<PAGE>
                                    FORM 10-Q
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                   Quarterly Report Under Section 13 or 15(d)
                     of the Securities Exchange Act of 1934



For the Quarter Ended      September 30, 1995  
                         ----------------------


Commission file number           1-12034       
                         ----------------------



     CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP
    ----------------------------------------------------------------
             (Exact name of registrant as specified in 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 officer)                 (Zip Code)




                                 (301) 468-9200
-------------------------------------------------------------------------
              (Registrant's telephone number, including area code)




     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 and (2) has been subject to such filing
requirements for the past 90 days.  Yes X   No   

     As of November 6, 1995, 5,258,268 Beneficial Assignee Certificates were
outstanding.
<PAGE>

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                               INDEX TO FORM 10-Q

                    FOR THE QUARTER ENDED SEPTEMBER 30, 1995


                                                                      Page
                                                                      ----


PART I.   Financial Information (Unaudited)

Item 1.   Financial Statements

          Consolidated Balance Sheets - September 30, 1995 and
            December 31, 1994   . . . . . . . . . . . . . . . . .      1

          Consolidated Statements of Income - for the three
            and nine months ended September 30, 1995 and 1994   .      3

          Consolidated Statement of Changes in Partners'
            Capital (Deficit) - for the nine months ended
            September 30, 1995  . . . . . . . . . . . . . . . . .      5

          Consolidated Statements of Cash Flows - for the nine
            months ended September 30, 1995 and 1994  . . . . . .      6

          Notes to Consolidated Financial Statements  . . . . . .      8

Item 2.   Management's Discussion and Analysis of Financial
            Condition and Results of Operations   . . . . . . . .      20

PART II.  Other Information

Item 1.   Legal Proceedings   . . . . . . . . . . . . . . . . . .      29

Item 6.   Exhibits and Reports on Form 8-K  . . . . . . . . . . .      29

Signature     . . . . . . . . . . . . . . . . . . . . . . . . . .      30
<PAGE>
PART I.   FINANCIAL INFORMATION
          ---------------------
ITEM 1.   FINANCIAL STATEMENTS
          --------------------

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>


                                                As of          As of
                                            September 30,   December 31,
                                                1995           1994
                                            -------------   ------------
                                             (Unaudited)
<S>                                         <C>             <C>
Investments in
  Real estate:
    Land                                    $ 10,228,056    $ 10,228,056
    Buildings and personal property           71,895,919      71,895,919
                                            ------------    ------------
                                              82,123,975      82,123,975
    Less:  accumulated depreciation          (13,464,641)    (11,343,330)
                                            ------------    ------------
                                              68,659,334      70,780,645
  Mortgage revenue bond and working
    capital loan                               8,254,707       8,254,707
                                            ------------    ------------
                                              76,914,041      79,035,352

Cash and cash equivalents                        131,737         100,513
Restricted cash and cash equivalents           2,113,785       1,345,940
Marketable securities                          1,304,826       1,707,572
Working capital reserves invested in
  marketable securities                        4,001,726       3,846,520
Interest reserves invested in marketable
  securities                                     298,750         414,326
Receivables and other assets                     654,322         845,809
                                            ------------    ------------
     Total assets                           $ 85,419,187    $ 87,296,032
                                            ============    ============


</TABLE>












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

                                       -1-
<PAGE>
PART I.   FINANCIAL INFORMATION
          ---------------------
ITEM 1.   FINANCIAL STATEMENTS
          --------------------

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                     CONSOLIDATED BALANCE SHEETS - Continued

                   LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)


<TABLE>
<CAPTION>


                                                As of           As of
                                            September 30,   December 31,
                                                1995            1994
                                            -------------   ------------
                                             (Unaudited)
<S>                                         <C>             <C>
Distributions payable                       $  1,593,575    $  2,177,886
Deferred revenue                               1,490,624       1,507,697
Accrued mortgage administration and
  servicing fees due to related parties        1,599,573       1,183,505
Other liabilities related to real estate
  operations                                   1,101,278         804,592
Accounts payable and accrued expenses            360,304         145,954
                                            ------------    ------------
     Total liabilities                         6,145,354       5,819,634
                                            ------------    ------------

Partners' capital (deficit):
  General Partner                               (404,862)       (382,616)
  Beneficial Assignee Certificates (BACs)
    - 5,258,268 BACs issued and outstanding   79,678,695      81,859,014
                                            ------------    ------------
     Total partners' capital                  79,273,833      81,476,398
                                            ------------    ------------

     Total liabilities and partners'
       capital                              $ 85,419,187    $ 87,296,032
                                            ============    ============
</TABLE>
















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

                                       -2-
<PAGE>
PART I.   FINANCIAL INFORMATION
          ---------------------
ITEM 1.   FINANCIAL STATEMENTS
          --------------------

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                        CONSOLIDATED STATEMENTS OF INCOME

                                   (Unaudited)
<TABLE>
<CAPTION>

                        For the three months ended   For the nine months ended
                               September 30,               September 30,     
                        --------------------------   -------------------------
                            1995          1994           1995         1994    
                        ------------  ------------   ------------ ------------
<S>                     <C>           <C>            <C>          <C>
Income from investment
  in real estate:
  Rental revenue        $  3,274,830  $  3,527,455   $  9,597,814 $  9,594,664
  Rental expenses         (1,802,847)   (2,317,149)    (5,139,063)  (5,474,394)
  Depreciation              (707,104)     (725,885)    (2,121,311)  (2,177,654)
                        ------------  ------------   ------------ ------------
  Net rental income          764,879       484,421      2,337,440    1,942,616

  Mortgage revenue
    bond and working
    capital loan             192,257        90,299        684,105      170,359
                        ------------  ------------   ------------ ------------
                             957,136       574,720      3,021,545    2,112,975
                        ------------  ------------   ------------ ------------
Other income (expenses):
  Other interest
    income                    39,548        32,699        137,302      169,088
  Merger-related
    expenses                (285,367)           --       (285,367)          --
  General and adminis-
    trative                  (51,732)      (36,572)      (238,628)    (239,009)
  Professional fees          (19,068)      (16,498)       (56,692)     (59,723)
                        ------------  ------------   ------------ ------------
                            (316,619)      (20,371)      (443,385)    (129,644)
                        ------------  ------------   ------------ ------------
Net income              $    640,517  $    554,349   $  2,578,160 $  1,983,331
                        ============  ============   ============ ============
Net income allocated
  to General Partner
  (1.01%)               $      6,469  $      5,599   $     26,039 $     20,032
                        ============  ============   ============ ============
Net income allocated
  to BAC Holders
  (98.99%)              $    634,048  $    548,750   $  2,552,121 $  1,963,299
                        ============  ============   ============ ============
</TABLE>






