UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                               -------------------
                                    FORM 10-K



[X]           Annual  Report  Pursuant to Section 13 or 15(d) of the  Securities
              Exchange Act of 1934 For the fiscal year ended December 31, 1997.

[  ]          Transition Report Pursuant to Section 13 or 15(d) of the 
              Securities Exchange Act of 1934
              For the transition period from              to

                         Commission file number 1-10813
                             -----------------------

                          PLM EQUIPMENT GROWTH FUND III
             (Exact name of registrant as specified in its charter)

         California                                68-0146197
(State or other jurisdiction of               (I.R.S. Employer
incorporation or organization)                 Identification No.)

One Market, Steuart Street Tower
Suite 800, San Francisco, CA                       94105-1301
(Address of principal                              (Zip code)
executive offices)


        Registrant's telephone number, including area code (415) 974-1399
                             -----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes X No ______

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

Aggregate market value of voting stock:  N/A

Indicate  the number of units  outstanding  of each of the  issuer's  classes of
partnership units, as of the latest practicable date:

                  Class                          Outstanding at March 20, 1998
     Limited partnership depositary units:             9,871,073
     General Partnership units:                                1

An index of exhibits filed with this Form 10-K is located at page 25.

Total number of pages in this report:  45



<PAGE>



                                     PART I
Item 1.           BUSINESS

(A)     Background

On October 27, 1987, PLM Financial Services,  Inc. (FSI or the General Partner),
a wholly-owned subsidiary of PLM International, Inc. (PLM International),  filed
a Registration Statement on Form S-1 with the Securities and Exchange Commission
with respect to a proposed  offering of 10,000,000  depositary units (the units)
in PLM  Equipment  Growth  Fund  III,  a  California  limited  partnership  (the
Partnership,  the  Registrant,  or EGF III). The  Partnership's  offering became
effective on March 21, 1988. FSI, as General Partner,  owns a 5% interest in the
Partnership.  The  Partnership  engages in the  business  of owning and  leasing
transportation  and  related  equipment  to be  operated by or leased to various
shippers and transportation companies.

The  Partnership  was formed to engage in the  business of owning and managing a
diversified  pool of used and new  transportation-related  equipment and certain
other items of equipment. The Partnership's primary objectives are:

     (1) to acquire a diversified  portfolio of low-obsolescence  equipment with
long  lives  and high  residual  values  with the net  proceeds  of the  initial
Partnership  offering,  supplemented by debt financing if deemed  appropriate by
the General  Partner.  The General Partner sought to purchase a diversified pool
of used  transportation and related  equipment,  which, due to supply and demand
being out of  equilibrium,  is priced  below its  inherent  value.  The  General
Partner places the equipment on lease or under other contractual agreements with
creditworthy lessees and operators of equipment. A lessee's  creditworthiness is
determined by PLM's Credit Review Committee (the Committee), which is made up of
members of PLM's senior management. In determining a lessee's  creditworthiness,
the Committee will  consider,  among other  factors,  its financial  statements,
internal and external credit ratings, and letters of credit;

     (2) to generate  sufficient net operating cash flows from lease  operations
to meet existing  liquidity  requirements and to generate cash  distributions to
the  limited  partners  until such time as the  General  Partner  commences  the
orderly  liquidation  of the  Partnership  assets or unless the  Partnership  is
terminated  earlier upon sale of all  Partnership  property or by certain  other
events;

     (3)  to  selectively  sell  and  purchase  other  equipment  to  add to the
Partnership's  initial equipment portfolio.  The General Partner sells equipment
when it believes  that,  due to market  conditions,  market prices for equipment
exceed inherent equipment values or that expected future benefits from continued
ownership  of a  particular  asset  will not  equal or  exceed  other  equipment
investment  opportunities.  Proceeds from these sales,  together with excess net
operating cash flow from operations  (net cash provided by operating  activities
plus distributions from  unconsolidated  special-purpose  entities (USPEs)) that
remain  after cash  distributions  have been made to the  Partners,  are used to
acquire additional  equipment  throughout the intended  seven-year  reinvestment
phase of the Partnership;

     (4) to  preserve  and protect the value of the  portfolio  through  quality
management, maintaining diversity and constantly monitoring equipment markets.

The offering of the units of the  Partnership  closed on May 11, 1989. On August
16, 1991,  the units of the  Partnership  began  trading on the  American  Stock
Exchange  (AMEX).  Thereupon,  each  unitholder  received a  depositary  receipt
representing  ownership  of the number of units  owned by such  unitholder.  The
General Partner delisted the Partnership's depositary units from the AMEX, which
had traded with the symbol  GFZ,  on April 8, 1996.  The last day for trading on
the AMEX was March 22,  1996.  As of December  31,  1997,  there were  9,871,073
depositary units  outstanding.  The General Partner  contributed $100 for its 5%
General Partner interest in the Partnership.

During the first seven years of operations,  which ended on December 31, 1996, a
portion  of cash  flow  and  surplus  funds  were  used to  purchase  additional
equipment and a portion was  distributed  to the partners.  Beginning  after the
Partnership's  seventh year of operations  which began on January 1, 1997,  cash
flow and surplus funds, if any, are being distributed to the partners. Beginning
in the eleventh year of operations of the Partnership,  the General Partner will
commence  to  liquidate  the assets of the  Partnership  in an orderly  fashion,
unless  the  Partnership  is  terminated  earlier  upon sale of all  Partnership
property or by certain other events. This Partnership will terminate on December
31, 2000,  unless  terminated  earlier upon sale of all  equipment or by certain
other events.

                                       


<PAGE>



     Table  1,  below,  lists  the  cost  of the  equipment  in the  Partnership
portfolio and the cost of investments in unconsolidated special-purpose entities
as of December 31, 1997 (in thousands of dollars):

                                     TABLE 1
<TABLE>
<CAPTION>

 Units                            Type                                       Manufacturer                    Cost
-------------------------------------------------------------------------------------------------------------------------

Equipment held for operating leases:

  <S>      <C>                                                    <C>                                     <C>            
      1    Dash 8-300                                             Dehavilland                             $    5,748
      3    737-200 Stage II commercial aircraft                   Boeing                                      30,506
      1    DC-9-32  Stage II commercial aircraft                  McDonnell Douglas                           10,028
      1    Mobile offshore drilling unit                          Falcon Drilling Company                      9,666
    550    Marine containers                                      Various                                      7,421
    119    Coal cars                                              Various                                      4,788
  1,260    Tank cars                                              Various                                     30,071
     68    Over-the-road dry trailers                             Stoughton and Strick                           401
    157    Over-the-road refrigerated trailers                    Various                                      4,145
    164    Intermodal trailers                                    Various                                      2,534
                                                                                                        -----------------
           Total equipment                                                                                $  105,308<F1>
                                                                                                        =================


Investments in unconsolidated special-purpose entities:


   0.56    Bulk carrier marine vessel                             Naikai Zosen, Naikai Shpbldg.           $    7,163<F2>
   0.17    Two trusts comprised of:
             Three 737-200 Stage II commercial aircraft,          Boeing                                       4,706<F3>
             two Stage II aircraft engines, and a                 Pratt Whitney                                  195<F3>
             portfolio of rotable components                      Various                                        325<F3>
   0.25    Trust comprised of:
             Four 737-200A Stage II commercial aircraft           Boeing                                       4,494<F4>

                                                                                                        -----------------
           Total investments                                                                              $   16,883<F1>
                                                                                                        =================
<FN>

<F1> Includes proceeds from capital contributions,  operations,  and Partnership
     borrowings invested in equipment.  Includes costs capitalized subsequent to
     the  date  of  acquisition  and  equipment  acquisition  fees  paid  to PLM
     Transportation  Equipment Corporation.  All equipment was used equipment at
     the time of purchase, except for 50 marine containers and 164 dry piggyback
     trailers.
<F2> Jointly owned:  EGF III (56%) and an affiliated program.
<F3> Jointly owned:  EGF III (17%) and three affiliated programs.
<F4> Jointly owned:  EGF III (25%) and two affiliated programs.

</FN>

</TABLE>


The equipment is generally  leased under  operating  leases with terms of one to
seven years. Some of the Partnership's  marine vessels and marine containers are
leased to  operators  of  utilization-type  leasing  pools,  which  may  include
equipment owned by unaffiliated parties. In such instances, revenues received by
the  Partnership  consist of a specified  percentage  of revenues  generated  by
leasing the pooled  equipment to  sublessees,  after  deducting  certain  direct
operating expenses of the pooled equipment.

As of December 31, 1997, 58% of the Partnership's  trailer equipment is operated
in rental yards owned and maintained by PLM Rental, Inc., the short-term trailer
rental  subsidiary of PLM  International  doing business as PLM Trailer Leasing.
Revenues  collected under  short-term  rental  agreements with the rental yards'
customers  are  credited to the owners of the  related  equipment  as  received.
Direct  expenses  associated  with the  equipment  are  charged  directly to the
Partnership. An allocation of indirect expenses of the rental yard operations is
charged to the Partnership monthly.



                                       


<PAGE>



The lessees of the  equipment  include but are not limited to:  Sahara  Airlines
India Ltd., Continental Airlines,  Inc., Canadian Airlines International,  Varig
S.A. (Viaco Aerea Rio - Grandense),  Time Air, Inc., and Terra  Nitrogen.  As of
December 31, 1997, all of the equipment was on lease or in rental yards,  except
for 28 marine containers and 41 railcars.

(B)     Management of Partnership Equipment

The  Partnership  has entered into an equipment  management  agreement  with PLM
Investment  Management,  Inc.  (IMI), a wholly-owned  subsidiary of FSI, for the
management  of the  equipment.  IMI agreed to perform all services  necessary to
manage the transportation  equipment on behalf of the Partnership and to perform
or contract for the  performance  of all  obligations  of the lessors  under the
Partnership's  leases.  In  consideration  for its  services and pursuant to the
partnership  agreement,  IMI  is  entitled  to a  monthly  management  fee  (see
consolidated financial statement,  Notes 1 and 2). The Partnership's  management
agreements with IMI is to co-terminate  with the dissolution of the Partnership,
unless the partners vote to terminate the agreement prior to that date or at the
discretion of the General Partner.

(C)     Competition

(1)     Operating Leases versus Full Payout Leases

Generally,  the equipment owned by the Partnership is leased out on an operating
lease basis wherein the rents owed during the initial  noncancelable term of the
lease are  insufficient  to  recover  the  Partnership's  purchase  price of the
equipment. The short to mid-term nature of operating leases generally commands a
higher  rental  rate than  longer-term  full  payout  leases and offers  lessees
relative  flexibility in their  equipment  commitment.  In addition,  the rental
obligation  under an  operating  lease  need not be  capitalized  on a  lessee's
balance sheet.

The Partnership encounters considerable  competition from lessors utilizing full
payout  leases on new  equipment.  Full payout leases are leases that have terms
equal to the expected  economic life of the equipment and are written for longer
terms and for lower rates than the Partnership offers. While some lessees prefer
the flexibility offered by a shorter-term  operating lease, other lessees prefer
the rate  advantages  possible  with a full  payout  lease.  Competitors  of the
Partnership may write full payout leases at considerably  lower rates, or larger
competitors  with a lower cost of capital  may offer  operating  leases at lower
rates, which may put the Partnership at a competitive disadvantage.

(2)     Manufacturers and Equipment Lessors

The Partnership competes with equipment manufacturers who offer operating leases
and full payout leases.  Manufacturers may provide  ancillary  services that the
Partnership  cannot offer, such as specialized  maintenance  service  (including
possible substitution of equipment),  training,  warranty services, and trade-in
privileges.

The Partnership competes with many equipment lessors,  including ACF Industries,
Inc.   (Shippers  Car  Line  Division),   General   Electric   Railcar  Services
Corporation,  General Electric Capital Aviation Services Corporation,  and other
limited partnerships that lease the same types of equipment.

(D)     Demand

The Partnership has investments in transportation-related  capital equipment and
relocatable    environments.    Relocatable    environments   are   functionally
self-contained  transportable  equipment,  such as marine  containers.  Types of
capital  equipment owned by the Partnership  include  aircraft,  marine vessels,
railcars,  and  trailers.  Except for those  aircraft  leased to  passenger  air
carriers,  the  Partnership's  equipment  is used  to  transport  materials  and
commodities, rather than people.


                                       


<PAGE>



The following  section describes the international and national markets in which
the Partnership's capital equipment operates:

Aircraft

(a)      Commercial aircraft

The international  commercial  aircraft market experienced  another good year in
1997, with a third consecutive year of profits by the world's airlines.  Airline
managements have continued to emphasize cost reductions and a moderate  increase
in capacity.  However,  even the limited  volume of new aircraft  deliveries has
caused the  market to change  from  being in  equilibrium  at the end of 1996 to
having excess supply.  This market  imbalance is expected to continue,  with the
number of surplus aircraft increasing from approximately 350 aircraft at the end
of 1996 to an estimated 600 aircraft by the end of the decade.

The changes  taking  place in the  commercial  aircraft  market also reflect the
impact of noise  legislation  enacted in the United  States and Europe.  Between
1997 and the end of 2002,  approximately  1,400 Stage II aircraft  (Stage II are
aircraft that have been shown to comply with Stage II noise levels prescribed in
Federal Aviation Regulation section C36.5) are forecast to be retired, primarily
due to noncompliance with Stage III noise  requirements  (Stage III aircraft are
aircraft  that have been shown to comply with Stage III noise levels  prescribed
in Federal Aviation  Regulation section C36.5). This represents about 41% of the
Stage II aircraft now in  commercial  service  worldwide.  By 2002,  about 2,000
(59%) of the  current  fleet of Stage II  aircraft  will  remain in  operational
service  outside of Stage  III-legislated  regions or as aircraft  that have had
hushkits  installed  so that engine  noise  levels  meet the  quieter  Stage III
requirements.  The cost to  install a hushkit  is  approximately  $1.5  million,
depending  on the  type of  aircraft.  The  new  aircraft  all  meet  Stage  III
requirements.

The  Partnership's  fleet consists of late-model Stage II narrowbody  commercial
aircraft.  The aircraft either are positioned with air carriers that are outside
Stage III-legislated  areas, are scheduled for Stage III hushkit installation in
1998-99,  or are  anticipated  to be sold or leased  outside  of Stage III areas
before 2000.  Specifically,  the Partnership has scheduled a Stage II narrowbody
aircraft for sale during 1998.  A Stage II  narrowbody  aircraft now on lease in
the United States will be sold or leased  outside the Stage  III-affected  areas
before the year 2000.

(b)      Commuter Aircraft

The commuter  aircraft  market is  experiencing a revolution with the successful
entry of small regional jets into this market. Major turboprop manufacturers are
re-evaluating  their programs,  and several successful but larger models are now
being  considered for phase-out.  The original concept for regional jets was for
them to take over the  hub-and-spoke  routes served by the larger  turboprops in
North America,  but they are also finding  successful  niches in  point-to-point
routes.  The introduction of this smaller aircraft has allowed major airlines to
shift the regional  jets to marginal  routes  previously  operated by narrowbody
aircraft,  allowing the larger-capacity aircraft to be more efficiently employed
in an airline's route system.

The  Partnership  leases  commuter  aircraft  in  the  36 to 50  seat  turboprop
category.   These   aircraft  are  all   positioned   in  North   America,   the
fastest-growing  market for commuter  aircraft in the world.  The  Partnership's
aircraft possess unique performance capabilities,  compared to other turboprops,
which  allow  them to  readily  operate  at  maximum  payloads  from  unimproved
surfaces,  hot and high runways, and short runways. The market for turboprops is
undergoing   rapid  change  due  to  the  introduction  of  regional  jets.  The
manufacturer  of  the  Partnership's   commuter/regional  aircraft  has  already
announced production cutbacks for some types of turboprops,  which may adversely
affect both demand and near-term values for the Partnership's aircraft.

