<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, 1997
                               -------------------------------------------------

                                       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)

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

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 12(g) of the Act:

                          SUBSIDIARY 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 delinquent filers pursuant to Item
405 of Regulation S-K (Section 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 Subsidiary 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. Effective January 1, 1998, the General
Partner of Registrant is Carey Diversified LLC ("Carey Diversified"). W. P.
Carey & Co., Inc. and William P. Carey were formerly Corporate General Partner
and Individual General Partner, respectively. Carey Diversified is also the
General Partner of 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") and Corporate Property Associates 9, L.P., a Delaware
limited partnership ("CPA(R):9"). Registrant has entered into an agreement with
Carey Management LLC ("Carey Management") pursuant to which Carey Management
performs a variety of management services for Registrant.

                  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 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, 1997, 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"), 42%, CSS
Industries, Inc./Cleo, Inc. ("Cleo"), 22% and Hughes Markets, Inc. ("Hughes"),
15%. No other property owned by Registrant accounted for 10% or more of its
total operating revenues during 1997. See Note 8 to the Financial Statements in
Item 8. CSS and Gibson are publicly traded companies. For the year ended
December 31, 1996, CSS' audited financial statements reported revenues of
$412,079,000, net income of $22,344,000, total assets of $346,364,000 and
shareholders' equity of $176,752,000. For the nine-month period ended September
30, 1997, CSS unaudited financial statements reported revenues of $243,606,000,
net income of $7,625,000, total assets of $405,840,000 and total shareholders'
equity of $185,978,000. For the year ended December 31, 1996, Gibson's audited
financial statements reported revenues of $390,246,000, a net income of
$21,960,000, total assets of $451,559,000 and shareholders' equity of
$256,316,000. Gibson's unaudited financial statements for the nine-month period
ended September 30, 1997 reported revenues of $284,421,000, net income of
$14,095,000, total assets of $434,908,000 and shareholders' equity of
$274,321,000.

                  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 Partner 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 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.



                                      -1-
<PAGE>   3
                  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 ("CPI"). Registrant's lease with Hughes for a dairy processing and
distribution facility in Los Angeles, California expires April 1998. Hughes is
obligated to pay Registrant a lump sum of approximately $587,000 in April 1998.
Such lump sum payment is supported by an irrevocable letter of credit. On June
20, 1997, Registrant and CPA(R):4 entered into a net lease agreement for the Los
Angeles property with Copeland Beverage Group, Inc. ("Copeland"). Copeland's
right of possession of the property and the date which it will be required to
commence paying rent will be the date on or after April 30, 1998 that Hughes
vacates the property. The Copeland lease has an initial term of nine years and
provides for annual rent of $1,800,000 of which Registrant's share is $301,680.
The lease has rent increases scheduled every three years based on a formula
indexed to the CPI. Other than the Hughes lease, all of Registrant's current
lease terms expire between 2001 and 2013 and provide for renewal terms.

                  Since Registrant has generally invested in properties which
are occupied by a single corporate tenant and subject to long-term leases 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. Registrant successfully re-leased 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 would 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.

                  As described in Note 9 to the financial statements in Item 8,
in connection with the bankruptcy claim of Registrant and CPA(R):2 against New
Valley Corporation ("New Valley"), the Bankruptcy Court entered a judgment in
January 1998 which awarded Registrant and CPA(R):2 $2,900,000 (of which
Registrant's share is $1,770,000) on their claim. New Valley has elected to
appeal the Bankruptcy Court's judgment to the United States District Court for
the District of New Jersey (Newark). Registrant and CPA(R):2 have cross-appealed
on different issues.

                  During 1997, Registrant received distributions on the
bankruptcy claim against The Leslie Fay Company ("Leslie Fay") totaling
$1,690,490 consisting of 45,720 shares of common stock of Sassco Fashions, Ltd.
("Sassco"), 22,860 shares of common stock of Leslie Fay and 12.75% senior notes
due March 31, 2004 of Sassco which have a stated principal of $739,592.

                  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.