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

                                       -3-
<PAGE>
PART I.   FINANCIAL INFORMATION
          ---------------------
ITEM 1.   FINANCIAL STATEMENTS
          --------------------

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                  CONSOLIDATED STATEMENTS OF INCOME - Continued

                                   (Unaudited)
<TABLE>
<CAPTION>

                        For the three months ended   For the nine months ended
                               September 30,               September 30,     
                        --------------------------   -------------------------
                            1995          1994           1995         1994    
                        ------------  ------------   ------------ ------------
<S>                     <C>           <C>            <C>          <C>
Net income per BAC      $       0.13  $       0.10   $       0.49 $       0.37
                        ============  ============   ============ ============
BACs outstanding           5,258,268     5,258,268      5,258,268    5,258,268
                        ============  ============   ============ ============

</TABLE>




































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

                                       -4-
<PAGE>
PART I.   FINANCIAL INFORMATION
          ---------------------
ITEM 1.   FINANCIAL STATEMENTS
          --------------------

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

        CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)

                  For the nine months ended September 30, 1995

                                   (Unaudited)

<TABLE>
<CAPTION>
                                  Beneficial 
                                   Assignee  
                                  Certificate    General
                                    Holders      Partner         Total   
                                  ------------  ----------   ------------
<S>                               <C>           <C>          <C>

Balance, December 31, 1994        $ 81,859,014  $ (382,616)  $ 81,476,398

  Net income                         2,552,121      26,039      2,578,160

  Distributions paid or accrued
    of $0.90 per BAC (including
    return of capital of
    $0.41 per BAC)                  (4,732,440)    (48,285)    (4,780,725)
                                  ------------  ----------   ------------
Balance, September 30, 1995       $ 79,678,695  $ (404,862)  $ 79,273,833
                                  ============  ==========   ============
</TABLE>



























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

                                       -5-
<PAGE>
PART I.   FINANCIAL INFORMATION
          ---------------------
ITEM 1.   FINANCIAL STATEMENTS
          --------------------

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   (Unaudited)
<TABLE>
<CAPTION>

                                              For the nine months ended
                                                     September 30,
                                                 1995           1994    
                                             ------------   ------------
<S>                                          <C>            <C>
Cash flows from operating activities:
  Net income                                 $  2,578,160   $  1,983,331
  Adjustments to reconcile net income to
    net cash provided by operating
    activities:
    Depreciation                                2,121,311      2,177,654
    Adjustment to reclass real estate to
      mortgage revenue bond                            --        281,657
    Changes in assets and liabilities:
      Increase in restricted cash
        and cash equivalents                     (767,845)      (897,915)
      Decrease in receivables and other
        assets                                    191,487         15,103
      (Decrease) increase in deferred
        revenue                                   (17,073)       118,480
      Increase in accrued mortgage admini-
        stration and servicing fees due
        to related parties                        416,068        367,642
      Increase in other liabilities related
        to real estate operations                 296,686        713,030
      Increase (decrease) in accounts payable
        and accrued expenses                      214,350        (23,146)
                                             ------------   ------------
          Net cash provided by operating
            activities                          5,033,144      4,735,836
                                             ------------   ------------

Cash flows from investing activities:
  Net sales of marketable securities              402,746          8,446
  (Deposits to) withdrawals from working
    capital reserves invested in
    marketable securities                        (155,206)     1,749,896
  Withdrawals from interest reserves
    invested in marketable securities             115,576             --
                                             ------------   ------------
          Net cash provided by investing
            activities                            363,116      1,758,342
                                             ------------   ------------
</TABLE>




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

                                       -6-
<PAGE>
PART I.   FINANCIAL INFORMATION
          ---------------------
ITEM 1.   FINANCIAL STATEMENTS
          --------------------

        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued

                                   (Unaudited)
<TABLE>
<CAPTION>

                                              For the nine months ended
                                                     September 30,
                                                 1995           1994    
                                             ------------   ------------
<S>                                          <C>            <C>
Cash flows from financing activities:
  Distributions paid to BAC Holders and
    General Partner                            (5,365,036)    (6,484,789)
                                             ------------   ------------

Net increase in cash and cash equivalents          31,224          9,389

Cash and cash equivalents, beginning of
  period                                          100,513         66,833
                                             ------------   ------------

Cash and cash equivalents, end of period     $    131,737   $     76,222
                                             ============   ============
</TABLE>





























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

                                       -7-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)



1.   BASIS OF PRESENTATION

     In the opinion of CRITEF III Associates Limited Partnership (the General
Partner), the accompanying unaudited consolidated financial statements of
Capital Realty Investors Tax Exempt Fund III Limited Partnership (the
Partnership) contain all adjustments of a normal recurring nature necessary to
present fairly the Partnership's consolidated financial position as of September
30, 1995 and December 31, 1994 and the results of its consolidated operations
for the three and nine months ended September 30, 1995 and 1994 and its
consolidated cash flows for the nine months ended September 30, 1995 and 1994.

     These unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted.  While the General Partner believes
that the disclosures presented are adequate to make the information not
misleading, it is suggested that these consolidated financial statements be read
in conjunction with the consolidated financial statements and the notes included
in the Partnership's Annual Report filed on Form 10-K for the year ended
December 31, 1994.

     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, as a result of the receipt of deeds in lieu of foreclosure,
transfer of partnership interests (for Geary Courtyard) or upon acquisition,
development or construction (ADC) determination, as further discussed in Note 3.
One property, Paces River 2, is not included in this consolidation due to the
implementation of SFAS No. 114, as discussed below.

