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, 1997

                                                  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  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 and intends to acquire various types of equipment
and to lease such  equipment  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 Partner 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.  As noted  above,  however,  it intends to
continue  to invest any cash flow in excess of certain  amounts  required  to be
distributed  to the Limited  Partners in  additional  items of leased  equipment
through December 31, 1999.

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, 1997, 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  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, 1997, 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>
Mining                            $ 17,109,802         $ 8,641,846     $ 14,721,920
Commercial aircraft                  2,322,136           1,656,694          226,541
Materials handling                   4,852,405           1,541,187        5,293,383
Transportation                      10,908,752           7,642,081       10,926,201
Food processing                      6,014,685           2,406,813        6,061,124
Point-of-sale                        6,358,094           3,775,309        5,947,266
Furniture & fixtures                 3,195,613           1,366,326        2,375,001
Other                                5,289,114           1,662,825        5,405,927
                               ----------------    ---------------- ----------------
                                  $ 56,050,601        $ 28,693,081     $ 50,957,363
                               ================    ================ ================
</TABLE>

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

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, 1997 and
the industries to which the assets have been leased.
<PAGE>

                                   Purchase price excluding  Percentage of total
         Asset types                   acquisition fees          acquisitions
         -----------                   ----------------          ------------
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%
                                      ================          ================

                                   Purchase price excluding  Percentage of total
  Industry of lessee                   acquisition fees            acquisitions
  ------------------                   ----------------            ------------
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%
                                      ================          ================

For further information regarding the Partnership's equipment lease portfolio as
of December 31, 1997,  see Note 3 to the financial  statements,  Investments  in
equipment  and  leases,   set  forth  in  Item  8,   Financial   Statements  and
Supplementary Data.


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.



<PAGE>

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, 1997, a total of 5,047 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 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.

The rates for  monthly  distributions  from 1996  operations  were  $0.11667  in
February  and  March  1996,  $0.08333  in April  1996 and  $0.10 in May  through
December 1996 and January 1997. Per Unit quarterly  distributions  were $0.31667
in April  1996,  $0.30 in July and  October  1996  and in  January  1997.  Total
distributions  were $1.21667 per Unit.  Distributions  were from cash flows from
operations and sales proceeds in 1996.


<PAGE>

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

<TABLE>
<CAPTION>
                                                1997             1996               1995             1994             1993
                                                ----             ----               ----             ----             ----
<S>                                                    <C>              <C>                <C>              <C>              <C>
Distributions of net income                            $ 0.58           $ 0.38             $ 0.27           $ 0.23           $ 0.25
Return of investment                                     0.45             0.87               1.13             1.15             1.05
                                              ---------------- ----------------  ----------------- ---------------- ----------------
Distributions per unit                                   1.03             1.25               1.40             1.38             1.30
Differences due to timing of distributions              (0.03)           (0.03)              -                0.02             -
                                              ---------------- ----------------  ----------------- ---------------- ----------------
Nominal distribution rates from above                  $ 1.00           $ 1.22             $ 1.40           $ 1.40           $ 1.30
                                              ================ ================  ================= ================ ================
</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, 1997,  1996,  1995,  1994 and 1993. This financial data
should be read in  conjunction  with the financial  statements and related notes
included under Item 8 of this report.

<TABLE>
<CAPTION>
                                               1997             1996               1995             1994             1993
                                               ----             ----               ----             ----             ----
<S>                                          <C>              <C>                <C>              <C>              <C>
Gross Revenues                               $ 10,433,457     $ 11,709,770       $ 14,332,795     $ 14,368,274     $ 13,829,714
Net income                                    $ 4,334,639      $ 2,851,478        $ 2,032,662      $ 1,688,646      $ 1,871,587
Weighted average Limited Partner Units
   (Units) outstanding                          7,376,934        7,376,934          7,378,884        7,379,447        7,383,634
Net income per Unit, based on
   weighted average Units outstanding              $ 0.58           $ 0.38             $ 0.27           $ 0.23           $ 0.25
Distributions per Unit, based on
   weighted average Units outstanding              $ 1.03           $ 1.25             $ 1.40           $ 1.38           $ 1.30
Total Assets                                 $ 22,727,752     $ 29,791,041       $ 41,900,878     $ 54,727,541     $ 67,533,367
Non-recourse Debt                             $ 2,497,392      $ 6,068,326       $ 11,451,641     $ 15,675,776     $ 19,783,538
Total Partners' Capital                      $ 19,797,739     $ 23,081,480       $ 29,451,915     $ 37,757,442     $ 46,279,817
</TABLE>

