UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
 ACT OF 1934.
                      For the year ended December 31, 1996

                                       OR

[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
 ACT OF 1934.
                       For the transition period from to

                         Commission file number: 0-13157

                             RANCON REALTY FUND III,
                        A CALIFORNIA LIMITED PARTNERSHIP
             (Exact name of registrant as specified in its charter)

                 California                              33-0023868
        (State or other jurisdiction                  (I.R.S. Employer
      of incorporation or organization)              Identification No.)

    400 South El Camino Real, Suite 1100                 94402-1708
            San Mateo, California                        (Zip Code)
  (Address of principal executive offices)

       Partnership's telephone number, including area code (415) 343-9300
        Securities registered pursuant to Section 12(b) of the Act: None
           Securities registered pursuant to Section 12(g) of the Act:

                      Units of Limited Partnership Interest
                                (Title of class)

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                                    Yes  X    No

No market for the Limited  Partnership Units exists and therefore a market value
for such Units cannot be determined.

                      DOCUMENTS INCORPORATED BY REFERENCE:
Prospectus  dated  December  29,  1986,  as amended  on  January 5, 1987,  filed
pursuant to Rule 424(b),  File no. 2-90327, is incorporated by reference in Part
IV hereof.

Report on Form 10-K dated October 31, 1992 filed pursuant to Section 13 or 15(d)
of the Securities  Exchange Act of 1934,  File No.  0-14207,  is incorporated by
reference in Part IV hereof.



                                  Page 1 of 35
<PAGE>



                                     Part I

Item 1.           Business

Rancon Realty Fund III, a California Limited  Partnership,  ("the  Partnership")
was  organized in  accordance  with the  provisions  of the  California  Uniform
Limited Partnership Act for the purpose of acquiring,  developing, operating and
ultimately  selling real property.  The general  partners of the Partnership are
Daniel  L.  Stephenson  and  Rancon  Financial   Corporation  ("RFC")  ("General
Partners").  RFC is wholly owned by Daniel L.  Stephenson.  The  Partnership was
organized in 1983, completed final funding in December, 1986 with 37,500 limited
partnership  units  ("Units")  issued.  As of December 31. 1996, nine Units have
been retired by the Partnership and eighteen Units have been abandoned.  Limited
partners  abandon  their units when they no longer  desire to receive a K-1 from
the   Partnership.The Partnership currently  has  37,473  units  issued  and
outstanding.

On February 12, 1997, the General Partners adopted a plan of orderly liquidation
of the  Partnership's  assets.  Accordingly,  all investments in real estate are
currently  being  marketed for sale, are classified as property held for sale on
the  accompanying  December  31,  1996  balance  sheet and are  recorded  at the
estimated  fair  value  of the  respective  assets.  The  carrying  value of the
investments  in real estate at December  31, 1996 does not purport to  represent
the ultimate sales price the  Partnership  will realize from the  disposition of
these  assets  nor are  the  amounts  reflected  in the  accompanying  financial
statements  intended to  represent  the  ultimate  amount to be  distributed  to
partners.

Competition Within The Market

Management  believes that  characteristics  influencing the competitiveness of a
real  estate  project  are  the  geographic   location  of  the  property,   the
professionalism  of the property  manager and the  maintenance and appearance of
the  property,  in  addition  to  external  factors  such  as  general  economic
circumstances,  trends,  and the existence of new,  competing  properties in the
vicinity.   Additional  competitive  factors  with  respect  to  commercial  and
industrial  properties  are the ease of access to the property,  the adequacy of
related facilities, such as parking, and the ability to provide rent concessions
and additional tenant  improvements  commensurate with local market  conditions.
Although  management  believes the Partnership's  rental property is competitive
with comparable properties as to those factors within the Partnership's control,
over-building  and other external  factors could adversely affect the ability of
the Partnership to attract and retain tenants.  The  marketability of the rental
property may also be affected (either positively or negatively) by these factors
as well as by  changes  in  general  or  local  economic  conditions,  including
prevailing interest rates.

Working Capital

The  Partnership's  practice is to maintain cash reserves,  when  possible,  for
normal  repairs,  replacements,  working  capital and other  contingencies.  The
Partnership  knows of no statistical  information which allows comparison of its
cash reserves to those of its competitors.

Item 2.      Properties

The Partnership  currently owns one commercial operating property and unimproved
land as listed below:

      Name                  Location               Type               Size
------------------      -------------------    ------------      --------------
Rental Property held for sale:
Civic Center II      Rancho Cucamonga, CA     Class B Office   17,750 leaseable
                                                                      sq.ft.
Land held for sale:
Unimproved land      Rancho Cucamonga, CA      Commercial        1.8 acres
Unimproved land      Rancho Cucamonga, CA      Commercial        6.00 acres
Unimproved land      San Bernardino, CA        Commercial        8.92 acres

                                  Page 2 of 35
<PAGE>


As of  December  31,  1996,  none  of the  real  estate  property  owned  by the
Partnership is encumbered.

Rancho Cucamonga Business Park

In 1984,  the  Partnership  acquired  approximately  77.22 acres of  undeveloped
commercial and industrial zoned land in Rancho Cucamonga, San Bernardino County,
California. The purchase price was approximately $19,900,000. Of the 77.22 acres
acquired,  the Partnership  developed  approximately 11.07 acres as a commercial
office  complex  known as Rancho  Cucamonga  Business  Park,  consisting of five
office buildings  (Barton Plaza I, Barton Plaza II, Civic Center I, Civic Center
II and Civic Center III) and one restaurant.  The Partnership  sold Barton Plaza
I, Barton Plaza II, Civic Center I and a substantial  amount of its  undeveloped
land from 1987 to 1988. In 1992, the  Partnership  sold the  restaurant.  During
calendar year 1995, Civic Center III was foreclosed upon by the lender. In June,
1996, the Partnership sold approximately 33 acres of undeveloped land.

The Civic Center II rental property consists of a two story,  pre-cast concrete,
multi-tenant  office  building,  which was  completed in 1984.  The property has
approximately  17,750 square feet of leaseable space,  currently  divided into 5
units,  ranging in size from 1,613 to 5,534 square feet. The property is located
in the Inland Empire  market region at the southwest  corner of Aspen Avenue and
Utica Avenue in the city of Rancho Cucamonga.

According  to research  conducted by the  Partnership's  property  manager,  the
Ontario/Rancho  Cucamonga office vacancy rate is  significantly  higher than the
overall  Inland  Empire rate.  The current  vacancy rate is  approximately  25%.
Current construction  included the 1996 fourth quarter completion of the 242,000
square foot General Dynamics office  facility.  The facility offers office space
targeted toward users over 20,000 square feet. The annual expected lease rate of
this  facility is $14.40 - $15.00 full  service  gross.  Presently,  there is no
construction  or  planned  product  of  office  space  in the  Rancho  Cucamonga
sub-market  other than a  two-story  33,000  square foot  build-to-suit  for the
Department of Public Social Services.  The average annual market lease rates are
ranging  between  $11.40 to $14.40 per square  foot per month for Class B office
space.

Although  Rancho  Cucamonga is ranked the ninth safest city in which to live and
conduct  business,  it is still  second to Ontario as a  commercial  real estate
market.  Ontario's main advantage is it's immediate access to the San Bernardino
(I-10) Freeway and the Ontario International  Airport. In addition,  tenants are
moving from garden style buildings to Class "A" properties and taking  advantage
of aggressive lease rates.  Overall,  companies in the area are either upgrading
their image,  consolidating offices,  experiencing bankruptcy, or moving back to
Orange and Los Angeles  counties.  The 1996 occupancy level at the Partnership's
rental property did in fact decrease due to a tenant downsizing its operations.

Civic Center II's 42% vacancy rate is  representative  of the  immediate  Rancho
Cucamonga  sub-market  vacancy,  within the Civic Center Drive market area.  The
Rancho Cucamonga office market has experienced  moderate absorption for the past
18 months.  Management believes the property's annual asking rate of $12.60 full
service gross is competitive.

The Civic Center II occupancy level at December 31, 1996 and September 30, 1995,
expressed as a percentage of the total net rentable square feet, and the average
annual effective rent per square foot for the last two years were:

                        Occupancy Level      Average Annual Effective
                          Percentage           Rent per Square Foot
     1996                     58%                    $    14.99
     1995                     86%                    $    12.80

                                  Page 3 of 35
<PAGE>

A tenant that occupied 5,000 square feet vacated the premises upon the March 31,
1996 lease  expiration,  which  resulted in the decrease in the occupancy  level
noted above.  According to the property  manager,  the tenant was downsizing its
operations and therefore, chose not to renew its lease with the Partnership.

Average  annual  effective  rent  increased  in 1996,  despite  the  decrease in
occupancy, due to rental increases for existing tenants.

Current annual effective rental rates range from $12.54 to $15.66.

The three tenants  listed below occupy more than ten percent of the net rentable
square footage of the building. The principal terms of the leases and the nature
of the tenants' businesses are as follows:
                                                              Rancho Cucamonga
                     NSF International  Spalding & Barrett  Chamber of Commerce
Nature of Business:     Insurance         Law Firm           Promote Business
Lease Term:             6 years           5 years            6 years, 5 months
Expiration Date:        January 31, 1998  November 30, 2000  June 30, 2000
Square Feet:            2,389             3,059              2,831
(% of rentable total):  13%               17%                16%
Annual Rent:            $29,000           $39,000            $35,000
Rent Increase:          Fixed             Fixed              Annual - CPI
Renewal Options:        None              None               None

In the opinion of management, the property is adequately covered by insurance.

During  1996,  the Civic  Center II  property  was  assessed  property  taxes of
approximately  $14,000,  based  on a tax  rate  of  1.09%.  The  6.00  acres  of
unimproved land in Rancho Cucamonga was assessed property taxes of approximately
$27,000 in 1996, based on a tax rate of 1.31%. The remaining 1.8 acres of Rancho
Cucamonga unimproved land was assessed property taxes of approximately $6,000 in
1996, based on a tax rate of 1.38%.

San Bernardino, Unimproved Land

As a legal settlement to a lawsuit in September,  1992, the Partnership received
approximately  8.92 acres of unimproved land in San  Bernardino,  San Bernardino
County, California. This land is zoned for commercial use and is held for sale.

In the opinion of management, the property is adequately covered by insurance.

During 1996, the San Bernardino  unimproved land was assessed  property taxes of
approximately $23,000, based on a tax rate of 1.52%.

