<PAGE>   1

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

                                    FORM 10-K


(Mark One)

[x]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 [FEE REQUIRED]

For the quarterly period ended December 31, 1996

                                       or

[ ]  TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
     1934 [NO FEE REQUIRED]

For the transition period from _____________________ to _____________________

Commission file number 0-10322

                         CORPORATE PROPERTY ASSOCIATES 3
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

         CALIFORNIA                                      94-2708080
--------------------------------------------------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)

50 ROCKEFELLER PLAZA, NEW YORK, NEW YORK                   10020
--------------------------------------------------------------------------------
(Address of principal executive offices)                 (Zip Code)

Registrant's telephone number, including area code (212) 492-1100

Securities registered pursuant to Section 12(b) of the Act:

          Title of each class                    Name of each exchange on which
                                                           registered

                 NONE                                        NONE
    -------------------------------              -------------------------------

    _______________________________              _______________________________

           Securities registered pursuant to Section 12(g) of the Act:

                            LIMITED PARTNERSHIP UNITS
--------------------------------------------------------------------------------
                                (Title of Class)

--------------------------------------------------------------------------------
                                (Title of Class)

      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.

                                                                  |X| Yes |_| No

      Indicate by check mark if disclosure of deliquent 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 the voting stock held by non-affiliates of
Registrant: There is no active market for Limited Partnership Units.
<PAGE>   2

                                     PART I

Item 1. Business.

            Registrant is engaged in the business of investing in commercial and
industrial real estate properties which are net leased to commercial and
industrial entities. Registrant was organized as a California limited
partnership on November 7, 1980. The General Partners of Registrant are W.P.
Carey & Co., Inc. (the "Corporate General Partner" or "W.P. Carey") and William
Polk Carey (the "Individual General Partner"). The Corporate General Partner,
the Individual General Partner and/or affiliates are also the General Partners
of affiliates of Registrant, Corporate Property Associates ("CPA(R):1"),
Corporate Property Associates 2 ("CPA(R):2"), Corporate Property Associates 4, a
California limited partnership ("CPA(R):4"), Corporate Property Associates 5
("CPA(R):5"), Corporate Property Associates 6 - a California limited partnership
("CPA(R):6"), Corporate Property Associates 7 - a California limited partnership
("CPA(R):7"), Corporate Property Associates 8, L.P., a Delaware limited
partnership ("CPA(R):8"), Corporate Property Associates 9, L.P., a Delaware
limited partnership ("CPA(R):9") and the advisor of Corporate Property
Associates 10 Incorporated ("CPA(R):10"), Carey Institutional Properties
Incorporated ("CIP(TM)") and Corporate Property Associates 12 Incorporated
("CPA(R):12"). Registrant has a management agreement with Carey Corporate
Property Management Company ("Carey Management"), a division of W.P. Carey.
According to the terms of this agreement, Carey Management performs a variety of
management services for Registrant. Registrant has entered into an agreement
with Fifth Rock L.P., an affiliate, for the purpose of leasing office space.
Reference is made to the Prospectus of Registrant dated July 31, 1981, as
supplemented by Supplements dated December 9, 1981, January 8, 1982 and February
10, 1982, filed pursuant to Rules 424(b) and 424(c) under the Securities Act of
1933 and such Prospectus and such Supplements are incorporated herein by
reference (said Prospectus, as so supplemented, is hereinafter called the
"Prospectus").

            Registrant has only one industry segment which consists of the
investment in and the leasing of industrial and commercial real estate. See
Selected Financial Data in Item 6 for a summary of Registrant's operations. Also
see the material contained in the Prospectus under the heading INVESTMENT
OBJECTIVES AND POLICIES.

            The properties owned by Registrant are described in Properties in
Item 2. Registrant's entire net proceeds from the public offering, less any
return of capital and the working capital reserve have been fully invested in
net leased commercial and industrial real estate since June 1, 1983, the date of
Registrant's final real estate acquisition.

            For the year ended December 31, 1996, revenues from properties
occupied by lease obligors which accounted for 10% or more of leasing revenues
of Registrant were as follows: Gibson Greetings, Inc. ("Gibson"), 46%, Cleo,
Inc. ("Cleo"), 24% and Hughes Markets, Inc. ("Hughes"), 13%. No other property
owned by Registrant accounted for 10% or more of its total operating revenues
during 1996. CSS Industries ("CSS") is the guarantor of the Cleo lease. See Note
8 to the Financial Statements in Item 8. CSS and Gibson are publicly traded
companies. For the year ended December 31, 1995, CSS' audited financial
statements reported revenues of $286,412,000, net income of $15,775,000, total
assets of $374,961,000 and shareholders' equity of $153,856,000. For the
nine-month period ended September 30, 1996, CSS unaudited financial statements
reported revenues of $242,102,000, net income of $7,299,000, total assets of
$374,961,000 and total shareholders' equity of $161,052,000. For the year ended
December 31, 1995, Gibson's audited financial statements reported revenues of
$540,821,000, a net loss of $46,484,000, total assets of $425,827,000 and
shareholders' equity of $230,242,000. Gibson's unaudited financial statements
for the nine-month period ended September 30, 1996 reported revenues of
$278,915,000, net income of $15,519,000, total assets of $418,997,000 and
shareholders' equity of $248,580,000.

            All of Registrant's properties are leased to corporate tenants under
long-term net leases. A net lease generally requires tenants to pay all
operating expenses relating to the leased properties including maintenance, real
estate taxes, insurance and utilities which under other forms of leases are
often paid by the lessor. Lessees are required to include Registrant as an
additional insured party on all insurance policies relating to the leased
properties. In addition, substantially all of the net leases include
indemnification provisions which require the lessees to indemnify Registrant and
the General Partners for liabilities on all matters relating to the leased
properties. Registrant believes that the insurance and indemnity provided on its
behalf by its lessees provides adequate coverage for property damage and any
liability claims which may arise against Registrant's ownership interests. In
addition to the insurance and indemnification provisions of the lease,
Registrant has contingent property and liability insurance for its leased
properties. To the extent that any lessees are not financially able to satisfy
indemnification obligations which exceed insurance


                                     - 1 -
<PAGE>   3

reimbursements, Registrant may incur the costs necessary to repair property and
settle liabilities. Presently there are no claims pending for property damages
or liability claims.

            As described above, lessees retain the obligation for the operating
expenses of their leased properties so that, other than rental income, there are
no significant operating data (i.e. expenses) reportable on Registrant's leased
properties. As discussed in Registrant's Management's Discussion and Analysis in
Item 7, Registrant's leases generally provide for periodic rent increases which
are either stated and negotiated at the inception of the lease or based on
formulas indexed to increases in the Consumer Price Index. During the year ended
December 31, 1996. Registrant modified its existing lease with Hughes and
entered into a new lease with a wholly-owned subsidiary of Excel
Telecommunications, Inc. ("Excel") for its property in Reno, Nevada. All of
Registrant's current lease terms expire between 1998 and 2013 and provide for
renewal terms.

            As Registrant has generally invested in properties which are
occupied by a single corporate tenant and subject to long-term leases with such
lease obligations backed by the credit of the corporate lessee, most of
Registrant's properties have not been greatly affected by competitive conditions
of local and regional real estate markets. Competitive conditions of such
markets have become more significant due to the anticipated expiration in 1998
of the lease with Hughes for a property in Los Angeles, California. Registrant
is in the process of remarketing the Los Angeles property. In selecting real
estate investments, Registrant's strategy was to identify properties which
included operations of material importance to the lessee so that the lessee may
be more likely to extend its lease beyond the initial term or exercise a
purchase option if such option was provided for in the lease agreement.
Registrant believes that this strategy reduces its exposure to the competitive
conditions of the local and regional real estate markets. Because Registrant may
be affected by the financial condition of its lessees rather than the
competitive conditions of the real estate marketplace, Registrant's strategy has
been to diversify its investments among tenants, property types and industries
in addition to achieving geographical diversification.

            Registrant's lease with Hughes for a dairy processing and
distribution facility in Los Angeles, California which initial term expired in
April 1996 was extended for a two-year extension term through April 1998. Under
the extension agreement, Registrant's share of monthly rent increased from
$25,420 to $56,341. In addition, Hughes is obligated to pay Registrant a lump
sum of approximately $587,000 at the end of the extended lease term. Such lump
sum payment is supported by an irrevocable letter of credit. Hughes also has the
opportunity to extend the lease on a month-to-month basis through October 1998.
Registrant is actively engaged in remarketing the property for both its current
use and alternative uses.

            In August 1996, Registrant entered into a lease agreement for its
Reno, Nevada property with a wholly-owned subsidiary of Excel with such lease
obligations unconditionally guaranteed by Excel. The initial lease term
commenced in December 1996 and the Registrant's share of annual rents is
approximately $325,000. The lease provides Excel with the right to terminate the
lease at the end of the sixth lease year.

            Registrant voluntarily contracted for Phase I environmental reviews
of all of its properties in 1993. Registrant believes, based on the results of
such reviews and Phase II environmental reviews of certain of its properties in
1994, that its properties are in substantial compliance with Federal and state
environmental statutes and regulations. Phase II reviews were only performed on
certain properties based on the recommendations of the Phase I reviews. Portions
of certain properties have been subject to a limited degree of contamination,
principally in connection with either leakage from underground storage tanks or
surface spills from facility activities. In many instances, tenants are actively
engaged in the remediation process and addressing identified conditions. For
those conditions which were identified, Registrant advised its tenants of such
findings and of their obligations to perform additional investigations and any
required remediation. Tenants are generally subject to environmental statutes
and regulations regarding the discharge of hazardous materials and any related
remediation obligations. In addition, Registrant's leases generally require
tenants to indemnify Registrant from all liabilities and losses related to the
leased properties. Accordingly, Management believes that the ultimate resolution
of the aforementioned environmental matters will not have a material adverse
effect on Registrant's financial condition, liquidity or results of operations.

            Registrant does not have any employees. The Corporate General
Partner of Registrant together with its affiliates employ twelve individuals who
perform accounting, secretarial and transfer services for Registrant. Gemisys,
Inc. performs certain transfer services for Registrant and The Bank of New York
performs certain banking services for Registrant. In addition, Registrant has
entered into an agreement with Carey Management pursuant to which Carey
Management provides certain management services to Registrant.


                                     - 2 -
<PAGE>   4

Item 2.  Properties.

