Silver Screen Management
(c)1997 Silver Screen Management, Inc. Design: Pentagram

Officers:                                    Directors:           
---------                                    ----------           
                                                                 
Roland W. Betts                              Paul Bagley          
President and                                New York, New York   
Chief Executive Officer                                           
                                             Tom A. Bernstein     
Tom A. Bernstein                             New York, New York   
Executive Vice President                                          
                                             Roland W. Betts      
Barbara Stubenrauch                          New York, New York   
Senior Vice President                                             
                                             John Tommasini       
Richard S. Kasof                             New York, New York   
First Vice President                                              
                                             William Turchyn, Jr. 
Dana Thayer                                  New York, New York   
First Vice President                         

Liz A. Brevetti
Vice President

Keith C. Champagne
Vice President

Evelyn Halley
Vice President

Stuart A. Sheinbaum
Director of Investor
Relations

Conchetta S. Mayfield
Director of Operations

Paul Rindone
Director of Operations


                                      F-1
<PAGE>


To Our Limited Partners:

     Silver Screen  Partners III  distributed  approximately  $5 million for the
four quarters of 1996,  bringing  total  distributions  since the  Partnership's
inception in 1987 to $431  million.  Of the $431 million,  approximately  70% is
return of capital and 30% is income.

     During 1996,  the majority of  Partnership  revenue was generated  from the
U.S. home video release of "Oliver & Company."  Additional  revenue was produced
by the U.S.  syndicated  television  market for  "Honey,  I Shrunk the Kids" and
"Benji the Hunted."

     In 1997,  "Oliver & Company" is expected to continue to contribute  revenue
from the U.S. home video market.  By the end of the year, "Three Men and a Baby"
will  become  available  to appear in the basic  cable  television  market  (USA
Network)  and  "Roger  Rabbit"  will  become  available  in the U.S.  syndicated
television market.

     Our current  expectations  are that between now and the  dissolution of the
Partnership,   after  expenses,  Silver  Screen  Partners  III  will  distribute
approximately  $135  to  $165  per  unit  to  investors  (this  amount  includes
anticipated future quarterly distributions and the buyout proceeds from Disney).
Closing of the purchase by Disney is  scheduled to occur on September  30, 1997.
The final  distribution  and  dissolution of the Partnership is expected to take
place before  December  31, 1997.  These  figures and dates  represent  our best
estimates as of today.

     As explained  in previous  correspondence,  a number of private  investment
groups  have sent out  correspondence  relating  to a tender  offer for units in
Silver  Screen  Partners  III, and there may be other such offers in the future.
Silver Screen Partners III and Silver Screen Management, Inc. are not affiliated
in any way with these firms and can make no  recommendation  as to the merits of
any past or future tender offer. If and when you receive such solicitations,  if
you are not interested in selling your units,  no action by you is required.  We
hope the above information will help you in evaluating the various bids from the
tender offer groups.

     Tax  information  for preparing your 1996 income tax returns will be mailed
to you by March  15. In the  meantime,  our  Investor  Relations  Department  is
available  to assist you with any  questions  you may have.  Please note our new
telephone number and address listed on the back of this report.

Sincerely,


/s/ Roland W. Betts
--------------------
Roland W. Betts
President



/s/ Tom S. Bernstein
--------------------
Tom A. Bernstein
Executive Vice President



January 24, 1997


                                      F-2
<PAGE>


                         REPORT OF INDEPENDENT AUDITORS


To the Partners
Silver Screen Partners III, L.P.

     We have audited the  accompanying  balance sheets of Silver Screen Partners
III,  L.P. (a limited  partnership)  as of December  31, 1996 and 1995,  and the
related  statements of operations,  partners' equity, and cash flows for each of
the  three  years  in the  period  ended  December  31,  1996.  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 audits 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 Silver Screen Partners III,
L.P. (a limited  partnership)  at December 31, 1996 and 1995, and the results of
its  operations  and its cash  flows for each of the three  years in the  period
ended  December  31,  1996 in  conformity  with  generally  accepted  accounting
principles.