Item 3.           Legal Proceedings

1.                In August,  1992, the Partnership settled a series of lawsuits
                  with Security Financial Concepts, Ltd., GDV Partners, West End
                  Investments  and George  Voight  arising  from the sale of the
                  Partnership's  interest in Barton Plaza I, Barton Plaza II and
                  7.932 acres of unimproved  land.  Pursuant to the  settlement,
                  the  parties  agreed to release  all claims  and  dismiss  all
                  pending actions between them. GDV Partners agreed to grant the
                  Partnership  a deed in lieu of  foreclosure  of  approximately
                  nine  acres  of  unimproved  real  property   located  in  San
                  Bernardino,  California,  which was pledged as security  for a
                  promissory  note in the  amount  of  $2,500,000  given  to the
                  Partnership as consideration in the above mentioned sale. Such
                  deed was recorded  September 16, 1992.  The case against James
                  E. Barton ("Barton"),  a former joint venture partner with the
                  Partnership, continued as the Partnership attempted to collect


                                  Page 4 of 35
<PAGE>

                  on Barton's personal guarantee of the $500,000 promissory note
                  taken back by the  Partnership  when  Barton and his  partners
                  purchased the  property.  Barton argued that the value of this
                  property was sufficient to cover both the $2,500,000  note and
                  the unsecured $500,000 promissory note he guaranteed,  thereby
                  satisfying his guarantee.  This case was heard in the Superior
                  Court for the County of Riverside  (Case No.  208598) on April
                  2,  1993 and was  ruled in favor of  Barton  and  awarded  him
                  attorneys fees and costs totaling $75,000.  The Court's ruling
                  was based upon the finding that the  Partnership's  acceptance
                  of a deed in lieu of foreclosure,  as discussed  above, was in
                  satisfaction of all notes guaranteed by Barton.

                  The  Partnership  contended  that this ruling was in error and
                  brought an action against Barton  entitled  Rancon Realty Fund
                  III v. Barton. The Court of Appeal, State of California Fourth
                  Appellate  District,  Division Two (Case No. E012623) issued a
                  "tentative ruling" against the Partnership. Rather than expend
                  additional  money  to  contest  the  tentative   ruling,   the
                  Partnership  settled the matter on October 4, 1995 for the sum
                  of $75,000.  The Partnership paid Barton $25,000 on October 5,
                  1995 and $50,000 on January 2, 1996.

2.                The Partnership was involved in an action against  Sumarco,  a
                  California  General  Partnership,  entitled Rancon Realty Fund
                  III v.  Sumarco  in the  Superior  Court for the County of San
                  Bernardino (Case No. 64196), which was filed October 21, 1992.
                  The   Partnership   agreed  to  indemnify   Rancon   Financial
                  Corporation and Daniel L. Stephenson  ("the Sponsors") for any
                  amounts  paid under an  agreement  executed by the Sponsors in
                  1992  guaranteeing the payment and performance of a portion of
                  a  promissory  note to Imperial  Thrift and Loan  ("Imperial")
                  which  was  assumed  by  Sumarco  when  Sumarco   purchased  a
                  restaurant  from  the  Partnership  on  April  30,  1992.  The
                  guarantee of up to a maximum  $600,000 was a condition of such
                  assumption.  Sumarco  defaulted  under  the terms of the note.
                  Imperial filed a foreclosure  action against Sumarco and named
                  the  Sponsors as  defendants  for  purposes of  enforcing  the
                  guarantee.  The  Partnership  felt there were strong points in
                  its favor,  but in the interim  recorded an estimated  loss on
                  the guarantee of $300,000 at September 30, 1993.

                  In order to avoid the  uncertainties  and  expense  of further
                  litigation,   Imperial  and  the   Sponsors   entered  into  a
                  Settlement  Agreement  and  Release on  January  2, 1996.  The
                  Agreeing Parties (Imperial and the Sponsors)  acknowledge that
                  the  settlement  between  them is a compromise  resolution  of
                  disputed  claims.  Accordingly,  Imperial  filed a Request for
                  Dismissal  of Case No. RCV 07394,  and the  Sponsors  complied
                  with  their  payment of  $182,500  on January  16,  1996.  The
                  Partnership   reimbursed  the  Sponsors  under  its  indemnity
                  agreement  and recorded a $117,500 gain for the balance of the
                  accrued  liability  that was not incurred by the  Partnership.
                  Sumarco is not party to this full and final settlement, and is
                  in no way to be benefited or released by it.

Item 4.           Submission of Matters to a Vote of Security Holders

None.



                                  Page 5 of 35
<PAGE>




                                     Part II


Item 5.  Market for Partnership's Common Equity and Related Stockholder Matters

Market Information

There is no established trading market for the Units.

Holders

As of December 31,  1996, a total of 5,549  persons  ("Limited  Partners")  held
Units.

Distributions

Distributions  are paid from either Cash From  Operations  or Cash From Sales or
Refinancing.

Cash  From  Operations  is  defined  in the  Partnership  Agreement  as all cash
receipts  from  operations  in the ordinary  course of business  (except for the
sale,  refinancing,  exchange  or  other  disposition  of real  property  in the
ordinary course of business) after  deducting  payments for operating  expenses.
All distributions of Cash From Operations are divided in the ratio of 98% to the
Limited Partners and 2% to the General Partners.

Cash From Sales or  Refinancing is defined in the  Partnership  Agreement as the
net cash realized by the Partnership  from the sale,  disposition or refinancing
of any property  after  retirement of applicable  mortgage debt and all expenses
related to the  transaction,  together  with interest on any notes taken back by
the  Partnership  upon the sale of a property.  All  distributions  of Cash From
Sales or  Refinancing  are  allocated  generally  as  follows  (a more  explicit
statement  of  these  distribution  policies  is set  forth  in the  Partnership
Agreement):

                  (i) First,  2 percent to the General  Partners  and 98% to the
                  Limited  Partners until the Limited  Partners have received an
                  amount equal to their capital contributions, plus a 15% return
                  on  their  unreturned   capital   contributions   (less  prior
                  distributions of Cash from  Operations);  (ii) Second,  20% to
                  the General Partners and 80% to the Limited Partners.

There were no distributions during the four most recent fiscal years.

Item 6.           Selected Financial Data

The financial data should be read in conjunction  with the financial  statements
and related notes contained elsewhere in this report. This financial data is not
covered by the reports of the independent public accountants.




                                  Page 6 of 35
<PAGE>



The following is selected  financial data for the four years ended September 30,
1992 through 1995,  the three months ended  December 31, 1995 and the year ended
December 31, 1996.

<TABLE>
<CAPTION>

                                                   SELECTED FINANCIAL DATA
                                            (In thousands, except per Unit data)


                                 Year Ended     Three Months                      Year Ended September 30,
                                December 31,        End             -------------------------------------------------
                                  1996        December 31, 1995      1995          1994          1993            1992
                                  ----        -----------------     ------        ------        ------          -----
<S>                           <C>                 <C>           <C>             <C>           <C>           <C>

Rental income                 $      154          $      45     $       303     $     554     $      732    $      806

Gain on sales
    of assets                 $      623          $      --     $        26     $      --     $      --     $       67

Gain (loss) on guarantee
    settlement costs          $      117          $      --     $       --      $     --      $     (300)   $       --

Gain on foreclosure           $       --          $      --     $       760     $      --     $       --    $       --

Discount on
    note receivable           $       --          $      --     $        --     $      96     $      --     $      180

Provision for impairment
    of investments in
    real estate               $      317          $      --     $     7,725     $   1,732     $       64    $    2,340

Net loss                      $     (176)         $    (183)    $    (7,772)    $  (2,429)    $     (796)   $   (2,942)

Net loss allocable
    to limited partners       $     (172)         $    (179)    $    (7,617)    $  (2,389)    $     (796)   $   (3,009)

Net loss per limited
    partnership unit          $    (4.59)         $  (4.78)     $   (203.17)    $  (63.72)    $  (21.23)    $   (80.24)

Total assets                  $    5,244          $   6,362     $     6,085     $  15,933     $   18,432    $   21,625

Long-term obligations         $       --          $     500     $        --     $   2,155     $    2,176    $    4,861

Cash distributions
    per limited
    partnership unit          $       --          $      --     $        --     $     ---     $       --    $       --
</TABLE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
        of Operations

LIQUIDITY AND CAPITAL COMMITMENTS:

As of December 31, 1996, the Partnership  had cash of $1,061,000.  The remainder
of the Partnership's assets consist primarily of its investments in real estate,
which totaled approximately $4,167,000 at December 31, 1996.

                                  Page 7 of 35
<PAGE>

On February 12, 1997, the General Partners adopted a plan of orderly liquidation
of the  Partnership's  assets.  Accordingly,  all investments in real estate are
currently  being  marketed for sale, are classified as property held for sale on
the  accompanying  December  31, 1996  balance  sheet and are  recorded at their
estimated fair value.  The carrying  value of the  investments in real estate at
December  31, 1996 does not purport to represent  the  ultimate  sales price the
Partnership  will  realize  from the  disposition  of these  assets  nor are the
amounts reflected in the accompanying financial statements intended to represent
the ultimate amount to be distributed to partners.

The  Partnership's  primary  source of funds include  property  sales,  property
operations  and interest  income  earned on cash  balances.  Funds from property
operations  consist of cash generated from rental activities  reduced by related
rental  expenses  and costs  associated  with  acquiring  tenants.  The net cash
generated by property  operations as well as the Partnership's cash reserves and
interest  income  thereon  have  been  used  to  pay  expenses  related  to  the
Partnership's administrative operations.

On June 3, 1996, the Partnership  sold 33 acres of Rancho  Cucamonga  unimproved
land for  $2,166,000.  The gain on sale  after  closing  costs of  $180,000  was
$623,000. The $1,986,000 of net cash proceeds from the sale were used to pay-off
a $560,000 note payable as well as prior and current  property  taxes,  with the
remaining proceeds added to cash reserves.

On October 4, 1995, the  Partnership  borrowed  $575,000,  from an  unaffiliated
third party,  secured by Civic Center II. $75,000 of the loan proceeds were held
back by the lender to be disbursed for tenant improvements. During 1996, $60,000
was disbursed to the Partnership from the lender holdback. On June 10, 1996, the
Partnership, with the net cash proceeds from the 33 acre land sale, paid-off the
$560,000 note payable plus accrued interest.

Management  believes that the  Partnership's  available  cash together with cash
generated  from  operations  prior to sale of the  real  estate  assets  and net
proceeds upon sales will be sufficient to finance the cash  requirements  of the
Partnership until an orderly liquidation is completed.

