Form 10-KSB

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

              |X|   Annual report pursuant to section 13 or 15(d) of the
                    Securities Exchange Act of 1934 (no fee required)

                    For the Year Ended December 31, 1998

                                                     OR

              |_|   Transition report pursuant to section 13 or 15(d)
                    of the  Securities  Exchange  Act of 1934 (no fee
                    required) For the transition  period from ____ to
                    ____

                        Commission File number 000-19160

                      ATEL Cash Distribution Fund III, L.P.

California                                                    94-3100855
(State or other jurisdiction of                              (I. R. S. Employer
incorporation or organization)                               Identification No.)

                         235 Pine Street, 6th Floor, San
                           Francisco, California 94104
                         (Address of principal executive
                                    offices)

        Registrant's telephone number, including area code (415) 989-8800

        Securities registered pursuant to section 12(b) of the Act: None

Securities  registered pursuant to section 12(g) of the Act: Limited Partnership
Units

Indicate  by a 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 |_|


State the aggregate market value of voting stock held by  non-affiliates  of the
registrant.
                                  Inapplicable

                       DOCUMENTS INCORPORATED BY REFERENCE
                                      None

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of  Regulation  S-K  (ss.229.405)  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|

<PAGE>

                                     PART I

Item 1.  BUSINESS

General Development of Business

ATEL Cash  Distribution Fund III, L.P. (the  Partnership),  was formed under the
laws of the State of California in September  1989. The  Partnership  was formed
for the purpose of acquiring  equipment to engage in equipment leasing and sales
activities.   The  General  Partners  of  the  Partnership  are  ATEL  Financial
Corporation  (ATEL),  a  California  corporation  and two  individuals,  who are
principals of ATEL Capital Group, the parent of ATEL.

The  Partnership  conducted  a public  offering  of  5,000,000  units of Limited
Partnership  Interest  (Units)  (which was  increased to 7,500,000  Units at the
option of the General Partners),  at a price of $10 per Unit which terminated on
January 3, 1992.  As of that date,  the  Partnership  had sold an  aggregate  of
7,385,584 Units for a total capitalization of $73,855,840.

The Partnership's  principal objectives are to invest in a diversified portfolio
of  equipment  which will (i)  preserve,  protect  and return the  Partnership's
invested  capital;  (ii) generate  substantial  distributions to the partners of
cash  from  operations  and cash from  sales or  refinancing,  with any  balance
remaining after certain minimum  distributions to be used to purchase additional
equipment  during the  reinvestment  period,  ending December 31, 1999 and (iii)
provide  significant  distributions  following the reinvestment period and until
all  equipment  has been  sold.  The  Partnership  is  governed  by its  Limited
Partnership Agreement.


Narrative Description of Business

The  Partnership  has acquired  various types of equipment to lease  pursuant to
"Operating"  leases  and "Full  Payout"  leases,  where  "Operating"  leases are
defined as being leases in which the minimum lease  payments  during the initial
lease  term do not  recover  the full cost of the  equipment  and "Full  Payout"
leases  recover such cost. It was the intention of the General  Partners that no
more than 30% of the aggregate  purchase price of equipment  would be subject to
"Operating" leases upon final investment of the Net Proceeds of the Offering and
that no more than 20% of the  aggregate  purchase  price of  equipment  would be
invested in equipment acquired from a single manufacturer.

The Partnership only purchases equipment for which a lease exists or for which a
lease will be entered  into at the time of the  purchase.  The  Partnership  has
completed its initial  acquisition stage with the investment of the net proceeds
from the public offering of Units.

The  Partnership's  objective  was to lease a  minimum  of 75% of the  equipment
acquired  with the net  proceeds  of the  offering  to lessees  which (i) had an
aggregate credit rating by Moody's Investor  Service,  Inc. of Baa or better, or
the credit equivalent as determined by the General Partners,  with the aggregate
rating weighted to account for the original equipment cost for each item leased;
or  (ii)  were   established   hospitals  with  histories  of  profitability  or
municipalities.  The balance of the original  equipment  portfolio could include
equipment leased to lessees which,  although deemed  creditworthy by the General
Partners,  would  not  satisfy  the  general  credit  rating  criteria  for  the
portfolio.  At December 31, 1998, in excess of 75% of the equipment acquired had
been leased to lessees  with an aggregate  credit  rating of Baa or better or to
such hospitals or municipalities.


<PAGE>

The General  Partners will seek to limit the amount invested in equipment to any
single lessee to not more than 25% of the aggregate  purchase price of equipment
owned at any time  during  the  reinvestment  period.  During  1998,  one lessee
accounted for 25% of the Partnership's lease revenues.  During 1997, two lessees
accounted for 16% and 15% of the Partnership's lease revenues.

The equipment leasing industry is highly competitive.  Equipment  manufacturers,
corporations, partnerships and others offer users an alternative to the purchase
of most types of equipment with payment terms which vary widely depending on the
lease term and type of  equipment.  The ability of the  Partnership  to keep the
equipment leased and/or operating and the terms of the acquisitions,  leases and
dispositions  of equipment  depend on various  factors (many of which are not in
the  control  of the  General  Partners  or the  Partnership),  such as  general
economic  conditions,  including  the effects of  inflation  or  recession,  and
fluctuations in supply and demand for various types of equipment resulting from,
among other things, technological and economic obsolescence.

The business of the Partnership is not seasonal.

The Partnership has no full time employees.


Equipment Dispositions:

Through December 31, 1998, the Partnership has disposed of certain leased assets
as set forth below:

<TABLE>
<CAPTION>
                                                                               Excess of
       Type of                    Original Equipment Cost,                    Rents Over
      Equipment                  Excluding Acquisition Fees  Sale Price       Expenses *

<S>                              <C>                          <C>              <C>         
Transportation                   $ 12,994,117                 $ 8,334,481      $ 13,439,654
Other                              10,028,731                   8,084,720         8,207,275
Mining                              9,538,330                   5,490,272         6,368,299
Earth moving                        8,455,362                   3,446,574         9,351,635
Point-of-sale                       6,358,094                   3,775,309         5,947,266
Food processing                     6,014,685                   2,406,813         6,061,124
Manufacturing                       5,861,028                   2,091,477         6,543,232
Materials handling                  5,251,534                   1,618,637         5,772,355
Furniture & fixtures                3,195,613                   1,366,326         2,375,001
Commercial aircraft                 2,322,136                   1,656,694           226,541
                               ---------------             ---------------  ----------------
                                 $ 70,019,630                 $38,271,304      $ 64,292,382
                               ===============             ===============  ================
</TABLE>

* Includes only those expenses directly related to the production of the related
rents.


<PAGE>

Equipment Leasing Activities:

The Partnership has acquired a diversified portfolio of equipment. The equipment
has been leased to lessees in various industries. The following tables set forth
the types of equipment acquired by the Partnership through December 31, 1998 and
the industries to which the assets have been leased.

<TABLE>
<CAPTION>
                                        Purchase price excluding  Percentage of total
         Asset types                        acquisition fees         acquisitions
         -----------                        ----------------         ------------
<S>                                               <C>                          <C>   
Earth moving                                      $24,102,343                  24.19%
Mining                                             10,018,844                  10.06%
Over-the-road tractors and trailers                 9,009,547                   9.04%
Other                                               8,342,298                   8.37%
Aircraft                                            7,571,020                   7.60%
Material handling                                   7,355,483                   7.38%
Point-of-sale                                       6,343,897                   6.37%
Food processing                                     5,947,041                   5.97%
Furniture, fixtures and equipment                   4,874,797                   4.89%
Utility                                             4,854,844                   4.87%
Chemicals manufacturing                             4,504,918                   4.52%
Printing                                            3,756,764                   3.77%
Medical                                             2,155,489                   2.16%
Railroad locomotives                                  792,657                   0.81%
                                               ---------------        ----------------
                                                  $99,629,942                 100.00%
                                               ===============        ================
</TABLE>

<TABLE>
<CAPTION>
                                        Purchase price excluding  Percentage of total
  Industry of lessee                        acquisition fees         acquisitions
  ------------------                        ----------------         ------------
<S>                                               <C>                          <C>   
Mining, coal                                      $30,687,214                  30.80%
Foods & food processing                             9,321,102                   9.36%
Manufacturing of auto/truck parts                   7,455,451                   7.48%
Retail, general                                     6,834,152                   6.86%
Utilities                                           5,696,857                   5.72%
Manufacturing, medical instruments                  5,275,000                   5.29%
Manufacturing, other                                5,095,798                   5.11%
Transportation, trucking                            4,896,425                   4.91%
Chemicals                                           4,384,918                   4.40%
Printing                                            3,756,764                   3.77%
Insurance                                           2,833,575                   2.84%
Mining, metals                                      2,591,961                   2.60%
Transportation, commercial air                      2,296,020                   2.30%
Medical                                             2,155,489                   2.16%
Retail, foods                                       2,112,747                   2.12%
Retail, apparel                                     2,041,222                   2.05%
Oil & gas                                             874,180                   0.88%
Transportation, rail                                  792,657                   0.80%
Primary metals                                        408,410                   0.41%
Electronics                                           120,000                   0.14%
                                               ---------------        ----------------
                                                  $99,629,942                 100.00%
                                               ===============        ================
</TABLE>

For further information regarding the Partnership's equipment lease portfolio as
of December 31, 1998,  see Note 3 to the financial  statements,  Investments  in
equipment  and  leases,   set  forth  in  Item  8,   Financial   Statements  and
Supplementary Data.