                                      /s/ Ernst & Young LLP

New York, New York
January 24, 1997


                                      F-3
<PAGE>


                                 BALANCE SHEETS


December 31, 1996 and 1995                                    1996         1995
--------------------------                               ----------   ----------
ASSETS
Current assets:
Cash .................................................   $  164,506   $  247,033
Temporary investments (at cost plus accrued interest,
  which approximates market) .........................    4,545,092    3,244,285
                                                         ----------   ----------
Total current assets .................................    4,709,598    3,491,318
Investment in Joint Venture ..........................    2,704,931    2,862,545
                                                         ----------   ----------
                                                         $7,414,529   $6,353,863
                                                         ----------   ----------

LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Due to managing general partner ......................   $    3,881   $   47,150
Accrued unincorporated business tax ..................       13,352         --
                                                         ----------   ----------
Total current liabilities ............................       17,233       47,150
Other liabilities ....................................         --        106,790
                                                         ----------   ----------
Total liabilities ....................................       17,233      153,940
                                                         ----------   ----------
Partners' Equity:
General partners .....................................         --           --
Limited partners .....................................    7,397,296    6,199,923
                                                         ----------   ----------
Total partners' equity ...............................    7,397,296    6,199,923
                                                         ----------   ----------
                                                         $7,414,529   $6,353,863
                                                         ==========   ==========

                       See notes to financial statements.


                                      F-4
<PAGE>

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Years ended December 31, 1996, 1995 and 1994               1996         1995         1994
--------------------------------------------          ----------   ----------   ----------
<S>                                                   <C>          <C>          <C>       
REVENUES:
Income from Joint Venture .........................   $7,220,549   $4,515,810   $3,444,814
Interest income ...................................      136,188      256,654      255,443
                                                      ----------   ----------   ----------
                                                       7,356,737    4,772,464    3,700,257
Costs and expenses:
General and administrative ........................      680,512    1,013,517      826,356
                                                      ----------   ----------   ----------
Income before income tax ..........................    6,676,225    3,758,947    2,873,901
Unincorporated business tax .......................      791,352         --           --
                                                      ----------   ----------   ----------
Net income ........................................   $5,884,873   $3,758,947   $2,873,901
                                                      ----------   ----------   ----------
Net income allocated to:
General partners ..................................   $   58,849   $   37,589   $   28,739
Limited partners ..................................    5,826,024    3,721,358    2,845,162
                                                      ----------   ----------   ----------
                                                      $5,884,873   $3,758,947   $2,873,901
                                                      ----------   ----------   ----------
Net income per $500 limited partnership unit
  (based on 600,000 units outstanding) ............   $     9.71   $     6.20   $     4.74
                                                      ----------   ----------   ----------
Cash distribution per $500 limited partnership unit   $     6.25   $     5.80   $     3.70
                                                      ----------   ----------   ----------
</TABLE>

                       See notes to financial statements.


                         STATEMENTS OF PARTNERS' EQUITY
<TABLE>
<CAPTION>
                                                   General        Limited
Years ended December 31, 1996, 1995 and 1994      Partners       Partners          Total
--------------------------------------------   -----------    -----------    -----------
<S>                                            <C>            <C>            <C>        
Partners' equity, January 1, 1994 ..........   $      --      $ 6,692,075    $ 6,692,075
Net income, 1994 ...........................        28,739      2,845,162      2,873,901
Allocation under Treasury Regulation Section
  1.704-1(b) ...............................       526,261       (526,261)          --
Distributions, 1994 ........................      (555,000)    (2,220,000)    (2,775,000)
                                               -----------    -----------    -----------
Partners' equity, December 31, 1994 ........          --        6,790,976      6,790,976
Net income, 1995 ...........................        37,589      3,721,358      3,758,947
Allocation under Treasury Regulation Section
  1.704-1(b) ...............................       832,411       (832,411)          --
Distributions, 1995 ........................      (870,000)    (3,480,000)    (4,350,000)
                                               -----------    -----------    -----------
Partners' equity, December 31, 1995 ........          --        6,199,923      6,199,923
Net income, 1996 ...........................        58,849      5,826,024      5,884,873
Allocation under Treasury Regulation Section
  1.704-1(b) ...............................       878,651       (878,651)          --
Distributions, 1996 ........................      (937,500)    (3,750,000)    (4,687,500)
                                               -----------    -----------    -----------
Partners' equity, December 31, 1996 ........   $      --      $ 7,397,296    $ 7,397,296
                                               -----------    -----------    -----------