The  Partnership's  assets are located within the Inland Empire, a sub-market of
Southern California, and have been directly affected by the economic weakness of
the region.  Management believes,  however, that the market has flattened and is
no longer  falling in terms of sales  prices.  While  prices have not  increased
significantly,  the  Southern  California  real  estate  market  appears  to  be
improving.

RESULTS OF OPERATIONS

Effective  December 31, 1995, the Partnership's  reporting year end changed from
September  30 to  December  31.  Since  the  Partnership's  operations  are  not
seasonal,  the  analysis of results of  operations  compares  fiscal years ended
December 31, 1996, September 30, 1995 and September 30, 1994.

Comparison of the year ended December 31,1996 to September 30, 1995

Rental income decreased by $149,000, or 49%, in 1996 compared to 1995 due to the
decrease in revenues generated by Civic Center III, which was foreclosed upon in
April 1995, and the reduction in occupancy at Civic Center II.

Interest and other income  increased by $17,000,  or 106%,  in 1996  compared to
1995, primarily as a result of a higher invested cash balance from the 1996 sale
of 33 acres of unimproved land.

The gain of $623,000 included in the Partnership's  1996 statement of operations
is the result of the sale of 33 acres of the Rancho  Cucamonga  unimproved  land
for $2,166,000.

                                  Page 8 of 35
<PAGE>

Operating expenses decreased by $98,000, or 52%, for the year ended December 31,
1996  compared to  September  30, 1995 as a result of the  foreclosure  of Civic
Center III.

Expenses  associated with undeveloped  land increased by $82,000,  or 77% during
1996,  compared to 1995, as a result of property  taxes  associated  with the 33
acres of Rancho  Cucamonga  land combined with property tax refunds  recorded in
1995.

As discussed in Note 4 of the Financial Statements, the book value of certain of
the Partnership's  real estate  investments were reduced to their estimated fair
values through aggregate  writedowns of $317,000,  $7,725,000 and $1,732,000 for
the years ended  December 31, 1996,  September 30, 1995, and 1994. As management
continuously  monitors the status of the Partnership's  assets and evaluates its
business strategy,  it has determined that certain carrying values have not been
recoverable. Upon such conclusions,  corresponding reductions in carrying values
have been  recorded.  In general,  unimproved  land values were  reduced when it
became  clear  that the  market  for such  properties  would not return to their
historic levels prior to liquidation of the  Partnership.  Operating  properties
have been  reduced  when it was  determined  that they  would  likely be sold or
returned to the lender in the relatively near future.

Interest expense  decreased by $92,000,  or 64%, for the year ended December 31,
1996 compared to September 30, 1995,  as a result of lower  outstanding  debt in
1996 due to the foreclosure in 1995 on the Civic Center III property.

Depreciation and amortization expense decreased by $64,000, or 55%, for the year
ended  December 31, 1996,  compared to  September  30, 1995,  as a result of the
foreclosure on Civic Center III.

General  and  administrative  expense in 1996  decreased  by  $194,000,  or 32%,
compared to 1995,  as a result of 1995  severance  costs of $66,000 and overhead
costs of $48,000  paid to RFC,  lower  legal fees due to the Barton and  Sumarco
settlements,  and the  payment  and  expense of 1994 audit and tax fees in 1995.
Since January 1, 1995, audit and tax fees have been accrued in the year to which
they relate.

Comparison of the year ended September 30, 1995  to September 30, 1994

Rental income for the year ended  September 30, 1995  decreased by $251,000,  or
45%, from 1994 due to the decrease in revenues  contributed by Civic Center III,
a reduction  in occupancy  and a reduction  in rental rates  necessary to remain
competitive with the market.

Interest and other income  decreased by $38,000,  or 70%,  during the year ended
September  30, 1995  compared to 1994,  primarily as a result of a lower average
invested cash balance.

The  decrease in  operating  expenses of  $136,000,  or 42%,  for the year ended
September  30,  1995,  compared to 1994 is the result of the receipt of property
tax refunds relating to a previous year and the decrease in expenses relating to
the  foreclosed  Civic  Center III  property.  The property tax refunds were the
result of the  Partnership  successfully  appealing  the  assessed  value of its
operating properties due to a decline in value.

Expenses  associated with undeveloped land decreased by $93,000,  or 46%, during
the year ended  September 30, 1995,  compared to 1994. The decrease is primarily
due to the receipt of property tax refunds  related to a previous tax year.  The
Partnership   successfully  appealed  the  assessed  value  of  certain  of  its
unimproved land as a result of a decline in value.

Interest expense decreased by $64,000,  or 31%, for the year ended September 30,
1995 compared to 1994 as a result of the 1995 foreclosure on Civic Center III.

                                  Page 9 of 35
<PAGE>

Depreciation and  amortization  expense during the year ended September 30, 1995
decreased by $32,000,  or 22%,  compared to September 30, 1994  primarily due to
the  foreclosure  on Civic  Center III and due to a lower  depreciable  property
value on the books  subsequent to the 1994  reduction in carrying  value of such
property.

General and administrative expenses at September 30, 1995 increased by $238,000,
or 66%,  when  compared to 1994  primarily  as a result of employee  termination
costs including severance of $66,000,  the payment and expense of 1994 audit and
tax fees in 1995,  a payment  to RFC of $48,000  for 1994  overhead  costs,  and
escalating legal fees associated with the Barton and Sumarco settlements.

In December 1994, RFC entered into an agreement with  Glenborough  Inland Realty
Corporation  (Glenborough)  whereby RFC sold to Glenborough,  for  approximately
$4,466,000  and the  assumption  of  $1,715,000  of RFC's debt,  the contract to
perform  the  rights  and  responsibilities   under  RFC's  agreement  with  the
Partnership,  eight other related partnerships and third parties  (collectively,
the Rancon  Partnerships) to perform or contract on the Partnership's behalf for
financial,  accounting,  data processing,  marketing, legal, investor relations,
asset and development management and consulting services for the Partnership. As
part of this agreement,  Glenborough will perform certain  responsibilities  for
the General Partner of the Rancon  Partnerships and RFC agreed to cooperate with
Glenborough, should Glenborough attempt to obtain a majority vote of the limited
partners  to  substitute  itself as the  Sponsor  for the  Rancon  Partnerships.
Glenborough is not an affiliate of RFC. This agreement was effective  January 1,
1995.

RFC entered into the  transaction  with  Glenborough  described  above,  when it
determined to sell that portion of its business  relating to investor  services,
property management services and asset management  services,  and those services
are now rendered to the Rancon  Partnerships  by  Glenborough.  The  Partnership
required  those  services  to be  rendered  to it until  such time as all of its
properties were sold,  whether  performed by the General Partner or Glenborough.
RFC,  as  General  Partner  for  the  Partnership,  has the  responsibility  and
obligation  to  manage  the  Partnership  business,  including  the  sale of its
properties,   notwithstanding   that  certain  property   management  and  other
administrative  activities  regarding  the  Partnership  are  now  performed  by
Glenborough.

As a result of the agreement between RFC and Glenborough, RFC terminated certain
employees who were  previously  responsible  for performing the  administrative,
legal and development  services to the Partnership.  Upon  termination,  certain
employee costs including severance benefits were allocated to the various Rancon
Partnerships.  Such costs  allocated to the Partnership  aggregated  $66,000 and
were included in administrative expenses for the year ended September 30, 1995.

Item 8.    Financial Statements and Supplementary Data

For information  with respect to Item 8, see Financial  Statements and Schedules
as listed in Item 14.

Item  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
          Financial Disclosure

On June 6, 1995, Price Waterhouse LLP was dismissed as the principal independent
accountant for the Partnership. The decision to dismiss Price Waterhouse LLP was
made by the Partnership's General Partners.

The reports of Price Waterhouse LLP on the  Partnership's  financial  statements
for the period ending September 30, 1994, do not contain an adverse opinion or a
disclaimer  of an opinion,  nor were such opinions  modified as to  uncertainty,
audit scope, or accounting principles.

During the fiscal  year ended  September  30,  1994 and the  subsequent  interim
period from October 1, 1994 to June 6, 1995, there were no disagreements between
the Partnership and Price Waterhouse LLP on any matter of accounting  principles
or practices,  financial statement  disclosure,  or auditing scope or procedure,
which, if not resolved to the  satisfaction of Price  Waterhouse LLP, would have
caused it to make a  reference  to the  subject  matter of the  disagreement  in
connection  with its reports.  For this purpose the term  disagreement  does not


                                 Page 10 of 35
<PAGE>

include initial  difference of opinion based on incomplete  facts or preliminary
information that were later resolved to the satisfaction of Price Waterhouse LLP
by obtaining additional relevant facts or information.

During the fiscal  year ended  September  30,  1994 and the  subsequent  interim
period from October 1, 1994 to June 6, 1995,  there were no "reportable  events"
of type described in Rule 304(a)(1)(v)(A) through (D) of Regulation S-K.

On  June  6,  1995,  the  Partnership  engaged  Arthur  Andersen  LLP as its new
principal  independent  accountant.  During the fiscal year ended  September 30,
1994 and the  subsequent  interim  period from  October 1, 1994  through June 6,
1995,  the  Partnership  did not  consult  with  Arthur  Andersen  LLP as to the
application of accounting  principles to a specified  transaction or the type of
audit opinion that might be rendered on the Partnership's financial statements.



                                 Page 11 of 35
<PAGE>



                                    Part III

Item 10.    Directors and Executive Officers of the Registrant

Daniel Lee Stephenson and RFC are the General Partners of the  Partnership.  The
executive officers and directors of Rancon are:

Daniel L. Stephenson     Director, President, Chief Executive Officer and
                         Chief Financial Officer

There is no fixed term of office for Mr. Stephenson

Mr.  Stephenson,  age 53, founded RFC (formerly known as Rancon  Corporation) in
1971 for the purpose of  establishing  itself as a  commercial,  industrial  and
residential  property  syndication,   development  and  brokerage  concern.  Mr.
Stephenson has, from inception,  held the position of Director. In addition, Mr.
Stephenson was President and Chief  Executive  Officer of RFC from 1971 to 1986,
from August  1991 to  September  1992 and from March 31,  1995 to  present.  Mr.
Stephenson is Chairman of the Board of PackWest Group,  Inc., a real estate firm
which has acquired a portfolio of assets from the Resolution Trust Corporation.

