the firms of Zuckerman, Spaeder,
Goldstein, Taylor & Kolker in Washington, D.C. and Hirsch & Westheimer in
Houston, Texas.  She holds a Juris Doctorate from the University of Virginia
School of Law and a Bachelor of Arts degree from the College of William & Mary.

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

     (f)  Involvement in certain legal proceedings.

          None.

     (g)  Promoters and control persons.

          Not applicable.

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

     (a), (b), (c) and (d)

          The Partnership has no officers or directors.  However, in accordance
     with the Partnership Agreement and as disclosed in the Partnership's
     Registration Statement on Form S-11, as amended, various kinds of
     compensation and fees are payable or were paid to the General Partner
     and/or its affiliates.  Additional information required in these sections
     is included in Notes 3 and 4 to the financial statements contained in Part
     IV (filed in response to Item 8 hereof), which are incorporated herein by
     reference.

     (e)  Termination of employment and change in control arrangement.

          None.






                                      III-2
<PAGE>
                                    PART III
                                    --------

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

     (a)  Security ownership of certain beneficial owners

          No person or "group", as that term is used in Section 13(d)(3) of the
     Securities Exchange Act of 1934, is known by the Partnership to be the
     beneficial owner of more than 5% of the issued and outstanding BACs as of
     December 31, 1995.

     (b)  Security ownership of management

          The following table sets forth certain information concerning all BACs
     beneficially owned, as of March 15, 1996, by each director and by all
     directors and officers as a group of the managing general partner of the
     Partnership's General Partner.  The voting and investment powers for the
     BACs listed are held solely by the named beneficial owner.  The General
     Partner, which controls the day-to-day operations of the Partnership, is a
     limited partnership whose managing general partner is CRI.  Mr. Dockser and
     Mr. Willoughby control CRI.

<TABLE>
<CAPTION>

    Name of                        Amount and Nature        % of total
Beneficial Owner                of Beneficial Ownership     BACs issued
----------------                -----------------------     -----------
<S>                             <C>                         <C>
William B. Dockser                       500 BACs               0.01%
H. William Willoughby                      None                 0.00%
All Directors and Officers
  as a Group (6 persons)                2,500 BACs              0.05%

</TABLE>

     (c)  Changes in control.

          There exists no arrangement known to the Partnership, the operation of
     which may at a subsequent date result in a change in control of the
     Partnership, with the exception of the merger agreement with an affiliate
     of Capital Apartment Properties, Inc., as discussed in Management's
     Discussion and Analysis of Financial Condition and Results of Operations
     and Note 7 of the notes to consolidated financial statements, which are
     incorporated herein by reference.  There is a provision in the Limited
     Partnership Agreement which allows, under certain circumstances, the
     ability to change control.













                                      III-3
<PAGE>
                                    PART III
                                    --------

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
          ----------------------------------------------

     (a)  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 General Partner of the Partnership
     other than any indirect interest such officers and directors may have (i)
     in the amounts paid to the General Partner or its affiliates by virtue of
     their stock ownership in CRI, as disclosed in Part IV, Item 14, in Note 3
     of the notes to consolidated financial statements, which is incorporated
     herein by reference; (ii) as shareholders in corporations that are partners
     in partnerships that hold title to properties, subject to the existing
     indebtedness, as a consequence of deeds in lieu of foreclosure from, or
     transfers of partnership interests in, former borrowers; and/or (iii) in
     the amounts paid to individual officers and directors of the General
     Partner with respect to distributions in connection with BACs held by such
     individuals.

          Nominee limited partnerships have been formed to take title to certain
     properties on which the original borrowers defaulted, subject to the
     existing indebtedness, rather than the Partnership taking title, in an
     effort to maintain the tax-exempt nature of the interest on the mortgage
     revenue bonds and to hold the properties until their ultimate disposition. 
     In the case of Geary Courtyard, nominee corporations of the Partnership
     assumed the partnership interests in the original borrower.  The nominee
     entities and the managing general partner of the General Partner of the
     Partnership have common ownership (except for Ethan's Glen IIA prior to
     March 14, 1996) and are under common control.  No compensation or fees were
     paid by the Partnership to the nominee entities or their principals in
     connection with the transfers of ownership.  Item 11 of this report, which
     contains a discussion of the fees and other compensation paid or accrued by
     the Partnership to the General Partner or its affiliates, is incorporated
     herein by reference.


         PROPERTY                      NOMINEE ENTITY
     -----------------   ----------------------------------------------

     Ethan's Glen IIA    CRICO of Ethan's II Limited Partnership
                         ---------------------------------------
                         General Partner: CRICO of Ethan's II, Inc.
                         Limited Partners: CRICO of Iona, Inc. and three
                           unrelated parties (the interest of which un-
                           related parties were terminated effective
                           March 14, 1996)

     Geary Courtyard     Geary Courtyard Associates
                         --------------------------
                         General Partner: CRICO of Geary Courtyard, Inc.
                         Limited Partner: CRICO Holdings, Inc.

     Regency Woods       CRICO of Regency Woods Limited Partnership
                         ------------------------------------------
                         General Partner: CRICO of Regency Woods, Inc.
                         Limited Partner: CRICO Holdings, Inc.




                                      III-4
<PAGE>
                                    PART III
                                    --------


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - Continued
          ----------------------------------------------


     Ocean Walk          CRICO of Ocean Walk Limited Partnership
                         ---------------------------------------
                         General Partner: CRICO of Ocean Walk, Inc.
                         Limited Partner: CRICO Holdings, Inc.

     Valley Creek II     CRICO of Valley Creek II Limited Partnership
                         --------------------------------------------
                         General Partner: CRICO of Valley Creek II, Inc.
                         Limited Partner: CRICO Minnesota Holdings, Inc.

     Woodlane Place      CRICO of Woodlane Place Limited Partnership
                         -------------------------------------------
                         General Partner: CRICO of Woodlane Place, Inc.
                         Limited Partner: CRICO Minnesota Holdings, Inc.

     (b)  Certain business relationships.

          The Partnership's response to Item 13(a) is incorporated herein by
     reference.  In addition, the Partnership has no business relationship with
     entities of which the general partners of the General Partner of the
     Partnership are officers, directors or equity owners other than as set
     forth in the Partnership's response to Item 13(a).

     (c)  Indebtedness of management.

          None.

     (d)  Transactions with promoters.

          Not applicable.


























                                      III-5
<PAGE>
                                     PART IV
                                     -------

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
          ---------------------------------------------------
               ON FORM 8-K
               -----------

     (a)  List of documents filed as part of this report:

          (1)  Financial Statements                              Page(s)
               --------------------                              -------

               Reports of Independent Public Accountants         25

               Reports of Independent Public Accountants on
                 which Arthur Andersen & Co. placed
                 reliance in 1995, 1994 and 1993                 IV-6

               Consolidated Balance Sheets as of
                 December 31, 1995 and 1994                      26

               Consolidated Statements of Income for
                 the years ended December 31, 1995, 1994
                 and 1993                                        27

               Consolidated Statements of Changes in
                 Partners' Capital (Deficit) for the
                 years ended December 31, 1995, 1994 and
                 1993                                            28

               Consolidated Statements of Cash Flows for
                 the years ended December 31, 1995, 1994
                 and 1993                                        29

               Notes to Consolidated Financial Statements
                 which include the information required to
                 be included in Schedule III - Real Estate
                 and Accumulated Depreciation of
                 Properties (Note 5)                             30-59

          (2)  Financial Statement Schedules
               -----------------------------

                    All financial statement schedules are omitted since they are
               not required, are inapplicable, or the required information is
               included in the financial statements or notes thereto.

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

               Exhibit No. 3 - Articles of incorporation and bylaws

               a.   Certificate of Limited Partnership of Capital Realty
                    Investors Tax Exempt Fund III Limited Partnership. 
                    (Incorporated by reference from Exhibit 3 to the  Regis-
                    trant's Post-Effective Amendment No. 3, dated January 30,
                    1989, to the Registration Statement on Form S-11.)

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



                                      IV-1
<PAGE>
                                     PART IV
                                     -------


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
          ---------------------------------------------------
               ON FORM 8-K - Continued
               -----------

               a.   Agreement of Limited Partnership of Capital Realty Investors
                    Tax Exempt Fund III Limited Partnership.  (Incorporated by
                    reference from Exhibit 4 to the Registrant's Post-Effective
                    Amendment No. 3, dated January 30, 1989, to the Registration
                    Statement on Form S-11.)

               Exhibit No. 10 - Material contracts

               a.   Beneficial Assignee Certificate.  (Incorporated by reference
                    from Exhibit 10A to the Registrant's Post-Effective
                    Amendment No. 1, dated February 1, 1988, to the Registration
                    Statement on Form S-11.)

               b.   Amended and Restated Agreement and Plan of Merger, dated as
                    of March 14, 1996.  (Incorporated by reference from Appendix
                    A-1 to the Registrant's Preliminary Proxy Statement Pursuant
                    to Section 14(a) of the Securities and Exchange Act of 1934
                    filed March 18, 1996.)

               Exhibit No. 13 - Annual Report to security holders, Form 10-Q or
               quarterly report to security holders

               a.   1995 Annual Report to BAC Holders.

               Exhibit No. 27 - Financial Data Schedule

     (b)  Report on Form 8-K
          ------------------

          No Reports on Form 8-K were filed with the Commission during the
          quarter ended December 31, 1995.

     (c)  Exhibits
          --------

          This list of Exhibits required by Item 601 of Regulation S-K is
          included in Item (a)(3) above.

     (d)  Financial Statement Schedules
          -----------------------------

          See (a)(1) and (2) above.













                                      IV-2
<PAGE>


                                   SIGNATURES
                                   ----------

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                   Capital Realty Investors Tax Exempt
                                     Fund III Limited Partnership

                                   By:  CRITEF III Associates Limited
                                          Partnership, General Partner

                                   By:  C.R.I., Inc., General Partner



March 27, 1996                     /s/ William B. Dockser
-------------------                ------------------------------------
DATE                               William B. Dockser, Director
                                   Chairman of the Board,
                                     Treasurer and Principal
                                     Executive Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, 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 27, 1996                     /s/ H. William Willoughby
-------------------                ------------------------------------
DATE                               H. William Willoughby
                                   Director, President and Secretary



March 27, 1996                     /s/ Richard J. Palmer
-------------------                ------------------------------------
DATE                               Richard J. Palmer
                                   Senior Vice President,
                                   Chief Financial Officer,
                                   Principal Financial and
                                     Principal Accounting Officer



















                                      IV-3
<PAGE>


                              CROSS REFERENCE SHEET

     The item numbers and captions in Parts I, II, III and IV hereof and the
page and/or pages in the referenced materials where the corresponding
information appears are as follows:

Item                                 Reference Materials         Pages
----                                 -------------------     -------------

3.   Legal Proceedings               1995 Annual Report      55 through 59

5.   Market for the Registrant's     1995 Annual Report      1 through 3
     Partnership Interests and
     Related Partnership Matters

6.   Selected Financial Data         1995 Annual Report      1 through 3

7.   Management's Discussion and     1995 Annual Report      4 through 24
     Analysis of Financial 
     Condition and Results of
     Operations

8.   Financial Statements and        1995 Annual Report      25 through 29
     Supplementary Data


14.  Exhibits, Financial Statement   1995 Annual Report      25 through 59
     Schedules, and Reports on
     Form 8-K

































                                      IV-4
<PAGE>

                                  EXHIBIT INDEX


Exhibit                                                  Page
-------                                      ----------------------------

(13)   Annual Report to BAC Holders          1 through 59

(27)   Financial Data Schedule               Filed herewith electronically






















































                                      IV-5
<PAGE>

















                          Independent Auditor's Report
                          ----------------------------

To the Partners
Investment VII, Ltd.,
d/b/a Washington Ridge Apartments
Birmingham, Alabama

     We have audited the accompanying balance sheet of Investment VII, Ltd.,
d/b/a Washington Ridge Apartments, as of December 31, 1995, and the related
statements of profit and loss, changes in partners' equity, and cash flows for
the year then ended.  These financial statements are the responsibility of the
project's management.  Our responsibility is to express an opinion on these
financial statements based on our audit.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Investment VII, Ltd., d/b/a
Washington Ridge Apartments as of December 31, 1995, and the results of its
operations and the changes in partners' equity and cash flows for the year then
ended in conformity with generally accepted accounting principles.



BROWDER & ASSOCIATES, P.C.

January 30, 1996












                                      IV-6
<PAGE>

















                          Independent Auditor's Report
                          ----------------------------

To the Partners
Investment VII, Ltd.,
d/b/a Washington Ridge Apartments
Birmingham, Alabama

     We have audited the accompanying balance sheet of Investment VII, Ltd.,
d/b/a Washington Ridge Apartments, as of December 31, 1994, and the related
statements of income and expense, changes in partners' equity, and cash flows
for the year then ended.  These financial statements are the responsibility of
the project's management.  Our responsibility is to express an opinion on these
financial statements based on our audit.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Investment VII, Ltd., d/b/a
Washington Ridge Apartments as of December 31, 1994, and the results of its
operations and the changes in partners' equity and cash flows for the year then
ended in conformity with generally accepted accounting principles.



BROWDER & ASSOCIATES, P.C.

January 10, 1995












                                      IV-7
<PAGE>

















                          Independent Auditor's Report
                          ----------------------------

To the Partners
Investment VII, Ltd.,
d/b/a Washington Ridge Apartments
Birmingham, Alabama

     We have audited the accompanying balance sheet of Investment VII, Ltd.,
d/b/a Washington Ridge Apartments, as of December 31, 1993, and the related
statements of income and expense, changes in partners' equity, and cash flows
for the year then ended.  These financial statements are the responsibility of
the project's management.  Our responsibility is to express an opinion on these
financial statements based on our audit.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Investment VII, Ltd., d/b/a
Washington Ridge Apartments as of December 31, 1993, and the results of its
operations and the changes in partners' equity and cash flows for the year then
ended in conformity with generally accepted accounting principles.



BROWDER & ASSOCIATES, P.C.

February 7, 1994












                                      IV-8
<PAGE>








                          Independent Auditors' Report
                          ----------------------------

To Partners
Regency Woods Limited Partnership
Wichita, Kansas

     We have audited the accompanying balance sheets of Regency Woods Limited
Partnership as of December 31, 1994 and 1993, and the related statements of loss
and partners' deficit and cash flows for the years then ended.  These financial
statements are the responsibility of the Partnerships' management.  Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Regency Woods Limited
Partnership as of December 31, 1994 and 1993, and the results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles.

     Our audit was conducted for the purpose of forming an opinion on the
financial statements taken as a whole.  The supporting information included in
the report (shown on pages 10 through 13) are presented for the purpose of
additional analysis and are not a required part of the basic financial
statements of Regency Woods Limited Partnership.  Such information has been
subjected to the auditing procedures applied in the audit of the basis financial
statements and, in our opinion, is fairly presented in all material respects in
relation to the financial statements taken as a whole.

     The accompanying financial statements have been prepared assuming that the
partnership will continue as a going concern.  As discussed in Note 7 to the
financial statements, the Partnership defaulted on it's mortgage debt raising
doubts about its ability to continue as a going concern.  The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.


                                        Peterson, Peterson & Goss, L.C.


January 13, 1995






                                      IV-9
<PAGE>




























        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP


                        1995 ANNUAL REPORT TO BAC HOLDERS
<PAGE>

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP


SELECTED FINANCIAL DATA
-----------------------

Financial Highlights
--------------------

<TABLE>
<CAPTION>

                                                                     For the years ended December 31,
                                               1995            1994 (3)         1993             1992            1991
                                           ------------     ------------    ------------     ------------    ------------
<S>                                        <C>              <C>             <C>              <C>             <C>
Net rental income (1)                      $  3,393,314     $  3,429,900    $  2,822,609     $  2,198,325    $  1,067,970
Interest income from:
  Mortgage revenue bonds and working
    capital loans (2)                           876,359               --              --               --         769,025
Income from investment in mortgage
  revenue bonds and working capital
  loan                                               --               --              --               --         989,152
Other income (expenses)                        (541,312)        (173,586)       (230,847)          50,411         (19,760)
Valuation adjustment on investment in
  real estate (1)                                    --               --              --               --        (373,637)
                                           ------------     ------------    ------------     ------------    ------------
Net income                                 $  3,728,361     $  3,256,314    $  2,591,762     $  2,248,736    $  2,432,750
                                           ============     ============    ============     ============    ============

Net income allocated to
  BAC Holders (98.99%)                     $  3,690,705     $  3,223,425    $  2,565,585     $  2,226,024    $  2,408,179
                                           ============     ============    ============     ============    ============

Net income per BAC outstanding             $       0.70     $       0.61    $       0.49     $       0.42    $       0.46
                                           ============     ============    ============     ============    ============
Total cash distribution per
  BAC outstanding                          $      1.20      $       1.63    $       1.63     $       1.63    $       1.87
                                           ============     ============    ============     ============    ============

Number of BACs outstanding                    5,258,268        5,258,268       5,258,268        5,258,268       5,258,268
                                           ============     ============    ============     ============    ============

Investment in real estate, before
  accumulated depreciation(1)              $ 82,190,763     $ 82,123,975    $ 91,576,714     $ 91,576,714    $ 91,576,714
                                           ============     ============    ============     ============    ============
Investment in real estate, before
  accumulated depreciation, per
  BAC outstanding                          $      15.47     $      15.46    $      17.24     $      17.24    $      17.24
                                           ============     ============    ============     ============    ============
Investment in mortgage revenue bonds
  and working capital loans(1)             $  8,254,707     $  8,254,707    $         --     $         --    $         --
                                           ============     ============    ============     ============    ============

Total assets                               $ 84,708,344     $ 87,296,032    $ 92,296,205     $ 97,929,180    $102,798,278
                                           ============     ============    ============     ============    ============

Total assets per BAC outstanding           $      15.95     $      16.50    $      17.38     $      18.44    $      19.35
                                           ============     ============    ============     ============    ============

</TABLE>


                                                                 -1-
<PAGE>

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP


SELECTED FINANCIAL DATA - Continued
-----------------------

Financial Highlights - Continued
--------------------

<TABLE>
<CAPTION>

                                                                     For the years ended December 31,
                                               1995            1994 (3)         1993             1992            1991
                                           ------------     ------------    ------------     ------------    ------------
<S>                                        <C>              <C>             <C>              <C>             <C>

Net assets                                 $ 78,830,457     $ 81,476,398    $ 86,878,511     $ 92,918,617    $ 99,301,738
                                           ============     ============    ============     ============    ============

Net assets per BAC outstanding             $      14.84     $      15.34    $      16.36     $      17.49    $      18.69
                                           ============     ============    ============     ============    ============

</TABLE>

(1)  Certain properties collateralizing the mortgage revenue bonds have been
     transferred by deed in lieu of foreclosure to nominees of the Partnership,
     subject to existing indebtedness, or considered in-substance foreclosed
     (ISF), generally as a result of defaults of the borrowers.  As a result,
     the Partnership has accounted for these investments as investments in real
     estate for financial statement purposes.  The Partnership recorded
     valuation adjustments representing the lower of (a) the carrying value of
     the loan and related accrued interest or (b) the estimated fair value of
     the property and other net assets of the property acquired in settlement of
     loans or in-substance foreclosed at the earlier of acquisition, development
     or construction (ADC) determination, transfer of the deed or when
     considered ISF. The valuation adjustments and the financial statement
     presentation are independent of the characterization of the bonds as loans
     for federal income tax purposes and the tax-exempt nature of the mortgage
     revenue bond interest. A reconciliation of the major differences between
     the financial statement net income and the municipal income for federal
     income tax purposes is contained in Note 6 to consolidated financial
     statements.

(2)  Effective December 31, 1994, the Partnership reclassified its investment in
     Paces River 2 from real estate to a mortgage revenue bond and working
     capital loan, as further discussed in Management's Discussion and Analysis
     of Financial Condition and Results of Operations.

(3)  Certain amounts have been reclassified to conform to 1995 presentation.


