10-K 1 a71054e10-k.txt FORM 10-K PERIOD END DECEMBER 31, 2000 1 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, 2000 COMMISSION FILE NUMBER 0-16027 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) Delaware 13-3341425 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 27611 La Paz Road, Laguna Niguel, California 92656 -------------------------------------------- ----- (Address of principal executive offices) (Zip Code)

(949) 643-7700 (Registrant's telephone number) Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: NONE 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 twelve 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 ninety 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. [ ] DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's registration statement on Form S-11 (Commission File No. 33-2132), dated December 13, 1985, filed under the Securities Act of 1933 are incorporated by reference into PART IV of this report. -1- 2 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000 INDEX

-2- 3 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP PART I Item 1. Business Real Estate Income Partners III, Limited Partnership (the "Partnership") was formed on December 9, 1985, under the laws of the State of Delaware. The General Partner of the Partnership is Birtcher/Liquidity Properties, a general partnership consisting of LF Special Fund I, L.P., a California limited partnership, and Birtcher Investors, a California limited partnership. The Partnership is engaged in the business of acquiring and operating existing income-producing office buildings, research and development facilities, shopping centers and other commercial or industrial properties as specified in its prospectus (Commission File No. 33-2132) dated April 7, 1986, as amended. The Partnership commenced operations on June 30, 1986. The closing for the final admission of Limited Partners to the Partnership occurred on September 30, 1987. Total limited partners' capital contributions through that date aggregated $63,534,000, including reinvestment from prior affiliated limited partnerships. The Partnership's objectives in operating the properties were: (i) to make regular quarterly cash distributions to the Partners, of which a portion will be tax sheltered; (ii) to achieve capital appreciation over a holding period of at least five years; and (iii) to preserve and protect the Partnership's capital. An Information Statement, dated May 5, 1993, mandated that the General Partner seek a vote of the Limited Partners no later than December 31, 1996, regarding prompt liquidation of the Partnership in the event that properties with appraised values as of January 1993, which constituted at least one-half of the aggregate appraised values of all Partnership properties as of that date, were not sold or under contract for sale by the end of 1996. Given the mandate of the May 5, 1993 Information Statement, the General Partner decided to account for the Partnership's properties as assets held for sale, instead of for investment as of December 31, 1995. In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (see Note 2 to the Financial Statements in Item 8), the carrying value of the properties was evaluated to insure that each property was carried on the Partnership's balance sheets at the lower of cost or fair value, less estimated selling costs. Accordingly, the General Partner compared the carrying value of each property to its appraised value as of January 1, 1996. If the carrying value of a property and certain related assets was greater than its appraised value, less estimated selling costs, the General Partner reduced the carrying value of the property by the difference. On February 18, 1997, the General Partner mailed a Consent Solicitation to the Limited Partners which sought their consent to dissolve the Partnership and sell and liquidate all of its remaining properties as soon as practicable, consistent with obtaining reasonable value for the Partnership's properties. A majority in interest of the Limited Partners consented by March 13, 1997. As a result, the Partnership adopted the liquidation basis of accounting as of March 31, 1997. The difference between the adoption of the liquidation basis of accounting as of March 13, 1997 and March 31, 1997 was not material. -3- 4 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP Item 1. Business (Cont'd.) Under the liquidation basis of accounting, assets are stated at their estimated net realizable values and liabilities are stated at their anticipated settlement amounts. The valuation of assets and liabilities necessarily requires many estimates and assumptions, and there are substantial uncertainties in carrying out the dissolution of the Partnership. The actual values upon dissolution and costs associated therewith could be higher or lower than the amounts recorded. In November 1998, the Partnership entered into a Purchase and Sale Agreement with Abbey Investments, Inc. to sell all of the Partnership's remaining properties for $12,300,000. However, in January 1999, the agreement was terminated because Abbey had requested a material reduction in the purchase price (approximately 11%), which the Partnership did not agree to. On April 30, 1999, the Partnership and Praedium Performance Fund IV ("Praedium") executed a Purchase and Sale Agreement to sell all of the Partnership's properties except its interest in Cooper Village to Praedium for $9,350,000. Praedium deposited $34,500 into escrow, pending completion of its due diligence inspection and review. Praedium's contingency period expired on June 14, 1999. During and after the contingency period, Praedium, in a series of negotiations with the Partnership, sought reductions in the purchase price of the properties. During this time, the General Partner negotiated with Praedium, and also sought other purchasers for the properties, both individually and as a group. Finally, in late July 1999, the Partnership declined Praedium's offer to purchase the properties for a materially reduced purchase price and terminated its dealings with Praedium. The Partnership subsequently sold its three remaining properties (including its 42% interest in Cooper Village Shopping Center) in three separate transactions during September and December 1999. See Capital Resources and Liquidity in Item 7 for further discussion. The Partnership has no employees and, accordingly, the General Partner and its affiliates perform services on behalf of the Partnership in connection with administering the affairs of the Partnership and operating the Partnership's properties. The General Partner and its affiliates receive compensation in connection with such activities. See Item 11 and Note 4 to the Financial Statements in Item 8 for a description of such charges. Item 2. PROPERTIES As of December 31, 2000, all of the Partnership's properties have been sold. Item 3. LEGAL PROCEEDINGS So far as is known to the General Partner, neither the Partnership nor its properties are subject to any material pending legal proceedings, except for the following: Bigelow - Diversified Secondary Partnership Fund 1990 litigation On March 25, 1997, a limited partner named Bigelow-Diversified Secondary Partnership Fund 1990 filed a purported class action lawsuit in the Court of Common Pleas of Philadelphia County against Damson/Birtcher Partners, Birtcher -4- 5 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP Item 3. LEGAL PROCEEDINGS (Cont'd.) Bigelow - Diversified Secondary Partnership Fund 1990 litigation (Cont'd.) Investors, Birtcher/Liquidity Properties, Birtcher Investments, L.F. Special Fund II, L.P., L.F. Special Fund I, L.P., Arthur Birtcher, Ronald Birtcher, Robert Anderson, Richard G. Wollack and Brent R. Donaldson alleging breach of fiduciary duty and breach of contract and seeking to enjoin the Consent Solicitation dated February 18, 1997. On April 18, 1997, the court denied the plaintiff's motion for a preliminary injunction. On June 10, 1997, the court dismissed the plaintiff's complaint on the basis of lack of personal jurisdiction and forum non conveniens. On June 13, 1997, the Partnership and its affiliated partnership Damson/Birtcher Realty Income Fund-II, and their general partner, Birtcher/Liquidity Properties, filed a complaint for declaratory relief in the Court of Chancery in Delaware against Bigelow-Diversified Secondary Partnership Fund 1990 L.P. The complaint seeks a declaration that the vote that the limited partners of the Partnership and Damson/Birtcher Realty Income Fund-II took pursuant to the respective consent solicitations dated February 18, 1997 was effective to dissolve the respective partnerships and complied with applicable law and that the actions of the General Partner in utilizing the consent solicitations to solicit the vote of the limited partners did not breach any fiduciary or contractual duty to such limited partners, and also seeks an award of costs and fees to the plaintiffs. The defendant has answered the complaint. The parties have initiated discovery. No motions are pending at this time. In September 1998, Bigelow/Diversified Secondary Partnership 1990 informed the Partnership that it was filing suit in the Delaware Chancery Court against Damson/Birtcher Partners, Birtcher Investors, Birtcher Liquidity Properties, Birtcher Investments, BREICORP, LF Special Fund I, LP, LF Special Fund II. LP, Arthur Birtcher, Ronald Birtcher, Robert Anderson, Richard G. Wollack and Brent R. Donaldson alleging a purported class action on behalf of the limited partners of the Partnership, Damson/Birtcher Realty Income Fund-I and Damson/Birtcher Realty Income Fund-II alleging breach of fiduciary duty and incorporating the allegations set forth in the previously dismissed March 25, 1997 complaint filed in the Court of Chancery of Philadelphia County. In March 2000, defendants informed the Court and plaintiff that they would bring a Motion for Summary Judgment against the named plaintiff based upon the allegations set forth in plaintiff's complaint. On April 4, 2000, Bigelow/Diversified Secondary Partnership Fund 1990 filed a First Amended Class Action and Derivative Complaint against Damson/Birtcher Partners, Birtcher Investors, Birtcher/Liquidity Properties, Birtcher Partners, Birtcher Properties, Birtcher Ltd., Birtcher Investments, BREICORP, L.F. Special Fund II, L.P., L.F. Special Fund I, L.P., Liquidity Fund Asset Management, Inc., Arthur Birtcher, Ronald Birtcher, Robert Anderson, Richard G. Wollack and Brent R. Donaldson, the Partnership, Damson/Birtcher Realty Income Fund-I and Damson/Birtcher Realty Income Fund-II, alleging breach of fiduciary duty, breach of contract, and a derivative claim for breach of fiduciary duty. Defendants have answered the First Amended Complaint. Plaintiff has engaged in preliminary discovery. -5- 6 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP Item 3. LEGAL PROCEEDINGS (Cont'd.) Bigelow - Diversified Secondary Partnership Fund 1990 litigation (Cont'd.) On October 27, 2000, defendants sought permission of the court to communicate an offer to settle to individual limited partners of the Partnership. Plaintiff's counsel opposed that motion. On December 4, 2000, the court ruled that defendants could communicate an offer to settle to individual limited partners. Thereafter, on December 12, 2000, the Partnership and the General Partner mailed to the limited partners an offer to settle this lawsuit and all other claims (including the Madison Partnership Liquidity Investors Litigation referenced below) for payment of each settling limited partner's pro rata share of the proceeds available for distribution from liquidation of the Partnership's properties (approximately $85 per $1,000 of original investment interest) plus a nominal payment of $1.00 from the General Partners for an assignment of all of a settling limited partner's interest in the Partnership to the General Partner. Limited partners holding 44% of the interests (including the Grape Settlement, see Item 5) in the Partnership settled on these terms. On March 6, 2001, all of the defendants other than the Partnership and the general partners filed a motion to be dismissed from the case. The court has not yet set a hearing date for this motion. Madison Partnership and ISA Partnership Litigation On April 2, 1999, Madison Partnership Liquidity Investors XVI, LLC and ISA Partnership Liquidity Investors filed a purported class and derivative action in the California Superior Court in Orange County, California (Case No. 807644) against Damson Birtcher Partners, Birtcher/Liquidity Properties, Birtcher Partners, Birtcher Investors, Birtcher Investments, Birtcher Limited, Breicorp LP Special Fund II, L.P., Liquidity Fund Asset Management, Inc., Robert M. Anderson, Brent R. Donaldson, Arthur B. Birtcher, Ronald E. Birtcher, and Richard G. Wollack, Defendants, and Damson/Birtcher Realty Income Fund-I, Damson/Birtcher Realty Income Fund-II, and Real Estate Income Partners III, Nominal Defendants. The complaint asserts claims for breach of fiduciary duty and breach of contract. The gravamen of the complaint is that the General Partners of these limited partnerships have not undertaken all reasonable efforts to expedite liquidation of the properties and to maximize the returns to the partnerships' limited partners. The complaint seeks unspecified monetary damages, attorneys' fees and litigation expenses, and an order for dissolution of the partnerships and appointment of an independent liquidating trustee. On August 14, 2000, plaintiffs petitioned the court for an order certifying the action as a class action. Plaintiffs also asked the court to issue a writ mandating that the Partnership immediately distribute all liquidation proceeds to the limited partners. On December 19, 2000, the court denied both motions. The case is currently proceeding only as a derivative action. As noted above, limited partners holding 44% of the interests in the Partnership have settled this (and all other) cases against the Partnership and the General Partner. -6- 7 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II Item 5. MARKET FOR THE REGISTRANT'S LIMITED PARTNERSHIP INTERESTS AND RELATED SECURITY HOLDER MATTERS There is no public market for the limited partnership interests and a market is not expected to develop as such limited partnership interests are not publicly traded or freely transferable. As of February 28, 2001, the number of holders of the Partnership's interests is as follows: General Partner 1 Limited Partners 4,300 ----- 4,301 =====