(c)      Aircraft Engines and Rotables

The demand for spare engines has increased, particularly for the Pratt & Whitney
Stage II JT8D engine, which powers many of the Partnership's Stage II commercial
aircraft.

Aircraft rotables, or components,  are replacement spare parts held in inventory
by an airline.  These parts are components  that are removed from an aircraft or
engine,  undergo  overhaul,  and are recertified and refit to the aircraft in an
"as new" condition.  Rotables carry specific  identification  numbers,  allowing
each part to be individually tracked during its use. The types of rotables owned
and leased by the Partnership  include landing gear,  certain engine components,
avionics,  auxiliary power units,  replacement doors,  control surfaces,  pumps,
valves,  and other  comparable  equipment.  The Partnership  expects to sell its
aircraft rotables during 1998.

(2)      Marine Vessel

The  Partnership  has  an  investment  with  another  affiliated  program  in  a
small-sized  dry bulk  vessel  that is traded in  worldwide  markets and carries
commodity cargos.  Dry bulk markets  experienced flat freight rates, with supply
increases outrunning demand growth. Demand for commodity shipping closely tracks
worldwide economic growth patterns;  however,  economic development alters trade
patterns from time to time, causing changes in volume on trade routes.

The General  Partner  operates  the  Partnership's  marine  vessel  under period
charters.  It is believed that this operating  approach provides the flexibility
to adapt to changing demand patterns.

Freight rates for dry bulk vessels in 1997 maintained the levels  experienced in
the fourth  quarter of 1996.  Freight rates had declined  significantly  in 1996
until a moderate  recovery occurred late in the year due to an increase in grain
trade.  The size of the  overall  dry bulk  carrier  fleet  increased  by 3%, as
measured by the number of vessels, and by 5%, as measured by deadweight tonnage.
Scrapping of ships was not a significant factor in 1997: 126 dry bulk ships were
scrapped  while 247 were  delivered.  Total dry trade (as measured in deadweight
tons) grew by 3% in 1997,  versus 1% in 1996.  This balance of supply and demand
made market conditions soft,  providing little foundation for increasing freight
rates.

Growth in 1998 is expected to be approximately  2%, with most commodity  trading
flat.  The  majority  of growth is  forecast to come from grain (2%) and thermal
coal (6%). The primary  variable in forecasts is Asian growth;  if there is some
recovery from the economic  shake-up of the second half of 1997, then there will
be prospects for  improvement in 1998.  Delivery of ships in 1998 is expected to
be about the same as in 1997;  however,  an increase in scrapping is anticipated
to strengthen the market.

Current rates do not justify any new construction of dry bulk carriers and there
should be a  significant  drop in orders  over the next two years.  If growth in
demand  matches  historic  averages of around 3%, then the current excess supply
should be absorbed by the end of 1999, leading to the possible  strengthening of
freight rates at that time.

(3)      Marine Containers

The marine  container  market began 1997 with a continuation  of the weakness in
industrywide  container utilization and rate pressures that had been experienced
in 1996. A reversal of this trend began in early spring and continued during the
remainder of 1997, as utilization  returned to the 80% range. Per diem rates did
not strengthen, as customers resisted attempts to raise daily rental rates.

Industrywide  consolidation continued in 1997. Late in the year, Genstar, one of
the world's largest container leasing  companies,  announced that it had reached
an agreement  with  SeaContainers,  another  large  container  leasing  company,
whereby  SeaContainers  will take over the management of Genstar's  fleet.  Long
term, such industrywide  consolidation  should bring more rationalization to the
container leasing market and result in both higher fleetwide utilization and per
diem rates.

(4)      Railcars

(a)      Pressurized Tank Cars

Pressurized  tank cars are used  primarily in the  petrochemical  and fertilizer
industries  to transport  liquefied  petroleum gas and  anhydrous  ammonia.  The
demand for natural gas is  anticipated  to grow through 1999, as the  developing
world,  former Communist  countries,  and the industrialized  world all increase
their energy  consumption.  World demand for fertilizer is expected to increase,
based on an awareness of the necessity of fertilizing crops and improving diets,
the shortage of farm land, and population growth in developing nations. Based on
ongoing  renewals with current  lessees,  demand for these cars  continues to be
strong and is projected to remain so during 1998.

The utilization  rate of the  Partnership's  fleet of pressurized  tank cars was
over 98% during 1997.


                                       


<PAGE>



(b)      General-Purpose (Nonpressurized) Tank Cars

General-purpose or nonpressurized tank cars are used to transport a wide variety
of bulk liquid commodities, such as petroleum fuels, lubricating oils, vegetable
oils, molten sulfur,  corn syrup,  asphalt,  and specialty  chemicals.  Chemical
carloadings  for the  first 45 weeks of 1997  were up 4%,  compared  to the same
period  in 1996.  The  demand  for  petroleum  is  anticipated  to grow,  as the
developing  world,  former Communist  countries,  and the  industrialized  world
increase energy consumption.

The demand for general-purpose tank cars in the Partnership's fleet has remained
healthy over the last three years, with utilization remaining above 98%.

(c)      Coal Cars

Coal car  loadings  for 1997  were  essentially  even  with  1996  levels.  Coal
dominates  electric  fuel markets and will probably  continue to do so,  despite
additional EPA restraints in 1997 on emissions from power plants. Coal remains a
fuel of choice  due to lower  prices,  improved  mining  techniques,  continuing
difficulties in nuclear power, and unstable prices for gas and oil.

(5)      Trailers

(a)      Intermodal (Piggyback) Trailers

In all intermodal equipment areas, 1997 was a remarkably strong year. The United
States inventory of intermodal  equipment totaled 163,900 units in 1997, divided
between  about 55%  intermodal  trailers  and 45% domestic  containers.  Trailer
loadings  increased  approximately  4% in 1997  due to a  robust  economy  and a
continuing shortage of drivers in over-the-road  markets. The expectation is for
flat to slightly declining  utilization of intermodal trailer fleets in the near
future.

(b)      Over-the-Road Dry Trailers

The United States  over-the-road dry trailer market began to recover in mid-1997
as an oversupply of equipment from 1996 subsided. The strong domestic economy, a
continuing focus on integrated  logistics  planning by American  companies,  and
numerous  service  problems on Class I railroads  contributed to the recovery in
the dry van market. In addition,  federal  regulations  requiring antilock brake
systems on all new trailers,  effective in March 1998, have helped stimulate new
trailer  production,  and the market is anticipated to remain strong in the near
future. There continues to be much consolidation of the trailer leasing industry
in North America, as the two largest lessors of dry vans now control over 60% of
the market. The reduced level of competition, coupled with anticipated continued
strong utilization, may lead to an increase in rates.

(c)      Over-the-Road Refrigerated Trailers

The  temperature-controlled  over-the-road  trailer  market  recovered  in 1997;
freight levels improved and equipment oversupply was reduced as industry players
actively  retired older  trailers and  consolidated  fleets.  Most  refrigerated
carriers posted revenue growth of between 2% and 5% in 1997, and accordingly are
planning  fleet  upgrades.   In  addition,   with   refrigeration   and  trailer
technologies   changing  rapidly  and  industry  regulations  becoming  tighter,
trucking companies are managing their refrigerated fleets more effectively.

As a  result  of  these  changes  in  the  refrigerated  trailer  market,  it is
anticipated that trucking  companies will utilize short-term trailer leases more
frequently  to  supplement  their  fleets.  Such  a  trend  should  benefit  the
Partnership,  which  generally  leases its equipment on a short-term  basis from
rental yards owned and operated by PLM subsidiaries.

(6)      Mobile Offshore Drilling Unit (Rig)

Worldwide demand in all sectors of the mobile offshore drilling unit industry in
1997 was a continuation  of the increases  experienced in 1996. This increase in
demand was spread  over all the  geographic  regions of  offshore  drilling  and
affected  both  jackup and  floating  rigs.  Potential  demand  during  1997 was
difficult to estimate because of the shortage of rigs.

The tightness in the market caused  significant  increases in contract day rates
throughout the year. Day rates at the end of 1997 approached  levels  justifying
new rig construction. While continuing market improvement can be attributed to a
number of factors,  the primary reason is worldwide growth in the use of oil and
natural gas for energy.  Stable prices at moderate  levels have  encouraged such
growth, while providing adequate margins for oil and natural gas exploration and
production development.

The trend of contractor  consolidation continued in 1997; three major mergers or
acquisitions initiated late in 1997 are expected to be consummated by the end of
1998.  For 1998,  utilization  and demand are  expected  to remain at the levels
reached in 1997. Industry participants project that demand for both floating and
jackup rigs will continue at current high levels through 1998,  with  additional
rig supply absorbed by demand  increases.  Day rates are expected to continue to
increase; however, the rate of increase will slow, since the current high levels
have induced long-term contracting with few opportunities for increases.

The jackup rig sector,  in which the General  Partner has  participated  for two
years,  comprises  approximately 70% of the offshore  drilling market.  Overall,
demand for jackup rigs increased  approximately 2.6%, from 274 rig-years in 1996
to 281 rig-years in 1997; the Gulf of Mexico alone  accounted for  approximately
120 rig-years. As measured by utilization, demand for jackups increased from 89%
in 1996 to 95% in 1997. Higher utilization provided the impetus for contract day
rates to double for most jackup rig types,  which led to increased asset values.
Although  there is no general trend toward new orders,  ten new jackup rigs were
on order  at the end of 1997.  Most of them  are for  heavy-weather  units  that
already have  multiyear  contracts.  The  majority of industry  capital is being
directed to upgrading existing equipment.

(E)     Government Regulations

The use, maintenance, and ownership of equipment is regulated by federal, state,
local,  or  foreign  governmental  authorities.   Such  regulations  may  impose
restrictions and financial burdens on the Partnership's  ownership and operation
of  equipment.  Changes  in  government  regulations,   industry  standards,  or
deregulation  may also  affect  the  ownership,  operation,  and  resale  of the
equipment.  Substantial  portions of the Partnership's  equipment  portfolio are
either registered or operated internationally.  Such equipment may be subject to
adverse  political,   government,   or  legal  action,  including  the  risk  of
expropriation  or loss arising from  hostilities.  Certain of the  Partnership's
equipment is subject to extensive  safety and operating  regulations,  which may
require  its  removal  from  service  or  extensive  modification  to meet these
regulations,  at considerable cost to the Partnership.  Such regulations include
but are not limited to:

     (1)       the U.S. Oil Pollution Act of 1990 (which  established  liability
               for operators and owners of vessels and mobile offshore  drilling
               units that create environmental  pollution).  This regulation has
               resulted in higher oil pollution liability insurance.  The lessee
               typically reimburses the Partnership for these additional costs;

     (2)       the U.S. Department of Transportation's  Aircraft Capacity Act of
               1990 (which  limits or  eliminates  the  operation of  commercial
               aircraft in the U.S. that do not meet certain noise,  aging,  and
               corrosion  criteria).  In addition,  under U.S.  Federal Aviation
               Regulations,  after December 31, 1999, no person shall operate an
               aircraft to or from any airport in the  contiguous  United States
               unless  that  airplane  has been  shown to comply  with Stage III
               noise  levels.  The  Partnership's  fleet  consists of late-model
               Stage II narrowbody commercial aircraft.  The aircraft either are
               positioned   with   air   carriers   that   are   outside   Stage
               III-legislated   areas,  are  scheduled  for  Stage  III  hushkit
               installation in 1998-99,  or are anticipated to be sold or leased
               outside   Stage  III  areas   before  2000.   Specifically,   the
               Partnership has scheduled a Stage II narrowbody aircraft for sale
               during 1998. A Stage II  narrowbody  aircraft now on lease in the
               United   States  will  be  sold  or  leased   outside  the  Stage
               III-affected areas before the year 2000;

     (3)       the Montreal  Protocol on Substances that Deplete the Ozone Layer
               and the U.S. Clean Air Act Amendments of 1990 (which call for the
               control and eventual  replacement  of  substances  that have been
               found to cause or contribute  significantly to harmful effects on
               the  stratospheric  ozone layer and which are used extensively as
               refrigerants   in  refrigerated   marine  cargo   containers  and
               over-the-road trailers);

     (4)       the  U.S.  Department  of  Transportation's  Hazardous  Materials
               Regulations  (which regulate the  classification of and packaging
               requirements for hazardous materials and which apply particularly
               to the Partnership's tank cars).

As of  December  31,  1997,  the  Partnership  is in  compliance  with the above
governmental  regulations.  Typically,  costs  related  to  extensive  equipment
modifications to meet government regulations are passed on to the lessee of that
equipment.

ITEM 2.       PROPERTIES

The Partnership  neither owns nor leases any properties other than the equipment
it has purchased for leasing purposes.  As of December 31, 1997, the Partnership
owned a portfolio of transportation and related equipment,  as described in Part
I, Table 1.

The  Partnership  maintains its principal  office at One Market,  Steuart Street
Tower, Suite 800, San Francisco,  California  94105-1301.  All office facilities
are provided by FSI without reimbursement by the Partnership.

ITEM 3.       LEGAL PROCEEDINGS

None.

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

No matters were submitted to a vote of the Partnership's limited partners during
the fourth quarter of its fiscal year ended December 31, 1997.











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<PAGE>




                                     PART II

ITEM 5.       MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED DEPOSITARY UNIT
              MATTERS

The  General  Partner  delisted  the  Partnership's  depositary  units  from the
American Stock Exchange (AMEX),  which had traded under the symbol GFZ, on April
8,  1996.  The last day for  trading on the AMEX was March 22,  1996.  Under the
Internal Revenue Code (the Code), then in effect, the Partnership was classified
as  a  Publicly  Traded  Partnership.  The  Code  treated  all  Publicly  Traded
Partnerships as corporations if they remained publicly traded after December 31,
1997. Treating the Partnership as a corporation would have meant the Partnership
itself  became a taxable,  rather  than a "flow  through"  entity.  As a taxable
entity,  the  income of the  Partnership  would have  become  subject to federal
taxation at both the partnership level and the investor level to the extent that
income  would have been  distributed  to an investor.  In addition,  the General
Partner  believed  that the  trading  price of the  depositary  units would have
become  distorted  when the  Partnership  began  the  final  liquidation  of the
underlying equipment portfolio. In order to avoid taxation of the Partnership as
a corporation  and to prevent  unfairness to  unitholders,  the General  Partner
delisted  the   Partnership's   depositary   units  from  the  AMEX.  While  the
Partnership's depositary units are no longer publicly traded on a national stock
exchange,  the  General  Partner  continues  to  manage  the  equipment  of  the
Partnership  and prepare and  distribute  quarterly and annual reports and Forms
10-Q  and  10-K in  accordance  with  the  Securities  and  Exchange  Commission
requirements.  In addition,  the General Partner  continues to provide pertinent
tax reporting forms and information to unitholders.

As of March 20, 1998, there were 9,871,073  depositary units outstanding.  There
are approximately 12,500 depositary unitholders of record as of the date of this
report.