Effective January 1, 1994 RFC acquired all the outstanding shares of Partnership
Asset Management Company, a California  corporation,  which previously performed
or  contracted  on the  Partnership's  behalf for  financial,  accounting,  data
processing,   marketing,   legal,  investor  relations,  asset  and  development
management  and  consulting  services for the  Partnership.  These services were
provided to the  Partnership by RFC subject to the provisions of the Partnership
Agreement during calendar 1994.

Rancon  Development  Fund VII (RDFVII),  a partnership  sponsored by the General
Partners filed for protection under Chapter 11 of Federal  Bankruptcy Law on May
6, 1994 in order to put an automatic stay on RDFVII's  property and to forestall
the pending foreclosure. In March, 1994, the General Partners were approached by
a non-affiliated party interested in acquiring the interests of RDFVII's general
partners and attempting to  restructure  the  partnership  and its secured debt.
Although the necessary  majority-in-interest  of RDFVII's  limited  partners was
received,  an  agreement  regarding  the terms of the  transfer  and the plan of
reorganization  could not be reached. The holder of the note secured by RDFVII's
property  filed for and was granted a relief from the stay thereby  allowing the
foreclosure sale to proceed.  Such sale took place on September 15, 1994 and the
bankruptcy was subsequently dismissed, as the property was RDFVII's only asset.

Six Stoneridge L.P. (SSRLP),  a partnership formed by Rancon Development Fund VI
(RDFVI),  a partnership  sponsored by the General  Partners filed for protection
under  Chapter  11 of  Federal  Bankruptcy  Law in  December,  1992.  Efforts to
negotiate a  modification  of the purchase  agreement of Stoneridge I, to obtain
loans,  joint  venture  partners  or other  vehicles  to meet or modify the cash
payment  requirements  were  unsuccessful.   In  February,  1993,  an  adversary
complaint  was filed  against  SSRLP in the  bankruptcy  court to determine  the
nature and extent of SSRLP's  interest in  Stoneridge I and the debt  associated
with the property.  A tentative  agreement has been reached,  and the bankruptcy
was dismissed  effective  November 8, 1995.  As of December 31, 1996,  SSRLP and
RDFVI have been dissolved.

Item 11.   Executive Compensation

The Partnership  has no executive  officers.  For information  relating to fees,
compensation,   reimbursements   and  distributions  paid  to  related  parties,
reference is made to Item 13 below.




                                 Page 12 of 35
<PAGE>



Item 12.   Security Ownership of Certain Beneficial Owners and Management

Security Ownership of Certain Beneficial Owners

No person is known by the Partnership to be the beneficial owner of more than 5%
of the Units.

Security Ownership of Management
                                                Amount and
                                                 Nature of
  Title                                         Beneficial              Percent
of Class    Name of Beneficial Owner             Ownership             of Class

  Units     Daniel Lee Stephenson       2 Units (indirect through IRA)    .005%
  Units     Daniel Lee Stephenson
                Family Trust            100 Units (direct)                .267%

Changes in Control

The Limited  Partners  have no right,  power or authority to act for or bind the
Partnership.  However,  the  Limited  Partners  have the  power to vote upon the
following  matters  affecting the basic  structure of the  Partnership,  each of
which shall require the approval of Limited  Partners  holding a majority of the
outstanding  interests:  (i) amendment of the Partnership's Amended and Restated
Certificate  and  Agreement  of Limited  Partnership;  (ii)  dissolution  of the
Partnership;  (iii) sale,  exchange or pledge of all or substantially all of the
assets of the Partnership; (iv) removal of the General Partners or any successor
General Partner;  (v) election of a new General Partner or General Partners upon
the removal, retirement, death, insanity, insolvency,  bankruptcy or dissolution
of the General Partners or any successor General Partner;  and (vi) extension of
the term of the Partnership.

Item 13.          Certain Relationships and Related Transactions

There were no related party transactions during the year ended December 31, 1996
or the three months ended December 31, 1995.



                                 Page 13 of 35
<PAGE>



                                     Part IV

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

        (a)  The following documents are filed as part of the report

             (1)  Financial Statements:

                  Reports of Independent Accountants

                  Balance Sheets as of December  31,1996, December 31, 1995 and
                  September 30, 1995

                  Statements of Operations for the year ended December 31, 1996,
                  the three months ended  December 31, 1995, and the years ended
                  September 30, 1995 and 1994

                  Statements  of Changes in Partners'  Equity  (Deficit) for the
                  year ended  December 31, 1996, the three months ended December
                  31, 1995, and the years ended September 30, 1995 and 1994

                  Statements of Cash Flows for the year ended December 31, 1996,
                  the three months ended  December 31, 1995, and the years ended
                  September 30, 1995 and 1994

                  Notes to Financial Statements

             (2)  Financial Statement Schedule:

                  Schedule III - Real Estate and Accumulated  Depreciation as of
                  December 31, 1996 and Note thereto

                  All  other   schedules  are  omitted   because  they  are  not
                  applicable  or  the  required  information  is  shown  in  the
                  financial statements or notes thereto.

             (3)  Exhibits:

                  (3.1)   Amended and  Restated  Certificate  and  Agreement  of
                          Limited  Partnership of the  Partnership  (included as
                          Exhibit B to the  Prospectus  dated December 17, 1985,
                          filed pursuant to Rule 424(b), file number 2-79805, is
                          incorporated herein by reference)

                  (10.1)  Escrow Statement related to the sale of Parcel 1 of PM
                          10444 (Polo Grounds  restaurant)  (included as Exhibit
                          10.1 to the  Annual  Report  filed on Form 10-K  dated
                          December   29,   1992   (file   number   0-13157)   is
                          incorporated herein by reference)

                  (10.2)  Documents  related to discount given on the net equity
                          balance of the AITD note  receivable from Ontario East
                          Main Property  (included as Exhibit 10.6 to the Annual
                          Report  filed on Form 10-K  dated  December  29,  1992
                          (file  number  0-13157)  is  incorporated   herein  by
                          reference)

                  (10.3)  Documents  related  to  pending  sale of  Parcel  1 of
                          Tentative Parcel Map 14653  (unimproved land in Rancho
                          Cucamonga)

                  (10.4)  Property  Management  Agreement with Rancon  Financial
                          Corporation  for Civic  Center II and Civic Center III
                          (included as Exhibit  10.3 to the Annual  Report filed
                          on Form 10-K dated  December  29,  1992  (file  number
                          0-13157) is incorporated herein by reference)

                                 Page 14 of 35
<PAGE>

                  (10.5)  First  Amendment  of Purchase  Money  Promissory  Note
                          Secured by Deed of Trust  dated  October  23,  1993 in
                          connection  with Lots 100-106 of Tract 4476 (Lakeridge
                          Apartments)  (included as Exhibit  10.10 to the Annual
                          Report  filed on Form 10-K  dated  December  27,  1993
                          (file  number  0-13157)  is  incorporated   herein  by
                          reference)

                  (27)    Financial Data Schedule

        (b)  Report on Form 8-K

             None





                                 Page 15 of 35
<PAGE>









                                   SIGNATURES



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


                              RANCON REALTY FUND III,
                              a California Limited Partnership
                              (Partnership)




Date: March 27, 1997           By:  /s/ DANIEL L. STEPHENSON
                                  --------------------------
                               Daniel L. Stephenson, General Partner and
                               Director, President, Chief Executive Officer and
                               Chief Financial Officer of
                               Rancon Financial Corporation,
                               General Partner





Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Partnership and in the
capacities and on the dates indicated.



Date: March 27, 1997          By:  /s/ DANIEL L. STEPHENSON
                                 --------------------------
                              Daniel L. Stephenson, General Partner and
                              Director, President, Chief Executive Officer and
                              Chief Financial Officer of
                              Rancon Financial Corporation,
                              General Partner



                                 Page 16 of 35
<PAGE>




                          INDEX TO FINANCIAL STATEMENTS

                                  AND SCHEDULE







Financial Statements and Schedule                                         Page

Financial Statements:

 Reports of Independent Accountants.......................................18,19

 Balance Sheets as of December 31, 1996 and 1995 and September 30, 1995......20

 Statements of Operations  for the year ended December 31, 1996, the
    three months ended December 31, 1995, and the years ended
    September 30, 1995 and 1994..............................................21

 Statements of Partners' Equity (Deficit) for the year ended December 31, 1996,
    the three months ended December 31, 1995 and the years ended
    September 30, 1995 and 1994..............................................22

 Statements of Cash Flows for the year ended December 31, 1996, the
    three months ended December 31, 1995 and the years ended September 30,
    1995 and 1994............................................................23

 Notes to Financial Statements...............................................25

Schedule:

   III - Real Estate and Accumulated Depreciation
      as of December 31, 1996 and Note thereto...............................33


All other  schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.





                                 Page 17 of 35
<PAGE>








                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Partners of
RANCON REALTY FUND III, A CALIFORNIA LIMITED PARTNERSHIP:

We have audited the  accompanying  balance  sheets of RANCON  REALTY FUND III, A
CALIFORNIA  LIMITED  PARTNERSHIP  as of December 31, 1996 and 1995 and September
30, 1995, and the related  statements of operations,  partners' equity (deficit)
and cash flows for the year ended  December  31,  1996,  the three  months ended
December 31, 1995 and year ended September 30, 1995. These financial  statements
and the schedule  referred to below are the  responsibility of the Partnership's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements and schedule 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  financial  position of RANCON  REALTY FUND III, A
CALIFORNIA LIMITED  PARTNERSHIP,  as of December 31, 1996 and 1995 and September
30,  1995,  and the  results of its  operations  and its cash flows for the year
ended  December 31, 1996,  the three months ended December 31, 1995 and the year
ended  September  30, 1995 in  conformity  with  generally  accepted  accounting
principles.

Our  audits  were  made for the  purpose  of  forming  an  opinion  on the basic
financial  statements taken as a whole. The accompanying  schedule listed in the
index to  financial  statements  and  schedule  is  presented  for  purposes  of
complying with the Securities and Exchange  Commission's  rules and are not part
of the basic financial  statements.  This  information has been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion,  is fairly  stated in all  material  respects in relation to the
basic financial statements taken as a whole.



San Francisco, California
  February 12, 1997





                                 Page 18 of 35
<PAGE>








                        REPORT OF INDEPENDENT ACCOUNTANTS



To the General and Limited Partners of
Rancon Realty Fund III

In our opinion, the accompanying  statements of operations,  of partners' equity
and of cash flows  present  fairly,  in all  material  respects,  the results of
operations and cash flows of Rancon Realty Fund III for the year ended September
30, 1994, in conformity with generally  accepted  accounting  principles.  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  audit.  We  conducted  our audit of these  statements  in  accordance  with
generally accepted auditing standards which 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,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audit  provides a reasonable  basis for the opinion  expressed
above.  We have not audited the  financial  statements of Rancon Realty Fund III
for any period subsequent to September 30, 1994.