     LEASE                                                 TYPE OF OWNERSHIP
    OBLIGOR        TYPE OF PROPERTY          LOCATION          INTEREST
-----------------  -----------------        -----------    -----------------

GIBSON GREETINGS,  Land and Manufac-        Cincinnati,    Ownership of a
INC.               turing/Warehouse         Ohio and       71.5% interest
                   Buildings - 2            Berea,         in land and
                   locations                Kentucky       buildings

CLEO, INC.         Land and Manufacturing/  Memphis,       Ownership of a 71.5%
                   Warehouse Building       Tennessee      interest in land and
                                                           building

NEW VALLEY         Land and                 Bridgeton,     Ownership of an
CORPORATION        Centralized              Missouri       approximate 61%
                   Telephone Bureau                        interest in land
                                                           and building

SPORTS &           Land and                 Moorestown,    Ownership of an
RECREATION, INC.   Building                 New Jersey     approximate 61%
                                                           interest in land
                                                           and building

EXCEL TELE-        Land and                 Reno, Nevada   Ownership of an
COMMUNICATIONS,    Building                                approximate 61%
INC.                                                       interest in land
                                                           and building

HUGHES MARKETS,    Land and Dairy Pro-      Los Angeles,   Ownership of an
INC.               cessing Facility         California     approximate
                                                           16.76% interest
                                                           in land and
                                                           building

AT&T CORPORATION   Land and a               Bridgeton,     Ownership of an
                   Computer Center          Missouri       approximate 61%
                                                           interest in land
                                                           and building


                                     - 3 -
<PAGE>   5

            The material terms of Registrant's leases with its significant
tenants are summarized in the following table:

<TABLE>
<CAPTION>
              Partnership's
                  Share                    Current    Lease
Lease          of Current      Square      Rent Per   Expiration  Renewal  Ownership             Terms of             Gross
Obligor       Annual Rents     Footage     Sq.Ft.(1)  (Mo/Year)   Terms    Interest              Purchase Option      Costs (2)
-----------   ------------     -------     ---------  ---------   -------  ---------------       ---------------      ---------
<S>             <C>            <C>          <C>        <C>          <C>    <C>                   <C>                  <C>        
Gibson          $2,366,571     1,194,840     2.59      11/2013      YES    71.5% interest;       Fair market          $ 9,498,662
Greetings,                                                                 remaining             value as encumbered
Inc.                                                                       interest owned        by the lease
                                                                           by Corporate
                                                                           Property Associates
                                                                           2 ("CPA(R):2")
                                                                         
Cleo, Inc.       1,145,400     1,006,566     1.49      12/2005      YES    71.5% interest;       The greater of         8,100,419
                                                                           remaining interest    fair market value
                                                                           owned by CPA(R):2     capped at $11,618,750
                                                                           by the lease          or $10,725,000
                                                                         
New Valley         372,987        78,080     7.86      11/2001      YES    61% interest;         N/A                    3,580,804
Corporation                                                                remaining
                                                                           interest owned
                                                                           by CPA(R):2
                                                                         
AT&T               453,422        55,810    13.37      11/2001      YES    61% interest;         N/A                    4,509,356
Corporation                                                                remaining
                                                                           interest owned
                                                                           by CPA(R):2
                                                                         
Hughes             676,097       390,000    10.34      04/1998      NO     16.76% interest;      N/A                    1,969,927
Markets Inc.                                                               remaining
                                                                           interest owned
                                                                           by Corporate
                                                                           Property
                                                                           Associates 4
                                                                         
Sports &           187,657        74,066     4.17       5/2012      YES    61% interest;         N/A                    1,800,000
Recreation                                                                 remaining
Inc.                                                                       interest owned
                                                                           by CPA(R):2
                                                                         
Excel Tele-        323,836        53,158    10.02      12/2002      YES    61% interest;         N/A                    2,303,443
commun-                                                                    remaining
ications, Inc.                                                             interest owned
                                                                           by  CPA(R):2
</TABLE>

(1)  Represents rate for rent per square foot when combined with rents
     applicable to tenants-in-common.
(2)  Includes original cost of investment and net increases or decreases to net
     investment subsequent to purchase.

None of Registrant's properties are encumbered by mortgage debt.


                                     - 4 -
<PAGE>   6

Item 3. Legal Proceedings.

            On April 1, 1993, New Valley Corporation ("New Valley"), a tenant of
a property owned by Registrant and formerly a tenant of two other of
Registrant's properties, filed a petition of voluntary bankruptcy seeking
reorganization under Chapter 11 of the United States Bankruptcy Code. In
connection with the filings, Registrant and Corporate Property Associates 2,
which together own the properties as tenants-in-common, filed a bankruptcy claim
in the amount of $6,766,904. New Valley is contesting the claims and Registrant
and New Valley are now in litigation regarding this claim. The matter is
expected to go to trial in May of 1997. No prediction regarding the outcome of
this litigation can be made at this time.

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

            No matter was submitted during the fourth quarter of the year ended
December 31, 1996 to a vote of security holders, through the solicitation of
proxies or otherwise.

                                     PART II

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

            Information with respect to Registrant's common equity is hereby
incorporated by reference to page 21 of Registrant's Annual Report contained in
Appendix A.

Item 6. Selected Financial Data.

            Selected Financial Data are hereby incorporated by reference to page
1 of Registrant's Annual Report contained in Appendix A.

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

            Management's Discussion and Analysis are hereby incorporated by
reference to pages 2 to 4 of Registrant's Annual Report contained in Appendix A.

Item 8. Financial Statements and Supplementary Data.

            The following financial statements and supplementary data are hereby
incorporated by reference to pages 5 to 17 of Registrant's Annual Report
contained in Appendix A:

     (i)  Report of Independent Accountants.
     (ii) Balance Sheets as of December 31, 1995 and 1996.
     (iii) Statements of Income for the years ended December 31, 1994, 1995 and
          1996.
     (iv) Statements of Partners' Capital for the years ended December 31, 1994,
          1995 and 1996.
     (v)  Statements of Cash Flows for the years ended December 31, 1994, 1995
          and 1996.
     (vi) Notes to Financial Statements.

Item 9. Disagreements on Accounting and Financial Disclosure.

            NONE


                                     - 5 -
<PAGE>   7

                                    PART III

Item 10. Directors and Executive Officers of the Registrant.

            Registrant has no officers or directors. The executive officers and
directors of the Corporate General Partner are as follows:

                                                               Has Served as a
                                                               Director and/or
      Name              Age      Positions Held                Officer Since (1)
      ----              ---      --------------                -----------------
                                                  
William Polk Carey       66   Chairman of the Board                 11/80
                              Director
Francis J. Carey         71   President                             11/80
                              Director
George E. Stoddard       80   Chairman of the Investment            11/80
                              Committee Director
Madelon DeVoe Talley     65   Vice Chairman of the Board             4/86
                              Director
Lawrence R. Klein        76   Chairman of the Economic Policy        4/84
                                  Committee
                              Director
Barclay G. Jones III     36   Executive Vice President               8/82
                              Director
Claude Fernandez         44   Executive Vice President               3/83
                              Chief Administrative Officer
H. Augustus Carey        39   Senior Vice President                  8/88
Anthony S. Mohl          34   Senior Vice President                  9/87
John J. Park             32   Senior Vice President                  7/91
                              Treasurer
Michael D. Roberts       45   First Vice President                   4/89
                              Controller

(1)  Each officer and director of the Corporate General Partner will hold office
     until the next annual meeting of the Board of Directors and thereafter
     until his successor shall have been elected and shall have qualified or
     until his prior death, resignation or removal.

            William Polk Carey and Francis J. Carey are brothers. H. Augustus
Carey is the nephew of William Polk Carey and the son of Francis J. Carey.

            A description of the business experience of each officer and
director of the Corporate General Partner is set forth below:

            William Polk Carey, Chairman and Chief Executive Officer, has been
active in lease financing since 1959 and a specialist in net leasing of
corporate real estate property since 1964. Before founding W.P. Carey & Co.,
Inc. ("W.P. Carey") in 1973, he served as Chairman of the Executive Committee of
Hubbard,


                                     - 6 -
<PAGE>   8

Westervelt & Mottelay (now Merrill Lynch Hubbard), head of Real Estate and
Equipment Financing at Loeb Rhoades & Co. (now Lehman Brothers), head of Real
Estate and Private Placements, Director of Corporate Finance and Vice Chairman
of the Investment Banking Board of duPont Glore Forgan Inc. A graduate of the
University of Pennsylvania's Wharton School of Finance and Commerce, Mr. Carey
is a Governor of the National Association of Real Estate Investment Trusts
(NAREIT). He also serves on the boards of The Johns Hopkins University, The
James A. Baker III Institute for Public Policy at Rice University, Templeton
College of Oxford University and other educational and philanthropic
institutions. He founded the Visiting Committee to the Economics Department of
the University of Pennsylvania and co-founded with Dr. Lawrence R. Klein the
Economics Research Institute at that University. Mr. Carey is also a Director of
CPA(R):10, CIP(TM) and CPA(R):12.

            Francis J. Carey was elected President and a Managing Director of
W.P. Carey in April 1987, having served as a Director since its founding in
1973. Prior to joining the firm full-time, he was a senior partner in
Philadelphia, head of the Real Estate Department nationally and a member of the
executive committee of the Pittsburgh based firm of Reed Smith Shaw & McClay,
counsel for Registrant, the General Partners, the CPA(R) Partnerships, W.P.
Carey and some of its affiliates. He served as a member of the Executive
Committee and Board of Managers of the Western Savings Bank of Philadelphia from
1972 until its takeover by another bank in 1982 and is former chairman of the
Real Property, Probate and Trust Section of the Pennsylvania Bar Association.
Mr. Carey served as a member of the Board of Overseers of the School of Arts and
Sciences of the University of Pennsylvania from 1983 through 1990. He has also
served as a member of the Board of Trustees of the Investment Program
Association since 1990 and on the Business Advisory Council of the Business
Council for the United Nations since 1994. He holds A.B. and J.D. degrees from
the University of Pennsylvania. Mr. Carey is also a Director of CPA(R):10 and
CIP(TM).

            George E. Stoddard, Chief Investment Officer, was until 1979 head of
the bond department of The Equitable Life Assurance Society of the United
States, with responsibility for all activities related to Equitable's portfolio
of corporate investments acquired through direct negotiation. Mr. Stoddard was
associated with Equitable for over 30 years. He holds an A.B. degree from
Brigham Young University, an M.B.A. from Harvard Business School and an LL.B.
from Fordham University Law School.

            Madelon DeVoe Talley, Vice Chairman, is a member of the New York
State Controller's Investment Committee, a Commissioner of the Port Authority of
New York and New Jersey, former CIO of New York State Common Retirement Fund and
a Trustee of the New York State Teachers Retirement System. She also served as a
managing director of Rothschild, Inc. and as the President of its asset
management division. Mrs. Talley was also a former Governor of the N.A.S.D. and
a director of Biocraft Laboratories, a New York Stock Exchange company. She is
an alumna of Sarah Lawrence College and the graduate school of International and
Public Affairs at Columbia University.

            Lawrence R. Klein, Chairman of the Economic Policy Committee since
1984, is Benjamin Franklin Professor of Economics Emeritus at the University of
Pennsylvania, having joined the faculty of Economics and the Wharton School in
1958. He holds earned degrees from the University of California at Berkeley and
Massachusetts Institute of Technology and has been awarded the Nobel Prize in
Economics as well as over 20 honorary degrees. Founder of Wharton Econometric
Forecasting Associates, Inc., Dr. Klein has been counselor to various
corporations, governments, and government agencies including the Federal Reserve
Board and the President's Council of Economic Advisers.

            Barclay G. Jones III, Executive Vice President, Managing Director,
and head of the Investment Department. Mr. Jones joined W.P. Carey as Assistant
to the President in July 1982 after his graduation from the Wharton School of
the University of Pennsylvania, where he majored in Finance and Economics. He
was elected to the Board of Directors of W.P. Carey in April 1992. Mr. Jones is
also a Director of the Wharton Business School Club of New York.


                                     - 7 -
<PAGE>   9

            Claude Fernandez, Chief Administrative Officer, Managing Director,
and Executive Vice President, joined W.P. Carey in 1983. Previously associated
with Coldwell Banker, Inc. for two years and with Arthur Andersen & Co., he is a
Certified Public Accountant. Mr. Fernandez received his B.S. degree in
accounting from New York University in 1975 and his M.B.A. in finance from
Columbia University Graduate School of Business in 1981.

            H. Augustus Carey, Senior Vice President, returned to W.P. Carey in
1988 and is President of W.P. Carey's broker-dealer subsidiary. Mr. Carey
previously worked for W.P. Carey from 1979 to 1981 as Assistant to the
President. Prior to rejoining W.P. Carey, Mr. Carey served as a loan officer of
the North American Department of Kleinwort Benson Limited in London, England. He
received an A.B. from Amherst College in 1979 and an M.Phil. in Management
Studies from Oxford University in 1984. Mr. Carey is a trustee of the Oxford
Management Centre Associates Council.

            Anthony S. Mohl, Senior Vice President and Director of Portfolio
Management, joined W.P. Carey & Co., in 1987 as Assistant to the President after
receiving his M.B.A. from the Columbia University Graduate School of Business.
Mr. Mohl was employed as an analyst in the strategic planning group at Kurt
Salmon Associates after receiving an undergraduate degree from Wesleyan
University.