</TABLE>

                       See notes to financial statements.


                                      F-5
<PAGE>


                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31, 1996, 1995 and 1994                                1996           1995           1994
--------------------------------------------                         -----------    -----------    -----------

<S>                                                                  <C>            <C>            <C>        
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................   $ 5,884,873    $ 3,758,947    $ 2,873,901
Adjustments to reconcile net income to net cash
  provided by operating activities:
Charge on overhead fee payable ...................................          --             --          138,414
(Increase) decrease in accrued interest receivable ...............        (7,160)        27,341        (28,200)
Net change in operating assets and liabilities:
Increase in accrued unincorporated business tax ..................        13,352           --             --
Decrease in other liabilities ....................................      (106,790)          --             --
(Decrease) increase in due to managing general partner ...........       (43,269)         8,654        (24,810)
Drawing on overhead fee ..........................................          --             --       (3,142,873)
                                                                     -----------    -----------    -----------
Net cash provided by (used in) operating activities ..............     5,741,006      3,794,942       (183,568)
                                                                     -----------    -----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Distributions received from Joint Venture (less than) in excess of
  equity in income ...............................................          --       (1,969,279)     2,333,529
Decrease in investments in Joint Venture .........................       157,614           --             --
(Purchases) sales of temporary investments with
maturities of three months or less, net ..........................    (1,293,647)     2,668,363        528,889
                                                                     -----------    -----------    -----------
Net cash (used in) provided by investing activities ..............    (1,136,033)       699,084      2,862,418
                                                                     -----------    -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to partners ........................................    (4,687,500)    (4,350,000)    (2,775,000)
                                                                     -----------    -----------    -----------
Net (decrease) increase in cash ..................................       (82,527)       144,026        (96,150)
Cash, beginning of year ..........................................       247,033        103,007        199,157
                                                                     -----------    -----------    -----------
Cash, end of year ................................................   $   164,506    $   247,033    $   103,007
                                                                     -----------    -----------    -----------
</TABLE>


                       See notes to financial statements.


                                      F-6
<PAGE>


                          NOTES TO FINANCIAL STATEMENTS

1.  ORGANIZATION

Silver Screen Partners III, L.P. ("the Partnership") was formed on September 17,
1986 as a Delaware limited partnership and began operations on January 29, 1987.
The Partnership  formed a Joint Venture with The Walt Disney Company  ("Disney")
for the purpose of financing (in whole or in part), producing and exploiting all
feature-length  theatrical  motion  pictures  selected for  production by Disney
until the  Partnership's  funds were fully committed.  The Partnership  provided
substantially all the financing for the Joint Venture's films,  while Disney was
responsible  for the  development  and  production or  acquisition  decisions on
behalf of the Joint Venture in connection with the films.

     Silver Screen  Management,  Inc., a Delaware  corporation,  is the managing
general partner ("MGP") of the Partnership and has exclusive  responsibility for
the  management  of the business and the affairs of the  Partnership.  Roland W.
Betts,  the President and a principal  shareholder of the MGP, is the individual
general partner of the Partnership.