Several   secondary   exchanges   facilitate  sales  and  purchases  of  limited
partnership units.  Secondary markets are characterized as having few buyers for
limited  partnership  interests  and  therefore  are  generally  viewed as being
inefficient  vehicles for the sale of partnership  units.  There is presently no
public market for the units and none is likely to develop.  To prevent the units
from being  considered  publicly  traded and  thereby to avoid  taxation  of the
Partnership  as an  association  treated  as a  corporation  under the  Internal
Revenue  Code,  the units will not be  transferred  without  the  consent of the
General Partner,  which may be withheld in its absolute discretion.  The General
Partner  intends to monitor  transfers of units in an effort to ensure that they
do not exceed the number  permitted by certain safe harbors  promulgated  by the
Internal  Revenue  Service.  A  transfer  may  be  prohibited  if  the  intended
transferee is not an U.S.  citizen or if the transfer would cause any portion of
the units to be treated as plan assets.

Pursuant  to the terms of the  partnership  agreement,  the  General  Partner is
generally  entitled to a 5% interest in the profits and losses and distributions
of the Partnership. The General Partner also is entitled to a special allocation
of any gains from the sale of the  Partnership's  assets in an amount sufficient
to eliminate any negative balance in the General Partner's capital account.  The
General Partner is the sole holder of such interests.










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<PAGE>




Table 2, below, sets forth the high and low reported prices of the Partnership's
depositary   units  for  1996,  as  reported  by  the  AMEX,  as  well  as  cash
distributions paid per depositary unit.

                                     TABLE 2
<TABLE>
<CAPTION>

                                                                     Cash Distributions Paid Per
                                                 Reported Trade        Per Depositary
                                                     Prices                 Unit
                                            -----------------------------------------

Calendar Period                                 High              Low

1996

<S>                                           <C>              <C>             <C>      
1st Quarter                                   $   5.25         $   3.88        $    0.40
2nd Quarter                                   $     --         $     --        $    0.25
3rd Quarter                                   $     --         $     --        $    0.25
4th Quarter                                   $     --         $     --        $    0.25

</TABLE>


The  General  Partner  delisted  the  Partnership's  depositary  units  from the
American Stock Exchange  (AMEX),  which had traded with the symbol GFZ, on April
8, 1996. The last day for trading on the AMEX was March 22, 1996.

The  Partnership  has engaged in a plan to repurchase  up to 250,000  depositary
units.  During the  period  from  January  1, 1996 to  December  31,  1996,  the
Partnership  repurchased  28,500  depositary  units  at a total  cost  of  $0.12
million.  There were no repurchases of depositary  units in 1997. As of December
31, 1997, the Partnership had purchased a cumulative total of 128,853 depositary
units at a total cost of $0.9  million.  The General  Partner  does not plan any
future repurchase of depositary units on behalf of the Partnership.





                      (This space intentionally left blank)


                                       


<PAGE>




ITEM 6.  SELECTED FINANCIAL DATA

Table 3, below, lists selected financial data for the Partnership:

                                     TABLE 3

                               For the years ended
                  December 31, 1997, 1996, 1995, 1994, and 1993
     (thousands of dollars, except weighted-average depositary unit amounts)
<TABLE>
<CAPTION>

                                                 1997              1996             1995              1994              1993
                                            ---------------------------------------------------------------------------------------

<S>                                           <C>              <C>               <C>               <C>              <C>        
Operating results:
  Total revenues                              $   26,066       $    25,886       $   28,055        $   40,247       $    42,149
  Net gain on disposition
    of equipment                                   5,629             6,450            2,936             2,863             1,707
  Loss on revaluation of
    equipment                                         --                --               --            (1,082)              (92)
  Equity in net income of unconsolidated
     special-purpose entities                        485             6,864               --                --                --
  Net income (loss)                                1,937             9,760            2,706               252              (241)

At year-end:
  Total assets                                $   53,186       $    78,651       $   83,317        $   98,779       $   117,531
  Total liabilities                               33,627            50,638           52,980            54,028            56,031
  Notes payable                                   29,290            40,284           41,000            41,000            40,866

Cash distribution                             $   10,391       $    11,964       $   16,737        $   16,811       $    16,829

Cash distributions representing
  a return of capital                         $    8,454       $     2,204       $   14,031        $   15,970       $    15,988

Per weighted-average depositary unit:

Net income (loss)                             $     0.14<F1>   $      0.93<F2>   $     0.19<F3>    $    (0.06)<F4>  $     (0.11)<F5>

Cash distribution                             $     1.00       $      1.15       $     1.60        $     1.60       $      1.60

Cash distribution representing
  a return of capital                         $     0.86       $      0.22       $     1.41        $     1.60       $      1.60


<FN>

<F1> After reduction of $0.4 million ($.04 per weighted-average depositary unit)
     resulting from a special  allocation to the General Partner relating to the
     gross gain on the sale of assets (see Note 1 to the consolidated  financial
     statements).

<F2> After reduction of $0.1 million ($.01 per weighted-average depositary unit)
     resulting from a special  allocation to the General Partner relating to the
     gross gain on the sale of assets (see Note 1 to the consolidated  financial
     statements).
                                                                                              
<F3> After reduction of $0.7 million ($.07 per weighted-average depositary unit)
     resulting from a special  allocation to the General Partner relating to the
     gross gain on the sale of assets (see Note 1 to the consolidated  financial
     statements).

<F4> After reduction of $0.8 million ($.08 per weighted-average depositary unit)
     resulting from a special  allocation to the General Partner relating to the
     gross gain on the sale of assets (see Note 1 to the consolidated  financial
     statements).
                                                                                                                                 
<F5> After reduction of $0.9 million ($.09 per weighted-average depositary unit)
     resulting from a special  allocation to the General Partner relating to the
     gross gain on the sale of assets (see Note 1 to the consolidated  financial
     statements).
</FN>

</TABLE>

                                       


<PAGE>



ITEM7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS
       OF OPERATIONS

(A)  Introduction

Management's  discussion  and  analysis of  financial  condition  and results of
operations relates to the financial  statements of PLM Equipment Growth Fund III
(the Partnership). The following discussion and analysis of operations and risks
focuses on the performance of the Partnership's  equipment in various sectors of
the  transportation  industry  and  its  effect  on  the  Partnership's  overall
financial condition.

(B)  Results of Operations -- Factors Affecting Performance

(1)  Re-leasing and Repricing Activity

     The exposure of the  Partnership's  equipment  portfolio to repricing  risk
occurs whenever the leases for the equipment expire or are otherwise  terminated
and the equipment must be  remarketed.  Factors  influencing  the current market
rate for  transportation  equipment  include  supply and  demand for  similar or
comparable types or kinds of transport  capacity,  desirability of the equipment
in the leasing market,  market conditions for the particular industry segment in
which the equipment is to be leased, overall market conditions,  and regulations
of many kinds concerning the use of the equipment. Equipment that is idle or out
of  service  between  the  expiration  of one  lease  and  the  assumption  of a
subsequent one can result in a reduction of contribution to the Partnership. The
Partnership  experienced  re-leasing or repricing  exposure in 1997 primarily in
its aircraft, marine vessel, marine containers, trailers, and railcars.

     (a) Aircraft:  Aircraft contribution  increased from 1996 to 1997 due to an
off-lease  Boeing  737-200  aircraft  that went back on lease  during  the first
quarter of 1997.  All other  aircraft  investments  were on lease for the entire
year.

     (b) Marine  Vessel:  The  Partnership's  partially  owned marine  vessel is
operated in a pooled operation.  In the third quarter of 1997, the lease rate on
this marine vessel decreased approximately 8%.

     (c) Marine Containers:  The majority of the Partnership's  marine container
portfolio is operated in utilization-based leasing pools and, as such, is highly
exposed to repricing activity. The Partnership's marine container  contributions
declined from 1996 to 1997, due to the disposition of equipment during 1997.

     (d)  Trailers:  All of the  Partnership's  trailer  portfolio  operates  in
short-term  rental  facilities or short-line  railroad  systems.  The relatively
short  duration  of most  leases in these  operations  exposes  the  trailers to
considerable  re-leasing activity.  Contribution from the Partnership's trailers
operated in short-term  rental  facilities  and the short-line  railroad  system
declined from 1996 to 1997, due to the disposition of equipment during 1997.

     (e) Railcars:  The majority of the Partnership's railcar equipment remained
on-lease  throughout the year, and thus was not adversely affected by re-leasing
and repricing exposure.

(2)      Equipment Liquidations and Nonperforming Lessees

Liquidation of Partnership  equipment  represents a reduction in the size of the
equipment  portfolio and will result in a reduction of net  contributions to the
Partnership.  Lessees not performing under the terms of their leases,  either by
not paying rent, not  maintaining or operating the equipment in accordance  with
the conditions of the leases, or other possible  departures from the leases, can
result not only in  reductions  in net  contributions,  but also may require the
Partnership  to assume  additional  costs to  protect  its  interests  under the
leases, such as repossession and legal fees.

     (a)  Liquidations:  During 1997, the  Partnership  sold marine  containers,
railcars, trailers, and two aircraft. A portion of the proceeds from the sale of
this  equipment  was used to repay part of the  Partnership's  outstanding  note
payable.


                                       


<PAGE>




     (b)  Nonperforming   Lessees:   One  aircraft  lessee  encounted  financial
difficulties.  The  General  Partner  fully  reserved  the  accounts  receivable
outstanding  from the  aircraft  lessee  as of  December  31,  1997.  All  other
equipment sectors experienced minor nonperforming  lessees,  none of which had a
significant impact on the performance of the Partnership.

(3)      Reinvestment Risk

During the first seven years of operations,  the  Partnership  invested  surplus
cash in additional equipment after fulfilling operating  requirements and paying
distributions  to the  partners.  Pursuant  to the  partnership  agreement,  the
Partnership  may no longer reinvest in additional  equipment  beginning in 1997.
Subsequent to the end of the  reinvestment  period,  which concluded on December
31, 1996,  the  Partnership  will  continue to operate for an  additional  three
years, then begin an orderly liquidation over an anticipated two-year period.

During the year, the Partnership  received proceeds from equipment  disposals of
approximately $12.1 million. The Partnership  reinvested $0.2 million in capital
repairs to pressurized and nonpressurized tank cars and trailers.

(4)      Equipment Valuation

In March 1995, the Financial  Accounting Standards Board (FASB) issued Statement
No. 121,  "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed  Of" (SFAS 121).  This  standard  is  effective  for years
beginning after December 15, 1995. The Partnership adopted SFAS 121 during 1995,
the effect of which was not material,  as the method previously  employed by the
Partnership  was  consistent  with SFAS 121. In  accordance  with SFAS 121,  the
General Partner  reviews the carrying value of its equipment  portfolio at least
annually in relation to expected  future  market  conditions  for the purpose of
assessing the recoverability of the recorded amounts.  If projected future lease
revenues plus residual values are less than the carrying value of the equipment,
a loss on  revaluation  is recorded.  No  adjustments  to reflect  impairment of
individual  equipment carrying values were required for the years ended December
31, 1997 or 1996.

As of December 31, 1997, the General  Partner  estimated the current fair market
value of the  Partnership's  equipment  portfolio,  including the  Partnership's
share of  equipment  owned by  unconsolidated  special-purpose  entities,  to be
approximately $86.3 million.

(C)  Financial Condition -- Capital Resources and Liquidity

The Partnership  purchased its initial  equipment  portfolio with capital raised
from its initial  equity  offering  and  permanent  debt  financing.  No further
capital  contributions  from original  partners are permitted under the terms of
the Partnership's limited partnership  agreement.  In addition, the Partnership,
under its current loan agreement, does not have the capacity to incur additional
debt.  Therefore,  the  Partnership  relies on  operating  cash flow to meet its
operating obligations and to make cash distributions to the limited partners.

For the year ended December 31, 1997, the Partnership generated sufficient funds
to  meet  its  operating  obligations  and to  maintain  the  current  level  of
distributions (total of $10.4 million in 1997) to the partners.

The Partnership's note payable,  which bears interest at 1.5% over LIBOR, had an
outstanding balance of $29.3 million as of December 31, 1997. Commencing October
1, 1997, the loan required quarterly principal payments of the greater of 75% of
the net  proceeds  from asset sales  occurring  after  September  30,  1997,  or
payments  equal to 9.0% of the facility  balance at September  30, 1997.  During
1997, the Partnership  paid $11.0 million of the  outstanding  loan balance as a
result of asset sales.

The General  Partner has not  planned any  expenditures,  nor is it aware of any
contingencies  that would  cause it to require  any  additional  capital to that
mentioned above.


                                      


<PAGE>



(D)  Results of Operations -- Year-to-Year Detailed Comparison

(1)  Comparison  of the  Partnership's  Operating  Results  for the Years  Ended
December 31, 1997 and 1996

(a)  Owned Equipment Operations

Lease revenues less direct expenses  (repairs and maintenance,  marine equipment
operating expense,  and asset-specific  insurance) on owned equipment  increased
for the year ended 1997 when compared to the same period of 1996.  The following
table presents results by owned equipment type (in thousands of dollars):

<TABLE>
<CAPTION>

                                                      For the Year Ended
                                                          December 31,
                                            --------------------------------------
                                                    1997                1996
                                            --------------------------------------
<S>                                           <C>                <C>             
Aircraft and aircraft engines                 $         6,499    $          3,688
Rail equipment                                          5,319               4,976
Mobile offshore drilling unit                           1,612                 701
Trailers                                                1,539               1,748
Marine containers                                       1,077               1,482
Marine vessels                                           (160)                926

</TABLE>

Aircraft and Aircraft  Engines:Aircraft  lease revenues and direct expenses were
$7.9 million and $1.4  million,  respectively,  for the year ended  December 31,
1997, compared to $5.0 million and $1.3 million,  respectively,  during the same
period of 1996.  The  increase  in net  contribution  was due to three  aircraft
acquired  during the second and third quarter of 1996, one aircraft that was off
lease for part of 1996 and went back on lease during the first  quarter of 1997,
partially  offset by  disposition  of two  aircraft  during the third and fourth
quarter of 1997.

Rail Equipment: Railcar lease revenues and direct expenses were $7.5 million and
$2.2 million,  respectively,  for the twelve months ended 1997, compared to $7.8
million and $2.8  million,  respectively,  during the same  period of 1996.  The
increase in railcar  contribution  resulted  from  running  repairs  required on
certain  railcars  in the fleet in 1996 that were not needed  during  1997.  The
increase  in  contribution  caused by lower  repairs was  partially  offset by a
decrease  in  railcar  revenue  due to lower  average  lease  rate in 1997  when
compared to 1996.

Mobile Offshore  Drilling Unit: Mobile offshore drilling unit lease revenues and
direct  expenses  were $1.6  million and $31,000,  respectively,  for the twelve
months  ended  December  31,  1997,   compared  to  $0.7  million  and  $19,000,
respectively,  during the same period of 1996. The increase in contribution  was
due to a full year of revenue earned on the rig in 1997, compared to five months
in 1996.

Trailers:  Trailer lease revenues and direct expenses were $1.8 million and $0.3
million,  respectively,  for the year ended December 31, 1997,  compared to $2.1
million and $0.4  million,  respectively,  during the same  period of 1996.  The
number of trailers owned by the  Partnership has been declining due to sales and
dispositions. The result of this declining fleet has been a decrease in trailers
net contribution.

Marine Containers: Marine container lease revenues and direct expenses were $1.1
million and $10,000,  respectively,  for the twelve  months  ended  December 31,
1997, compared to $1.5 million and $12,000, respectively, during the same period
of 1996.  The  number of marine  containers  owned by the  Partnership  has been
declining due to sales and dispositions.  The result of this declining fleet has
been a decrease in marine container net contribution.