     In May 1993, the FASB issued SFAS No. 114 "Accounting by Creditors for
Impairment of a Loan".  This statement, as amended, addresses how a creditor
should measure impairment of a loan and requires that loans previously accounted
for as in-substance foreclosed (ISF) be accounted for in accordance with SFAS
No. 114.  This statement is effective for fiscal years beginning after December
15, 1994 and was implemented by the Partnership in the first quarter of 1995. 
The adoption of SFAS No. 114 resulted in the reclassification of the investment
in Paces River 2 from real estate to a loan.  The investment in Paces River 2 is
now reflected on the Partnership's consolidated balance sheets as an investment
in mortgage revenue bond and working capital loan with a combined recorded
investment of $8,254,707, which represents the carrying value of the property,
net of accumulated depreciation and deferred revenue, as of September 30, 1995
and December 31, 1994.  The mortgage revenue bond and working capital loan
original principal balances are $8,750,000 and $850,000, respectively.  The
Partnership expects the full principal amounts of the loans to be repaid at
maturity in 2000.  The Partnership recognizes the income from the Paces River 2
investment on an accrual basis.


     Certain amounts, including those relating to Paces River 2, in the 1994
consolidated financial statements have been reclassified to conform with the
1995 presentation in accordance with SFAS No. 114.  Net rental income for Paces
River 2 of $90,299 and $170,359 for the three and nine months ended

                                       -8-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)


1.   BASIS OF PRESENTATION - Continued

September 30, 1994, respectively, has been reclassified as mortgage revenue bond
and working capital loan interest.  Actual Paces River 2 mortgage revenue bond
interest received by the Partnership during the three and nine months ended
September 30, 1994 was $172,811 and $525,726, respectively.  Actual Paces River
2 working capital loan interest received by the Partnership during the three and
nine months ended September 30, 1994 was $9,564, and $35,213, respectively.  The
reclassification of prior year net rental income for Paces River 2 did not
result in a restatement of prior year's Partner's Capital (Deficit).

2.   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. 
The redemption price per BAC will be $14.360.  In addition, the General Partner
will sell its 1.01% general partnership interest in the Partnership to CAPREIT
for $500,000.  CAPREIT will also acquire an account receivable held by an
affiliate and a former affiliate of the General Partner for the accrued mortgage
servicing and administration fees on the related property mortgage loans by
paying the discounted amount of $1,620,966.

     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 price to BAC Holders  from a
financial point of view.  A proxy statement is expected to be issued to BAC
Holders after it is filed with and reviewed by the Securities and Exchange
Commission.  This proxy statement will include a full description of the
proposed merger and the independent fairness opinion.

3.   INVESTMENTS

     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 discussed in
the Partnership's Annual Report filed on Form 10-K for the year ended December
31, 1994, 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. 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 Notice to Practitioners - ADC
Arrangements. Accordingly, the consolidated balance sheets reflect these
investments in the amount of $68,659,334 and $70,780,645 as of September 30,
1995 and December 31, 1994, respectively, net of accumulated depreciation, based
on the lower of cost or fair value at the earlier of date of deed  in lieu of
foreclosure, transfer of partnership interests, or acquisition, development and
construction (ADC) determination.  The Partnership continues to evaluate these
investments on a lower of cost or net realizable basis, taking into
consideration the Partnership's intention for the nominees to hold these

                                       -9-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)


3.   INVESTMENTS - Continued

properties for the long term if necessary, and with investor consent, in order
to recover its recorded investment.  The financial statement presentation is
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. 
Additionally, the Partnership accounts for the investment in the Paces River 2
mortgage revenue bond and working capital loan as loans with a recorded
investment of $8,254,707 as of September 30, 1995 and December 31, 1994, in
accordance with SFAS No. 114, as discussed above.  

     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
General Partner continues to believe that these bonds remain tax-exempt.  The
General Partner will continue its efforts 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.

     As of September 30, 1995, the Partnership had cash and cash equivalents of
$131,737, unrestricted marketable securities of $1,304,826 and restricted cash
and cash equivalents of $2,113,785. Marketable securities consist of tax-exempt
municipal bonds which generally contain a seven-day put option with established
banks or brokerage houses, and are stated at cost, which generally represents
par value and approximates market value.  The Partnership has classified these
investments as Available for Sale in accordance with SFAS No. 115.  Realized
gains and losses on the sale of marketable securities were determined on a
specific identification basis.  There were no net unrealized holding gains or
losses recognized during the three and nine months ended September 30, 1995 as
there was no material difference between the cost for the tax-exempt municipal
bonds and fair value throughout the first three quarters of 1995.

     Following are updates of significant events affecting the Partnership's
properties during the nine months ended September 30, 1995:














                                      -10-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)


3.   INVESTMENTS - Continued

     Regency Woods
     -------------

          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.

     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 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 $29,000 were
     completed in the fourth quarter of 1994 and are included in buildings and
     personal property in the consolidated balance sheets.  As the remaining
     costs to correct the drainage problem are capitalizable costs and the work
     had not begun as of September 30, 1995, the consolidated financial
     statements do not include an adjustment for the remaining estimated costs. 
     A contract for $55,000 in drainage work, representing the first phase of
     the repairs, has been negotiated and work on the repairs began in October
     1995.  The remaining repairs are expected to be completed in 1996 and 1997.
     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
     judgement, 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.











                                      -11-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)


3.   INVESTMENTS - Continued

     Ethan's Glen IIA
     ----------------

          In April 1995, Ethan's Glen IIA suffered damage to certain roofs due
     to a severe hail storm.  The cost to repair the damaged roofs was paid by
     the property's insurance carrier, less a minimal deductible.

4.   DISTRIBUTIONS TO BAC HOLDERS

     The Partnership expects to continue to make distributions to BAC Holders on
a quarterly basis.  The proposed merger agreement stipulates that current year
distributions cannot exceed ten cents per BAC per month.  The agreement also
stipulates that distributions during 1996 cannot exceed 95% of Cash Flow, as
defined in the Partnership Agreement.  There are no other legal restrictions on
the Partnership's present or future ability to make cash distributions.  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, the Partnership will not be able to maintain the
distributions to BAC Holders at the 1994 level.  It is expected that the 1995
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 payments from one property, supplemented by any
available property reserves/borrower guarantees, less Partnership expenses.  The
Partnership 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 1995 distribution is
expected to approximate $1.20 per BAC.