            John J. Park, Senior Vice President, Treasurer and Director of
Research, joined W.P. Carey as an Investment Analyst in December 1987. Mr. Park
received his undergraduate degree from Massachusetts Institute of Technology and
his M.B.A. in Finance from New York University.

            Michael D. Roberts joined W. P. Carey as a Second Vice President and
Assistant Controller in April 1989 and is currently First Vice President and
Controller. Prior to joining W.P. Carey, Mr. Roberts was employed by Coopers &
Lybrand for over 8 years, where he attained the title of audit manager. A
certified public accountant, Mr. Roberts received a B.A. in sociology from
Brandeis University and an M.B.A. from Northeastern University.

Item 11. Executive Compensation.

            Under the Amended Agreement of Limited Partnership of Registrant
(the "Agreement"), 1.9% of Distributable Cash From Operations, as defined, is
payable to the Corporate General Partner and .1% of Distributable Cash From
Operations is payable to the Individual General Partner. The Corporate General
Partner and the Individual General Partner received $62,206 and $3,274
respectively, from Registrant as their share of Distributable Cash From
Operations during the year ended December 31, 1996. As owner of 200 Limited
Partnership Units, the Corporate General Partner received cash distributions of
$9,860 ($49.30 per Unit) during the year ended December 31, 1996. See Item 6 for
the net income allocated to the General Partners under the Agreement. Registrant
is not required to pay, and has not paid, any remuneration to the officers or
directors of the Corporate General Partner or any other affiliate of Registrant
during the year ended December 31, 1996. Although Registrant is authorized to
pay the Individual General Partner a fee of up to $15,000 in any year beginning
after December 31, 1980, no fee will be paid so long as Mr. Carey is the
Individual General Partner and no fee may be paid to any successor Individual
General Partner appointed by Mr. Carey pursuant to the Agreement.

            In the future, the Corporate General Partner will continue to
receive 1.9% of Distributable Cash From Operations, the Individual General
Partner will continue to receive .1% of Distributable Cash From Operations and
each General Partner will continue to be allocated the same percentage of the
profits and losses of Registrant as had been allocated in the past. For a
description of the subordinated interest of the Corporate General Partner and
the Individual General Partner in Cash From Sales and Cash From Financing,
reference is made to the materials contained in the Prospectus under the heading
MANAGEMENT COMPENSATION.


                                     - 8 -
<PAGE>   10

Item 12. Security Ownership of Certain Beneficial Owners and Management.

            As of December 31, 1996, no person owned of record, or was known by
Registrant to own beneficially, more than 5% of the Limited Partnership Units of
Registrant.

            The following table sets forth as of March 15, 1997 certain
information as to the ownership by directors and executive officers of
securities of Registrant:

                                                 Number of Units
                             Name of              and Nature of         Percent
Title of Class          Beneficial Owner       Beneficial Ownership     of Class
--------------          ----------------       --------------------     --------
Limited                 
  Partnership Units     William Polk Carey (1)       211  units          .30%
                        Francis J. Carey
                        George E. Stoddard
                        Madelon DeVoe Talley
                        Barclay G. Jones III
                        Lawrence R. Klein
                        Claude Fernandez
                        H. Augustus Carey             42                 .10%
                        Anthony S. Mohl
                        John J. Park
                        Michael D. Roberts
                                                     ---                 ----
All executive officers  
and directors as a      
group (11 persons)                                   253  units          .40%
                                                     ===                 ====

            (1) As of March 15, 1997, the Corporate General Partner, W. P. Carey
& Co., Inc., owned 200 Limited Partnership Units of Registrant. William Polk
Carey, the sole shareholder of the Corporate General Partner, is the beneficial
owner of these Units.

            There exists no arrangement, known to Registrant, the operation of
which may at a subsequent date result in a change of control of Registrant.

Item 13. Certain Relationships and Related Transactions.

            For a description of transactions and business relationships between
Registrant and its affiliates and their directors and officers, see Notes 2 and
3 to the Financial Statements contained in Item 8. Michael B. Pollack, Senior
Vice President and Secretary of the Corporate General Partner, is a partner of
Reed Smith Shaw & McClay which is engaged to perform legal services for
Registrant.

            No officer or director of the Corporate General Partner or any other
affiliate of Registrant or any member of the immediate family or associated
organization of any such officer or director was indebted to Registrant at any
time since the beginning of Registrant's last fiscal year.


                                     - 9 -
<PAGE>   11

                                     PART IV

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

      (a) 1. Financial Statements:

            The following financial statements are filed as a part of this
Report:

Report of Independent Accountants.

Balance Sheets, December 31, 1995 and 1996.

Statements of Income for the years ended December 31, 1994, 1995 and 1996.

Statements of Partners' Capital for the years ended December 31, 1994, 1995 and
1996.

Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996.

Notes to Financial Statements.

     The financial statements are hereby incorporated by reference to pages 5 to
     17 of Registrant's Annual Report contained in Appendix A.

      (a) 2. Financial Statement Schedule:

            The following schedule is filed as a part of this Report:

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

Notes to Schedule III.

     Schedule III and notes thereto are hereby incorporated by reference to
     pages 18 of Registrant's Annual Report contained in Appendix A.

            Financial Statement Schedules other than those listed above are
omitted because the required information is given in the Financial Statements,
including the Notes thereto, or because the conditions requiring their filing do
not exist.


                                     - 10 -
<PAGE>   12

      (a) 3. Exhibits:

            The following exhibits are filed as part of this Report. Documents
other than those designated as being filed herewith are incorporated herein by
reference.

<TABLE>
<CAPTION>
 Exhibit                                                           Method of
   No.       Description                                            Filing
 -------     -----------                                           ---------
<C>       <S>                                               <C>    
   3.1    Amended Agreement of Limited Partnership of       Exhibit 3(B) to Regis-
          Registrant dated as of June 1, 1981.              tration Statement (Form
                                                            S-11) No. 2-70773

   4.1    Deed from Western Union Realty Corporation        Exhibit 10(H)(3) to Post-
          ("WURC") to Corporate Property Associates 2       Effective Amendment No. 1
          ("CPA(R):2") and Registrant, as tenants in        to Registration Statement
          common, dated November 16, 1981.                  (Form S-11) No. 2-70773

   4.6    Deed from WURC to CPA(R):2 and Registrant         Exhibit 10(H)(13) to Post-
          as tenants in common, dated November 16,          Effective Amendment No. 1
          1981.                                             to Registration Statement
                                                            (Form S-11) No. 2-70773

   4.10   Deed from WURC to CPA(R):2 and Registrant, as     Exhibit 10(H)(23) to Post-
          tenants in common, dated November 16, 1981.       Effective Amendment No. 1
                                                            to Registration Statement
                                                            (Form S-11) No. 2-70773

   4.15   Deed from WURC to CPA(R):2 and Registrant, as     Exhibit 10(H)(33) to Post-
          tenants in common, dated November 16, 1981.       Effective Amendment No. 1
                                                            to Registration Statement
                                                            (Form S-11) No. 2-70773

   4.43   Agreement for Sale and Sale of Property           Exhibit 4.1 to Regis-
          and Escrow Instructions, dated October 17,        trant's Form 8-K dated
          1986, by and between Registrant, CPA(R):4,        November 6, 1986
          collectively as Seller, and Kraft, Inc.
          ("Kraft"), as Purchaser.

   4.44   Agreement for Sale and Sale of Property           Exhibit 4.2 to Regis-
          and Escrow Instructions, dated October 17,        trant's Form 8-K dated
          1986, by and between Registrant, CPA(R):4,        November 6, 1986
          collectively as Seller, and Hughes Markets,
          Inc. ("Hughes"), as Purchaser.

   4.45   Letter Agreement dated October 17, 1986           Exhibit 4.3 to Regis-
          from Registrant and CPA(R):4, and agreed to       trant's Form 8-K dated
          and accepted by Kraft and Hughes.                 November 6, 1986

   4.46   Guaranty made as of October 21, 1986 by           Exhibit 4.4 to Regis-
          Hughes, as Guarantor, to Registrant and           trant's Form 8-K dated
          CPA(R):4.                                         November 6, 1986

  10.1    Contract of Sale dated November 16, 1981          Exhibit 10(H)(1) to Post-
          between WURC as seller, and CPA(R):2 and          Effective Amendment No. 1
          Registrant, as purchasers.                        to Registration Statement
                                                            (Form S-11) No. 2-70773
</TABLE>


                                     - 11 -
<PAGE>   13

<TABLE>
<CAPTION>
 Exhibit                                                           Method of
   No.       Description                                            Filing
 -------     -----------                                           ---------
<C>       <S>                                               <C>    
  10.2    Indenture of Lease dated September 16,            Exhibit 10(H)(1) to Post-
          1971 between WURC as landlord, and The            Effective Amendment No. 1
          Western Union Telegraph Company ("WUTCO"),        to Registration Statement
          as tenant.                                        (Form S-11) No. 2-70773

  10.3    Amendment of Lease dated March 27, 1972           Exhibit 10(H)(5) to Post-
          between WURC and WUTCO.                           Effective Amendment No. 1
                                                            to Registration Statement
                                                            (Form S-11) No. 2-70773

  10.4    Second Amendment of Lease dated November 16,      Exhibit 10(H)(6) to Post-
          1981 between WURC and WUTCO.                      Effective Amendment No. 1
                                                            to Registration Statement
                                                            (Form S-11) No. 2-70773

  10.5    Assignment of Lease from WUTCO to CPA(R):2        Exhibit 10(H)(7) to Post-
          and Registrant, as tenants in common,             Effective Amendment No. 1
          dated November 16, 1981.                          to Registration Statement
                                                            (Form S-11) No. 2-70773

  10.6    Indenture of Lease dated November 14,             Exhibit 10(H)(14) to Post-
          1972 between WURC, as landlord, and               Effective Amendment No. 1
          Western Union Corporation ("WUC"), as             to Registration Statement
          tenant.                                           (Form S-11) No. 2-70773

  10.7    Amendment of Lease dated December 12,             Exhibit 10(H)(15) to Post-
          1972 between WURC and WUC.                        Effective Amendment No. 1
                                                            to Registration Statement
                                                            (Form S-11) No. 2-70773

  10.8    Amendment of Lease dated April 30, 1973           Exhibit 10(H)(16) to Post-
          between WURC and WUC.                             Effective Amendment No. 1
                                                            to Registration Statement
                                                            (Form S-11) No. 2-70773

  10.9    Third Amendment of Lease Agreement dated          Exhibit 10(H)(17) to Post-
          November 12, 1981 between WURC and WUC.           Effective Amendment No. 1
                                                            to Registration Statement
                                                            (Form S-11) No. 2-70773

  10.10   Assignment of Lease from WURC to CPA(R):2 and     Exhibit 10(H)(18) to Post-
          Registrant, as tenants in common, dated           Effective Amendment No. 1
          November 16, 1981.                                to Registration Statement
                                                            (Form S-11) No. 2-70773

  10.11   Indenture of Lease dated July 12, 1972            Exhibit 10(H)(24) to Post-
          between WURC, as landlord, and WUC, as            Effective Amendment No. 1
          tenant.                                           to Registration Statement
                                                            (Form S-11) No. 2-70773

  10.12   Amendment of Lease dated March 1, 1973            Exhibit 10(H)(25) to Post-
          between WURC and WUC.                             Effective Amendment No. 1
                                                            to Registration Statement
                                                            (Form S-11) No. 2-70773
</TABLE>


                                     - 12 -
<PAGE>   14

<TABLE>
<CAPTION>
 Exhibit                                                           Method of
   No.       Description                                            Filing
 -------     -----------                                           ---------
<C>       <S>                                               <C>    
  10.13   Second Amendment of Lease Agreement               Exhibit 10(H)(26) to Post-
          dated November 16, 1981 between WURC              Effective Amendment No. 1
          and WUC.                                          to Registration Statement
                                                            (Form S-11) No. 2-70773