Market Data
-----------

     On July 1, 1993, the General Partner listed the BACs on the American Stock
Exchange with a trading symbol of CRL.  As of December 31, 1995, there were
5,258,268 BACs issued and outstanding.  The following table sets forth the high
and low closing sales price and the distributions per BAC during the periods
indicated:



                                                                 -2-
<PAGE>

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP


SELECTED FINANCIAL DATA - Continued
-----------------------

<TABLE>
<CAPTION>
                                             1995
                          ------------------------------------------
                                Sales Price
                          ---------------------        Distributions
Quarter Ended               High          Low             per BAC
------------------        -------       -------        -------------
<S>                       <C>           <C>            <C>
March 31                  $12 1/4       $10 1/4          $    0.30
June 30                    12 3/4        11 3/4               0.30
September 30               14            11 5/8               0.30
December 31                13 3/4        13 1/8               0.30
                                                         ---------
                                                         $    1.20
                                                         =========
</TABLE>

<TABLE>
<CAPTION>
                                             1994
                          ------------------------------------------
                                Sales Price
                          ---------------------        Distributions
Quarter Ended               High          Low             per BAC
------------------        -------       -------        -------------
<S>                       <C>           <C>            <C>
March 31                  $13 3/8       $11 1/4          $    0.40
June 30                    12 3/4        11 3/4               0.41   
September 30               12 3/8        10 5/8               0.41
December 31                10 7/8         9 1/4               0.41
                                                         ---------
                                                         $    1.63
                                                         =========
</TABLE>

<TABLE>
<CAPTION>
                                             1993
                          ------------------------------------------
                                Sales Price
                          ---------------------        Distributions
Quarter Ended               High          Low             per BAC
------------------        -------       -------        -------------
<S>                       <C>           <C>            <C>
March 31                    N/A           N/A            $    0.40
June 30                     N/A           N/A                 0.41   
September 30              $15           $11 1/2               0.41
December 31                13 1/2        11 3/8               0.41
                                                         ---------
                                                         $    1.63
                                                         =========
</TABLE>




                                       -3-
<PAGE>

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP


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

                                    Business
                                    --------

     Capital Realty Investors Tax Exempt Fund III Limited Partnership (the
Partnership) was organized on September 1, 1987 under the Delaware Revised
Uniform Limited Partnership Act and will continue until December 31, 2017,
unless dissolved earlier in accordance with the Agreement of Limited
Partnership.  The Partnership was formed to acquire a portfolio of tax-exempt
mortgage revenue bonds, issued by various state or local governments or their
agencies or authorities and collateralized by non-recourse participating first
mortgage loans on multifamily residential developments. Additionally, the
Partnership was permitted to use up to 5% of its gross offering proceeds to make
taxable working capital loans to borrowers to cover certain expenses which could
not be financed from the proceeds of the mortgage revenue bonds.

     The Partnership commenced a public offering of Series A Beneficial Assignee
Certificates (BACs) representing assignment of limited partnership interests in
February 1988.  As provided in the original offering, the Partnership could
issue BACs in additional series at the discretion of the General Partner.  As of
December 31, 1995, 5,258,268 Series A BACs had been sold, representing total
capital contributions of $131,456,700.

     On July 1, 1993, the General Partner listed the BACs on the American Stock
Exchange (AMEX) with a trading symbol of CRL.  The General Partner believes that
the benefits to BAC Holders from listing the BACs on AMEX include increased
liquidity and reduced transaction costs.  However, a publicly traded partnership
is treated as a corporation for income tax purposes unless it meets certain
exceptions.  In 1995, 1994 and 1993, the Partnership met these exceptions and
was not taxed as a corporation.

     The Partnership's objectives have been to:  (1) provide quarterly cash
distributions that will be exempt from regular federal income tax from base
interest on the mortgage revenue bonds; (2) provide additional cash
distributions that will be exempt from regular federal income tax from payments
of contingent interest on the mortgage revenue bonds which will be determined
(a) on the basis of the cash flow of the mortgaged properties, or (b) to the
extent that cash flow is not sufficient to provide for the current payment of
the maximum amount of contingent interest, on the basis of either (i) the net
proceeds resulting from the sale of the mortgaged properties or (ii) the
appraised value of the mortgaged properties upon repayment of the mortgage loans
or remarketing of the mortgage revenue bonds; (3) in certain circumstances,
provide additional taxable cash distributions from payments of interest on the
working capital loans; and (4) preserve and protect the Partnership's capital. 
As of December 31, 1995, six of the eight properties securing the loans have
been taken control of by nominees of the Partnership through deed in lieu of
foreclosure or through transfer of partnership interests of the borrower (in the
case of Geary Courtyard), subject to existing indebtedness, which resulted in
significant valuation adjustments to the carrying values of these properties
during 1991 and 1990.  Although the Partnership will use diligent efforts to
recover its investment, it is probable that the full amount of BAC Holder
invested capital may not be recoverable on most of the bonds through net sale or
refinancing proceeds as originally anticipated at the time of the BAC offerings.
Consequently, it may be advisable, with BAC Holder consent, to hold certain of
the properties beyond the maturity dates of the mortgage loans (1999 through

                                       -4-
<PAGE>

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP


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

2000).  Due to proposed Internal Revenue Service (IRS) regulations, the General
Partner cannot be sure at this time how long the mortgage loans could be
extended without triggering a deemed reissuance of the mortgage revenue bonds
for federal income tax purposes.  If an extension of the mortgage loan maturity
dates is a deemed reissuance, it would most likely result in the loss of the
tax-exempt status of the mortgage revenue bonds.

     Base interest income on the mortgage loans is funded from property
operations, certain borrowers' operating deficit guarantees, and reserves, if
any, established at the time of closing on the acquisition of the mortgage
revenue bonds.  If base interest payments cannot be fully satisfied, the General
Partner evaluates various courses of action, including sale, recapitalization,
loan modification, deed in lieu of foreclosure or foreclosure.

     A description of the portfolio securing the mortgage revenue bonds and
working capital loans held by the Partnership is as follows:







































                                       -5-
<PAGE>

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP


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

<TABLE>
<CAPTION>

                    Investment Information                                          Mortgage Information
-----------------------------------------------------------------      -------------------------------------------
                                                                        Permanent
                                                         Date of           Loan                              Loan
                                      No. of         Acquisition or    Origination                         Maturity
 Name and Location                 Rental Units       Construction         Date         Face Amount          Date
--------------------               ------------      --------------    ------------    --------------     ----------
<S>                                <C>               <C>               <C>             <C>                <C>
Mortgage Revenue Bond and
  Working Capital Loan
-------------------------
PACES RIVER 2
  ROCK HILL, SC (2,4)                  230                  --            7/28/88       $  9,600,000       2/02/2000

Real Estate
-----------
ETHAN'S GLEN IIA
  KANSAS CITY, MO (1)                  242                2/88            8/18/88         10,525,000       3/31/2000
GEARY COURTYARD
  SAN FRANCISCO, CA (1,2)              164                2/89            8/18/88         18,900,000       9/01/2000
OCEAN WALK
  KEY WEST, FL (1)                     296                1/89            1/27/89         19,826,000       4/01/2000
REGENCY WOODS
  WEST DES MOINES, IA (1,2)            200                1/90            1/29/90          7,559,604       2/01/2000
VALLEY CREEK II
  WOODBURY, MN (1)                     177                5/89            2/21/89         10,100,000       7/01/2000
WASHINGTON RIDGE
  KNOXVILLE, TN (3)                    248                9/90           12/14/88         10,000,000       7/01/2000
WOODLANE PLACE
  WOODBURY, MN (1)                     216                2/88            9/16/88         14,000,000      11/01/1999
                                     -----                                              ------------
                                     1,773                                              $100,510,604
                                     =====                                              ============
</TABLE>


















                                                                 -6-
<PAGE>

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP


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

<TABLE>
<CAPTION>
                                                           Real Estate Information
                                   ------------------------------------------------------------------------------------------------
                                   Commencement                         Buildings       Carrying
                                        of                                and           Amount of
                                    Real Estate                         Personal       Investments
  Name of Location                  Accounting          Land            Property       at 12/31/95
--------------------               -------------     -----------       -----------     -----------
<S>                                <C>               <C>               <C>             <C>
ETHAN'S GLEN IIA
  KANSAS CITY, MO (1)                  4/15/90       $   887,222       $ 8,943,985     $ 9,831,207
GEARY COURTYARD
  SAN FRANCISCO, CA (1,2)             12/31/90         2,679,666        16,716,243      19,395,909
OCEAN WALK
  KEY WEST, FL (1)                     9/30/91         3,580,530        13,387,656      16,968,186
REGENCY WOODS
  WEST DES MOINES, IA (1,2)           12/31/91           552,938         6,382,591       6,935,529
VALLEY CREEK II
  WOODBURY, MN (1)                    12/31/90           107,964         8,416,883       8,524,847
WASHINGTON RIDGE
  KNOXVILLE, TN (3)                   12/31/91         1,697,677         6,492,192       8,189,869
WOODLANE PLACE
  WOODBURY, MN (1)                    12/31/90           722,059        11,623,157      12,345,216
                                                     -----------       -----------     -----------
                                                     $10,228,056       $71,962,707      82,190,763
                                                     ===========       ===========

                            Less: Accumulated depreciation as of December 31, 1995     (14,171,745)
                                                                                       -----------
                                                                                       $68,019,018
                                                                                       ===========
</TABLE>

(1)  As discussed herein and in Notes 2 and 5 of the notes to consolidated
     financial statements, as of December 31, 1995, these properties are
     accounted for as real estate due to deeds in lieu of foreclosure or other
     transfers.

(2)  The amount listed under face amount of mortgage includes both the first
     lien tax-exempt loan and the second lien working capital loan.

(3)  This loan has the characteristics of real estate and, therefore, is
     accounted for as such in accordance with the policy discussed in Note 2 of
     the notes to consolidated financial statements.

(4)  As discussed herein, effective December 31, 1994, the Paces River 2
     investment is accounted for as an investment in mortgage revenue bond and
     working capital loan in the aggregate amount of $8,254,707.

     As illustrated in the table below, as of December 31, 1995, the Partnership
accounts for all of its investments in mortgage revenue bonds and working
capital loans, except Paces River 2, as real estate for financial statement
purposes due to the receipt by nominees of the Partnership of deeds in lieu of

                                                                 -7-
<PAGE>

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP


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

foreclosure or transfer of partnership interests or in accordance with the AICPA
Notice of Practitioners-ADC Arrangements.





















































                                       -8-
<PAGE>

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP


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

<TABLE>
<CAPTION>
                                                                                              Change in
                                                                                              Management
                           Depletion of             Commencement                              Company to
                           Borrower and                  of              Date of           Affiliate of the
Name of Investment         Debt Service              Real Estate      Deed in Lieu           Partnerships
 Rental Property           Reserves (1)              Accounting        or Transfer        through 1/31/94(2)
------------------         ------------             ------------      -------------       ------------------
<S>                        <C>                      <C>               <C>                 <C>
Ethan's Glen IIA               1993                   4/15/90           4/15/90(3)              6/01/92
Geary Courtyard                1991                  12/31/90           6/30/93(4)                N/A
Ocean Walk                     1992                   9/30/91           3/16/93(5)             11/01/93
Paces River 2                  1992                  12/31/91(7)          N/A  (6)                N/A
Regency Woods                  1995                  12/31/91           2/28/95(8)                N/A
Valley Creek II                1993                  12/31/90           1/02/93                 7/01/92
Washington Ridge                N/A                  12/31/91             N/A  (9)                N/A
Woodlane Place                 1991                  12/31/90           1/02/92                10/01/91

</TABLE>

(1)  Due to the depletion of borrower and debt service reserves, base interest
     payments made to the Partnership are solely in the form of cash flow from
     property operations.

(2)  CRICO Management Corporation (CRICO) or CRICO Management of Minnesota, Inc.
     (CRICO Minnesota), affiliates of the General Partner, assumed property
     management responsibilities on the indicated dates.  On February 1, 1994,
     CRICO and CRICO Minnesota contributed their property management contracts
     and personnel to CAPREIT Residential Corporation (Residential). 
     Residential was formed by C.R.I., Inc. (CRI), the managing general partner
     of the General Partner, but on February 1, 1994, Residential was sold to AP
     CAPREIT, which is not currently owned or controlled by CRI and/or its
     affiliates.

(3)  During 1990, the nominee limited partnership holding Ethan's Glen IIA was
     expanded so that two unaffiliated individuals acquired a 98.99% interest in
     the nominee as limited partners in consideration for certain capital
     contributions, plus their undertaking to form an investor limited
     partnership to admit additional partners in exchange for further capital
     contributions.  In November 1991, the nominee partnership was further
     expanded to admit the investor partnership entity.  The unaffiliated
     investor limited partners are presently in default with respect to the pay-
     in schedule and their interests were terminated effective March 14, 1996.

(4)  In 1991, the Partnership entered into a workout agreement with the borrower
     pursuant to which the borrower would pay all cash flow to the Partnership,
     with certain agreed upon minimum performance goals.  The borrower, at that
     time, deposited a deed in lieu of foreclosure in escrow that would be
     recorded if the borrower defaulted under the workout or failed to cure all
     arrearages by June 1, 1992.  The borrower transferred its partnership
     interests in Geary Courtyard Associates, a California Limited Partnership,
     as a result of the default by the borrower on the loan workout agreement.


                                                                 -9-
<PAGE>

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP


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

(5)  A deed in lieu of foreclosure was obtained in exchange for a release of the
     General Partners' unsecured operating deficit guarantee.

(6)  In March 1993, the Partnership finalized a three-year workout agreement
     (the Workout) with the borrower.  The balance of the borrower's guarantee
     amount has been paid in full. The Workout required the borrower to pay the
     base interest on the tax-exempt loan in full on a monthly basis, while
     allowing all or a portion of the interest on the working capital loan to
     accrue (the amount adjusted annually).  Upon the occurrence of a monetary
     default during the term of the Workout, the Partnership could direct the
     release of the deed currently held in escrow to be recorded in lieu of
     foreclosure.  The borrower has complied with the terms of the Workout,
     which matured in March 1996.

(7)  Effective December 31, 1994, the Paces River 2 investment is accounted for
     as an investment in mortgage revenue bond and working capital loan, as
     discussed below.

(8)  Shortfalls in interest payments from Regency Woods were being paid from
     draws on a $250,000 irrevocable letter of credit.  The Partnership drew
     down the full amount remaining under the letter of credit in January 1995,
     resulting in the default by the borrower on the working capital loan.  The
     borrower transferred the property by deed in lieu of foreclosure to a
     nominee of the Partnership as of February 28, 1995.

(9)  The borrower is paying full debt service solely from property operations. 
     In the fourth quarter of 1994, the borrower informed the Partnership that
     the debt service coverage requirement had been met.  Upon review of
     documentation from the borrower's independent accounting firm, the General
     Partner released the operating deficit guarantee on March 30, 1995. 
     Contingent interest is being paid on a quarterly basis.  This investment is
     accounted for as real estate due to ADC determination.

     The Partnership invested in eight Federally tax-exempt mortgage revenue
bonds with an aggregate principal amount of $97,101,000 and made three working
capital loans with an aggregate principal amount of $3,409,604.  As of December
31, 1995, six properties collateralizing certain of the mortgage revenue bonds
have been transferred by deed in lieu of foreclosure (or by transfer of
partnership interests in the borrower entity) to nominees of the Partnership,
subject to existing indebtedness.  As a result, the Partnership accounts for
these investments as real estate for financial statement purposes. 
Additionally, the Partnership accounts for the Washington Ridge mortgage revenue
bond as real estate in accordance with the American Institute of Certified
Public Accountants (AICPA) Notice to Practitioners-ADC Arrangements. 
Accordingly, the consolidated balance sheets reflect these investments in the
amounts of $68,019,018 and $70,780,645 as of December 31, 1995 and 1994,
respectively, net of accumulated depreciation.  Additionally, the Partnership
accounts for the investment in the Paces River 2 mortgage revenue bond and
working capital loan as a security and a loan, respectively, with a combined
recorded investment of $8,254,707 as of December 31, 1995 and 1994, as discussed
below.

     In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 115 "Accounting for Certain

                                      -10-
<PAGE>

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP


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

Investments in Debt and Equity Securities" (SFAS 115).  This statement requires
that most investments in securities be classified into one of the following
investment categories based upon circumstances under which securities might be
sold:  Held to Maturity, Available for Sale, and Trading.  Generally,
investments in securities for which an enterprise has both the ability and the
intent to hold to maturity should be accounted for using the amortized cost
method and all other securities must be recorded at their fair values.

     The Partnership originally accounted for the Paces River 2 mortgage revenue
bond and working capital loan as loans.  From December 31, 1991 to December 31,
1994, the Partnership accounted for the investments in Paces River 2 as real
estate as they had been considered ISF.  In 1993, the Partnership finalized a
three-year workout agreement with Paces River 2 and in 1994, after a period of
sustained performance under the workout agreement, reclassified its investments
in Paces River 2 from real estate to a security and a loan.

     As of December 31, 1995 and 1994, the investment in Paces River 2 on the
Partnership's consolidated balance sheets is comprised of an investment in
mortgage revenue bond and working capital loan with a combined recorded
investment of $8,254,707.  The Partnership accounts for its investment in the
Paces River 2 Mortgage Revenue Bond as Available for Sale since it may not have
the ability to hold the mortgage revenue bond to maturity.  There were no
unrealized gains or losses recognized in 1995 and 1994, as the recorded
investment of the mortgage revenue bond approximated market value.  The mortgage
revenue bond and working capital loan original principal balances are $8,750,000
and $850,000, respectively.

     Investments in mortgage revenue bonds that were previously accounted for as
loans are accounted for as real estate on the earlier of the date of ADC
determination, deed in lieu of foreclosure, transfer of partnership interests,
or in-substance foreclosure (ISF), and were recorded at the lower of (a) the
carrying value of the loan and related accrued interest or (b) the estimated
fair value of the property, including other net assets of the property.  The
estimated fair values of the properties are the amounts the owners of the
properties could reasonably expect to receive in an as-is sale between a willing
buyer and a willing seller.  The General Partner determined the estimated fair
value of the properties acquired based upon information obtained from
independent real estate appraisers and/or its own market analyses.  To the
extent fair value was less than carrying value, direct write-downs were recorded
to establish a new cost basis for these assets.  The Partnership continues to
evaluate its recorded investment in the properties on a lower of cost or net
realizable value basis, under the guidance of the American Institute of
Certified Public Accounts (AICPA) Statement of Position 92-3 "Accounting for
Foreclosed Assets" (SOP 92-3).  The Partnership's net realizable value
determination takes into account the Partnership's intention to hold these
properties for the long term, if necessary, to recover its recorded investment. 
If the Partnership determines that its estimated net realizable value is less
than the recorded investment in the property, an additional valuation adjustment
is recorded if the decline is considered permanent.  In March 1995, the FASB
issued Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(SFAS 121).  This statement addresses how entities should measure impairment of
long-lived assets.  This statement is required to be implemented by the
Partnership in 1996 and effectively supersedes the impairment guidance under SOP

                                      -11-
<PAGE>

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP


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

92-3 for properties intended to be held long term.  The adoption of SFAS 121 is
not expected to have a material effect on the Partnership's consolidated
financial statements.  If the proposed merger, as discussed below, is not
consummated, it may be necessary to hold the properties for longer periods
within the terms of the mortgage revenue bonds, rather than the shorter existing
loan terms, in which event investor approval will be sought.

     No valuation adjustments were necessary on the properties in 1995, 1994 or
1993.

     In connection with the transfers of properties to nominees of the
Partnership, the Partnership obtained an opinion from its former independent
accounting firm in July of 1991 that the reduction in pay rate and compounding
of unpaid base interest at the original base interest rate would not cause a
reissuance of the bonds under Section 103 of the Internal Revenue Code of 1986,
as amended (the Code) (which would cause the bonds to lose their tax-exempt
status).  The Partnership also obtained opinions from certain bond counsel that
certain transfers of the properties to Partnership nominees would not cause the
Partnership to become a substantial user of the projects pursuant to Section 103
of the Code (which also could have caused the bonds to lose their tax-exempt
status).  The bond counsel opinions were obtained in connection with the Ethan's
Glen IIA and Ocean Walk transfers.