     The following distributions were paid or accrued to BAC Holders of record
for the first three quarters of 1995 and 1994:



















                                      -12-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)


4.   DISTRIBUTIONS TO BAC HOLDERS - Continued

<TABLE>
<CAPTION>
                                 1995                     1994
                           Distributions to         Distributions to   
                              BAC Holders              BAC Holders    
                         --------------------     -------------------
Quarter Ended               Total     Per BAC        Total    Per BAC
-------------            -----------  -------     ----------- -------
<S>                      <C>          <C>         <C>         <C>

March 31,                $ 1,577,480  $  0.30     $ 2,103,307 $  0.40
June 30,                   1,577,480     0.30       2,155,890    0.41
September 30,              1,577,480     0.30       2,155,890    0.41
                         -----------  -------     ----------- -------
  Totals                 $ 4,732,440  $  0.90     $ 6,415,087 $  1.22
                         ===========  =======     =========== =======
</TABLE>

     Distributions to BAC Holders for the three and nine months ended
September 30, 1995 and 1994 were funded as follows:

<TABLE>
<CAPTION>
                                             For the three months ended
                                                    September 30,      
                                             --------------------------
                                                 1995          1994    
                                             ------------  ------------
<S>                                          <C>           <C>
Cash flow (1)                                $  1,442,204  $  1,494,646
Withdrawals from working capital/interest
  reserves                                        151,371       683,241
                                             ------------  ------------
    Total cash available for distribution    $  1,593,575  $  2,177,887
                                             ============  ============
Distributions to:
  General Partner (1.01%)                    $     16,095  $     21,997
                                             ============  ============
  BAC Holders (98.99%)                       $  1,577,480  $  2,155,890
                                             ============  ============
</TABLE>














                                      -13-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)


4.   DISTRIBUTIONS TO BAC HOLDERS - Continued

<TABLE>
<CAPTION>
                                             For the nine months ended
                                                    September 30,      
                                             --------------------------
                                                 1995          1994    
                                             ------------  ------------
<S>                                          <C>           <C>
Cash flow (1)                                $  4,820,355  $  4,730,645
(Deposits to) withdrawals from working
  capital/interest reserves                       (39,630)    1,749,896
                                             ------------  ------------
    Total cash available for distribution    $  4,780,725  $  6,480,541
                                             ============  ============
Distributions to:
  General Partner (1.01%)                    $     48,285  $     65,454
                                             ============  ============
  BAC Holders (98.99%)                       $  4,732,440  $  6,415,087
                                             ============  ============
</TABLE>

(1)  As defined in the Partnership Agreement.

     The General Partner expects the distribution for the quarter ending
December 31, 1995 to be approximately $0.30 per BAC, payable on February 14,
1996, or possibly earlier depending on the merger closing date, to BAC Holders
of record as of the last day in each month.

     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
September 30, 1995 and December 31, 1994, the working capital reserves were
$4,001,726 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 $284,000 as of September 30, 1995 may be used to
supplement distributions to BAC Holders.  Net withdrawals from the surplus
working capital reserves to fund distributions for the three and nine months
ended September 30, 1995, were $151,371 and $0, respectively.  Net withdrawals
from the surplus working capital reserves to fund distributions for the three
and nine months ended September 30, 1994, were $683,241 and $1,749,896,
respectively.

     Interest reserves relating to Regency Woods of $0 and $115,576 were
transferred to working capital reserves during the three and nine months ended
September 30, 1995, respectively, to fund distributions to BAC Holders.  As of
September 30, 1995, interest reserves relating to Regency Woods had been
depleted, and interest reserves applicable to Washington Ridge were $298,750.






                                      -14-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)


4.   DISTRIBUTIONS TO BAC HOLDERS - Continued

As of December 31, 1994, interest reserves applicable to Regency Woods and
Washington Ridge were $414,326.  No interest reserves were transferred to
working capital reserves during 1994.

5.   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, collectibility
of the interest due is considered unlikely. Once a loan has been placed on 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.  In 1993, Geary Courtyard, Woodlane Place
and Valley Creek II were placed on a non-accrual status for income tax purposes;
therefore, income is recognized only to the extent of cash received.  Contingent
interest from the investment is recognized as revenue when collected. 
Contingent interest of $9,775 and $56,522 was recognized from Washington Ridge
for the three and nine months, respectively, ended September 30, 1995.  No
contingent interest was recognized for the three or nine months ended September
30, 1994.

     As discussed in Note 3, 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 for financial statement purposes as of September 30,
1995. However, for federal income tax purposes the investments in all of the
mortgage revenue bonds and working capital loans are treated as loans.  Interest
on the investment in mortgage revenue bonds, which represents approximately 96%
of the Partnership's income for tax purposes, is exempt from federal income tax.
A reconciliation of the primary differences between the financial statement net
income and municipal income for tax purposes is as follows:


























                                      -15-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)


5.   INCOME TAXES - Continued

<TABLE>
<CAPTION>
                     For the three months ended   For the nine months ended 
                            September 30,               September 30,    
                     --------------------------   -------------------------
                         1995           1994          1995         1994    
                     ------------   ------------  ------------ ------------
<S>                  <C>            <C>           <C>          <C>
Financial statement
  net income         $    640,517   $    554,349  $  2,578,160 $  1,983,331
Municipal interest
  income not
  recognized(1)         1,717,069      1,254,333     4,884,282    4,587,585
Rental income,
  net (2)                (764,879)      (484,421)   (2,337,440)  (1,942,616)
Accrued interest
  on delinquent
  interest (3)             41,297         31,882       116,279       86,892
Excess amortization
  for tax purposes        (36,150)       (36,150)     (108,450)    (108,450)
Taxable income on
  working capital
  loans not
  recognized (1)           43,565         63,009        80,964      189,025
                     ------------   ------------  ------------ ------------
Municipal income,
  net for tax
  purposes           $  1,641,419   $  1,383,002  $  5,213,795 $  4,795,767
                     ============   ============  ============ ============
Municipal income
  per BAC            $       0.31   $       0.26  $       0.98 $       0.90
                     ============   ============  ============ ============
</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, the Partnership continued to charge all of the
borrowers interest under the terms of the original loans and interest on unpaid







                                      -16-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)


5.   INCOME TAXES - Continued

base interest.  The following tables summarize the full base interest payments
for the nine months ended September 30, 1995 and 1994 that are due to the
Partnership from the loans and properties:

<TABLE>
<CAPTION>
                         For the nine months ended September 30, 1995        
                   --------------------------------------------------------
                                      Base            Base
                                     Interest       Interest      Current
                   Current Base     Paid From       Paid From       Base
                     Interest       Properties'   Non-Operating   Interest
                      Due(1)        Operations      Sources(2)    Not Paid  
                   ------------     -----------   -------------  ----------
<S>                <C>              <C>           <C>            <C>
Ethan's Glen IIA   $    690,703     $   547,277   $        --    $  143,426 
Geary Courtyard       1,305,450         577,000            --       728,450
Ocean Walk            1,330,820       1,209,332            --       121,488
Paces River 2           576,769         607,835            --            --
Regency Woods           520,094         333,562        17,834       168,698
Valley Creek II         689,325         520,052            --       169,273
Washington Ridge        656,250         656,250            --            --
Woodlane Place        1,055,250         707,716            --       347,534 
                   ------------     -----------   -----------    ----------
                   $  6,824,661     $ 5,159,024   $    17,834    $1,678,869 
                   ============     ===========   ===========    ==========
</TABLE>

<TABLE>
<CAPTION>
                         For the nine months ended September 30, 1994
                   --------------------------------------------------------
                                       Base           Base
                                     Interest       Interest       Current
                   Current Base     Paid From       Paid From        Base
                     Interest       Properties'   Non-Operating    Interest
                      Due(1)        Operations      Sources(2)     Not Paid  
                   ------------     -----------   -------------  ----------
<S>                <C>              <C>           <C>            <C>
Ethan's Glen IIA   $    690,703     $   546,087    $   65,654    $   78,962 
Geary Courtyard       1,305,450         451,329            --       854,121
Ocean Walk            1,330,820       1,087,162        35,838       207,820
Paces River 2           576,769         560,939            --        15,830
Regency Woods           520,094         408,055       112,039            --
Valley Creek II         689,325         387,959            --       301,366
Washington Ridge        656,250         656,250            --            --
Woodlane Place        1,055,250         600,917            --       454,333 
                   ------------     -----------    ----------    ----------
                   $  6,824,661     $ 4,698,698    $  213,531    $1,912,432
                   ============     ===========    ==========    ==========
</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

                                      -17-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)


5.   INCOME TAXES - Continued

     base interest, which totalled $762,676 and $565,512 for the nine months
     ended September 30, 1995 and 1994, respectively.
(2)  Amounts were funded from reserves from the mortgage loan proceeds and/or
     funds from the general partners of the borrowers.

6.   LITIGATION

     On September 22, 1995, a purported class-action lawsuit (styled Zakin v.
Dockser, et. al.) was filed by Irving Zakin (the Plaintiff), a BAC Holder of the
Partnership against the Partnership, its general partner (CRITEF III Associates
Limited Partnership), its Assignor Limited Partner (CRITEF III, Inc.), C.R.I.,
Inc., 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 Chancery Court for the State
of Delaware.  The lawsuit alleges, among other matters, that certain of the
Defendants breached their fiduciary duty to the BAC Holders by failing to fully
disclose their intentions regarding the proposed merger.  The lawsuit also
alleges that the Defendants' merger negotiations have not been conducted at
arms-length, resulting in self-dealing among certain of the Defendants.  The
lawsuit seeks, among other things, to enjoin the proposed merger, to require
arms-length negotiations purportedly to increase the price to be paid to BAC
Holders, to evaluate alternatives to the proposed merger, and to pay Plaintiff's
costs.

     On October 5, 1995, a second purported class-action lawsuit (styled Wingard
v. Dockser, et. al.) was filed by David and Johanna Wingard, BAC Holders of an
affiliate of the Partnership, against the same Defendants, in Chancery Court for
the State of Delaware.  The second lawsuit makes the same allegations as the
first lawsuit.  A request to the court has been made by the Plaintiffs in both
lawsuits to consolidate the two complaints.

     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 lawsuits, therefore, the Partnership's financial
statements do not include any adjustment that might result from the outcome of
the lawsuits.  The Defendants believe that the lawsuits are without merit and
intend to defend themselves vigorously against the allegations contained in both
lawsuits.

7.   RELATED-PARTY TRANSACTIONS

     The General Partner and its affiliates are entitled to receive
reimbursements from the Partnership for actual costs and expenses incurred in
connection with the operation of the Partnership.  During the three and nine
months ended September 30, 1995, the General Partner and its affiliates were
reimbursed $28,425 and $124,568, respectively, and $44,029 and $145,735 for the








                                      -18-
<PAGE>
        CAPITAL REALTY INVESTORS TAX EXEMPT FUND III LIMITED PARTNERSHIP

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   (Unaudited)


7.   RELATED-PARTY TRANSACTIONS - Continued

three and nine months ended September 30, 1994, respectively. These expenses are
included in general and administrative expenses and merger-related expenses 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 debt service on the mortgage loans.  On June 30, 1995, CRICO
Mortgage merged with and into an affiliate of CRIIMI MAE Inc., a publicly traded
real estate investment trust (the REIT).  The REIT was originally sponsored by
C.R.I., Inc. (CRI), the general partner of the General Partner, but is not
controlled by CRI, although the CRI stockholders are 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 merger was distributed by CRICO Mortgage to its
shareholders and contributed by them to CRI.  As of June 30, 1995, the mortgage
administration and servicing are being performed by an affiliate of the REIT and
mortgage administration and servicing fees are paid to that entity.  This merger
did not result in any increase in fees or changes in the amount of fees which
are currently payable.  Total unpaid fees, including those relating to Paces
River 2, of $1,599,573 and $1,183,505 were due to CRI as of September 30, 1995
and December 31, 1994, respectively.  Total unpaid fees, including those
relating to Paces River 2, of $141,667 were due to the affiliate of the REIT as
of September 30, 1995, and are included in other liabilities related to real
estate operations in the consolidated balance sheets.  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.  During the six months ended June 30, 1995, the fees
paid by the borrowers to CRICO Mortgage totalled $49,312.  During the three
months ended September 30, 1995, the fees paid by the borrowers to the affiliate
of the REIT totalled $18,750.  Fees paid by the borrowers to CRICO Mortgage for
the three and nine months ended September 30, 1994 were $30,562 and $113,614,
respectively.