     The Partnership Agreement provides that all Partnership profits, losses and
distributable cash ("Proceeds") are allocated 99% to the limited partners and 1%
to the general  partners  until the  Partnership  has satisfied  certain  tests.
Thereafter,  all Proceeds will be allocated 90% to the limited  partners and 10%
to the general partners until additional tests have been satisfied.  Thereafter,
all  Proceeds  will be  allocated  80% to the  limited  partners  and 20% to the
general  partners.  During the year ended  December  31,  1993,  the  allocation
percentages with regard to  distributable  cash changed from 90% for the limited
partners  and 10% for the general  partners to 80% and 20%,  respectively.  Cash
generated  by net gain from  sale,  as  defined,  will be  allocated  85% to the
limited  partners and 15% to the general partners once the general partners have
received an aggregate of 15% of the total cash  generated by net gain from sale.
The  Partnership  Agreement  provides for the special  allocation  of income and
gain, in accordance with Treasury  Regulation Section  1.704-1(b),  to eliminate
any capital account deficit  created through cash  distributions  to the general
partners.  This special  allocation in 1996, 1995 and 1994 amounted to $878,651,
$832,411 and $526,261, respectively, which represents $1.46, $1.39 and $0.88 per
$500 limited partnership unit,  respectively.  Cash distributions to the limited
partners  are  allocated  pro-rata  according  to the  capital  accounts  of the
respective limited partners.


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Income taxes: No provision has been made for income taxes except for the City of
New York unincorporated  business tax since income or loss of the Partnership is
required to be reported by the  respective  partners on their income tax returns
(see Note 7).


3.  TEMPORARY INVESTMENTS

Temporary investments consisted of the following:

                                1996             1995
                          ----------       ----------

Commercial paper ......   $4,545,092       $3,244,285
                          ----------       ----------


All  commercial  paper is rated by Standard & Poor's A1 or A1+.

1996  commercial  paper matured  between  January 2 and January 23, 1997 and had
interest rates ranging from 5% to 5.30%.

1995  commercial  paper matured  January 11, 1996 and had interest rates ranging
from 5.75% to 5.79%.


                                      F-7
<PAGE>


4.  INVESTMENT IN JOINT VENTURE

The Partnership  entered into a Letter  Agreement (the "Buyout  Agreement") with
Disney dated  September 11, 1995  providing for the sale to Disney of all of the
Partnership's  interest in the Joint Venture.  The Buyout Agreement provides for
the payment of the purchase  price of  $125,000,000  in cash (subject to certain
adjustments  with  respect to  revenues  received  by the  Partnership  from the
exploitation of the film "Oliver & Co.").

     The  closing  is  scheduled  to occur on  September  30,  1997  subject  to
satisfaction of certain customary conditions. In addition to the purchase price,
the Buyout  Agreement  provides  that Buena Vista  Pictures  Distribution,  Inc.
("BV") will  continue to account for and make  payments to the Joint  Venture as
required by the Distribution  Agreement for all revenues  received by BV through
August 31, 1997.

     As a result of the  Buyout  Agreement,  the  Partnership  is using the cost
method  of  accounting   starting  January  1,  1996.  Under  the  cost  method,
distributions  received are recognized as income and investments will be reduced
in proportion to the actual cash  received to ultimate  revenues  expected to be
received.


     The  investment in the  Disney-Silver  Screen III Joint Venture (the "Joint
Venture") was accounted  for using the equity  method of  accounting.  Under the
equity method, the investment was initially recorded at cost, and was thereafter
increased by additional  investments,  adjusted by the Partnerhip's share of the
Joint Venture's  results of operations,  and reduced by  distributions  received
from the Joint Venture. The Joint Venture's fiscal year ends September 30, while
the Partnership's  fiscal year ends December 31. The 1995 and 1994 statements of
operations  reflect the Joint  Venture's  results of  operations  for its fiscal
years ended  September 30, 1995 and 1994. The investment in the Joint Venture on
January 1, 1996 totaled $2,862,545.