<PAGE>

Item 2.  PROPERTIES

The  Partnership  does not own or lease any real  property,  plant or materially
important  physical  properties  other than the equipment  held for lease as set
forth in Item 1.


Item 3.  LEGAL PROCEEDINGS

No material legal  proceedings are currently  pending against the Partnership or
against any of its assets.


Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Inapplicable.


                                     PART II

Item 5.  MARKET FOR REGISTRANT'S LIMITED PARTNERSHIP UNITS
              AND RELATED MATTERS

Market Information

The Units are transferable  subject to restrictions on transfers which have been
imposed  under the  securities  laws of certain  states  and by the  Partnership
Agreement.  However,  as  a  result  of  such  restrictions,  the  size  of  the
Partnership and its investment  objectives,  to the General Partners' knowledge,
no established  public secondary trading market has developed and it is unlikely
that a public trading market will develop in the future.

Holders

As of December 31, 1998, a total of 5,075 investors were record holders of Units
in the Partnership.

Dividends

The Limited Partners of the Partnership are entitled to certain distributions as
provided under the Limited Partnership Agreement.

The General  Partners shall have sole  discretion in  determining  the amount of
distributions; provided, however, that the General Partners will not reinvest in
equipment,  but will  distribute,  subject to payment of any  obligations of the
Partnership,  such  available  cash  from  operations  and  cash  from  sales or
refinancing  as may be  necessary  to cause total  distributions  to the Limited
Partners  for each year during the  reinvestment  period to equal the  following
amounts per unit:  $1.20 in 1993; $1.30 in 1994 and 1995; $1.40 in 1996 and 1997
and $1.50 in 1998 and 1999. The reinvestment period ends December 31, 1999.

The rates for monthly distributions from 1998 operations were $.125 per Unit for
monthly  distributions  made from February  through December 1998 and in January
1999. The rates for quarterly distributions made in April, July and October 1998
and in January  1999 were  $.375 per Unit.  Total  distributions  were $1.50 per
Unit.  Distributions  were from cash flows from operations and sales proceeds in
1998.

The rates for monthly  distributions  from 1997 operations were $.08333 per Unit
for  monthly  distributions  made from  February  through  December  1997 and in
January 1998.  The rates for  quarterly  distributions  made in April,  July and
October 1997 and in January 1998 were $.25 per Unit.  Total  distributions  were
$1.00 per Unit.  Distributions  were from cash flows from  operations  and sales
proceeds in 1997.


<PAGE>

The following table presents summarized  information regarding  distributions to
Limited Partners:

<TABLE>
<CAPTION>
                                                    1998             1997             1996             1995             1994
                                                    ----             ----             ----             ----             ----
<S>                                                    <C>              <C>               <C>              <C>              <C>   
Distributions of net income                            $ 0.98           $ 0.58            $ 0.38           $ 0.27           $ 0.23
Return of investment                                     0.44             0.45              0.87             1.13             1.15
                                               ---------------  --------------- ----------------- ---------------- ----------------
Distributions per unit                                   1.42             1.03              1.25             1.40             1.38
Differences due to timing of distributions               0.08            (0.03)            (0.03)               -             0.02
                                               ---------------  --------------- ----------------- ---------------- ----------------
Nominal distribution rates from above                  $ 1.50           $ 1.00            $ 1.22           $ 1.40           $ 1.40
                                               ===============  =============== ================= ================ ================
</TABLE>

Limited Partners may elect to receive  distributions on a monthly basis.  Owners
of 2,000 or more units may make the election without charge. Owners of less than
2,000 units may make the election upon payment of a $20.00 annual fee.


Item 6.  SELECTED FINANCIAL DATA

The following table presents selected  financial data of the Partnership for the
years ended December 31, 1998,  1997,  1996, 1995, and 1994. This financial data
should be read in  conjunction  with the financial  statements and related notes
included under Item 8 of this report.

<TABLE>
<CAPTION>
                                                    1998             1997             1996             1995             1994
                                                    ----             ----             ----             ----             ----
<S>                                               <C>              <C>              <C>              <C>               <C>        
Gross Revenues                                    $11,007,336      $10,433,457      $ 11,709,770     $ 14,332,795      $14,368,274
Net income                                        $ 7,293,197      $ 4,334,639       $ 2,851,478      $ 2,032,662      $ 1,688,646
Weighted average Units outstanding                  7,376,201        7,376,934         7,376,934        7,378,884        7,379,447
Net income per Unit, based on
   weighted average Units outstanding                  $ 0.98           $ 0.58            $ 0.38           $ 0.27           $ 0.23
Distributions per Unit, based on
   weighted average Units outstanding                  $ 1.42           $ 1.03            $ 1.25           $ 1.40           $ 1.38
Total Assets                                      $17,582,514      $22,727,752      $ 29,791,041     $ 41,900,878      $54,727,541
Non-recourse Debt                                   $ 413,707      $ 2,497,392       $ 6,068,326     $ 11,451,641      $15,675,776
Total Partners' Capital                           $16,630,778      $19,797,739      $ 23,081,480     $ 29,451,915      $37,757,442
</TABLE>

In 1997 and 1996, distributions to Limited Partners were not sufficient to allow
the Partnership to reinvest in additional equipment.


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


Capital Resources and Liquidity

The  liquidity of the  Partnership  will vary in the future,  increasing  to the
extent cash flows from leases and proceeds from asset sales exceed expenses, and
decreasing  as lease  assets  are  acquired,  as  distributions  are made to the
Limited  Partners and to the extent  expenses  exceed cash flows from leases and
proceeds from asset sales.
<PAGE>

As another source of liquidity, the Partnership has contractual obligations with
a diversified group of lessees for fixed lease terms at fixed rental amounts. As
the  initial  lease  terms  expire the  Partnership  will  re-lease  or sell the
equipment.  The future  liquidity  beyond the  contractual  minimum rentals will
depend on the General  Partners'  success in re-leasing or selling the equipment
as it comes off lease.

The  Partnership  participates  with the  General  Partner  and  certain  of its
affiliates  in  a  $90,000,000   revolving  line  of  credit  with  a  financial
institution  that  includes  certain  financial  covenants.  The line of  credit
expires on January 31,  2000.  As of December  31, 1998 the  Partnership  had no
borrowings  under  this  line of  credit  and  the  remaining  availability  was
$13,070,344.

At December 31, 1998,  there were no  commitments to purchase  additional  lease
assets.

As of December 31, 1998, cash balances  consisted of working capital and amounts
reserved for distributions in 1999.

The Partnership  currently has available adequate reserves to meet its immediate
cash requirements,  but in the event those reserves were found to be inadequate,
the  Partnership  would  likely be in a position  to borrow  against its current
portfolio  to meet such  requirements.  The  General  Partners  envision no such
requirements for operating purposes.

Through   December  31,  1998,  the  Partnership   had  borrowed   approximately
$32,425,000.  The remaining  unpaid  balance of such  borrowings at December 31,
1998 was $413,707. The borrowings are non-recourse to the Partnership.  As such,
the only  recourse  the lender has is to the  equipment or  corresponding  lease
acquired with the loan proceeds.  Through  December 31, 1998, debt proceeds were
approximately   40%  of  the  aggregate  cost  of  equipment   acquired  by  the
Partnership.  The Limited Partnership  Agreement limits the amount of additional
debt that the  Partnership  may incur at any point in time. The  Partnership may
only incur  additional debt to the extent that the then  outstanding  balance of
all such  debt,  including  the  additional  debt,  does not  exceed  40% of the
original cost of the lease assets then owned by the  Partnership,  including any
such assets purchased with the proceeds of such additional debt.

The  Partnership  commenced  regular  distributions,  based on cash  flows  from
operations, beginning with the second quarter of 1990. See Items 5 and 6 of this
report for additional information regarding the distributions.

If  inflation  in the general  economy  becomes  significant,  it may affect the
Partnership  inasmuch as the residual  (resale) values and rates on re-leases of
the  Partnership's  leased  assets may  increase as the costs of similar  assets
increase.  However,  the  Partnership's  revenues from existing leases would not
increase,  as such rates are generally fixed for the terms of the leases without
adjustment for inflation.

If interest rates increase  significantly,  the lease rates that the Partnership
can obtain on future  leases will be expected to increase as the cost of capital
is a significant  factor in the pricing of lease  financing.  Leases  already in
place, for the most part, would not be affected by changes in interest rates.