  10.14   Assignment of Lease from WURC to CPA(R):2         Exhibit 10(H)(27) to Post-
          and Registrant, as tenants in common,             Effective Amendment No. 1
          dated November 16, 1981.                          to Registration Statement
                                                            (Form S-11) No. 2-70773

  10.15   Indenture of Lease dated December 18,             Exhibit 10(H)(34) to Post-
          1973 between WURC, as landlord, and WUC,          Effective Amendment No. 1
          as tenant.                                        to Registration Statement
                                                            (Form S-11) No. 2-70773

  10.16   Second Amendment of Lease Agreement               Exhibit 10(H)(35) to Post-
          dated November 16, 1981 between WURC              Effective Amendment No. 1
          and WUC.                                          to Registration Statement
                                                            (Form S-11) No. 2-70773

  10.17   Assignment of Lease from WURC to CPA(R):2         Exhibit 10(H)(36) to Post-
          and Registrant, as tenants in common,             Effective Amendment No. 1
          dated November 16, 1981.                          to Registration Statement
                                                            (Form S-11) No. 2-70773

  10.19   Lease Agreement dated January 25, 1982            Exhibit 10(J)(4) to Post-
          between CPA(R):2 and Registrant, as landlord,     Effective Amendment No. 1
          and Gibson as tenant.                             to Registration Statement
                                                            (Form S-11) No. 2-70773

  10.22   Management Agreement among Registrant,            Exhibit 10(C) to Amendment
          and Carey Corporate Property Management,          No. 1 to Registration
          Inc.                                              Statement (Form S-11)
                                                            No. 2-70773

  10.23   Support Agreement among Registrant,               Exhibit 10(D) to Amendment
          Third Carey Corporate Property, Inc.              No. 1 to Registration
          and W.P. Carey & Co., Inc.                        Statement (Form S-11)
                                                            No. 2-70773

  10.24   Lease Agreement dated June 1, 1983                Exhibit 10.1 to Form 8-K
          between Registrant and CPA(R):4, as               dated June 22, 1983 of
          landlord, and Knudsen Corporation                 CPA(R):4 (Commission File
          ("Knudsen") as tenant.                            No. 2-79041

  10.25   Agreement dated June 1, 1983 between              Exhibit 10.2 to Form 8-K
          Registrant and CPA(R):4, as landlord, and         dated June 22, 1983 of
          Knudsen as tenant.                                CPA(R):4 (Commission File
                                                            No. 2-79041
</TABLE>


                                     - 13 -
<PAGE>   15

<TABLE>
<CAPTION>
 Exhibit                                                           Method of
   No.       Description                                            Filing
 -------     -----------                                           ---------
<C>       <S>                                               <C>    
  10.26   Second Amendment of Lease entered into as         Exhibit 10.1 to Regis-
          of October 21, 1986, by and between               trant's Form 8-K dated
          Registrant and CPA(R):4, collectively as          November 6, 1986
          Landlord, and Santee Dairies, Inc. as
          Tenant.

  10.27   Lease Agreement dated November 15, 1995           Exhibit 10.27 to Form 10-K
          by and between Registrant and CPA(R):2, as        dated April 8, 1996
          Landlord, and Cleo, Inc., as Tenant.

  10.28   Lease Amendment Agreement dated November 15,      Exhibit 10.28 to Form 10-K 
          1995 by and between Registrant and CPA(R):2,      dated April 8, 1996 
          as Landlord, and Gibson Greetings, Inc., as
          Tenant.

  28.2    Press release regarding Pennsylvania              Exhibit 28.1 to Form 8-K
          Superior Court decision.                          dated December 10, 1992.

  28.3    Prospectus of Registrant                          Exhibit 28.3 to Form 10-K/A
          dated July 31, 1981.                              dated September 24, 1993


  28.4    Supplement dated December 9, 1981                 Exhibit 28.4 to Form 10-K/A
          to Prospectus dated July 31, 1981.                dated September 24, 1993


  28.5    Supplement dated January 8, 1982                  Exhibit 28.5 to Form 10-K/A
          to Prospectus dated July 31, 1981.                dated September 24, 1993


  28.6    Supplement dated February 10, 1982                Exhibit 28.6 to Form 10-K/A
          to Prospectus dated July 31, 1981.                dated September 24, 1993

  28.8    Press release dated June 30, 1993                 Exhibit 28.1 to Form 8-K
          announcing the suspension of secondary            dated July 12, 1993 
          market sales of Limited Partnership Units.

  28.9    Compromise and Settlement Agreement dated as of   Exhibit 28.1 to Form 8-K
          May 1, 1995 between The Leslie Fay Companies,     dated May 1, 1995 
          Inc., Registrant and the Official Committee of
          Unsecured Creditors of Leslie Fay and National
          Union Fire Insurance Company.
</TABLE>

      (b) Reports on Form 8-K

            During the quarter ended December 31, 1996 the Registrant was not
required to file any reports on Form 8-K.


                                     - 14 -
<PAGE>   16

                                   SIGNATURES

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


                  CORPORATE PROPERTY ASSOCIATES 3
                  (a California limited partnership)

                  BY:   W. P. CAREY & CO., INC.


   04/03/97       BY:   /s/ Claude Fernandez
  ----------            ---------------------------------
     Date               Claude Fernandez
                        Executive Vice President and
                        Chief Administrative Officer
                        (Principal Financial Officer)

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

                  BY:   W. P. CAREY & CO., INC.

                        William P. Carey
                        Chairman of the Board
                        and Director
                        (Principal Executive Officer)

                        Francis J. Carey
                        President and Director

                        George E. Stoddard            BY: /s/ George E. Stoddard
                        Chairman of the Investment        ----------------------
                        Committee and Director            George E. Stoddard
                                                          Attorney in fact
                        Dr. Lawrence R. Klein             April 3, 1997
                        Chairman of the Economic Policy
                        Committee and Director

                        Madelon DeVoe Talley
                        Vice Chairman of the Board of
                        Directors and Director

   04/03/97       BY:   /s/ Claude Fernandez
  ----------            ---------------------------------
     Date               Claude Fernandez
                        Executive Vice President and
                        Chief Administrative Officer
                        (Principal Financial Officer)

   04/03/97       BY:   /s/ Michael D. Roberts
  ----------            ---------------------------------
     Date               Michael D. Roberts
                        First Vice President and Controller
                        (Principal Accounting Officer)


                                     - 15 -
<PAGE>   17

                                                         APPENDIX A TO FORM 10-K

                         CORPORATE PROPERTY ASSOCIATES 3
                       (a California limited partnership)

                                                              1996 ANNUAL REPORT
<PAGE>   18
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
--------------------------------------------------------------------------------

(In thousands except per unit amounts)

                                  1992        1993     1994     1995      1996
                                  ----        ----     ----     ----      ----
<S>                              <C>         <C>      <C>      <C>       <C>
OPERATING DATA:                
                          
Revenues                         $ 8,478     $ 7,554  $ 7,392  $ 7,249   $ 5,730

Net income                         4,900       2,929    3,215   15,976     4,434

Net income allocated:
    To General Partners               98          59       64      320        89
    To Limited Partners            4,802       2,870    3,151   15,656     4,345
    Per unit                       72.76       43.49    47.74   237.21     65.84

Distributions attributable(1):
    To General Partners              130          93       93      168        66
    To Limited Partners            8,032(2)    4,536    4,568   12,208(2)  3,268
    Per unit                      121.70       68.72    69.21   184.97     49.51

BALANCE SHEET DATA:

Total assets                      57,978      57,171   57,050   33,223    32,530

Long-term
  obligations                     17,078      15,624   14,026     --        --
</TABLE>
(1)  Includes distributions attributable to the fourth quarter of each fiscal
     year payable in the following fiscal year less distributions in the first
     fiscal quarter attributable to the prior year.
(2)  Include special distributions of $50 and $120 per Limited Partnership Unit
     in 1992 and 1995, respectively.


                                     - 1 -
<PAGE>   19

MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------

            Results of Operations

            Net income for the year ended December 31, 1996 decreased by
$11,542,000 as compared with net income for 1995 due to a nonrecurring gain in
1995. Excluding the effects of the $11,499,000 gain recognized in 1995 in
connection with the Leslie Fay Company ("Leslie Fay") settlement, an additional
$146,000 writedown in 1995 to net realizable value of the Leslie Fay property
and the nonrecurring amounts included as other income in the accompanying
financial statements for both 1995 and 1996, income was substantially unchanged.

            Although income, as adjusted, was stable, there were significant
changes to revenue and interest expense for the comparable years. The decrease
in lease revenues was due to the restructuring of the Gibson Greetings, Inc.
("Gibson") lease in November 1995. The decrease that resulted from the Gibson
restructuring was partially offset by increases from other leases including
increased revenues of $457,000 from the Hughes Markets, Inc. ("Hughes") lease.
Under the Gibson restructuring, the Partnership received substantial
consideration in exchange for reducing Gibson's annual rental obligation,
severing a property from the Gibson master lease to enable the sale of the Cleo
Inc. ("Cleo") subsidiary to CSS Industries, Inc. and entering into a lease with
Cleo at that property. Under an extension agreement with Hughes in May 1996,
annual rent increased by $371,000 for the two-year extension term and Hughes
agreed to a lump sum rental payment of $587,000 at the end of the lease term.
For financial reporting purposes, rent in 1996 included a pro rata portion of
the lump sum payment being recognized as rental revenue on a straight-line basis
over the extension term. Of the increased revenues reported from the Hughes
lease of $457,000, $261,000 was due to the increases in rent received and
$196,000 was due to the recognition of the straight-line adjustment. The
decrease in interest expense was due to the elimination of all of the
Partnership's mortgage debt in November 1995, when the loan of $13,191,000 on
the Gibson properties was paid off. Cash flow (rents net of mortgage debt
service) from the Gibson and Cleo properties increased as scheduled rents
decreased by $2,450,000, but the annual debt service eliminated by the payoff of
the mortgage was $2,510,000. Prior to the restructuring, Gibson represented 81%
of the Partnership's lease revenues. With the restructuring, Gibson provided 46%
of such revenues providing the Partnership with greater diversification of
credit risk among its lessees.

            Net income for the year ended December 31, 1995 increased by
$12,761,000 as compared with net income for the year ended December 31, 1994,
primarily due to the successful settlement of its dispute with Leslie Fay, which
accounted for $11,499,000 of the increase to net income. Excluding the effect of
Leslie Fay, other nonrecurring income of $225,000 and writedowns of properties
to net realizable value in 1995 and 1994 of $146,000 and $697,000, respectively,
the Partnership would have reflected an increase in income of $485,000. The
increase in income, as adjusted, was due to decreases in interest and property
expenses and an increase in other interest income and was partially offset by a
decrease in lease revenues. The decrease in interest expense resulted from the
$1,320,000 prepayment of mortgage loans on properties leased or formerly leased
to New Valley Corporation ("New Valley") in the first quarter of 1995 and the
prepayment of the mortgage loan on the Gibson properties in November 1995 in
connection with the aforementioned restructuring of the Gibson lease. The
decrease in property expenses was due to the costs incurred in 1994 in
connection with the Partnership's assessment of its liquidity alternatives which
included environmental reviews and property valuations. Other interest income
increased as the result of the receipt of a lump sum cash payment of $5,000,000
received upon resolution of the dispute with Leslie Fay, which payment was
invested in money market funds before being distributed to partners through a
special distribution. The decrease in lease revenues was due to the termination
of the New Valley lease on the Reno, Nevada property in December 1994 and the
modification and restructuring of the Gibson lease as described above. The
substantial increase in cash flow provided from operations was primarily due to
the receipt of the lump sum payments of $13,732,000 relating to Gibson and
Leslie Fay.