                                      -2-
<PAGE>   4
                  On October 16, 1997, Registrant distributed a Consent
Solicitation Statement/Prospectus to the Limited Partners that described a
proposal to consolidate Registrant with the other CPA(R) Partnerships. Proposals
that each of the nine CPA(R) limited partnerships be merged with a corresponding
subsidiary partnership of Carey Diversified, of which Carey Diversified is the
general partner, were approved by the Limited Partners of all nine of the CPA(R)
limited partnerships. Each limited partner had the option of either exchanging
his or her limited partnership interest for an interest in Carey Diversified
("Listed Shares") or to retain a limited partnership interest in the subsidiary
partnership ("Subsidiary Partnership Units"). On January 1, 1998, 2,427 holders
representing 64,878 of the 66,000 limited partnership units exchanged such units
for 2,460,368 Listed Shares with 44 holders of the remaining 1,122 limited
partnership units exchanging such units for Subsidiary Partnership Units. The
former General Partners received 295,327 Listed Shares for their interest in
their share of the appreciation in Registrant properties.

                  The Listed Shares are listed on the New York Stock Exchange.
The Subsidiary Partnership Units provide substantially the same economic
interest and legal rights as those of a limited partnership unit in Registrant
prior to the Consolidation, but are not listed on a securities exchange. A
liquidating distribution to holders of Subsidiary Partnership Units will be made
after an appraisal of Registrant's properties. The date of such an appraisal is
to be no later than December 31, 1998.

                  Registrant does not have any employees. Carey Management, an
affiliate of the General Partner of Registrant, performs accounting, secretarial
and transfer services for Registrant. Chase Mellon Shareholder Services, Inc.
performs certain transfer services for Registrant and The Chase Manhattan Bank
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 for Registrant.

                  Registrant's management company has responsibility for
maintaining Registrant's books and records. An affiliate of the management
company services the computer systems used in maintaining such books and
records. In its preliminary assessment of Year 2000 issues, the affiliate
believes that such issues will not have a material effect on Registrant's
operations; however, such assessment has not been completed. Registrant relies
on its bank and transfer agent for certain computer related services and has
initiated discussions to determine whether they are addressing Year 2000 issues
that might affect Registrant.




                                      -3-
<PAGE>   5

Item 2.  Properties.


<TABLE>
<CAPTION>
     LEASE                                                                    TYPE OF OWNERSHIP
    OBLIGOR             TYPE OF PROPERTY                LOCATION                  INTEREST
---------------         ----------------                --------              ----------------
<S>                     <C>                             <C>                   <C>

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


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


WESTERN UNION           Land and                        Bridgeton,            Ownership of an
FINANCIAL SERVICES,     Centralized                     Missouri              approximate 61%
INC.                    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                   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
</TABLE>


                                      -4-
<PAGE>   6
                  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
Obligor       Annual Rents     Footage     Sq.Ft.(1)  (Mo/Year)   Terms    Interest              Purchase Option
-----------   ------------     -------     ---------  ---------   -------  ---------------       ---------------

<S>           <C>              <C>         <C>        <C>         <C>      <C>                   <C>
Gibson          $2,366,571     1,194,840      2.59      11/2013      YES   71.5% interest;       Fair market
Greetings,                                                                 remaining             value as encumbered
Inc.                                                                       interest owned        by the lease
                                                                           by Corporate
                                                                           Property Associates
                                                                           2 ("CPA(R):2")

CSS              1,145,400     1,006,566      1.49      12/2005      YES   71.5% interest;       The greater of
Industries,                                                                remaining interest    fair market value
Inc./Cleo, Inc.                                                            owned by CPA(R):2     capped at $11,618,750
                                                                           by the lease          and $10,725,000


Western            399,250        78,080      8.41      11/2001      YES   61% interest;         N/A
Union Finan-                                                               remaining
cial Services,                                                             interest owned
Inc.                                                                       by CPA(R):2

AT&T               483,055        55,810     14.24      11/2001      YES   61% interest;         N/A
Corporation                                                                remaining
                                                                           interest owned
                                                                           by CPA(R):2

Hughes             225,366       390,000     10.34      04/1998      NO    16.76% interest;      N/A
Markets Inc.                                                               remaining
                                                                           interest owned
                                                                           by Corporate
                                                                           Property
                                                                           Associates 4

Sports &           187,657        74,066      4.17       5/2012      YES   61% interest;         N/A
Recreation                                                                 remaining
Inc.                                                                       interest owned
                                                                           by CPA(R):2


Excel              323,836        53,158     10.02      12/2002      YES   61% interest;         N/A
Commun-                                                                    remaining
ications, Inc.                                                             interest owned
                                                                           by  CPA(R):2
</TABLE>


(1)     Represents rate for rent per square foot on an annualized basis and when
        combined with rents applicable to tenants-in-common.