Our audit for the year  ended  September  30,  1994 was made for the  purpose of
forming an opinion on the basic financial statements taken as a whole. Our audit
also included an audit of the Financial Statement Schedule listed in Item 14 (a)
of this Form 10-K. In our opinion,  the Financial  Statement  Schedule  presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related financial statements.



PRICE WATERHOUSE LLP

San Diego, California
January 6, 1995




                                 Page 19 of 35
<PAGE>






                             RANCON REALTY FUND III,
                        A CALIFORNIA LIMITED PARTNERSHIP

                                 Balance Sheets
                December 31, 1996 and 1995 and September 30, 1995
                    (in thousands, except units outstanding)
<TABLE>
<CAPTION>

                                                                       December 31,      December 31,     September 30,
                                                                           1996              1995             1995
<S>                                                                    <C>              <C>               <C>
Assets
Investments in real estate:
  Rental property held for sale                                        $       800      $        --       $        --
  Land held for sale                                                         3,367            1,514             1,514
  Rental property, net of accumulated depreciation
     of $557 and $544 at December 31, 1995 and
     September 30, 1995, respectively                                           --            1,152             1,115
  Land held for development                                                     --            3,186             3,186
                                                                       -----------      -----------       -----------
     Total real estate investments                                           4,167            5,852             5,815

Cash and cash equivalents                                                    1,061              459               244
Prepaid expenses and other assets, net of accumulated
  amortization of $83, $53 and $46 at December 31, 1996
  and 1995, and September 30, 1995, respectively                                16               51                26
                                                                       -----------      -----------       -----------

     Total assets                                                      $     5,244      $     6,362       $     6,085
                                                                        ==========       ==========        ==========

Liabilities and Partners' Equity (Deficit)
Liabilities:
  Accounts payable and other liabilities                               $        52      $       194       $       234
  Note payable                                                                  --              500                --
  Accrued guarantee settlement costs                                            --              300               300
                                                                       -----------      -----------       -----------

     Total liabilities                                                          52              994               534
                                                                       -----------      -----------       -----------

Partners' equity (deficit):
  General Partner                                                             (268)            (264)             (260)
  Limited Partners, (37,473, 37,489 and 37,489 limited
     partnership units outstanding at December 1996
     and 1995, and September 1995, respectively)                             5,460            5,632             5,811
                                                                       -----------      -----------       -----------

     Total partners' equity                                                  5,192            5,368             5,551
                                                                       -----------      -----------       -----------
 Total liabilities and partners' equity                                     $5,244      $     6,362      $     6,085
                                                                        ==========       ==========       ===========

</TABLE>

                See accompanying notes to financial statements.


                                 Page 20 of 35
<PAGE>




                             RANCON REALTY FUND III,
                        A CALIFORNIA LIMITED PARTNERSHIP

                            Statements of Operations

                 For the year ended December 31, 1996, the three
               months ended December 31, 1995, and the years ended
                           September 30, 1995 and 1994
                     (in thousands, except per unit amounts)
<TABLE>
<CAPTION>

                                                               For the        For the Three      For the           For the
                                                             Year Ended       Months Ended     Year Ended        Year Ended
                                                            December 31,      December 31,    September 30,     September 30,
                                                                1996              1995            1995              1994
<S>                                                            <C>              <C>             <C>             <C>
Revenues:
    Rental income                                              $       154      $       45      $       303     $       554
    Interest and other income                                           33               5               16              54
    Gains on sales of assets                                           623              --               26              --
    Gain on guarantee settlement                                       117              --               --              --
                                                               -----------      ----------      -----------     -----------
                                                                       927              50              345             608
                                                               -----------      ----------      -----------     -----------

Expenses:
    Operating, including $5, $44 paid to Sponsor
       in September 1995 and 1994, respectively                         91              30              189             325
    Expenses associated with undeveloped land                          189              26              107             200
    Provision for impairment of investments
       in real estate                                                  317              --            7,725           1,732
    Interest expense                                                    51              20              143             207
    Depreciation and amortization                                       52              13              116             148
    Discount on note receivable                                         --              --               --              96
    General and administrative, including $182
       and $195 paid to sponsor in September
       1995 and 1994, respectively                                     403             144              597             329
                                                               -----------      ----------      -----------     -----------

          Total expenses                                             1,103             233            8,877           3,037
                                                               -----------      ----------      -----------     -----------

Loss from operations
    before extraordinary item                                         (176)           (183)          (8,532)         (2,429)

Extraordinary item:
    Gain on foreclosure                                                 --              --              760              --
                                                               -----------      ----------      -----------     -----------

Net loss                                                       $      (176)     $     (183)     $    (7,772)    $    (2,429)
                                                                ===========      ==========      ==========      ==========

Net loss per limited partnership unit                          $     (4.59)     $    (4.78)     $   (203.17)    $    (63.72)
                                                                ===========      ==========      ==========      ==========

Weighted average number of limited partnership
    units outstanding during each period used to
    compute net loss per limited partnership unit                   37,483          37,489           37,489          37,492
                                                               ===========      ==========      ===========     ===========

</TABLE>

                See accompanying notes to financial statements.

                                 Page 21 of 35
<PAGE>




                             RANCON REALTY FUND III,
                        A CALIFORNIA LIMITED PARTNERSHIP

                    Statements of Partners' Equity (Deficit)
                 For the year ended December 31, 1996, the three
               months ended December 31, 1995, and the years ended
                          September 30, 1995 and 1994
                                 (in thousands)

<TABLE>
<CAPTION>

                                                                                                      Total
                                                           General             Limited              Partners'
                                                          Partners            Partners               Equity

<S>                                                       <C>             <C>                   <C>
Balance at September 30, 1993                             $     (65)      $     15,818          $     15,753

Abandonment/retirement of Limited
     Partnership units                                           --                 (1)                   (1)

Net loss                                                        (40)            (2,389)               (2,429)
                                                          ----------      -------------         -------------

Balance at September 30, 1994                                  (105)            13,428                13,323

Net loss                                                       (155)            (7,617)               (7,772)
                                                          ----------      -------------         -------------

Balance at September 30, 1995                                  (260)             5,811                 5,551

Net loss                                                         (4)              (179)                 (183)
                                                          ----------      -------------         -------------

Balance at December 31, 1995                                   (264)             5,632                 5,368

Net loss                                                         (4)              (172)                 (176)
                                                          ----------      -------------         -------------

Balance at December 31, 1996                              $    (268)      $      5,460          $      5,192
                                                           =========       ===========           ===========

</TABLE>


                See accompanying notes to financial statements.

                                 Page 22 of 35
<PAGE>



                             RANCON REALTY FUND III,
                        A CALIFORNIA LIMITED PARTNERSHIP

                        Statements of Cash Flows For the
                 year ended December 31, 1996, the three months
                  ended December 31, 1995, and the years ended
                           September 30, 1995 and 1994
                                 (in thousands)
<TABLE>
<CAPTION>

                                                           For the        For the Three       For the           For the
                                                         Year Ended       Months Ended      Year Ended        Year Ended
                                                        December 31,      December 31,     September 30,     September 30,
                                                            1996              1995             1995              1994
Cash flows from operating activities:                   -----------       ------------     ------------      ------------
<S>                                                    <C>               <C>              <C>               <C>
Net loss                                               $      (176)      $      (183)     $    (7,772)      $    (2,429)
Adjustments to reconcile net loss
    to net cash used for operating activities:
    Gains on sales of assets                                  (623)               --              (26)               --
    Gain on foreclosure                                         --                --             (760)               --
    Provisions for impairment of
      investments in real estate                               317                --            7,725             1,732
    Gain on guarantee settlement                              (117)               --               --                --
    Bad debt expense                                            --                --               --                17
    Discount on note receivable                                 --                --               --                96
    Depreciation and amortization                               52                15              116               148
    Amortization of loan fees, included in interest expense     23                 5                5                 5
Changes in certain assets and liabilities:
    Prepaid expenses and other assets                            5               (32)              25                17
    Accounts payable and other liabilities                    (142)              (40)             174               (40)
    Payment of guarantee settlement                           (183)               --               --                --
    Payable to Sponsor                                          --                --               --                (3)
    Interest receivable                                         --                --               --               (15)
                                                        -----------       -----------       -----------        -----------
      Net cash used for operating activities                  (844)             (235)            (513)             (472)
                                                        -----------       -----------       -----------        -----------

Cash flows from investing activities:
    Additions to real estate investments                       (40)              (50)             (47)              (87)
    Net proceeds from sale of land                           1,986                --              420                --
    Payments received on notes receivable                       --                --               92                 4
    Leasehold improvements                                      --                --               --                (1)
                                                        -----------       -----------      -----------       -----------
    Net cash provided by (used for) investing activities     1,946               (50)             465               (84)
                                                        -----------       -----------      -----------        ----------
Cash flows from financing activities:
    Borrowings on notes payable                                 60               500               48                --
    Note payable principal payments                           (560)               --              (54)              (22)
                                                        ------------      -----------      ------------      -----------
    Net cash provided by (used for) financing activities      (500)              500               (6)              (22)
                                                        ------------      -----------      ------------      -----------

Net increase (decrease) in cash and cash equivalents           602               215              (54)             (578)

Cash and cash equivalents at beginning of period               459               244              298               876
                                                       -----------       -----------      -----------       -----------

Cash and cash equivalents at end of period             $     1,061       $       459      $       244       $       298
                                                        ==========        ==========       ==========        ==========
</TABLE>


                See accompanying notes to financial statements.
                                 Page 23 of 35
<PAGE>



                             RANCON REALTY FUND III,
                        A CALIFORNIA LIMITED PARTNERSHIP

                      Statements of Cash Flows - continued
                 For the year ended December 31, 1996, the three
               months endedDecember 31, 1995, and the years ended
                           September 30, 1995 and 1994
                                 (in thousands)
<TABLE>
<CAPTION>


                                                           For the        For the Three       For the           For the
                                                         Year Ended       Months Ended      Year Ended        Year Ended
                                                        December 31,      December 31,     September 30,     September 30,
                                                            1996              1995             1995              1994
                                                        -----------       -----------      -----------       -----------
<S>                                                    <C>               <C>              <C>               <C>
Supplemental disclosure of cash flow information:
    Cash paid for interest                             $        28       $        15      $       138       $       203
                                                        ==========        ==========       ==========        ==========

Supplemental disclosure of non-cash transaction:
    Deed-in-lieu of foreclosure:
    Reduction of investment in real estate and other
      assets                                           $        --       $        --      $     1,460       $        --
                                                        ==========        ==========       ==========        ==========
    Reduction of notes payable                         $        --       $        --      $     2,149       $        --
                                                        ==========        ==========       ==========        ==========
    Reduction of accrued expense and other liabilities $        --       $        --      $        95       $        --
                                                        ==========        ==========       ==========        ==========
    Reduction of deferred financing costs              $        --       $        --      $        25       $        --
                                                        ==========        ==========       ==========        ==========



























</TABLE>


                See accompanying notes to financial statements.
                                 Page 24 of 35
<PAGE>




                             RANCON REALTY FUND III,
                        A CALIFORNIA LIMITED PARTNERSHIP

                          Notes to Financial Statements

                December 31, 1996 and September 30, 1995 and 1994



Note 1.     ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization

Rancon Realty Fund III (the  Partnership)  was organized in accordance  with the
provisions of the California Uniform Limited  Partnership Act for the purpose of
acquiring,  developing and operating real property.  The General Partners of the
Partnership  are Daniel Lee Stephenson and Rancon  Financial  Corporation  (RFC)
hereinafter  referred  to as the  Sponsors.  RFC is wholly  owned by Daniel  Lee
Stephenson. The Partnership reached final funding in December, 1986. At December
31, 1996 and September 30, 1995,  37,473 and 37,489  Units,  respectively,  were
issued and outstanding.