Through 1999 (when operations ceased), the Partnership made quarterly cash distributions to its partners out of distributable cash, when available, pursuant to the Partnership's Agreement of Limited Partnership. Distributable cash from operations was generally paid 99% to the Limited Partners and 1% to the General Partner. The Partnership has paid the following quarterly cash distributions to its Limited Partners:

-7- 8 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP Item 5. MARKET FOR THE REGISTRANT'S LIMITED PARTNERSHIP INTERESTS AND RELATED SECURITY HOLDER MATTERS (Cont'd.) The Limited Partners and the General Partner are entitled to receive quarterly cash distributions, as available, in the future. In June 1996, the Partnership made a $2,159,000 special distribution to its limited partners from a portion of the proceeds from the sale of Flaircentre. See Item 7, Liquidity and Capital Resources, for further discussion. In February 1997, the Partnership made a $11,708,000 special distribution to its limited partners from a portion of the proceeds from the sale of Northtech. See Item 7, Liquidity and Capital Resources, for further discussion. In October 1997, the Partnership made a $5,605,000 special distribution to its limited partners from the proceeds of the sale of Martinazzi Square. See Item 7, Liquidity and Capital Resources, for further discussion. In December 1999, the Partnership made two special distributions of $1,102,000 on December 8th and $5,096,000 on December 31st representing a portion of the sales proceeds from the sales of The Forum Office Park and the Partnership's 42% interest in Cooper Village. In March 2000, the Partnership made another special distribution of $1,752,000 from a portion of the remaining sales proceeds it had been holding in reserve. On October 19, 2000, Grape Investors, LLC ("Grape"), the holder of 4.533% of the limited partnership interests of the Partnership, settled its portion of the purported class action lawsuits entitled "Bigelow/Diversified Secondary Partnerships Fund 1990 Litigation" and "Madison Partnership and ISA Partnership Litigation" (the "Grape Settlement"). In exchange for a complete settlement and release from Grape, the Partnership paid Grape its pro rata share of the proceeds available for distribution from the liquidation of the Partnership's properties. Grape's final distribution was $243,000, or approximately $85 per $1,000 of original investment. The General Partner also paid $1.00 for all of Grape's interest in the Partnership. On December 12, 2000, the Partnership and the General Partner mailed to the limited partners an offer to settle the "Bigelow/Diversified Secondary Partnerships Fund 1990 Litigation" and the "Madison Partnership and ISA Partnership Litigation" and all other claims (including the Madison Partnership Liquidity Investors Litigation referenced below) for payment of each settling limited partner's pro rata share of the proceeds available for distribution from liquidation of the Partnership's properties (approximately $85 per $1,000 of original investment interest) plus a nominal payment of $1.00 from the General Partners for an assignment of all of a settling limited partner's interest in the Partnership to the General Partner. Limited partners holding 44% (including the Grape Settlement) of the interests in the Partnership settled on these terms. The aggregate distribution in connection with the December 12, 2000 offer, which was reflected as an accrual at December 31, 2000, was approximately $2,107,000. -8- 9 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP Item 5. MARKET FOR THE REGISTRANT'S LIMITED PARTNERSHIP INTERESTS AND RELATED SECURITY HOLDER MATTERS (Cont'd.) As of December 31, 2000, the Partnership has sold all of its operating properties. Due to the costs of defending and the uncertainty involved with the ongoing litigation, it is probable that future distributions will be limited to a liquidating distribution upon Partnership wind down, should funds be available at that time. Item 6. SELECTED FINANCIAL DATA

The following summary of financial data is for the period since the Partnership adopted the liquidation basis of accounting.