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



                                      -5-
<PAGE>   7
Item 3.  Legal Proceedings.

                  As of the date hereof Registrant is not a party to any
material legal proceedings.


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

                  Information with respect to matters submitted to a vote of
security holders during the fourth quarter of the year ended December 31, 1997
is hereby incorporated by reference to page 20 of Registrant's Annual Report
contained in Appendix A.


                                     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 20 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 16 of Registrant's Annual Report
contained in Appendix A:


           (i) Report of Independent Accountants.

          (ii) Balance Sheets as of December 31, 1996 and 1997.

         (iii) Statements of Income for the years ended December 31, 1995, 1996
               and 1997.

          (iv) Statements of Partners' Capital for the years ended December 31,
               1995, 1996 and 1997.

           (v) Statements of Cash Flows for the years ended December 31, 1995,
               1996 and 1997.

          (vi)  Notes to Financial Statements.

Item 9.  Disagreements on Accounting and Financial Disclosure.

                  NONE



                                      -6-
<PAGE>   8
                                    PART III


Item 10.     Directors and Executive Officers of the Registrant.

                  Registrant has no officers or directors. The directors and
executive officers of the General Partner, Carey Diversified LLC, are as
follows:

<TABLE>
<CAPTION>
                                                                         Has Served as a
                                                                         Director and/or
     Name                   Age           Positions Held                Officer Since (1)
     ----                   ---           --------------                -----------------
<S>                         <C>   <C>                                   <C>
Francis J. Carey            72    Chairman of the Board                         1/98
                                  Chief Executive Officer
                                  Director

William Polk Carey          67    Chairman of the Executive Committee           1/98
                                  Director

Steven M. Berzin            47    Vice Chairman                                 1/98
                                  Chief Legal Officer
                                  Director

Gordon F. DuGan             31    President                                     1/98
                                  Chief Acquisitions Officer
                                  Director

Donald E. Nickelson         64    Chairman of the Audit Committee               1/98
                                  Director

Eberhard Faber, IV          61    Director                                      1/98

Barclay G. Jones III        37    Director                                      1/98

Lawrence R. Klein           77    Director                                      1/98

Charles C. Townsend, Jr.    69    Director                                      1/98

Reginald Winssinger         55    Director                                      1/98

Claude Fernandez            45    Executive Vice President                      1/98
                                  - Financial Operations

John J. Park                33    Executive Vice President                      1/98
                                  Chief Financial Officer
                                  Treasurer

H. Augustus Carey           40    Senior Vice President                         1/98
                                  Secretary

Samantha K. Garbus          29    Vice President - Asset Management             1/98

Susan C. Hyde               29    Vice President - Shareholder Services         1/98

Robert C. Kehoe             37    Vice President - Accounting                   1/98

Edward V. LaPuma            24    Vice President - Acquisitions                 1/98

</TABLE>


                   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.



                                      -7-
<PAGE>   9
                  A description of the business experience of each officer and
director of the Corporate General Partner is set forth below:

                  Francis J. Carey, Chairman of the Board, Chief Executive
Officer and Director, was elected President and a Managing Director of W. P.
Carey & Co. ("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.

                   Gordon F. DuGan, President, Chief Acquisitions Officer and
Director, was elected Executive Vice President and a Managing Director of W.P.
Carey in June 1997. Mr. Dugan rejoined W.P. Carey as Deputy Head of Acquisitions
in February 1997. Mr. Dugan was until September 1995 a Senior Vice President in
the Acquisitions Department of W.P. Carey. Mr. Dugan joined W.P. Carey as
Assistant to the Chairman in May 1988, after graduating from the Wharton School
at the University of Pennsylvania where he concentrated in Finance. From October
1995 until February 1997, Mr. Dugan was Chief Financial Officer of
Superconducting Core Technologies, Inc., a Colorado-based wireless
communications equipment manufacturer.