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

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



<PAGE>

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.

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  Partner's  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 (which has been increased
to  $105,000,000  through  March 31,  1998) with a  financial  institution  that
includes certain financial covenants.  The line of credit expires on October 28,
1998. As of December 31, 1997 the Partnership had no borrowings  under this line
of credit and the remaining availability was $17,754,812.

The Partnership  anticipates reinvesting a portion of lease payments from assets
owned in new leasing  transactions.  Such reinvestment will occur only after the
payment  of  all  obligations,   including  debt  service  (both  principal  and
interest), the payment of management and acquisition fees to the General Partner
and providing for cash distributions to the Limited Partners.

At December 31, 1997,  there were no  commitments to purchase  additional  lease
assets.

As of December 31, 1997, cash balances  consisted of working capital and amounts
reserved for distributions in 1998.

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.

As of December 31, 1997, the Partnership had borrowed approximately $32,425,000.
The  remaining  unpaid  balance of such  borrowings  at  December  31,  1997 was
$2,497,392.  The borrowings are  non-recourse to the  Partnership,  that is, the
only  recourse of the lender will be to the  equipment  or  corresponding  lease
acquired with the loan proceeds.  Through  December 31, 1997, debt proceeds were
approximately   40%  of  the  aggregate  cost  of  equipment   acquired  by  the
Partnership.   The  Agreement  of  Limited  Partnership  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.


<PAGE>

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 1998. If they
are  terminated  as  scheduled,  gross  lease  rents from  operating  leases are
expected to decrease by  $3,264,366  (from  $7,116,131  in 1997 to $3,851,765 in
1998).  Depreciation  expense  related to operating  leases is also  expected to
decrease.  Cash flows from direct  financing  leases are expected to decrease by
about $66,302 (from $1,333,784 in 1997 to $1,267,482 in 1998).

Cash flows from operations decreased by approximately $1,900,000.  This decrease
resulted primarily from decreased operating lease rents  ($2,864,578).  This was
partially offset by decreased interest expense ($311,035). Operating lease rents
remain the Partnership's most significant source of operating cash flows.

Cash flows from investing activities increased by about $4,266,000. Most of this
increase (about  $4,847,000)  resulted from increased sales of lease assets. The
primary  sources of cash from  investing  activities  are proceeds from sales of
assets and rents from direct financing leases. Such direct financing lease rents
decreased by about $563,000 compared to 1996.

There  were  no  financing  sources  of cash in  1997  or  1996.  Repayments  of
non-recourse  debt  decreased  due to  scheduled  debt  payments.  Cash used for
distributions to Limited Partners  decreased as a result of the reduction of the
per Unit rate of distributions from $1.22 in 1996 to $1.00 in 1997.



Results of Operations

Operations resulted in net income of $2,851,478 in 1996 and $4,334,639 in 1997.

As of December 31,  1997,  43%,  17% and 14% of the  Partnership's  lease assets
(based  on   equipment   cost)   were   leased  to   lessees   in  the   mining,
electrical/electronics  manufacturing and utilities industries, respectively. As
of December 31, 1996, 19% of the Partnership's  lease assets (based on equipment
cost) was leased to lessees in the mining  industry.  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 $2,851,478 in 1996 to $4,334,639 in 1997. The increase
resulted  from a number  of  factors.  Gains on sales  of  assets  increased  by
$1,679,288.  The  increase  was  largely  due to the  sale of the  Partnership's
interest  in a Falcon 50  aircraft  which  resulted  in a gain of  approximately
$1,905,000.  Operating lease rents decreased by $2,864,578  offset by a decrease
in depreciation expense ($2,491,612) on those assets.