-9- 10 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Capital Resources and Liquidity Since the completion of its acquisition program in December 1988, the Partnership has been primarily engaged in the operation of its properties. The Partnership's original objective had been to hold its properties as long-term investments. However, an Information Statement, dated May 5, 1993, mandated that the General Partner seek a vote of the Limited Partners no later than December 31, 1996, regarding prompt liquidation of the Partnership in the event that properties with appraised values as of January 1993, which constituted at least one-half of the aggregate appraised values of all Partnership properties as of that date are not sold or under contract for sale by the end of 1996. Given the mandate of the May 5, 1993 Information Statement, at December 31, 1995, the General Partner decided to account for the Partnership's properties as assets held for sale instead of for investment. In a Consent Solicitation dated February 18, 1997, the Partnership solicited and received the consent of the Limited Partners to dissolve the Partnership and convey the Partnership's property as soon as practicable, consistent with obtaining reasonable value for the properties. The Partnership's properties were held for sale throughout 1997 and 1998 and the remaining three properties (including the Partnership's interest in Cooper Village) were sold in 1999. Working capital is and will be principally provided from the working capital reserve established by the General Partner. The Partnership made no regular distributions during the year ended December 31, 2000. Regular distributions for the year ended December 31, 1999, represented net cash flow from operations of the Partnership's properties and interest earned on the temporary investment of working capital, net of capital reserve requirements. In December 1999, the Partnership made two special distributions of $1,102,000 on December 8th and $5,096,000 on December 31st representing a portion of the sales proceeds from the sales of The Forum Office Park, Creek Edge Business Park and the Partnership's 42% interest in Cooper Village. In March 2000, the Partnership made another special distribution of $1,752,000 from a portion of the remaining sales proceeds it has been holding in reserve. This last special distribution arose out of discussions with the named plaintiffs and their lawyers in the purported class action lawsuits. It represents the culmination of further, private discussions with representatives of Grape Investors, the holder of the largest investor position in the Partnership. Grape Investors has agreed that for a period of 24 months, it will not involve itself in any way or support any effort to seek, or cause anyone else to seek, the addition of new general partners, the appointment of a receiver, or the removal of the General Partner. Grape Investors also agreed to either abstain or vote against any such action or proposal. On October 19, 2000, Grape Investors, LLC ("Grape"), the holder of 4.533% of the limited partnership interests of the Partnership, settled its portion of the purported class action lawsuits entitled "Bigelow/Diversified Secondary Partnerships Fund 1990 Litigation" and "Madison Partnership and ISA Partnership -10- 11 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd.) Capital Resources and Liquidity (Cont'd.) Litigation" (the "Grape Settlement"). In exchange for a complete settlement and release from Grape, the Partnership paid Grape its pro rata share of the proceeds available for distribution from the liquidation of the Partnership's properties. Grape's final distribution was $243,000, or approximately $85 per $1,000 of original investment. The General Partner also paid $1.00 for all of Grape's interest in the Partnership. On December 12, 2000, the Partnership and the General Partner mailed to the limited partners an offer to settle the "Bigelow/Diversified Secondary Partnerships Fund 1990 Litigation" and the "Madison Partnership and ISA Partnership Litigation" and all other claims (including the Madison Partnership Liquidity Investors Litigation referenced below) for payment of each settling limited partner's pro rata share of the proceeds available for distribution from liquidation of the Partnership's properties (approximately $85 per $1,000 of original investment interest) plus a nominal payment of $1.00 from the General Partners for an assignment of all of a settling limited partner's interest in the Partnership to the General Partner. Limited partners holding 44% (including the Grape Settlement) of the interests in the Partnership settled on these terms. The aggregate distribution in connection with the December 12, 2000 offer, which was reflected as an accrual at December 31, 2000, was approximately $2,107,000. The Partnership also made special distributions of $5,605,000 in October 1997 (sale of Martinazzi Square), $11,708,000 in February 1997 (sale of Northtech) and $2,159,000 in June 1996 (sale of Flaircentre). As of December 31, 1999, the Partnership had sold all of its operating properties. Two lawsuits remain pending against the Partnership and its General Partner and certain of its affiliates that seek, among other things, unspecified monetary damages. Since these cases are in the preliminary discovery phase, there is unavoidable uncertainty regarding their ultimate resolution. The Partnership Agreement mandates that the General Partner provide for all of the Partnership's liabilities and obligations, including contingent liabilities, before distributing liquidation proceeds to its partners. Therefore, the amount and timing of any distribution of liquidation proceeds will be determined by the General Partner in light of these and other relevant considerations. Due to these uncertainties, it is probable that future distributions will be limited to a liquidating distribution upon Partnership wind down should funds be available at that time. In June 1993, the Partnership completed its solicitation of written consents from its Limited Partners. A majority in interest of the Partnership's Limited Partners approved each of the proposals contained in the Information Statement, dated May 5, 1993. Those proposals have been implemented by amending the Partnership Agreement as contemplated by the Information Statement. The amendments include, among other things, the payment of asset management and leasing fees to the General Partner and the elimination of the General Partner's residual interest and deferred leasing fees that were previously subordinated to return of the Limited Partners' 9% Preferential Return. See Item 8, Note 4 to the -11- 12 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd.) Capital Resources and Liquidity (Cont'd.) Financial Statements for discussion of fees paid to the General Partner for the years ended December 31, 2000, 1999 and 1998. On February 18, 1997, the General Partner mailed a Consent Solicitation to the Limited Partners which sought their consent to dissolve the Partnership and sell and liquidate all of its remaining properties as soon as practicable, consistent with obtaining reasonable value for the properties. A majority in interest of the Limited Partners consented by March 13, 1997. As a result, the Partnership adopted the liquidation basis of accounting as of March 31, 1997. The difference between the adoption of the liquidation basis of accounting as of March 13, 1997 and March 31, 1997 was not material. Under the liquidation basis of accounting, assets are stated at their estimated net realizable values and liabilities are stated at their anticipated settlement amounts. The valuation of assets and liabilities necessarily requires many estimates and assumptions, and there are substantial uncertainties in carrying out the dissolution of the Partnership. The actual values upon dissolution and costs associated therewith could be higher or lower than the amounts recorded. Since the approval of the February 18, 1997 Consent Solicitation, the General Partner had been evaluating possible sales of Partnership properties, individually and as a portfolio, to liquidate and wind up the Partnership. On April 30, 1998 the General Partner accepted an offer to purchase all of the Partnership's properties for $12,560,000 from Abbey Investments, Inc. ("Abbey"), which was subject to certain customary contingencies, including due diligence review by the purchaser and negotiation of a definitive Purchase and Sale Agreement. On November 9, 1998, the Partnership and Abbey entered into a definitive Purchase and Sale Agreement, for an adjusted purchase price of $12,300,000. Abbey thereafter requested a material reduction in the purchase price, which the Partnership did not agree to. Therefore, in late January 1999, the sale to Abbey was terminated. On April 30, 1999, the Partnership and Praedium Performance Fund IV ("Praedium") executed a Purchase and Sale Agreement to sell all of the Partnership's properties except its interest in Cooper Village to Praedium for $9,350,000. Praedium deposited $34,500 into escrow, pending completion of its due diligence inspection and review. Praedium's contingency period expired on June 14, 1999. During and after the contingency period, Praedium, in a series of negotiations with the Partnership, sought reductions in the purchase price of the properties. During this time, the General Partner negotiated with Praedium, and also sought other purchasers for the properties, both individually and as a group. Finally, in late July 1999, the Partnership declined Praedium's offer to purchase the properties for a materially reduced purchase price and terminated its dealings with Praedium. During the last half of 1999, the Partnership sold its three remaining properties (including its 58% interest in Cooper Village Shopping Center) in three separate transactions, as set forth below: -12- 13 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd.) Capital Resources and Liquidity (Cont'd.) Cooper Village On September 21, 1999, the Partnership sold its 42% interest in Cooper Village Shopping Center (co-owned with an affiliated partnership), in Mesa, Arizona to Old Vine Corporation ("Old Vine"), a local shopping center operator that is not affiliated in any way with the Partnership, its General Partner or any of its principals or affiliates. The sale price for the Partnership's 42% interest was $2,593,500. The buyer was represented by a third-party broker in the transaction. The Partnership's allocation of the broker commission paid was $33,000 from the sale proceeds. The General Partner was not paid any property disposition fee in connection with the sale. Old Vine has hired an affiliate of Birtcher to perform certain onsite property management services (not accounting or asset management), pursuant to a contract that is cancelable at any time upon 30 days notice. The proceeds from the sale of Cooper Village Shopping Center were distributed to the Partnership and its affiliated partnership during the fourth quarter of 1999. The Forum On September 23, 1999, the Partnership sold The Forum, in Wauwatosa, Wisconsin to Rubin Pachulsky Dew Properties, LLC ("Rubin Pachulsky Dew") for $5,350,000. Rubin Pachulsky Dew is a third-party real estate investment entity that is not affiliated in any way with the Partnership, its General Partner or any of its principals or affiliates. Rubin Pachulsky Dew was represented by a third-party broker in the transaction. The broker was paid $53,500 from the sale proceeds. Since the sale price of The Forum exceeded the January 1, 1993 appraised value ($4,440,000), pursuant to the 1993 Amendment of the Partnership Agreement, the General Partner earned and was paid a property disposition fee of $133,750 in connection with the sale. Rubin Pachulsky Dew hired an affiliate of Birtcher as property manager for The Forum for a fee that is approximately the same as the fee that the Partnership previously paid to the General Partner for property management. In addition, Rubin Pachulsky Dew has hired an affiliate of Birtcher to provide certain asset management services for The Forum, and will pay an incentive fee approximately equal to 10% of the profits, if any, after Rubin Pachulsky Dew has received a 15% cumulative annual, return on its investment. The incentive fee, if earned, is not payable until the property is sold or four years from date of purchase, whichever comes first. The property management agreement is cancelable at any time upon 60 days notice, but the incentive fee will survive termination of the contract. A portion of the proceeds from the sale of The Forum to Rubin Pachulsky Dew was held in escrow. A sum equal to two and one-half percent of the purchase price was -13- 14 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd.) Capital Resources and Liquidity (Cont'd.) The Forum (Cont'd.) held back as a potential source of payment for any claims that may arise related to a Partnership breach of certain representations and warranties related to the sale (released to the Partnership on September 26, 2000) and for any litigation costs that may arise (released to the Partnership on March 23, 2000). The cash held in escrow was included in the gain on sale of real estate. Creek Edge Business Center On December 15, 1999, the Partnership sold Creek Edge Business Center to Investcorp Properties Limited, a Deleware Corporation ("Buyer"), for a sale price of $5,300,000. Affiliates of the Buyer have had a pre-existing relationship with affiliates of Birtcher Investors for more than 20 years. In fact, an affiliate of the Buyer initially sold Creek Edge to the Partnership, and subsequently contracted with the General Partner to perform property management services at Creek Edge on behalf of the Partnership. An affiliate of Buyer acted as buyer's broker in the transaction, and was paid a brokerage commission of $159,000 at closing. In addition, the General Partner earned and was paid a disposition fee of $132,500 in connection with the transaction. Buyer did not hire the General Partner or any of its affiliates to perform asset management or property management services for this property after close of the sale. The Partnership realized approximately $5,090,000 in distributable cash proceeds from the sale of Creek Edge after deducting for closing costs, commissions (excluding the General Partner's disposition fee) and prorations totaling approximately $210,000. Property Appraisals and Net Asset Value In accordance with the terms of the Partnership Agreement, each year the Partnership secures an independent appraisal of each of the Partnership's properties as of January 1. Prior to the January 1, 1995 appraisals, the independent appraiser had estimated each property's "Investment Value," utilizing a seven to ten-year cash flow model to estimate value based upon an income approach. The amendment to the Partnership Agreement consented to by the Limited Partners in June 1993 mandated, among other things, that the General Partner seek a vote of (and provide an analysis and recommendation to) the Limited Partners no later than December 31, 1996 regarding the prompt liquidation of the Partnership in the event that properties with (then) current appraised values (constituting at least one-half of the total (then) current appraised values) of all of the Partnership's properties were not sold or under contract for sale by the end of 1996. -14- 15 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd.) Capital Resources and Liquidity (Cont'd.) Property Appraisals and Net Asset Value (Cont'd.) Given this mandate, the General Partner requested that the appraiser provide an assessment of value that reflects a shorter investment holding term. At that time, the General Partner did not know how long it would take to sell the Partnership's remaining properties, so it requested that the appraiser assume that the entire portfolio would be sold over four years, in connection with the January 1995 appraisals, over three years in connection with the January 1996 appraisals, over approximately two years for the January 1997 appraisals and over one year for the 1998 appraisals. In lieu of obtaining appraisals as of January 1, 1999, the General Partner calculated an estimated selling price net of estimated selling costs by taking an average of the offer prices, net of estimated selling costs, from those proposals. The General Partner utilized those averages to estimate fair value. The General Partner estimated the fair value of the Partnership's remaining properties at January 1, 1999 to be $12,111,000, net of estimated selling costs and disposition fees. As of December 31, 1999, the Partnership had sold all of its properties, therefore there were no properties to value as of January 1, 2000. Year 2000 As of December 31, 1999, the Partnership's accounting systems and the investor services system used to track the limited partners' interests, distributions and tax information were tested and appeared to be free of year 2000 bugs. As of December 31, 2000, the Partnership did not experience any significant issues or problems relating to year 2000. The cost of the Partnership's accounting systems upgrade was borne by the General Partner and was not reimbursed by the Partnership. Results of Operations Year Ended December 31, 2000 Because the Partnership has been liquidating its assets, a year-to-year comparison of the results of operations is not practical. As the Partnership's assets (properties) were sold, the results of operations have been generated from a smaller asset base, and are therefore not comparable. During the last half of 1999, the Partnership sold its three remaining properties (including its 58% interest in Cooper Village Shopping Center) in three separate transactions. The Partnership's operating results have been reflected on the Statements of Changes of Net Assets in Liquidation. For the year ended December 31, 2000, interest income was $354,000. The increase in interest income was reflective of the temporary investment of cash and cash equivalent balances that were generated from the sale of the properties. -15- 16 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd.) Results of Operations (Cont'd.) Year Ended December 31, 2000 (Cont'd.) Accrued expenses for liquidation as of December 31, 2000, includes estimates of costs to be incurred in carrying out the dissolution and liquidation of the Partnership through December 31, 2001. These costs include estimates of legal fees, accounting fees, tax preparation and filing fees, other professional services and the general partner's liability insurance. During the year ended December 31, 2000, the General Partner continuously re-evaluated the estimated costs to wind up and dissolve the Partnership given the uncertainty involved with the ongoing litigation. The provision for liquidation expenses was accordingly adjusted by an aggregate of $543,000 to reflect the revised estimates. The actual costs could vary significantly from the related provisions due to the uncertainty related to the length of time required to complete the liquidation and dissolution and the complexities which may arise. The accrued expenses for liquidation do not take into consideration the possible outcome of the ongoing litigation after December 31, 2001. Such costs are unknown and are not estimable at this time. Liquidation expenses incurred for the year ended December 31, 2000, included charges of $12,000 from the General Partner and its affiliates for services rendered in connection with administering the affairs of the Partnership. Also included in liquidation expenses incurred for the year ended December 31, 2000, are direct charges of $314,000 relating to audit fees, tax preparation fees, legal and professional fees, costs incurred in providing information to the Limited Partners and other miscellaneous costs. Year Ended December 31, 1999 Because the Partnership was in the process of liquidating its remaining assets, a comparison of the results of operations was not practical. As the Partnership's assets (properties) are sold, the results of operations will be generated from a smaller asset base, and are therefore not comparable. The Partnership completed the sale of its three remaining properties (including a 42% interest in Cooper Village shopping center) in three separate transactions during the year ended December 31, 1999. The Partnership's operating results have been reflected on the Statements of Changes of Net Assets in Liquidation. For the year ended December 31, 1999 the Partnership generated $929,000 of net operating income from operation of its properties as compared to $1,006,000 in 1998. The decrease was primarily attributable to the sales of The Forum office park in September 1999 and Creek Edge Business Park in December 1999. Interest income resulted from the temporary investment of Partnership working capital. For the year ended December 31, 1999 the Partnership earned $110,000 of interest income. The increase when compared to 1998, was directly related to the temporary investment of proceeds from the sale of properties in late 1999. The gain on sale of real estate ($749,000) reflects the gains incurred on the sale of The Forum ($197,000) and Creek Edge Business Park ($552,000). -16- 17 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd.) Results of Operations (Cont'd.) Year Ended December 31, 1999 (Cont'd.) The decrease in equity in earnings of Cooper Village Partners for the year ended December 31, 1999, as compared to 1998, was primarily attributable to the sale of Cooper Village Shopping Center that occurred on September 21, 1999 for a sales price of $6,175,000. The Partnership's portion of the gain on the sale of the property was $190,000. General and administrative expenses for the year ended December 31, 1999 include charges of $118,000 from the General Partner and its affiliates for services rendered in connection with administrating the affairs of the Partnership and operating the Partnership's properties. Also included in general and administrative expense for the year ended December 31, 1999, are direct charges of $342,000 related to audit fees, tax preparation fees, legal and professional fees, costs incurred in providing information to the Limited Partners and other miscellaneous costs. The decrease in general and administrative expenses for the year ended December 31, 1999 as compared to 1998 was attributable to a decrease in asset management fees, administrative wages and the cost of liability insurance coverage. These decreases were partially offset by an increase in fees for legal and professional services incurred during 1999. Accrued expenses for liquidation as of December 31, 1999, include estimates of costs to be incurred in carrying out the dissolution and liquidation of the Partnership. These costs include estimates of legal fees, accounting fees, tax preparation and filing fees, and other professional services. At December 31, 1999, the General Partner re-evaluated the estimated costs to wind up and dissolve the Partnership given the uncertainty involved with the ongoing litigation. The provision for liquidation expenses was accordingly adjusted by an additional $184,000 to reflect the revised estimates. The allowance for accrued expenses for liquidation does not, however, reflect any costs of the ongoing litigation due to the uncertainty associated with those matters. Year Ended December 31, 1998 Because the Partnership adopted the liquidation basis of accounting on March 31, 1997, a comparison of the results of operations is not practical. The Statements of Net Assets in Liquidation and Statements of Changes of Net Assets in Liquidation reflect the Partnership in the process of liquidation. Prior financial statements reflect the Partnership as a going concern. As the Partnership's assets (properties) are sold, the results of operations will be generated from a smaller asset base and are therefore not comparable. The Partnership's operating results have been reflected on the Statements of Changes of Net Assets in Liquidation for the year ended December 31, 1998. For the year ended December 31, 1998, the Partnership generated $1,006,000 of net operating income from operation of its properties (exclusive of Cooper Village Partners), which was slightly lower than 1997. The decrease in operating income for the year ended December 31, 1998, when compared to 1997 was primarily attributable to the following: 1) the sale of Northtech in January 1997 which -17- 18 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Cont'd.) Results of Operations (Cont'd.) Year Ended December 31, 1998 (Cont'd.) caused a decrease in 1998 rental revenue of $108,000, offset by a $584,000 write off of deferred rent in 1997 related to the sale; 2) the sale of Martinazzi Square in October 1997 that caused a decrease in rental revenue of $479,000; the decrease in operating expenses of $617,000 related to the sale of Northtech; and 4) the write off of $178,000 at The Forum related to the early termination of a lease arrangement. Interest income resulted from the temporary investment of Partnership working capital. For the year ended December 31, 1998, interest income was approximately $65,000. The decrease, when compared to 1997, was due to the lower average cash balance on hand during 1998. General and administrative expenses for the year ended December 31, 1998, included charges of $158,000 from the General Partner and its affiliates for services rendered in connection with administering the affairs of the Partnership and operating the Partnership's properties. Also included in general and administrative expenses for the year ended December 31, 1998, are direct charges of $328,000 relating to audit fees, tax preparation fees, cost of legal and professional fees, insurance expenses, costs incurred in providing information to the Limited Partners and other miscellaneous costs. The decrease in general and administrative expenses for the year ended December 31, 1998, as compared to 1997, was primarily attributable to decreases in wage reimbursements, asset management fees, cost of legal and professional services, insurance and appraisal fees incurred in 1998. During 1998, the carrying value of Creek Edge was increased by $236,000 to its estimated net realizable value of $4,432,000. In addition, the carrying value of real estate in the Partnership's investment in Cooper Village Partners was also adjusted as the General Partners of Cooper Village Partners determined that the carrying value of real estate was in excess of its net realizable value. The Partnership's portion (42%) of the adjustment was $236,000. Accrued expenses for liquidation as of December 31, 1998, includes estimates of costs to be incurred in carrying out the dissolution and liquidation of the Partnership. These costs include estimates of legal fees, accounting fees, tax preparation and filing fees and professional services. The actual costs could vary significantly from the related provisions due to the uncertainty related to the length of time required to complete the liquidation and dissolution and the complexities which may arise in disposing of the Partnership's remaining assets. Impact of Issued But Not Yet Adopted Accounting Principles In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards, or SFAS, No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS Nos. 137 and 138, describes the accounting for derivative instruments and hedging activities. SFAS No. 133, as amended, is effective for the first fiscal quarter of the first fiscal year beginning after June 15, 2000. We do not believe that the implementation of SFAS No. 133, as amended, will have an impact on our financial position or results of operations. Item 7a. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES As of December 31, 2000, the Partnership had cash equivalents of $5,114,000 invested in interest-bearing certificates of deposit. These investments are subject to interest rate risk due to changes in interest rates upon maturity. Declines in interest rates over time would reduce Partnership interest income. -18- 19 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS

Information required by schedules called for under Regulation S-X is either not applicable or is included in the financial statements. COOPER VILLAGE PARTNERS (A GENERAL PARTNERSHIP) INDEX TO FINANCIAL STATEMENTS Independent Auditors' Report........................................................... F-20 Financial Statements: Statements of Net Assets in Liquidation as of December 31, 1999................. F-21 Statements of Changes of Net Assets in Liquidation for the Years Ended December 31, 1999 and 1998................................................ F-22 Notes to Financial Statements................................................... F-23

Information required by schedules called for under Regulation S-X is either not applicable or is included in the financial statements. F-1 20 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP INDEPENDENT AUDITORS' REPORT To Birtcher/Liquidity Properties, as General Partner of Real Estate Income Partners III, Limited Partnership: We have audited the financial statements of Real Estate Income Partners III, Limited Partnership as listed in the accompanying index. 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 conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets in liquidation as of December 31, 2000 and 1999 of Real Estate Income Partners III, Limited Partnership, and the changes of net assets in liquidation for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America applied on the basis of accounting discussed in note 2. KPMG LLP Orange County, California February 6, 2001 F-2 21 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP STATEMENTS OF NET ASSETS IN LIQUIDATION

The accompanying notes are an integral part of these financial statements. F-3 22 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP STATEMENTS OF CHANGES OF NET ASSETS IN LIQUIDATION