     In 1991, the U. S. Supreme Court decided a case, Cottage Savings
Association v. Commissioner (Cottage Savings), that could be interpreted to
compromise the tax-exempt status of mortgage revenue bonds which have been
modified.  In response to this decision, in December 1992, the IRS issued
proposed regulations in connection with the modification of debt instruments. 
If the regulations are adopted in their present form, they would alter existing
authority and curtail the type and extent of modifications that could be made by
a bond owner/lender without adversely affecting the tax-exempt status of bonds. 
It is not clear at this time what effect the Cottage Savings decision or the
proposed regulations may have on the Partnership with respect to the bonds
secured by loans on properties currently held by nominees.  The General Partner
continues to believe that these bonds remain tax-exempt.  The General Partner
will continue its efforts, which include the transfer of title on the properties
to nominees, in an attempt to protect the tax-exempt status of the bonds and the
interest thereon.  However, in light of the Cottage Savings decision and the
proposed regulations, there can be no assurance that the General Partner will be
successful in its efforts.

     In March 1995, the Partnership was notified by the Paces River 2 borrower
that the property may not have been in compliance with the low to moderate
income requirements under the tax-exempt bonds.  The borrower had applied tenant
certification criteria consistent with that used by state authorities.  Further,
state authorities had reviewed and approved the compliance on an annual basis. 
However, the borrower believed that certain technical aspects of the tenant
certification criteria may not have been appropriately applied.  The borrower
met with the state authorities and determined the appropriate criteria.  As of
December 31, 1995, the borrower was in compliance with the requirements for tax-
exempt status.

     The General Partner's ongoing strategy has been for the nominees to
continue holding the properties acquired upon the defaults of the original

                                      -12-
<PAGE>

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP


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

borrowers until the loan maturity dates.  If the merger proposal,  as discussed
below, is approved, the interests of the BAC Holders will be redeemed.  If the
merger proposal is not approved, in order to maximize the overall yield, the
General Partner may recommend, subject to satisfactory resolution of any issues
relating to the tax-exempt status of the mortgage revenue bonds, for investor
approval of the extension of certain loan maturity dates and, if approved,
arrange for related amendments to the pertinent mortgage revenue bonds as
needed.

     Following are updates of significant events affecting the Partnership's
properties during 1995, 1994 and 1993:

     Ocean Walk
     ----------

          In March 1994, Ocean Walk experienced fire damage of approximately
     $135,000. The fire was caused by the negligence of a resident.  The
     property's insurance carrier has covered the cost of the repairs less a
     minimal deductible.  The cost of repairing the fire damage and the
     insurance carrier's reimbursement are reflected in rental expenses and
     rental revenue, respectively, in the 1994 consolidated statement of income.
     Repairs to the property relating to the fire damage were completed during
     1994.  In addition, the insurance carrier reimbursed the property
     approximately $27,000 in 1995 to cover lost rental revenue due to units
     taken off the market in 1994 as a result of the fire.  As of December 31,
     1994, all units were fully operational.

     Woodlane Place
     --------------

          In March 1994, the Partnership was notified by the management agent of
     Woodlane Place that certain buildings at the property experienced damage
     due to frost heaving.  The cost to repair the damage of approximately
     $237,000, less a minimal deductible, was covered by the property's
     insurance carrier.  The cost of repairing the damage and the insurance
     carrier's reimbursement are reflected in rental expenses and rental
     revenue, respectively, in the consolidated statement of income.  These
     repairs were completed in 1994.

          The nominee owner hired an engineer to analyze the underlying problem
     of inadequate drainage at the property and to determine the number of
     affected buildings and the severity of the drainage problem.  Based on this
     analysis, the costs associated with the correction of the drainage problem
     are expected to be approximately $300,000, and will not be covered by the
     property's insurance carrier.  Property improvements relating to the
     drainage problem totalling approximately $67,000 and $29,000 were completed
     in 1995 and 1994, respectively, and are included in buildings and personal
     property in the consolidated balance sheets.  The remaining repairs are
     expected to be completed in 1996 and 1997.  As the remaining costs to
     correct the drainage problem are capitalizable, the consolidated financial
     statements do not include an adjustment for the remaining estimated costs. 
     Due to the nature of the drainage problem, occupancy levels at the property
     are not expected to decrease as a result of the ongoing capital
     improvements.  Funding for these capital improvements may be provided from

                                      -13-
<PAGE>

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP


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

     the property's existing replacement reserves, future property cash flow,
     and/or a loan to the property from the working capital reserves of the
     Partnership.

          The Partnership has joined with the property's insurance carrier in a
     lawsuit against the original architect and general contractor of Woodlane
     Place.  The Partnership has joined on a contingent basis, with no legal
     fees being incurred unless the Partnership receives a settlement or
     judgment, and with other legal expenses estimated to be less than $20,000. 
     There is no assurance that the Partnership will receive any funds as a
     result of this lawsuit.

Merger Proposal
---------------

     On September 11, 1995, the Partnership and its General Partner entered into
a merger agreement, subject to BAC Holder approval, with an affiliate of Capital
Apartment Properties, Inc. (CAPREIT), a private real estate investment trust. 
An affiliate of CAPREIT is the property manager for five of the eight properties
securing the bonds held by the Partnership.  If the merger proposal is approved
by a majority vote of BAC Holders, all of the BACs in the Partnership will be
redeemed for cash and the interests represented by such BACs will be canceled. 
On January 31, 1996, the agreement for the proposed merger was modified for the
first time to improve the terms of the original proposal.  Under the original
proposal, the redemption amount per BAC was to be $14.360.  Under the first
modified agreement, the redemption amount per BAC was to be $15.1735, subject to
adjustment but not less than $15.0372 or greater than $15.3098.  On March 14,
1996, the merger agreement was modified for the second time to round the
expected redemption amount per BAC from $15.1735 to $15.18, subject to
adjustment for available cash as defined in the amended merger agreement, but
not less than $15.04 or greater than $15.32.  In addition, the redemption
amounts will be reduced by the amount of court approved legal fees and expenses
awarded to counsel of the plaintiffs in the putative class action suits
described below.  Such legal fees and expenses are not expected to exceed $0.16
per BAC.

     The BAC Holders will also vote upon the removal of the Partnership's
General Partner immediately prior to consummation of the proposed merger and the
election in its stead of a newly-formed wholly-owned subsidiary of CAPREIT. 
CAPREIT has agreed to pay the General Partner $500,000 in consideration for its
1.01% general partner interest in the Partnership.  CAPREIT and/or its designee
will also acquire an account receivable held by CRI and CRIIMI MAE Services
Limited Partnership (CRIIMI), for the accrued mortgage servicing and
administration fees on certain property mortgage loans of the Partnership.  The
general partner of CRIIMI is a subsidiary of CRIIMI MAE Inc., a publicly-traded
company affiliated with the General Partners.  Under the second modified
agreement, CAPREIT will pay the discounted amount of $667,485 to CRI for its
accrued fees, which represents approximately 42% of the total accrued fees owed
to CRI by the Partnership.  Also, CAPREIT will pay $566,676 to CRIIMI for its
accrued fees, which represents all of the accrued fees which are expected to be
owed to CRIIMI by the Partnership as of June 30, 1996.  If the closing of the
proposed merger does not occur by June 30, 1996, the amounts to be paid by
CAPREIT to CRIIMI will increase, to reflect additional amounts currently being
accrued for mortgage servicing and administration fees, at a rate of $47,223 per

                                      -14-
<PAGE>

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP


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

month.

     Each of the nominee entities has agreed to either (a) sell, assign and
transfer the partnership interests in, or the real property and other assets of,
such nominee entities to CAPREIT or its designee for no additional consideration
or (b) admit CAPREIT or its designee as the managing general partner, whereupon
the general partner interests of the current general partners will be converted
into limited partner interests, and CAPREIT will have the option to acquire all
of the limited partner interests at any time within five years from the closing
date of the merger at the then fair market value (defined as the proportionate
interest of such limited partner in the fair market value of the partnership
property as encumbered by the mortgage loans) thereof.  Although such interests
currently have nominal value, if the fair market value of the partnership
properties increases prior to the time CAPREIT exercises its option, such
increase in value may benefit the owners of the nominee entities.

     Consummation of the merger is contingent upon the approval of a majority of
BAC Holders.  The proposed merger is also contingent upon receiving a favorable
opinion regarding the fairness of the redemption amount to BAC Holders from a
financial point of view.  A favorable opinion from an independent investment
banking firm was issued on March 14, 1996.  A proxy statement is expected to be
issued to BAC Holders after it is filed with and clearance is received from the
Securities and Exchange Commission (SEC).  A preliminary proxy statement was
filed with the SEC on March 18, 1996.   This proxy statement includes a full
description of the proposed merger and the independent fairness opinion.

Litigation
----------

     On September 22, 1995, Irving Zakin commenced a putative class action (the
Zakin Action) against the Partnership, its General Partner (CRITEF III
Associates Limited Partnership), its Assignor Limited Partner (CRITEF III,
Inc.), CRI, William B. Dockser, H. William Willoughby, Capital Realty Investors
Tax Exempt Fund Limited Partnership, CRITEF Associates Limited Partnership,
CRITEF, Inc., and CAPREIT (collectively, the Defendants) in the Court of
Chancery of the State of Delaware in New Castle County (the Chancery Court)
(C.A. No. 14558).  The complaint alleges, among other things, that the amount
offered to the BAC Holders in the proposed merger at the time the complaint was
filed was inadequate, and that the Defendants breached their fiduciary duty to
the BAC Holders, or aided and abetted such a breach, engaged in self-dealing and
misled BAC Holders in connection with the proposed merger.  The suit seeks to
enjoin the proposed merger, to obtain damages in an unspecified amount for the
BAC Holders, and to compel the Defendants to maximize the amount paid to the BAC
Holders and consider unspecified alternatives to the proposed merger.

     On October 5, 1995, David and Johanna Wingard (the Wingard Action)
commenced a second putative class action against the Defendants in the Chancery
Court (C.A. No 14604).  The complaint in the Wingard Action contains virtually
the identical allegations and seeks virtually the identical relief as in the
Zakin Action.  A request to the Chancery Court has been made by the plaintiffs
in both lawsuits to consolidate the two actions.

     On January 31, 1996, the Defendants and the plaintiffs and their respective
attorneys reached a tentative settlement of the putative class actions which is

                                      -15-
<PAGE>

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP


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

memorialized in a Memorandum of Understanding (the Memorandum), dated as of such
date.  The proposed settlement must be approved by the Chancery Court.  The
Memorandum contemplates the complete discharge, settlement and release of all
claims that have been, could have been, or in the future might be asserted in
any action or any other proceeding in connection with the proposed merger.  The
parties to the Memorandum will use their best efforts to execute an appropriate
Stipulation of Settlement (the Stipulation) and such other documents as may be
required in order to obtain approval by the Chancery Court of the settlement.

     The Defendants have denied, and continue to deny, that any of them have
committed or threatened to commit any violations of law or breaches of duty to
the BAC Holders.  The Defendants have entered into the Memorandum solely because
the proposed settlement would eliminate the burden and expense of further
litigation and would facilitate the consummation of the proposed merger, which
the General Partner believes to be in the best interest of the BAC Holders.

     In accordance with the Memorandum, the agreements for the proposed merger
were amended to provide for the revised merger terms, as discussed above. 
Pursuant to the Memorandum, the plaintiffs' counsel will be entitled to apply to
the Chancery Court for an award of reasonable attorneys' fees and expenses. 
Such expenses are not expected to exceed $0.16 per BAC.  These fees will reduce
the redemption amounts to BAC Holders in connection with the proposed merger, as
discussed.  In the event that the proposed merger is not consummated, these fees
will not be borne by the Partnership.  As such, the Partnership's financial
statements do not include any adjustment for these fees.

     Counsel for the plaintiffs have reviewed certain documents relating to the
proposed mergers, and will have the opportunity to review and take depositions
of representatives of the General Partner and CAPREIT.  After such review,
counsel for the plaintiffs shall have the right to terminate the settlement
contemplated in the Memorandum, based on material information not presently
available to them.

     After the Stipulation is executed, the parties will seek preliminary
approval of the settlement by the Chancery Court and will then mail notice of
the proposed settlement to members of the putative class.  As soon as
practicable following completion of the discovery described in the preceding
paragraph and after class members have had a period of time to review the notice
of proposed settlement, the parties will use their best efforts to obtain final
Chancery Court approval of the settlement and the dismissal of the class actions
as to all of the claims.

     On November 9, 1995, CRI filed a complaint against Capital Management
Strategies, Inc. (CMS), a company controlled by Martin C. Schwartzberg, to
determine the proper amount of fees to be paid in 1996 under an asset management
agreement.  CMS answered on January 10, 1996, but asserted no counterclaims.

     Thereafter, Mr. Schwartzberg launched a hostile consent solicitation to be
designated as managing general partner of approximately 125 private partnerships
sponsored by CRI.  Mr. Schwartzberg is a former shareholder and executive
officer of CRI who decided to leave the company as of January 1, 1990.  In
connection with his departure, he relinquished his general partner duties for
all CRI-sponsored partnerships, including those of the General Partner.  Mr.
Schwartzberg has publicly stated that he is opposing the proposed merger until

                                      -16-
<PAGE>

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP


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

the Partnership makes its financial statements and financial statements of the
properties available.  Such financial statements of the properties are included
in the Form 8-K filed with the Securities and Exchange Commission on March 25,
1996.

     On January 18, 1996, Mr. Schwartzberg and CMS filed a complaint in the
Circuit Court of Montgomery County, Maryland (the Circuit Court), against CRI
and Messrs. Dockser and Willoughby alleging, among other things, (i) that CRI
and Messrs. Dockser and Willoughby have breached an asset management agreement
pursuant to which Mr. Schwartzberg's company, CMS, agreed to perform limited
functions related to property-level issues for a portion of CRI's subsidized
housing portfolio (but not properties securing the mortgage revenue bonds) by
reducing the proposed budget for 1996, (ii) that the actions of CRI and Messrs.
Dockser and Willoughby in connection with the proposed merger involve self-
dealing and constitute a breach of their fiduciary duties to Mr. Schwartzberg,
and (iii) that the actions in connection with the merger of CRIIMI MAE Inc. in
June, 1995 involved self-interest and led in part to the proposed reduction of
the asset management agreement budget.  Neither the Partnership nor the General
Partner was named as a defendant in this action, and Mr. Schwartzberg does not
allege that he is a BAC Holder.  Messrs. Dockser and Willoughby have entered an
answer denying all of Mr. Schwartzberg's claims and moving to strike the
allegations concerning the Partnership and CRIIMI MAE Inc. and dismiss the
related counts for failure to state a claim upon which relief can be granted. 
Messrs. Dockser and Willoughby have publicly responded that Mr. Schwartzberg's
suit is motivated by his budget dispute with CRI and personal animosity.

     On February 12, 1996, the Circuit Court issued a memorandum opinion and
order enjoining CMS and Mr. Schwartzberg from disclosing information made
confidential under the asset management agreement.

     On February 15, 1996, Mr. Schwartzberg filed suit in the Chancery Court
against the General Partner and CRITEF III Associates Limited Partnership (No.
14837).  He alleges that he has made demands upon the General Partner and CRITEF
III Associates Limited Partnership, in his capacity as a general and limited
partner of the General Partner and as a limited partner of CRITEF III Associates
Limited Partnership, to inspect and obtain copies of a current list of the BAC
Holders and other documents.  He further alleges that his demands were rejected.
On February 23, 1996, the General Partner and CRITEF III Associates Limited
Partnership answered the complaint, admitting that his demands have been
rejected and denying that Mr. Schwartzberg is entitled to the materials
requested because, among other things, he lacks standing and proper purpose to
inspect and obtain copies of the requested materials.  A hearing was held on
March 6 and 7, 1996 and it is expected that the Court will render a decision
following submission of briefs by the parties.

     On February 16, 1996, the Partnership, together with the General Partner,
Capital Realty Investors Tax Exempt Fund Limited Partnership and its general
partner, CRI and CAPREIT (collectively, the Plaintiffs) filed suit against Mr.
Schwartzberg in the United States District Court for the Southern District of
New York (the District Court), No. 96 Civ. 1186 (LAK) (the New York Action). 
The complaint alleges that Mr. Schwartzberg is engaged in an unlawful
solicitation of proxies of the BAC Holders through two press releases he issued
in violation of the federal securities laws and rules promulgated by the SEC
requiring definitive proxy materials to be filed with the SEC and delivered to

                                      -17-
<PAGE>

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP


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

the BAC Holders.  The complaint also alleges that Mr. Schwartzberg has made
false and misleading statements in the solicitations concerning the terms of the
proposed merger and the availability of certain financial information, and has
falsely imputed base motives to the principals of the General Partner.  On
February 23, 1996, the District Court, without making a finding of fact, issued
a temporary restraining order barring Mr. Schwartzberg from making any
solicitation of the BAC Holders without first complying with the SEC rules
pending a hearing on a proposed preliminary injunction.  The District Court held
a hearing on March 5, 1996, on the motion of preliminary injunction, and,
pending a decision, continued the temporary restraining order.

     On March 18, 1996, the District Court issued its Opinion enjoining Mr.
Schwartzberg from (1) making any further solicitation of BAC Holders without
complying with the provisions of Regulation 14A under the Securities Exchange
Act of 1934, and (2) committing any violation of Rule 14a-9 (regarding false or
misleading statements) in connection with any solicitation relating to the
Partnerships.  The injunction was based on the District Court's findings of fact
and conclusions of law, in which it stated that the Plaintiffs (including the
Partnership) have established a strong likelihood of success on their claim that
the press releases constitute a proxy solicitation in violation of securities
laws and that the Plaintiffs are likely to establish that Mr. Schwartzberg acted
with the requisite culpability with respect to at least some of the false
statements made in his press releases.  Also on March 18, 1996, Mr. Schwartzberg
filed his answer to the complaint in the New York action, coupled with
counterclaims against at least some of the Plaintiffs (the Partnership cannot
determine from the pleadings exactly which parties are counter-defendants)
alleging that three press releases issued by the General Partner of the
Partnership constituted solicitations in violation of the same provisions of the
Securities Exchange Act and that they were false and misleading.  The counter-
defendants deny the allegations.

     The Partnership Agreement provides that the costs incurred in connection
with any litigation in which the Partnership is involved be borne by the
Partnership itself.  At this time, there is no estimate as to the timing or
amount, if any, of the outcome of the New York Action, but the General Partners
do not anticipate that the litigation will have an adverse affect on the
Partnership.

                        Financial Condition and Liquidity
                        ---------------------------------

     The primary sources of the Partnership's future cash flows are expected to
be from receipts of base interest on mortgage loans, which are dependent upon
the net operating income of the properties. Therefore, the Partnership's
investment in the mortgage revenue bonds and working capital loans is subject to
the general risks inherent to the ownership of real property.  These risks
include reduction in rental income due to an inability to maintain occupancy
levels, adverse changes in general economic conditions, and adverse changes in
local conditions.  The General Partner expects that the properties transferred
to nominees of the Partnership, subject to existing indebtedness, will continue
to generate sufficient cash flow to pay all operating expenses, meet escrow
deposit requirements and pay some, but not all, of the base interest due to the
Partnership.  Other than the estimated $200,000 in remaining drainage correction
costs relating to Woodlane Place, as discussed above, and approximately $180,000

                                      -18-
<PAGE>

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP


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

in painting costs contracted at Ocean Walk in February 1996, the Partnership has
no material commitments for capital expenditures.