A number of the Partnership's leases are scheduled to terminate in 1999. If they
are  terminated  as  scheduled,  gross  lease  rents from  operating  leases are
expected to  decrease  by  $3,078,882  (from  $4,027,337  in 1998 to $948,455 in
1999).  Depreciation  expense  related to operating  leases is also  expected to
decrease.  Cash flows from direct  financing  leases are expected to decrease by
approximately $761,175 (from $1,307,820 in 1998 to $546,645 in 1999).
<PAGE>

The General  Partners plan that the Partnership  will sell its remaining  assets
during 1999 and that it will cease  operations by December 31, 1999. These plans
will only be carried out to the extent that economic conditions are favorable to
the  Partnership  and  only if the  General  Partners  deem it to be in the best
interest of the Limited Partners to do so.

Cash Flows

Cash flows from operations decreased by approximately $2,582,000.  This decrease
resulted  primarily from decreased  operating lease rents ($3,088,794) which was
partially offset by decreased interest expense ($192,433). Operating lease rents
remain the Partnership's most significant source of operating cash flows.

Cash flows from investing  activities decreased by approximately  $687,000.  The
primary  sources of cash from  investing  activities  are proceeds from sales of
assets and rents from direct  financing  leases.  Sales  proceeds  decreased  by
approximately $602,000.  Direct financing lease rents decreased by approximately
$26,000 compared to 1997.

There  were  no  financing  sources  of cash in  1998  or  1997.  Repayments  of
non-recourse  debt  decreased  due to  scheduled  debt  payments.  Cash used for
distributions to Limited  Partners  increased as a result of the increase of the
per Unit rate of distributions from $1.00 in 1997 to $1.50 in 1998.

Results of Operations

As of December 31,  1998,  11%,  19% and 15% of the  Partnership's  lease assets
(based on equipment  cost) were leased to lessees in the  electrical/electronics
manufacturing, utilities and mining industries, respectively. Leases are subject
to the General  Partners'  credit committee  review.  The leases provide for the
return of the equipment upon default.  The  concentration  of the  Partnership's
assets  in  these  industries  is not  known  to  have  had  any  effect  on the
Partnership's results of operations nor is there any known trend regarding these
industries that would effect its operations in future periods.

Net income increased from $7,293,197 in 1998 to $4,334,639 in 1997. The increase
resulted  from a number  of  factors.  Gains on sales  of  assets  increased  by
$3,336,924.  Operating lease rents decreased by $3,088,794, but this was largely
offset by a decrease in  depreciation  expense  ($2,002,989)  on operating lease
assets.

The most significant change in expenses,  other than depreciation  expense,  was
the reduction in interest expense  ($192,433).  Interest expense declined due to
scheduled debt payments.

Management  fees have  decreased  by  $20,355.  This  decrease is related to the
decrease in lease  revenues  and to the decrease in  distributions  of cash from
operations to the limited partners.


Impact of the Year 2000

The year 2000 issue is the result of certain  computer  programs  being  written
using two digits  rather than four to define the  applicable  year. As a result,
these  programs are not designed to make the  transition to the year 2000.  This
computer  software problem is commonly referred to as the "year 2000" (or "Y2K")
issue. Computer programs with date-sensitive  applications may, if not modified,
fail or miscalculate  dates,  causing system failures,  the inability to process
transactions or other disruptions of operations.
<PAGE>

ATEL uses, and on behalf of the Partnership uses, primarily third party software
and is  communicating  with key software vendors to ensure that the systems used
by General  Partner and the Partnership are not impacted by the year 2000 issue.
Currently,  all of ATEL's critical  software  systems are believed by ATEL to be
Y2K  compliant  except one.  Compliance  of this final  system is expected to be
obtained in the first half of 1999. Based on discussions with ATEL's third party
software  vendor,  ATEL believes that any cost to be incurred by the Partnership
to bring this system into  compliance  will not be material.  ATEL's third party
software  vendor for the system in question  has  indicated  that it expects the
cost of compliance to be included in the annual upgrade and maintenance cost for
the  software  system,  and that the  total  incremental  amount of such cost is
expected to be minimal.  Any such cost would be  allocated  by ATEL over the six
public funds (including the Partnership)  under its management which use or will
use the software.  This  allocation  would be based on the relative size of each
such program and its proportionate  allocation of the expected minimal cost will
in itself be  minimal.  In no event will  offering  proceeds  be  required to be
committed to any such  expenditure.  If any cost is incurred by the Partnership,
it would be an operating expense funded out of operating revenues.

The ultimate impact of the year 2000 issue on the  Partnership  will depend to a
great extent on the manner in which the issue is  addressed by those  businesses
whose operational  capability is important to the Partnership.  Failure of these
businesses to be Y2K  compliant  may impact  credit  quality or cause a delay in
payments made to the Partnership. ATEL has contacted those businesses with which
the  Partnership  currently  has  material  relationships  in order  to  request
verification of Y2K  compliance.  ATEL believes that each of those entities will
have a material self interest in resolving any year 2000 issue affecting its own
operations.

Equipment  purchased by the  Partnership may include  technology  subject to the
year 2000  issue.  Potential  year 2000  issues  will be among the many  factors
considered   by  ATEL  and  its   affiliates  in  analyzing  and  pricing  lease
transactions  for acquisition by the  Partnership.  The lessees of the equipment
will select  such  equipment  and may be  expected to consider  year 2000 issues
themselves in determining the suitability of the equipment for the lessee's use.
Most equipment is subject to fixed term,  non-cancelable,  triple net leases. In
addition, new equipment may be covered by manufacturer's warranties. As a result
of such triple net provisions and warranties, repairs or modifications necessary
to  correct  year 2000  issues  will most  likely be the  responsibility  of the
manufacturers or the lessees,  and the Partnership's rights to lease payments as
a triple net lessor will not be affected by any functional  issues affecting the
equipment.  It is expected that the lease terms for such  equipment  will extend
well beyond the year 2000.

As a result of the year 2000 issue,  the  Partnership  may experience  increased
costs resulting from delayed  payments from lessees,  the costs  associated with
the collection of those payments,  or costs  associated  with manual  processing
efforts in the event of a Y2K related system  failure.  In any event,  ATEL does
not expect these  increased costs to be significant or that such costs will have
any material adverse effect on the operations of the Partnership.  Nevertheless,
the  impact of year 2000  issues  cannot be  predicted  with  certainty  and the
Partnership may be affected both by the impact these issues have on parties with
which it has  direct  contractual  and other  relationships  as well as by their
impact on financial institutions and the national and international economy as a
whole.  Accordingly,  there can be no assurance  that year 2000 issues might not
have  some  adverse  impact  on  the  operating   results   experienced  by  the
Partnership.




<PAGE>

Item 7a.  QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

The Partnership,  like most other companies, is exposed to certain market risks,
including  primarily  changes in interest rates.  The  Partnership  believes its
exposure to other market risks including  foreign  currency  exchange rate risk,
commodity  risk and equity price risk are  insignificant  to both its  financial
position and results of operations.

In  general,  the  Partnership  manages its  exposure  to interest  rate risk by
obtaining fixed rate debt which is coterminous with the Partnership's fixed rate
lease  receivables.  Furthermore,  the Partnership has historically been able to
maintain  a stable  spread  between  its cost of funds and lease  yields in both
periods of rising and falling rates.  Nevertheless,  the Partnership  frequently
funds leases with its floating  rate line of credit and is therefore  exposed to
interest  rate risk until fixed rate  financing is arranged.  As of December 31,
1998, the Partnership  had no outstanding  balances on the floating rate line of
credit.

To hedge its interest rate risk related to any  outstanding  variable rate debt,
the  Partnership may enter into interest rate swaps. As of December 31, 1998, no
swaps or other  derivative  financial  instruments were held by the Partnership.
The  Partnership  does not hold or issue  derivative  financial  instruments for
speculative purposes.


Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See the  Report  of  Independent  Auditors,  Financial  Statements  and Notes to
Financial Statements attached hereto at pages 10 through 22.

<PAGE>

                         REPORT OF INDEPENDENT AUDITORS






The Partners
ATEL Cash Distribution Fund III, L.P.


We have audited the accompanying  balance sheet of ATEL Cash  Distribution  Fund
III, L.P. as of December 31, 1998, and the related statements of income, changes
in  partners'  capital  and cash  flows for each of the two years in the  period
ended December 31, 1998. These financial  statements are the  responsibility  of
the  Partnership's  management.  Our  responsibility is to express an opinion on
these financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of ATEL Cash  Distribution Fund
III, L.P. at December 31, 1998,  and the results of its  operations and its cash
flows  for each of the two years in the  period  ended  December  31,  1998,  in
conformity with generally accepted accounting principles.






                                                              ERNST & YOUNG LLP
San Francisco, California
January 25, 1999

<PAGE>

                      ATEL CASH DISTRIBUTION FUND III, L.P.