The accompanying notes are an integral part of these financial statements. F-4 23 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (1) Organization and Operations Real Estate Income Partners III, Limited Partnership (the "Partnership") was formed on December 9, 1985, under the laws of the State of Delaware, for the purpose of acquiring and operating specified income-producing retail, commercial and industrial properties. The Partnership acquired its properties for cash. The General Partner of the Partnership is Birtcher/Liquidity Properties, a general partnership consisting of LF Special Fund I, L.P. ("LF-I"), a California limited partnership and Birtcher Investors, a California limited partnership. Birtcher Investors, or its affiliates, provides day-to-day administration, supervision and management of the Partnership. The General Partner filed an Information Statement with the Securities and Exchange Commission seeking consent of the Limited Partners to amend the Partnership Agreement. On June 24, 1993, the Partnership completed its solicitation of written consent from its Limited Partners. A majority in interest of the Partnership's Limited Partners approved each of the proposals contained in the Information Statement, dated May 5, 1993. Those proposals have been implemented by the Partnership as contemplated by the Information Statement as amendments to the Partnership Agreement, and are reflected in these financial statements as such. The amendment modified the Partnership Agreement to eliminate the General Partner's 1% subordinated interest in distributions of Distributable Cash (net cash from operations) and reduce its subordinated interest in such distributions from 10% to 1%. The amendment also modified the Partnership Agreement to eliminate the General Partner's 1% subordinated interest in Sale or Financing Proceeds (net cash from sale or financing of Partnership property) and to reduce its subordinated interest in such proceeds from 15% to 1%. In lieu thereof, the Partnership Agreement now provides for the Partnership's payment to the General Partner of an annual asset management fee equal initially to .75% of the aggregate appraised value of the Partnership's properties. The factor used to calculate the annual asset management fee was reduced by .10% each year beginning after December 31, 1996 (e.g., from .65% in 1997 to .55% in 1998 and to .45% in 1999). All of the Partnership's properties were sold by December 31, 1999, therefore no asset management fees were paid in 2000. The amendment modified the Partnership Agreement to eliminate the subordination provisions with respect to future leasing fees. Such fees for future leasing services rendered by the General Partner or its affiliates will be payable by the Partnership on a current basis and will not be subordinated to the Limited Partners Preferred Return and Adjusted Invested Capital or any other amount. The amendment eliminated the deferred leasing fees earned by the General Partner or its affiliates (approximately $490,000 as of December 31, 1992) on and after the effective date of the amendment. The amendment modified the Partnership Agreement to eliminate subordination F-5 24 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Cont'd.) (1) Organization and Operations (Cont'd.) provisions with respect to future property disposition fees payable under that section. The amendment authorized payment to the General Partner and its affiliates of the property disposition fees as earned. The fees will not be subordinated to the Limited Partners Preferred Return and Adjusted Invested Capital or any other amount. The disposition fees are to be paid to the General Partner and its affiliate in an amount equal to 50% of the competitive real estate brokerage commission that would be charged by unaffiliated third-parties providing comparable services in the area in which a property is located, but in no event more than three percent of the gross sale price of the property, and are to be reduced by the amount by which any brokerage or similar commissions paid to any unaffiliated third-parties in connection with the sale of the property exceed three percent of the gross sale price. This amount was not payable, unless and to the extent that the sale price of the property in question, net of any other brokerage commissions (but not other costs of sale), exceeded the appraised value of the property as of January 1, 1993. The amendment states that the Partnership is no longer authorized to pay the General Partner or its affiliates any insurance commissions or any property financing fees. No such commissions or fees have been paid or accrued by the Partnership since its inception. The amendment modified the provisions of the Partnership Agreement regarding allocations of Partnership income, gain and other tax items between the General Partner and the Limited Partners primarily to conform to the changes in the General Partner's interest in distributions of Distributable Cash and Sale or Financing Proceeds as defined, effected by the amendment. It is not anticipated that the adoption and implementation of the amendment will have any material adverse effect on future allocations of income, gain, loss or other tax items to the Limited Partners. The Limited Partners have certain priorities in the allocation of cash distributions by the Partnership. Out of each distribution of net cash, the Limited Partners generally have certain preferential rights to receive payments that, together with all previous payments to them, would provide an overall 9% per annum (cumulative non-compounded) return (a "9% Preferential Return") on their investment in the Partnership. Any distributions not equaling this 9% Preferential Return in any quarter are to be made up in subsequent periods if and to the extent distributable cash is available. It is not, however, attainable given the Partnership's liquidation status. Distributable cash from operations was paid out each quarter in the following manner: 99% to the Limited Partners and 1% to the General Partner. These payments were made each quarter to the extent that there was sufficient distributable cash available. F-6 25 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Cont'd.) (1) Organization and Operations (Cont'd.) Sale or financing proceeds were to be distributed, to the extent available, as follows: (i) to the Limited Partners until all cash distributions to them amount to a 9% Preferential Return on their investment cumulatively from the date of their admission to the Partnership; (ii) then to the Limited Partners in an amount equal to their investment; and (iii) the remainder, 99% to Limited Partners and 1% to the General Partner. Although the unpaid 9% Preferential Return to the Limited Partners aggregates $24,965,000 as of December 31, 2000, the limited partners will not realize this return due to the Partnership's estimated liquidation value of $2,558,000. The amendment modified the Partnership Agreement so as to restrict the Partnership from entering into a future "Reorganization Transaction" (as defined in the amendment) sponsored by the General Partner or any of its affiliates unless such transaction is approved by a "supermajority" of at least 80% in interest of the Limited Partners and the General Partner. The amendment also prohibits the modification of this restriction on Reorganization Transactions without the approval of at least 80% in interest of the Limited Partners. The Partnership's original investment objectives contemplated that it would hold its properties for a period of at least five years, with decisions about the actual timing of property sales or other dispositions to be left to the General Partner's discretion based on the anticipated remaining economic benefits of continued ownership and other factors. On February 18, 1997, the General Partner mailed a Consent Solicitation to the Limited Partners which sought their consent to dissolve the Partnership and sell and liquidate all of its remaining properties as soon as practicable, consistent with obtaining reasonable value for the Partnership's properties. A majority in interest of the Limited Partners consented by March 13, 1997. As a result, the Partnership adopted the liquidation basis of accounting as of March 31, 1997. The difference between the adoption of the liquidation basis of accounting as of March 13, 1997 and March 31, 1997 was not material. Under the liquidation basis of accounting, assets are stated at their estimated net realizable values and liabilities are stated at their anticipated settlement amounts. The valuation of assets and liabilities necessarily requires many estimates and assumptions, and there are substantial uncertainties in carrying out the dissolution of the Partnership. The actual values upon dissolution and costs associated therewith could be higher or lower than the amounts recorded. F-7 26 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Cont'd.) (1) Organization and Operations (Cont'd.) The Partnership adopted the liquidation basis of accounting on March 31, 1997. Comparison of results to prior years, therefore, is not practical. The Statements of Net Assets in Liquidation and Statements of Changes of Net Assets in Liquidation reflect the Partnership in the process of liquidation. Prior financial statements reflect the Partnership as a going concern. As of December 31, 1995 the General Partner decided to treat its properties as held for sale, instead of for investment, for financial statement purposes. Since adoption of the 1993 amendment, the General Partner considered several preliminary indications of interest from third parties to acquire some or all of the Partnership's properties. Apart from the sales of Flaircentre, Northtech and Martinazzi Square, these transactions never materialized, primarily because the General Partner rejected as too low the valuations of the Partnership's remaining properties as proposed by the potential purchasers. The Partnership's properties were held for sale throughout 1997 and 1998. During 1999 the three remaining properties were sold (including the Partnership's 42% interest in Cooper Village) in three separate transactions. In accordance with the liquidation basis of accounting adopted on March 31, 1997 (see Note 2), the carrying value of these properties was evaluated to ensure that each property was carried on the Partnership's Statements of Net Assets in Liquidation at the estimated net realizable value. The General Partner estimated net realizable value by using an average of recent offers (at that time) to acquire the properties, net of estimated selling costs, in lieu of obtaining appraisals at December 31, 1998. Fair value can only be determined based upon sales to third parties, and sales proceeds could differ substantially from internal estimates of fair value or appraised values. On October 19, 2000, Grape Investors, LLC ("Grape"), the holder of approximately 4.533% of the limited partnership interests of the Partnership, settled its portion of the purported class action lawsuits entitled "Bigelow/Diversified Secondary Partnerships Fund 1990 Litigation" and "Madison Partnership and ISA Partnership Litigation" (the "Grape Settlement"). See Note 6. (2) Summary of Significant Accounting Policies Liquidation Basis The Partnership adopted the liquidation basis of accounting as of March 31, 1997. The liquidation basis of accounting is appropriate when liquidation appears imminent, the Partnership can no longer be classified as a going concern and the net realizable values of the Partnership's assets are reasonably determinable. Under this method of accounting, assets and liabilities are stated at their estimated net realizable values and costs of liquidating the Partnership are provided to the extent reasonably determinable. For the year ended December 31, 1998, the General Partner determined that the carrying value of Creek Edge was below its estimated net realizable value. As a result, its carrying value was adjusted by $236,000, to F-8 27 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Cont'd.) (2) Summary of Significant Accounting Policies (Cont'd.) Liquidation Basis (Cont'd.) $4,432,000. In addition, the carrying value of real estate in the Partnership's investment in Cooper Village Partners was also adjusted as the General Partners of Cooper Village Partners determined that the carrying value of real estate was in excess of its net realizable value. The Partnership's portion (42%) of the adjustment was $236,000. Segment Reporting Given that the Partnership is in the process of liquidation, the Partnership has identified only one operating business segment which is the business of asset liquidation. Cash and Cash Equivalents The Partnership invests its excess cash balances in short-term investments (cash equivalents). These investments are stated at cost, which approximates market, and consist of money market, certificates of deposit and other non-equity-type cash investments. Cash equivalents at December 31, 2000 and 1999, totaled $5,114,000 and $7,027,000, respectively. Cash equivalents are defined as temporary non-equity investments with original maturities of three months or less, which can be readily converted into cash and are not subject to changes in market value; however, are subject to interest rate risk. Revenue Recognition Rental income was recognized according to the lease terms. Income Taxes Income taxes are not levied at the Partnership level, but rather on the individual partners; therefore, no provision or liability for Federal and State income taxes has been reflected in the accompanying financial statements. F-9 28 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Cont'd.) (2) Summary of Significant Accounting Policies (Cont'd.) Income Taxes (Cont'd.) Following are the Partnership's assets and liabilities as determined in accordance with generally accepted accounting principles ("GAAP") (liquidation basis of accounting) and for federal income tax reporting purposes at December 31:

Following are the differences between Financial Statement and tax return income:

F-10 29 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Cont'd.) (2) Summary of Significant Accounting Policies (Cont'd.) Earnings and Distributions Per Unit The Partnership Agreement does not designate investment interests in units. All investment interests are calculated on a "percent of Partnership" basis, in part to accommodate reduced rates on sales commissions for subscriptions in excess of certain specified amounts. A Limited Partner who was charged a reduced sales commission or no sales commission was credited with proportionately larger Invested Capital and therefore had a disproportionately greater interest in the capital and revenues of the Partnership than a Limited Partner who paid commissions at a higher rate. As a result, the Partnership has no set unit value as all accounting, investor reporting and tax information is based upon each investor's relative percentage of Invested Capital. Accordingly, earnings or loss per unit is not presented in the accompanying Financial Statements. Estimations The preparation of financial statements in conformity with generally accepted accounting principles requires the General Partner to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses or changes in net assets during the reporting period. Actual results could differ from those estimates. Investment in Cooper Village Partners The Partnership used the equity method of accounting to account for its investment in Cooper Village Partners inasmuch as control of Cooper Village Partners was shared jointly between the Partnership and Damson/Birtcher Realty Income Fund-II, Limited Partnership. The accounting policies of Cooper Village Partners were consistent with those of the Partnership. (3) Investment in Cooper Village Partners During 1987 and 1988, Cooper Village Partners ("CV Partners"), a California general partnership consisting solely of the Partnership and Damson/Birtcher Realty Income Fund-II, Limited Partnership ("Fund II"), an affiliated limited partnership, acquired Cooper Village Shopping Center. In connection therewith, the Partnership and Fund-II contributed capital of $4,300,000 (42%) and $5,937,000 (58%), respectively, and shared in the profits, losses and distributions of CV Partners in proportion to their F-11 30 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Cont'd.) (3) Investment in Cooper Village Partners (Cont'd.) respective ownership interests. Cooper Village Shopping Center was sold on September 21, 1999 (see Note 5) and CV Partners' assets were distributed to the Partnership and Fund II as of December 31, 1999. Condensed summary financial information for CV Partners is presented below. Condensed Statements of Changes Of Net Assets in Liquidation:

For the year ended December 31, 1998, the carrying value of real estate in the Partnership's investment in Cooper Village Partners was adjusted as the General Partners of Cooper Village Partners determined that the carrying value of real estate was in excess of its estimated net realizable value. The Partnership's portion (42%) of the adjustment was $236,000. Cooper Village was liquidated as of December 31, 1999. (4) Transactions with Affiliates The Partnership has no employees and, accordingly, the General Partner and its affiliates perform services on behalf of the Partnership in connection with administering the affairs of the Partnership. The General Partner and affiliates are reimbursed for their general and administrative costs actually incurred and associated with services performed on behalf of the Partnership. For the years ended December 31, 2000, 1999 and 1998, the Partnership was charged with approximately $12,000, $69,000 and $88,000, respectively, of such expenses. An affiliate of the General Partner provides property management services with respect to the Partnership's properties and receives a fee for such services not to exceed 6% of the gross receipts from the properties under management, provided that leasing services are performed, otherwise not to exceed 3%. Such fees amounted to approximately $0, $49,000 and $55,000 for the years ended December 31, 2000, 1999 and 1998, respectively. In addition, an affiliate of the General Partner received $0, $31,000 and $39,000, respectively, for the F-12 31 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Cont'd.) (4) Transactions with Affiliates (Cont'd.) years ended December 31, 2000, 1999 and 1998, as reimbursement of costs for on-site property management personnel and other reimbursable costs. In addition to the aforementioned, an affiliate of the General Partner was also paid $0, $34,000 and $40,000, related to the Partnership's portion (42%) of property management fees, leasing fees, reimbursement of on-site property management personnel and other reimbursable expenses for Cooper Village Partners for the years ended December 31, 2000, 1999 and 1998, respectively. The amended Partnership Agreement provides for the Partnership's payment to the General Partner of an annual asset management fee equal to .35% (.45% in 1999 and .55% in 1998) of the aggregate appraised value of the Partnership's properties as determined by independent appraisal undertaken in January of each year. Such fees for the year ended December 31, 2000, 1999 and 1998, amounted to $0, $37,000 and $53,000, respectively. In addition, the amended Partnership Agreement provides for payment to the General Partner of a leasing fee for services rendered in connection with leasing space in a Partnership property after the expiration or termination of any lease of such space. Fees for leasing services for the year ended December 31, 2000, 1999 and 1998, amounted to $1,000, $12,000 and $17,000 respectively. In addition, to the aforementioned, the General Partner was also paid $0, $8,000 and $15,000, related to the Partnership's portion (42%) of asset management fees for Cooper Village Partners for the years ended December 31, 2000, 1999 and 1998, respectively. (5) Gain from Sales of Real Estate During the year ended December 31, 1999, the Partnership sold its three remaining properties (including its 42% interest in Cooper Village Shopping Center) in three separate transactions, as set forth below: Cooper Village On September 21, 1999, the Partnership sold its 42% interest in Cooper Village Shopping Center (co-owned with an affiliated partnership), in Mesa, Arizona to Old Vine Corporation ("Old Vine"), a local shopping center operator that is not affiliated in any way with the Partnership, its General Partner or any of its principals or affiliates. The sale price for the Partnership's 42% interest was $2,593,500. The buyer was represented by a third-party broker in the transaction. The Partnership's allocation of the broker commission paid was $33,000 from the sale proceeds. The General Partner was not paid any property disposition fee in connection with the sale. Old Vine has hired an affiliate of Birtcher to perform certain onsite property management F-13 32 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Cont'd.) (5) Gain from Sales of Real Estate (Cont'd.) Cooper Village (Cont'd.) services (not accounting or asset management), pursuant to a contract that is cancelable at any time upon 30 days notice. The sale of Cooper Village shopping center resulted in a gain of $190,000 (representing the Partnership's 42% interest), which is reflected on the Statement of Changes of Net Assets in Liquidation. The Partnership's portion of the final distribution from CV Partners was $2,811,000. The Forum On September 23, 1999, the Partnership sold The Forum, in Wauwatosa, Wisconsin to Rubin Pachulsky Dew Properties, LLC ("Rubin Pachulsky Dew") for $5,350,000. Rubin Pachulsky Dew is a third-party real estate investment entity that is not affiliated in any way with the Partnership, its General Partner or any of its principals or affiliates. Rubin Pachulsky Dew was represented by a third-party broker in the transaction. The broker was paid $53,500 from the sale proceeds. Since the sale price of The Forum exceeded the January 1, 1993 appraised value ($4,440,000), pursuant to the 1993 Amendment of the Partnership Agreement, the General Partner earned and was paid a property disposition fee of $133,750 in connection with the sale. Rubin Pachulsky Dew has hired an affiliate of Birtcher as property manager for The Forum for a fee that is approximately the same as the fee that the Partnership previously paid to the General Partner for property management. In addition, Rubin Pachulsky Dew has hired an affiliate of Birtcher to provide certain asset management services for The Forum, and will pay an incentive fee approximately equal to 10% of the profits, if any, after Rubin Pachulsky Dew has received a 15% date of purchase, whichever comes first. The incentive fee, if earned, is not payable until the property is sold or four years from the date of purchase, whichever comes first. The property management agreement is cancelable at any time upon 60 days notice, but the incentive fee will survive termination of the contract. A sum equal to two and one-half percent of the purchase price was held back as a potential source of payment for any claims that may arise related to a Partnership breach of certain representations and warranties related to the sale (released to the Partnership on September 26, 2000) and for any litigation costs that may arise (released to the Partnership on March 23, 2000). The cash held in escrow was included in the gain from sales of real estate. F-14 33 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Cont'd.) (5) Gain from Sales of Real Estate (Cont'd.) The Forum (Cont'd.) The sale of The Forum resulted in a gain of $197,000, which is reflected on the Statement of Changes of Net Assets in Liquidation. Creek Edge On December 15, 1999, the Partnership sold Creek Edge Business Center to Investcorp Properties Limited, a Delaware Corporation ("Buyer"), for a sale price of $5,300,000. Affiliates of the Buyer have had a pre-existing relationship with affiliates of Birtcher Investors for more than 20 years. In fact, an affiliate of the Buyer initially sold Creek Edge to the Partnership, and subsequently contracted with the General Partner to perform property management services at Creek Edge on behalf of the Partnership. An affiliate of Buyer acted as buyer's broker in the transaction, and was paid a brokerage commission of $159,000 at closing. In addition, the General Partner earned and was paid a disposition fee of $132,500 in connection with the transaction. Buyer did not hire the General Partner or any of its affiliates to perform asset management or property management services for this property after close of the sale. The sale of Creek Edge resulted in a gain of $552,000, which is reflected on the Statement of Changes of Net Assets in Liquidation. (6) Commitments and Contingencies Litigation So far as is known to the General Partner, neither the Partnership nor its properties are subject to any material pending legal proceedings, except for the following: Bigelow - Diversified Secondary Partnership Fund 1990 litigation On March 25, 1997, a limited partner named Bigelow-Diversified Secondary Partnership Fund 1990 filed a purported class action lawsuit in the Court of Common Pleas of Philadelphia County against Damson/Birtcher Partners, Birtcher Investors, Birtcher/Liquidity Properties, Birtcher Investments, L.F. Special Fund II, L.P., L.F. Special Fund I, L.P., Arthur Birtcher, Ronald Birtcher, Robert Anderson, Richard G. Wollack and Brent R. Donaldson alleging breach of fiduciary duty and breach of contract and seeking to enjoin the Consent Solicitation dated February 18, 1997. On April 18, 1997, the court denied the plaintiff's motion for a preliminary injunction. On June 10, 1997, the court dismissed the plaintiff's complaint on the basis of lack of personal jurisdiction and forum non conveniens. F-15 34 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Cont'd.) (6) Commitments and Contingencies (Cont'd.) Litigation (Cont'd.) Bigelow - Diversified Secondary Partnership Fund 1990 litigation (Cont'd.) On June 13, 1997, the Partnership and its affiliated partnership Damson/Birtcher Realty Income Fund-II, and their general partner, Birtcher/Liquidity Properties, filed a complaint for declaratory relief in the Court of Chancery in Delaware against Bigelow-Diversified Secondary Partnership Fund 1990 L.P. The complaint seeks a declaration that the vote that the limited partners of the Partnership and Damson/Birtcher Realty Income Fund-II took pursuant to the respective consent solicitations dated February 18, 1997 was effective to dissolve the respective partnerships and complied with applicable law and that the actions of the General Partner in utilizing the consent solicitations to solicit the vote of the limited partners did not breach any fiduciary or contractual duty to such limited partners, and also seeks an award of costs and fees to the plaintiffs. The defendant has answered the complaint. The parties have initiated discovery. No motions are pending at this time. In September 1998, Bigelow/Diversified Secondary Partnership 1990 informed the Partnership that it was filing suit in the Delaware Chancery Court against Damson/Birtcher Partners, Birtcher Investors, Birtcher Liquidity Properties, Birtcher Investments, BREICORP, LF Special Fund I, LP, LF Special Fund II. LP, Arthur Birtcher, Ronald Birtcher, Robert Anderson, Richard G. Wollack and Brent R. Donaldson alleging a purported class action on behalf of the limited partners of the Partnership, Damson/Birtcher Realty Income Fund-I and Damson/Birtcher Realty Income Fund-II alleging breach of fiduciary duty and incorporating the allegations set forth in the previously dismissed March 25, 1997 complaint filed in the Court of Chancery of Philadelphia County. In March 2000, defendants informed the Court and plaintiff that they would bring a Motion for Summary Judgment against the named plaintiff based upon the allegations set forth in plaintiff's complaint. On April 4, 2000, Bigelow/Diversified Secondary Partnership Fund 1990 filed a First Amended Class Action and Derivative Complaint against Damson/Birtcher Partners, Birtcher Investors, Birtcher/Liquidity Properties, Birtcher Partners, Birtcher Properties, Birtcher Ltd., Birtcher Investments, BREICORP, L.F. Special Fund II, L.P., L.F. Special Fund I, L.P., Liquidity Fund Asset Management, Inc., Arthur Birtcher, Ronald Birtcher, Robert Anderson, Richard G. Wollack and Brent R. Donaldson, the Partnership, Damson/Birtcher Realty Income Fund-I and Damson/Birtcher Realty Income Fund-II, alleging breach of fiduciary duty, breach of contract, and a derivative claim for breach of fiduciary duty. Defendants have answered the First Amended Complaint. Plaintiff has engaged in preliminary discovery. F-16 35 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Cont'd.) (6) Commitments and Contingencies (Cont'd.) Litigation (Cont'd.) Bigelow - Diversified Secondary Partnership Fund 1990 litigation (Cont'd.) On October 27, 2000, defendants sought permission of the court to communicate an offer to settle to individual limited partners of the Partnership. Plaintiff's counsel opposed that motion. On December 4, 2000, the court ruled that defendants could communicate an offer to settle to individual limited partners. Thereafter, on December 12, 2000, the Partnership and the General Partner mailed to the limited partners an offer to settle this lawsuit and all other claims (including the Madison Partnership Liquidity Investors Litigation referenced below) for payment of each settling limited partner's pro rata share of the proceeds available for distribution from liquidation of the Partnership's properties (approximately $85 per $1,000 of original investment interest) plus a nominal payment of $1.00 from the General Partners for an assignment of all of a settling limited partner's interest in the Partnership to the General Partner. Limited partners holding 44% (including the Grape Settlement) of the interests in the Partnership settled on these terms. The aggregate distribution in connection with the December 12, 2000 offer, which was reflected as an accrual at December 31, 2000, was approximately $2,107,000. On March 6, 2001, all of the defendants other than the Partnership and the general partners filed a motion to be dismissed from the case. The court has not yet set a hearing date for this motion. Madison Partnership and ISA Partnership Litigation On April 2, 1999, Madison Partnership Liquidity Investors XVI, LLC and ISA Partnership Liquidity Investors filed a purported class and derivative action in the California Superior Court in Orange County, California (Case No. 807644) against Damson Birtcher Partners, Birtcher/Liquidity Properties, Birtcher Partners, Birtcher Investors, Birtcher Investments, Birtcher Limited, Breicorp LP Special Fund II, L. P., Liquidity Fund Asset Management, Inc., Robert M. Anderson, Brent R. Donaldson, Arthur B. Birtcher, Ronald E. Birtcher, and Richard G. Wollack, Defendants, and Damson/Birtcher Realty Income Fund-I, Damson/Birtcher Realty Income Fund-II, and Real Estate Income Partners III, Nominal Defendants. The complaint asserts claims for breach of fiduciary duty and breach of contract. The gravamen of the complaint is that the General Partners of these limited partnerships have not undertaken all reasonable efforts to expedite liquidation of the properties and to maximize the returns to the partnerships' limited partners. The complaint seeks unspecified monetary damages, attorneys' fees and litigation expenses, and an order for dissolution of the partnerships and appointment of an independent liquidating trustee. On August 14, 2000, plaintiffs petitioned the court for an order certifying the action as a class action. Plaintiffs also asked the court to issue a F-17 36 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Cont'd.) (6) Commitments and Contingencies (Cont'd.) Litigation (Cont'd.) Madison Partnership and ISA Partnership Litigation (Cont'd.) writ mandating that the Partnership immediately distribute all liquidation proceeds to the limited partners. On December 19, 2000, the court denied both motions. The case is currently proceeding only as a derivative action. As noted above, limited partners holding 44% of the interests in the Partnership have settled this (and all other) cases against the Partnership and the General Partner. (7) Accrued Expenses for Liquidation Accrued expenses for liquidation as of December 31, 2000, includes estimates of costs to be incurred in carrying out the dissolution and liquidation of the Partnership through December 31, 2001. These costs include estimates of legal fees, accounting fees, tax preparation and filing fees, other professional services and the general partner's liability insurance. During the year ended December 31, 2000, the General Partner continuously re-evaluated the estimated costs to wind up and dissolve the Partnership given the uncertainty involved with the ongoing litigation. The provision for liquidation expenses was accordingly adjusted by an aggregate of $543,000 to reflect the revised estimates. The actual costs could vary significantly from the related provisions due to the uncertainty related to the length of time required to complete the liquidation and dissolution and the complexities which may arise. The accrued expenses for liquidation do not take into consideration the possible outcome of the ongoing litigation after December 31, 2001. Such costs are unknown and are not estimable at this time. F-18 37 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS (Cont'd.) (8) Quarterly Results of Operations (Unaudited)