     The Partnership expects to continue to make distributions to BAC Holders on
a quarterly basis.  The amended merger agreement stipulates that 1996
distributions cannot exceed ten cents per BAC per month.  There are no other
legal restrictions on the Partnership's present or future ability to make cash
distributions other than as set forth in the amended merger agreement.  The
distributions to BAC Holders have been funded from three primary sources: cash
flow from the underlying properties' operations, surplus working capital
reserves of the Partnership, and funds from property reserves/borrower
guarantees.  However, because the surplus working capital reserves are almost
depleted and property reserves/borrower guarantees were depleted during the
first quarter of 1995, it is expected that distributions will be based primarily
on cash flow from the Partnership's operations.  Cash flow from the
Partnership's operations consists of cash flow from six of the properties, plus
specified interest payments from two properties and contingent interest from one
property, supplemented by any available property reserves/borrower guarantees,
less Partnership expenses.  The General Partner seeks to optimize cash flow from
the properties owned by nominees.  Despite these efforts, the amounts paid to
the Partnership from the properties' operations may be expected to fluctuate
from period to period due to changes in occupancy rates, rental rates, operating
expenses and other variables.  Based upon the current operations of the
Partnership, the General Partner expects the 1996 distribution to approximate
$1.20 per BAC.

     The following distributions were paid or accrued to BAC Holders of record
during 1995, 1994 and 1993:



























                                      -19-
<PAGE>

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP


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

<TABLE>
<CAPTION>
                                     1995                         1994                          1993
                                Distributions to             Distributions to              Distributions to
                                   BAC Holders                  BAC Holders                   BAC Holders
                            -----------------------      ------------------------      ------------------------
    Quarter Ended              Total        Per BAC         Total         Per BAC         Total        Per BAC
----------------------      -----------     -------      -----------      -------      -----------     -------
<S>                         <C>             <C>          <C>              <C>          <C>             <C>
March 31                    $ 1,577,480        0.30      $ 2,103,307      $  0.40      $ 2,106,988     $  0.40
June 30                       1,577,480        0.30        2,155,890         0.41        2,135,908        0.41
September 30                  1,577,480        0.30        2,155,890         0.41        2,141,693        0.41
December 31                   1,577,482        0.30        2,155,890         0.41        2,160,097        0.41
                            -----------     -------      -----------      -------      -----------     -------
     Total                  $ 6,309,922     $  1.20      $ 8,570,977      $  1.63      $ 8,544,686     $  1.63
                            ===========     =======      ===========      =======      ===========     =======

</TABLE>

     Distributions to BAC Holders for the years ended December 31, 1995,
1994 and 1993 were funded as follows:

<TABLE>
<CAPTION>
                                                                          For the years ended
                                                                               December 31,
                                                            ------------------------------------------------
                                                                1995              1994              1993
                                                            ------------      ------------      ------------
<S>                                                         <C>               <C>               <C>
Cash Flow (1)                                               $  6,647,350      $  6,740,474      $  7,132,542

Net (deposits to) withdrawals from working
  capital/interest reserves                                     (273,048)        1,917,953         1,499,326 (2)
                                                            ------------      ------------      ------------
       Total cash available for distribution                $  6,374,302      $  8,658,427      $  8,631,868
                                                            ============      ============      ============
Distributions to:

  General Partner (1.01%)                                   $     64,380      $     87,450      $     87,182
                                                            ============      ============      ============
  BAC Holders (98.99%)                                      $  6,309,922      $  8,570,977      $  8,544,686
                                                            ============      ============      ============

</TABLE>

(1)  As defined in the Limited Partnership Agreement.
(2)  Excludes working capital loan advances and repayments of $153,000 and
     $83,939, respectively.

     Although distributions are paid on a quarterly basis, in July 1993, the
Partnership began declaring distributions on a monthly basis as a result of
listing the BACs on AMEX.  Distributions to BAC Holders totalling $1,577,480 or
$0.30 per BAC were declared for the quarter ending March 31, 1996, payable to

                                                                -20-
<PAGE>

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP


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

BAC Holders of record as of the last day of each month.

     As of December 31, 1995, the Partnership had cash and cash equivalents of
$187,747, unrestricted marketable securities of $1,213,572 and restricted cash
and cash equivalents of $1,561,442. Marketable securities consist of tax-exempt
municipal bonds which generally contain a seven-day put option with established
banks or brokerage houses.  The Partnership classified its investments in
marketable securities into the Available for Sale category under SFAS 115. 
Realized gains or losses on the sale of the marketable securities were
determined on a specific identification basis.  There were no net unrealized
holding gains or losses recognized during 1995 and 1994 as the cost for the tax-
exempt municipal bonds approximated market value throughout 1995 and 1994.

     The Partnership has working capital reserves which may be available for the
ongoing costs of operating the Partnership, for supplementing distributions to
investors and for making working capital loans to the borrowers.  As of December
31, 1995 and 1994, the working capital reserves were $4,235,144 and $3,846,520,
respectively, both of which exceed the Partnership's minimum working capital
reserve balance of approximately $3,718,000.  The minimum working capital
reserve balance may be increased or decreased from time to time as deemed
necessary by the General Partner.  The surplus working capital reserve balance
of approximately $517,000 as of December 31, 1995 may be used to supplement
distributions to BAC Holders.  Of the total distributions made during 1995, 1994
and 1993, $0, $1,917,953 and $1,499,326, respectively, were funded from the
surplus working capital reserves.

     The Partnership established interest reserves which represent the General
Partner's estimate of the total base interest on the investment in mortgage
revenue bonds and working capital loans to be deferred during the deferral
period, generally, the project construction period as defined by the respective
loan agreements. The interest reserves also included debt service reserves
established by the Partnership for six mortgage loans.  Funds in the interest
reserves are invested in tax-exempt municipal bonds with terms similar to the
Partnership's marketable securities and are stated at their approximate market
value.  The interest reserves may be used to supplement distributions to BAC
Holders in an amount sufficient to achieve an equivalent gross base interest
rate as if the full amount of base interest had been paid to the Partnership
during the deferral period.  Interest reserves were $298,750 and $414,326 as of
December 31, 1995 and 1994.  There were no interest reserves established during
1995, 1994 or 1993.  During 1995, 1994 and 1993, amounts of $115,576, $0 and
$15,000, respectively, were transferred to working capital reserves to fund
distributions to BAC Holders from the debt service reserve or used to fund
distributions to BAC Holders from the deferred interest reserve.

     As of December 31, 1995, the Partnership had aggregate investments in
marketable securities (including those held in working capital and interest
reserves) with the following maturities:








                                      -21-
<PAGE>

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP


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

                 Amount            Maturity
               -----------         --------

               $  900,632          Within one year
                1,030,711          Between one and five years
                  690,000          Between five and ten years
                3,126,123          After ten years
               -----------
               $5,747,466
               ===========

     In December 1991, the FASB issued Statement of Financial Accounting
Standards No. 107 "Disclosure about Fair Value of Financial Instruments" (SFAS
107).  This statement requires the disclosure of fair value information about
financial instruments for which it is practicable to estimate that value.  As
required, the Partnership implemented SFAS 107 in 1995.  The Partnership has
determined that the carrying amount of cash and cash equivalents and restricted
cash and cash equivalents approximate fair value.  The estimated fair value of
marketable securities and working capital/interest reserves invested in
marketable securities are based on the quoted market prices of these instruments
at December 31, 1995.  The estimated fair value of the Paces River 2 mortgage
revenue bond and working capital loan is estimated by discounting cash flows
expected to be received by the Partnership from this investment using current
rates adjusted for credit risk.

     The following table presents information on the Partnership's financial
instruments:

<TABLE>
<CAPTION>
                                         Carrying         Estimated Fair
                                         Value at            Value at
                                     December 31, 1995   December 31, 1995
                                     -----------------   -----------------
     <S>                             <C>                 <C>
     Cash and cash equivalents          $   187,747         $   187,747
     Restricted cash and cash
       equivalents                        1,561,442           1,561,442
     Marketable securities                1,213,572           1,211,462
     Working capital reserves
       invested in marketable
       securities                         4,235,144           4,227,782
     Interest reserves invested in
       marketable securities                298,750             298,231
     Mortgage revenue bond and
       working capital loan               8,254,707           8,254,707

</TABLE>

     The Partnership closely monitors its cash flow and liquidity position in an
effort to ensure that sufficient cash is available for operating requirements
and distributions to BAC Holders.  The Partnership's net cash provided by
operating activities for 1995 and 1994, which consisted primarily of receipt of
base interest on mortgage loans, was adequate to support operating requirements

                                      -22-
<PAGE>

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP


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

and the payment of declared distributions to BAC Holders and the General
Partner.  The Partnership estimates that future cash flows from receipt of base
interest on mortgage loans, in the aggregate, will be sufficient to pay
operating expenses and make distributions to BAC Holders and the General
Partner.  Distributions to BAC Holders may be supplemented by withdrawals from
working capital and interest reserves, as discussed above.

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

     The Partnership's net income for 1995 increased from 1994 primarily due to
the reclassification of the investment in Paces River 2 from real estate to
security and working capital loan, as discussed above.  The 1994 income from the
Paces River 2 mortgage revenue bond and working capital loan was limited to the
property's net rental income due to its classification as real estate in 1994. 
Contributing to the increase in net income was an increase in rental revenue as
a result of increased occupancy and rental rates at certain properties, as well
as a decrease in depreciation expense resulting from the use of an accelerated
method for personal property.  Partially offsetting the increase in net income
were fees incurred by the Partnership for an independent fairness opinion in
connection with the consideration to be received by BAC Holders in the proposed
merger, as previously discussed.

     The Partnership's net income for 1994 increased compared to 1993 primarily
as a result of an increase in net rental income.  The net rental income of the
properties increased principally as a result of an increase in rental rates and
economic occupancy at certain properties, as well as insurance reimbursements
received in 1994 for repairs to Ocean Walk and Woodlane Place, as discussed
above.  Contributing to the increase in net income was a decrease in
depreciation expense as a result of the use of an accelerated method for
personal property.  Also contributing to the increase in net income was a
decrease in general and administrative costs and professional fees primarily
related to loan workout negotiations in 1993 concerning Paces River 2 and the
transfer of the deed of Ocean Walk.  Partially offsetting the increase in net
income was an increase in rental expense resulting primarily from repairs
relating to fire damage and frost heaving at Ocean Walk and Woodlane Place,
respectively, as discussed above, as well as an increase in non-recurring
repairs and maintenance, payroll expense and marketing fees at certain
properties.  Also partially offsetting the increase in net income was a decrease
in other interest income resulting from less cash available for short-term
investments.














                                      -23-
<PAGE>

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP


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

     Presented below is a summary of the rental operations for the years
ended December 31, 1995, 1994 and 1993 of each of the properties in which
the Partnership has invested.

<TABLE>
<CAPTION>
                          Average Physical Occupancy          Base Interest Paid From Properties' Operations(1,4)
                          --------------------------          ---------------------------------------------------
Name of Investment
 Rental Property          1995       1994       1993             1995(4)          1994            1993
------------------        ----       ----       ----          -----------      -----------     -----------
<S>                       <C>        <C>        <C>           <C>              <C>             <C>
Ethan's Glen IIA           94%        92%        94%          $   754,900      $   776,803     $   811,075

Geary Courtyard            92%        89%        88%              762,000          601,329         687,267

Ocean Walk                 95%        94%        97%            1,648,840        1,571,022       1,560,048

Paces River 2              97%        97%        97%              795,522          743,314         706,634

Regency Woods              95%        95%        93%              463,362          544,268         538,836

Valley Creek II            97%        96%        95%              722,363          614,332         554,970

Washington Ridge(5)        95%        95%        94%              875,000          875,000         875,000

Woodlane Place             99%        97%        98%              954,478          979,747         880,463
                          ----       ----       ----          -----------      -----------     -----------
                           95%        95%        90%          $ 6,976,465      $ 6,705,815     $ 6,614,293
                          ====       ====       ====          ===========      ===========     ===========

</TABLE>























                                                                -24-
<PAGE>

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP


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

<TABLE>
<CAPTION>
                                       Net Rental Operating Income (2)
                              ----------------------------------------------
Name of Investment
 Rental Property                 1995             1994             1993
------------------            -----------      -----------      -----------
<S>                           <C>              <C>              <C>
Ethan's Glen IIA              $   873,716      $   790,845      $   774,122

Geary Courtyard                   864,522          783,771          580,464

Ocean Walk                      1,671,428        1,824,749        1,606,833

Paces River 2 (3)                      --          687,471          742,487

Regency Woods                     463,254          625,189          565,256

Valley Creek II                   756,189          673,774          614,947

Washington Ridge                1,001,816        1,024,343        1,006,807

Woodlane Place                  1,138,935          964,846        1,026,677
                              -----------      -----------      -----------
                              $ 6,769,860      $ 7,374,988      $ 6,917,593
                              ===========      ===========      ===========
</TABLE>

(1)  Exclusive of amounts paid to the Partnership from the properties' reserves
     and/or general partners of the borrowers.  Such amounts were $17,834,
     $250,682 and $622,060, respectively, for the years ended December 31, 1995,
     1994 and 1993.  Although the Partnership accounted for seven of the eight
     mortgage loan investments and two of the three working capital loans as
     real estate for financial statement purposes, and reclassified the cash
     flow from these properties as rental income and expense, the Partnership
     continues to charge the borrowers and nominees interest under the terms of
     the original loans and interest on unpaid base mortgage interest.

(2)  Calculated from the respective property's financial statements as net loss,
     adjusted for depreciation, amortization, mortgage loan interest and
     mortgage servicing and administration fees.

(3)  Rental operating information is not provided for the Paces River 2
     investment for 1995 because it is accounted for as an investment in
     mortgage revenue bond and working capital loan as of December 31, 1994.

(4)  Excludes amounts received by the Partnership in January 1996 from the
     release of excess tax and insurance reserves relating to 1995.  Such
     amounts received from Ethan's Glen IIA, Paces River 2 and Woodlane Place
     totalled $70,000, $12,000 and $23,000, respectively.

(5)  Base interest paid from operations excludes amounts received by the
     Partnership for contingent interest.  Such amounts were $70,549, $0 and $0
     for the years ending December 31, 1995, 1994 and 1993, respectively.

                                                                -25-
<PAGE>










                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
                    ----------------------------------------

To the Partners and Beneficial Assignee Certificate Holders of
  Capital Realty Investors Tax Exempt Fund III Limited Partnership:

     We have audited the accompanying consolidated balance sheets of Capital
Realty Investors Tax Exempt Fund III Limited Partnership (the Partnership, a
Delaware limited partnership) as of December 31, 1995 and 1994, and the related
consolidated statements of income, changes in partners' capital (deficit) and
cash flows for the years ended December 31, 1995, 1994 and 1993.  These
financial statements are the responsibility of the Partnership's management. 
Our responsibility is to express an opinion on these financial statements based
on our audits.  We did not audit the financial statements of certain borrowers
(Washington Ridge in 1995 and Washington Ridge and Regency Woods in 1994 and
1993) which received the proceeds of the Partnership's investments in mortgage
revenue bonds, which combined statements reflect total assets of 8 percent and
15 percent, respectively of 1995 and 1994 consolidated totals, and total
revenues of 13 percent, 19 percent and 21 percent, respectively, of 1995, 1994
and 1993 consolidated totals.  Those statements were audited by other auditors
whose reports have been furnished to us, and our opinion, insofar as it relates
to the amounts included for these borrowers, is based solely on the reports of
the other auditors.

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

     In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Capital Realty Investors Tax Exempt
Fund III Limited Partnership as of December 31, 1995 and 1994, and the results
of its operations and its cash flows for the years ended December 31, 1995, 1994
and 1993, in conformity with generally accepted accounting principles.


                                                  Arthur Andersen LLP

Washington, D.C.
March 18, 1996








                                      -26-
<PAGE>

         CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                            CONSOLIDATED BALANCE SHEETS

                                      ASSETS
<TABLE>
<CAPTION>

                                                                                      As of December 31,
                                                                                -------------------------------
                                                                                    1995             1994
                                                                                ------------     ------------
<S>                                                                             <C>              <C>
Investments in Real estate:
    Land                                                                        $ 10,228,056     $ 10,228,056
    Buildings and personal property                                               71,962,707       71,895,919
                                                                                ------------     ------------
                                                                                  82,190,763       82,123,975
    Less:  accumulated depreciation                                              (14,171,745)     (11,343,330)
                                                                                ------------     ------------
                                                                                  68,019,018       70,780,645
  Mortgage revenue bond and working capital loan                                   8,254,707        8,254,707
                                                                                ------------     ------------
                                                                                  76,273,725       79,035,352

Cash and cash equivalents                                                            187,747          100,513
Restricted cash and cash equivalents                                               1,561,442        1,345,940
Marketable securities                                                              1,213,572        1,707,572
Working capital reserves invested in marketable securities                         4,235,144        3,846,520
Interest reserves invested in marketable securities                                  298,750          414,326
Receivables and other assets                                                         937,964          845,809
                                                                                ------------     ------------
     Total assets                                                               $ 84,708,344     $ 87,296,032
                                                                                ============     ============

                     LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)


Distributions payable                                                           $  1,593,577     $  2,177,886
Deferred revenue                                                                   1,526,429        1,507,697
Accrued mortgage administration and servicing fees due to
  related parties                                                                  1,667,032        1,172,173
Other liabilities related to real estate operations                                  697,504          815,924
Accounts payable and accrued expenses                                                393,345          145,954
                                                                                ------------     ------------
     Total liabilities                                                             5,877,887        5,819,634
                                                                                ------------     ------------

Partners' capital (deficit):
  General Partner                                                                   (409,340)        (382,616)
  Beneficial Assignee Certificates (BACs) - 5,258,268 BACs
    issued and outstanding                                                        79,239,797       81,859,014
                                                                                ------------     ------------
     Total partners' capital                                                      78,830,457       81,476,398
                                                                                ------------     ------------

     Total liabilities and partners' capital                                    $ 84,708,344     $ 87,296,032
                                                                                ============     ============
</TABLE>

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

                                                                -27-
<PAGE>

         CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                         CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>

                                                                 For the years ended December 31,
                                                             1995                 1994             1993
                                                          -----------          -----------     ------------
<S>                                                       <C>                  <C>             <C>
Income from investment in real estate:
  Rental revenue                                          $13,065,907          $14,367,365     $13,433,679
  Rental expense                                           (6,844,178)          (7,634,048)     (7,144,288)
  Depreciation                                             (2,828,415)          (3,303,417)     (3,466,782)
                                                          -----------          -----------     -----------
  Net rental income                                         3,393,314            3,429,900       2,822,609

  Mortgage revenue bond and working capital loan              876,359                   --              --
                                                          -----------          -----------     -----------
                                                            4,269,673            3,429,900       2,822,609
                                                          -----------          -----------     -----------
Other income (expenses):
  Other interest income                                       175,506              214,004         345,366
  Merger-related expenses                                    (338,559)                  --              --
  General and administrative                                 (297,001)            (314,850)       (446,474)
  Professional fees                                           (81,258)             (72,740)       (111,222)
  AMEX Listing                                                     --                   --         (18,517)
                                                          -----------          -----------     -----------
                                                             (541,312)            (173,586)       (230,847)
                                                          -----------          -----------     -----------
Net income                                                $ 3,728,361          $ 3,256,314     $ 2,591,762
                                                          ===========          ===========     ===========

Net income allocated to General Partner (1.01%)           $    37,656          $    32,889     $    26,177
                                                          ===========          ===========     ===========

Net income allocated to BAC Holders (98.99%)              $ 3,690,705          $ 3,223,425     $ 2,565,585
                                                          ===========          ===========     ===========

Net income per BAC                                        $      0.70          $      0.61     $      0.49
                                                          ===========          ===========     ===========

BACs outstanding                                            5,258,268            5,258,268       5,258,268
                                                          ===========          ===========     ===========

</TABLE>













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

                                                                -28-
<PAGE>

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

        CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)