Marine  Vessels:  Marine vessel lease revenues and direct expenses were zero and
$0.2 million,  respectively,  for the year ended December 31, 1997,  compared to
$1.4 million and $0.5 million, respectively, during the same period of 1996. The
decrease of net contribution was due to the sale of all the Partnership's marine
vessels  during  1996.  The $0.2 million net loss in 1997 was  primarily  due to
uncollectible  port  costs for a sold  vessel  that were  formerly  borne by the
lessee.


                                      


<PAGE>



(b)      Indirect Operating Expenses Related to Owned Equipment Operations

Total  indirect  expenses of $20.5 million for the twelve months ended  December
31, 1997 increased  from $18.1 million for the same period of 1996.  Significant
variances are explained below:

     (i) An increase of $2.9 million in depreciation  and  amortization  expense
from 1996 levels  reflects  the  Partnership's  entire year of  depreciation  on
equipment  purchased  in  1996,  which  was  partially  offset  by the  sale  or
disposition of certain Partnership assets during 1997 and 1996.

     (ii) An increase of $0.1 million in management fees was due to higher lease
revenues in 1997, compared to 1996.

     (iii) A decrease  of $0.4  million  in bad debt  expense  from 1996  levels
primarily  reflects the  Partnership's  evaluation of  collectibility of certain
receivable balances.

     (iv) A decrease of $0.3 million in general and administrative  expenses was
primarily due to decreases in inspection costs and various taxes.

(c)      Net Gain on Disposition of Equipment

The net gain on  disposition  of  equipment  was $5.6 million for the year ended
December  31,  1997 and  resulted  from the  disposition  of marine  containers,
trailers,  railcars, and aircraft.  These assets had an aggregate net book value
of $6.5 million and were sold or liquidated for proceeds of $12.1  million.  The
net gain on  disposition  of  equipment  totaled $6.5 million for the year ended
December 31, 1996 and resulted from the disposition of aircraft engines,  marine
vessels,  marine  containers,  trailers,  and  railcars.  These  assets  had  an
aggregate  net  book  value of $8.0  million  and were  sold or  liquidated  for
proceeds of $13.8 million. Included in the gain of $6.5 million from the sale of
equipment was the unused portion of accrued drydocking of $0.7 million.

Interest and Other Income

Interest and other income  decreased by $0.5 million for the year ended December
31, 1997 compared to 1996  primarily  due to no sales-type  lease income in 1997
compared to $0.5 million in 1996. The charterer  exercised its option to buy the
vessel which was under the sales-type lease in July 1996.

(e)  Equity in Net  Income  (Loss) of  Unconsolidated  Special-Purpose  Entities
(USPEs)

The  equity in net  income  (loss) of  unconsolidated  special-purpose  entities
represents the net income (loss)  generated from the operation of  jointly-owned
assets  accounted  for under the equity  method (see Note 4 to the  consolidated
financial statements) (in thousands of dollars).

<TABLE>
<CAPTION>

                                                     For the Year Ended
                                                        December 31,
                                            ---------------------------------------
                                                   1997               1996
                                            ---------------------------------------
<S>                                           <C>                <C>            
Aircraft and aircraft engines                 $           857    $           901
Marine vessels                                           (372)              (611)
Mobile offshore drilling unit                              --              6,574

</TABLE>

Aircraft and Aircraft Engines:  The Partnership's share of aircraft revenues and
expenses were $2.8 million and $1.9 million, respectively, for 1997, compared to
$3.6 million and $2.7  million,  respectively,  during 1996.  As of December 31,
1997, the  Partnership  had a partial  beneficial  interest in three trusts that
hold seven commercial  aircraft,  two aircraft engines, and a package of rotable
components.  The  decrease  in net  contribution  was  due to the  Partnership's
liquidation of its 50% investment in an entity that owned an aircraft  engine in
the third quarter of 1996, resulting in $0.7 million in net gains on sale.

Marine  Vessel:  The  Partnership's  share of  revenues  and  expenses of marine
vessels was $1.4  million  and $1.8  million,  respectively,  for the year ended
December 31, 1997, compared to $1.4 million and $2.0 million,  respectively, for
the same period in 1996.  As of December 31,  1997,  the  Partnership  had a 56%
interest in an entity that owns a bulk-carrier  marine  vessel.  The decrease in
net  loss in  1997,  when  compared  to  1996,  was  due to  lower  repairs  and
maintenance and lower marine operating expenses in 1997 than in 1996.


Mobile Offshore Drilling Unit: The Partnership's  share of revenues and expenses
of the mobile  offshore  drilling unit was zero for the year ended  December 31,
1997,  compared to $7.2  million and $0.6  million,  respectively,  for the same
period of 1996.  The income of $6.6 million for the twelve months ended December
31, 1996 was  primarily  due to the sale,  in the third  quarter of 1996, of the
Partnership's investment in an entity that owns a mobile offshore drilling unit,
for a gain of which the Partnership' share was $6.5 million.

(e) Net Income

As a result of the foregoing,  the  Partnership's net income of $1.9 million for
the year ended  December 31, 1997 decreased from $9.8 million in the same period
in 1996.  The  Partnership's  ability  to operate or  liquidate  assets,  secure
leases,  and  re-lease  those  assets  whose  leases  expire is  subject to many
factors. Therefore, the Partnership's performance in the year ended December 31,
1997  is  not  necessarily   indicative  of  future  periods.   The  Partnership
distributed $9.9 million to the limited partners,  or $1.00 per weighted-average
depositary unit in the twelve months ended December 31, 1997.

(2)  Comparison  of the  Partnership's  Operating  Results  for the Years  Ended
December 31, 1996 and 1995

(a) Owned Equipment Operations

Lease revenues less direct expenses  (repairs and maintenance,  marine equipment
operating expense,  and asset-specific  insurance) on owned equipment  decreased
for the year ended 1996 when compared to the same period of 1995.  The following
table presents results by owned equipment type (in thousands of dollars):

<TABLE>
<CAPTION>

                                                      For the Year Ended
                                                         December 31,
                                            --------------------------------------
                                                    1996                1995
                                            --------------------------------------
<S>                                           <C>                <C>             
Rail equipment                                $         4,976    $          4,745
Aircraft and aircraft engines                           3,688               4,595
Trailers                                                1,748               1,666
Marine containers                                       1,482               1,848
Marine vessels                                            926               1,465
Mobile offshore drilling unit                             701                  --

</TABLE>

Rail Equipment: Railcar lease revenues and direct expenses were $7.8 million and
$2.8 million,  respectively,  for the twelve months ended 1996, compared to $7.8
million and $3.1  million,  respectively,  during the same  period of 1995.  The
increase in railcar  contribution  resulted  from  running  repairs  required on
certain railcars in the fleet during 1995, which were not needed during 1996.

Aircraft and Aircraft Engines:  Aircraft lease revenues and direct expenses were
$5.0 million and $1.3  million,  respectively,  for the year ended  December 31,
1996, compared to $4.7 million and $0.1 million,  respectively,  during the same
period of 1995.  The  decrease in net  contribution  was due to $1.1  million in
repairs on one aircraft to prepare it for re-leasing and the off-lease status of
this aircraft during the third quarter of 1996.

Trailers:  Trailer lease revenues and direct expenses were $2.1 million and $0.4
million,  respectively,  for the year ended December 31, 1996,  compared to $1.9
million and $0.2  million,  respectively,  during the same  period of 1995.  The
trailer fleet decreased as of the year ended December 31, 1996,  compared to the
same period of 1995, due to the  disposition  of trailers  during 1996. In 1996,
the number of trailers in the  PLM-affiliated  short-term rental yards increased
due to term leases that expired. These trailers earned a higher lease rate while
in the rental yards,  compared to the  fixed-term  leases,  thus  increasing net
contribution.

Marine Containers: Marine container lease revenues and direct expenses were $1.5
million and $12,000,  respectively,  for the twelve  months  ended  December 31,
1996, compared to $1.9 million and $27,000, respectively, during the same period
of 1995. The number of marine  containers  owned by the Partnership  declined in
1996 due to sales and  dispositions.  The result of this  declining  fleet was a
decrease in marine container net contribution.

Marine  Vessels:  Marine  vessel lease  revenues and direct  expenses  were $1.4
million and $0.5 million,  respectively,  for the year ended  December 31, 1996,
compared to $2.7 million and $1.2 million, respectively,  during the same period
of 1995.  The  decrease  of net  contribution  was due to the sale of one marine
vessel  during  the second  quarter  of 1995 and the sale of two marine  vessels
during the third quarter of 1996.

Mobile Offshore  Drilling Unit: Mobile offshore drilling unit lease revenues and
direct expenses were $0.7 million and $19,000,  respectively, for the year ended
December 31, 1996.  The  Partnership  acquired and placed into lease service one
mobile offshore drilling unit in the third quarter of 1996.

(b)      Indirect Operating Expenses Related to Owned Equipment Operations

Total  indirect  expenses of $18.1 million for the twelve months ended  December
31, 1996  increased from $16.1 million for the same period of 1995. The variance
is explained as follows:

     (i) A decrease of $1.8 million in depreciation  and  amortization  expenses
from 1995 levels  reflects  the  Partnership's  depreciation  on the purchase of
$28.5 million of new  equipment,  which was offset by the sale or disposition of
certain Partnership assets during 1995 and 1996.

     (ii) An  increase  of $0.4  million in bad debt  expense  from 1995  levels
primarily  reflects the  Partnership's  evaluation of  collectibility of certain
receivable balances.

     (iii) An  increase  of $0.1  million in  aircraft  inspection  expense  was
incurred on one aircraft before it could be re-leased.

     (iv) A decrease of $0.4 million in interest  expense was due to the payment
of debt principal due to the sale of assets.

(c)      Net Gain on Disposition of Equipment

The net gain on  disposition  of  equipment  was $6.5 million for the year ended
December 31, 1996 and resulted from the disposition of aircraft engines,  marine
vessels,  marine  containers,  trailers,  and  railcars.  These  assets  had  an
aggregate  net  book  value of $8.0  million  and were  sold or  liquidated  for
proceeds of $13.8 million. Included in the gain of $6.5 million from the sale of
equipment was the unused portion of accrued drydocking of $0.7 million.  The net
gain on disposition of equipment totaled $2.9 million in the same period of 1995
and resulted from the disposition of marine containers,  railcars,  and a marine
vessel.  These assets had an  aggregate  net book value of $5.5 million and were
sold or liquidated for proceeds of $8.4 million, which included proceeds of $5.0
million from a marine vessel related to a sales-type lease.

(d)      Interest and Other Income

Interest and other income  decreased by $0.8 million for the year ended December
31, 1996  compared to 1995 due  primarily to lower cash  balances  available for
investment when compared to the same period of 1995.

(e)  Equity in Net  Income  (Loss) of  Unconsolidated  Special-Purpose  Entities
(USPEs)

The  equity in net  income  (loss) of  unconsolidated  special-purpose  entities
represents the net income (loss)  generated from the operation of  jointly-owned
assets  accounted  for under the equity  method (see Note 4 to the  consolidated
financial statements) (in thousands in dollars).

<TABLE>
<CAPTION>

                                                      For the Year Ended
                                                         December 31,
                                            --------------------------------------
                                                   1996                1995
                                            --------------------------------------
<S>                                           <C>                <C>             
Mobile offshore drilling unit                 $         6,574    $              1
Aircraft and aircraft engines                             901                (154)
Marine vessels                                           (611)                 13

</TABLE>


                                      


<PAGE>



Mobile Offshore Drilling Unit: The Partnership's  share of revenues and expenses
of the  mobile  offshore  drilling  unit was  $7.2  million  and  $0.6  million,
respectively, for the year ended December 31, 1996, compared to $1.3 million and
$1.3 million,  respectively, for the same period of 1995. The increase in income
to $6.6  million for the twelve  months  ended  December 31, 1996 was due to the
sale, in the third quarter of 1996, of the Partnership's investment in an entity
that owns a mobile offshore drilling unit, for a gain of which the Partnership's
share was $6.5 million.

Aircraft and Aircraft Engines:  The Partnership's share of aircraft revenues and
expenses was $3.6 million and $2.7 million,  respectively, for 1996, compared to
$1.1 million and $1.2  million,  respectively,  during 1995.  As of December 31,
1996, the  Partnership  had a partial  beneficial  interest in three trusts that
hold nine commercial  aircraft,  two aircraft engines, and a package of aircraft
rotables. The increase in income to $0.9 million for the year ended December 31,
1996,  compared to a loss of $0.15 million for the year ended December 31, 1995,
was due to the  Partnership's  sale of its 50% investment in an entity that owns
an aircraft  engine in the third  quarter of 1996,  resulting in $0.7 million in
net gains and $0.7 million in net income. In addition,  the Partnership's  share
of revenue  was higher in the year ended  December  31,  1996,  compared to 1995
levels, due to the acquisition of three trusts in September 1995.

Marine  Vessels:  The  Partnership's  share of revenues  and  expenses of marine
vessels was $1.4  million  and $2.0  million,  respectively,  for the year ended
December 31, 1996, compared to $1.9 million and $1.9 million,  respectively, for
the same period in 1995.  The loss of $0.6 million of marine vessel  revenue for
the year ended  December 31, 1996 was caused by lower revenue for the year ended
December 31, 1996, due to lower charter rates, when compared to 1995 levels, and
higher  marine  operating  expense for the year ended  December 31,  1996,  when
compared to 1995 levels.

(f) Net Income

As a result of the foregoing,  the  Partnership's net income of $9.8 million for
the year ended  December 31, 1996 increased from a net income of $2.7 million in
the same  period in 1995.  The  Partnership's  ability to  operate or  liquidate
assets,  secure leases, and re-lease those assets whose leases expire is subject
to many factors.  Therefore,  the  Partnership's  performance  in the year ended
December  31,  1996  is  not  necessarily  indicative  of  future  periods.  The
Partnership  distributed  $11.4  million to the limited  partners,  or $1.15 per
weighted-average depositary unit in the twelve months ended December 31, 1996.

(E)  Geographic Information

The Partnership operates its equipment in international markets.  Although these
operations expose the Partnership to certain currency,  political,  credit,  and
economic risks, the General Partner believes that these risks are minimal or has
implemented strategies to control the risks as follows:  Currency risks are at a
minimum because all invoicing,  with the exception of a small number of railcars
operating in Canada, is conducted in U.S. dollars. Political risks are minimized
generally  through the avoidance of  operations in countries  that do not have a
stable judicial system and established  commercial business laws. Credit support
strategies  for lessees range from letters of credit  supported by U.S. banks to
cash  deposits.  Although these credit support  mechanisms  generally  allow the
Partnership  to  maintain  its lease  yield,  there are  risks  associated  with
slow-to-respond  judicial  systems  when legal  remedies  are required to secure
payment or repossess equipment. Economic risks are inherent in all international
markets  and the  General  Partner  strives to  minimize  this risk with  market
analysis prior to committing equipment to a particular geographic area. Refer to
the consolidated  financial statements,  Note 3 for information on the revenues,
income, and net book value of equipment in various geographic regions.

Revenues and net operating income by geographic  region are impacted by the time
period the asset is owned and  on/off-lease  status and the useful life ascribed
to the asset for  depreciation  purposes.  Net income  (loss) from  equipment is
significantly  impacted by depreciation charges, which are greatest in the early
years due to the General Partner's decision to use the double-declining  balance
method of depreciation.  The  relationships of geographic  revenues,  net income
(loss), and net book value are expected to significantly change in the future as
equipment is sold in various equipment markets and geographic areas.

The  Partnership's  equipment leased to  Canadian-domiciled  lessees consists of
railcars and an interest in an entity that owns a commercial aircraft.  Revenues
in Canada accounted for 27% of total lease revenues  (including lease revenue in
USPEs),  while these operations accounted for $3.4 million in net income for the
Partnership's total net income of $1.9 million.