Allocation of profits,  losses and cash  distributions  from operations and cash
distributions  from sales or  refinancing  are made pursuant to the terms of the
Partnership  Agreement which generally allocates 98% to the limited partners and
2% to the general partners.

Plan of Orderly Liquidation

On February 12, 1997, the General Partners adopted a plan of orderly liquidation
of the  Partnership's  assets.  Accordingly,  all investments in real estate are
currently  being  marketed for sale, are classified as property held for sale on
the  accompanying  December  31,  1996  balance  sheet and are  recorded  at the
estimated  fair  value  of the  respective  asset.  The  carrying  value  of the
investments  in real estate at December  31, 1996 does not purport to  represent
the ultimate sales price the  Partnership  will realize from the  disposition of
these  assets  nor are  the  amounts  reflected  in the  accompanying  financial
statements  intended to  represent  the  ultimate  amount to be  distributed  to
partners.

Management  believes that the  Partnership's  available  cash together with cash
generated  from  operations  prior to sale of the  real  estate  assets  and net
proceeds upon sales will be sufficient to finance the cash  requirements  of the
Partnership until an orderly liquidation is completed.

General Partners and Management Matters

Effective  January 1, 1994,  RFC performed or  contracted  on the  Partnership's
behalf  financial,  accounting,  data  processing,  marketing,  legal,  investor
relations,  asset and  development  management  and consulting  services.  These
services  were  provided by RFC  subject to the  provisions  of the  Partnership
Agreement.  Prior to  January 1,  1994,  the  Partnership  had  contracted  with
Partnership Asset Management Company  ("PAMCO"),  a California  corporation,  to
perform  the same  services.  Effective  January 1, 1994,  RFC  entered  into an
agreement with the owner of PAMCO to purchase all of its  outstanding  shares of
stock.  PAMCO was not considered to be an affiliate of the Partnership or RFC at
the time of purchase.

In December,  1994, RFC entered into an agreement with Glenborough Inland Realty
Corporation  (Glenborough)  whereby  RFC sold to  Glenborough  the  contract  to
perform  the  rights  and  responsibilities   under  RFC's  agreement  with  the
Partnership   and  other   related   Partnerships   (collectively,   the  Rancon
Partnerships)  to perform or contract  on the  Partnership's  behalf  financial,
accounting,  data processing,  marketing,  legal, investor relations,  asset and
development  management and consulting services for the Partnership for a period
of ten years or to the  liquidation of the  Partnership,  whichever comes first.
According to the contract, the Partnership will pay Glenborough for its services
as follows: (i) a specified asset administration fee of $299,000 per year, which
is fixed for five years  subject to reduction in the year  following the sale of


                                 Page 25 of 35
<PAGE>
                             RANCON REALTY FUND III,
                        A CALIFORNIA LIMITED PARTNERSHIP

                          Notes to Financial Statements

                December 31, 1996 and September 30, 1995 and 1994

assets;  (ii) sales fees of 2% for improved  properties and 4% for land; (iii) a
refinancing fee of 1% and (iv) a management fee of 5% of gross rental  receipts.
As part of this agreement, Glenborough will perform certain responsibilities for
the General Partner of the Rancon Partnerships. RFC has agreed to cooperate with
Glenborough, should Glenborough attempt to obtain a majority vote of the limited
partners to substitute itself as the Sponsor for the Rancon  Partnerships.  This
agreement was effective January 1, 1995.  Glenborough is not an affiliate of RFC
or the Partnership.

As a result of this agreement,  RFC terminated  several of its employees between
December 31, 1994 and February  28,  1995.  Also as a result of this  agreement,
certain of the officers of RFC resigned from their positions  effective February
28, 1995, March 31, 1995 and July 1, 1995.

Significant Accounting Policies

Basis of Accounting - The accompanying  financial  statements have been prepared
on the  accrual  basis of  accounting  in  accordance  with  generally  accepted
accounting  principles  under the presumption that the Partnership will continue
as a going  concern.  As discussed  above,  on February  12,  1997,  the General
Partners  adopted a plan of orderly  liquidation  of the  Partnership's  assets.
However,  the  liquidation  proceeds  and the timing  thereof are not  currently
estimable.  Once  such  liquidation  proceeds  and the  cost and  timing  of the
liquidation become determinable,  the Partnership will commence reporting on the
liquidation  basis of accounting  whereby  remaining assets will be presented at
the estimated realizable value and remaining liabilities,  including a provision
for the  estimated  costs  of the  plan,  will  be  presented  at the  estimated
settlement  value.  Accordingly,  the accompanying  financial  statements do not
provide  for any  adjustments  relating  to the  aforementioned  plan of orderly
liquidation.

Use of Estimates - The  preparation of financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that effect the reported  amounts of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements and the reported results of operations  during the reporting  period.
Actual results could differ from those estimates.

Risks and Uncertainties - The Partnership's ability to (i) achieve positive cash
flow  from   operations,   (ii)  meet  its  debt   obligations,   (iii)  provide
distributions  either  from  operations  or  the  ultimate  disposition  of  the
Partnership's properties or (iv) continue as a going concern, may be impacted by
changes in interest rates, property values,  geographic economic conditions,  or
the entry of other  competitors  into the  market.  The  accompanying  financial
statements do not provide for adjustments with regard to these uncertainties.

Investments in Real Estate - In March, 1995, the Financial  Accounting Standards
Board issued  Statement of Financial  Accounting  Standards  No. 121 (SFAS 121),
"Accounting  for  Impairment of Long-Lived  Assets and  Long-Lived  Assets to be
Disposed Of." The  Partnership  adopted SFAS 121 in the fourth quarter of fiscal
1995.  SFAS 121  requires  that  long-lived  assets be  carried  at the lower of
carrying  amount or fair value and that an evaluation of an individual  property
for  possible  impairment  must be  performed  whenever  events  or  changes  in
circumstances  indicate that an impairment  may have  occurred.  On February 12,
1997 the  Partnership  elected to list all  properties  for sale and as such has
classified  them as held  for  sale in the  accompanying  financial  statements.
Commencing  with  the  first  quarter  of  1997,  the  Partnership   will  cease
depreciating  these assets.  The specific  accounting  policies for assets to be
held and used and those to be disposed of are described in more detail below.

                                 Page 26 of 35
<PAGE>
                             RANCON REALTY FUND III,
                        A CALIFORNIA LIMITED PARTNERSHIP

                          Notes to Financial Statements

                December 31, 1996 and September 30, 1995 and 1994

Rental  Property Held for Sale - Rental  property held for sale is stated at the
lower of cost or estimated  fair value.  Estimated  fair value is computed using
estimated  sales price or appraised  value of the property and does not purport,
for a  specific  property,  to  represent  the  current  sales  price  that  the
Partnership could obtain from third parties for such property.

Land  Held for  Sale - Land  held for  sale is  stated  at the  lower of cost or
estimated fair value.  Estimated fair value is computed  using  estimated  sales
price or  appraised  value of the land  and  does not  purport,  for a  specific
property, to represent the current sales price that the Partnership could obtain
from third parties for such property.

Rental Property - Rental  properties,  including the related land, are stated at
cost unless  events or  circumstances  indicate that cost cannot be recovered in
which case carrying  value is reduced to estimated  fair value.  Estimated  fair
value for  financial  reporting  purposes:  (i) is based upon the  Partnership's
plans for the  continued  operation  of each  property;  (ii) is computed  using
estimated sales price, as determined by prevailing  market values for comparable
properties  and/or the use of  capitalization  rates  multiplied  by  annualized
rental  income based upon the age,  construction  and use of the  building,  and
(iii) does not purport, for a specific property,  to represent the current sales
price that the  Partnership  could obtain from third parties for such  property.
The  fulfillment  of  the  Partnership's  plans  related  to its  properties  is
dependent upon,  among other things,  the presence of economic  conditions which
will enable the Partnership to continue to hold and operate the properties prior
to their eventual sale. Due to uncertainties  inherent in the valuation  process
and in the  economy,  it is  reasonably  possible  that the  actual  results  of
operating  and  disposing of the  Partnership's  properties  could be materially
different than current expectations.

Depreciation is provided using the straight line method over the useful lives of
the respective assets.

Land Held for  Development - Land held for  development is stated at cost unless
events or  circumstances  indicate  that cost cannot be  recovered in which case
carrying  value is reduced to  estimated  fair value.  Estimated  fair value for
financial  reporting  purposes:  (i) is based on the Partnership's plans for the
development and/or sale of each property; (ii) is computed using estimated sales
price, based upon market values for comparable properties,  less estimated costs
to complete and/or sell the property; and (iii) does not purport, for a specific
property, to represent the current sales price that the Partnership could obtain
from third parties for such property. The fulfillment of the Partnership's plans
related to each of its  properties is dependent  upon,  among other things,  the
presence of economic conditions which will enable the Partnership to either hold
the  properties  for eventual  sale or obtain  financing to further  develop the
properties prior to their sale.

Cash and Cash  Equivalents  - The  Partnership  considers  all  certificates  of
deposit and money market funds with original  maturities of less than 90 days to
be cash equivalents.