              For the years ended December 31, 1995, 1994 and 1993

<TABLE>
<CAPTION>

                                                           Beneficial
                                                            Assignee
                                                          Certificate           General
                                                            Holders             Partner           Total
                                                          ------------         ----------      ------------
<S>                                                       <C>                  <C>             <C>
Balance, December 31, 1992                                $ 93,185,667         $ (267,050)     $ 92,918,617

  Distributions of $1.63 per BAC (including return
    of capital of $1.14 per BAC)                            (8,544,686)           (87,182)       (8,631,868)

  Net income                                                 2,565,585             26,177         2,591,762
                                                          ------------         ----------      ------------
Balance, December 31, 1993                                  87,206,566           (328,055)       86,878,511

  Distributions of $1.63 per BAC (including return
    of capital of $1.02 per BAC)                            (8,570,977)           (87,450)       (8,658,427)

  Net income                                                 3,223,425             32,889         3,256,314
                                                          ------------         ----------      ------------
Balance, December 31, 1994                                  81,859,014           (382,616)       81,476,398

  Distributions of $1.20 per BAC (including return
    of capital of $0.50 per BAC)                            (6,309,922)           (64,380)       (6,374,302)

  Net income                                                 3,690,705             37,656         3,728,361
                                                          ------------         ----------      ------------
Balance, December 31, 1995                                $ 79,239,797         $ (409,340)     $ 78,830,457
                                                          ============         ==========      ============

</TABLE>




















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

                                                                -29-
<PAGE>

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                       CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                 For the years ended December 31,
                                                              1995                 1994            1993
                                                          ------------         ------------    ------------
<S>                                                       <C>                  <C>             <C>
Cash flows from operating activities:
  Net income                                              $  3,728,361         $  3,256,314    $  2,591,762
  Adjustments to reconcile net income to
    net cash provided by operating activities:
      Depreciation                                           2,828,415            3,303,417       3,466,782
      Changes in assets and liabilities:
        (Increase) decrease in restricted cash
          and cash equivalents                                (215,502)            (135,456)        577,009
        (Increase) decrease in receivables and other
          assets                                               (92,155)            (153,080)         61,100
        Increase in deferred revenue                            18,732              185,541         252,996
        Increase in accrued mortgage administration
          and servicing fees due to related parties            494,859              497,498         416,811
        (Decrease) increase in other liabilities
          related to real estate operations                   (118,420)              92,627        (277,563)
        Increase (decrease) in accounts payable and
          accrued expenses                                     247,391                 (231)          3,203
                                                          ------------         ------------    ------------
        Net cash provided by operating activities            6,891,681            7,046,630       7,092,100
                                                          ------------         ------------    ------------
Cash flows from investing activities:
  Purchase of personal property                                (66,788)            (297,261)             --
  Sale of marketable securities                             12,938,223           10,618,490      14,418,516
  Purchase of marketable securities                        (12,444,223)         (10,589,456)    (14,398,858)
  Deposits to working capital reserves invested
    in marketable securities                                  (539,995)                  --         (98,939)
  Withdrawals from working capital reserves invested
    in marketable securities                                   151,371            1,917,953       1,652,326
  Withdrawals from interest reserves invested
    in marketable securities                                   115,576                   --          15,000
                                                          ------------         ------------    ------------
       Net cash provided by investing activities               154,164            1,649,726       1,588,045
                                                          ------------         ------------    ------------
Cash flows from financing activities:
  Distributions to BAC Holders and General Partner          (6,958,611)          (8,662,676)     (8,620,184)
                                                          ------------         ------------    ------------
Net increase in cash and cash equivalents                       87,234               33,680          59,961

Cash and cash equivalents, beginning of year                   100,513               66,833           6,872
                                                          ------------         ------------    ------------
Cash and cash equivalents, end of year                    $    187,747         $    100,513    $     66,833
                                                          ============         ============    ============
</TABLE>







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

                                                                -30-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   Organization

     Capital Realty Investors Tax Exempt Fund III Limited Partnership (the
Partnership) was organized on September 1, 1987 under the Delaware Revised
Uniform Limited Partnership Act and will continue until December 31, 2017,
unless dissolved earlier in accordance with the Agreement of Limited
Partnership.  The Partnership was formed to acquire a portfolio of tax-exempt
mortgage revenue bonds, issued by various state or local governments or their
agencies or authorities and collateralized by nonrecourse participating first
mortgage loans on multifamily residential developments. Additionally, the
Partnership was permitted to use up to 5% of its gross offering proceeds to make
taxable working capital loans to borrowers to cover certain expenses which could
not be financed from the proceeds of the mortgage revenue bonds.

     The Partnership received initial capital contributions from the General
Partner and the Assignor Limited Partner.  The General Partner is CRITEF III
Associates Limited Partnership (CRITEF III Associates) whose managing general
partner is C.R.I., Inc. (CRI).  The limited partners of CRITEF III Associates
include the shareholders of CRI and a general partnership comprised of certain
current and former employees of CRI and others.  The Assignor Limited Partner is
CRITEF III, Inc. whose outstanding shares of stock are owned by the shareholders
of CRI. The Assignor Limited Partner has assigned certain of the ownership
attributes of its limited partnership interest, including rights to a percentage
of the income, gains, losses, deductions and distributions of the Partnership,
to the purchasers of the Beneficial Assignee Certificates (BACs) on the basis of
one unit of limited partnership interest for one BAC.

     A Form S-11 Registration Statement was filed with the Securities and
Exchange Commission (SEC) and became effective on February 3, 1988 for a maximum
offering of 10,000,000 BACs at $25 per BAC.  The Registration Statement
provided, as was allowed for in the Limited Partnership Agreement, that the BACs
could be issued in series at the discretion of the General Partner.  On February
8, 1989, CRITEF III Series A completed its tenth and final investor closing
after raising $131,456,700 from the sale of 5,258,268 BACs.  The Partnership
suspended selling the remaining 4,741,732 BACs as Series B effective April 3,
1989.  All funds held in escrow pending issuance of the Series B BACs were
refunded to investors.  On  February 28, 1990, Post-Effective Amendment No. 3
was filed at the SEC deregistering the Partnership's remaining unsold BACs.

     On July 1, 1993, the General Partner listed the BACs on the American Stock
Exchange (AMEX) with a trading symbol of CRL.  The General Partner believes that
the benefits to BAC Holders from listing the BACs on AMEX include increased
liquidity and reduced transaction costs.  However, a publicly traded partnership
is treated as a corporation for income tax purposes unless it meets certain
exceptions.  In 1995, 1994 and 1993, the Partnership met these exceptions and
was not taxed as a corporation.














                                      -31-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.   Summary of significant accounting policies

     a.   Method of accounting
          --------------------

          The consolidated financial statements of the Partnership are prepared
     on the accrual basis of accounting in accordance with generally accepted
     accounting principles.

          The Partnership's consolidated balance sheets reflect the financial
     position of seven properties for the dates presented.  The Partnership's
     consolidated statements of income include the rental income, rental
     expenses and depreciation of the seven properties, exclusive of debt-
     service due to the Partnership due to receipt of deeds in lieu of
     foreclosure or transfer of partnership interests (for Geary Courtyard),
     subject to the existing indebtedness by nominees of the Partnership, or
     upon acquisition, development or construction (ADC) determination.  One
     property, Paces River 2, is not included in this consolidation, as
     discussed below.

     b.   Use of estimates
          ----------------

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

     c.   Investments in mortgage revenue bonds and working capital loans
          ---------------------------------------------------------------

          The Partnership accounts for its investment in mortgage revenue bonds
     in accordance with the American Institute of Certified Public Accountants
     (AICPA) "Notice to Practitioners - ADC Arrangements" (the Notice).  Under
     the Notice, loans qualifying as ADC arrangements follow real estate or
     joint venture accounting policies if the lender effectively has the risks
     and rewards of an owner or investor in real estate.  Generally, the lender
     has the same risks and rewards as an owner or investor if the borrower has
     little or no equity in the project and if the lender expects to participate
     in residual profits (as defined in the Notice) of the project.  The Ocean
     Walk, Regency Woods, Valley Creek II, and Washington Ridge investments
     originally qualified as ADC arrangements.  However, nominees of the
     Partnership received deeds in lieu of foreclosure, subject to existing
     indebtedness, on all of these investments, except Washington Ridge, from
     1993 through 1995.  The Partnership continues to account for the Washington
     Ridge investment as real estate due to ADC determination.

          In May 1993, the Financial Accounting Standards Board (FASB) issued
     Statement of Financial Accounting Standards No. 115 "Accounting for Certain
     Investments in Debt and Equity Securities" (SFAS 115).  This statement
     requires that most investments in securities be classified into one of the
     following investment categories based upon circumstances under which
     securities might be sold:  Held to Maturity, Available for Sale, and
     Trading.  Generally, investments in securities for which an enterprise has
     both the ability and the intent to hold to maturity should be accounted for
     using the amortized cost method and all other securities must be recorded
     at their fair values.

                                      -32-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.   Summary of significant accounting policies - Continued

          The Partnership originally accounted for the Paces River 2 mortgage
     revenue bond and working capital loan as loans.  From December 31, 1991 to
     December 31, 1994, the Partnership accounted for its investments in Paces
     River 2 as real estate as they had been considered ISF.  In 1993, the
     Partnership finalized a three-year workout agreement with Paces River 2 and
     in 1994, after a period of sustained performance under the workout
     agreement, reclassified its investments in Paces River 2 from real estate
     to a security and a loan.

          As of December 31, 1995 and 1994, the investment in Paces River 2 on
     the Partnership's consolidated balance sheets is comprised of an investment
     in mortgage revenue bond and working capital loan with a combined recorded
     investment of $8,254,707.  The Partnership accounts for its investment in
     the Paces River 2 mortgage revenue bond as Available for Sale since it may
     not have the ability to hold the Mortgage Revenue Bond to maturity.  There
     were no unrealized gains or losses recognized in 1995 and 1994, as the
     recorded investment of the mortgage revenue bond approximated market value.
     The mortgage revenue bond and working capital loan original principal
     balances are $8,750,000 and $850,000, respectively.

     d.   Investment in real estate
          -------------------------

          As further described in Note 5, as of December 31, 1995, the
     Partnership accounts for all of its investments in mortgage revenue bonds,
     except Paces River 2, as real estate.  Investments in mortgage revenue
     bonds that were previously accounted for as loans are accounted for as real
     estate on the earlier of the date of ADC determination, deed in lieu of
     foreclosure, transfer of partnership interests, or ISF, and are recorded at
     the lower of (a) the carrying value of the loan and related accrued
     interest or (b) the estimated fair value of the property, including other
     net assets of the property.  The estimated fair values of the properties
     are the amounts the owners of the properties could reasonably expect to
     receive in an as-is sale between a willing buyer and a willing seller.  The
     General Partner determined the estimated fair value of the properties
     acquired based upon information obtained from independent real estate
     appraisers and/or its own market analyses.  To the extent fair value was
     less than carrying value,  direct write-downs were recorded to establish a
     new basis for these assets.  



















                                      -33-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.   Summary of significant accounting policies - Continued

          The Partnership continues to evaluate its recorded investment in the
     properties on a lower of cost or net realizable value basis, under the
     guidance of the American Institute of Certified Public Accountants (AICPA)
     Statement of Position  92-3 "Accounting for Foreclosed Assets" (SOP 92-3). 
     The Partnership's net realizable value determination takes into account the
     Partnership's intention to hold these properties for the long term, if
     necessary, to recover its recorded investment.  If the Partnership deter-
     mines that its estimated net realizable value is less than the recorded
     investment in the property, an additional valuation adjustment is recorded
     if the decline is considered permanent.  In March 1995, the FASB issued
     Statement of Financial Accounting Standards No. 121 "Accounting for the
     Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
     Of" (SFAS 121).  This statement addresses how entities should measure
     impairment of long-lived assets.  This statement is required to be
     implemented by the Partnership in 1996 and effectively supersedes the
     impairment guidance under SOP 92-3 for properties intended to be held long
     term.  The adoption of SFAS 121 is not expected to have a material effect
     on the Partnership's consolidated financial statements.  If the proposed
     merger, as discussed in Note 7, is not consummated, it may be necessary to
     hold the properties through longer periods within the terms of the mortgage
     revenue bonds, rather than the shorter existing loan terms, in which event
     investor approval will be sought.

     e.   Depreciation
          ------------

          Depreciation of real estate is based on the estimated useful lives of
     the properties, which consist of 27.5 years for building and 7 years for
     personal property.  The straight-line method is used for building, and the
     double declining balance method is used for personal property.

     f.   Cash and cash equivalents
          -------------------------

          Cash and cash equivalents consist of tax-exempt money market funds
     with original maturities of three months or less.

     g.   Restricted cash and cash equivalents
          ------------------------------------

          Restricted cash and cash equivalents consist of the following funds
     obtained from the former borrowers on the Ethan's Glen IIA, Woodlane Place,
     Valley Creek II, Ocean Walk, Geary Courtyard and Regency Woods loans in
     connection with the actual transfer of the properties to nominees of the
     Partnership, subject to existing indebtedness: escrow deposits restricted
     for tax and insurance payments and for replacement of fixed assets. These
     accounts were established under the terms of the original mortgage loans
     and escrow agreements and are maintained in interest-bearing savings and
     money market accounts.

     h.   Marketable securities
          ---------------------

          Marketable securities, consisting of tax-exempt municipal bonds with
     carrying amounts of $1,213,572 and $1,707,572 as of December 31, 1995 and
     1994, respectively, are stated at their approximate market value.  The
     Partnership has the option to resell certain bonds to the seller on seven

                                      -34-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.   Summary of significant accounting policies - Continued

     days' notice at the bonds' par value.  Proceeds from the sale of marketable
     securities totalled $13,205,170, $12,536,443 and $16,085,842 for the years
     ended December 31, 1995, 1994 and 1993, respectively.  Realized gains and
     losses on these sales were determined on a specific identification basis. 
     The interest rate on the bonds is generally adjusted weekly.

          The Partnership has classified its investments in marketable
     securities into the Available for Sale category under SFAS 115.  There were
     no net unrealized holding gains or losses recognized during 1995 and 1994
     as the cost for the tax-exempt municipal bonds approximated market value
     throughout 1995 and 1994.

          As of December 31, 1995, the Partnership had aggregate investments in
     marketable securities (including those held in working capital and interest
     reserves, as discussed below) with the following maturities:

                 Amount            Maturity
               -----------         --------

               $  900,632          Within one year
                1,030,711          Between one and five years
                  690,000          Between five and ten years
                3,126,123          After ten years
               -----------
               $5,747,466
               ===========

     i.   Working capital reserves
          ------------------------

          The Partnership has working capital reserves which may be available
     for the ongoing costs of operating the Partnership, for supplementing
     distributions to investors and for making working capital loans to the
     borrowers.  As of December 31, 1995 and 1994, the working capital reserves
     were $4,235,144 and $3,846,520, respectively, both of which exceed the
     Partnership's minimum working capital reserve balance of approximately
     $3,718,000.  The minimum working capital reserve balance may be increased
     or decreased from time to time as deemed necessary by the General Partner. 
     The surplus working capital reserve balance of approximately $517,000 as of
     December 31, 1995 may be used to supplement distributions to BAC Holders. 
     Of the total distributions made during 1995, 1994 and 1993, $0, $1,917,953
     and $1,499,326, respectively, were funded from the surplus working capital
     reserves.

     j.   Interest reserves
          -----------------

          The Partnership established interest reserves which represent the
     General Partner's estimate of the total base interest on the investment in
     mortgage revenue bonds and working capital loans to be deferred during the
     deferral period, generally, the project construction period as defined by
     the respective loan agreements. The interest reserves also included debt
     service reserves established by the Partnership for six mortgage loans. 
     Funds in the interest reserves are invested in tax-exempt municipal bonds
     with terms similar to the Partnership's marketable securities and are
     stated at their approximate market value.  The interest reserves may be
     used to supplement distributions to BAC Holders in an amount sufficient to

                                      -35-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.   Summary of significant accounting policies - Continued

     achieve an equivalent gross base interest rate as if the full amount of
     base interest had been paid to the Partnership during the deferral period. 
     Interest reserves were $298,750 and $414,326 as of December 31, 1995 and
     1994.  There were no interest reserves established during 1995, 1994 or
     1993.  During 1995, 1994 and 1993, amounts of $115,576 and $0 and $15,000,
     respectively, were transferred to working capital reserves to fund
     distributions to BAC Holders from the debt service reserve or used to fund
     distributions to BAC Holders from the deferred interest reserve.

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

          In December 1991, the FASB issued Statement of Financial Accounting
     Standards No. 107 "Disclosure about Fair Value of Financial Instruments"
     (SFAS 107).  This statement requires the disclosure of fair value
     information about financial instruments for which it is practicable to
     estimate that value.  As required, the Partnership implemented SFAS 107 in
     1995.  The Partnership has determined that the carrying value of cash and
     cash equivalents and restricted cash and cash equivalents approximate fair
     value.  The estimated fair value of marketable securities and working
     capital/interest reserves invested in marketable securities are based on
     the quoted market prices of these instruments at December 31, 1995.  The
     estimated fair value of the Paces River 2 mortgage revenue bond and working
     capital loan is estimated by discounting cash flows expected to be received
     by the Partnership from this investment using current rates adjusted for
     credit risk.

          The following table presents information on the Partnership's
     financial instruments:

<TABLE>
<CAPTION>
                                         Carrying         Estimated Fair
                                         Value at            Value at
                                     December 31, 1995   December 31, 1995
                                     -----------------   -----------------
     <S>                             <C>                 <C>
     Cash and cash equivalents          $   187,747         $   187,747
     Restricted cash and cash
       equivalents                        1,561,442           1,561,442
     Marketable securities                1,213,572           1,211,462
     Working capital reserves
       invested in marketable
       securities                         4,235,144           4,227,782
     Interest reserves invested in
       marketable securities                298,750             298,231
     Mortgage revenue bond and
       working capital loan               8,254,707           8,254,707

</TABLE>

     l.   Consolidated Statements of Cash Flows
          -------------------------------------

          The consolidated statements of cash flows are intended to reflect only
     cash receipt and cash payment activity; therefore, the statements do not
     reflect non-cash investing and financing activities that affect the

                                      -36-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.   Summary of significant accounting policies - Continued

     consolidated balance sheets.  Investments in mortgage revenue bonds and
     working capital loans which, through deeds in lieu of foreclosures or other
     transfers, resulted in ownership of the underlying properties by nominees
     of the Partnership, subject to existing indebtedness, represent non-cash
     investing activities for financial statement purposes.

     m.   Income taxes
          ------------

          No provision has been made for federal, state or local income taxes in
     the consolidated financial statements since the General Partner and the BAC
     Holders are required to report on their individual tax returns their
     allocable share of taxable income, gains, losses, deductions and credits of
     the Partnership. For federal income tax purposes, the Partnership's
     investment in mortgage revenue bonds and working capital loans is carried
     at cost in the aggregate amount of $100,510,604 as of both December 31,
     1995 and 1994, since they are interest-only loans. Interest income from the
     mortgage revenue bonds is exempt from regular federal income tax, as
     discussed in Notes 5 and 6.

     n.   Net income and distributions per BAC
          ------------------------------------

          Net income and distributions per BAC represent 98.99% of net income
     and distributions declared, respectively, divided by the number of BACs
     outstanding during the year.

     o.   Reclassifications
          -----------------

          Certain amounts in the consolidated financial statements for the years
     ended December 31, 1994 and 1993 have been reclassified to conform with the
     1995 presentation.

3.   Related-party transactions

     The General Partner has the authority and responsibility for, among other
things, the overall management and control of the Partnership. The General
Partner and its affiliates do not receive any fees from the Partnership for
their services to the Partnership, but are reimbursed by the Partnership for any
actual costs and expenses incurred in connection with the operation of the
Partnership.  During 1995, 1994 and 1993, $188,546, $191,411 and $163,540,
respectively, were reimbursed for such costs and are included in general and
administrative expense and merger- related expense in the consolidated
statements of income.