The  Partnership's  equipment  on lease to  U.S.-domiciled  lessees  consists of
railcars,  trailers, and an aircraft. During 1997, U.S. lease revenues accounted
for 22% of the lease revenues generated by wholly and partially-owned equipment,
while  these  operations  accounted  for  $1.1  million  in net  income  for the
Partnership's total net income of $1.9 million.

European  operations  consist of three  owned  aircraft  and an  interest in two
trusts that own three  aircraft,  two aircraft  engines,  and  aircraft  rotable
components,  which  accounted for 22% of the lease revenues  generated by wholly
and partially-owned equipment. The net loss generated by this equipment was $1.9
million in 1997 for the Partnership's total net income of $1.9 million.

Asian  operations  consisted  of one  aircraft at the end of 1997.  During 1997,
revenues of this  aircraft  and an aircraft  sold in 1997  accounted  for 11% of
total  lease  revenues  (including  the lease  revenue  in USPEs),  while  these
operations  accounted for $3.8 million in net income for the Partnership's total
net income of $1.9  million.  The sold  aircraft  was  disposed of in the fourth
quarter of 1997, for a gain of $4.9 million.

Marine  containers,  one mobile offshore drilling unit, a partially owned marine
vessel, and a sold aircraft, which were leased in various regions, accounted for
19% of the total lease revenues (including lease revenues in USPEs), while these
operations  accounted for $0.6 million in net income for the Partnership's total
net income of $1.9 million.

Year 2000 Compliance

The General  Partner is currently  addressing  the Year 2000  computer  software
issue.  The General Partner is creating a timetable for carrying out any program
modifications that may be required. The General Partner does not anticipate that
the cost of these modifications allocable to the Partnership will be material.

(G)      Accounting Pronouncements

In  June  1997,  the  Financial   Accounting  Standards  Board  issued  two  new
statements:  SFAS No. 130,  "Reporting  Comprehensive  Income,"  which  requires
enterprises to report,  by major  component and in total,  all changes in equity
from  nonowner  sources;  and SFAS No. 131,  "Disclosures  about  Segments of an
Enterprise  and  Related  Information,"  which  establishes  annual and  interim
reporting  standards for a public  Partnership's  operating segments and related
disclosures about its products, services, geographic areas, and major customers.
Both statements are effective for the  Partnership's  fiscal year ended December
31, 1998, with earlier  application  permitted.  The effect of adoption of these
statements  will  be  limited  to the  form  and  content  of the  Partnership's
disclosures and will not impact the  Partnership's  results of operations,  cash
flow, or financial position.

(H)      Inflation

Inflation had no significant impact on the Partnership's operations during 1997,
1996, or 1995.

(I)      Forward-Looking Information

Except for historical  information contained herein, the discussion in this Form
10-K contains  forward-looking  statements that involve risks and uncertainties,
such as statements of the Partnership's  plans,  objectives,  expectations,  and
intentions.  The cautionary  statements made in this Form 10-K should be read as
being applicable to all related forward-looking  statements wherever they appear
in this Form 10-K. The Partnership's actual results could differ materially from
those discussed here.

(J)      Outlook for the Future

Since the  Partnership  is in its  holding or  passive  liquidation  phase,  the
General  Partner will be seeking to  selectively  re-lease or sell assets as the
existing leases expire.  Sale decisions will cause the operating  performance of
the  Partnership to decline over the remainder of its life. The General  Partner
anticipates that the liquidation of Partnership  assets will be completed by the
scheduled termination of the Partnership at the end of the year 2000.

The  Partnership  intends  to use cash  flow  from  operations  to  satisfy  its
operating  requirements,  pay loan principal on debt, and pay cash distributions
to the investors.


(1)      Impact of Government Regulations on Future Operations

The General  Partner  operates the  Partnership's  equipment in accordance  with
current applicable regulations (see Item 1, Section E, Government  Regulations).
However, the continuing implementation of new or modified regulations by some of
the  authorities  mentioned  previously,  or others,  may  adversely  affect the
Partnership's  ability to continue to own or operate equipment in its portfolio.
Additionally,  regulatory  systems  vary  from  country  to  country,  which may
increase the burden to the Partnership of meeting regulatory  compliance for the
same equipment  operated  between  countries.  Ongoing changes in the regulatory
environment, both in the United States and internationally,  cannot be predicted
with any accuracy and preclude the General  Partner from  determining the impact
of such  changes on  Partnership  operations  or sale of  equipment.  Under U.S.
Federal Aviation  Regulations,  after December 31, 1999, no person shall operate
an aircraft to or from any airport in the  contiguous  United States unless that
airplane has been shown to comply with Stage III noise levels. The Partnership's
fleet  consists of  late-model  Stage II  narrowbody  commercial  aircraft.  The
aircraft  either  are  positioned  with  air  carriers  that are  outside  Stage
III-legislated  areas,  are  scheduled  for Stage III  hushkit  installation  in
1998-99,  or are anticipated to be sold or leased outside Stage III areas before
2000. Specifically, the Partnership has scheduled a Stage II narrowbody aircraft
for sale during 1998. A Stage II narrowbody  aircraft now on lease in the United
States will be sold or leased  outside the Stage  III-affected  areas before the
year 2000.

(2) Distributions

Pursuant  to  the  limited   partnership   agreement,   the  Partnership  ceased
reinvesting in additional  equipment beginning in 1997. The General Partner will
pursue a strategy of  selectively  re-leasing  equipment to achieve  competitive
returns or selling equipment that is  underperforming or whose operation becomes
prohibitively  expensive  in the period  prior to the final  liquidation  of the
Partnership.  During this time, the Partnership will use operating cash flow and
proceeds from the sale of equipment to meet its operating  obligations  and make
distributions to the partners.  Although the General Partner intends to maintain
a  sustainable  level of  distributions  prior to the final  liquidation  of the
Partnership, actual Partnership performance and other considerations may require
adjustments to then-existing  distribution  levels.  In the long term,  changing
market  conditions  and used equipment  values may preclude the General  Partner
from  accurately  determining  the  impact of  future  re-leasing  activity  and
equipment sales on Partnership performance and liquidity.

The Partnership  will enter the active  liquidation  phase beginning  January 1,
2000.  During  this phase,  the size of the  Partnership's  remaining  equipment
portfolio  and,  in turn,  the  amount of net cash flows  from  operations  will
continue  to  become   progressively   smaller  as  assets  are  sold.  Although
distribution  levels  will be  reduced,  significant  asset  sales may result in
potential special distributions to unitholders.

ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The  financial  statements  for the  Partnership  are  listed  in the  Index  to
Financial  Statements and Financial  Statement  Schedules included in Item 14 of
this Annual Report on Form 10-K.

ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
              FINANCIAL DISCLOSURE
None.


                      (This space intentionally left blank)

                                      


<PAGE>



                                    PART III

 ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF PLM INTERNATIONAL
              AND PLM FINANCIAL SERVICES, INC.

As of the date of this annual  report,  the directors and executive  officers of
PLM  International  (and key executive  officers of its subsidiaries) and of PLM
Financial Services, Inc. are as follows:
<TABLE>
<CAPTION>

Name                                     Age                   Position
-------------------------------------------------------------------------------------------------------------------------

<S>                                      <C>                   <C>        
Robert N. Tidball                        59                    Chairman of the Board, 
                                                               Director, President, and Chief Executive Officer, 
                                                               PLM International, Inc.;
                                                               Director, PLM Financial Services, Inc.;
                                                               Vice President, PLM Railcar Management Services, Inc.; 
                                                               President, PLM Worldwide Management Services Ltd.

Randall L.-W. Caudill                    50                    Director, PLM International, Inc.

Douglas P. Goodrich                      51                    Director and Senior Vice President, 
                                                               PLM International; Director and President, 
                                                               PLM Financial Services, Inc.; 
                                                               President, PLM Transportation Equipment Corporation;
                                                               President, PLM Railcar Management Services, Inc.

Harold R. Somerset                       63                    Director, PLM International, Inc.

Robert L. Witt                           57                    Director, PLM International, Inc.

J. Michael Allgood                       49                    Vice President and Chief Financial Officer, 
                                                               PLM International, Inc. and PLM Financial Services, Inc.

Stephen M. Bess                          51                    President, PLM Investment Management, Inc. and PLM Securities Corp.; 
                                                               Vice President and Director, PLM Financial Services, Inc.

Richard K Brock                          35                    Vice President and Corporate Controller, 
                                                               PLM International, Inc. and PLM Financial Services, Inc.

Frank Diodati                            43                    President, PLM Railcar Management Services Canada Limited

Steven O. Layne                          43                    Vice President, PLM Transportation Equipment Corporation; 
                                                               Vice President, PLM Worldwide Management Services Ltd.

Susan C. Santo                           35                    Vice President, Secretary, and General Counsel, 
                                                               PLM International, Inc. and PLM Financial Services, Inc.

Thomas L. Wilmore                        55                    Vice President, PLM Transportation Equipment Corporation; 
                                                               Vice President, PLM Railcar Management Services, Inc.

</TABLE>

Robert N.  Tidball  was  appointed  Chairman  of the  Board in  August  1997 and
President and Chief Executive Officer of PLM International in March 1989. At the
time of his appointment,  he was Executive Vice President of PLM  International.
Mr.  Tidball became a director of PLM  International  in April 1989. Mr. Tidball
was  appointed  Director of PLM  Financial  Services,  Inc. in July 1997 and was
elected President of PLM Worldwide Management Services Limited in February 1998.
He has served as an officer of PLM Railcar Management Services,  Inc. since June
1987.  Mr.  Tidball was  Executive  Vice  President  of Hunter  Keith,  Inc.,  a
Minneapolis-based  investment  banking  firm,  from March 1984 to January  1986.
Prior to Hunter Keith, he was Vice President,  General Manager,  and Director of
North American Car Corporation and a director of the American Railcar  Institute
and the Railway Supply Association.

Randall L.-W.  Caudill was elected to the Board of Directors in September  1997.
He is  President  of  Dunsford  Hill  Capital  Partners,  a San  Francisco-based
financial consulting firm serving emerging growth companies in the United States
and  abroad,  as well as a senior  advisor  to the  investment  banking  firm of
Prudential  Securities,  where he has been employed since 1987. Mr. Caudill also
serves as a director of VaxGen, Inc. and SBE, Inc.

Douglas  P.  Goodrich  was  elected  to the  Board of  Directors  in July  1996,
appointed  Senior  Vice  President  of PLM  International  in  March  1994,  and
appointed Director and President of PLM Financial  Services,  Inc. in June 1996.
Mr.  Goodrich  has also served as Senior Vice  President  of PLM  Transportation
Equipment Corporation since July 1989 and as President of PLM Railcar Management
Services,  Inc. since September 1992,  having been a senior vice president since
June 1987.  Mr.  Goodrich was an executive  vice  president of G.I.C.  Financial
Services  Corporation,  a  subsidiary  of  Guardian  Industries  Corporation  of
Chicago, Illinois, from December 1980 to September 1985.

Harold R. Somerset was elected to the Board of Directors of PLM International in
July 1994.  From February 1988 to December 1993, Mr.  Somerset was President and
Chief Executive  Officer of California & Hawaiian Sugar Corporation (C&H Sugar),
a recently acquired subsidiary of Alexander & Baldwin,  Inc. Mr. Somerset joined
C&H Sugar in 1984 as  Executive  Vice  President  and Chief  Operating  Officer,
having  served on its Board of  Directors  since  1978,  a position  in which he
continues  to serve.  Between  1972 and 1984,  Mr.  Somerset  served in  various
capacities with Alexander & Baldwin,  Inc., a publicly held land and agriculture
company headquartered in Honolulu, Hawaii, including Executive Vice President of
Agriculture and Vice President, General Counsel, and Secretary. In addition to a
law degree from Harvard Law School,  Mr.  Somerset  also holds  degrees in civil
engineering from the Rensselaer  Polytechnic Institute and in marine engineering
from the U.S. Naval Academy. Mr. Somerset also serves on the boards of directors
for various other  companies  and  organizations,  including  Longs Drug Stores,
Inc., a publicly held company.

Robert L. Witt was elected to the Board of Directors  in June 1997.  Since 1993,
Mr. Witt has been a principal with WWS  Associates,  a consulting and investment
group specializing in start-up situations and private  organizations about to go
public.  Prior to that, he was Chief Executive Officer and Chairman of the Board
of Hexcel  Corporation,  an international  advanced materials company with sales
primarily in the aerospace,  transportation, and general industrial markets. Mr.
Witt also serves on the boards of  directors  for various  other  companies  and
organizations.

J. Michael Allgood was appointed Vice President and Chief  Financial  Officer of
PLM International in October 1992 and Vice President and Chief Financial Officer
of PLM Financial Services,  Inc. in December 1992. Between July 1991 and October
1992,  Mr.  Allgood  was a  consultant  to  various  private  and  public-sector
companies  and  institutions   specializing  in  financial   operations  systems
development.  In October 1987, Mr. Allgood  co-founded  Electra Aviation Limited
and its holding  company,  Aviation  Holdings Plc of London,  where he served as
Chief Financial Officer until July 1991. Between June 1981 and October 1987, Mr.
Allgood  served as a first vice  president  with  American  Express Bank Ltd. In
February 1978,  Mr. Allgood  founded and until June 1981 served as a director of
Trade Projects  International/Philadelphia  Overseas  Finance  Company,  a joint
venture with  Philadelphia  National Bank. From March 1975 to February 1978, Mr.
Allgood served in various capacities with Citibank, N.A.

Stephen M. Bess was appointed Director of PLM Financial  Services,  Inc. in July
1997.  Mr. Bess was appointed  President of PLM  Securities  Corporation in June
1996 and President of PLM  Investment  Management,  Inc. in August 1989,  having
served as Senior Vice President of PLM Investment Management,  Inc. beginning in
February  1984 and as  Corporate  Controller  of PLM  Financial  Services,  Inc.
beginning in October 1983. Mr. Bess served as Corporate  Controller of PLM, Inc.
beginning  in December  1982.  Mr. Bess was Vice  President-Controller  of Trans
Ocean Leasing  Corporation,  a container leasing company,  from November 1978 to
November  1982,  and Group Finance  Manager with the Field  Operations  Group of
Memorex  Corporation,  a manufacturer  of computer  peripheral  equipment,  from
October 1975 to November 1978.

Richard K Brock was appointed  Vice  President  and Corporate  Controller of PLM
International and PLM Financial Services, Inc. in June 1997, having served as an
accounting  manager  beginning in September 1991 and as Director of Planning and
General  Accounting  beginning  in  February  1994.  Mr.  Brock  was a  division
controller of Learning Tree International,  a technical education company,  from
February 1988 through July 1991.

Frank Diodati was appointed  President of PLM Railcar Management Services Canada
Limited in 1986. Previously,  Mr. Diodati was Manager of Marketing and Sales for
G.E. Railcar Services Canada Limited.

Steven O. Layne was appointed  Vice  President of PLM  Transportation  Equipment
Corporation's  Air Group in November  1992, and was appointed Vice President and
Director of PLM Worldwide  Management  Services  Limited in September  1995. Mr.
Layne was its Vice President,  Commuter and Corporate Aircraft beginning in July
1990.  Prior to joining PLM, Mr. Layne was Director of Commercial  Marketing for
Bromon Aircraft Corporation, a joint venture of General Electric Corporation and
the  Government  Development  Bank of Puerto  Rico.  Mr. Layne is a major in the
United States Air Force Reserves and a senior pilot with 13 years of accumulated
service.