Deferred  Costs - Included in prepaid  expenses  and other  assets are  deferred
lease  commissions  which  are  amortized  over  the term of the  related  lease
agreements.

Rental  Income - Rental  income is  recognized  as  earned  over the life of the
respective leases.

Net Loss Per Limited Partnership Unit - Net loss per limited partnership unit is
calculated using the weighted average of limited  partnership  units outstanding
during the period and the Limited Partners' share of the net loss.

                                 Page 27 of 35
<PAGE>
                             RANCON REALTY FUND III,
                        A CALIFORNIA LIMITED PARTNERSHIP

                          Notes to Financial Statements

                December 31, 1996 and September 30, 1995 and 1994

Gain on Sales of Real Estate - Revenue  from the sale of property is  recognized
at the close of escrow, when title has passed, minimum down payment requirements
are met, the terms of any notes received by the Partnership  satisfy  continuing
payment  requirements  and the Partnership is relieved of any  requirements  for
continued involvement with the properties.

Income  Taxes - No provision  for income  taxes is included in the  accompanying
financial  statements,  as the  Partnership's  results of operations  are passed
through to the partners for  inclusion in their  respective  income tax returns.
Net  income  (loss) and  partners'  equity  (deficit)  for  financial  reporting
purposes  differs from the  Partnership  income tax return  because of different
accounting  methods used for certain items,  principally the  capitalization  of
carrying costs  associated with  development and the provision for impairment of
investments in real estate.

Reclassification  - Certain 1995 and 1994 balances  have been  reclassified  to
conform with the current year presentation.

Note 2.     RELATED PARTY TRANSACTIONS

Reimbursable Expenses and Management Fees to Sponsor

Through  December  31,  1994,  the  Partnership  had an  agreement  with RFC for
property management services.  The agreement provided for a management fee equal
to 5% of gross  rents  collected  while  managing  properties.  Fees  and  costs
incurred  under this  agreement  totaled  $5,000 and $44,000 for the years ended
September 30, 1995 and 1994, respectively.

The Partnership  Agreement also provides for the  reimbursement  of actual costs
incurred  by RFC in  providing  certain  administrative,  legal and  development
services  necessary for the prudent  operation of the Partnership.  Reimbursable
costs incurred by the  Partnership  totaled  $182,000 and $195,000 for the years
ended  September  30, 1995 and 1994,  respectively.  Effective  January 1, 1995,
these services are being provided by Glenborough as described in Note 1.

Note 3.     NOTE RECEIVABLE

During October,  1992, the Partnership began legal  proceedings  against Sumarco
(operating as Backwaters  Restaurant) on a $38,000 note  receivable  that was in
default.  The Partnership and Sumarco  negotiated a payment schedule whereby the
Partnership  received a one time premium  payment of $5,000 and agreed to reduce
the  principal  balance by  approximately  $5,000  provided  that  Sumarco  made
semi-monthly  principal  and  interest  payments  of  $1,000  until  $33,000  in
principal is paid. To show good faith during the  negotiations,  the Partnership
also  received a partial  payment of $5,000  from  Sumarco  which was applied to
interest  receivable,  late  charges and the  reimbursement  of a portion of the
legal costs  incurred to date related to the  delinquent  note.  Any payment not
made by Sumarco would result in a judgment in favor of the  Partnership  for the
full  principal  balance,  accrued and unpaid  interest and legal fees and costs
associated  with the  enforcement  of such  judgment.  Sumarco  defaulted on its
payments  under the note and the  Partnership  obtained a default  judgment  and
recorded the related  abstracts of judgment.  At September 30, 1994, the balance
in the note  receivable was $17,000.  Based on the  uncertainty of collection on
the note, management  established a reserve for the remaining balance of $17,000
at  September  30, 1994.  There were no payments  made on the note in 1995 or in
1996.  Therefore,  it was  determined  that  the  $17,000  note  receivable  was
uncollectible and on March 31, 1996, management wrote-off the receivable and the
related allowance.

                                 Page 28 of 35
<PAGE>
                             RANCON REALTY FUND III,
                        A CALIFORNIA LIMITED PARTNERSHIP

                          Notes to Financial Statements

                December 31, 1996 and September 30, 1995 and 1994

Note 4.    INVESTMENT IN REAL ESTATE

Rental property held for sale as of December 31 ,1996 and held for investment at
September 30, 1995 is as follows:

                                        1996                  1995
Land                               $   231,000           $   304,000
Buildings                              748,000               992,000
Leasehold and other improvements       423,000               364,000
                                     ---------             ---------
                                     1,402,000             1,660,000
Less accumulated depreciation         (602,000)             (545,000)
                                     ----------           ----------
Total                              $   800,000           $ 1,115,000
                                     ==========            ==========


Land held for sale is as follows:
                                      December 31,          September 30,
                                          1996                  1995
6 acres in Rancho Cucamonga        $     1,513,000       $     1,486,000
33.14 acres in Rancho Cucamonga                 --             1,363,000
1.8 acres in Rancho Cucamonga              154,000               151,000
8.92 acres in San Bernardino             1,700,000             1,700,000
                                    --------------        --------------
                                   $     3,367,000       $     4,700,000
                                    ==============        ==============

The 6 acres in Rancho  Cucamonga and the 8.92 acres in San  Bernardino  were not
held for sale as of September 30, 1995.

The above land held for sale remains unencumbered at December 31, 1996.

During the years ended  December 31, 1996,  and  September 30, 1995 and 1994 the
following   provisions  to  reduce  the  carrying  value  of  the  Partnership's
properties were made:

                                      1996                1995              1994
                                      ----                ----              ----
Rental Properties:
 Civic Center II                $    317,000    $           --    $           --
 Civic Center III                         --                --           620,000
                                ------------    --------------    --------------
                                     317,000                --           620,000
                                ------------    --------------    --------------
Unimproved Land:
  Rancho Cucamonga, CA:
   33.14 acres                            --         6,773,000           752,000
   6.00 acres (7.43 in 1994)              --                --           345,000
   1.8 acres                              --           289,000            15,000
  San Bernardino, CA:
   8.92 acres                             --           663,000                --
                                ------------    --------------    --------------
                                          --         7,725,000         1,112,000
                                ------------    --------------    --------------

     Total                    $    317,000      $    7,725,000    $    1,732,000
                                 ===========     =============     =============

                                 Page 29 of 35
<PAGE>
                             RANCON REALTY FUND III,
                        A CALIFORNIA LIMITED PARTNERSHIP

                          Notes to Financial Statements

                December 31, 1996 and September 30, 1995 and 1994

The Partnership did not record a provision for impairment of investments in real
estate during the three months ended December 31, 1995.

Prior to January,  1995,  the  Partnership's  business  strategy was to hold its
properties for future development and operation.  Conclusions about the carrying
value of the  Partnership's  properties were based upon this strategy.  In 1994,
the  Partnership  reduced the carrying value of the Civic Center III property to
its then estimated fair value in anticipation of the foreclosure  which occurred
in 1995.  Also in 1994,  certain costs  associated with the unimproved land were
deemed  to be  unrecoverable  and  the  related  carrying  values  were  reduced
accordingly.  In 1995,  the  Partnership  modified  its strategy to focus on its
eventual  liquidation  with its assets being disposed of at the optimal time and
sales  price.  On February  12,  1997,  the General  Partners  adopted a plan of
orderly liquidation of the Partnership's  assets.  Accordingly,  the Partnership
revalued  certain  of its  assets in 1996 and 1995  based  upon  this  change in
strategy and independent  appraisals obtained in 1995.  Appraisals are estimates
of fair value based upon assumptions  about the property and the market in which
it is located. Due to the uncertainties inherent in the appraisal process, these
valuations do not purport to be the price at which a sale transaction  involving
these properties can or will take place.

Note 5.           DISPOSITION OF PROPERTY

On June  3,  1996,  the  Partnership  sold  33  acres  of the  Rancho  Cucamonga
unimproved land for $2,166,000. The gain on sale after closing costs of $180,000
was $623,000 and is included as a gain on sales of property on the Partnership's
1996 statement of operations.  The net cash proceeds of $1,986,000 from the sale
were used to pay prior and current  property taxes and the $560,000 note payable
discussed in Note 7. The remaining proceeds were added to cash reserves.

On March 15, 1995  management  of Civic Center III was turned over to a receiver
for the lender of the $2,149,000  note payable  secured by such  property.  As a
result of  decreased  occupancy  and rental  rates,  the  monthly  debt  service
payments  exceeded the cash generated by the rental  operations of the property.
These  factors,  along  with  the  decline  in  the  property's  value  and  the
unsuccessful attempts to renegotiate the terms of the loan, forced management to
discontinue  the monthly debt service  payments.  In April 1995, the Partnership
was required to turn over to the  receiver the net cash flow  generated by Civic
Center III from January 1, 1995 through March 15, 1995 of approximately  $26,000
and on May 23, 1995, title to the property passed to the lender. The Partnership
recognized a $760,000  extraordinary  gain on the  deed-in-lieu  of foreclosure,
which is included on the Partnership's 1995 statement of operations.

On May 30, 1995,  the  Partnership  sold a 3,417 square foot easement of the San
Bernardino  unimproved land for $26,000. The gain on sale after closing costs of
$1,000,  was  $1,000  and  is  included  in  gain  on  sale  of  assets  on  the
Partnership's 1995 statement of operations.

On August 24, 1995, the  Partnership  sold 1.43 acres of land for $444,000.  The
gain on sale after  closing costs of $49,000 was $25,000 and is included in gain
on sale of assets on the Partnership's 1995 statement of operations.

Note 6.           ACCRUED GUARANTEE SETTLEMENT COSTS

The  Partnership  agreed to indemnify the Sponsors for any amounts paid under an
agreement  executed  by the  Sponsors  in  1992  guaranteeing  the  payment  and


                                 Page 30 of 35
<PAGE>
                             RANCON REALTY FUND III,
                        A CALIFORNIA LIMITED PARTNERSHIP

                          Notes to Financial Statements

                December 31, 1996 and September 30, 1995 and 1994

performance  of a portion  of a  promissory  note to  Imperial  Thrift  and Loan
(Imperial)  which was assumed by the buyer  (Sumarco)  when Sumarco  purchased a
restaurant  property from the Partnership on April 30, 1992. The guarantee of up
to a maximum  $600,000 was a condition  of such  assumption.  Sumarco  defaulted
under the terms of the note. Imperial filed a foreclosure action against Sumarco
and named the Sponsors as defendants  for purposes of enforcing  the  guarantee.
The Partnership  felt there were strong points in its favor,  but in the interim
recorded an estimated  loss on the  guarantee  of $300,000 as of  September  30,
1993.