            Operating cash flow will benefit from (i) the Partnership's new
lease with Excel Telecommunications, Inc. ("Excel") which will provide annual
rents of $325,000 and (ii) stated rent increases in May 1997 of $56,000 on the
leases with New Valley and AT&T Corporation ("AT&T"). In addition, with the
commencement of the Excel lease at the Reno, Nevada property, the Partnership
has been relieved of the carrying costs for maintenance, insurance and real
estate taxes related to that property as Excel is obligated under the lease to
pay such costs. The Partnership benefited from the Hughes lease extension which


                                     - 2 -
<PAGE>   20

increased annual cash flow from the Hughes property by $371,000. Additionally,
the Partnership will benefit from the $587,000 lump sum rental payment due from
Hughes in April 1998. When the Hughes lease ends in April 1998, the Partnership
expects that rents paid by a new lessee will be less than the rents paid by
Hughes. Although the lease provides Hughes with a holdover period of up to six
months, the Partnership is engaged in attempting to remarket the property in
order to try to prevent any extended period of vacancy at the property. The
Partnership is currently evaluating whether it will need to invest any resources
in retrofitting the facility for other uses after the Hughes lease term ends.
Although Sports & Recreation, Inc. ("Sports & Recreation"), which entered into a
lease for the Partnership's property in Moorestown, New Jersey, continues to
meet its rental obligation, it may seek to terminate its lease as it has decided
not to occupy the property. The Partnership will only agree to such termination
in exchange for substantial consideration.

            Because of the long-term nature of the Partnership's net leases,
inflation and changes in prices have not unfavorably affected the Partnership's
net income or had an impact on the continuing operations of the Partnership's
properties. The leases with Gibson, New Valley, Sports & Recreation and AT&T
provide periodic fixed rent increases and the lease with Cleo provides for
periodic rent increases based on formulas indexed to increases in the Consumer
Price Index ("CPI"). Future rent increase may be affected by changes in the
method of the calculation of the CPI. Although there are indications that there
may be legislation which changes the method of calculating the CPI, the
Partnership cannot predict the outcome of any proposed changes to the CPI
formula.

            Financial Condition

            All of the Partnership's properties are leased to corporate tenants
under net leases which generally require the tenants to pay all operating
expenses relating to the leased properties. The Partnership depends on
relatively stable cash flow from its net leases to meet operating expenses and
fund quarterly distributions to partners. For the year ended December 31, 1996,
the Partnership's cash position increased by $338,000 to $1,496,000.

            Since its inception, the Partnership has distributed a substantial
portion of its cash flow to its partners. Cash provided from operations of
$3,907,000 was sufficient to pay quarterly distributions to partners of
$3,319,000. Although cash provided from operations reflected a decrease from the
prior year, cash provided from operations for the year ended December 31, 1995
included the one-time benefit from $8,151,000 received in connection with the
Gibson restructuring. As cash flow from operating activities may exceed
earnings, distributions to partners may also be in excess of reported income.
During the five-year period ended December 31, 1996, distributions have exceeded
net income in three of the years including 1992 when a special distribution of
$50 per Limited Partnership Unit was declared and paid. A special distribution
of $120 per Limited Partnership Unit was declared and paid in 1995; however,
reported earnings for 1995 were in excess of distributions. Management gives
primary consideration to projections of the Partnership's cash flows provided
from operating and/or investing activities as well as any commitments requiring
the use of current cash balances rather than reported earnings in determining
distributions. Reported earnings are reduced by charges which do not impact
operating cash flow such as depreciation, amortization and property writedowns.

            The Partnership's investing activities during 1996 included funding
$303,000 of improvements at the Reno property in connection with its obligation
to fund specific tenant improvements. The Partnership will fund up to $665,000
of improvements in 1997 at the Reno property under the tenant improvement
obligation even though Excel has already taken occupancy of the property. The
Partnership expects to fund such obligation from its operating cash flow.
Although it has no current plans to borrow funds, the Partnership would have
great flexibility in structuring any borrowing due to the fact that the
properties are all unleveraged and currently occupied. In January 1996, the
Partnership sold the property that had been leased to Leslie Fay for $1,854,000.


                                     - 3 -
<PAGE>   21

            The Partnership's financing activities in 1996 consisted of paying
quarterly distributions to partners of $3,319,000. The Partnership also reduced
its note obligation to an affiliate by $1,800,000 to $500,000. The loan is a
demand note and it is anticipated that the remaining $500,000 will be repaid
from future operating cash flow.

            Cleo has an option to purchase its property which is exercisable at
any time with at least six months' notice. The Partnership's share of the sales
proceeds in the event the option is exercised would range between $10,725,000
and $11,619,000. Annual cash flow from the Cleo property is $1,145,000.

            All of the Partnership's properties are subject to environmental
statutes and regulations regarding the discharge of hazardous materials and
related remediation obligations. All of the Partnership's properties are
currently leased to corporate tenants. The Partnership generally structures a
lease to require the tenant to comply with all laws. In addition, substantially
all of the Partnership's net leases include provisions which require tenants to
indemnify the Partnership from all liabilities and losses related to their
operations at the leased properties. If the Partnership undertakes to clean up
or remediate any of its properties, the General Partners believe that in most
cases the Partnership will be entitled to reimbursement from tenants for such
costs. In the event that the Partnership absorbs a portion of such costs because
of a tenant's failure to fulfill its obligations (or because a property
currently has no tenant), the General Partners believe such expenditures will
not have a material adverse effect on the Partnership's financial condition,
liquidity or results of operations.

            In 1994, the Partnership voluntarily conducted Phase II
environmental reviews of certain of its properties based on the results of Phase
I environmental reviews conducted in 1993. The Partnership believes, based on
the results of such reviews, that its properties are in substantial compliance
with Federal and state environmental statutes and regulations. Portions of
certain properties have been documented as having a limited degree of
contamination, principally in connection with either leakage from underground
storage tanks or surface spills from facility activities. For those conditions
which were identified, the Partnership advised the affected tenant of the Phase
II findings and of its obligation to perform required remediation.

            The General Partners are continuing to investigate ways to provide
liquidity for limited partners on a tax-effective basis.


                                     - 4 -
<PAGE>   22

                        REPORT of INDEPENDENT ACCOUNTANTS

To the Partners of
  Corporate Property Associates 3:

            We have audited the accompanying balance sheets of Corporate
Property Associates 3 (a California limited partnership) as of December 31, 1995
and 1996, and the related statements of income, partners' capital and cash flows
for each of the three years in the period ended December 31, 1996. We have also
audited the financial statement schedule included on pages 17 to 18 of this
Annual Report. These financial statements and financial statement schedule are
the responsibility of the General Partners. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.

            We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by the General Partners, 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 Corporate Property
Associates 3 (a California limited partnership) as of December 31, 1995 and
1996, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. In addition, in our opinion, the Schedule of
Real Estate and Accumulated Depreciation as of December 31, 1996, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the financial information required to
be included therein pursuant to Securities and Exchange Commission Regulation
S-X Rule 12-28.


                                                    /s/ Coopers & Lybrand L.L.P.
New York, New York
March 17, 1997


                                     - 5 -
<PAGE>   23

                         CORPORATE PROPERTY ASSOCIATES 3
                       (a California limited partnership)

                                 BALANCE SHEETS

                           December 31, 1995 and 1996

<TABLE>
<CAPTION>
                                                  1995            1996
                                                  ----            ----
<S>                                           <C>             <C>
     ASSETS:

Real estate leased to others:
  Accounted for under the
    operating method:
      Land                                    $ 1,255,499     $ 1,255,499
      Buildings                                 4,514,428       4,817,871
                                              -----------     -----------
                                                5,769,927       6,073,370
      Accumulated depreciation                  1,175,202       1,364,095
                                              -----------     -----------
                                                4,594,725       4,709,275
  Net investment in direct financing leases    25,291,792      25,689,201
                                              -----------     -----------
      Real estate leased to others             29,886,517      30,398,476
Real estate held for sale                       1,853,816
Cash and cash equivalents                       1,158,302       1,496,001
Accrued interest and rents receivable             210,362         200,696
Other assets                                      114,160         435,177
                                              -----------     -----------
           Total assets                       $33,223,157     $32,530,350
                                              ===========     ===========

     LIABILITIES:

Note payable to affiliate                     $ 2,300,000     $   500,000
Accounts payable and accrued expenses              86,776          63,200
Accounts payable to affiliates                     57,298          73,313
                                              -----------     -----------
         Total liabilities                      2,444,074         636,513
                                              -----------     -----------

Commitments and contingencies

     PARTNERS' CAPITAL:

General Partners                                  191,606         214,807
Limited Partners (66,000 Limited
  Partnership Units issued and
  outstanding)                                 30,587,477      31,679,030
                                              -----------     -----------

         Total partners' capital               30,779,083      31,893,837
                                              -----------     -----------

         Total liabilities and
           partners' capital                  $33,223,157     $32,530,350
                                              ===========     ===========
</TABLE>

The accompanying notes are an integral part of the financial statements.


                                     - 6 -
<PAGE>   24

                         CORPORATE PROPERTY ASSOCIATES 3
                       (a California limited partnership)

                              STATEMENTS of INCOME

              For the years ended December 31, 1994, 1995 and 1996

<TABLE>
<CAPTION>
                                          1994           1995           1996
                                          ----           ----           ----
<S>                                   <C>             <C>            <C> 
Revenues:
  Rental income                       $  287,779      $  290,657     $  845,257
  Interest income from direct
    financing leases                   7,055,695       6,502,361      4,735,487
  Other interest Income                   48,378         230,926         74,338
  Other income                                           225,321         75,000
                                      ----------      ----------     ----------
                                       7,391,852       7,249,265      5,730,082
                                      ----------      ----------     ----------

Expenses:
  Interest                             1,602,175       1,255,047         75,158
  Depreciation                           158,567         198,590        188,893
  General and administrative             309,069         372,006        326,082
  Property expenses                    1,387,498         781,442        705,915
  Amortization                            22,405          19,605
  Writedown to net realizable value      697,325         146,184
                                      ----------      ----------     ----------
                                       4,177,039       2,772,874      1,296,048
                                      ----------      ----------     ----------

    Income before gain on settlement   3,214,813       4,476,391      4,434,034

Gain on settlement, net of $7,400,000
  writedown to net realizable value                   11,499,176
                                      ----------      ----------     ----------

    Net income                        $3,214,813     $15,975,567     $4,434,034
                                      ==========     ===========     ==========


Net income allocated to:
  Individual General Partner          $    3,215     $    15,976     $    4,434
                                      ==========     ===========     ==========

  Corporate General Partner           $   61,081     $   303,536     $   84,247
                                      ==========     ===========     ==========

  Limited Partners                    $3,150,517     $15,656,055     $4,345,353
                                      ==========     ===========     ==========

Net income per Unit
  (66,000 Limited Partnership
  Units outstanding)                      $47.74         $237.21         $65.84
                                      ==========     ===========     ==========
</TABLE>

The accompanying notes are an integral part of the financial statements.


                                     - 7 -
<PAGE>   25

                         CORPORATE PROPERTY ASSOCIATES 3
                       (a California limited partnership)

                         STATEMENTS of PARTNERS' CAPITAL

              For the years ended December 31, 1994, 1995 and 1996

<TABLE>
<CAPTION>
                                          Partners' Capital Accounts
                             ---------------------------------------------------
                                                                       Limited
                                                                       Partners'
                                              General     Limited     Amount Per
                                 Total        Partners    Partners      Unit (a)
                                 -----        --------    --------      --------
<S>                          <C>             <C>        <C>              <C>
Balance, December 31, 1993   $ 28,967,437    $  75,372  $ 28,892,065     $ 438

Distributions                  (4,656,367)     (93,127)   (4,563,240)      (69)

Net income 1994                 3,214,813       64,296     3,150,517        48
                             ------------    ---------  ------------     -----

Balance, December 31, 1994     27,525,883       46,541    27,479,342       417

Distributions                 (12,722,367)    (174,447)  (12,547,920)     (190)

Net income 1995                15,975,567      319,512    15,656,055       237
                             ------------    ---------  ------------     -----

Balance, December 31, 1995     30,779,083      191,606    30,587,477       464

Distributions                  (3,319,280)     (65,480)   (3,253,800)      (49)

Net income 1996                 4,434,034       88,681     4,345,353        66
                             ------------    ---------  ------------     -----

Balance, December 31, 1996   $ 31,893,837    $ 214,807  $ 31,679,030     $ 481
                             ============    =========  ============     =====
</TABLE>

(a)  Based on 66,000 Units issued and outstanding during all periods.