Susan C. Santo  became Vice  President,  Secretary,  and General  Counsel of PLM
International and PLM Financial Services,  Inc. in November 1997. She has worked
as an  attorney  for PLM  International  since  1990 and  served  as its  Senior
Attorney since 1994.  Previously,  Ms. Santo was engaged in the private practice
of law in San  Francisco.  Ms. Santo  received her J.D.  from the  University of
California, Hastings College of the Law.

Thomas L.  Wilmore was  appointed  Vice  President,  Rail of PLM  Transportation
Equipment  Corporation  in March  1994,  and has  served  as Vice  President  of
Marketing for PLM Railcar  Management  Services,  Inc. since May 1988.  Prior to
joining PLM, Mr. Wilmore was Assistant  Vice President and Regional  Manager for
MNC Leasing  Corporation  in Towson,  Maryland from February 1987 to April 1988.
From July 1985 to  February  1987,  he was  President  and  co-owner of Guardian
Industries  Corporation,  Chicago,  and between December 1980 and July 1985, Mr.
Wilmore was an executive vice  president for its  subsidiary,  G.I.C.  Financial
Services  Corporation.  Mr.  Wilmore also served as Vice  President of Sales for
Gould Financial Services,  located in Rolling Meadows,  Illinois, from June 1978
to December 1980.

The directors of PLM  International,  Inc. are elected for a three-year term and
the directors of PLM Financial Services, Inc. are elected for a one-year term or
until their successors are elected and qualified.  No family relationships exist
between  any  director or  executive  officer of PLM  International  Inc. or PLM
Financial Services, Inc.

ITEM 11.          EXECUTIVE COMPENSATION

The Partnership has no directors, officers, or employees. The Partnership had no
pension,  profit-sharing,  retirement,  or similar  benefit plan in effect as of
December 31, 1997.







                      (This space intentionally left blank)


                                      


<PAGE>



ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     (A) Security Ownership of Certain Beneficial Owners

         The  General  Partner is  generally  entitled  to a 5%  interest in the
         profits and losses and distributions of the Partnership. In addition to
         its General Partner interest,  FSI owned 8,000 units in the Partnership
         as of December 31, 1997. As of December 31, 1997, no investor was known
         by  the  General  Partner  to  beneficially  own  more  than  5% of the
         depositary units of the Partnership.

     (B) Security Ownership of Management

         Table 4, below,  sets forth, as of the date of this report,  the amount
         and  percent  of  the   Partnership's   outstanding   depositary  units
         beneficially  owned by each of the directors and executive officers and
         all directors and executive  officers as a group of the General Partner
         and its affiliates: 

                                    TABLE 4

Name                          Depositary Units                 Percent of Units


Robert N. Tidball                  2,000                                   *

All directors and officers
As a group (1 person)              2,000                                   *


         * Less than 1%.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     (A) Transactions with Management and Others

         During 1997, management fees to IMI were $1.2 million. In addition, the
         General  Partner and its affiliates  were  reimbursed  $0.8 million for
         administrative and data processing  services performed on behalf of the
         Partnership  in 1997. The  Partnership  paid  Transportation  Equipment
         Indemnity Company Ltd. (TEI), a wholly-owned,  Bermuda-based subsidiary
         of PLM International, $6,000 for insurance coverages during 1997, which
         amounts were paid substantially to third-party reinsurance underwriters
         or  placed  in  risk  pools  managed  by TEI on  behalf  of  affiliated
         partnerships  and  PLM  International,   and  which  provide  threshold
         coverages on marine vessel loss of hire and hull and machinery  damage.
         All pooling  arrangement  funds are either paid out to cover applicable
         losses or refunded pro rata by TEI.

         During 1997, the USPEs paid or accrued the following fees to FSI or its
         affiliates   (based  on  the   Partnership's   proportional   share  of
         ownership):  management fees, $0.2 million, and administrative and data
         processing services, $0.1 million. The USPEs also paid TEI $0.1 million
         for insurance coverages during 1997.

     (B) Certain Business Relationships

         None.

     (C) Indebtedness of Management

         None.

     (d) Transactions with Promoters

         None.






                                      


<PAGE>



                                     PART IV

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

     (A) 1.    Financial Statements

         The financial  statements listed in the accompanying Index to Financial
         Statements are filed as part of this Annual Report on Form 10-K.

     (B) Reports on Form 8-K

         None.

     (C) Exhibits

         4.   Limited  Partnership  Agreement of  Partnership.  Incorporated  by
              reference to the Partnership's  Registration Statement on Form S-1
              (Reg. No.  33-18104),  which became  effective with the Securities
              and Exchange Commission on March 25, 1988.

         4.1  Amendment,   dated  November  18,  1991,  to  Limited  Partnership
              Agreement  of  Partnership.   Incorporated  by  reference  to  the
              Partnership's Annual Report on Form 10-K filed with the Securities
              and Exchange Commission on March 30, 1992.

         10.1 Management   Agreement  between  Partnership  and  PLM  Investment
              Management,  Inc.  Incorporated by reference to the  Partnership's
              Registration  Statement  on Form S-1 (Reg.  No.  33-18104),  which
              became  effective with the  Securities and Exchange  Commission on
              March 25, 1988.

         10.2 $41,000,000  Credit  Agreement  dated as of December 13, 1994 with
              First Union National Bank of North Carolina.

         25.  Powers of Attorney.

                                      


<PAGE>



                                   SIGNATURES

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

The Partnership has no directors or officers.  The General Partner has signed on
behalf of the Partnership by duly authorized officers.


Date:  March 20, 1998               PLM EQUIPMENT GROWTH FUND III
                                    PARTNERSHIP

                                    By:      PLM Financial Services, Inc.
                                             General Partner



                                    By:      /s/ Douglas P. Goodrich
                                             -------------------------
                                             Douglas P. Goodrich
                                             President & Director



                                    By:      /s/ Richard Brock
                                             -------------------------
                                             Richard Brock
                                             Vice President and
                                             Corporate Controller



Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  directors of the  Partnership's  General
Partner on the dates indicated.


Name                           Capacity                        Date


*___________________
Robert N. Tidball            Director, FSI               March 20, 1998


*___________________
Douglas P. Goodrich          Director, FSI               March 20, 1998


*___________________
Stephen M. Bess              Director, FSI               March 20, 1998

*Susan Santo,  by signing her name hereto,  does sign this document on behalf of
the persons indicated above pursuant to powers of attorney duly executed by such
persons and filed with the Securities and Exchange Commission.



/s/ Susan Santo
-------------------
Susan Santo
Attorney-in-Fact


                                      


<PAGE>




                          PLM EQUIPMENT GROWTH FUND III
                             (A Limited Partnership)
                          INDEX TO FINANCIAL STATEMENTS


                                  (Item 14(a))


                                                                     Page

Report of independent auditors                                         28

Balance sheets as of December 31, 1997 and 1996                        29

Statements of income for the years ended December 31,
     1997, 1996, and 1995                                              30

Statements of changes in partners' capital for
     the years ended December 31, 1997, 1996, and
     1995                                                              31

Statements of cash flows for the years ended December 31,
     1997, 1996, and 1995                                              32

Notes to financial statements                                          33-41


All other financial  statement  schedules have been omitted because the required
information  is not pertinent to the  registrant or is not material,  or because
the  information  required  is included in the  financial  statements  and notes
thereto.


                                      


<PAGE>



                         REPORT OF INDEPENDENT AUDITORS


The Partners
PLM Equipment Growth Fund III:



We have audited the financial  statements  of PLM  Equipment  Growth Fund III as
listed  in  the  accompanying   index.   These  financial   statements  are  the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial position of PLM Equipment Growth Fund III
as of December 31, 1997 and 1996 and the results of its  operations and its cash
flows for each of the years in the three-year  period ended December 31, 1997 in
conformity with generally accepted accounting principles.



/s/ KPMG PEAT MARWICK, LLP
--------------------------------

SAN FRANCISCO, CALIFORNIA
March 12, 1998

                                      


<PAGE>




                          PLM EQUIPMENT GROWTH FUND III
                            (A Limited Partnership)
                                 BALANCE SHEETS
                                  December 31,
                 (in thousands of dollars, except unit amounts)


<TABLE>
<CAPTION>




                                                                           1997                1996
                                                                       ---------------------------------
<S>                                                                     <C>                   <C>       
Assets

Equipment held for operating leases, at cost                            $   105,308           $  136,670
Less accumulated depreciation                                               (67,234)             (78,607 )
                                                                      -------------------------------------
    Net equipment                                                            38,074               58,063

Cash and cash equivalents                                                     4,239                1,414
Restricted cash and marketable securities                                        --                5,966
Accounts and notes receivable, net of allowance for doubtful
    accounts of $1,837 in 1997 and $1,381 in 1996                             1,316                1,515
Investments in unconsolidated special-purpose entities                        9,179               11,138
Prepaid expenses                                                                 71                   64
Deferred charges, net of accumulated amortization
    of $348 in 1997 and $800 in 1996                                            307                  491
                                                                      -------------------------------------

      Total assets                                                      $    53,186           $   78,651
                                                                      =====================================

Liabilities and partners' capital

Liabilities:
Accounts payable and accrued expenses                                   $     1,294           $    1,505
Due to affiliates                                                             2,208                1,297
Lessee deposits and reserve for repairs                                         835                7,552
Note payable                                                                 29,290               40,284
                                                                      -------------------------------------
  Total liabilities                                                          33,627               50,638
                                                                      -------------------------------------

Partners' capital:
Limited partners (9,871,073 depositary units
    In 1997 and 1996)                                                        19,559               28,013
General Partner                                                                  --                   --
                                                                      -------------------------------------
  Total partners' capital                                                    19,559               28,013
                                                                      -------------------------------------

      Total liabilities and partners' capital                           $    53,186           $   78,651
                                                                      =====================================

</TABLE>












                       See accompanying notes to financial
                                  statements.

                                      


<PAGE>




                          PLM EQUIPMENT GROWTH FUND III
                            (A Limited Partnership)
                              STATEMENTS OF INCOME
                        For the Years Ended December 31,
        (in thousands of dollars, except weighted-average unit amounts)

<TABLE>
<CAPTION>


                                                                           1997           1996            1995
                                                                       -------------------------------------------
<S>                                                                     <C>              <C>              <C>      
Revenues

Lease revenue                                                           $   19,989       $   18,459       $  23,368
Interest and other income                                                      448              977           1,751
Net gain on disposition of equipment                                         5,629            6,450           2,936
                                                                      ------------------------------------------------
  Total revenues                                                            26,066           25,886          28,055
                                                                      ------------------------------------------------

Expenses

Depreciation and amortization                                               13,959           11,047          12,757
Management fees to affiliate                                                 1,153            1,004           1,137
Repairs and maintenance                                                      3,707            4,475           4,063
Repositioning expense                                                           --               13             (18 )
Equipment operating expenses                                                   248              176             902
Interest expense                                                             3,164            3,078           3,474
Insurance expense to affiliate                                                   6               --             268
Other insurance expenses                                                       211              359             390
General and administrative expenses to affiliates                              777              747             816
Other general and administrative expenses                                      931            1,263           1,166
Provision for bad debts                                                        458              828             394
                                                                      ------------------------------------------------
  Total expenses                                                            24,614           22,990          25,349
                                                                      ------------------------------------------------

Equity in net income of unconsolidated
      special-purpose entities                                                 485            6,864              --
                                                                      ------------------------------------------------

      Net income                                                        $    1,937       $    9,760       $   2,706
                                                                      ================================================

Partners' share of net income

Limited partners                                                        $    1,417       $    9,162       $   1,869
General Partner                                                                520              598             837
                                                                      ------------------------------------------------

      Total                                                             $    1,937       $    9,760       $   2,706
                                                                      ================================================

Net income per weighted-average depositary unit
    (9,871,073, 9,873,821, and
      9,927,458 units -in 1997, 1996, and 1995, respectively)           $     0.14       $     0.93       $    0.19
                                                                      ================================================

Cash distribution                                                       $   10,391       $   11,964       $  16,737
                                                                      ================================================

Cash distribution per weighted-average depositary unit                  $     1.00       $     1.15       $    1.60
                                                                      ================================================

</TABLE>









                       See accompanying notes to financial
                                  statements.

                                      


<PAGE>





                          PLM EQUIPMENT GROWTH FUND III
(A Limited Partnership) STATEMENTS OF CHANGES IN PARTNERS' CAPITAL For the Years
       Ended December 31, 1997, 1996, and 1995 (in thousands of dollars)

<TABLE>
<CAPTION>




                                                       Limited           General
                                                       Partners          Partner           Total
                                                     -----------------------------------------------

<S>                                                    <C>                 <C>              <C>       
Partners' capital as of December 31, 1994              $   44,751          $    --          $   44,751

Net income                                                  1,869              837               2,706

Repurchase of depositary units                               (383)              --                (383 )

Cash distribution                                         (15,900)            (837)            (16,737 )
                                                     ----------------------------------------------------

Partners' capital as of December 31, 1995                  30,337               --              30,337

Net income                                                  9,162              598               9,760

Repurchase of depositary units                               (120)              --                (120 )

Cash distribution                                         (11,366)            (598)            (11,964 )
                                                     ----------------------------------------------------

Partners' capital as of December 31, 1996                  28,013               --              28,013

Net income                                                  1,417              520               1,937

Cash distribution                                          (9,871)            (520)            (10,391 )
                                                     ----------------------------------------------------

Partners' capital as of December 31, 1997              $   19,559          $    --          $   19,559
                                                     ====================================================

</TABLE>





















                       See accompanying notes to financial
                                  statements.

                                      


<PAGE>




                          PLM EQUIPMENT GROWTH FUND III
                            (A Limited Partnership)
                            STATEMENTS OF CASH FLOWS
                        For the Years Ended December 31,
                             (thousands of dollars)
<TABLE>
<CAPTION>


                                                                           1997           1996            1995
                                                                       --------------------------------------------
<S>                                                                     <C>              <C>              <C>       
Operating activities
Net income                                                              $    1,937       $    9,760       $    2,706
Adjustments to reconcile net income
      to net cash provided by (used in) operating activities:
  Depreciation and amortization                                             13,959           11,047           12,757
  Net gain on disposition of equipment                                      (5,629 )         (6,450 )         (2,936 )
  Equity in net income from unconsolidated special-
      Purpose entities                                                        (485 )         (6,864 )             --
  Income from sales-type lease                                                  --           (1,885 )             --
  Changes in operating assets and liabilities:
    Restricted cash and marketable securities                                5,966             (306 )           (307 )
    Accounts and notes receivable, net                                         205              727              202
    Due (to) from affiliates                                                  (881 )           (202 )          1,050
    Prepaid expenses                                                            (7 )             10              111
    Accounts payable and accrued expenses                                     (211 )            150               43
    Lessee deposits and reserves for repairs                                (6,717 )           (914 )           (302 )
                                                                      --------------------------------------------------
      Net cash provided by operating activities                              8,137            5,073           13,324
                                                                      --------------------------------------------------

Investing activities
Payments for purchase of equipment                                              --          (28,540 )         (9,961 )
Payment of capitalized repairs                                                (248 )           (728 )         (1,008 )
Payments of acquisition fees to affiliate                                       --           (1,284 )           (447 )
Payments received on sales-type lease                                           --            6,403              482
Proceeds from disposition of equipment                                      12,085           13,786            3,389
Liquidation distribution from unconsolidated
    special-purpose entities                                                    --           13,711               --
Distribution from unconsolidated
    special-purpose entities                                                 2,444            2,835               --
Payments of lease negotiation fees to affiliate                                 --             (285 )            (99 )
      Net cash provided by (used in) investing activities                   14,281            5,898           (7,644 )
                                                                      --------------------------------------------------

Financing activities
Due to affiliate                                                             1,792               --               --
Proceeds from notes payable                                                     --           19,148               --
Principal payments on notes payable                                        (10,994 )        (19,864 )             --
Repurchase of depositary units                                                  --             (120 )           (383 )
Cash distribution paid to limited partners                                  (9,871 )        (11,366 )        (15,900 )
Cash distribution paid to General Partner                                     (520 )           (598 )           (837 )
      Net cash used in financing activities                                (19,593 )        (12,800 )        (17,120 )
                                                                      --------------------------------------------------

Net increase (decrease) in cash and cash equivalents                         2,825           (1,829 )        (11,440 )
Cash and cash equivalents at beginning of year ( See Note 4)                 1,414            3,243           14,885
                                                                      --------------------------------------------------
Cash and cash equivalents at end of year                                $    4,239       $    1,414       $    3,445
                                                                      ==================================================

Supplemental information:
Interest paid                                                           $    3,339       $    2,957       $    2,611
                                                                      =================================================

Supplemental disclosure of noncash investing and financing activities:
   Sales proceeds included in accounts receivable                       $        6       $       --       $       --
                                                                      ==================================================
</TABLE>

                       See accompanying notes to financial
                                  statements.