                                  BALANCE SHEET

                                DECEMBER 31, 1998


                                     ASSETS


Cash and cash equivalents                                        $11,294,942

Accounts receivable                                                   66,029

Investments in equipment and leases                                6,221,543
                                                             ----------------
Total assets                                                     $17,582,514
                                                             ================


                        LIABILITIES AND PARTNERS' CAPITAL



Non-recourse debt                                                  $ 413,707

Accrued interest                                                       1,363

Accounts payable:
     General Partner                                                 339,374
     Other                                                           144,165

Unearned operating lease income                                       53,127
                                                             ----------------
Total liabilities                                                    951,736

Partners' capital:
     General Partners                                                242,543
     Limited Partners                                             16,388,235
                                                             ----------------
Total partners' capital                                           16,630,778
                                                             ----------------
Total liabilities and partners' capital                          $17,582,514
                                                             ================

                             See accompanying notes.


<PAGE>

                      ATEL CASH DISTRIBUTION FUND III, L.P.

                              STATEMENTS OF INCOME

                     YEARS ENDED DECEMBER 31, 1998 AND 1997


<TABLE>
<CAPTION>
                                                               1998             1997
                                                               ----             ----
Revenues:
Leasing activities:
<S>                                                           <C>              <C>        
     Operating leases                                         $ 4,027,337      $ 7,116,131
     Direct financing leases                                      345,081          286,103
     Leveraged leases                                              18,573           28,225
     Gain on sales of equipment                                 6,160,019        2,823,095
Other                                                              57,089            4,385
Interest income                                                   399,237          175,518
                                                          ---------------- ----------------
                                                               11,007,336       10,433,457
                                                          ---------------- ----------------

Expenses:
Depreciation                                                    2,557,024        4,560,013
Equipment and incentive management fees to General Partner        640,419          660,774
Interest expense                                                  126,982          319,415
Administrative cost reimbursements to General Partner             235,984          248,250
Other                                                             110,675          174,046
Provision for losses and impairments                               17,173          104,335
Professional fees                                                  25,882           31,985
                                                          ---------------- ----------------
                                                                3,714,139        6,098,818
                                                          ---------------- ----------------
Net income                                                    $ 7,293,197      $ 4,334,639
                                                          ================ ================

Net income:
     General Partners                                            $ 72,932         $ 43,346
     Limited Partners                                           7,220,265        4,291,293
                                                          ---------------- ----------------
                                                              $ 7,293,197      $ 4,334,639
                                                          ================ ================

Net income per Limited Partnership unit                            $ 0.98           $ 0.58

Weighted average number of units outstanding                    7,376,201        7,376,284
</TABLE>



                             See accompanying notes.

<PAGE>

                      ATEL CASH DISTRIBUTION FUND III, L.P.

                    STATEMENT OF CHANGES IN PARTNERS' CAPITAL

                     YEARS ENDED DECEMBER 31, 1998 AND 1997


<TABLE>
<CAPTION>
                                                                        Limited Partners              General
                                                                    Units            Amount          Partners           Total
<S>                                                                  <C>            <C>                 <C>            <C>        
Balance December 31, 1996                                            7,376,284      $ 22,955,215        $ 126,265      $23,081,480
Distributions to limited partners ($1.03  per Unit)                                   (7,618,380)                       (7,618,380)
Net income                                                                             4,291,293           43,346        4,334,639
                                                                --------------- ----------------- ---------------- ----------------
Balance December 31, 1997                                            7,376,284        19,628,128          169,611       19,797,739
Distributions to limited partners ($1.42  per Unit)                                  (10,457,123)               -      (10,457,123)
Repurchase of Limited Partnership Units                                 (1,000)           (3,035)                           (3,035)
Net income                                                                             7,220,265           72,932        7,293,197
                                                                --------------- ----------------- ---------------- ----------------
Balance December 31, 1998                                            7,375,284      $ 16,388,235        $ 242,543      $16,630,778
                                                                =============== ================= ================ ================
</TABLE>







                             See accompanying notes.



<PAGE>

                      ATEL CASH DISTRIBUTION FUND III, L.P.

                            STATEMENTS OF CASH FLOWS

                     YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
Operating activities:                                                                 1998             1997
                                                                                      ----             ----
<S>                                                                                  <C>              <C>        
Net income                                                                           $ 7,293,197      $ 4,334,639
  Adjustment  to  reconcile  net  income  to  net  cash  provided  by  operating
   activities:
     Depreciation                                                                      2,557,024        4,560,013
     Gain on sales of equipment                                                       (6,160,019)      (2,823,095)
     Income from investment in leveraged leases                                          (18,573)         (28,225)
     Provision for losses and impairments                                                 17,173          104,335
     Changes in operating assets and liabilities:
        Accounts receivable                                                              159,006          596,445
        Accounts payable, General Partner                                                266,835          (35,050)
        Accounts payable, other                                                          (49,626)         (65,651)
        Accrued interest                                                                 (10,479)         (48,320)
        Unearned operating lease income                                                 (101,322)         (59,593)
                                                                                 ---------------------------------
Net cash provided by operating activities                                              3,953,216        6,535,498

Investing activities:
Proceeds from sales of lease assets                                                    9,580,103       10,182,310
Reductions of net investment in direct financing leases                                  962,739        1,047,681
                                                                                 ---------------- ----------------
Net cash provided by investing activities                                             10,542,842       11,229,991

Financing activities:
Distributions to limited partners                                                    (10,457,123)      (7,618,380)
Repayments of non-recourse debt                                                       (2,083,685)      (3,570,934)
Repurchase of limited partnership units                                                   (3,035)               -
                                                                                 ---------------- ----------------
Net cash used in financing activities                                                (12,543,843)     (11,189,314)
                                                                                 ---------------- ----------------

Net increase in cash and cash equivalents                                              1,952,215        6,576,175
Cash and cash equivalents at beginning of period                                       9,342,727        2,766,552
                                                                                 ---------------- ----------------
Cash and cash equivalents at end of period                                          $ 11,294,942      $ 9,342,727
                                                                                 ================ ================


Supplemental disclosures of cash flow information:

Cash paid during the year for interest                                                 $ 137,461        $ 367,735
                                                                                 ================ ================
</TABLE>



                             See accompanying notes.


<PAGE>

                      ATEL CASH DISTRIBUTION FUND III, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


1.  Organization and partnership matters:

ATEL Cash  Distribution Fund III, L.P. (the  Partnership),  was formed under the
laws of the State of California in September  1989, for the purpose of acquiring
equipment to engage in equipment leasing and sales activities.  Contributions in
the  amount  of $600  were  received  as of  September  7,  1989,  $100 of which
represented  the  General  Partners'  continuing  interest,  and  $500 of  which
represented the Initial Limited Partners' capital investment.

Upon the sale of the  minimum  amount of Units of Limited  Partnership  Interest
(Units) of $1,200,000 and the receipt of the proceeds  thereof on March 1, 1990,
the Partnership commenced operations.

The General Partners of the Partnership are ATEL Financial Corporation (ATEL), a
California  corporation and two individuals,  who are principals of ATEL Capital
Group, the parent of ATEL.

The Partnership's business consists of leasing various types of equipment. As of
December 31, 1998,  the original  terms of the leases  ranged from six months to
eight years and nine months.

Pursuant to the Limited  Partnership  Agreement,  the General  Partners  receive
compensation  and   reimbursements  for  services  rendered  on  behalf  of  the
Partnership  (Note 5). The  General  Partners  are  required  to maintain in the
Partnership  reasonable  cash reserves for working  capital,  the  repurchase of
Units and contingencies.


2. Summary of significant accounting policies:

Equipment on operating leases:

Equipment on operating leases is stated at cost.  Depreciation is being provided
by use of the  straight-line  method over the terms of the related leases to the
equipment's estimated residual values at the end of the leases.

Revenues  from  operating  leases  are  recognized  evenly  over the life of the
related leases.

Direct financing leases:

Income from direct  financing  lease  transactions  is reported on the financing
method  of  accounting,  in which the  Partnership's  investment  in the  leased
property is reported as a  receivable  from the lessee to be  recovered  through
future  rentals and the  realization of residual  values.  The income portion of
each rental payment is calculated so as to generate a constant rate of return on
the net receivable outstanding.

Investment in leveraged leases:

Leases which are financed  principally with non-recourse debt at lease inception
and which meet certain other  criteria are  accounted  for as leveraged  leases.
Leveraged lease contracts  receivable are stated net of the related non-recourse
debt service (which  includes  unpaid  principal and aggregate  interest on such
debt) plus estimated  residual values.  Unearned income represents the excess of
anticipated  cash flows (after  taking into account the related debt service and
residual  values)  over the  investment  in the lease and is  amortized  using a
constant rate of return  applied to the net investment  when such  investment is
positive.




<PAGE>

                      ATEL CASH DISTRIBUTION FUND III, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


2. Summary of significant accounting policies (continued):

Statements of cash flows:

For purposes of the Statements of Cash Flows, cash and cash equivalents includes
cash in banks and cash equivalent investments with original maturities of ninety
days or less.

Income taxes:

The  Partnership  does not provide for income  taxes since all income and losses
are the liability of the  individual  partners and are allocated to the partners
for inclusion in their individual tax returns.