     CRICO Mortgage Company, Inc. (CRICO Mortgage), a former affiliate of the
General Partner, was entitled to annual mortgage administration and servicing
fees from the borrowers which were payable from operating revenues each month
after payment of full base interest on the mortgage loans.  On June 30, 1995,
CRICO Mortgage merged with and into CRIIMI MAE Services Limited Partnership
(CRIIMI), an affiliate of CRIIMI MAE Inc., a publicly traded real estate
investment trust (the REIT).  The REIT was originally sponsored by CRI, the
general partner of the General Partner, but is not controlled by CRI, although
the CRI stockholders are directors, officers and major stockholders of the REIT.
Pursuant to the REIT merger agreement, the right to receive the accrued and
unpaid mortgage administration and servicing fees as of the date of the REIT

                                      -37-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.   Related-party transactions - Continued

merger was distributed by CRICO Mortgage to its shareholders and contributed by
them to CRI.  After June 30, 1995, the mortgage administration and servicing are
being performed by CRIIMI and mortgage administration and servicing fees are
payable to that entity.  The merger did not result in any increase in fees or
changes in the amount of fees which are currently payable.

     The following unpaid fees, including those relating to Paces River 2, were
due to CRI/CRICO Mortgage and CRIIMI as of December 31, 1995 and 1994:

<TABLE>
<CAPTION>
                                                   As of December 31,
                                                  1995           1994
                                               -----------    -----------
<S>                                            <C>            <C>
CRI/CRICO Mortgage                             $ 1,578,694    $ 1,307,173
CRIIMI                                             283,338             --
                                               -----------    -----------
     Total                                     $ 1,862,032    $ 1,307,173
                                               ===========    ===========
</TABLE>

     The unpaid fees are payable from available cash flow after payment of all
current and delinquent base interest and accrued interest on delinquent base
interest.  If available cash flow from the borrower is insufficient to pay the
fee, it is payable on the earlier of prepayment or maturity of the loan, after
debt repayment.  Any payments made with respect to unpaid fees will be applied
against the oldest outstanding fees first.

     In connection with the amended merger agreement entered into by the
Partnership, as discussed in Note 7, the unpaid fees will be purchased from CRI
for the discounted amount of $667,485, which represents approximately 42% of the
total accrued fees owed to CRI.  In addition, unpaid fees will be purchased by
CAPREIT from CRIIMI for $556,674, which represents all of the accrued fees which
are expected to be owed to CRIIMI by the Partnership as of June 30, 1996.  The
proposed purchase price for CRIIMI's portion remains in effect until June 30,
1996.  If the proposed merger is not consummated by such date, the purchase
price of CRIIMI's portion will be adjusted upward at a rate of $47,223 per
month.

     Fees paid by the borrowers to CRI/CRICO Mortgage and CRIIMI for the years
ended December 31, 1995, 1994 and 1993 were as follows:

<TABLE>
<CAPTION>
                                      For the years ended December 31,
                                   1995           1994           1993
                                -----------    -----------    -----------
<S>                             <C>            <C>            <C>
CRI/CRICO Mortgage              $    49,312    $   144,175    $   212,359
CRIIMI                               37,500              -              -
                                -----------    -----------    -----------
     Total                      $    86,812    $   144,175    $   212,359
                                ===========    ===========    ===========
</TABLE>



                                      -38-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.   Related-party transactions - Continued

     CRICO Management Corporation (CRICO), an affiliate of the General Partner,
assumed the property management responsibilities for Woodlane Place on October
1, 1991, and for Ethan's Glen IIA on June 1, 1992.  The General Partner engaged
CRICO Management of Minnesota, Inc. (CRICO Minnesota), another affiliate of the
General Partner, as management agent for the Valley Creek II and Ocean Walk
properties on July 1, 1992 and November 1, 1993, respectively.  Effective August
1, 1992, CRICO transferred its property management responsibilities for Woodlane
Place and Ethan's Glen IIA to CRICO Minnesota.  Management fees of $21,399 were
paid or accrued to the affiliates of the General Partner by the properties for
the month ended January 31, 1994.  In addition, 1993 incentive management fees
of $9,990 relating to Woodlane Place were paid to CRICO Minnesota in December
1994.  Management fees of $198,645 were paid or accrued during 1993.  The amount
paid under each management contract represented a base fee equal to 3.75% of
total gross revenues of the property, plus an additional incentive fee of .50%
payable only if certain performance standards were met.

     On February 1, 1994, CRICO and CRICO Minnesota contributed their property
management contracts and personnel to CAPREIT Residential Corporation
(Residential).  Residential was formed by CRI, but on February 1, 1994,
Residential was sold to AP CAPREIT, which is not currently owned or controlled
by CRI and/or its affiliates.  This change did not result in any increase in
property management fees.

     Nominee entities formed to take title to properties, subject to existing
indebtedness, are structured as limited partnerships.  The nominee entities and
the managing general partner of the General Partner have primarily common
ownership (except for Ethan's Glen IIA prior to March 14, 1996) and are under
common control.  The nominees, rather than the Partnership, became holders of
title to the properties in an effort to maintain the tax exempt nature of the
interest on the mortgage revenue bonds.  No compensation or fees were paid by
the Partnership to the nominee entities or their principal in connection with
the transfers of ownership.

     In connection with the amended merger agreement, each of the nominee
entities has agreed to either (a) sell, assign and transfer the partnership
interests in, or the real property and other assets of, such nominee entities to
CAPREIT or its designee for no additional consideration or (b) admit CAPREIT or
its designee as the managing general partner, whereupon the general partner
interests of the current general partners will be converted into limited partner
interests, and CAPREIT will have the option to acquire all of the limited
partner interests at any time within five years from the closing date of the
merger at the then fair market value (defined as the proportionate interest of
such limited partner in the fair market value of the partnership property as
encumbered by the mortgage loans) thereof.  Although such interests currently
have nominal value, if the fair market value of the partnership properties
increases prior to the time CAPREIT exercises its option, such increase in value
may benefit the owners of the nominee entities.

4.   Profits, losses and cash distributions to Partners

     Cash available for distribution (defined below) is distributed on a
quarterly basis within 45 days after the end of each quarter.  Each year, cash
available for distribution is distributed 98.99% to the BAC Holders and 1.01% to
the General Partner for each year until the BAC Holders receive a noncumulative
return equal to 10% per annum of their adjusted capital contribution (adjusted
for any return of capital contributions and by any distributions of residual or
liquidation proceeds from the sale of mortgaged properties or the dissolution of

                                      -39-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.   Profits, losses and cash distributions to Partners - Continued

the Partnership, described below).  Thereafter, during such year, the balance of
all such cash available for distribution will be distributed 90% to the BAC
Holders and 10% to the General Partner.

     Cash available for distribution, as defined in the Partnership Agreement,
is as follows:

     (1)  all revenues received by the Partnership, plus
     (2)  any amounts released by the General Partner from the working capital
          reserves, plus
     (3)  any amounts released from the interest reserves after completion of
          any applicable interest deferral period with respect to the mortgage
          loan in connection with such mortgaged property, less:

           (i) payments from revenues of operating expenses and Partnership
               indebtedness, and
          (ii) any amounts set aside for deposit into the working capital
               reserves.

     All cash receipts of the Partnership arising from a sale or other
disposition of a mortgaged property or the repayment of the principal and the
payment of interest, if any, payable upon the redemption or remarketing of the
applicable mortgage revenue bond (residual proceeds) will be distributed as
follows:

     (1)  to the payment of debts and liabilities of the Partnership (including
          any expenses of the Partnership incident to a sale or repayment),
          including loans or other debts and liabilities of the Partnership to
          any Partner or any affiliate (such debts and liabilities, in the case
          of a nonliquidating distribution, to be only those which are then
          required to be paid or, in the judgment of the General Partner,
          required to be provided for) and to any additions to the working
          capital reserves as the General Partner deems reasonably necessary for
          contingent, unmatured or unforeseen liabilities or obligations of the
          Partnership;
     (2)  to the General Partner and BAC Holders in the total amount of their
          capital contributions reduced (but not below zero) by any return of
          capital contributions previously made to the General Partner and BAC
          Holders and by the total amount of all prior distributions of residual
          proceeds to them; and
     (3)  to the General Partner and BAC Holders, in accordance with the
          respective positive balances in their capital accounts as of the date
          of sale or repayment, adjusted for operations and distributions to
          that date, and after allocation of any profits from such sale or
          repayment.

     All cash receipts other than residual proceeds arising from the dissolution
of the Partnership and the liquidation of the Partnership's assets less the
amounts utilized to pay the expenses of such liquidation (liquidation proceeds)
will be allocated in the same order as residual proceeds.

     All profits and losses not arising from a sale of a mortgaged property or
repayment of a mortgage loan shall be allocated 98.99% to the BAC Holders and
1.01% to the General Partner until the BAC Holders have received any unpaid
portion of the preferred cash flow return.  Thereafter, such profits and losses
shall be allocated 90% to the BAC Holders and 10% to the General Partner.


                                      -40-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.   Profits, losses and cash distributions to Partners - Continued

     Profits arising from a sale of a mortgaged property or repayment of a
mortgage loan will be allocated to the General Partner and BAC Holders as
follows: (i) that portion of profits as of the date immediately prior to the
date of sale or repayment shall be allocated in proportion to the negative
balances in their capital accounts, if any, to bring such negative balances in
their capital accounts to zero; (ii) to the General Partner and BAC Holders in
the amount of their capital contributions reduced (but not below zero) by any
return of capital contributions previously made to them and reduced by the sum
of (a) the total amount of all prior distributions of residual proceeds made to
them, plus (b) the positive balance in their respective capital accounts prior
to this allocation; (iii) of the remainder, 98.99% to the BAC Holders and 1.01%
to the General Partner, until the BAC Holders have received an allocation equal
to any unpaid portion of an amount which equals an annual noncompounded return
of 10% on their adjusted capital contributions (the Preferred Cash Flow Return);
provided however, that the allocation to the General Partner pursuant to this
provision will be deferred until after the BAC Holders have been allocated an
amount equal to any unpaid portion of the Preferred Cash Flow Return; and (iv)
the remainder, 90% to the BAC Holders and 10% to the General Partner.  No
proceeds were received in connection with any transfers of properties to
nominees.

     Losses from such a sale or repayment shall be allocated as follows: (i) an
amount of loss to the Partners and BAC Holders to the extent and in such
proportions as shall be necessary such that, after giving effect thereto, the
respective balances in all Partners' and BAC Holders' capital accounts are
proportionate to their interests; (ii) an amount of loss, if any, to the
Partners and BAC Holders until each Partners' and BAC Holders' capital account
equals his capital contributions to the Partnership; (iii) an amount of loss to
the Partners and BAC Holders to the extent of and in proportion to the Partners'
and BAC Holders' capital accounts after the above-described adjustments; and
(iv) any remaining loss to the Partners and BAC Holders in accordance with the
manner in which they bear the economic risk of loss or, if none, in accordance
with their interests.

     The Partnership expects to continue to make distributions to BAC Holders on
a quarterly basis.  The amended merger agreement stipulates that 1996
distributions cannot exceed ten cents per BAC per month.  There are no other
legal restrictions on the Partnership's present or future ability to make cash
distributions other than as set forth in the amended merger agreement.  The
distributions to BAC Holders have been funded from three primary sources: cash
flow from the underlying properties' operations, surplus working capital
reserves of the Partnership, and funds from property reserves/borrower
guarantees.  However, because the surplus working capital reserves are almost
depleted and property reserves/borrower guarantees were depleted during the
first quarter of 1995, it is expected that distributions will be based primarily
on cash flow from the Partnership's operations.  Cash flow from the
Partnership's operations consists of cash flow from six of the properties, plus
specified interest payments from two properties and contingent interest from one
property, supplemented by any available property reserves/borrower guarantees,
less Partnership expenses.  The General Partner seeks to optimize cash flow from
the properties owned by nominees.  Despite these efforts, the amounts paid to
the Partnership from the properties' operations may be expected to fluctuate
from period to period due to changes in occupancy rates, rental rates, operating
expenses and other variables.  Based upon the current operations of the
Partnership, the General Partner expects the 1996 distribution to approximate
$1.20 per BAC.


                                      -41-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.   Profits, losses and cash distributions to Partners - Continued

     The following distributions were paid or accrued to BAC Holders of
record during 1995, 1994 and 1993:

<TABLE>
<CAPTION>
                                     1995                         1994                          1993
                                Distributions to             Distributions to              Distributions to
                                   BAC Holders                  BAC Holders                   BAC Holders
                            ------------------------     ------------------------      -----------------------
   Quarter Ended               Total        Per BAC         Total         Per BAC         Total        Per BAC
----------------------      -----------     -------      -----------      -------      -----------     -------
<S>                         <C>             <C>          <C>              <C>          <C>             <C>
March 31                    $ 1,577,480     $  0.30      $ 2,103,307      $  0.40      $ 2,106,988     $  0.40
June 30                       1,577,480        0.30        2,155,890         0.41        2,135,908        0.41
September 30                  1,577,480        0.30        2,155,890         0.41        2,141,693        0.41
December 31                   1,577,482        0.30        2,155,890         0.41        2,160,097        0.41
                            -----------     -------      -----------      -------      -----------     -------
     Total                  $ 6,309,922     $  1.20      $ 8,570,977      $  1.63      $ 8,544,686     $  1.63
                            ===========     =======      ===========      =======      ===========     =======
</TABLE>

     Distributions to BAC Holders for the years ended December 31, 1995,
1994 and 1993 were funded as follows:

<TABLE>
<CAPTION>
                                                                          For the years ended
                                                                               December 31,
                                                            -------------------------------------------------
                                                                1995              1994              1993
                                                            ------------      ------------      ------------
<S>                                                         <C>               <C>               <C>
Cash Flow (1)                                               $  6,647,350      $  6,740,474      $  7,132,542

 Net (deposits to) withdrawals from working
   capital/interest reserves                                    (273,048)        1,917,953         1,499,326(2)
                                                            ------------      ------------      ------------
       Total cash available for distribution                $  6,374,302      $  8,658,427      $  8,631,868
                                                            ============      ============      ============
Distributions to:

  General Partner (1.01%)                                   $     64,380      $     87,450      $     87,182
                                                            ============      ============      ============

  BAC Holders (98.99%)                                      $  6,309,922      $  8,570,977      $  8,544,686
                                                            ============      ============      ============
</TABLE>

(1)  As defined in the Limited Partnership Agreement.
(2)  Excludes working capital loan advances and repayments of $153,000 and
     $83,939, respectively.

     Although distributions are paid on a quarterly basis, in July 1993, the
Partnership began declaring distributions on a monthly basis as a result of
listing the BACs on AMEX.  Distributions to BAC Holders totalling $1,577,480 or
$0.30 per BAC were declared for the quarter ending March 31, 1996, payable to
BAC Holders of record as of the last day of each month.

                                                                -42-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.   Investments

Description of the portfolio
----------------------------

     The Partnership acquired a portfolio of eight tax-exempt mortgage revenue
bonds issued by various state and local governments or their agencies or
authorities.  The proceeds from the mortgage revenue bonds were used by the
issuers to make nonrecourse participating mortgage loans to finance construction
and ownership of multifamily residential developments.  The mortgage revenue
bond with respect to each mortgaged property is payable only from payments made
on the corresponding mortgage loan.  None of the mortgage revenue bonds
constitutes a general obligation of any state or local government agency or
authority and no such government agency or authority is liable for the mortgage
revenue bonds.

     A description of the portfolio securing the mortgage revenue bonds and
working capital loans held by the Partnership is as follows:










































                                      -43-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.   Investments - Continued

<TABLE>
<CAPTION>
                    Investment Information                                          Mortgage Information
-----------------------------------------------------------------      ---------------------------------------------
                                                                        Permanent
                                                        Date of            Loan                              Loan
                                      No. of         Acquisition or    Origination                         Maturity
 Name and Location                 Rental Units       Construction         Date         Face Amount          Date
--------------------               ------------      --------------    ------------    --------------     ----------
<S>                                <C>               <C>               <C>             <C>                <C>
Mortgage Revenue Bond and
  Working Capital Loan
-------------------------
PACES RIVER 2
  ROCK HILL, SC (2,4)                  230                  --            7/28/88       $  9,600,000       2/02/2000

Real Estate
-----------
ETHAN'S GLEN IIA
  KANSAS CITY, MO (1)                  242                2/88            8/18/88         10,525,000       3/31/2000
GEARY COURTYARD
  SAN FRANCISCO, CA (1,2)              164                2/89            8/18/88         18,900,000       9/01/2000
OCEAN WALK
  KEY WEST, FL (1)                     296                1/89            1/27/89         19,826,000       4/01/2000
REGENCY WOODS
  WEST DES MOINES, IA (1,2)            200                1/90            1/29/90          7,559,604       2/01/2000
VALLEY CREEK II
  WOODBURY, MN (1)                     177                5/89            2/21/89         10,100,000       7/01/2000
WASHINGTON RIDGE
  KNOXVILLE, TN (3)                    248                9/90           12/14/88         10,000,000       7/01/2000
WOODLANE PLACE
  WOODBURY, MN (1)                     216                2/88            9/16/88         14,000,000      11/01/1999
                                     -----                                              ------------
                                     1,773                                              $100,510,604
                                     =====                                              ============
</TABLE>






















                                                                -44-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.   Investments - Continued

<TABLE>
<CAPTION>
                                                          Real Estate Information
                                   -------------------------------------------------------------------
                                   Commencement                         Buildings       Carrying
                                        of                                and           Amount of
                                    Real Estate                         Personal       Investments
  Name of Location                  Accounting          Land            Property       at 12/31/95
--------------------               -------------     -----------       -----------     -----------
<S>                                <C>               <C>               <C>             <C>
ETHAN'S GLEN IIA
  KANSAS CITY, MO (1)                  4/15/90       $   887,222       $ 8,943,985     $ 9,831,207
GEARY COURTYARD
  SAN FRANCISCO, CA (1,2)             12/31/90         2,679,666        16,716,243      19,395,909
OCEAN WALK
  KEY WEST, FL (1)                     9/30/91         3,580,530        13,387,656      16,968,186
REGENCY WOODS
  WEST DES MOINES, IA (1,2)           12/31/91           552,938         6,382,591       6,935,529
VALLEY CREEK II
  WOODBURY, MN (1)                    12/31/90           107,964         8,416,883       8,524,847
WASHINGTON RIDGE
  KNOXVILLE, TN (3)                   12/31/91         1,697,677         6,492,192       8,189,869
WOODLANE PLACE
  WOODBURY, MN (1)                    12/31/90           722,059        11,623,157      12,345,216
                                                     -----------       -----------     -----------
                                                     $10,228,056       $71,962,707      82,190,763
                                                     ===========       ===========
                               Less: Accumulated depreciation as of December 31, 1995  (14,171,745)
                                                                                       -----------
                                                                                       $68,019,018
                                                                                       ===========
</TABLE>

(1)  As discussed in Notes 2 and herein, as of December 31, 1995, these
     properties are accounted for as real estate due to deed in lieu of
     foreclosure or other transfers.

(2)  The amount listed under face amount of mortgage includes both the first
     lien tax-exempt loan and the second lien working capital loan.

(3)  This loan has the characteristics of real estate and, therefore, is
     accounted for as such in accordance with the policy discussed in Note 2.

(4)  As discussed herein, effective December 31, 1994, the Paces River 2
     investment is accounted for as an investment in mortgage revenue bond and
     working capital loan in the aggregate amount of $8,254,707.