     The investment in Joint Venture at December 31, 1995 was as follows:

                                                                           1995
                                                                    -----------

Balance, January 1 ..............................................   $   893,266
Income from Joint Venture for the fiscal year ended September 30      4,515,810
Distributions received, January 1 to December 31 ................    (2,546,531)
                                                                    -----------
Balance, December 31 ............................................   $ 2,862,545
                                                                    ===========


For each Joint Venture Film, all revenues  received by the Joint Venture (except
for "Roger Rabbit") were allocated and distributed  first to the Partnership and
Disney in proportion  to their  respective  investments  in the budgeted cost of
each film until each recovered its investment; second, net of participations, to
Disney until it recovered any amounts paid for cost  overruns;  and  thereafter,
net of  participations,  75% to the Partnership and 25% to Disney  (adjusted for
any Disney investment in the film other than cost overruns).


                                      F-8
<PAGE>


The  condensed  balance sheet for the Joint Venture at September 30, 1995 was as
follows:

                                                                           1995
                                                                     -----------

ASSETS
Receivable from Buena Vista Pictures Distribution, Inc. ........     $ 9,601,275
Film production costs, net of accumulated
  amortization of $209,457,749 .................................       6,057,023
                                                                     -----------
                                                                     $15,658,298
                                                                     ===========
LIABILITIES AND VENTURERS' CAPITAL
Accounts and distributions payable to:
The Walt Disney Company ........................................     $ 7,071,310
Silver Screen Partners III, L.P. ...............................       1,773,157
Deferred revenue ...............................................         756,809
Venturers' capital:
The Walt Disney Company ........................................       3,589,389
Silver Screen Partners III, L.P. ...............................       2,467,633
                                                                     -----------
                                                                     $15,658,298
                                                                     ===========


The  condensed  statements  of income for the Joint  Venture for the years ended
September 30, 1995 and 1994 were as follows:

                                                         1995             1994
                                                 ------------      ------------
Revenues ...................................     $  9,127,690      $ 12,978,791
Amortization of film production costs ......         (501,055)       (2,940,665)
Participation expense ......................       (1,759,597)       (5,482,403)
                                                 ------------      ------------
Net income .................................     $  6,867,038      $  4,555,723
                                                 ============      ============


The  Partnership's  share of the  September  30,  1995 and 1994 net  income  was
$4,515,810 and $3,444,814, respectively.


                                      F-9
<PAGE>


     Film  costs  included  production  costs,  a 17.5%  overhead  charge on the
budgeted  film  cost  (payable  13.5%  to  Disney  and  4% to  the  MGP),  and a
development  fee of $500,000 for each film (except  "Roger  Rabbit")  payable to
Disney.  In December 1988, an underbudget bonus of $6,024,240 was paid to Disney
by the Partnership  pursuant to the Joint Venture Agreement.  Upon revision,  an
additional  underbudget  bonus of $528,585 was paid in August  1990.  Film costs
were  charged  to  earnings  on an  individual  film basis in the ratio that the
current  year's  revenues  bore to Joint  Venture  management's  estimate of the
ultimate  revenues to be received  from all sources.  See Note 6 with respect to
the Joint Venture's distribution agreement.

     Film costs were  stated at the lower of cost or  estimated  net  realizable
value on an individual  film basis.  Revenue  forecasts for all motion  pictures
were continually reviewed by Joint Venture management and revised when warranted
by changing  conditions.  When  estimates  of  ultimate  revenues to be received
indicated  that a motion  picture would result in an ultimate  loss,  additional
amortization was provided to reduce the film to its net realizable value.

     All  of the  Joint  Venture's  motion  pictures  have  been  completed  and
released,  and are currently in secondary  markets (home video,  pay television,
free television, and syndication).  Based on Joint Venture management's ultimate
revenue  estimates at September 30, 1995, all unamortized  film production costs
will be amortized during 1997.