<PAGE>

The most significant change in expenses,  other than depreciation  expense,  was
the reduction in interest expense  ($311,035).  Interest expense declined due to
scheduled debt payments.

Management  fees have  decreased  by  $61,651.  This  decrease is related to the
decrease in lease revenues and to the decrease in  distributions  to the limited
partners.


Impact of the Year 2000

The year 2000 issue is the result of computer  programs  being written using two
digits rather than four to define the  applicable  year.  Any computer  programs
that have time  sensitive  software may  recognize a date using "00" as the year
1900  rather  than the year  2000.  This  could  result in a system  failure  or
miscalculation causing disruptions of operations, including, among other things,
a  temporary  inability  to process  transactions  or engage in  similar  normal
business activities.

The  Partnership  believes  that it will not be  required  to modify or  replace
significant  portions of its software and that the year 2000 issue will not pose
significant  operational problems for its computer systems. The Partnership does
not expect  that the costs  related to the year 2000 issue will be  significant.
Ultimately,  the potential impact of the year 2000 issue will depend not only on
the corrective measures the Partnership undertakes, but also on the way in which
the year  2000  issue is  addressed  by  businesses  and  other  entities  whose
financial  condition or operational  capability is important to the Partnership.
Therefore,  the Partnership is communicating to these parties to ensure they are
aware of the year  2000  issue,  to learn  how they are  addressing  it,  and to
evaluate any likely impact on the Partnership.


Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Financial  Statements and Notes to Financial  Statements  attached hereto at
pages 11 through 25.

<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, 1997, 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, 1997. 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, 1997 and the results of its  operations  and its cash
flows  for each of the two years in the  period  ended  December  31,  1997,  in
conformity with generally accepted accounting principles.






                                                    ERNST & YOUNG LLP
San Francisco, California
February 3, 1998

<PAGE>

                      ATEL CASH DISTRIBUTION FUND III, L.P.

                                  BALANCE SHEET

                                DECEMBER 31, 1997


                                     ASSETS


Cash and cash equivalents                                      $ 9,342,727

Accounts receivable                                                225,035

Investments in equipment and leases                             13,159,990
                                                           ----------------
Total assets                                                  $ 22,727,752
                                                           ================


                       LIABILITIES AND PARTNERS' CAPITAL



Non-recourse debt                                              $ 2,497,392

Accrued interest                                                    11,842

Accounts payable:
     General Partners                                               72,539
     Other                                                         193,791

Unearned operating lease income                                    154,449
                                                           ----------------
Total liabilities                                                2,930,013

Partners' capital:
     General Partners                                              169,611
     Limited Partners                                           19,628,128
                                                           ----------------
Total partners' capital                                         19,797,739
                                                           ----------------
Total liabilities and partners' capital                       $ 22,727,752
                                                           ================

                             See accompanying notes.


<PAGE>

                      ATEL CASH DISTRIBUTION FUND III, L.P.

                              STATEMENTS OF INCOME

                     YEARS ENDED DECEMBER 31, 1997 AND 1996


<TABLE>
<CAPTION>
                                                                                      1997             1996
                                                                                      ----             ----
<S>                                                                                  <C>              <C>
Revenues:
Leasing activities:
     Operating leases                                                                $ 7,116,131      $ 9,980,709
     Direct financing leases                                                             286,103          434,019
     Leveraged leases                                                                     28,225           85,030
     Gain on sale of equipment                                                         2,823,095        1,143,807
Other                                                                                      4,385           11,520
Interest income                                                                          175,518           54,685
                                                                                 ---------------- ----------------
                                                                                      10,433,457       11,709,770
                                                                                 ---------------- ----------------