     In addition, CRICO Management of Minnesota, Inc. (CRICO Minnesota), an
affiliate of the General Partner, performed property management services for
Valley Creek II, Woodlane Place, Ethan's Glen IIA and Ocean Walk through January
31, 1994.  On February 1, 1994, CRICO Minnesota contributed its property
management contracts and personnel to CAPREIT Residential Corporation
(Residential).  Residential was formed by CRI but is not owned or controlled by
CRI and/or its affiliates.  Management fees of $21,399 were paid or accrued to
the affiliates for the month ended January 31, 1994.










                                      -19-
<PAGE>
PART I.   FINANCIAL INFORMATION
          ---------------------
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          -------------------------------------------------
               CONDITION AND RESULTS OF OPERATIONS
               -----------------------------------

                                    Business
                                    --------

     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. 
The redemption price per BAC will be $14.360.  In addition, the General Partner
will sell its 1.01% general partnership interest in the Partnership to CAPREIT
for $500,000.  CAPREIT will also acquire an account receivable held by an
affiliate and a former affiliate of the General Partner for the accrued mortgage
servicing and administration fees on the related property mortgage loans by
paying the discounted amount of $1,620,966.

     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 price to BAC Holders  from a
financial point of view.  A proxy statement is expected to be issued to BAC
Holders after it is filed with and reviewed by the Securities and Exchange
Commission.  This proxy statement will include a full description of the
proposed merger and the independent fairness opinion.

     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 discussed in
the Partnership's Annual Report filed on Form 10-K for the year ended December
31, 1994, 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. 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 Notice to Practitioners - ADC
Arrangements. Accordingly, the consolidated balance sheets reflect these
investments in the amount of $68,659,334 and $70,780,645 as of September 30,
1995 and December 31, 1994, respectively, net of accumulated depreciation, based
on the lower of cost or fair value at the earlier of date of deed in lieu of
foreclosure, transfer of partnership interests, or acquisition, development and
construction (ADC) determination.  The Partnership continues to evaluate these
investments on a lower of cost or net realizable basis, taking into
consideration the Partnership's intention for the nominees to hold these
properties for the long term if necessary, and with investor consent, in order
to recover its recorded investment.  The financial statement presentation is
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. 
Additionally, the Partnership accounts for the investment in the Paces River 2
mortgage revenue bond and working capital loan as loans with a recorded
investment of $8,254,707 as of September 30, 1995 and December 31, 1994, in
accordance with SFAS No. 114, as discussed above.  

     In May 1993, the FASB issued SFAS No. 114 "Accounting by Creditors for
Impairment of a Loan".  This statement, as amended, addresses how a creditor
should measure impairment of a loan and requires that loans previously accounted

                                      -20-
<PAGE>
PART I.   FINANCIAL INFORMATION
          ---------------------
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          -------------------------------------------------
               CONDITION AND RESULTS OF OPERATIONS - Continued
               -----------------------------------


for as in-substance foreclosed (ISF) be accounted for in accordance with SFAS
No. 114.  This statement is effective for fiscal years beginning after December
15, 1994 and was implemented by the Partnership in the first quarter of 1995. 
The adoption of SFAS No. 114 resulted in the reclassification of the investment
in Paces River 2 from real estate to a loan.  The investment in Paces River 2 is
now reflected on the Partnership's consolidated balance sheets as an investment
in mortgage revenue bond and working capital loan with a combined recorded
investment of $8,254,707, which represents the carrying value of the property,
net of accumulated depreciation and deferred revenue, as of September 30, 1995
and December 31, 1994.  The mortgage revenue bond and working capital loan
original principal balances are $8,750,000 and $850,000, respectively.  The
Partnership expects the full principal amounts of the loans to be repaid at
maturity in 2000.  The Partnership recognizes the income from the Paces River 2
investment on an accrual basis.

     Following are updates of significant events affecting the Partnership's
properties during the nine months ended September 30, 1995:

     Regency Woods
     -------------

          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.

     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 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 $29,000 were
     completed in the fourth quarter of 1994 and are included in buildings and
     personal property in the consolidated balance sheets.  As the remaining
     costs to correct the drainage problem are capitalizable costs and the work
     had not begun as of September 30, 1995, the consolidated financial
     statements do not include an adjustment for the remaining estimated costs. 
     A contract for $55,000 in drainage work, representing the first phase of
     the repairs, has been negotiated and work on the repairs began in October
     1995.  The remaining repairs are expected to be completed in 1996 and 1997.
     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.


                                      -21-
<PAGE>
PART I.   FINANCIAL INFORMATION
          ---------------------
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          -------------------------------------------------
               CONDITION AND RESULTS OF OPERATIONS - Continued
               -----------------------------------


          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
     judgement, 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.

     Ethan's Glen IIA
     ----------------

          In April 1995, Ethan's Glen IIA suffered damage to certain roofs due
     to a severe hail storm.  The cost to repair the damaged roofs was paid by
     the property's insurance carrier, less a minimal deductible.


                          Financial Condition/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 in 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 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
$270,000 in drainage correction costs relating to Woodlane Place, as discussed
above, the Partnership has no material commitments for capital expenditures.

     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
General Partner continues to believe that these bonds remain tax-exempt.  The
General Partner will continue its efforts 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.

     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 is approved,
the interests of the BAC Holders would be redeemed at closing.  If the merger
proposal is not approved, in order to maximize the overall yield, the General

                                      -22-
<PAGE>
PART I.   FINANCIAL INFORMATION
          ---------------------
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          -------------------------------------------------
               CONDITION AND RESULTS OF OPERATIONS - Continued
               -----------------------------------


Partner may recommend for investor approval extension of certain loan maturity
dates and, if approved, arrange for related adjustments of the pertinent
mortgage revenue bonds as needed.

     The Partnership expects to continue to make distributions to BAC Holders on
a quarterly basis.  The proposed merger agreement stipulates that current year
distributions cannot exceed ten cents per BAC per month.  The agreement also
stipulates that distributions during 1996 cannot exceed 95% of Cash Flow, as
defined in the Partnership Agreement.  There are no other legal restrictions on
the Partnership's present or future ability to make cash distributions.  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, the Partnership will not be able to maintain the
distributions to BAC Holders at the 1994 level.  It is expected that the 1995
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 payments from one property, supplemented by any
available property reserves/borrower guarantees, less Partnership expenses.  The
Partnership 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 1995 distribution is
expected to approximate $1.20 per BAC.