The accompanying notes are an integral part of the financial statements.


                                     - 8 -
<PAGE>   26

                         CORPORATE PROPERTY ASSOCIATES 3
                       (a California limited partnership)

                            STATEMENTS of CASH FLOWS
              For the years ended December 31, 1994, 1995 and 1996

<TABLE>
<CAPTION>
                                                                1994                1995              1996
                                                                ----                ----              ----
<S>                                                          <C>              <C>                <C>        
Cash flows from operating activities:
    Net Income                                               $ 3,214,813      $ 15,975,567       $ 4,434,034
    Adjustments to reconcile net income
       to net cash provided by operating
       activities:
       Depreciation and amortization                             180,972           218,195           188,893
       Gain on settlement, net                                                 (11,499,176)
       Restructuring fees received, net of costs                                 8,150,941
       Cash receipts on direct financing leases in
         excess of (less than) amortization of unearned
         income and straight-line adjustments                      9,046           (26,973)         (592,942)
       Writedown to net realizable value                         697,325           146,184
       Net change in operating assets and liabilities            545,219           (47,161)         (123,379)
                                                             -----------      ------------       ----------- 
            Net cash provided by operating
               activities                                      4,647,375        12,917,577         3,906,606
                                                             -----------      ------------       -----------
Cash flows from investing activities:
    Capitalized costs                                                                               (303,443)
    Proceeds from settlement, net                                                4,850,869
    Proceeds from sale of real estate                                                              1,853,816
    Payments received in connection with
       exercise of purchase option                             2,286,195           585,000
                                                             -----------      ------------       -----------
       Net cash provided by
               investing activities                            2,286,195         5,435,869         1,550,373
                                                             -----------      ------------       -----------
Cash flows from financing activities:
    Distributions to partners                                 (4,656,367)      (12,722,367)       (3,319,280)
    Payment of mortgage principal                             (1,453,396)       (1,113,283)
    Prepayment of mortgage principal                                           (14,510,913)
    Payment of note to affiliate                                                                  (1,800,000)
    Proceeds from issuance of note to affiliate                                  2,300,000
                                                             -----------      ------------       ----------- 
            Net cash used in
               financing activities                           (6,109,763)      (26,046,563)       (5,119,280)
                                                             -----------      ------------       ----------- 
            Net increase (decrease) in cash
               and cash equivalents                              823,807        (7,693,117)          337,699

Cash and cash equivalents,
    beginning of year                                          8,027,612         8,851,419         1,158,302
                                                             -----------      ------------       -----------
            Cash and cash equivalents,
               end of year                                   $ 8,851,419      $  1,158,302       $ 1,496,001
                                                             ===========      ============       ===========
Supplemental cash flows information:

Interest paid                                                $ 1,613,684       $ 1,357,609       $    97,192
                                                             ===========       ===========       ===========
</TABLE>

The accompanying notes are an integral part of the financial statements.


                                     - 9 -
<PAGE>   27

                         CORPORATE PROPERTY ASSOCIATES 3
                        (a California limited partnership)

                          NOTES to FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies:

      Use of Estimates:

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

      Real Estate Leased to Others:

          Real estate is leased to others on a net lease basis, whereby the
            tenant is generally responsible for all operating expenses relating
            to the property, including property taxes, insurance, maintenance,
            repairs, renewals and improvements.

          Corporate Property Associates 3 (the "Partnership") diversifies its
            real estate investments among various corporate tenants engaged in
            different industries and by property type throughout the United
            States.

          The leases are accounted for under the direct financing or operating
            methods. Such methods are described below:

                  Direct financing method - Leases accounted for under the
                  direct financing method are recorded at their net investment
                  (Note 5). Unearned income is deferred and amortized to income
                  over the lease terms so as to produce a constant periodic rate
                  of return on the Partnership's net investment in the lease.

                  Operating method - Real estate is recorded at cost, revenue is
                  recognized as rentals are earned and expenses (including
                  depreciation) are charged to operations as incurred.

          The Partnership assesses the recoverability of its real estate
            assets, including residual interests, based on projections of
            undiscounted cash flows over the life of such assets. In the event
            that such cash flows are insufficient, the assets are adjusted to
            their estimated net realizable value.

          Substantially all of the Partnership's leases provide for either
            scheduled rent increases or periodic rent increases based on
            formulas indexed to increases in the Consumer Price Index ("CPI").

      Real Estate Held for Sale:

          Real estate held for sale is accounted for at the lower of cost or
            fair value less costs to sell.

      Depreciation:

          Depreciation is computed using the straight-line method over the
            estimated useful lives of components of the property, which range
            from 5 to 36 years.

      Cash Equivalents:

          The Partnership considers all short-term, highly-liquid investments
            that are both readily convertible to cash and have a maturity of
            generally three months or less at the time of purchase to be cash
            equivalents. Items classified as cash equivalents include commercial
            paper and money market funds. Substantially all of the Partnership's
            cash and cash equivalents at December 31, 1995 and 1996 were held in
            the custody of two financial institutions.

                                   Continued


                                     - 10 -
<PAGE>   28

                         CORPORATE PROPERTY ASSOCIATES 3
                       (a California limited partnership)

                    NOTES to FINANCIAL STATEMENTS, Continued

      Income Taxes:

          A partnership is not liable for Federal income taxes as each partner
            recognizes his proportionate share of the partnership income or loss
            in his tax return. Accordingly, no provision for income taxes is
            recognized for financial statement purposes.

2. Partnership Agreement:

          The Partnership was organized on November 7, 1980 under the Uniform
            Limited Partnership Act of the State of California for the purpose
            of engaging in the business of investing in and leasing industrial
            and commercial real estate. The Corporate General Partner purchased
            200 Limited Partnership Units in connection with the Partnership's
            public offering. The Partnership will terminate on December 31,
            2018, or sooner, in accordance with the terms of the Amended
            Agreement of Limited Partnership (the "Agreement").

          The Agreement provides that the General Partners are allocated 2% (.1%
            to the Individual General Partner, William P. Carey, and 1.9% to the
            Corporate General Partner, W. P. Carey & Co., Inc. ("W.P. Carey")
            and the Limited Partners are allocated 98% of the profits and losses
            as well as distributions of distributable cash from operations, as
            defined. The partners are also entitled to receive net proceeds from
            the sale of the Partnership properties as defined in the Agreement.
            The General Partners may be entitled to receive a subordinated
            preferred return, measured based upon the cumulative proceeds
            arising from the sale of Partnership assets.  Pursuant to the
            subordination provisions of the Agreement, the preferred return may
            be paid only after the limited partners receive 100% of their
            initial investment from the proceeds of asset sales and a cumulative
            annual return ranging from 6% to 9% since the inception of the
            Partnership.  The General Partners interest in such preferred return
            amounts to $731,023 based upon the cumulative proceeds from the sale
            of assets since the inception of the Partnership through December
            31, 1996.  The Partnership's ability to satisfy the subordination
            provisions of the Agreement may not be determinable until
            liquidation of a substantial portion of the Partnership's assets has
            been made.

3. Transactions with Related Parties:

          Under the Agreement, a division of W.P. Carey is also entitled to
            receive a property management fee and reimbursement of certain
            expenses incurred in connection with the Partnership's operations.
            Property management fee in 1995 includes the effects of certain
            transactions described in Notes 10 and 11. General and
            administrative expense reimbursements consist primarily of the
            actual cost of personnel needed in providing administrative services
            necessary to the operation of the Partnership. Property management
            fee and general and administrative expense reimbursements are
            summarized as follows:
<TABLE>
<CAPTION>
                                                1994        1995        1996
                                                ----        ----        ----
           <S>                               <C>        <C>         <C>
            Property management fee           $162,711  $  930,191  $  218,507
            General and administrative
               expense reimbursements           84,839      86,183      84,519
                                              --------  ----------  ----------
                                              $247,550  $1,016,374  $  303,026
                                              ========  ==========  ==========
</TABLE>

          During 1994, 1995 and 1996, fees and expenses aggregating $32,352,
            $96,306 and $284,067, respectively, were incurred for legal services
            performed by a firm in which the Secretary of the Corporate General
            Partner and other affiliates is a partner.

                                   Continued


                                     - 11 -
<PAGE>   29

                         CORPORATE PROPERTY ASSOCIATES 3
                       (a California limited partnership)

                    NOTES to FINANCIAL STATEMENTS, Continued

          The Partnership is a participant in an agreement with W.P. Carey and
            other affiliates for the purpose of leasing office space used for
            the administration of real estate entities and W.P. Carey and for
            sharing the associated costs. Pursuant to the terms of the
            agreement, the Partnership's share of rental, occupancy and
            leasehold improvement costs is based on adjusted gross revenues as
            defined. Net expenses incurred in 1994, 1995 and 1996 were $53,757,
            $87,907 and $67,625, respectively.

          The Partnership incurred interest expense of $75,158 on its note
            payable to an affiliate. The loan, evidenced by a promissory note,
            bears interest at the prime rate and is due on demand.

          The Partnership's ownership interests in certain properties are
            jointly held with affiliated entities as tenants-in-common with the
            Partnership's ownership interests in such jointly held properties
            ranging from 16.76% to 71.5%. The Partnership accounts for its
            assets and liabilities relating to tenants-in-common interests on a
            proportional basis.

4. Real Estate Leased to Others Accounted for Under the Operating Method:

          Scheduled future minimum rents, exclusive of renewals, under a
            noncancelable operating leases amount to approximately $1,188,000 in
            1997; $1,323,000 in 1998; $511,000 in 1999 through 2001 and
            aggregate approximately $6,369,000 through 2012.

          Contingent rents were approximately $36,000 in 1994, $39,000 in 1995
            and $18,000 in 1996.

5. Net Investment in Direct Financing Leases:

          Net investment in direct financing leases is summarized as follows:

<TABLE>
<CAPTION>
                                                           December 31,
                                                           ------------
                                                       1995             1996
                                                       ----             ----
               <S>                                 <C>              <C>
               Minimum lease payments receivable   $ 72,193,297     $ 67,855,219
               Unguaranteed residual value           33,409,444       33,409,444
                                                   ------------     ------------
                                                    105,602,741      101,264,663
               Less, Unearned income                 80,310,949       75,575,462
                                                   ------------     ------------
                                                   $ 25,291,792     $ 25,689,201
                                                   ============     ============
</TABLE>
                                                  
          Scheduled future minimum rents, exclusive of renewals, under
            noncancelable direct financing leases amount to approximately
            $4,375,000 in 1997, $4,339,000 in 1998, $4,321,000 in 1999,
            $4,360,000 in 2000 and $4,871,000 in 2001 and aggregate
            approximately $67,855,000 through 2013.

          Contingent rents were approximately $1,904,000 in 1994 and
            $1,142,000 in 1995. No contingent rents were realized in 1996.

6. Distributions:

          Distributions are declared and paid to partners quarterly and are
            summarized as follows:

<TABLE>
<CAPTION>
Year Ending          Distributions Paid to  Distributions Paid to   Per Limited
December 31,           General Partners       Limited Partners     Partners Unit
------------         ---------------------  ---------------------  -------------
<S>                       <C>                   <C>                   <C>
1994                      $ 93,127              $ 4,563,240           $ 69.14
                          ========              ===========           =======
1995                                        
 Quarterly distributions  $ 94,447              $ 4,627,920           $ 70.12
 Special distribution                           
 - Note 10                  80,000                7,920,000            120.00
                          --------              -----------           -------
                          $174,447              $12,547,920           $190.12
                          ========              ===========           =======
1996                      $ 65,480              $ 3,253,800           $ 49.30
                          ========              ===========           =======
</TABLE>

                                   Continued


                                     - 12 -
<PAGE>   30

                         CORPORATE PROPERTY ASSOCIATES 3
                       (a California limited partnership)

                    NOTES to FINANCIAL STATEMENTS, Continued

      Distributions of $16,671 to the General Partners and $818,400 to the
      Limited Partners for the quarter ended December 31, 1996 were declared and
      paid in January 1997.