Expenses:
Depreciation                                                                           4,560,013        7,051,625
Equipment and incentive management fees to General Partner                               660,774          722,425
Interest expense                                                                         319,415          630,450
Administrative cost reimbursements to General Partner                                    248,250          245,242
Other                                                                                    174,046          149,613
Provision for losses and impairments                                                     104,335          118,023
Professional fees                                                                         31,985           38,522
                                                                                 ---------------- ----------------
                                                                                       6,098,818        8,955,900
                                                                                 ---------------- ----------------
Income before extraordinary item                                                       4,334,639        2,753,870
Extraordinary gain on early extinguishment of debt                                             -           97,608
                                                                                 ---------------- ----------------
Net income                                                                           $ 4,334,639      $ 2,851,478
                                                                                 ================ ================

Net income:
     General Partners                                                                   $ 43,346         $ 28,515
     Limited Partners                                                                  4,291,293        2,822,963
                                                                                 ---------------- ----------------
                                                                                     $ 4,334,639      $ 2,851,478
                                                                                 ================ ================

Income before extraordinary item per limited partnership unit                             $ 0.58           $ 0.37
Extraordinary gain on early extinguishment of debt per limited partnership unit             -                0.01
                                                                                 ---------------- ----------------
Net income per Limited Partnership unit                                                   $ 0.58           $ 0.38
                                                                                 ================ ================

Weighted average number of units outstanding                                           7,376,934        7,376,934
</TABLE>



                             See accompanying notes.

<PAGE>

                      ATEL CASH DISTRIBUTION FUND III, L.P.

                    STATEMENT OF CHANGES IN PARTNERS' CAPITAL

                     YEARS ENDED DECEMBER 31, 1997 AND 1996


<TABLE>
<CAPTION>
                                                               Limited Partners               General
                                                           Units             Amount          Partners           Total
<S>                                                         <C>             <C>                 <C>           <C>
Balance December 31, 1995                                   7,378,884       $ 29,354,165         $ 97,750     $ 29,451,915
Distributions to limited partners ($1.25  per Unit)                           (9,213,305)                       (9,213,305)
Repurchases of Limited Partnership Units                       (2,600)            (8,608)                           (8,608)
Net income                                                                     2,822,963           28,515        2,851,478
                                                      ----------------  ----------------- ---------------- ----------------
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
                                                      ----------------  ----------------- ---------------- ----------------
                                                            7,376,284       $ 19,628,128        $ 169,611     $ 19,797,739
                                                      ================  ================= ================ ================
</TABLE>







                             See accompanying notes.

<PAGE>
                      ATEL CASH DISTRIBUTION FUND III, L.P.

                            STATEMENTS OF CASH FLOWS

                     YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                                     1997             1996
                                                                                     ----             ----
<S>                                                                                 <C>              <C>
Operating activities:
Net income                                                                          $ 4,334,639      $ 2,851,478
  Adjustment  to  reconcile  net  income  to  net  cash  provided  by  operating
   activities:
     Depreciation                                                                     4,560,013        7,051,625
     Gain on sales of equipment                                                      (2,823,095)      (1,143,807)
     Income from investment in leveraged leases                                         (28,225)         (85,030)
     Provision for losses and impairments                                               104,335          118,023
     Extraordinary gain on early extinguishment of debt                                       -          (97,608)
     Changes in operating assets and liabilities:
        Accounts receivable                                                             596,445           51,971
        Notes receivable                                                                      -           44,861
        Accounts payable, General Partner                                               (35,050)          (2,190)
        Accounts payable, other                                                         (65,651)         (30,986)
        Accrued interest                                                                (48,320)         (64,864)
        Deposits due to lessees                                                               -          (75,340)
        Unearned operating lease income                                                 (59,593)        (182,707)
                                                                                ---------------- ----------------
Net cash provided by operating activities                                             6,535,498        8,435,426