     The following distributions were paid or accrued to BAC Holders of record
for the first three quarters of 1995 and 1994:

























                                      -23-
<PAGE>
PART I.   FINANCIAL INFORMATION
          ---------------------
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          -------------------------------------------------
               CONDITION AND RESULTS OF OPERATIONS - Continued
               -----------------------------------


<TABLE>
<CAPTION>
                                 1995                     1994
                           Distributions to         Distributions to   
                              BAC Holders              BAC Holders    
                         --------------------     -------------------
Quarter Ended               Total     Per BAC        Total    Per BAC
-------------            -----------  -------     ----------- -------
<S>                      <C>          <C>         <C>         <C>
March 31,                $ 1,577,480  $  0.30     $ 2,103,307 $  0.40
June 30,                   1,577,480     0.30       2,155,890    0.41
September 30,              1,577,480     0.30       2,155,890    0.41
                         -----------  -------     ----------- -------
  Totals                 $ 4,732,440  $  0.90     $ 6,415,087 $  1.22
                         ===========  =======     =========== =======
</TABLE>

     Distributions to BAC Holders for the three and nine months ended
September 30, 1995 and 1994 were funded as follows:

<TABLE>
<CAPTION>
                                             For the three months ended
                                                    September 30,      
                                             --------------------------
                                                 1995          1994    
                                             ------------  ------------
<S>                                          <C>           <C>
Cash flow (1)                                $  1,442,204  $  1,494,646
Withdrawals from working capital/interest
  reserves                                        151,371       683,241
                                             ------------  ------------
    Total cash available for distribution    $  1,593,575  $  2,177,887
                                             ============  ============
Distributions to:
  General Partner (1.01%)                    $     16,095  $     21,997
                                             ============  ============
  BAC Holders (98.99%)                       $  1,577,480  $  2,155,890
                                             ============  ============
</TABLE>
















                                      -24-
<PAGE>
PART I.   FINANCIAL INFORMATION
          ---------------------
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          -------------------------------------------------
               CONDITION AND RESULTS OF OPERATIONS - Continued
               -----------------------------------


<TABLE>
<CAPTION>
                                             For the nine months ended
                                                    September 30,      
                                             --------------------------
                                                 1995          1994    
                                             ------------  ------------
<S>                                          <C>           <C>
Cash flow (1)                                $  4,820,355  $  4,730,645
(Deposits to) withdrawals from working
  capital/interest reserves                       (39,630)    1,749,896
                                             ------------  ------------
    Total cash available for distribution    $  4,780,725  $  6,480,541
                                             ============  ============
Distributions to:
  General Partner (1.01%)                    $     48,285  $     65,454
                                             ============  ============
  BAC Holders (98.99%)                       $  4,732,440  $  6,415,087
                                             ============  ============
</TABLE>

(1)  As defined in the Partnership Agreement.

     The General Partner expects the distribution for the quarter ending
December 31, 1995 to be approximately $0.30 per BAC, payable on February 14,
1996, or possibly earlier depending on the merger closing date, to BAC Holders
of record as of the last day in each month.

     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
September 30, 1995 and December 31, 1994, the working capital reserves were
$4,001,726 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 $284,000 as of September 30, 1995 may be used to
supplement distributions to BAC Holders.  Net withdrawals from the surplus
working capital reserves to fund distributions for the three and nine months
ended September 30, 1995, were $151,371 and $0, respectively.  Net withdrawals
from the surplus working capital reserves to fund distributions for the three
and nine months ended September 30, 1994, were $683,241 and $1,749,896,
respectively.

     Interest reserves relating to Regency Woods of $0 and $115,576 were
transferred to working capital reserves during the three and nine months ended
September 30, 1995, respectively, to fund distributions to BAC Holders.  As of
September 30, 1995, interest reserves relating to Regency Woods had been
depleted, and interest reserves applicable to Washington Ridge were $298,750.







                                      -25-
<PAGE>
PART I.   FINANCIAL INFORMATION
          ---------------------
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          -------------------------------------------------
               CONDITION AND RESULTS OF OPERATIONS - Continued
               -----------------------------------


As of December 31, 1994, interest reserves applicable to Regency Woods and
Washington Ridge were $414,326.  No interest reserves were transferred to
working capital reserves during 1994.

     As of September 30, 1995, the Partnership had cash and cash equivalents of
$131,737, unrestricted marketable securities of $1,304,826 and restricted cash
and cash equivalents of $2,113,785. Marketable securities consist of tax-exempt
municipal bonds which generally contain a seven-day put option with established
banks or brokerage houses, and are stated at cost, which generally represents
par value and approximates market value.  The Partnership has classified these
investments as Available for Sale in accordance with SFAS No. 115.  Realized
gains and losses on the sale of marketable securities were determined on a
specific identification basis.  There were no net unrealized holding gains or
losses recognized during the three and nine months ended September 30, 1995 as
there was no material difference between the cost for the tax-exempt municipal
bonds and fair value throughout the first three quarters of 1995.

     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 the nine months ended September 30, 1995, which
consists primarily of receipt of base interest on mortgage loans, was adequate
to support operating requirements 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.


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

     The Partnership's net income for the three months ended September 30, 1995
increased from the same period in 1994 primarily due to a decrease in rental
expenses resulting from repairs made in 1994 relating to fire damage and frost
heaving at Ocean Walk and Woodlane Place, respectively, as well as a decrease in
real estate tax expense at Woodlane Place resulting from a special assessment
paid in 1994.  Contributing to the increase in net income was the
reclassification of the investment in Paces River 2 from real estate to loan, in
accordance with SFAS No. 114, as discussed above.  In 1995, the Partnership
recognized income from the Paces River 2 mortgage revenue bond and working
capital loan on an accrual basis.  The 1994 income from the Paces River 2
mortgage revenue bond and working capital loan is limited to the property's net
rental income due to its classification as real estate in 1994.  Also
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. 
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, as well as a decrease in rental revenue resulting from the
receipt in 1994 of insurance reimbursements for repairs to Ocean Walk and
Woodlane Place, as discussed above.  The decrease in rental revenue was
partially offset by an increase in occupancy and rental rates at certain
properties.  Also partially offsetting the increase in net income was an
increase in general and administrative expenses due to the recognition in the
third quarter of 1994 of decreased annual report printing costs.