The tax basis of the  Partnership's  net assets and liabilities  varies from the
amounts presented in these financial statements are as follows (unaudited):

Financial statement basis of net assets              $ 16,630,778
Tax basis of net assets                                23,359,900
                                                  ----------------
Difference                                            $ 6,729,122
                                                  ================

The  primary  differences  between  the tax basis of net assets and the  amounts
recorded in the financial  statements are the accounting for  syndication  costs
and  differences  between  the  depreciation   methods  used  in  the  financial
statements and the Partnership's tax returns.

The following  reconciles the net income reported in these financial  statements
to the income reported on the Partnership's federal tax return (unaudited):

                                          1998             1997
                                          ----             ----
Net income per financial statements      $ 7,293,197      $ 4,334,639
Adjustment to depreciation expense           503,382          342,622
Adjustments to revenues                    2,743,103        5,624,921
Provision for losses and impairments          17,173          104,335
                                    ----------------- ----------------
Net income per federal tax return       $ 10,556,855     $ 10,406,517
                                    ================= ================

Credit Risk:

Financial   instruments   which   potentially   subject   the   Partnership   to
concentrations  of credit risk  include cash and cash  equivalents  and accounts
receivable.  The  Partnership  places  its  cash  deposits  and  temporary  cash
investments  with  creditworthy,   high  quality  financial  institutions.   The
concentration  of such deposits and temporary cash  investments is not deemed to
create a significant  risk to the  Partnership.  Accounts  receivable  represent
amounts  due from  lessees  in  various  industries,  related  to  equipment  on
operating and direct financing  leases.  See Note 7 for a description of lessees
by industry as of December 31, 1998 and 1997.

Use of estimates:

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual  results  could differ from those  estimates.  Such  estimates  primarily
relate to the determination of residual values at the end of the lease term.

Per unit data:

Net income and distributions per unit are based upon the weighted average number
of units outstanding during the period.


<PAGE>

                     ATEL CASH DISTRIBUTION FUND III, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


Reserve for losses and impairments:

The  Partnership  maintains a reserve on its investments in equipment and leases
for losses and impairments which are inherent in the portfolio as of the balance
sheet date. The General Partner's evaluation of the adequacy of the allowance is
a judgmental  estimate that is based on a review of individual leases, past loss
experience and other factors.  While the General Partner  believes the allowance
is adequate to cover known losses, it is reasonably  possible that the allowance
may change in the near term.  However,  such  change is not  expected  to have a
material  effect on the financial  position or future  operating  results of the
Partnership.  It is the Partnership's policy to charge off amounts which, in the
opinion  of the  General  Partner,  are  not  recoverable  from  lessees  or the
disposition of the collateral.


3. Investments in equipment and leases:

As of December 31, 1998, the  Partnership's  investments in equipment and leases
consist of the following:
<TABLE>
<CAPTION>

                                                                                  Depreciation
                                                                                   Expense or        Reclass-
                                                                                     Lease         ifications or
                                                    1997          Additions       Amortization     Dispositions         1998
                                                    ----          ---------       ------------    --------------        ----
<S>                                               <C>                <C>            <C>              <C>                <C>       
Net investment in operating leases                $11,267,650                       $ (2,557,024)    $ (3,749,525)      $4,961,101
Net investment in direct financing leases           2,379,596                           (962,739)        (302,234)       1,114,623
Net investment in leveraged leases                    126,371                             18,573                -          144,944
Assets held for lease or sale                               -                                  -          363,048          363,048
Reserve for losses and impairments                   (613,627)       $ (17,173)                -          268,627         (362,173)
                                               ---------------  --------------- ----------------- ---------------- ----------------
                                                  $13,159,990        $ (17,173)     $ (3,501,190)    $ (3,420,084)     $ 6,221,543
                                               ===============  =============== ================= ================ ================
</TABLE>

Operating leases:

Property on operating  lease  consists of the following as of December 31, 1997,
additions and dispositions during 1998 and as of December 31, 1998:

<TABLE>
<CAPTION>
                                Balance                           Reclass-          Balance
                              December 31,                      ifications or    December 31,
                                  1997          Additions       Dispositions         1998
                                  ----          ---------       ------------         ----
<S>                             <C>              <C>                <C>             <C>         
Manufacturing                   $ 4,881,231                       $ (1,263,231)     $ 3,618,000
Printing                          3,044,659                                  -        3,044,659
Utilities                         3,946,886                         (1,107,785)       2,839,101
Food processing                   2,438,524                                  -        2,438,524
Transportation                    3,760,326                         (1,546,111)       2,214,215
Mining                           12,690,592                        (10,518,612)       2,171,980
Medical                           2,155,489                                  -        2,155,489
Materials handling                  964,980                           (435,909)         529,071
Other                                65,695                                  -           65,695
Communications                      290,175                           (290,175)               -
                             --------------- ----------------- ---------------- ----------------
                                 34,238,557                        (15,161,823)      19,076,734
Less accumulated depreciation   (22,970,907)     $ (2,557,024)      11,412,298      (14,115,633)
                             --------------- ----------------- ---------------- ----------------
                                $11,267,650      $ (2,557,024)    $ (3,749,525)     $ 4,961,101
                             =============== ================= ================ ================
</TABLE>

Direct financing leases:

As of December 31,  1998,  investment  in direct  financing  leases  consists of
mining equipment,  turbine  generating units, and office furniture and fixtures.
The following  lists the  components of the  Partnership's  investment in direct
financing leases as of December 31, 1998.

Total minimum lease payments receivable                             $732,775
Estimated residual values of leased equipment (unguaranteed)         491,886
                                                            -----------------
Investment in direct financing leases                              1,224,661
Less unearned income                                                (110,038)
                                                            -----------------
Net investment in direct financing leases                         $1,114,623
                                                            =================

<PAGE>

                      ATEL CASH DISTRIBUTION FUND III, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


3.  Investments in equipment and leases (continued):

Direct financing leases (continued):

At December 31, 1998,  the aggregate  amounts of future  minimum lease  payments
under operating and direct financing leases are as follows:

          Year ending                         Direct
          December 31,     Operating        Financing          Total
                   1999       $ 948,455        $ 546,645       $ 1,495,100
                   2000         238,486          144,416           382,902
                   2001          59,415           23,836            83,251
                   2002               -           17,878            17,878
                         ---------------  --------------- -----------------
                            $ 1,246,356        $ 732,775       $ 1,979,131
                         ===============  =============== =================

Leveraged leases:

The Partnership  participates in leveraged lease transactions in which the costs
of assets  leased  to  others is  financed  primarily  by loans  from  financial
institutions,  but the  ownership of the assets is retained by the  Partnership.
The lessees' rental  obligations are assigned to the financial  institutions and
the  leased  property  is pledged as  collateral  for the loans and are  without
recourse to the general credit of the  Partnership.  Equipment  under  leveraged
leases consists of coal mining and processing  equipment.  The net investment in
leveraged leases at December 31, 1998 is as follows:

Aggregate rentals receivable                                          $ 78,004
Aggregate principal and interest payable on non-recourse loans         (76,937)
Estimated residual value of leased assets                              165,000
Less unearned income                                                   (21,123)
                                                              -----------------
Net investment in leveraged leases                                   $ 144,944
                                                              =================

Reserves for losses and impairments:

Activity in the reserve for losses and impairments consists of the following:

                        Balance 12/31/96            $ 509,292
                        Provision                     104,335
                                               ---------------
                        Balance 12/31/97              613,627
                        Provision                      17,173
                        Dispositions                 (268,627)
                                               ---------------
                        Balance 12/31/98            $ 362,173
                                               ===============



<PAGE>

                      ATEL CASH DISTRIBUTION FUND III, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


4.  Non-recourse debt:


At December 31, 1998,  non-recourse  debt,  other than that related to leveraged
leases  which is  accounted  for as a part of the net  investment  in  leveraged
leases,  consists of notes payable to financial  institutions  of $413,707.  The
notes are due in varying monthly,  quarterly and semi-annual payments.  Interest
on the notes is at rates from 7.66% to 11%. The notes are secured by assignments
of lease  payments and pledges of assets.  At December  31,  1998,  the carrying
value of the pledged assets is approximately $2,626,071.
The notes mature from 1999 through 2000.

Future minimum payments of non-recourse debt are as follows:

      Year ending
      December 31,     Principal         Interest          Total
               1999       $ 356,416         $ 22,120         $ 378,536
               2000          57,291            2,374            59,665
                     ---------------  --------------- -----------------
                          $ 413,707         $ 24,494         $ 438,201
                     ===============  =============== =================


5.  Related party transactions:

The terms of the Limited Partnership Agreement provide that the General Partners
and/or   Affiliates   are  entitled  to  receive   certain  fees  for  equipment
acquisition, management and resale and for management of the Partnership.