In order to avoid the uncertainties and expense of further litigation,  Imperial
and the Sponsors  entered into a Settlement  Agreement and Release on January 2,
1996.  The Agreeing  Parties  (Imperial and the Sponsors)  acknowledge  that the
settlement  between  them  is  a  compromise   resolution  of  disputed  claims.
Accordingly,  Imperial filed a Request for Dismissal of Case No. RCV 07394,  and
the Sponsors  complied with their  payment of $182,500 on January 16, 1996.  The
Partnership reimbursed the Sponsors under its indemnity agreement and recorded a
$117,500 gain for the balance of the accrued  liability that was not incurred by
the Partnership.  Sumarco is not party to this full and final settlement, and is
in no way to be benefited or released by it.

Note 7.           NOTES PAYABLE

On October 4, 1995, the  Partnership  borrowed  $575,000,  from an  unaffiliated
third party,  secured by Civic Center II. $75,000 of the loan proceeds were held
back by the lender to be disbursed for tenant improvements. During 1996, $60,000
was disbursed to the Partnership from the lender holdback. On June 10, 1996, the
Partnership  paid-off the $560,000  note payable plus accrued  interest with the
net cash proceeds from the 33 acre land sale.

Note 8.           LEASES

The  Partnership's  rental property is leased under operating leases that expire
at various dates  through July 31, 2001.  The following is a schedule of minimum
future rental income on non-cancelable operating leases as of December 31, 1996:

                    1997             $        137,000
                    1998                      111,000
                    1999                      110,000
                    2000                       51,000
                    2001                       21,000
                    Thereafter                 27,000
                                      ---------------
                      Total          $        457,000
                                      ===============

Note 9.           TAXABLE INCOME

The  Partnership's  tax  returns,  the  qualification  of the  Partnership  as a
partnership  for federal  income tax purposes,  and the amount of income or loss
are subject to  examination  by federal and state  taxing  authorities.  If such
examinations result in changes to the Partnership's  taxable income or loss, the
tax liability of the partners could change accordingly.

The  Partnership's  tax returns are filed on a calendar year basis. As such, the
following  reconciliation  has been  prepared  using tax amounts  estimated on a
calendar year basis.

                                 Page 31 of 35
<PAGE>
                             RANCON REALTY FUND III,
                        A CALIFORNIA LIMITED PARTNERSHIP

                          Notes to Financial Statements

                December 31, 1996 and September 30, 1995 and 1994

The  following  is a  reconciliation  for the years ended  December 31, 1996 and
September 30, 1995 and 1994, of the net income for financial  reporting purposes
to the  estimated  taxable  income  determined  in  accordance  with  accounting
practices used in preparation of federal income tax returns (in thousands).
<TABLE>
<CAPTION>

                                                      1996            1995               1994
                                                      ----            ----               ----
<S>                                               <C>             <C>              <C>
Net loss per financial statements                 $     (176)     $   (7,772)      $    (2,429)
Gain on foreclosure                                       --            (760)               --
Provision for impairment of investments
       in real estate                                    317           7,725             1,732
Financial reporting gain (loss) on sale of
       assets in excess of tax reporting
       gain                                           (7,648)             --                --
Financial reporting gain on guarantee
       settlement in excess of tax
       reporting gain                                   (117)             --                --
Financial reporting depreciation in excess
       of tax depreciation                                (1)             --                --
Property taxes capitalized for tax reporting
       purposes                                          125              --                --
Tax reporting loss on bad debt in excess of
       financial reporting loss                         (183)             --                --
Penalties not deductible for tax purposes                 43              --                --
Operating expenses reported in a different
       period for tax than for financial
       reporting                                          47              --                --
                                                  ----------      ----------       -----------
Estimated net income (loss) for federal
 income tax purposes                              $   (7,593)     $     (807)      $      (697)
                                                   ==========      =========        ==========
</TABLE>

The following is a reconciliation as of December 31, 1996 and September 30, 1995
of partner's  capital for financial  reporting  purposes to estimated  partners'
capital for federal income tax purposes (in thousands).

                                                     1996            1995
                                                     -----           ----
Partners' equity per financial statements        $    5,192      $    5,551
Cumulative provision for impairment of
       investments in real estate                     2,797          10,441
Acquisition fees capitalized for tax purposes           898              --
Financial reporting depreciation in excess
       of tax reporting depreciation                     46              --
Operating expenses recognized in a different
       period for financial reporting than for
       income tax reporting, net                         47              --
Estimated partners' capital for federal
 income tax purposes                             $    8,980      $   15,992
                                                  =========       =========




                                 Page 32 of 35
<PAGE>






                             RANCON REALTY FUND III,
                        A California Limited Partnership

             SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
                                December 31, 1996
                                 (In Thousands)

COLUMN A             COLUMN B             COLUMN C                COLUMN D

<TABLE>
<CAPTION>
                                          Initial Cost to         Subsequent to
                                         Partnership                Acquisition
                                                          Buildings
                                                             and                      Carrying
<S>                                <C>         <C>        <C>           <C>           <C>
Description                     Encumbrances     Land   Improvements   Improvements     Costs
-----------------------------------------------------------------------------------------------
Rental Property held for sale:
  Commercial office complex,
    San Bernardino County, California:
    1.194 acres - Civic Center II $   --      $    346    $     --      $   1,422     $   226
       Less: Writedown to estimated
       fair value (2)                 --            --          --          (560)         (32)
-----------------------------------------------------------------------------------------------
                                      --           346          --           862          194
-----------------------------------------------------------------------------------------------
Land held for sale:
  San Bernardino County, California:
     6 acres                           --         2,018          --           203          107
       Less: Writedown to estimated
       fair value (2)                  --            --          --          (176)        (639)
     8.92 acres                        --         2,777          --             9           --
       Less: Writedown to estimated
       fair value (2)                  --            --          --            (9)      (1,077)
     1.8 acres                         --           393          --            33           32
       Less: Writedown to estimated
       fair value (2)                  --            --          --           (30)        (274)
-----------------------------------------------------------------------------------------------
                                       --         5,188          --            30       (1,851)
===============================================================================================

                                 $     --      $  5,534    $     --      $    892     $ (1,657)
===============================================================================================

(1)  The aggregate cost for Federal income tax purpose is $7,269.
(2)  See Note 4 to Financial Statements.
(3)  Building depreciated over 40 years, tenant improvements depreciated over 5-10 years.

</TABLE>


                                 Page 33 of 35
<PAGE>


                             RANCON REALTY FUND III,
                        A California Limited Partnership

             SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
                                December 31, 1996
                                 (In Thousands)
<TABLE>
<CAPTION>
COLUMN A                                              COLUMN E                  COLUMN F      COLUMN G   COLUMN H    COLUMN I

                                                   Cost Capitalized
                                               Gross Amount Carried
                                                 at December 31, 1996
                                                        Building                              Date                   Life
                                                          and          (1)   Accumulated  Construction   Date     Depreciated
<S>                                    <C>         <C>          <C>         <C>               <C>        <C>           <C>
Description                                Land      Improvements     Total  Depreciation     Began      Acquired     Over
------------------------------------------------------------------------------------------------------------------------------------
Rental Property held for sale:
  Commercial office complex,
    San Bernardino County, California:
    1.194 acres - Civic Center II      $    354    $     1,640  $     1,994 $     602         10/31/84   2/28/84       (3)
       Less: Writedown to estimated
       fair value (2)                     (123)         (469)        (592)        --
--------------------------------------------------------------------------------------------------------------------------------
                                           231         1,171         1,402        602
--------------------------------------------------------------------------------------------------------------------------------
Land held for sale:
  San Bernardino County, California:
     6 acres                              2,328            --        2,328         --        N/A         8/06/84      N/A
       Less: Writedown to estimated
       fair value (2)                      (815)           --         (815)        --
     8.92 acres                           2,786            --        2,786         --        N/A         9/16/92      N/A
       Less: Writedown to estimated
       fair value (2)                    (1,086)           --       (1,086)        --
     1.8 acres                              458            --          458         --        N/A         8/06/84     N/A
       Less: Writedown to estimated
       fair value (2)                      (304)           --         (304)        --
--------------------------------------------------------------------------------------------------------------------------------
                                          3,367            --        3,367         --
================================================================================================================================

                                       $  3,598      $  1,171     $  4,769    $   602
================================================================================================================================

(1)  The aggregate cost for Federal income tax purpose is $7,269.
(2)  See Note 4 to Financial Statements.
(3)  Building depreciated over 40 years, tenant improvements depreciated over 5-10 years.

</TABLE>

                                 Page 33 of 35
<PAGE>



                            RANCON REALTY FUND III,
                          A California Limited Partnership

         NOTE TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
                                 (In Thousands)


Reconciliation  of gross amount at which real estate was  carried,  for the year
ended December 31,1996,  the three months ended December 31, 1995, and the years
ended September 30, 1995 and 1994.
<TABLE>
<CAPTION>


                                              Dec. 31,          Dec. 31,          Sept. 30,      Sept. 30,
                                                1996               1995             1995            1994

INVESTMENT IN REAL ESTATE

<S>                                          <C>               <C>               <C>           <C>
Balance at beginning of period               $    6,409        $    6,359        $   16,683    $   18,327

     Additions (deletions) during period:
        Improvements, etc.                           40                50                14            88
        Foreclosure                               ---                 ---            (2,251)          ---
        Writedown to estimated fair value          (317)              ---            (7,725)       (1,732)
     Sales during period                         (1,363)              ---              (362)          ---
                                              ---------         ---------         ---------      --------

  Balance at end of period                   $    4,769        $    6,409        $    6,359    $   16,683
                                              =========         =========         =========     =========

   ACCUMULATED DEPRECIATION
Balance at beginning of period                  $   557        $      544        $    1,242    $    1,120

     Additions charged to expenses                   45                13               100           122
     Foreclosure                                    ---               ---              (798)          ---
                                              ---------         ---------         ---------      --------

  Balance at end of period                   $      602        $      557        $      544    $    1,242
                                              =========         =========         =========     =========


</TABLE>

                                 Page 34 of 35
<PAGE>






                            RANCON REALTY FUND III,
                        A California Limited Partnership




                                INDEX TO EXHIBITS


Exhibit Number                                  Exhibit


     27                                   Financial Data Schedule

                                 Page 35 of 35
<PAGE>