                                      -26-
<PAGE>
PART I.   FINANCIAL INFORMATION
          ---------------------
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          -------------------------------------------------
               CONDITION AND RESULTS OF OPERATIONS - Continued
               -----------------------------------


     The Partnership's net income for the nine months ended September 30, 1995
increased from the same period in 1994 primarily due to the reclassification of
the investment in Paces River 2, a decrease in rental expenses and a decrease in
depreciation expense, as discussed above.  Partially offsetting the increase in
net income were fees incurred for an independent fairness opinion, as discussed
above, as well as a decrease in other interest income resulting from lower cash
and investment balances.

     Presented below is a summary of the rental operations for the nine months
ended September 30, 1995 and 1994 of each of the properties accounted for as
Investment in Real Estate in which the Partnership has invested.

<TABLE>
<CAPTION>

                                             Average Physical
Name of Investment         No. of               Occupancy
Rental Property            Rental           for the nine months
and Location               Units            ended September 30,
------------------         ------          --------------------
                                           1995           1994
                                           ----           ----
<S>                        <C>             <C>            <C>
Ethan's Glen IIA
  Kansas City, MO            242            93%            92%
Geary Courtyard
  San Francisco, CA          164            93%            90%
Ocean Walk
  Key West, FL               296            95%            93%
Paces River 2
  Rock Hill, SC              230            96%            97%
Regency Woods
  West Des Moines, IA        200            95%            96%
Valley Creek II
  Woodbury, MN               177            97%            95%
Washington Ridge
  Knoxville, TN              248            96%            95%
Woodlane Place
  Woodbury, MN               216            98%            97%
                           -----           ---            ---
                           1,773            95%            94%
                           =====           ===            ===
</TABLE>













                                      -27-
<PAGE>
PART I.      FINANCIAL INFORMATION
             ---------------------
ITEM 2.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
             -----------------------------------------------------------
                  AND RESULTS OF OPERATIONS - Continued
                  -------------------------


<TABLE>
<CAPTION>

                        Base Interest Paid From         Net Rental Operating
Name of Investment      Properties' Operations(1)             Income (2)
Rental Property         for the nine months ended     for the nine months ended
and Location                  September 30,                 September 30,
------------------     ---------------------------   --------------------------
                           1995           1994          1995           1994
                       ------------   ------------   -----------    -----------
<S>                    <C>            <C>            <C>            <C>
Ethan's Glen IIA
  Kansas City, MO      $    547,277   $    546,087   $   586,439    $   562,689
Geary Courtyard
  San Francisco, CA         577,000        451,329       631,505        442,318
Ocean Walk
  Key West, FL            1,209,332      1,087,162     1,250,336      1,242,732
Paces River 2 (3)
  Rock Hill, SC             607,835        560,939            --             --
Regency Woods
  West Des Moines, IA       333,562        408,055       313,187        480,407
Valley Creek II
  Woodbury, MN              520,052        387,959       537,062        482,472
Washington Ridge
  Knoxville, TN             656,250        656,250       786,095        778,069
Woodlane Place
  Woodbury, MN              707,716        600,917       811,433        624,623
                       ------------   ------------   -----------    -----------
                       $  5,159,024   $  4,698,698   $ 4,916,057    $ 4,613,310
                       ============   ============   ===========    ===========
</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 and
     $213,531 for the nine months ended September 30, 1995 and 1994,
     respectively.

(2)  Calculated from the respective properties monthly operating reports as
     net loss, adjusted for depreciation, amortization, mortgage loan
     interest, mortgage servicing and administration fees and interest
     income on reserves.

(3)  Rental operating information is not provided for the Paces River 2
     investment because it is accounted for as an Investment in Mortgage Revenue
     Bond and Working Capital Loan.











                                      -28-
<PAGE>
PART II.  OTHER INFORMATION
          -----------------

ITEM 1.   LEGAL PROCEEDINGS
          -----------------

     On September 22, 1995, a purported class-action lawsuit (styled Zakin v.
Dockser, et. al.) was filed by Irving Zakin (the Plaintiff), a BAC Holder of the
Partnership against the Partnership, its general partner (CRITEF III Associates
Limited Partnership), its Assignor Limited Partner (CRITEF III, Inc.), C.R.I.,
Inc., 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 Chancery Court for the State
of Delaware.  The lawsuit alleges, among other matters, that certain of the
Defendants breached their fiduciary duty to the BAC Holders by failing to fully
disclose their intentions regarding the proposed merger.  The lawsuit also
alleges that the Defendants' merger negotiations have not been conducted at
arms-length, resulting in self-dealing among certain of the Defendants.  The
lawsuit seeks, among other things, to enjoin the proposed merger, to require
arms-length negotiations purportedly to increase the price to be paid to BAC
Holders, to evaluate alternatives to the proposed merger, and to pay Plaintiff's
costs.

     On October 5, 1995, a second purported class-action lawsuit (styled Wingard
v. Dockser, et. al.) was filed by David and Johanna Wingard, BAC Holders of an
affiliate of the Partnership, against the same Defendants, in Chancery Court for
the State of Delaware.  The second lawsuit makes the same allegations as the
first lawsuit.  A request to the court has been made by the Plaintiffs in both
lawsuits to consolidate the two complaints.

     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 lawsuits, therefore, the Partnership's financial
statements do not include any adjustment that might result from the outcome of
the lawsuits.  The Defendants believe that the lawsuits are without merit and
intend to defend themselves vigorously against the allegations contained in both
lawsuits.


ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K
          --------------------------------

     A report on Form 8-K was filed with the Commission on September 13, 1995
regarding the Partnership's acceptance of a cash merger offer from an affiliate
of CAPREIT for redemption of the Partnership's BACs, subject to BAC Holder
approval.

     All other items are not applicable.















                                      -29-
<PAGE>
                                    SIGNATURE


     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


November 14, 1995                  /s/ Richard J. Palmer
--------------------------         ------------------------------------
Date                               Richard J. Palmer
                                   Senior Vice President/Finance

                                   Signing on behalf of the Registrant
                                     and as Principal Accounting Officer








































                                      -30-