The  General   Partners   and/or   Affiliates   earned  fees,   commissions  and
reimbursements pursuant to the Limited Partnership Agreement as follows:

<TABLE>
<CAPTION>
                                                                                      1998             1997
                                                                                      ----             ----
Incentive  management  fees  (computed  as  5% of  distributions  of  cash  from
operations,  as defined in the  Limited  Partnership  Agreement)  and  equipment
management  fees  (computed as 5% of gross revenues from  operating  leases,  as
defined in the Limited Partnership Agreement plus 2% of gross revenues from full
payout leases, as defined in
<S>                                                                                    <C>              <C>      
the Limited Partnership Agreement).                                                    $ 640,419        $ 660,774

Administrative cost reimbursements to General Partner                                    235,984          248,250
                                                                                 ---------------- ----------------
                                                                                       $ 876,403        $ 909,024
                                                                                 ================ ================
</TABLE>

The Limited Partnership Agreement allows for the reimbursement of costs incurred
by ATEL in providing administrative services to the Partnership.  Administrative
services provided include  Partnership  accounting,  investor  relations,  legal
counsel  and lease  and  equipment  documentation.  ATEL is not  reimbursed  for
services where it is entitled to receive a separate fee as compensation for such
services,  such as acquisition and disposition of equipment.  Reimbursable costs
incurred  by ATEL are  allocated  to the  Partnership  based  upon  actual  time
incurred by employees working on Partnership  business and an allocation of rent
and other costs based on utilization studies.

Substantially   all  employees  of  ATEL  record  time  incurred  in  performing
administrative  services on behalf of all of the Partnerships  serviced by ATEL.
ATEL  believes  that the  costs  reimbursed  are the lower of (i)  actual  costs
incurred on behalf of the Partnership or (ii) the amount the  Partnership  would
be required to pay independent parties for comparable administrative services in
the same geographic location and are reimbursable in accordance with the Limited
Partnership Agreement.

<PAGE>

                      ATEL CASH DISTRIBUTION FUND III, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


6.  Partners' capital:

As of December 31, 1998, 7,375,284 Units were issued and outstanding  (including
the Units issued to the Initial Limited Partners.) The Partnership is authorized
to issue up to 7,500,000  Units of Limited  Partnership  Interest in addition to
the 50 Units issued to the Initial Limited Partners.

The Partnership Net Profits, Net Losses, and Tax Credits are to be allocated 99%
to the Limited Partners and 1% to the General Partners.

Available Cash from Operations and Cash from Sales and  Refinancing,  as defined
in the Limited Partnership Agreement, shall be distributed as follows:

     First, 5% of  Distributions of Cash from Operations to the General Partners
     as Incentive Management Compensation.

     Second, the balance to the Limited Partners until the Limited Partners have
     received  Aggregate  Distributions  in an  amount  equal to their  Original
     Invested Capital, as defined,  plus a 10% per annum cumulative  (compounded
     daily) return on their Adjusted Invested Capital.

     Third,   the  General   Partners  will  receive  as  Incentive   Management
Compensation, the following:

          (A)  10% of remaining Cash from Operations,

          (B) 15% of remaining Cash from Sales or Refinancing.

     Fourth, the balance to the Limited Partners.




<PAGE>

                      ATEL CASH DISTRIBUTION FUND III, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


7. Concentration of credit risk and major customers:

The Partnership  leases equipment to lessees in diversified  industries.  Leases
are subject to the General Partners' credit committee review. The leases provide
for the return of the equipment upon default.

As of December 31,  1998,  11%,  19% and 15% of the  Partnership's  lease assets
(based on equipment  cost) were leased to lessees in the  electrical/electronics
manufacturing, utilities and mining industries, respectively.

During 1998,  one customer  comprised  25% of the  Partnership's  revenues  from
leases.

During  1997,  two  customers  comprised  16%  and  15%,  respectively,  of  the
Partnership's revenues from leases.


8.  Line of credit:

The  Partnership  participates  with ATEL and  certain  of its  Affiliates  in a
$90,000,000  revolving credit  agreement with a group of financial  institutions
which  expires on January  31,  2000.  The  agreement  includes  an  acquisition
facility  to be  used  by the  Partnership  and  Affiliates  to  provide  bridge
financing  for  assets  on  leases.  Draws on the  acquisition  facility  by any
individual  borrower  are  secured  only by that  borrower's  assets,  including
equipment and related leases.  Borrowings on the warehouse facility are recourse
jointly to certain of the Affiliates, the Partnership and ATEL.

The Partnership had no borrowings under the agreement during 1998.

The credit agreement  includes certain  financial  covenants  applicable to each
borrower.  The  Partnership  was in compliance with its covenants as of December
31, 1998. At December 31, 1998, $13,070,344 was available under this agreement.



9. Fair value of financial instruments:

The following  methods and  assumptions  were used to estimate the fair value of
each class of financial  instrument for which it is practicable to estimate that
value.

Cash and cash equivalents:

The carrying amount of cash and cash equivalents approximates fair value because
of the short-term maturity of these instruments.

Non-recourse debt:

The  fair  value  of the  Partnership's  non-recourse  debt is  estimated  using
discounted cash flow analyses,  based on the Partnership's  current  incremental
borrowing rates for similar types of borrowing arrangements.  The estimated fair
value of the Partnership's non-recourse debt at December 31, 1998 is $409,867.


<PAGE>

Item 9.  CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON
           ACCOUNTING AND FINANCIAL DISCLOSURES

Inapplicable.


                                    PART III

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS

The  registrant  is a Limited  Partnership  and,  therefore,  has no officers or
directors.

All  of the  outstanding  capital  stock  of  ATEL  Financial  Corporation  (the
corporate  General  Partner) is held by ATEL Capital  Group  ("ACG"),  a holding
company formed to control the General Partner and affiliated  companies pursuant
to a corporate  restructuring  completed in July 1994. The  outstanding  capital
stock of ATEL Capital Group is owned 75% by A. J. Batt and 25% by Dean Cash (the
individual General Partners),  and was obtained in the restructuring in exchange
for their capital interests in ATEL Financial Corporation.

Each of ATEL Leasing Corporation  ("ALC"),  ATEL Equipment  Corporation ("AEC"),
ATEL  Investor  Services  ("AIS") and ATEL  Financial  Corporation  ("AFC") is a
wholly-owned  subsidiary  of ATEL Capital  Group and  performs  services for the
Partnership.  Acquisition  services are  performed for the  Partnership  by ALC,
equipment  management,  lease  administration and asset disposition services are
performed by AEC, investor relations and  communications  services are performed
by AIS and general administrative  services for the Partnership are performed by
AFC. ATEL Securities  Corporation ("ASC"), is a wholly-owned  subsidiary of ATEL
Financial Corporation.

The officers and directors of ATEL Capital Group, ATEL Financial Corporation and
their affiliates are as follows:

A. J. Batt . . . . . . . . . . Chairman.of the Board of Directors of ACG, AFC, 
                               ALC, AEC, AIS and ASC; President and Chief 
                               Executive Officer of ACG, AFC and AEC

Dean L. Cash . . . . . . . . . Director, Executive Vice President and Chief 
                               Operating Officer of ACG, AFC, and AEC; Director,
                               President and Chief Executive Officer of ALC, AIS
                               and ASC

Donald E. Carpenter . . . . . .Vice President and Controller of ACG, AFC, ALC, 
                               AEC and AIS; Chief Financial Officer of ASC

Vasco H. Morais . . . . . . . .Senior Vice.President, Secretary and General 
                               Counsel for ACG, AFC, ALC, AIS and AEC

William J. Bullock . . . . . . Director.of Asset Management of AEC 

Carl W. Magnuson . . . . . . . Vice.President - Syndication of ALC

Barbara F. Medwadowski . . . . Vice.President - Syndication of ALC

James A. Kamradt . . . . . . . Director of Pricing and Syndication of ALC

Thomas D. Sbordone . . . . . . Senior.Vice President - Marketing of ALC

Russell H. Wilder . . . . . . .Vice President - Credit of AEC 

John P. Scarcella . . . . . . .Vice President of ASC 


<PAGE>

A. J. Batt, age 62, founded ATEL in 1977 and has been its president and chairman
of the  board of  directors  since  its  inception.  From  1973 to 1977,  he was
employed by GATX  Leasing  Corporation  as  manager-data  processing  and equity
placement for the lease underwriting department, which was involved in equipment
financing  for  major  corporations.  From  1967 to 1973  Mr.  Batt was a senior
technical representative for General Electric Corporation, involved in sales and
support  services for computer  time-sharing  applications  for corporations and
financial  institutions.  Prior to that time, he was employed by North  American
Aviation as an  engineer  involved in the Apollo  project.  Mr. Batt  received a
B.Sc.  degree with honors in  mathematics  and physics  from the  University  of
British Columbia in 1961.

Dean L. Cash,  age 48, joined ATEL as director of marketing in 1980 and has been
a vice president since 1981,  executive vice president since 1983 and a director
since  1984.   Prior  to  joining  ATEL,   Mr.  Cash  was  a  senior   marketing
representative for Martin Marietta Corporation, data systems division, from 1979
to 1980.  From 1977 to 1979,  he was employed by General  Electric  Corporation,
where he was an applications  specialist in the medical  systems  division and a
marketing  representative in the information  services division.  Mr. Cash was a
systems  engineer  with  Electronic  Data  Systems  from  1975 to 1977,  and was
involved in maintaining and developing software for commercial applications. Mr.
Cash received a B.S.  degree in psychology and mathematics in 1972 and an M.B.A.
degree with a  concentration  in finance in 1975 from Florida State  University.
Mr. Cash is an arbitrator with the American Arbitration Association.