                                      


<PAGE>




                          PLM EQUIPMENT GROWTH FUND III
                             (A Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1997

1.       Basis of Presentation

         Organization

         PLM Equipment  Growth Fund III, a California  limited  partnership (the
         Partnership),  was formed on October 15, 1987. The Partnership  engages
         in the business of owning and leasing primarily used transportation and
         related equipment.  The Partnership  offering became effective on March
         25, 1988. The Partnership commenced significant operations in September
         1988. PLM Financial Services, Inc. (FSI) is the General Partner. FSI is
         a   wholly-owned   subsidiary   of   PLM   International,   Inc.   (PLM
         International).

         The Partnership will terminate on December 31, 2000,  unless terminated
         earlier  upon  sale  of  all  equipment  or by  certain  other  events.
         Beginning  in the  Partnership's  seventh  year  of  operations,  which
         commenced on January 1, 1997, the General Partner  stopped  reinvesting
         excess  cash,  all  of  which,  less  reasonable   reserves,   will  be
         distributed to the Partners.  Beginning in the  Partnership's  eleventh
         year of  operations,  the General  Partner  intends to begin an orderly
         liquidation of the Partnership's assets.

         FSI manages the affairs of the  Partnership.  The net income (loss) and
         distributions  of the  Partnership  are generally  allocated 95% to the
         limited  partners and 5% to the General  Partner (see Net Income (Loss)
         and Distributions per Depositary Unit,  below).  The General Partner is
         entitled  to a  subordinated  incentive  fee equal to 7.5% of  "Surplus
         Distributions,"  as defined  in the  partnership  agreement,  remaining
         after the limited  partners  have  received a certain  minimum  rate of
         return.

         These  financial  statements have been prepared on the accrual basis of
         accounting in accordance with generally accepted accounting principles.
         This requires  management to make estimates and assumptions that affect
         the  reported  amounts of assets and  liabilities  and  disclosures  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.

         Operations

         The equipment owned by the  Partnership is managed,  under a continuing
         management  agreement  by PLM  Investment  Management,  Inc.  (IMI),  a
         wholly-owned  subsidiary of FSI. IMI receives a monthly  management fee
         from the  Partnership  for managing the equipment (see Note 2). FSI, in
         conjunction with its subsidiaries,  sells  transportation  equipment to
         investor  programs and third parties,  manages pools of  transportation
         equipment under agreements with the investor programs, and is a General
         Partner of
         other programs.

         Accounting for Leases

         The  Partnership's  leasing  operations  generally consist of operating
         leases.  Under the  operating  lease method of  accounting,  the leased
         asset is recorded at cost and  depreciated  over its  estimated  useful
         life.  Rental  payments  are  recorded as revenue  over the lease term.
         Lease  origination costs are capitalized and amortized over the term of
         the lease.

         Depreciation and Amortization

         Depreciation of equipment held for operating  leases is computed on the
double-declining balance method, taking a full month's depreciation in the month
of  acquisition,  based upon  estimated  useful lives of 12 years for  aircraft,
marine  containers,  trailers,  and marine  vessels,  and 15 years for railcars.
Certain aircraft are depreciated under the double-declining balance depreciation
method over the lease term. The depreciation method is changed to straight-

                                      


<PAGE>




                          PLM EQUIPMENT GROWTH FUND III
                             (A Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1997


1.       Basis of Presentation (continued)

         Depreciation and Amortization (continued)

         line method when annual  depreciation  expense using the  straight-line
         method exceeds that calculated by the double-declining  balance method.
         Acquisition  fees  have  been  capitalized  as part of the  cost of the
         equipment  and  amortized  over  the  equipment's   depreciable   life.
         Organization  costs  were  amortized  over  a  60-month  period.  Lease
         negotiation  fees are amortized over the initial  equipment lease term.
         Debt  placement  fees and issuance costs are amortized over the term of
         the related loan.  Major  expenditures  that are expected to extend the
         equipment's  useful life or reduce  equipment  operating  expenses  are
         amortized over the estimated remaining life of the equipment.

         Transportation Equipment

         In March 1995, the Financial  Accounting  Standards Board (FASB) issued
         Statement No. 121,  "Accounting for the Impairment of Long-Lived Assets
         to Be Disposed Of" (SFAS 121). In accordance with SFAS 121, the General
         Partner reviews the carrying value of its equipment  portfolio at least
         annually  in  relation to expected  future  market  conditions  for the
         purpose  of  assessing  recoverability  of  the  recorded  amounts.  If
         projected  future lease revenue plus residual  values are less than the
         carrying value of the equipment,  a loss on revaluation is recorded. No
         reductions to the carrying value of equipment were required during 1997
         or 1996.

         Equipment held for operating  leases is stated at cost.  Equipment held
         for sale is stated at the lower of the equipment's  depreciated cost or
         fair value less cost to sell, and is subject to a pending  contract for
         sale.

         Investments in Unconsolidated Special-Purpose Entities

         The  Partnership  has  interests  in   unconsolidated   special-purpose
         entities (USPEs) that own transportation equipment. These interests are
         accounted for using the equity method.

         The  Partnership's  investment in USPEs includes  acquisition and lease
         negotiation  fees  paid  by  the  Partnership  to  PLM   Transportation
         Equipment  Corporation  (TEC). TEC is a wholly-owned  subsidiary of the
         General  Partner.  The  Partnership's  equity interest in net income of
         USPEs is reflected  net of  management  fees paid or payable to IMI and
         the amortization of acquisition and lease negotiation fees paid to TEC.

         Repairs and Maintenance

         Maintenance costs are usually the obligation of the lessee. If they are
         not  covered by the  lessee,  they are charged  against  operations  as
         incurred.  To meet the  maintenance  requirements  of certain  aircraft
         airframes  and engines,  escrow  accounts are prefunded by the lessees.
         Estimated costs  associated with marine vessel  drydockings are accrued
         and charged to income ratably over the period prior to such drydocking.
         The  reserve  accounts  are  included  in the  balance  sheet as lessee
         deposits and reserve for repairs. The prefunded amounts are included in
         the balance sheet as restricted cash as of December 31, 1996.

         Net Income (Loss) and Distributions per Depositary Unit

         The  net  income  (loss)  and  distributions  of  the  Partnership  are
         generally  allocated 95% to the limited  partners and 5% to the General
         Partner. Gross gain on disposition of equipment in each

                                      


<PAGE>




                          PLM EQUIPMENT GROWTH FUND III
                             (A Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1997

1.       Basis of Presentation (continued)

         Net Income (Loss) and Distributions per Depositary Unit (continued)

         year is specially  allocated to the General  Partner to the extent,  if
         any,  necessary  to cause the  capital  account  balance of the General
         Partner to be zero as of the close of such year.  The  General  Partner
         received  a special  allocation  in the  amount of $0.4  million,  $0.1
         million,  and  $0.7  million  from the  gross  gain on  disposition  of
         equipment  for the years  ended  December  31,  1997,  1996,  and 1995,
         respectively. The limited partners' net income (loss) and distributions
         are  allocated  among  the  limited  partners  based on the  number  of
         depositary  units  owned by each  limited  partner and on the number of
         days of the year each limited partner is in the Partnership.

         Cash  distributions are recorded when paid. Cash  distributions of $2.6
         million were declared on January 22, 1998 and were paid on February 13,
         1998 to the  unitholders  of  record  as of  December  31,  1997.  Cash
         distributions  of $12.0 million and $16.7 million were paid on February
         15, 1997 and 1996,  respectively.  Cash  distributions  to investors in
         excess of net income are  considered  to represent a return of capital.
         Distributions  of $8.5 million,  $2.2  million,  and $14.0 million were
         deemed a return of capital in 1997, 1996, and 1995, respectively.

         Marketable Securities

         Marketable  securities  as of December 31, 1996 included a $6.0 million
         zero-coupon bond that matured on November 15, 1997, which was reflected
         at its discounted value and approximated market value.

         Cash and Cash Equivalents

         The Partnership  considers  highly liquid  investments that are readily
         convertible  into known  amounts of cash with  original  maturities  of
         three months or less to be cash  equivalents.  Lessee security deposits
         and required reserves held by the Partnership are considered restricted
         cash.

         Deferred Charges, Net of Accumulated Amortization

         The  deferred  charges  on  the  financial  statements  included  lease
         negotiation fees and debt placement fees.

         Reclassifications

         Certain  amounts in the 1996 and 1995  financial  statements  have been
         reclassified to conform to the 1997 presentation.

2.       General Partner and Transactions with Affiliates

         An  officer  of  FSI  contributed  $100  of the  Partnership's  initial
         capital.  Under the  equipment  management  agreement,  IMI  receives a
         monthly fee  attributable  to either  owned  equipment  or interests in
         equipment  owned by the USPEs  equal to the lesser of (i) the fees that
         would be charged by an independent third party for similar services for
         similar equipment or (ii) the sum of (a) 5% of the gross lease revenues
         (as defined in the agreement) attributable to equipment that is subject
         to operating leases and (b) 2% of the gross lease revenues attributable
         to equipment that is subject to full payout leases.  The  partnership's
         management fees of $0.4 million and $1.3 million were payable to IMI as
         of  December  31,  1997  and  1996,  respectively.   The  Partnership's
         proportional  share of USPE management fees of $0.1 million and $20,000
         were  payable  as of  December  31,  1997 and 1996,  respectively.  The
         Partnership's  proportional share of USPE management fee expense during
         1997  and  1996  was  $0.2  million.   Additionally,   the  Partnership
         reimbursed FSI and its affiliates $0.8 million,  $0.7 million, and $0.8
         million for administrative and

                                      


<PAGE>




                          PLM EQUIPMENT GROWTH FUND III
                             (A Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1997

2.       General Partner and Transactions with Affiliates (continued)

         data  processing  services  performed on behalf of the  Partnership  in
         1997, 1996, 1995, respectively. The Partnership's proportional share of
         USPEs  administrative  and data  processing  services  was $0.1 million
         during 1997 and 1996.

         No lease negotiation and equipment acquisition fees were paid to TEC or
         PLM  Worldwide  Management  Services Ltd.  (WMS) during 1997.  WMS is a
         wholly-owned  subsidiary  of PLM  International.  The  Partnership  and
         unconsolidated   special-purpose   entities   paid  or  accrued   lease
         negotiation  and  equipment  acquisition  fees of $1.6 million and $0.5
         million  to TEC  and  WMS  during  1996  and  1995,  respectively.  The
         Partnership  paid $6,000 and $0.3 million to  Transportation  Equipment
         Indemnity  Company Ltd.  (TEI) during 1997 and 1995,  respectively.  No
         expenses were paid to TEI during 1996. The  Partnership's  proportional
         share of USPE marine  insurance  coverage  paid to TEI was $0.1 million
         during 1997 and 1996. TEI provides marine insurance  coverage and other
         insurance  brokerage  services  and  is an  affiliate  of  the  General
         Partner. A substantial portion of these amounts was paid to third-party
         reinsurance  underwriters  or placed in risk  pools  managed  by TEI on
         behalf of affiliated partnerships and PLM International,  which provide
         threshold  coverages  on  marine  vessel  loss of  hire  and  hull  and
         machinery damage.  All pooling  management funds are either paid out to
         cover applicable losses or refunded pro rata by TEI.

         As of December 31, 1997, 58% of the Partnership's trailer equipment was
         operated in rental yards owned and maintained by PLM Rental,  Inc., the
         short-term  trailer  rental  subsidiary  of  PLM  International   doing
         business as PLM Trailer  Leasing.  Revenues  collected under short-term
         rental  agreements with the rental yards' customers are credited to the
         owners of the related equipment as received. Direct expenses associated
         with  the  equipment  are  charged  directly  to  the  Partnership.  An
         allocation  of  indirect  expenses  of the rental  yard  operations  is
         charged to the Partnership monthly.

         The  Partnership  has  interests  in  certain  equipment  for  lease in
         conjunction   with  affiliated   partnerships   that  are  included  in
         unconsolidated   special-purpose  entities.  In  1997,  this  equipment
         included a 56% ownership in an entity that owns a marine vessel,  a 17%
         ownership  in two  trusts  that  own  three  commercial  aircraft,  two
         aircraft  engines,  and  portfolio  of  aircraft  rotables;  and  a 25%
         ownership in a trust that owns four commercial aircraft.

         The balance due to  affiliates  as of December 31, 1997  included  $0.4
         million  due to FSI and its  affiliates  for  management  fees and $1.8
         million due to  affiliated  USPEs.  The balance due to affiliates as of
         December 31, 1996 included  $1.3 million due to FSI and its  affiliates
         for management fees. There was no balance due to affiliated USPEs as of
         December 31, 1996.

3.       Equipment

         The components of owned  equipment as of December 31, 1997 and 1996 are
as follows (in thousands of dollars):

<TABLE>
<CAPTION>

Equipment held for operating leases:                     1997               1996
                                                     --------------------------------

<S>                                                   <C>                 <C>        
Aircraft and aircraft engines                         $    46,282         $    70,615
Rail equipment                                             34,859              35,733
Mobile offshore drilling unit                               9,666               9,666
Marine containers                                           7,421              13,146
Trailers                                                    7,080               7,510
                                                          105,308             136,670
Less accumulated depreciation                             (67,234)            (78,607)
                                                    ------------------------------------
Net equipment                                         $    38,074         $    58,063
                                                    ====================================
</TABLE>


                                      


<PAGE>




                          PLM EQUIPMENT GROWTH FUND III
                             (A Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1997


3.       Equipment (continued)

         Revenues are earned by placing the  equipment  under  operating  leases
         that are billed monthly or quarterly.  Some of the Partnership's marine
         vessels and  containers  are leased to  operators  of  utilization-type
         leasing pools,  which include equipment owned by unaffiliated  parties.
         In such instances,  revenues  received by the Partnership  consist of a
         specified  percentage of revenues generated by leasing the equipment to
         sublessees,  after deducting  certain direct operating  expenses of the
         pooled equipment. Rents for railcars are based on mileage traveled or a
         fixed rate; rents for all other equipment are based on fixed rates.