     The Partnership invested in eight Federally tax-exempt mortgage revenue
bonds with an aggregate principal amount of $97,101,000 and made three working
capital loans with an aggregate principal amount of $3,409,604.  As of December
31, 1995, six properties collateralizing certain of the mortgage revenue bonds
have been transferred by deed in lieu of foreclosure (or by transfer of
partnership interests in the borrower entity) to nominees of the Partnership,
subject to existing indebtedness.  As a result, the Partnership accounts for
these investments as real estate for financial statement purposes. 
Additionally, the Partnership accounts for the Washington Ridge mortgage revenue
bond as real estate in accordance with the American Institute of Certified

                                                                -45-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.   Investments - Continued

Public Accountants (AICPA) Notice to Practitioners-ADC Arrangements. 
Accordingly, the consolidated balance sheets reflect these investments in the
amounts of $68,019,018 and $70,780,645 as of December 31, 1995 and 1994,
respectively, net of accumulated depreciation.  Additionally, the Partnership
accounts for the investment in the Paces River 2 mortgage revenue bond and
working capital loan as a security and a loan, respectively, with a combined
recorded investment of $8,254,707 as of December 31, 1995 and 1994, as discussed
in Note 2.

     Base interest income on the mortgage loans is funded from property
operations, certain borrowers' operating deficit guarantees and reserves, if
any, established at the time of closing on the acquisition of the mortgage
revenue bonds.  If base interest payments cannot be fully satisfied, the General
Partner evaluates various courses of action, including sale, recapitalization,
loan modification, deed in lieu of foreclosure or foreclosure.

     Following are updates of significant events affecting the Partnership's
properties during 1995, 1994 and 1993:

     Ocean Walk
     ----------

          In March 1994, Ocean Walk experienced fire damage of approximately
     $135,000. The fire was caused by the negligence of a resident.  The
     property's insurance carrier has covered the cost of the repairs less a
     minimal deductible.  The cost of repairing the fire damage and the
     insurance carrier's reimbursement are reflected in rental expenses and
     rental revenue, respectively, in the 1994 consolidated statement of income.
     Repairs to the property relating to the fire damage were completed during
     1994.  In addition, the insurance carrier reimbursed the property
     approximately $27,000 in 1995 to cover lost rental revenue due to units
     taken off the market in 1994 as a result of the fire.  As of December 31,
     1994, all units were fully operational.

     Woodlane Place
     --------------

          In March 1994, the Partnership was notified by the management agent of
     Woodlane Place that certain buildings at the property experienced damage
     due to frost heaving.  The cost to repair the damage of approximately
     $237,000, less a minimal deductible, was covered by the property's
     insurance carrier.  The cost of repairing the damage and the insurance
     carrier's reimbursement are reflected in rental expenses and rental
     revenue, respectively, in the consolidated statement of income.  These
     repairs were completed in 1994.

          The nominee owner hired an engineer to analyze the underlying problem
     of inadequate drainage at the property and to determine the number of
     affected buildings and the severity of the drainage problem.  Based on this
     analysis, the costs associated with the correction of the drainage problem
     are expected to be approximately $300,000, and will not be covered by the
     property's insurance carrier.  Property improvements relating to the
     drainage problem totalling approximately $67,000 and $29,000 were completed
     in 1995 and 1994, respectively, and are included in buildings and personal
     property in the consolidated balance sheets.  The remaining repairs are
     expected to be completed in 1996 and 1997.  As the remaining costs to
     correct the drainage problem are capitalizable, the consolidated financial

                                      -46-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.   Investments - Continued

     statements do not include an adjustment for the remaining estimated costs. 
     Due to the nature of the drainage problem, occupancy levels at the property
     are not expected to decrease as a result of the ongoing capital
     improvements.  Funding for these capital improvements may be provided from
     the property's existing replacement reserves, future property cash flow,
     and/or a loan to the property from the working capital reserves of the
     Partnership.

          The Partnership has joined with the property's insurance carrier in a
     lawsuit against the original architect and general contractor of Woodlane
     Place.  The Partnership has joined on a contingent basis, with no legal
     fees being incurred unless the Partnership receives a settlement or
     judgment, and with other legal expenses estimated to be less than $20,000. 
     There is no assurance that the Partnership will receive any funds as a
     result of this lawsuit.

Collateral
----------

     The mortgage revenue bonds are secured by mortgage loans which are
collateralized by first mortgages on the properties, assignments of existing and
future rents and security agreements with respect to personal property evidenced
by the filing of Uniform Commercial Code (UCC) financing statements.  Addition-
ally, the Partnership required the borrowers to establish operating reserves,
replacement reserves, tax and insurance escrows and debt service reserves and
provide operating deficit guarantees.  As a result of various circumstances,
including, but not limited to, slow rent-up of the properties, unstable
operations and depletion of certain properties' operating and debt service
reserves, nominees of the Partnership had received title to six of the
properties as of December 31, 1995.  These properties, along with the collateral
for the Washington Ridge mortgage, are classified as investments in real estate
in the accompanying balance sheets as of December 31, 1995 and 1994.

     In connection with the transfers of properties to nominees of the
Partnership, the Partnership obtained an opinion from its former independent
accounting firm in July of 1991 that the reduction in pay rate and compounding
of unpaid base interest at the original base interest rate would not cause a
reissuance of the bonds under Section 103 of the Internal Revenue Code of 1986,
as amended (the Code) (which would cause the bonds to lose their tax-exempt
status).  The Partnership also obtained opinions from certain bond counsel that
certain transfers of the properties to Partnership nominees would not cause the
Partnership to become a substantial user of the projects pursuant to Section 103
of the Code (which also could have caused the bonds to lose their tax-exempt
status).  The bond counsel opinions were obtained in connection with the Ethan's
Glen IIA and Ocean Walk transfers.

     In 1991, the U. S. Supreme Court decided a case, Cottage Savings
Association v. Commissioner (Cottage Savings), that could be interpreted to
compromise the tax-exempt status of mortgage revenue bonds which have been
modified.  In response to this decision, in December 1992, the Internal Revenue
Service issued proposed regulations in connection with the modification of debt
instruments.  If the regulations are adopted in their present form, they would
alter existing authority and curtail the type and extent of modifications that
could be made by a bond owner/lender without adversely affecting the tax-exempt
status of bonds.  It is not clear at this time what effect the Cottage Savings
decision or the proposed regulations may have on the Partnership with respect to
the bonds secured by loans on properties currently held by nominees.  The

                                      -47-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.   Investments - Continued

General Partner continues to believe that these bonds remain tax-exempt.  The
General Partner will continue its efforts, which include the transfer of title
on the properties to nominees, in an attempt to protect the tax-exempt status of
the bonds and the interest thereon.  However, in light of the Cottage Savings
decision and the proposed regulations, there can be no assurance that the
General Partner will be successful in its efforts.

     In March 1995, the Partnership was notified by the Paces River 2 borrower
that the property may not have been in compliance with the low to moderate
income requirements under the tax-exempt bonds.  The borrower had applied tenant
certification criteria consistent with that used by state authorities.  Further,
state authorities had reviewed and approved the compliance on an annual basis. 
However, the borrower believed that certain technical aspects of the tenant
certification criteria may not have been appropriately applied.  The borrower
met with the state authorities and determined the appropriate criteria.  As of
December 31, 1995, the borrower was in compliance with the requirements for tax-
exempt status.

     The General Partner's ongoing strategy has been for the nominees to
continue holding the properties acquired upon the defaults of the original
borrowers until the loan maturity dates.  If the merger proposal, as discussed
in Note 7, is approved, the interests of the BAC Holders will be redeemed.  If
the merger proposal is not approved, in order to maximize the overall yield, the
General Partner may recommend, subject to satisfactory resolution of any issues
relating to the tax-exempt status of the mortgage revenue bonds, for investor
approval of the extension of certain loan maturity dates and, if approved,
arrange for related amendments to the pertinent mortgage revenue bonds as
needed.

     No valuation adjustments were necessary on the properties in 1995, 1994 or
1993.

     As illustrated in the table below, as of December 31, 1995, the Partnership
accounts for all of its investments, except Paces River 2, in mortgage revenue
bonds and working capital loans as real estate for financial statement purposes
due to the receipt of deeds in lieu of foreclosure or transfer of partnership
interests when or in accordance with the Notice.





















                                      -48-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.   Investments - Continued

<TABLE>
<CAPTION>
                                                                                                Change in
                                                                                                Management
                              Depletion of             Commencement                             Company to
                              Borrower and                  of              Date of          Affiliate of the
Name of Investment            Debt Service              Real Estate      Deed in Lieu          Partnerships
 Rental Property              Reserves (1)              Accounting        or Transfer       through 1/31/94(2)
------------------            ------------             ------------      -------------      ------------------
<S>                           <C>                      <C>               <C>                <C>
Ethan's Glen IIA                  1993                   4/15/90           4/15/90(3)             6/01/92
Geary Courtyard                   1991                  12/31/90           6/30/93(4)               N/A
Ocean Walk                        1992                   9/30/91           3/16/93(5)            11/01/93
Paces River 2                     1992                  12/31/91 (7)         N/A  (6)               N/A
Regency Woods                     1995                  12/31/91           2/28/95(8)               N/A
Valley Creek II                   1993                  12/31/90           1/02/93                7/01/92
Washington Ridge                   N/A                  12/31/91             N/A  (9)               N/A
Woodlane Place                    1991                  12/31/90           1/02/92               10/01/91

</TABLE>

(1)  Due to the depletion of borrower and debt service reserves, base interest
     payments made to the Partnership are solely in the form of cash flow from
     property operations.

(2)  CRICO Management Corporation (CRICO) or CRICO Management of Minnesota, Inc.
     (CRICO Minnesota), affiliates of the General Partner, assumed property
     management responsibilities on the indicated dates.  On February 1, 1994,
     CRICO and CRICO Minnesota contributed their property management contracts
     and personnel to CAPREIT Residential Corporation (Residential). 
     Residential was formed by CRI, the managing general partner of the General
     Partner, but on February 1, 1994, Residential was sold to AP CAPREIT, which
     is not currently owned or controlled by CRI and/or its affiliates.

(3)  During 1990, the nominee limited partnership holding Ethan's Glen IIA was
     expanded so that two unaffiliated individuals acquired a 98.99% interest in
     the nominee as limited partners in consideration for certain capital
     contributions, plus their undertaking to form an investor limited
     partnership to admit additional partners in exchange for further capital
     contributions.  In November 1991, the nominee partnership was further
     expanded to admit the investor partnership entity.  The unaffiliated
     investor limited partners are presently in default with respect to the pay-
     in schedule and their interests were terminated effective March 14, 1996.

(4)  In 1991, the Partnership entered into a workout agreement with the borrower
     pursuant to which the borrower would pay all cash flow to the Partnership,
     with certain agreed upon minimum performance goals.  The borrower, at that
     time, deposited a deed in lieu of foreclosure in escrow that would be
     recorded if the borrower defaulted under the workout or failed to cure all
     arrearages by June 1, 1992.  The borrower transferred its partnership
     interests in Geary Courtyard Associates, a California Limited Partnership,
     as a result of the default by the borrower on the loan workout agreement.

(5)  A deed in lieu of foreclosure was obtained in exchange for a release of the
     General Partners' unsecured operating deficit guarantee.



                                                                -49-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.   Investments - Continued

(6)  In March 1993, the Partnership finalized a three-year workout agreement
     (the Workout) with the borrower.  The balance of the borrower's guarantee
     amount has been paid in full. The Workout required the borrower to pay the
     base interest on the tax-exempt loan in full on a monthly basis, while
     allowing all or a portion of the interest on the working capital loan to
     accrue (the amount adjusted annually).  Upon the occurrence of a monetary
     default during the term of the Workout, the Partnership could direct the
     release of the deed currently held in escrow to be recorded in lieu of
     foreclosure.  The borrower has complied with the terms of the Workout,
     which matured in March 1996.

(7)  Effective December 31, 1994, the Paces River 2 investment is accounted for
     as an investment in mortgage revenue bond and working capital loan, as
     discussed below.

(8)  Shortfalls in interest payments from Regency Woods were being paid from
     draws on a $250,000 irrevocable letter of credit.  The Partnership drew
     down the full amount remaining under the letter of credit in January 1995,
     resulting in the default by the borrower on the working capital loan.  The
     borrower transferred the property by deed in lieu of foreclosure to a
     nominee of the Partnership as of February 28, 1995.

(9)  The borrower is paying full debt service solely from property operations. 
     In the fourth quarter of 1994, the borrower informed the Partnership that
     the debt service coverage requirement had been met.  Upon review of
     documentation from the borrower's independent accounting firm, the General
     Partner released the operating deficit guarantee on March 30, 1995. 
     Contingent interest is being paid on a quarterly basis.  This investment is
     accounted for as real estate due to ADC determination.

Interest
--------

     The mortgage loans, and correspondingly the mortgage revenue bonds, bear
interest at a base interest rate and provide for contingent interest, payable as
described below, in an amount equal to the difference between the base mortgage
interest rate and an annual noncompounding rate of return to the Partnership of
16% per annum.  The mortgage loans provide for base mortgage interest which is
unconditional and payable monthly, in arrears.  After depletion of properties'
reserves, the payment of base interest from properties currently owned by
nominees of the Partnership will be solely from cash flow from the properties'
operations.  The mortgage loan on the Regency Woods property provided that only
a portion of the base mortgage interest was required to be paid on a current
basis during an initial period of the loan, not to exceed three years from
acquisition of the mortgage revenue bond.  The deferred base mortgage interest
is unconditionally due and payable upon sale of the project or repayment of the
loan.  The unpaid base mortgage interest bears interest at the base mortgage
interest rate and is to be repaid prior to contingent interest.

     Contingent interest will be equal to the sum of (i) 100% of the project
cash flow for each year up to an amount which provides the Partnership a
noncompounded interest rate between 1.5% and 2.25% over the base mortgage
interest rate in effect, and (ii) 42.5% to 60% of remaining cash flow (subject
to certain priority payments including any currently payable interest with 
respect to a working capital loan to such borrower) to provide the Partnership a
total return of 16% per annum.  Contingent interest is payable quarterly on an
estimated basis, in arrears but only to the extent of available net cash flow,

                                      -50-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.   Investments - Continued

if any.  Contingent interest is recognized as revenue when collected. 
Contingent interest due as of December 31, 1995, 1994 and 1993 amounted to
$37,635,033, $30,841,439 and $23,977,293, respectively.  No contingent interest
was received or accrued by the Partnership during 1994 or 1993.  The Partnership
received contingent interest of $70,549 from Washington Ridge during 1995.  

     To the extent that the aggregate of all interest payments, including
contingent interest, for any period after completion of construction does not
equal 16% per annum, the difference will be deferred (without interest on
contingent interest) until the mortgaged property is sold or the mortgage loan
is otherwise repaid and will be payable if sufficient proceeds exist.  The
amount of deferred contingent interest payable in such event will equal the sum
of (i) 100% of the sale or repayment proceeds (after certain priority payments)
up to the amount necessary for the Partnership to achieve the full amount of the
100% participation, to the extent that such amount was previously deferred,
and/or (ii)(a) with respect to mortgage loans for to-be-constructed or
rehabilitated mortgaged properties, 50% of the sale or repayment proceeds, or
(b) with respect to mortgage loans for existing mortgaged properties, up to
42.5% to 60% of the sale or repayment proceeds, in either instance after the
payment of any 100% participation, if applicable, up to the amount necessary for
the Partnership to achieve a total return of 16% per annum. Consequently, the
ability of the Partnership to collect all contingent interest will be dependent
upon the mortgaged property's operating performance and the sale or repayment
proceeds.  Because the Partnership may not be able ultimately to collect
contingent interest, the Partnership has not recorded any contingent interest
since inception of the Partnership with exception to the contingent interest
received from Washington Ridge, as discussed above.

Terms
-----

     In general, the terms of the mortgage loans extend for 10 years after the
completion of construction, except for Regency Woods which is for 10 years from
the commencement of the mortgage loan.  The corresponding bonds contain
provisions requiring payment or redemption of the bonds upon maturity of the
related loan.  The Partnership may seek authority from investors and the issuers
of the mortgage revenue bonds to hold the mortgage revenue loans with respect to
the mortgaged properties through longer periods within the mortgage revenue bond
terms, as described below, if necessary, in an effort to maximize overall yields
and residual proceeds upon the sale or refinancing of the underlying properties.
There can be no assurance that the investors or the issuers will consent to such
extensions.

     The principal of the mortgage revenue bonds will not be amortized during
the terms of the bond and will be required to be repaid in a lump-sum balloon
payment at the expiration of the loan term or at such earlier time as the loan
may require.  Each mortgage loan is non-assumable and due on sale of the
mortgaged property.  Prepayment and sale of a mortgaged property is prohibited
during the first seven years of a mortgage loan following completion of
construction. Prepayment of the Regency Woods loan (or sale of the Regency Woods
property) is prohibited during the first seven years following the Partnership's
acquisition of that bond.  Thereafter, prepayment in full is permitted under any
mortgage loan, subject to the payment to the Partnership of:

     (1)  any 100% participation contingent interest accrued to the date of
          prepayment, and


                                      -51-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.   Investments - Continued

     (2)  additional interest in an amount equal to the highest total amount of
          all contingent interest paid by the borrower in any of the three years
          preceding the date of prepayment, capitalized at the base mortgage
          loan interest rate then in effect.

     The Partnership may require prepayment upon the occurrence of an "event of
taxability" which would include, among others, any act or event which presents
significant risk that interest on the mortgage revenue bonds would be subjected
to federal taxation. As of December 31, 1995 the Partnership is aware of no
"event of taxability" which has occurred.

Working capital loans
---------------------

     The Partnership was permitted to use up to 5% of its gross offering
proceeds to make working capital loans to borrowers to cover certain expenses
which were not financeable from the proceeds of the mortgage revenue bonds. The
interest on the working capital loans is subject to federal income tax.  As of
December 31, 1995, the Partnership had made taxable working capital loans to
Paces River 2, Geary Courtyard and Regency Woods in the amounts of $850,000,
$900,000 and $1,659,604, respectively. These loans are collateralized by second
deeds of trust on the properties and mature on February 1, 2000, September 1,
2000 and February 1, 2000, respectively. The investments in working capital
loans, except Paces River 2, are accounted for as real estate as of December 31,
1995.

     The principal of the working capital loans will not be amortized during the
terms of the loans and will be required to be repaid in a lump-sum balloon
payment at the expiration of the loan term or at such earlier time as the loan
terms may require. Each working capital loan is nonassumable and due on sale of
the mortgaged property.  Prepayment and sale of the mortgaged property is
prohibited during the first seven years after the commencement dates. The
working capital loans provide for base interest during the construction and
permanent phases of the loans and contingent interest, which commenced after the
completion of construction of the applicable project, on a basis similar to the
mortgage revenue bonds.

6.    Income taxes

     For income tax purposes, base interest income is accrued when earned.  The
accrual of interest is discontinued when at the time of accrual, ultimate
collectibility of the interest due is considered unlikely. Once a loan has been
placed in a non-accrual status, income is recorded only as cash payments are
received from the borrower or nominee until such time as the uncertainty of
collection of unpaid base interest is eliminated.  Loans relating to Geary
Courtyard, Valley Creek II and Woodlane Place were placed on non-accrual status
in 1993; therefore, for income tax purposes, income is recognized to the extent
of cash received.  Contingent interest from the investment is recognized as
revenue when collected.  Contingent interest of $70,549, as discussed above, was
recognized for the year ended December 31, 1995.  No contingent interest was
recognized for the years ended December 31, 1994 and 1993.