Donald E. Carpenter, age 50, joined ATEL in 1986 as controller. Prior to joining
ATEL, Mr. Carpenter was an audit supervisor with Laventhol & Horwath,  certified
public accountants in San Francisco, California, from 1983 to 1986. From 1979 to
1983,  Mr.  Carpenter  was an  audit  senior  with  Deloitte,  Haskins  & Sells,
certified public accountants,  in San Jose,  California.  From 1971 to 1975, Mr.
Carpenter was a Supply Corp officer in the U. S. Navy. Mr. Carpenter  received a
B.S. degree in mathematics  (magna cum laude) from California State  University,
Fresno in 1971 and completed a second major in accounting in 1978. Mr. Carpenter
has been a California certified public accountant since 1981.

Vasco H. Morais, age 40, joined ATEL in 1989 as general counsel to provide legal
support in the  drafting  and  reviewing  of lease  documentation,  advising  on
general corporate law matters, and assisting on securities law issues. From 1986
to 1989,  Mr.  Morais was  employed  by the  BankAmeriLease  Companies,  Bank of
America's  equipment leasing  subsidiaries,  providing in-house legal support on
the  documentation  of  tax-oriented  and non-tax  oriented direct and leveraged
lease transactions, vendor leasing programs and general corporate matters. Prior
to the BankAmeriLease  Companies,  Mr. Morais was with the Consolidated  Capital
Companies in the Corporate and Securities Legal Department  involved in drafting
and reviewing  contracts,  advising on corporate law matters and  securities law
issues.  Mr.  Morais  received  a B.A.  degree  in 1982 from the  University  of
California in Berkeley,  a J.D.  degree in 1986 from Golden Gate  University Law
School and an MBA (Finance) in 1997 from Golden Gate University.  Mr. Morais has
been an active member of the State Bar of California since 1986.

William J.  Bullock,  age 35,  joined  ATEL in 1991,  as the  director  of asset
management. He assumed responsibility for the disposition of off-lease equipment
and  residual  valuation  analysis on new lease  transactions.  Prior to joining
ATEL,  Mr.  Bullock  was a senior  member of the  equipment  group at  McDonnell
Douglas  Finance  Corporation  ("MDFC")  responsible for managing its $4 billion
portfolio of leases.  Mr. Bullock was involved in negotiating sales and renewals
as well as preparing and  inspecting  equipment.  Prior to joining MDFC in 1989,
Mr. Bullock was the Senior  Negotiator at Equitable  Leasing (a subsidiary of GE
Capital Equipment Corp.) in San Diego. At Equitable, he handled the end-of-lease
negotiations  and equipment  dispositions of a portfolio  comprised of equipment
leased primarily to Fortune 200 companies.  Mr. Bullock has been a member of the
Equipment Lessors  Association  ("ELA") since 1987 and has authored ELA industry
articles.  He  received a B.S.  degree in  Finance in 1987 from San Diego  State
University and is pursuing his M.B.A.


<PAGE>

Carl  W.  Magnuson,  age  55,  joined  ATEL in  1994  and is  Vice  President  -
Syndication for ALC. Mr. Magnuson is responsible for acquiring third party lease
transactions  and debt placement.  Prior to joining ATEL he was a Regional Group
Manager and Portfolio  Sales Manager for Bell  Atlantic  Systems  Leasing for 10
years.  From 1983 to 1984 he was Vice President and Chief  Financial  Officer of
the Handi-Kup  Company,  a plastics  manufacturer,  and from 1981 to 1982 he was
Controller for the Cyclotron  Corporation,  engaged in nuclear medicine research
and  development.  From 1978 to 1981 he was Executive  Vice President of Shannon
Financial Corporation, a middle market leasing corporation. From 1975 to 1978 he
was a Deputy Program Manager for the Watkins Johnson Company.  From 1968 to 1973
Mr.  Magnuson was an engineering  duty officer in the U. S. Navy.  Mr.  Magnuson
received a B.S. in Engineering  Science and an M.S. in Applied  Mathematics from
the Rensselaer Polytechnic Institute, an MS in Industrial Engineering/Operations
Research  from  Stanford  University,  and an  M.B.A.  from  the  University  of
California at Berkeley.

Barbara F.  Medwadowski,  age 59,  joined  ATEL in 1997 and is vice  president -
syndication  for ALC. Ms.  Medwadoski is responsible  for acquiring  third party
lease  transactions.  Prior to joining ATEL, she was a syndications  manager for
Mellon US Leasing  (successor to USL Capital and U.S.  Leasing  Corporation) for
nine  years.  From 1985 to 1987,  she was a vice  president  with Great  Western
Leasing where she acquired lease and loan transactions from intermediaries. From
1982 through 1984, she was a portfolio  manager with U.S.  Leasing  Corporation.
Ms. Medwadowski  received an M.B.A.  degree from the University of California at
Berkeley in 1982. From 1964 through 1979, she was a senior  researcher in lipids
and  lipoproteins  at the  University of California  at Berkeley.  In 1964,  she
earned  an  M.S.  degree  in  nutrition  and  in  1961 a B.S.  degree  in  child
development, each from the University of California at Berkeley

James A. Kamradt,  age 37,  Director of Pricing and  Syndication for ALC, joined
ATEL in 1997. Mr. Kamradt is involved in the pricing of lease  transactions  and
the placement of debt to leverage certain  transactions.  From 1985 to 1997, Mr.
Kamradt managed his own private consulting business,  providing underwriting and
operational services for numerous leasing companies.  Prior to that, Mr. Kamradt
was the National Operations Officer for the computer leasing division of Phoenix
American;  and Regional Credit Manager for Dana Commercial  Credit  Corporation.
Mr.  Kamradt  received  his  B.S.  from  Michigan   Technological   University's
Engineering  School of Business,  and his M.B.A. from Haas School of Business of
the University of California, Berkeley.

Thomas D.  Sbordone,  age 40, is Senior Vice  President - Marketing  for ALC. He
joined ATEL in 1993, as a regional  vice  president in the  northeastern  United
States.  Mr.  Sbordone is currently  responsible  for new  business  development
within the eastern  U.S.,  including  management  of filed sales  personnel  and
directly interfacing with ATEL's existing and prospective clients to achieve the
company's lease investment  objectives.  Prior to joining ATEL, Mr. Sbordone was
employed, from 1985, by American Finance Group, a Boston-based equipment lessor.
While there, Mr. Sbordone's various responsibilities  involved lease origination
of vendor finance  relationships.  Mr. Sbordone  earned a B.S., with honors,  in
finance and marketing from  Northeastern  University,  and has attended  Bentley
College Graduate School of Business.

Russell  H.  Wilder,  age 44,  joined  ATEL in  1992 as Vice  President  of ATEL
Business Credit, a wholly-owned  subsidiary of ACG. Immediately prior to joining
ATEL,  Mr.  Wilder was a personal  property  broker  specializing  in  equipment
leasing  and  financing  and an  outside  contractor  in the areas of credit and
collections.  From 1985 to 1990 he was Vice President and Manager of Leasing for
Fireside Thrift Co., a Teledyne subsidiary,  and was responsible for all aspects
of setting up and  managing  the  department,  which  operated as a small ticket
lease  funding  source.  From  1983 to  1985 he was  with  Wells  Fargo  Leasing
Corporation  as  Assistant  Vice  President  in the credit  department  where he
oversaw all credit analysis on  transactions in excess of $2 million.  From 1978
to 1983 he was District Credit Manager with  Westinghouse  Credit  Corporation's
Industrial Group and was responsible for all non-marketing operations of various
district offices. Mr. Wilder holds a B.S. with Honors in Agricultural  Economics
and Business  Management from the University of California at Davis. He has been
awarded the Certified Lease Professional  designation by the Western Association
of Equipment Lessors.


<PAGE>

John P. Scarcella,  age 37, joined ATEL Securities as vice president in 1992. He
is involved in the marketing of securities offered by ASC. Prior to joining ASC,
from 1987 to 1991,  he was  employed  by Lansing  Pacific  Fund,  a real  estate
investment  trust in San Mateo,  California  and acted as  director  of investor
relations.   From  1984  to  1987,   Mr.   Scarcella   acted  as  broker  dealer
representative  for Lansing  Capital  Corporation,  where he was involved in the
marketing of direct  participation  programs and REITs. Mr. Scarcella received a
B.S.C.  degree with emphasis in investment finance in 1983 and an M.B.A.  degree
with a concentration in marketing in 1991 from Santa Clara University.


Item 11.  EXECUTIVE COMPENSATION

The  registrant  is a Limited  Partnership  and,  therefore,  has no officers or
directors.