         As of  December  31,  1997,  all  owned  equipment  in the  Partnership
         portfolio  was  on  lease,  except  for  28  marine  containers  and 41
         railcars.  As  of  December  31,  1996,  all  owned  equipment  in  the
         Partnership portfolio was on lease, except for 32 marine containers, 67
         railcars,  and an aircraft.  The  aggregate net book value of equipment
         off lease was $0.3 million and $4.3 million as of December 31, 1997 and
         1996, respectively.

         During 1997,  the  Partnership  sold or disposed of marine  containers,
         trailers,  railcars,  and aircraft  with an aggregate net book value of
         $6.5 million for aggregate proceeds of $12.1 million.

         During 1996,  the  Partnership  sold or disposed of marine  containers,
         aircraft engines, vessels, trailers, and railcars with an aggregate net
         book value of $8.0 million for aggregate proceeds of $14.5 million.

         In the fourth  quarter  of 1996 the  Partnership  ended its  investment
         phase in accordance with the limited partnership agreement;  therefore,
         no equipment was purchased  during 1997.  Capital  improvements  to the
         Partnership's  existing equipment of $0.2 million and $0.7 million were
         made during 1997 and 1996,  respectively.  During 1996, the Partnership
         purchased three commercial aircraft and a mobile offshore drilling unit
         for $28.5 million and paid acquisition fees of $1.3 million to TEC.

         All leases for owned and partially  owned equipment are being accounted
         for as operating  leases.  Future minimum  rentals under  noncancelable
         leases for owned and partially  owned equipment as of December 31, 1997
         during each of the next five years are  approximately  $10.0 million in
         1998, $6.9 million in 1999, $4.8 million in 2000, $3.7 million in 2001,
         $0.9 million in 2002, and $1.3 million  thereafter.  Contingent rentals
         based  upon  utilization  were $0.9  million,  $1.5  million,  and $1.9
         million in 1997, 1996, and 1995, respectively.

         The  Partnership  owns  certain  equipment  that is leased and operated
         internationally. A limited number of the Partnership's transactions are
         denominated  in  a  foreign  currency.   The  Partnership's  asset  and
         liability  accounts  denominated in a foreign  currency were translated
         into U.S.  dollars at the rates in effect at the balance  sheet  dates,
         and revenue and expense  items were  translated at average rates during
         the year. Gains or losses resulting from foreign currency  transactions
         are included in the results of operations and are not material.



                                      


<PAGE>




                          PLM EQUIPMENT GROWTH FUND III
                             (A Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1997

3.       Equipment (continued)

         The Partnership leases or leased its aircraft,  railcars,  and trailers
         to lessees  domiciled in four geographic  regions:  Canada,  the United
         States,  Europe,  Asia. The marine vessels,  mobile  offshore  drilling
         unit, and marine containers are leased to multiple lessees in different
         regions  that  operate  the  marine   vessels  and  marine   containers
         worldwide.  The tables below set forth geographic information about the
         Partnership's  owned and partially owned equipment  grouped by domicile
         of the lessee as of and for the years ended  December 31,  1997,  1996,
         and 1995 (in thousands of dollars):

         Revenues:

<TABLE>
<CAPTION>

                                                                   Owned             Total Equipment
                             Investments in USPEs                 Equipment


Region                        1997           1996           1997            1996            1995
------------------------------------------------------------------------------------------------------

  <S>                     <C>            <C>            <C>            <C>               <C>      
  Rest of the world       $      1,414   $      2,113   $      3,105   $      4,087      $   6,998
  Canada                         1,019          1,083          5,479          3,434          5,098
  United States                     --             --          5,227          7,749          7,542
  Europe                         1,766          1,869          3,620          1,120            826
  Asia                              --             --          2,558          2,069          2,904
                        ------------------------------------------------------------------------------
Total lease revenues      $      4,199   $      5,065   $     19,989   $     18,459      $  23,368
                        ==============================================================================
</TABLE>





         The  following  table  below  sets  forth  identifiable  income  (loss)
information by region (in thousands of dollars):

<TABLE>
<CAPTION>

                                                                             Owned           Total Equipment
                                        Investments in USPEs               Equipment


Net income (loss):                         1997        1996              1997           1996             1995
                                     -----------------------------------------------------------------------------

  <S>                                 <C>             <C>            <C>            <C>              <C>       
  Rest of the world                   $       (372)   $     5,962    $       941    $      6,858     $    3,193
  Canada                                        84           (307 )        3,340           2,591          1,869
  United States                                 --             --          1,130           1,639          1,818
  Europe                                       773          1,209         (2,662)         (1,728)           107
  Asia                                          --             --          3,771          (2,821)          (476)
                                     -----------------------------------------------------------------------------
Total identifiable net income                  485          6,864          6,520           6,539          6,511
Administrative and other net loss               --             --         (5,068)         (3,643)        (3,805)
                                     -----------------------------------------------------------------------------
Total net income                      $        485    $     6,864    $     1,452    $      2,896     $    2,706
                                     =============================================================================
</TABLE>


                                      


<PAGE>




                          PLM EQUIPMENT GROWTH FUND III
                             (A Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1997

3.       Equipment (continued)

         The net book value of these assets at December 31, 1997, 1996, and 1995
were as follows (in thousands of dollars):

<TABLE>
<CAPTION>


                                             Investments in USPEs                   Owned Equipment


                                         1997         1996        1995         1997          1996         1995
                                    --------------------------------------------------------------------------------

                 <S>                 <C>          <C>          <C>          <C>           <C>          <C>       
                 Rest of the world   $    3,104   $    3,999   $    4,821   $    8,542    $   13,599   $   11,035
                 Canada                   2,054        2,575        3,948        6,866         8,136       10,019
                 United States               --           --        6,093        8,639        10,862       12,157
                 Europe                   4,021        4,564        5,958       11,175        17,399           --
                 Asia                        --           --           --        2,852         8,067       12,714

                                    --------------------------------------------------------------------------------
Total equipment held for
  operating leases                        9,179       11,138       20,820       38,074       58,063        45,925
  Railcars held for sale                     --           --           --           --           --           475
                                   ---------------------------------------------------------------------------------
  Total Equipment                    $    9,179   $   11,138   $   20,820   $   38,074   $   58,063    $   46,400
                                   =================================================================================

</TABLE>


         No lessees  comprised more than 10% of total revenues in 1997, 1996, or
         1995.

4.       Investments in Unconsolidated Special Purpose Entities

         During the second half of 1995, the  Partnership  began to increase the
         level  of  its   participation   in  the   ownership  of   large-ticket
         transportation  assets to be owned and operated jointly with affiliated
         programs.  Prior to  1996,  the  Partnership  accounted  for  operating
         activities  associated  with joint  ownership  of rental  equipment  as
         undivided  interests,  including its proportionate  share of each asset
         with similar  wholly-owned  assets in its financial  statements.  Under
         generally  accepted   accounting   principles,   the  effects  of  such
         activities,  if material, should be reported using the equity method of
         accounting.  Therefore,  effective  January  1, 1996,  the  Partnership
         adopted  the  equity  method  to  account  for its  investment  in such
         jointly-held assets.

         The principal  differences  between the previous  accounting method and
         the equity method concern the  presentation  of activities  relating to
         these assets in the statement of  operations.  Whereas under the equity
         method of accounting the Partnership's proportionate share is presented
         as a single net amount,  "equity in net income (loss) of unconsolidated
         special-purpose  entities," under the previous method the Partnership's
         income statement  reflected its proportionate  share of each individual
         item of revenue and  expense.  Accordingly,  the effect of adopting the
         equity  method of  accounting  has no  cumulative  effect on previously
         reported  partners'  capital or on the  Partnership's net income (loss)
         for the period of adoption.  Because the effects on  previously  issued
         financial  statements  of applying the equity  method of  accounting to
         investments in  jointly-owned  assets are not considered to be material
         to such  financial  statements  taken  as a  whole,  previously  issued
         financial  statements  have not been  restated.  The beginning cash and
         cash  equivalents  for 1996 is different  from the ending cash and cash
         equivalents   for  1995  on  statements  of  cash  flows  due  to  this
         reclassification.


                                      


<PAGE>




                          PLM EQUIPMENT GROWTH FUND III
                             (A Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1997


4.       Investments in Unconsolidated Special-Purpose Entities (continued)

         The following  summarizes the financial  information  for the USPEs and
the  Partnership's  interests therein as of and for the years ended December 31,
1997 and 1996 (in thousands of dollars):

<TABLE>
<CAPTION>


                                                  1997                                     1996
                                                --------                                ----------
                                                         Net Interest                           Net Interest 
                                        Total                 of              Total USPEs      of Partnership      
                                        USPEs            Partnership
                                 --------------------------------------------------------------------------------

<S>                                <C>                 <C>                  <C>                <C>            
Net investments                    $       45,015      $         9,179      $       49,985     $        11,138
Revenues                                   18,882                4,199              22,146               5,065
Net income                                 11,077                  485              15,930               6,864

</TABLE>

         The net  investment  in  USPEs  includes  the  following  jointly-owned
equipment (and related assets and  liabilities) as of December 31, (in thousands
of dollars):

<TABLE>
<CAPTION>

      %
  Ownership                              Equipment                                  1997            1996
---------------------------------------------------------------------------------------------------------------
     <S>     <C>                                                               <C>             <C>
     17%     Two trusts that own three commercial aircraft, two aircraft
             engines, and a portfolio of rotable components                    $       4,021   $        4,564
     56%      Bulk carrier marine vessel                                               3,104            3,999
     17%      Trust that owns six commercial aircraft                                     --            2,575
     25%      Trust that owns four commercial aircraft                                 2,054               --

                                                                             ----------------------------------
                Investments in unconsolidated special-purpose entities         $       9,179   $       11,138
                                                                             ==================================
</TABLE>

         The  Partnership  has interests in a USPE that owns  multiple  aircraft
         (the   Trust).   This  Trust   contains   provisions,   under   certain
         circumstances,  for  allocating  specific  aircraft  to the  beneficial
         owners.  During 1997,  PLM  Equipment  Growth Fund IV and PLM Equipment
         Growth Fund VI each sold the aircraft  designated to it. The result for
         the  Partnership  was to restate the ownership in the Trust from 17% to
         25%. This change has no effect on the income or loss recognized  during
         1997.

5.       Note Payable

         The  Partnership  had a note  outstanding  with a face  amount of $29.3
         million as of December 31, 1997,  with interest  computed at LIBOR plus
         1.5% per annum.  The note had three tranches with different  maturities
         based  on  the  General  Partner's  ability  to  select  various  LIBOR
         maturities (one month,  two months,  or six months) for tranches of the
         notes. Rates are set when the tranches mature and are reset (7.4% as of
         December 31, 1997 and 7.0%,  7.1%,  and 7.3% as of December 31,  1996).
         During  the  first 15  months  following  conversion  to a term loan on
         September 30, 1996,  quarterly  principal  payments equal to 75% of net
         proceeds  from  asset  sales  was  due.  Commencing  October  1,  1997,
         quarterly  principal payments will be equal to 75% of net proceeds from
         asset sales from  September 30, 1997, or payments  equal to 9.0% of the
         facility balance as of September 30, 1997. During 1997, the Partnership
         paid $11.0 million of the outstanding loan balance as a result of asset
         sales.

         The  General  Partner   believes  that  the  book  value  of  the  debt
         approximates  fair market value due to its variable  interest rate. The
         Partnership is prohibited from incurring any new  indebtedness  when it
         is in the holding phase or liquidation phase.


                                      


<PAGE>




                          PLM EQUIPMENT GROWTH FUND III
                             (A Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                                December 31, 1997

6.       Income Taxes

         The  Partnership is not subject to income taxes,  as any income or loss
         is included in the tax returns of the individual partners. Accordingly,
         no provision for income taxes has been made in the financial statements
         of the Partnership.

         As  of  December  31,  1997,   there  were  temporary   differences  of
         approximately  $28.4 million between the financial  statement  carrying
         values of certain  assets and  liabilities  and the income tax basis of
         such  assets  and   liabilities,   primarily  due  to   differences  in
         depreciation methods and equipment reserves.

7.       Repurchase of Depositary Units

         On  December  28,  1992,  the  Partnership  engaged  in  a  program  to
         repurchase up to 250,000  depository  units. No purchases of depositary
         units were made during 1997. As of December 31, 1997,  the  Partnership
         had  repurchased a cumulative  total of 128,853  depositary  units at a
         total cost of $0.9 million. The General Partner does not intend to make
         any  additional  repurchase  of  depositary  units  on  behalf  of  the
         Partnership.

8.       Delisting of Partnership Units

         The General Partner  delisted the  Partnership's  depositary units from
         the American Stock Exchange  (AMEX),  which had traded under the symbol
         GFZ,  on April 8, 1996.  The last day for trading on the AMEX was March
         22, 1996. Under the Internal  Revenue Code (the Code),  then in effect,
         the Partnership was classified as a Publicly  Traded  Partnership.  The
         Code treated all Publicly  Traded  Partnerships as corporations if they
         remained  publicly  traded  after  December  31,  1997.   Treating  the
         Partnership as a corporation  would have meant the  Partnership  itself
         became a taxable,  rather than a "flow  through"  entity.  As a taxable
         entity,  the income of the  Partnership  would have  become  subject to
         federal  taxation at both the partnership  level and the investor level
         to the extent that income would have been  distributed  to an investor.
         In addition, the General Partner believed that the trading price of the
         depositary units would have become distorted when the Partnership began
         the final liquidation of the underlying equipment  portfolio.  In order
         to avoid taxation of the  Partnership  as a corporation  and to prevent
         unfairness   to   Unitholders,   the  General   Partner   delisted  the
         Partnership's  depositary units from the AMEX. While the  Partnership's
         depositary  units are no longer  publicly  traded on a  national  stock
         exchange,  the General Partner continues to manage the equipment of the
         Partnership and prepare and distribute quarterly and annual reports and
         Forms 10-Q and 10-K in  accordance  with the  Securities  and  Exchange
         Commission requirements.  In addition, the General Partner continues to
         provide pertinent tax reporting forms and information to unitholders.

         As  of  March  20,  1998,   there  were  9,871,073   depositary   units
         outstanding.  There are approximately 12,500 depositary  unitholders of
         record as of the date of this report.

         Several secondary  exchanges  facilitate sales and purchases of limited
         partnership  units.  Secondary  markets are characterized as having few
         buyers for limited  partnership  interests  and therefore are generally
         viewed as being inefficient vehicles for the sale of partnership units.
         There is presently no public market for the units and none is likely to
         develop. To prevent the units from being considered publicly traded and
         thereby to avoid taxation of the Partnership as an association  treated
         as a corporation under the Internal Revenue Code, the units will not be
         transferred  without the consent of the General  Partner,  which may be
         withheld in its absolute  discretion.  The General  Partner  intends to
         monitor  transfers  of units in an effort  to  ensure  that they do not
         exceed the number permitted by certain safe harbors  promulgated by the
         Internal Revenue Service.  A transfer may be prohibited if the intended
         transferee  is not an U.S.  citizen or if the transfer  would cause any
         portion of the units to be treated as plan assets.


                                      


<PAGE>


                          PLM EQUIPMENT GROWTH FUND III

                                INDEX OF EXHIBITS



    Exhibit                                                               Page

    4.     Limited Partnership Agreement of Partnership                     *

    4.1    Amendment, dated November 18, 1991, to Limited Partnership       *
           Agreement of Partnership

   10.1    Management Agreement between Partnership and PLM Investment      *
           Management, Inc.

   10.2    $41,000,000 Credit Agreement dated as of December 13, 1994 with  *
           First Union National Bank of North Carolina

   24.     Powers of Attorney.                                          43-45





* Incorporated by reference. See page 25 of this report.