F-19 38 COOPER VILLAGE PARTNERS (A GENERAL PARTNERSHIP) INDEPENDENT AUDITORS' REPORT To Damson/Birtcher Realty Income Fund-II, Limited Partnership and Real Estate Income Partners III, Limited Partnership as General Partners of Cooper Village Partners: We have audited the financial statements of Cooper Village Partners, a general partnership, as listed in the accompanying index. 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 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 provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets in liquidation as of December 31, 1999 of Cooper Village Partners, and the changes of net assets in liquidation for the years ended December 31, 1999 and 1998, in conformity with generally accepted accounting principles applied on the basis of accounting as discussed in note 2. KPMG LLP Orange County, California March 24, 1999 F-20 39 COOPER VILLAGE PARTNERS (A GENERAL PARTNERSHIP) STATEMENT OF NET ASSETS IN LIQUIDATION

The accompanying notes are an integral part of these Financial Statements. F-21 40 COOPER VILLAGE PARTNERS (A GENERAL PARTNERSHIP) STATEMENTS OF CHANGES OF NET ASSETS IN LIQUIDATION

The accompanying notes are an integral part of these financial statements. F-22 41 COOPER VILLAGE PARTNERS (A GENERAL PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (1) Organization Cooper Village Partners, (the "Partnership") was formed on December 18, 1987 under the laws of the State of California. The General Partners of the Partnership are Damson Birtcher Realty Income Fund II, Limited Partnership ("Fund II") and Real Estate Income Partners III, Limited Partnership ("Fund III"). During 1987 and 1988, The Partnership acquired Cooper Village Shopping Center in Mesa, Arizona. In connection with this acquisition, Fund II and Fund III contributed capital of $5,937,000 (58%) and $4,300,000 (42%), respectively. Fund II and Fund III share in the profits, losses and distributions of the Partnership in proportion to their respective ownership interests. The Partnership maintained its accounting records and prepared its financial statements in accordance with generally accepted accounting principles. On February 18, 1997, the General Partners mailed a Consent Solicitation to the Limited Partners of Funds II and III which sought their consent to dissolve those Partnerships and sell and liquidate all of their remaining properties (including the Partnership's property) as soon as practicable, consistent with obtaining reasonable value for the Partnership's property. A majority in interest of the Limited Partners of Funds II and III consented by March 13, 1997. As a result, the General Partners, as well as the Partnership, adopted the liquidation basis of accounting as of March 31, 1997. The difference between the adoption of the liquidation basis of accounting as of March 13, 1997 and March 31, 1997 was not material. Under the liquidation basis of accounting, assets are stated at their estimated net realizable values and liabilities are stated at their anticipated settlement amounts. The Partnership adopted the liquidation basis of accounting on March 31, 1997. Comparison of results to prior years, therefore, is not practical. The Statements of Net Assets in Liquidation and Statements of Changes of Net Assets in Liquidation reflect the Partnership as liquidated. Prior financial statements reflect the Partnership as a going concern. As of December 31, 1995, the General Partners decided to treat their properties, as well as the Partnership's property, as held for sale, instead of for investment, for financial statement purposes. Since 1993, the General Partners have considered several preliminary indications of interest from third parties to acquire the Partnership's property. The Partnership's sole property was held for sale throughout 1997 and 1998 and was sold on September 21, 1999. See Note 4 for a description of the transaction. In accordance with the liquidation basis of accounting (see Note 2), the carrying value of the Partnership's property was evaluated to ensure it was carried on the Partnership's Statements of Net Assets in Liquidation at net realizable value. The General Partners estimated net realizable value for this purpose by using an average of the offers it had received to acquire Cooper Village Shopping Center net of estimated selling costs, in lieu of obtaining appraisals at December 31, 1998. F-23 42 COOPER VILLAGE PARTNERS (A GENERAL PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (Cont'd.) (2) Summary of Significant Accounting Policies Liquidation Basis The Partnership adopted the liquidation basis of accounting as of March 31, 1997. The liquidation basis of accounting is appropriate when liquidation appears imminent, the Partnership can no longer be classified as a going concern and the net realizable values of the Partnership's assets are reasonably determinable. Under this method of accounting, assets and liabilities are stated at their estimated net realizable values and costs of liquidating the Partnership are provided to the extent reasonably determinable. For the year ended December 31, 1998, the General Partners determined that the carrying value of Cooper Village Shopping Center was in excess of its estimated net realizable value. As a result, the carrying value was adjusted by $564,000 to $5,632,000. Cooper Village Shopping Center was sold on September 21, 1999 (see Note 4) and the Partnership's assets were distributed to Fund II and Fund III upon dissolution of the Partnership prior to December 31, 1999. Segment Reporting Given that the Partnership is in the process of liquidation, the Partnership has identified only one operating business segment which is the business of asset liquidation. Revenue Recognition Rental income was recognized according to the lease terms. Income Taxes Income taxes were levied at the Partnership level, therefore, no provision or liability for Federal and State income taxes was reflected in the accompanying financial statements. Below are the Partnership's assets and liabilities as determined in accordance with generally accepted accounting principles ("GAAP") (liquidation basis of accounting) and for federal income tax reporting purposes at December 31, 1999:

F-24 43 COOPER VILLAGE PARTNERS (A GENERAL PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (Cont'd.) (2) Summary of Significant Accounting Policies (Cont'd.) Income Taxes (Cont'd.) Following are the differences between Financial Statement and tax return income:

(3) Transactions with Affiliates The Partnership had no employees and, accordingly, Birtcher Properties, an affiliate of the General Partner of Fund II and Fund III and its affiliates performed services on behalf of the Partnership in connection with administering the affairs of the Partnership. Birtcher Properties and affiliates were reimbursed for their general and administrative costs actually incurred and associated with services performed on behalf of the Partnership. For the years ended December 31, 1999 and 1998, the Partnership was charged with approximately $1,000 and $1,000, respectively, of such expenses. An affiliate of the General Partner of Fund II and Fund III provided property management services with respect to the Partnership's property and received a fee for such services not to exceed 6% of the gross receipts from the property under management provided that leasing services were performed, otherwise not to exceed 3%. Such fees amounted to approximately $43,000 in 1999, and $53,000 in 1998. In addition, as reimbursement of costs for on-site property management personnel and other related costs, an affiliate of the General Partner received $34,000 in 1999 and $37,000 in 1998, as reimbursement of costs for on-site property management personnel and other reimbursable costs. The amended Partnership Agreements for Fund II and Fund III provided for payments to Birtcher Properties or its affiliates of an annual asset management fee equal to .45% (.55% in 1998) of the aggregate appraised value of Cooper Village as determined by independent appraisal undertaken in January of each year. Such fees for the years ended December 31, 1999 and 1998, amounted to $18,000 and $35,000, respectively. F-25 44 COOPER VILLAGE PARTNERS (A GENERAL PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (Cont'd.) (3) Transactions with Affiliates (Cont'd.) In addition, the amended Partnership Agreements for Fund II and Fund III provided for payment to the General Partner or its affiliates of a leasing fee for services rendered in connection with leasing space in the Partnership property after the expiration or termination of any lease of such space including renewal options. Fees for leasing services for the years ended December 31, 1999 and 1998, amounted to $2,000 and $4,000, respectively. (4) Gain from Sale of Real Estate On September 21, 1999, the Partnership sold Cooper Village Shopping Center, in Mesa, Arizona to Old Vine Corporation ("Old Vine"), a local shopping center operator that is not affiliated in any way with the Partnership, its General Partner or any of its principals or affiliates. The sale price was $6,175,000. The buyer was represented by a third-party broker in the transaction. The Partnership paid a broker commission of $79,000 from the sale proceeds. The General Partner was not paid any property disposition fee in connection with the sale. Old Vine has hired an affiliate of Birtcher to perform certain onsite property management services (not accounting or asset management), pursuant to a contract that is cancelable at any time upon 30 days notice. The sale of Cooper Village Shopping Center resulted in a gain of $453,000, which is reflected on the Statement of Changes of Net Assets in Liquidation. F-26 45 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP PART III Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Partnership and the General Partner have no directors or executive officers. The General Partner of the Partnership is Birtcher/Liquidity Properties, a California general partnership of which Birtcher Investors, a California limited partnership, and LF Special Fund I, L.P., a California limited partnership, are the general partners. Under the terms of the Partnership Agreement, Birtcher Investors is responsible for the day-to-day management of the Partnership's assets. The general partner of LF Special Fund I, L.P., is Liquidity Fund Asset Management, Inc., a California corporation affiliated with Liquidity Financial Group, L.P. The principals and officers of Liquidity Fund Asset Management, Inc. are as follows: - Richard G. Wollack, Chairman of the Board - Brent R. Donaldson, President - Deborah M. Richard, Financial Officer The general partner of Birtcher Investors is Birtcher Investments, a California general partnership. Birtcher Investments' general partner is Birtcher Limited, a California limited partnership and its general partner is BREICORP, a California corporation. The principals and relevant officers of BREICORP are as follows: - Ronald E. Birtcher, Co-Chairman of the Board - Arthur B. Birtcher, Co-Chairman of the Board - Robert M. Anderson, Executive Director -19- 46 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP Item 11. EXECUTIVE COMPENSATION The following table sets forth the fees, compensation and other expense reimbursements paid to the General Partner and its affiliates in all capacities for each year in the three-year period ended December 31, 2000.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of December 31, 2000, Birtcher/Liquidity Properties, a California general partnership, was the beneficial owner of certain limited partnership interests, as follows:

(1) Based upon original invested capital. (2) Residual interest in any derivative action. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS For information concerning transactions to which the Registrant was or is to be a party in which the General Partner or its affiliates had or are to have a direct or indirect interest, see Notes 1, 3 and 4 to the Financial Statements in Item 8, which information is incorporated herein by reference. -20- 47 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP PART IV Item 14. EXHIBITS AND REPORTS ON FORM 8-K a) 1. and 2. Financial Statements: See accompanying Index to Financial Statements, which information is incorporated herein by reference. 3. Exhibits: Articles of Incorporation and Bylaws (a) Agreement of Limited Partnership incorporated by reference to Exhibit No. 3.1 to the Partnership's registration statement on Form S-11 (Commission File No. 33-2132), dated December 13, 1985, filed under the Securities Act of 1933. 10. Material Contracts (a) Agreement of Purchase and Sale of Real Property (Cooper Village, Phase I) dated November 13, 1987, by and between Broadway Village Partners and Birtcher Acquisition Corporation incorporated by reference to Form 8-K, as filed December 30, 1987. (b) Agreement of General Partnership, dated December 15, 1987, by and between Damson/Birtcher Realty Income Fund-II, Limited Partnership and Real Estate Income Partners III, Limited Partnership, incorporated by reference to Form 8-K, as filed December 30, 1987. (c) Agreement of Purchase and Sale of Real Property (Martinazzi Square), dated December 22, 1987, by and between Hayden-Woodbury Tualatin and Birtcher Acquisition Corporation incorporated by reference to Form 8-K, as filed December 23, 1987. (d) Property Management Agreement dated October 24, 1991, between Glenborough Management Corporation and the Registrant for Creek Edge Business Center, Flaircentre Office Park, The Forum, Martinazzi Square Shopping Center and Northtech. Incorporated by reference to Exhibit 1 of the Partnership's Quarterly Report on Form 10-Q for the quarter ended September 20, 1991. (SUPERSEDED) (e) Property Management Agreement dated October 24, 1991, between Glenborough Management Corporation and Cooper Village Partners for Cooper Village Shopping Center. Incorporated by reference to Exhibit 2 of the Partnership's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991. (SUPERSEDED) -21- 48 Item 14. EXHIBITS REPORTS ON FORM 8-K (Cont'd.) 10. Material Contracts (Cont'd.) (f) Agreement for Partnership Administrative Services dated October 24, 1991, between Glenborough Management Corporation and the Registrant for the services described therein. Incorporated by reference to Exhibit 3 of the Partnership's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991. (SUPERSEDED) (g) Property Management Agreement, dated October 29, 1993, between Birtcher Properties and the Registrant for Creek Edge Business Center, Flaircentre, The Forum, Martinazzi Square Shopping Center and Northtech. Incorporated by reference to Exhibit 1 of the Partnership's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. (h) Property Management Agreement, dated October 29, 1993, between Birtcher Properties and Cooper Village Partners for Cooper Village Shopping Center. Incorporated by reference to Exhibit 2 of the Partnership's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. 99. Additional Exhibits (a) Registrant's prospectus (Commission File No. 33-2132), dated April 7, 1986, as supplemented November 5, 1986, filed pursuant to Rule 424(c) under the Securities Act of 1933 is incorporated herein by reference. b) Reports on Form 8-K: None filed during the year ended December 31, 2000. -22- 49 REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the Undersigned, thereunto duly authorized. REAL ESTATE INCOME PARTNERS III, LIMITED PARTNERSHIP By: BIRTCHER/LIQUIDITY By: BIRTCHER INVESTORS, PROPERTIES a California limited partnership (General Partner) By: BIRTCHER INVESTMENTS, a California general partnership, General Partner of Birtcher Investors By: BIRTCHER LIMITED, a California limited partnership, General Partner of Birtcher Investments By: BREICORP, a California corporation, formerly known as Birtcher Real Estate Inc., General Partner of Birtcher Limited Date: March 30, 2001 By: /s/Robert M. Anderson ------------------------ Robert M. Anderson Executive Director BREICORP By: LF Special Fund I, L.P., a California limited partnership By: Liquidity Fund Asset Management, Inc., a California corporation, General Partner of LF Special Fund I, L.P. Date: March 30, 2001 By: /s/ Brent R. Donaldson ------------------------------------- Brent R. Donaldson President Liquidity Fund Asset Management, Inc. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Birtcher/Liquidity Properties (General Partner of the Registrant) and in the capacities and on the dates indicated.

-23-

REAL ESTATE INCOME PARTNERS III LTD PARTNERSHIP 10-K