Set forth hereinafter is a description of the nature of remuneration paid and to
be paid to the  General  Partners  and  their  affiliates.  The  amount  of such
remuneration paid for the years ended December 31, 1998 and 1997 is set forth in
Item 8 of this report under the caption "Financial  Statements and Supplementary
Data - Notes to the Financial  Statements - Related party transactions," at Note
5 thereof which information is hereby incorporated by reference.


Selling Commissions

The  Partnership  paid  selling  commissions  in the  amount  of 9.5%  of  Gross
Proceeds, as defined, ($7,016,305), to ATEL Securities Corporation, an affiliate
of the General  Partners . Of this  amount,  $6,455,378  was  reallowed to other
broker/dealers.

Acquisition Fees

Acquisition  fees were paid to the General  Partners  for  services  rendered in
finding,  reviewing and evaluating  equipment to be purchased by the Partnership
and  rejecting  equipment  not  to  be  purchased  by  the  Partnership.   Total
acquisition  fees paid through  December 31, 1998 were  $3,508,152,  the maximum
allowable amount.

Equipment Management Fees

As compensation for its services  rendered  generally in managing or supervising
the management of the  Partnership's  equipment and in supervising other ongoing
services  and  activities  including,  among  others,  broker  assistance,  cash
management,   product  development,   property  and  sales  tax  monitoring  and
preparation  of financial  data,  the General  Partners or their  affiliates are
entitled to receive  management  fees which are payable for each fiscal  quarter
and are to be in an amount  equal to (i) 5% of the  gross  lease  revenues  from
"operating" leases and (ii) 2% of gross lease revenues from "full payout" leases
which  contain  net lease  provisions.  See Note 5 to the  financial  statements
included at Item 8 of this report for amounts paid.


<PAGE>

Incentive Management Fees

As compensation  for its services  rendered in connection with the management of
the  Partnership,  including but not limited to employment  and  supervision  of
supervisory  managing  agents,  insurance  brokers,   equipment  lease  brokers,
accountants and other professional advisors, and for supervising the preparation
of reports and  maintenance of financial and operating data of the  Partnership,
Securities and Exchange Commission and Internal Revenue Service filings, returns
and reports,  the General  Partners shall be entitled to receive the Partnership
management  fee which shall be payable  for each fiscal  quarter and shall be an
amount equal to 5% of  distributions  of cash from operations until such time as
the  Limited  Partners  have  received  aggregate  distributions  of  cash  from
operations in an amount equal to their original  invested capital plus a 10% per
annum  return on their  average  adjusted  invested  capital  (as defined in the
Limited Partnership Agreement).  Thereafter,  the incentive management fee shall
be 15% of all distributions of cash from operations,  sales or refinancing.  See
Note 5 to the financial statements included at Item 8 of this report for amounts
paid.

Equipment Resale Fees

As compensation for services  rendered in connection with the sale of equipment,
the General  Partners shall be entitled to receive an amount equal to the lesser
of (i) 3% of the sales  price of the  equipment,  or (ii)  one-half  the  normal
competitive  equipment sales commission charged by unaffiliated parties for such
services.  Such fee is payable only after the Limited  Partners  have received a
return of their adjusted invested capital (as defined in the Limited Partnership
Agreement) plus 10% of their adjusted invested capital per annum calculated on a
cumulative basis,  compounded  daily,  commencing the last day of the quarter in
which the limited  partner was admitted to the  Partnership.  To date, none have
been accrued or paid.

Equipment Re-lease Fee

As compensation for providing  re-leasing  services,  the General Partners shall
receive fees equal to 2% of the gross rentals or the comparable competitive rate
for such services relating to comparable  equipment,  whichever is less, derived
from the re-lease  provided  that (i) the General  Partners or their  affiliates
have  and  will  maintain   adequate  staff  to  render  such  services  to  the
Partnership,  (ii) no such  re-lease  fee is  payable  in  connection  with  the
re-lease of equipment to a previous lessee or its affiliates,  (iii) the General
Partners or their affiliates have rendered  substantial  re-leasing  services in
connection with such re-lease and (iv) the General  Partners or their affiliates
are compensated for rendering equipment management services.

General Partners' Interest in Operating Proceeds

Net income, net loss and investment tax credits are allocated 99% to the Limited
Partners and 1% to the General  Partners.  See the statements of income included
in Item 8 of this  report for the amounts  allocated  to the General and Limited
Partners in 1998 and 1997.



Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT

Security Ownership of Certain Beneficial Owners

At  December  31,  1998  no  investor  is  known  to  the  Partnership  to  hold
beneficially more than 5% of the issued and outstanding Units.


<PAGE>

Security Ownership of Management

The General  Partners  are  beneficial  owners of Limited  Partnership  Units as
follows:
<TABLE>
<CAPTION>

                    (1)                        (2)                         (3)                               (4)
                                                Name and Address of        Amount and Nature of              Percent
        Title of Class                          Beneficial Owner           Beneficial Ownership              of Class

<S>                                             <C>                        <C>                               <C>    
Limited Partnership Units                       A. J. Batt                 Initial Limited Partner Units     0.0007%
                                                235 Pine Street, 6th Floor 50 Units ($500)
                                                San Francisco, CA 94104    (owned by daughters)
</TABLE>

Changes in Control

The Limited Partners have the right, by vote of the Limited Partners owning more
than 50% of the  outstanding  limited  Partnership  units,  to  remove a General
Partner.

The General Partners may at any time call a meeting of the Limited Partners or a
vote of the  Limited  Partners  without a meeting,  on matters on which they are
entitled  to vote,  and shall call such  meeting  or for vote  without a meeting
following  receipt of a written request therefor of Limited Partners holding 10%
or more of the total outstanding Limited Partnership Units .


Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The responses to Item 8 of this report under the caption  "Financial  Statements
and  Supplemental  Data - Notes to the  Financial  Statements  -  Related  party
transactions"  at Note 5 thereof,  and Item 11 of this report  under the caption
"Executive Compensation," are hereby incorporated herein by reference.

The Partnership owned a one-half undivided interest in the Falcon 50 aircraft on
lease  to  ARR,  Inc.,  a  subsidiary  of  U.  S.  Surgical   Corporation.   The
Partnership's  interest in the asset was purchased from an unrelated third party
on the same terms as that of the affiliated  Partnership (ATEL Cash Distribution
Fund IV, L.P.) which owned the  remaining  one-half  interest.  The aircraft was
sold in 1997. 

<PAGE>

                                    PART IV

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

                    (a) Financial Statements and Schedules

                           1.  Financial Statements
                               Included in Part II of this report:
                               Report of Independent Auditor

                               Balance Sheet at December 31, 1998

                               Statements of Income for the years ended December
                               31, 1998 and 1997

                               Statements  of Changes in  Partners'  Capital for
                               the  years  ended  December  31,  1998  and  1997

                               Statements  of Cash  Flows  for the  years  ended
                               December  31,  1998 and 1997  

                               Notes to  Financial Statements

                           2.  Financial Statement Schedules
                               Allschedules  for which  provision is made in the
                                  applicable   accounting   regulations  of  the
                                  Securities  and  Exchange  Commission  are not
                                  required under the related instructions or are
                                  inapplicable, and therefore have been omitted.

                    (b) Reports on Form 8-K for the fourth quarter of 1998
                               None

                    (c) Exhibits
                               (3)and  (4)  Agreement  of  Limited  Partnership,
                                  incorporated  by reference to Exhibits (3) and
                                  (4) to the Partnership's Annual Report on Form
                                  10K for the  year  ended  December  31,  1990,
                                  filed March 29, 1991 (File No. 33-31395)

<PAGE>

                                   SIGNATURES


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



                        Date:       3/26/1999

                           ATEL Cash Distribution Fund III, L.P.
                                 (Registrant)


           By:  ATEL Financial Corporation,
                General Partner of Registrant



                           By:  /s/  A. J. Batt
                                -----------------------------------------------
                                A. J. Batt,
                                President and Chief Executive Officer



           By:  /s/  A. J. Batt
                ------------------------------------------------
                A. J. Batt,
                General Partner of Registrant,
                President and Chief Executive Officer of
                ATEL Financial Corporation (General
                Partner)



           By:   /s/ Dean Cash
                ------------------------------------------------
                Dean Cash,
                General Partner of Registrant,
                Executive Vice President of ATEL
                Financial Corporation (General Partner)





<PAGE>

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


         SIGNATURE                 CAPACITIES                          DATE



/s/  A. J. Batt                General Partner of registrant;         3/26/1999
------------------------------ president, chairman and chief 
      A. J. Batt               executive officer of ATEL Financial
                               Corporation



 /s/ Dean Cash                 General Partner of registrant;         3/26/1999
------------------------------ executive vice president and
      Dean Cash                director of ATEL Financial 
                               Corporation



/s/ Donald E. Carpenter        Principal financial officer of         3/26/1999
------------------------------ registrant; principal financial 
  Donald E. Carpenter          officer of ATEL Financial Corporation 
                               Principal accounting officer of 
                               registrant; principal
                               accounting officer of ATEL Financial 
                               Corporation