     As discussed in Note 5, seven of the eight investments in mortgage revenue
bonds and two of the three working capital loans are accounted for as
investments in real estate as of December 31, 1995.  However, for federal income
tax purposes, the investments in all of these mortgage revenue bonds are treated
as loans, interest on which is exempt from federal income tax.  A reconciliation

                                      -52-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.   Income taxes - Continued

of the primary differences between the financial statement net income and
municipal income for tax purposes is as follows:
























































                                      -53-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.   Income taxes - Continued

<TABLE>
<CAPTION>
                                                                          For the years ended
                                                                               December 31,
                                                            -----------------------------------------------
                                                                1995              1994             1993
                                                            ------------      ------------     ------------
<S>                                                         <C>               <C>              <C>
Financial statement net income                              $  3,728,361      $  3,256,314     $  2,591,726

  Municipal interest income not recognized (1)                 6,783,017         7,101,650        6,830,474
  Rental income, net (2)                                      (3,393,314)       (3,429,900)      (2,822,609)
  Investment expenses and losses not allowable
    for tax purposes                                              29,166            25,344          720,849
  Excess amortization for tax purposes                          (144,600)         (144,600)        (144,600)
  Taxable income on working capital loans, net                  (127,505)               --         (252,033)
                                                            ------------      ------------     ------------
Municipal income, net for tax purposes                      $  6,875,125      $  6,808,808     $  6,923,807
                                                            ============      ============     ============

Municipal income per BAC                                    $       1.29      $       1.28     $      1.30
                                                            ============      ============     ============

</TABLE>

(1)  Represents the adjustment for interest income received or receivable during
     the period, which was previously eliminated from net income for financial
     statement purposes.
(2)  Represents net rental income from investments accounted for as real estate.
(3)  Represents interest on delinquent base interest, for loans on accrual
     status for income tax purposes, compounded monthly at the base rate of
     interest of the applicable loan.

     Although the Partnership accounted for seven of the eight mortgage loan
investments and two of the three working capital loans as real estate for
financial statement purposes, and reclassified the cash flow from these
properties as rental income and expense, the Partnership continues to charge the
borrowers and nominees interest under the terms of the original loans and
interest on unpaid base mortgage interest.  The following tables summarize the
full interest payments for the years ended December 31, 1995, 1994 and 1993 that
are due to the Partnership from the properties:

















                                                                -54-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.   Income taxes - Continued

<TABLE>
<CAPTION>

                                                  For the year ended December 31, 1995
                          ----------------------------------------------------------------------------------
                                              Base Interest      Base Interest                     Cumulative
                                                Paid From          Paid From       Current Base      Unpaid  
                           Current Base        Properties'       Non-Operating       Interest         Base
                          Interest Due(1)     Operations(3,4)      Sources(2)        Not Paid        Interest
                          ---------------     -------------      -------------     ------------    -----------
<S>                       <C>                 <C>                <C>               <C>             <C>
Ethan's Glen IIA            $  920,937          $  754,900         $       --       $  166,037     $   321,262
Geary Courtyard              1,740,600             762,000                 --          978,600       5,722,503
Ocean Walk                   1,774,427           1,648,840                 --          125,587       1,466,416
Paces River 2                  769,025             795,522                 --          (26,497)        197,359
Regency Woods                  693,458             463,362             17,834          212,262         270,050
Valley Creek II                919,100             722,363                 --          196,737         707,343
Washington Ridge               875,000             875,000                 --               --          72,917
Woodlane Place               1,407,000             954,478                 --          452,522       2,662,408
                            ----------          ----------         ----------       ----------     -----------
                            $9,099,547          $6,976,465         $   17,834       $2,105,248     $11,420,258
                            ==========          ==========         ==========       ==========     ===========
</TABLE>

<TABLE>
<CAPTION>
                                                  For the year ended December 31, 1994
                          ---------------------------------------------------------------------------------
                                              Base Interest      Base Interest                     Cumulative
                                                Paid From          Paid From       Current Base      Unpaid  
                           Current Base        Properties'       Non-Operating       Interest         Base
                          Interest Due(1)      Operations          Sources(2)        Not Paid        Interest
                          ---------------     -------------      -------------     ------------    -----------
<S>                       <C>                 <C>                <C>               <C>             <C>
Ethan's Glen IIA            $  920,937          $  776,803         $   65,654       $   78,480     $   155,225
Geary Courtyard              1,740,600             601,329                 --        1,139,271       4,743,903
Ocean Walk                   1,774,427           1,571,022             35,838          167,567       1,340,829
Paces River 2                  769,025             743,314                 --           25,711         223,856
Regency Woods                  693,458             544,268            149,190               --          57,788
Valley Creek II                919,100             614,332                 --          304,768         510,606
Washington Ridge               875,000             875,000                 --               --          72,917
Woodlane Place               1,407,000             979,747                 --          427,253       2,209,886
                            ----------          ----------         ----------       ----------     -----------
                            $9,099,547          $6,705,815         $  250,682       $2,143,050     $ 9,315,010
                            ==========          ==========         ==========       ==========     ===========
</TABLE>












                                                                -55-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.   Income taxes - Continued

<TABLE>
<CAPTION>

                                                  For the year ended December 31, 1993
                          ------------------------------------------------------------------------------------
                                              Base Interest      Base Interest                     Cumulative
                                                Paid From          Paid From       Current Base      Unpaid  
                           Current Base        Properties'       Non-Operating       Interest         Base
                          Interest Due(1)      Operations          Sources(2)        Not Paid        Interest
                          ---------------     -------------      -------------     ------------    -----------
<S>                       <C>                 <C>                <C>               <C>             <C>
Ethan's Glen IIA            $  920,937          $  811,075         $  109,862       $       --     $    76,745
Geary Courtyard              1,740,600             687,267                 --        1,053,333       3,604,632
Ocean Walk                   1,774,427           1,560,048                 --          214,379       1,173,262
Paces River 2                  769,025             706,634            142,848          (80,457)        198,145
Regency Woods                  673,303             538,836            134,467               --          57,788
Valley Creek II                919,100             554,970            234,883          129,247         205,838
Washington Ridge               875,000             875,000                 --               --          72,917
Woodlane Place               1,407,000             880,463                 --          526,537       1,782,633
                            ----------          ----------         ----------       ----------     -----------
                            $9,079,392          $6,614,293         $  622,060       $1,843,039     $ 7,171,960
                            ==========          ==========         ==========       ==========     ===========

</TABLE>

(1)  Although three of these loans were placed on non-accrual status for income
     tax purposes, the Partnership also charges the borrowers interest on unpaid
     base interest, which, totaled $1,050,137, $803,279 and $518,381 for 1995,
     1994 and 1993, respectively.
(2)  Amounts were funded from reserves provided for from the mortgage loan
     proceeds and/or funds from the general partners of the borrowers.
(3)  Excludes amounts received by the Partnership in January 1996 from the
     release of excess tax and insurance reserves relating to 1995.  Such
     amounts received from Ethan's Glen IIA, Paces River 2 and Woodlane Place
     totalled $70,000, $12,000 and $23,000, respectively.
(4)  Excludes contingent interest of $70,549 received by the Partnership from
     Washington Ridge during 1995.


7.   Merger Proposal

     On September 11, 1995, the Partnership and its General Partner entered into
a merger agreement, subject to BAC Holder approval, with an affiliate of Capital
Apartment Properties, Inc. (CAPREIT), a private real estate investment trust. 
An affiliate of CAPREIT is the property manager for five of the eight properties
securing the bonds held by the Partnership.  If the merger proposal is approved
by a majority vote of BAC Holders, all of the BACs in the Partnership will be
redeemed for cash and the interests represented by such BACs will be canceled. 
On January 31, 1996, the agreement for the proposed merger was modified for the
first time to improve the terms of the original proposal.  Under the original
proposal, the redemption amount per BAC was to be $14.360.  Under the first
modified agreement, the redemption amount per BAC was to be $15.1735, subject to
adjustment but not less than $15.0372 or greater than $15.3098.  On March 14,
1996, the merger agreement was modified for the second time to round the
expected redemption amount per BAC from $15.1735 to $15.18, subject to
adjustment for available cash as defined in the amended merger agreement, but
not less than $15.04 or greater than $15.32.  In addition, the redemption

                                                                -56-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.   Merger Proposal - Continued

amounts will be reduced by the amount of court approved legal fees and expenses
awarded to counsel of the plaintiffs in the putative class action suits
described below.  Such legal fees and expenses are not expected to exceed $0.16
per BAC.

     The BAC Holders will also vote upon the removal of the Partnership's
General Partner immediately prior to consummation of the proposed merger and the
election in its stead of a newly-formed wholly-owned subsidiary of CAPREIT. 
CAPREIT has agreed to pay the General Partner $500,000 in consideration for its
1.01% general partner interest in the Partnership.  CAPREIT and/or its designee
will also acquire an account receivable held by CRI and CRIIMI MAE Services
Limited Partnership (CRIIMI), for the accrued mortgage servicing and
administration fees on certain property mortgage loans of the Partnership.  The
general partner of CRIIMI is a subsidiary of CRIIMI MAE Inc., a publicly-traded
company affiliated with the General Partners.  Under the second modified
agreement, CAPREIT will pay the discounted amount of $667,485 to CRI for its
accrued fees, which represents approximately 42% of the total accrued fees owed
to CRI by the Partnership.  Also, CAPREIT will pay $566,676 to CRIIMI for its
accrued fees, which represents all of the accrued fees which are expected to be
owed to CRIIMI by the Partnership as of June 30, 1996.  If the closing of the
proposed merger does not occur by June 30, 1996, the amounts to be paid by
CAPREIT to CRIIMI will increase, to reflect additional amounts currently being
accrued for mortgage servicing and administration fees, at a rate of $47,223 per
month.

     Each of the nominee entities has agreed to either (a) sell, assign and
transfer the partnership interests in, or the real property and other assets of,
such nominee entities to CAPREIT or its designee for no additional consideration
or (b) admit CAPREIT or its designee as the managing general partner, whereupon
the general partner interests of the current general partners will be converted
into limited partner interests, and CAPREIT will have the option to acquire all
of the limited partner interests at any time within five years from the closing
date of the merger at the then fair market value (defined as the proportionate
interest of such limited partner in the fair market value of the partnership
property as encumbered by the mortgage loans) thereof.  Although such interests
currently have nominal value, if the fair market value of the partnership
properties increases prior to the time CAPREIT exercises its option, such
increase in value may benefit the owners of the nominee entities.

     Consummation of the merger is contingent upon the approval of a majority of
BAC Holders.  The proposed merger is also contingent upon receiving a favorable
opinion regarding the fairness of the redemption amount to BAC Holders from a
financial point of view.  A favorable opinion from an independent investment
banking firm was issued on March 14, 1996.  A proxy statement is expected to be
issued to BAC Holders after it is filed with and clearance is received from the
Securities and Exchange Commission (SEC).  A preliminary proxy statement was
filed with the SEC on March 18, 1996.   This proxy statement includes a full
description of the proposed merger and the independent fairness opinion.

8.   Litigation

     On September 22, 1995, Irving Zakin commenced a putative class action (the
Zakin Action) against the Partnership, its General Partner (CRITEF III
Associates Limited Partnership), its Assignor Limited Partner (CRITEF III,
Inc.), CRI, William B. Dockser, H. William Willoughby, Capital Realty Investors
Tax Exempt Fund Limited Partnership, CRITEF Associates Limited Partnership,
CRITEF, Inc., and CAPREIT (collectively, the Defendants) in the Court of

                                      -57-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.   Litigation - Continued

Chancery of the State of Delaware in New Castle County (the Chancery Court)
(C.A. No. 14558).  The complaint alleges, among other things, that the amount
offered to the BAC Holders in the proposed merger at the time the complaint was
filed was inadequate, and that the Defendants breached their fiduciary duty to
the BAC Holders, or aided and abetted such a breach, engaged in self-dealing and
misled BAC Holders in connection with the proposed merger.  The suit seeks to
enjoin the proposed merger, to obtain damages in an unspecified amount for the
BAC Holders, and to compel the Defendants to maximize the amount paid to the BAC
Holders and consider unspecified alternatives to the proposed merger.

     On October 5, 1995, David and Johanna Wingard (the Wingard Action)
commenced a second putative class action against the Defendants in the Chancery
Court (C.A. No 14604).  The complaint in the Wingard Action contains virtually
the identical allegations and seeks virtually the identical relief as in the
Zakin Action.  A request to the Chancery Court has been made by the plaintiffs
in both lawsuits to consolidate the two actions.

     On January 31, 1996, the Defendants and the plaintiffs and their respective
attorneys reached a tentative settlement of the putative class actions which is
memorialized in a Memorandum of Understanding (the Memorandum), dated as of such
date.  The proposed settlement must be approved by the Chancery Court.  The
Memorandum contemplates the complete discharge, settlement and release of all
claims that have been, could have been, or in the future might be asserted in
any action or any other proceeding in connection with the proposed merger.  The
parties to the Memorandum will use their best efforts to execute an appropriate
Stipulation of Settlement (the Stipulation) and such other documents as may be
required in order to obtain approval by the Chancery Court of the settlement.

     The Defendants have denied, and continue to deny, that any of them have
committed or threatened to commit any violations of law or breaches of duty to
the BAC Holders.  The Defendants have entered into the Memorandum solely because
the proposed settlement would eliminate the burden and expense of further
litigation and would facilitate the consummation of the proposed merger, which
the General Partner believes to be in the best interest of the BAC Holders.

     In accordance with the Memorandum, the agreements for the proposed merger
were amended to provide for the revised merger terms, as discussed above. 
Pursuant to the Memorandum, the plaintiffs' counsel will be entitled to apply to
the Chancery Court for an award of reasonable attorneys' fees and expenses. 
Such expenses are not expected to exceed $0.16 per BAC.  These fees will reduce
the redemption amounts to BAC Holders in connection with the proposed merger, as
discussed.  In the event that the proposed merger is not consummated, these fees
will not be borne by the Partnership.  As such, the Partnership's financial
statements do not include any adjustment for these fees.

     Counsel for the plaintiffs have reviewed certain documents relating to the
proposed mergers, and will have the opportunity to review and take depositions
of representatives of the General Partner and CAPREIT.  After such review,
counsel for the plaintiffs shall have the right to terminate the settlement
contemplated in the Memorandum, based on material information not presently
available to them.

     After the Stipulation is executed, the parties will seek preliminary
approval of the settlement by the Chancery Court and will then mail notice of
the proposed settlement to members of the putative class.  As soon as
practicable following completion of the discovery described in the preceding
paragraph and after class members have had a period of time to review the notice

                                      -58-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.   Litigation - Continued

of proposed settlement, the parties will use their best efforts to obtain final
Chancery Court approval of the settlement and the dismissal of the class actions
as to all of the claims.

     On November 9, 1995, CRI filed a complaint against Capital Management
Strategies, Inc. (CMS), a company controlled by Martin C. Schwartzberg, to
determine the proper amount of fees to be paid in 1996 under an asset management
agreement.  CMS answered on January 10, 1996, but asserted no counterclaims.

     Thereafter, Mr. Schwartzberg launched a hostile consent solicitation to be
designated as managing general partner of approximately 125 private partnerships
sponsored by CRI.  Mr. Schwartzberg is a former shareholder and executive
officer of CRI who decided to leave the company as of January 1, 1990.  In
connection with his departure, he relinquished his general partner duties for
all CRI-sponsored partnerships, including those of the General Partner.  Mr.
Schwartzberg has publicly stated that he is opposing the proposed merger until
the Partnership makes its financial statements and financial statements of the
properties available.  Such financial statements of the properties are included
in the Form 8-K filed with the Securities and Exchange Commission on March 25,
1996.

     On January 18, 1996, Mr. Schwartzberg and CMS filed a complaint in the
Circuit Court of Montgomery County, Maryland (the Circuit Court), against CRI
and Messrs. Dockser and Willoughby alleging, among other things, (i) that CRI
and Messrs. Dockser and Willoughby have breached an asset management agreement
pursuant to which Mr. Schwartzberg's company, CMS, agreed to perform limited
functions related to property-level issues for a portion of CRI's subsidized
housing portfolio (but not properties securing the mortgage revenue bonds) by
reducing the proposed budget for 1996, (ii) that the actions of CRI and Messrs.
Dockser and Willoughby in connection with the proposed merger involve self-
dealing and constitute a breach of their fiduciary duties to Mr. Schwartzberg,
and (iii) that the actions in connection with the merger of CRIIMI MAE Inc. in
June, 1995 involved self-interest and led in part to the proposed reduction of
the asset management agreement budget.  Neither the Partnership nor the General
Partner was named as a defendant in this action, and Mr. Schwartzberg does not
allege that he is a BAC Holder.  Messrs. Dockser and Willoughby have entered an
answer denying all of Mr. Schwartzberg's claims and moving to strike the
allegations concerning the Partnership and CRIIMI MAE Inc. and dismiss the
related counts for failure to state a claim upon which relief can be granted. 
Messrs. Dockser and Willoughby have publicly responded that Mr. Schwartzberg's
suit is motivated by his budget dispute with CRI and personal animosity.

     On February 12, 1996, the Circuit Court issued a memorandum opinion and
order enjoining CMS and Mr. Schwartzberg from disclosing information made
confidential under the asset management agreement.

     On February 15, 1996, Mr. Schwartzberg filed suit in the Chancery Court
against the General Partner and CRITEF Associates Limited Partnership (No.
14837).  He alleges that he has made demands upon the General Partner and CRITEF
III Associates Limited Partnership, in his capacity as a general and limited
partner of the General Partner and as a limited partner of CRITEF III Associates
Limited Partnership, to inspect and obtain copies of a current list of the BAC
holders and other documents.  He further alleges that his demands were rejected.
On February 23, 1996, the General Partner and CRITEF III Associates Limited
Partnership answered the complaint, admitting that his demands have been
rejected and denying that Mr. Schwartzberg is entitled to the materials
requested because, among other things, he lacks standing and proper purpose to

                                      -59-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.   Litigation - Continued

inspect and obtain copies of the requested materials.  A hearing was held on
March 6 and 7, 1996 and it is expected that the Court will render a decision
following submission of briefs by the parties.

     On February 16, 1996, the Partnership, together with the General Partner,
Capital Realty Investors Tax Exempt Fund Limited Partnership and its general
partner, CRI and CAPREIT (collectively, the Plaintiffs) filed suit against Mr.
Schwartzberg in the United States District Court for the Southern District of
New York (the District Court), No. 96 Civ. 1186 (LAK) (the New York Action). 
The complaint alleges that Mr. Schwartzberg is engaged in an unlawful
solicitation of proxies of the BAC Holders through two press releases he issued
in violation of the federal securities laws and rules promulgated by the SEC
requiring definitive proxy materials to be filed with the SEC and delivered to
the BAC Holders.  The complaint also alleges that Mr. Schwartzberg has made
false and misleading statements in the solicitations concerning the terms of the
proposed merger and the availability of certain financial information, and has
falsely imputed base motives to the principals of the General Partner.  On
February 23, 1996, the District Court, without making a finding of fact, issued
a temporary restraining order barring Mr. Schwartzberg from making any
solicitation of the BAC Holders without first complying with the SEC rules
pending a hearing on a proposed preliminary injunction.  The District Court held
a hearing on March 5, 1996, on the motion of preliminary injunction, and,
pending a decision, continued the temporary restraining order.

     On March 18, 1996, the District Court issued its Opinion enjoining Mr.
Schwartzberg from (1) making any further solicitation of BAC Holders without
complying with the provisions of Regulation 14A under the Securities Exchange
Act of 1934, and (2) committing any violation of Rule 14a-9 (regarding false or
misleading statements) in connection with any solicitation relating to the
Partnerships.  The injunction was based on the District Court's findings of fact
and conclusions of law, in which it stated that the Plaintiffs (including the
Partnership) have established a strong likelihood of success on their claim that
the press releases constitute a proxy solicitation in violation of securities
laws and that the Plaintiffs are likely to establish that Mr. Schwartzberg acted
with the requisite culpability with respect to at least some of the false
statements made in his press releases.  Also on March 18, 1996, Mr. Schwartzberg
filed his answer to the complaint in the New York action, coupled with
counterclaims against at least some of the plaintiffs (the Partnership cannot
determine from the pleadings exactly which parties are counter-defendants)
alleging that three press releases issued by the General Partner of the
Partnership constituted solicitations in violation of the same provisions of the
Securities Exchange Act and that they were false and misleading.  The counter-
defendants deny the allegations.

     The Partnership Agreement provides that the costs incurred in connection
with any litigation in which the Partnership is involved be borne by the
Partnership itself.  At this time, there is no estimate as to the timing or
amount, if any, of the outcome of the New York Action, but the General Partners
do not anticipate that the litigation will have an adverse affect on the
Partnership.








                                      -60-