     Participations  represent  a  participant's  share  of a  motion  picture's
profits  as  contractually   defined.  An  ultimate   participation  expense  is
determined for each motion picture using ultimate  revenues.  Revenue  forecasts
for all motion pictures are continually reviewed by Joint Venture management and
ultimate participation expense is revised when warranted. Ultimate participation
expense is charged to  earnings  on an  individual  film basis in the ratio that
current  year's  revenues  bear to Joint  Venture  management's  estimate of the
ultimate revenues to be received from all sources.


5.  OVERHEAD FEES PAYABLE

The  Partnership   Agreement   provided  that  overhead  fees  received  by  the
Partnership for the benefit of the MGP (see Note 4) would remain on account with
the Partnership with the understanding that the MGP could draw from such account
from time to time in order to cover its actual operating expenses not reimbursed
from other  sources.  Pursuant to the  Partnership  Agreement,  the  overhead on
account was paid to the MGP on June 14,  1994.  Whenever  the MGP drew from such
account,  it was entitled to receive at that time from the Partnership an amount
equal to 10% per  annum on the  amounts  not yet  paid to the  MGP.  The  amount
included in general and administrative expenses in 1994 was $138,414.


6.  AGREEMENT WITH RELATED PARTIES

The Joint  Venture  entered  into a  distribution  agreement  with  Buena  Vista
Pictures  Distribution,  Inc.  ("Buena  Vista"),  a  wholly-owned  subsidiary of
Disney.  The  agreement  provided  that the Joint  Venture  grant  Buena Vista a
license to distribute all the Joint Venture's films, in all media throughout the
world through  September 30, 1997. The distribution  agreement  provided that if
the revenues  received by the Joint Venture for a Joint Venture film (except for
"Roger  Rabbit")  were less than  100% of the  film's  budgeted  film  cost,  as
defined, actually expended, then, five years after the release of that film (or,
if earlier,  seven years  after the  release of the first Joint  Venture  film),
Buena Vista,  to the extent it had retained  revenues from that film,  would pay
the Joint  Venture  an  additional  amount  (the  "Revenue  Shortfall  Payment")
sufficient to return the budgeted film cost actually  expended.  Buena Vista was
entitled to recoup any Revenue Shortfall Payments from the Joint Venture's share
of film revenue from such film after the date of such payment.  The  Partnership


received Revenue  Shortfall  Payments during the year ended December 31, 1995 of
$1.4 million.  Disney had  guaranteed  Buena Vista's  obligation to make Revenue
Shortfall Payments.


                                      F-10
<PAGE>


7.  UNINCORPORATED BUSINESS TAX

On September 30, 1996, the Partnership received an assessment from New York City
regarding  unincorporated  business  tax  covering  all periods  from  inception
through December 31, 1995 of $878,000 (including  interest).  This liability was
paid on the date of assessment. The Unincorporated Business Tax Expense reflects
the  excess  of  this  payment  over  an  amount  previously  established  as  a
contingency reserve plus a provision for 1996.

--------------------------------------------------------------------------------
                                                                     (unaudited)


Value per unit based on annual appraisal
----------------------------------------

The  appraised  value per unit based on  projected  cash flow as of December 31,
1996 is $173. The appraised value does not consider the time value of money.


Cash distributions
------------------

The Partnership made two  distributions in 1996 totalling $6.25 or 1.3% per $500
unit.  Cumulative  distributions through December 31, 1996 totalled $713 or 143%
per unit.


Availability of Form 10-K
-------------------------

A copy  of the  Partnership's  Annual  Report  to the SEC on  Form  10-K  may be
obtained  without  charge by  writing  to the  Partnership,  c/o  Silver  Screen
Management, Chelsea Piers-Pier 62, Suite 300, New York, N.Y. 10011.


                                      F-11
<PAGE>


Silver Screen Management, Inc.
Chelsea Piers-Pier 62
Suite 300 New York, NY 10011
(212) 336-6700




                                  Bulk Rate
                                U. S. Postage
                                     PAID
                                  Permit #9
                                  Boston, MA


                                      F-12
<PAGE>