7. Income for Federal Tax Purposes:

          Income for financial statement purposes differs from income for
            Federal income tax purposes because of the difference in the
            treatment of certain items for income tax purposes and financial
            statement purposes. A reconciliation of accounting differences is as
            follows:

<TABLE>
<CAPTION>
                                             1994           1995         1996
                                             ----           ----         ----
<S>                                      <C>           <C>            <C>        
Net income per Statements of Income      $ 3,214,813   $ 15,975,567   $ 4,434,034
Excess tax depreciation                   (1,423,529)    (1,364,376)     (880,310)
Recognition of purchase installments
  as operating income                      2,286,195     (5,880,601)
Writedown to net realizable value            697,325      7,546,184
Restructuring fee                                         8,150,941
Other                                       (312,950)      (474,841)     (407,625)
                                         -----------   ------------   -----------
     Income reported for Federal income
       tax purposes                      $ 4,461,854   $ 23,952,874   $ 3,146,099
                                         ===========   ============   ===========
</TABLE>

8. Industry Segment Information:

          The Partnership's operations consist of the investment in and the
            leasing of industrial and commercial real estate.

          In 1994, 1995 and 1996, the Partnership earned its total operating
            revenues (rental income plus interest income from direct financing
            leases) from the following lease obligors:

<TABLE>
<CAPTION>
                                   1994        %         1995        %         1996        %
                                   ----       ---        ----       ---        ----       ---
<S>                             <C>            <C>    <C>            <C>    <C>           <C>
Gibson Greetings, Inc.          $5,962,090     81%    $5,525,671     81%    $2,560,499    46%
Cleo, Inc.                                               150,885      2      1,349,237    24     
Hughes Markets, Inc.               287,779      4        290,657      4        747,946    13
AT&T Corporation                   457,818      6        458,275      7        458,807     8
New Valley Corporation             635,786      9        367,530      6        366,944     7
Sports & Recreation, Inc.                                                       93,829     2
Excel Telecommunications, Inc.                                                   3,482
                                ----------    ---     ----------    ---     ----------   --- 
                                $7,343,473    100%    $6,793,018    100%    $5,580,744   100%
                                ==========    ===     ==========    ===     ==========   ===
</TABLE>

9. Properties Formerly Leased to New Valley Corporation:

          The Partnership and Corporate Property Associates 2 ("CPA(R):2"), an
            affiliate, own 61% and 39% interests, respectively, in properties
            located in Reno, Nevada; Bridgeton, Missouri; and Moorestown, New
            Jersey. Until May 1993, the properties were leased to New Valley
            Corporation ("New Valley"). On April 1, 1993, New Valley filed a
            petition of voluntary bankruptcy seeking reorganization under
            Chapter 11 of the United States Bankruptcy Code. In connection with
            the bankruptcy filing, the Bankruptcy Court approved New Valley's
            termination of its lease with the Partnership and CPA(R):2 for the
            Moorestown, New Jersey property in May 1993. In December 1994, the
            Bankruptcy Court also approved the termination of New Valley's lease
            on the Reno property effective December 31, 1994. In connection with
            the lease termination, the Partnership

                                   Continued


                                     - 13 -
<PAGE>   31

                         CORPORATE PROPERTY ASSOCIATES 3
                       (a California limited partnership)

                    NOTES to FINANCIAL STATEMENTS, Continued

            wrote down the Reno property in 1994 to its estimated net realizable
            value of $2,000,000 and recognized a charge of $697,325 on the
            writedown. New Valley continues to lease the Bridgeton property.

          In 1995 the Partnership and CPA(R):2 entered into a net lease for
            the Moorestown property with Sports & Recreation, Inc. ("Sports &
            Recreation"). The agreement provided that after conversion of the
            facility into a retail store, a lease term of 16 years with an
            initial rent of $308,750 (of which the Partnership's share is
            $187,750) would commence. During 1996 Sports & Recreation indicated
            to the Partnership and CPA(R):2 that it had decided not to occupy
            the property and would seek to terminate the lease. At that time,
            the Partnership and CPA(R):2 rejected as inadequate Sports &
            Recreation's offer of $300,000 as a settlement in exchange for being
            released from its lease obligations. Sports & Recreation has paid
            all scheduled rents. The Partnership and CPA(R):2 expect that Sports
            & Recreation will resume discussions for the purposes of reaching a
            termination settlement; however, no discussions are currently in
            progress.

          On August 28, 1996 the Partnership and CPA(R):2 entered into a lease
            agreement for the Reno property with Excel Teleservices, Inc.
            ("Excel"). The lease obligations of Excel have been guaranteed by
            its parent company, Excel Telecommunications, Inc. The initial lease
            term commenced on December 26, 1996. Annual rent during the first
            five years is $532,800 increasing to $580,800 thereafter (of which
            the Partnership's share is $325,000 and $354,200, respectively). The
            lease, which has a term of ten years, provides Excel with two
            five-year renewal options with the rent during such renewal terms
            based on the then prevailing market rate. Excel has the right to
            terminate the lease at the end of the sixth lease year.

          In connection with the termination of the Moorestown and Reno
            leases, the Partnership and CPA(R):2 expect to receive a bankruptcy
            settlement from New Valley. The amount of such settlement cannot be
            estimated and no amounts that the Partnership may ultimately receive
            have been recorded in the accompanying financial statements.

10. Gain on Settlement:

          In August 1995, the Partnership reached a settlement with The Leslie
            Fay Company ("Leslie Fay") and its surety company regarding Leslie
            Fay's lease with the Partnership. In connection with the settlement,
            the Partnership recognized a gain of $11,499,176, which consisted of
            aggregate net cash received from Leslie Fay and the surety company
            of $18,839,750 and the waiving of the $382,706 interest obligation
            that had been accrued on the Leslie Fay monthly payments, offset by
            the writedown of $7,400,000 and aggregate management fees, payable
            to an affiliate, of $323,280 on the monthly payments received from
            Leslie Fay since the beginning of the dispute in 1992. Of the rent
            received, $5,435,869 was received in 1995. Under the settlement
            agreement, Leslie Fay was required to dismiss with prejudice all of
            its suits filed against the Partnership, and the Partnership's
            bankruptcy claim against Leslie Fay, as an unsecured creditor, was
            reduced to $2,650,000. The bankruptcy claim is pending and the
            Partnership may not realize the full amount of the bankruptcy claim.

          As the fair value of the property was no longer impacted by the
            Leslie Fay lease, the Partnership wrote down the estimated fair
            value of the property, net of anticipated selling costs, to
            $2,000,000 and recognized a noncash charge of $7,400,000, which is
            netted against the gain on settlement.

          As a result of the settlement, a special distribution of $120 per
            Limited Partner Unit ($7,920,000) was declared and paid in October
            1995. In 1992, a special distribution of $50 per Limited Partner
            Unit ($3,300,000) was paid from the receipt of the $7,200,000
            installment from Leslie Fay.

                                   Continued


                                     - 14 -
<PAGE>   32

                         CORPORATE PROPERTY ASSOCIATES 3
                       (a California limited partnership)

                    NOTES to FINANCIAL STATEMENTS, Continued

          On January 10, 1996, the Partnership sold the vacant property to a
            third party, net of transaction costs, for $1,853,816. The
            Partnership recognized an additional writedown on the property to an
            amount equal to the net sales proceeds, resulting in a charge to
            income in 1995 of $146,184. Accordingly, no gain or loss was
            recognized in 1996 in connection with the sale.

11. Properties Leased to Gibson Greetings, Inc.:

          In January 1982, the Partnership and CPA(R):2 entered into a net
            lease with Gibson Greetings, Inc. ("Gibson"), for three properties
            in Memphis, Tennessee; Berea, Kentucky; and Cincinnati, Ohio. In
            1988, the Partnership and CPA(R):2 consented to Gibson's sublease of
            the Memphis, Tennessee property to a wholly-owned subsidiary, Cleo,
            Inc. ("Cleo"). The lease for the three properties had an initial
            term of 20 years with two five-year renewal options and provided for
            minimum annual rentals of $5,865,000 with rent increases every five
            years based on a formula indexed to the CPI. The lease also provided
            Gibson with a purchase option which was exercisable during the tenth
            year of the lease and at the end of the initial term. Gibson
            declined to exercise its purchase option in 1992.

          In connection with Gibson's sale of the Cleo subsidiary to CSS
            Industries, Inc. ("CSS"), the Partnership, CPA(R):2 and Gibson
            entered into an agreement on November 15, 1995, whereby the Memphis,
            Tennessee property occupied by Cleo was severed from the Gibson
            master lease, the Gibson lease was amended and Cleo entered into a
            separate lease for the Tennessee property with CSS as the guarantor
            of Cleo's lease obligations. The Partnership and CPA(R):2 received
            $12,200,000 (of which the Partnership's share was $8,723,000) as a
            one-time lump sum payment in consideration for severing the
            Tennessee property from the Gibson master lease. Gibson still
            retains certain specific obligations for any environmental
            violations which may be detected and which resulted from any
            pre-existing conditions at the Tennessee property.

          The Gibson lease on the two remaining properties in Kentucky and
            Ohio, as amended, provides for an initial term which has been
            extended through November 30, 2013, and provides for one renewal
            term of ten years. Annual rent is $3,100,000 (of which the
            Partnership's share is approximately $2,367,000), with stated
            increases of 20% every five years through the end of the renewal
            term. The lease includes new purchase options exercisable on
            November 30, 2005 and 2010 and Gibson has the right to exercise the
            purchase option on either one of its leased properties or both. The
            option is exercisable at fair market value of the properties as
            encumbered by the lease.

          The Cleo lease provides for a ten-year term through December 31, 2005
            with two five-year renewal terms. Annual rent is $1,500,000 (of
            which the Partnership's share is approximately $1,145,000), and
            there is a rent increase effective January 1, 2001. The rent
            increase will be based on a formula indexed to the CPI; however, the
            increased annual rent will be at least $1,689,000 but no more than
            $1,898,000. Cleo has an option to purchase the property at any time
            during the term of the lease so long as there is no monetary
            default. Exercise of the purchase option requires at least six
            months' notice. The exercise price is the greater of (i) $15,000,000
            or (ii) fair market value capped at a maximum of $16,250,000.

          In connection with the payment made by Gibson to sever the Tennessee
            property from the Gibson lease, the Partnership deferred recognition
            of a gain on restructuring of $8,150,941, consisting of the
            Partnership's $8,723,000 share of the lump sum payment offset by
            costs of $572,059, including management fees of $429,560, payable to
            an affiliate, with such deferred gain included in the net investment
            in direct financing leases. The Partnership is amortizing such
            deferred gain over the remaining initial terms of the Gibson and
            Cleo direct financing leases. Such amortization, included in
            interest income from direct financing leases, was $398,065 in 1996.
            The net proceeds from the agreement as well as other available funds
            were used to pay off the Partnership's share of the mortgage loan
            collateralized by the Gibson properties of $13,190,566 in November
            1995.