Investing activities:
Proceeds from sales of lease assets                                                  10,182,310        5,335,135
Reductions of net investment in direct financing leases                               1,047,681        1,611,128
Reductions of net investment in leveraged leases                                              -           17,709
                                                                                ---------------- ----------------
Net cash provided by investing activities                                            11,229,991        6,963,972

Financing activities:
Distributions to limited partners                                                    (7,618,380)      (9,213,305)
Repayments of non-recourse debt                                                      (3,570,934)      (5,285,707)
Repurchase of limited partner units                                                           -           (8,608)
                                                                                ---------------- ----------------
Net cash used in financing activities                                               (11,189,314)     (14,507,620)
                                                                                ---------------- ----------------

Net increase in cash and cash equivalents                                             6,576,175          891,778
Cash and cash equivalents at beginning of period                                      2,766,552        1,874,774
                                                                                ---------------- ----------------
Cash and cash equivalents at end of period                                          $ 9,342,727      $ 2,766,552
                                                                                ================ ================
</TABLE>


<PAGE>

                      ATEL CASH DISTRIBUTION FUND III, L.P.

                            STATEMENTS OF CASH FLOWS
                                   (CONTINUED)
                     YEARS ENDED DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>

                                                                                    1997             1996
                                                                                    ----             ----
<S>                                                                                 <C>              <C>
Supplemental disclosures of cash flow information:

Cash paid during the year for interest                                               $ 367,735        $ 695,314
                                                                                =============== ================

Supplemental disclosure of non-cash transactions:

Operating lease assets reclassified to direct financing leases                                        $ 674,771
Less accumulated depreciation                                                                          (554,771)
                                                                                                ----------------
                                                                                                      $ 120,000
                                                                                                ================
</TABLE>

                             See accompanying notes.


<PAGE>

                      ATEL CASH DISTRIBUTION FUND III, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1997


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  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, 1997,  the original  terms of the leases  ranged from six months to
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.



<PAGE>

                      ATEL CASH DISTRIBUTION FUND III, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1997


2. Summary of significant accounting policies (continued):

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.

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 (unaudited):

   Financial statement basis of net assets        $ 19,797,739
   Tax basis of net assets                          21,983,006
                                               ----------------
   Difference                                      $ 2,185,267
                                               ================

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  (loss)  reported  on  the  Partnership's   federal  tax  return
(unaudited):

                                                  1997             1996
                                                  ----             ----
Net income per financial statements              $ 4,334,639      $ 2,851,478
Adjustment to depreciation expense                   342,622          610,802
Extraordinary gain on extinguishment of debt               -          (97,608)
Adjustments to revenues                            5,624,921        4,922,093
Provision for losses and impairments                 104,335          118,023
                                            ----------------- ----------------
Net income per federal tax return               $ 10,406,517      $ 8,404,788
                                            ================= ================

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, 1997.

<PAGE>

                      ATEL CASH DISTRIBUTION FUND III, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1997


2. Summary of significant accounting policies (continued):

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.

Per unit data:

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


3. Investments in equipment and leases:

As of December 31, 1997, the  Partnership's  investments in equipment and leases
consist of the following:

<TABLE>
<CAPTION>
                                                                               Depreciation
                                                                                Expense or        Reclass-
                                                                                  Lease         ifications or
                                               1996           Additions        Amortization     Dispositions         1997
                                               ----           ---------        ------------    --------------        ----
<S>                                          <C>                <C>              <C>              <C>              <C>
Net investment in operating leases           $ 21,853,800                        $ (4,560,013)    $ (6,026,137)     $11,267,650
Net investment in direct financing leases       3,680,949                          (1,047,681)        (253,672)       2,379,596
Net investment in leveraged leases                757,654                              28,225         (659,508)         126,371
Assets held for lease or sale                     419,898                                   -         (419,898)               -
Reserve for losses and impairments               (509,292)      $ (104,335)                 -                -         (613,627)
                                          ---------------- ----------------  ----------------- ---------------- ----------------
                                             $ 26,203,009       $ (104,335)      $ (5,579,469)    $ (7,359,215)    $ 13,159,990
                                          ================ ================  ================= ================ ================
</TABLE>

<PAGE>

                      ATEL CASH DISTRIBUTION FUND III, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1997


3.  Investments in equipment and leases (continued):

Operating leases:

Property on operating  lease  consists of the following as of December 31, 1996,
additions and dispositions during 1997 and as of December 31, 1997:
<TABLE>
<CAPTION>
                                    Balance                            Reclass-          Balance
                                 December 31,                        ifications or    December 31,
                                     1996            Additions       Dispositions         1997
                                     ----            ---------       ------------         ----
<S>                                 <C>                <C>              <C>              <C>
Mining                             $ 17,497,908                        $ (4,807,316)    $ 12,690,592
Manufacturing                        10,144,506                          (5,263,275)       4,881,231
Utilities                             3,946,886                                   -        3,946,886
Transportation                        3,923,808                            (163,482)       3,760,326
Printing                              3,454,353                            (409,694)       3,044,659
Food processing                       2,438,524                                   -        2,438,524
Medical                               2,155,489                                   -        2,155,489
Materials handling                    1,958,393                            (993,413)         964,980
Communications                          290,175                                   -          290,175
Other                                    65,695                                   -           65,695
Aircraft                              5,275,000                          (5,275,000)               -
                                ----------------  ----------------- ---------------- ----------------
                                     51,150,737                         (16,912,180)      34,238,557
Less accumulated depreciation       (29,296,937)      $ (4,560,013)      10,886,043      (22,970,907)
                                ----------------  ----------------- ---------------- ----------------
                                    $21,853,800        ($4,560,013)     ($6,026,137)     $11,267,650
                                ================  ================= ================ ================
</TABLE>

Direct financing leases:

As of December 31,  1997,  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, 1997.

Total minimum lease payments receivable                           $2,000,256
Estimated residual values of leased equipment (unguaranteed)         834,458
                                                            -----------------
Investment in direct financing leases                              2,834,714
Less unearned income                                                (455,118)
                                                            -----------------
INet investment in direct financing leases                         $2,379,596
                                                            =================




<PAGE>

                      ATEL CASH DISTRIBUTION FUND III, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1997


3.  Investments in equipment and leases (continued):

Direct financing leases (continued):

At December 31, 1997,  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
               1998      $ 3,851,765      $ 1,267,482        $ 5,119,247
               1999          364,941          546,645            911,586
               2000                -          144,416            144,416
               2001                -           23,836             23,836
               2002                -           17,877             17,877
                     ---------------- ----------------  -----------------
                         $ 4,216,706      $ 2,000,256        $ 6,216,962
                     ================ ================  =================

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, 1997 is as follows:

Aggregate rentals receivable                                         $ 173,606
Aggregate principal and interest payable on non-recourse loans        (172,539)
Estimated residual value of leased assets                              165,000
Less unearned income                                                   (39,696)
                                                              -----------------
Net investment in leveraged leases                                   $ 126,371
                                                              =================








<PAGE>

                      ATEL CASH DISTRIBUTION FUND III, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1997


4.  Non-recourse debt:


At December 31, 1997,  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 $2,497,392.  The
notes are due in varying monthly,  quarterly and semi-annual payments.  Interest
on the notes is at rates from 6.8% to 11%. The notes are secured by  assignments
of lease  payments and pledges of assets.  At December  31,  1997,  the carrying
value of the pledged assets is approximately  $6,992,485.  The notes mature from
1998 through 2000.

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

           Year ending
          December 31,       Principal        Interest            Total
                    1998      $ 2,083,685        $ 132,689        $ 2,216,374
                    1999          356,416           22,120            378,536
                    2000           57,291            2,374             59,665
                          ---------------- ----------------  -----------------
                              $ 2,497,392        $ 157,183        $ 2,654,575
                          ================ ================  =================


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:

The General  Partners  earned  partnership  management  fees equal to 5% of cash
distributed  from  operations and equipment  management fees equal to 2% of full
payout lease rentals and 5% of operating  lease rentals  pursuant to the Limited
Partnership  Agreement.  The amounts  earned in 1997 and 1996 were  $660,774 and
$722,425, respectively.