                                   Continued


                                     - 15 -
<PAGE>   33

                         CORPORATE PROPERTY ASSOCIATES 3
                       (a California limited partnership)

                    NOTES to FINANCIAL STATEMENTS, Continued

12. Property Leased to Hughes Markets, Inc.:

          The Partnership and Corporate Property Associates 4 ("CPA(R):4"), an
            affiliate, own a dairy processing facility in Los Angeles,
            California as tenants-in-common with 16.76% and 83.24% ownership
            interests, respectively. On May 1, 1996, the Partnership and
            CPA(R):4 entered into a lease amendment agreement with the lessee,
            Hughes Markets, Inc. ("Hughes"), to extend the lease term from April
            30, 1996 to April 30, 1998. Under the extension agreement, Hughes'
            monthly rent increased to $336,166 (of which the Partnership's share
            is $56,341) from $151,686 (of which the Partnership's share was
            $25,420). At the end of the lease term, Hughes is obligated to pay a
            lump sum rental payment of $3,500,000 (of which the Partnership's
            share will be approximately $587,000). Hughes has an option to
            extend the lease on a month-to-month basis for up to six months at a
            rental of $500,000 per month.

          In accordance with the lease amendment agreement, Hughes has
            provided the Partnership and CPA(R):4 an irrevocable letter of
            credit in the amount of $3,500,000, an amount equal to Hughes' lump
            sum payment obligation. For financial reporting purposes, the
            $3,500,000 lump sum rental payment due at the end of the lease term
            is being recognized on a straight-line basis over the lease
            extension term. For the year ended December 31, 1996, the difference
            between scheduled rents under the lease and rent recognized for
            financial reporting purposes including the adjustment for lump sum
            payment amounts to $195,533.

13. Environmental Matters:

          All of the Partnership's properties are subject to environmental
            statutes and regulations regarding the discharge of hazardous
            materials and related remediation obligations. All of the
            Partnership's properties are currently leased to corporate tenants.
            The Partnership generally structures a lease to require the tenant
            to comply with all laws. In addition, substantially all of the
            Partnership's net leases include provisions which require tenants to
            indemnify the Partnership from all liabilities and losses related to
            their operations at the leased properties. The costs for
            remediation, which are being performed and paid for by the affected
            tenant at three of the properties, are not expected to be material.
            In the event that the Partnership absorbs a portion of such costs
            because of a tenant's failure to fulfill its obligations, the
            General Partners believe such expenditures will not have a material
            adverse effect on the Partnership's financial condition, liquidity
            or results of operations.

          In 1994, based on the results of Phase I environmental reviews
            performed in 1993, the Partnership voluntarily conducted Phase II
            environmental reviews on four of its properties. The Partnership
            believes, based on the results of Phase I and Phase II reviews, that
            its properties are in substantial compliance with Federal and state
            environmental statutes and regulations. Portions of certain
            properties have been documented as having a limited degree of
            contamination, principally in connection with surface spills from
            facility activities. For those conditions which were identified, the
            Partnership advised the affected tenants of the Phase II findings
            and of their obligations to perform required remediation.

14. Disclosures About Fair Value of Financial Instruments:

          The carrying amounts of cash, receivables and accounts payable and
            accrued expenses approximate fair value because of the short
            maturity of these items.


                                     - 16 -
<PAGE>   34

                         CORPORATE PROPERTY ASSOCIATES 3
                       (a California limited partnership)

              SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION

                             as of December 31, 1996

<TABLE>
<CAPTION>
                                              Initial Cost to          Cost            Increase    
                                                Partnership         Capitalized      (Decrease) in   
                                             --------------------   Subsequent to         Net         
         Description       Encumbrances      Land       Buildings  Acquisition (a)   Investment(b)
         -----------       ------------      ----       ---------  ---------------   -------------
<S>                        <C>           <C>           <C>              <C>          <C>            
Operating Method:                                                                   
 Dairy processing                                                                   
  facility leased to                                                                
  Hughes Markets, Inc.                   $  340,146    $1,625,424       $  4,357                    
                                                                                    
 Building leased to                                                                                 
  Sports & Recreation, Inc.                 411,843     2,983,209                    $(1,595,052)   
                                                                                    
 Centralized telephone                                                              
  bureau leased to                                                                  
  Excel Telecommun-                                                                                 
  ications, Inc.                            692,644     2,054,223        307,272        (750,696)   
                                         ----------    ----------       --------     -----------    
                                         $1,444,633    $6,662,856       $311,629     $(2,345,748)   
                                         ==========    ==========       ========     ===========    
Direct financing method:                                                            
 Centralized telephone                                                              
  bureau leased to                                                                  
  New Valley                                                                                        
  Corporation                            $  542,884   $ 3,069,669                    $   (31,749)   
                                                                                    
  Computer Center                                                                   
  leased to AT&T                                                                                    
  Corporation                               224,642     4,245,903         $2,006          36,805    
                                                                                    
 Warehouse and                                                                      
  manufacturing                                                                     
  buildings leased to                                                                               
  Gibson Greetings, Inc.                  1,361,493    12,325,776                     (4,188,647)   
                                                                                    
 Warehouse and                                                                      
  manufacturing                                                                     
  building leased to                                                                                
  Cleo, Inc.                                810,639    10,826,432                     (3,536,652)   
                                         ----------   -----------         ------     -----------    
                                         $2,939,658   $30,467,780         $2,006     $(7,720,243)   
                                         ==========   ===========         ======     ===========    
</TABLE>

<TABLE>
<CAPTION>
                                                                                                         Life on which    
                                                                                                          Depreciation    
                                  Gross Amount at which Carried                                            in Latest      
                                  at Close of Period  (c)(d)                                              Statement of   
                                  -------------------------------    Accumulated                            Income    
         Description              Land       Buildings      Total    Depreciation (d)   Date Acquired     is Computed    
         -----------              ----       ---------      -----    ----------------   -------------    ------------    
<S>                           <C>           <C>           <C>           <C>             <C>               <C>            
Operating Method:                                                                                                        
 Dairy processing                                                                                                        
  facility leased to                                                                                                     
  Hughes Markets, Inc.        $  344,503    $1,625,424    $1,969,927    $1,079,232      June 1, 1993      5-36 years     
                                                                                                                         
 Building leased to                                                                     November 24,                     
  Sports & Recreation, Inc.      218,352     1,581,648     1,800,000       197,706         1981           30 years       
                                                                                                                         
 Centralized telephone                                                                                                   
  bureau leased to                                                                                                       
  Excel Telecommun-                                                                     November 24,                     
  ications, Inc.                 692,644     1,610,799     2,303,443        87,157          1981          30 years       
                              ----------    ----------    ----------    ----------                                       
                              $1,255,499    $4,817,871    $6,073,370    $1,364,095                                       
                              ==========    ==========    ==========    ==========                                       
Direct financing method:                                                                                                 
 Centralized telephone                                                                                                   
  bureau leased to                                                                                                       
  New Valley                                                                            November 24,                     
  Corporation                                            $ 3,580,804                        1981                       
                                                                                                                         
  Computer Center                                                                                                        
  leased to AT&T                                                                        November 24,                     
  Corporation                                              4,509,356                        1981                       
                                                                                                                         
 Warehouse and                                                                                                           
  manufacturing                                                                                                          
  buildings leased to                                                                   January 26,                      
  Gibson Greetings, Inc.                                   9,498,622                        1982                       
                                                                                                                         
 Warehouse and                                                                                                           
  manufacturing                                                                                                          
  building leased to                                                                    January 26,                      
  Cleo, Inc.                                               8,100,419                        1982                       
                                                         -----------                                                     
                                                         $25,689,201                                                     
                                                         ===========                                                     
</TABLE>

See accompanying notes to Schedule.


                                     - 17 -
<PAGE>   35

                         CORPORATE PROPERTY ASSOCIATES 3
                       (a California limited partnership)

          NOTES TO SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION

(a)   Consists of acquisition costs including legal fees, appraisal fees, title
      costs and other related professional fees, and the purchase of additional
      land subsequent to purchase.

(b)   The increase (decrease) in net investment is due to the amortization of
      unearned income producing a constant periodic rate of return on the net
      investment which is greater (less) than lease payments received and the
      writedowns to net realizable value of the Moorestown, New Jersey and Reno,
      Nevada properties and adjustments relating to deferred gains on lease
      restructurings.

(c)   At December 31, 1996, the aggregate cost of real estate owned for Federal
      income tax purposes is $41,778,562.

(d)   

<TABLE>
<CAPTION>
                                Reconciliation of Real Estate Accounted
                                   for Under the Operating Method

                                             December 31,
                                      -------------------------
                                         1995           1996
                                      ----------     ----------
      <S>                             <C>            <C>
      Balance at beginning of year    $5,769,927     $5,769,927

      Additions                                         303,443
                                      ----------     ----------

      Balance at close of year        $5,769,927     $6,073,370
                                      ==========     ==========
<CAPTION>
                                Reconciliation of Accumulated Depreciation

                                             December 31,
                                      -------------------------
                                         1995           1996
                                      ----------     ----------
      <S>                             <C>            <C>
      Balance at beginning of year    $  976,612     $1,175,202

      Depreciation expense               198,590        188,893
                                      ----------     ----------

      Balance at close of year        $1,175,202     $1,364,095
                                      ==========     ==========
</TABLE>

                                     - 18 -
<PAGE>   36

PROPERTIES

--------------------------------------------------------------------------------

     LEASE                                                    TYPE OF OWNERSHIP
    OBLIGOR        TYPE OF PROPERTY         LOCATION               INTEREST
-----------------  -----------------        -----------       -----------------

GIBSON GREETINGS,  Land and Manufac-        Cincinnati,         Ownership of a
INC.               turing/Warehouse         Ohio; and           71.5% interest
                   Buildings - 2            Berea, Kentucky     in land and
                   locations                                    buildings

CLEO, INC.         Land and Manufacturing/  Memphis             Ownership of a
                   Warehouse Buildings      Tennessee           71.5% interest
                                                                in land and
                                                                buildings

NEW VALLEY         Land and                 Bridgeton,          Ownership of a
CORPORATION        Centralized              Missouri            61% interest
                   Telephone Bureau                             in land and
                                                                buildings

SPORTS &           Land and                 Moorestown,         Ownership of an
RECREATION, INC.   Building                 New Jersey          approximate 61%
                                                                interest in land
                                                                and building

EXCEL TELECOMM-    Land and                 Reno, Nevada        Ownership of an
UNICATIONS, INC.   Building                                     approximate 61%
                                                                interest in land
                                                                and building

HUGHES MARKETS,    Land and Dairy Pro-      Los Angeles,        Ownership of an
INC.               cessing Facility         California          approximate
                                                                16.76% interest
                                                                in land and
                                                                building

AT&T CORPORATION   Land and a               Bridgeton,          Ownership of an
                   Computer Center          Missouri            approximate 61%
                                                                interest in land
                                                                and building


                                     - 19 -
<PAGE>   37

MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED
   UNITHOLDER MATTERS
--------------------------------------------------------------------------------

                  Except for limited or sporadic transactions, there is no
established public trading market for the Limited Partnership Units of the
Partnership. As of December 31, 1996 there were 2,476 holders of record of the
Limited Partnership Units of the Partnership.

                  In accordance with the requirements of the Partnership's
Amended Agreement of Limited Partnership (the "Agreement") contained as Exhibit
A to the Prospectus, the Corporate General Partner expects to continue to make
quarterly distributions of Distributable Cash From Operations as defined in the
Agreement. The following table shows the frequency and amount of distributions
paid per Unit since 1993:

<TABLE>
<CAPTION>
                              Cash Distributions Per Unit
                              ------------------------------
                               1994        1995        1996
                               ----        ----        ----
            <S>               <C>        <C>          <C>
            First quarter     $17.27     $ 17.34      $12.19
            Second quarter     17.28       17.39       12.34
            Third quarter      17.29       17.58       12.38
            Fourth quarter     17.30      137.81 (a)   12.39
                              ------     -------      ------
                              $68.40     $190.12      $49.30
                              ======     =======      ======
</TABLE>

(a) Includes a special distribution of $120 per Unit.

REPORT ON FORM 10-K

--------------------------------------------------------------------------------

            The Corporate General Partner will supply to any owner of Limited
Partnership Units, upon written request and without charge, a copy of the Annual
Report on Form 10-K for the year ended December 31, 1996 as filed with the
Securities and Exchange Commission.