The Limited Partnership Agreement allows for the reimbursement of costs incurred
by the Corporate  General  Partner in providing  administrative  services to the
Partnership.  Administrative  services provided include Partnership  accounting,
investor  relations,  legal counsel and lease and equipment  documentation.  The
Corporate General Partner 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 the Corporate
General Partner 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.

In 1997 and 1996, the Partnership reimbursed ATEL Financial Corporation $248,250
and  $245,242,  respectively,  for  costs  incurred  in  the  administration  of
Partnership business.



<PAGE>

                      ATEL CASH DISTRIBUTION FUND III, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1997


5.  Related party transactions (continued):


Substantially  all  employees  of the  Corporate  General  Partner  record  time
incurred  in  performing  administrative  services  on  behalf  of  all  of  the
Partnerships  serviced by the Corporate  General Partner.  The Corporate General
Partner  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.


6.  Partners' capital:

As of December 31, 1997, 7,376,284 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, 1997


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,  1997,  43%,  17% and 14% of the  Partnership's  lease assets
(based  on   equipment   cost)   were   leased  to   lessees   in  the   mining,
electrical/electronics  manufacturing and utilities industries, respectively. As
of December 31, 1996, 19% of the Partnership's  lease assets (based on equipment
cost) was leased to lessees in the mining industry.

During 1997, two customers  comprised 16% and 15% of the Partnership's  revenues
from  leases.   During  1996,  no  customers   comprised  10%  or  more  of  the
Partnership's revenues from leases.


8.  Line of credit:

The Partnership  participates  with the Corporate General Partner and certain of
its  Affiliates  in a $90,000,000  revolving  credit  agreement  (which has been
increased  to  $105,000,000  through  March 31,  1998) with a group of financial
institutions  which  expires on October  28,  1998.  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.

The Partnership had no borrowings under the agreement during 1997.

The credit agreement  includes certain  financial  covenants  applicable to each
borrower.  The  Partnership  was in compliance with its covenants as of December
31, 1997. At December 31, 1997, $17,754,812 was available under this agreement.


<PAGE>

                      ATEL CASH DISTRIBUTION FUND III, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1997


9. Extraordinary gain on extinguishment of debt:

In January 1996,  Barney's,  Inc., one of the Partnership's  lessees,  filed for
reorganization  under  Chapter  11 of the  United  States  Bankruptcy  Code.  In
accordance with Financial Accounting Standards Board Statement No. 121 (FAS 121)
the  Partnership  determined  that the assets under an  operating  lease to this
particular  lessee were  impaired  as of  December  31,  1995.  The  Partnership
estimated  that only a portion of the  contractual  cash flows would be received
under the lease.  Under FAS 121, the estimated cash flows were discounted at the
effective rate of the non-recourse debt related to the lease and the assets were
written down to the present value of those cash flows.

On July 19,  1996,  the assets  subject to the lease were  purchased  by a third
party.  As  part  of the  purchase  and  transaction  restructure,  the  related
non-recourse debt was extinguished by the lender and the Partnership  received a
small amount of cash  proceeds.  The sale  resulted in a gain on the sale of the
assets and a gain on the  extinguishment of the related  non-recourse  debt. The
following summarizes this transaction:

Assets at cost                                                   $ 2,041,222
Accumulated depreciation at June 30, 1996                           (954,271)
                                                            -----------------
Book value of lease assets at June 30, 1996                        1,086,951
Reserve for impairment                                              (471,906)
                                                            -----------------
Carrying value at June 30, 1996                                      615,045
Deposits from lessee retained by Partnership                         (75,340)
                                                            -----------------
Excess of carrying value over deposits from lessee                   539,705
Gross sales proceeds                                                 957,680
                                                            -----------------
Gain on sale of assets                                             $ 417,975
                                                            =================

Non-recourse debt                                                $ 1,051,398
Gross sales proceeds used to extinguish non-recourse debt           (953,790)
                                                            -----------------
Extraordinary gain on extinguishment of debt                        $ 97,608
                                                            =================

Gross sales proceeds                                               $ 957,680
Gross sales proceeds used to extinguish non-recourse debt           (953,790)
                                                            -----------------
Net cash proceeds to Partnership                                     $ 3,890
                                                            =================
<PAGE>

                      ATEL CASH DISTRIBUTION FUND III, L.P.

                          NOTES TO FINANCIAL STATEMENTS

                                DECEMBER 31, 1997


10. 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 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, 1997 is $2,451,286.


<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

F. Randall Bigony          Senior Vice President and Chief Financial Officer of
                           ACG, AFC, ALC, AIS and AEC

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

Vasco H. Morais            General Counsel for ACG, AFC, ALC, AIS and AEC

William J. Bullock         Director of Asset Management of AEC

Russell H. Wilder          Vice President - Credit of AEC

John P. Scarcella          Vice President of ASC


<PAGE>

A. J. Batt, age 61, 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 47, 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.

F.  Randall  Bigony,  age 40,  joined  ATEL in  1992  to  review  administrative
operations  within  ATEL  Financial  Corporation  and to develop  and  implement
functional  plans to  support  company  growth.  He  currently  oversees  ATEL's
accounting, MIS and treasury functions. From 1987 until joining ATEL, Mr. Bigony
was  president  of F.  Randall  Bigony & Co., a  consulting  firm that  provided
financial and strategic  planning  services to emerging growth  companies.  From
1983 to 1987,  he was a manager  with the  accounting  firm of Ernst &  Whinney,
serving  clients in its management  consulting  practice.  Mr. Bigony received a
B.A.  degree in business  from the  University  of  Massachusetts  and an M.B.A.
degree in finance from the University of California,  Berkeley. He is a founding
board member and acting  treasurer  of the I Have a Dream  Foundation - Bay Area
Chapter.

Donald E. Carpenter, age 49, 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 39, 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 and a J.D. degree in 1986 from Golden Gate University Law
School.  Mr.  Morais  has been an active  member of the State Bar of  California
since 1986.


<PAGE>

William J.  Bullock,  age 34,  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.

Russell  H.  Wilder,  age 43,  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.

John P. Scarcella,  age 36, 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, 1997 and 1996 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.
<PAGE>

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, 1997 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  revenues  from
"operating" leases and (ii) 2% of gross 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.

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.


<PAGE>

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 1997 and 1996.


Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT

Security Ownership of Certain Beneficial Owners

At  December  31,  1997  no  investor  is  known  to  the  Partnership  to  hold
beneficially more than 5% of the issued and outstanding Units.

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 .



<PAGE>

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.


                                     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 Auditors
                               Balance Sheet at December 31, 1997
                               Income statements for the years ended December
                                  31, 1997 and 1996
                               Statements  of Changes in  Partners'  Capital for
                                  the  years  ended  December  31,  1997  and
                                  1996
                               Statements  of Cash  Flows  for the  years  ended
                                  December  31,  1997 and 1996
                               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 1997
                               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:                3/27/1998

                                     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;           3/27/1998
---------------------------- president, chairman and chief
      A. J. Batt             executive officer of ATEL
                             Financial Corporation




 /s/ Dean Cash               General Partner of registrant;           3/27/1998
---------------------------- executive vice president and
      Dean Cash              director of ATEL Financial
                             Corporation




/s/ F. Randall Bigony        Principal financial officer              3/27/1998
---------------------------- of registrant; principal
  F. Randall Bigony          financial officer of ATEL
                             Financial Corporation




/s/ Donald E. Carpenter      Principal accounting officer             3/27/1998
---------------------------- of registrant; principal
 Donald E. Carpenter         accounting officer of ATEL
                             Financial Corporation