                   Steven M. Berzin, Vice Chairman, Chief Legal Officer and
Director, was elected Executive Vice President, Chief Financial Officer, Chief
Legal Officer and a Managing Director of W.P. Carey in July 1997. From 1993 to
1997, Mr. Berzin was Vice President - Business Development of General Electric
Capital Corporation in the office of the Executive Vice President and, more
recently, in the office of the President, where he was responsible for business
development activities and acquisitions. From 1985 to 1992, Mr. Berzin held
various positions with Financial Guaranty Insurance Company, the last two being
Managing Director, Corporate Development and Senior Vice President and Chief
Financial Officer. Mr. Berzin associated with the law firm of Cravath, Swaine &
Moore from 1978 to 1985 and from 1976 to 1977, he served as law clerk to the
Honorable Anthony M. Kennedy, then a United States Circuit Judge. Mr. Berzin
received a B.A. and M.A. in Applied Mathematics from Harvard University, a B.A.
in Jurisprudence and an M.A. from Oxford University and a J.D. from Harvard Law
School..

                   Donald E. Nickelson, Chairman of the Audit Committee and
Director, serves as Chairman of the Board and a Director of Greenfield
Industries, Inc. and a Director of Allied Healthcare Products, Inc. Mr.
Nickelson is Vice-Chairman and a Director of the Harbor Group, a leverage
buy-out firm. He is also a Director of Sugen Corporation and D.T.I. Industries,
Inc. and a Trustee of mainstay Mutual Fund Group. From 1986 to 1988, Mr.
Nickelson was President of PaineWebber Incorporated; from 1988 to 1990, he was
President of the PaineWebber Group; and from 1980 to 1993 a Director. Prior to
1986, Mr. Nickelson served in various capacities with affiliates of PaineWebber
Incorporated and its predecessor firm. From 1988 to 1989, Mr. Nickelson was a
Director of a diverse group of corporations in the manufacturing, service and
retail sectors, including Wyndham Baking Co., Inc., Hoover Group, Inc., Peebles,
Inc. and Motor Wheel Corporation. He is a former Chairman of National Car
Rentals, inc. Mr. Nickelson is also a former Director of the Chicago Board
Options Exchange and is the former Chairman of the Pacific Stock Exchange.

                  William Polk Carey, Chairman of the Executive Committee and
Director, 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
in 1973, he served as Chairman of the Executive Committee of Hubbard, 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


                                      -8-
<PAGE>   10
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.

                  Eberhard Faber IV, is currently a Director of PNC Bank, N.A.,
Chairman of the Board and Director of the newspaper Citizens Voice, a Director
of Ertley's Motorworld, Inc., Vice-Chairman of the Board of King's College and a
Director of Geisinger Wyoming Valley Hospital. Mr. Faber served as Chairman and
Chief Executive Officer of Eberhard Faber, Inc., from 1973 to 1987. Mr. Faber
also served as the Director of the Philadelphia Federal Reserve Bank, including
service as the Chairman of its Budget and Operations Committee from 1980 to
1986. Mr. Faber has served on the boards of several companies, including First
Eastern bank from 1980 to 1993.

                   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.

                  Lawrence R. Klein, Director, 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.

                   Charles C. Townsend, Jr., Director, currently is an Advisory
Director of Morgan Stanley & Co., having held such position since 1979. Mr.
Townsend was a Partner and a Managing Director of Morgan Stanley & Co. from 1963
to 1978 and served as Chairman of Morgan Stanley Realty Corporation from 1977 to
1982. Mr. Townsend holds a B.S.E.E. from Princeton University and an M.B.A. from
Harvard University. Mr. Townsend serves as Director of CIP(TM) and CPA(R)14.

                   Reginald Winssinger, Director, is currently Chairman of the
Board and Director of Horizon Real Estate Group, Inc. Mr. Winssinger has managed
portfolios of diversified real estate assets exceeding $500 million throughout
the United States for more than 20 years. Mr. Winssinger is active in the
planning and development of major land parcels and has developed 20 commercial
properties. Mr. Winssinger is a native of Belgium with more than 25 years of
real estate practice, including 10 years based in Brussels, overseeing
appraisals, construction and management. Mr. Winssinger holds a B.S. in
Geography from the University of California at berkeley and received a degree in
Appraisal and Survey in Belgium. Mr. Winssinger presently serves as Honorary
Belgium Consul to the State of Arizona, a position he has held since 1991.

                   Claude Fernandez, Executive Vice President - Financial
Operations, 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 a 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.

                   John J. Park, Executive Vice President, Chief Financial
Officer and Treasurer, 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.

                   H. Augustus Carey, Senior Vice President and Secretary,
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.



                                      -9-
<PAGE>   11
                   Samantha K Garbus, Vice President - Director of Asset
Management, became a Second Vice President of W.P. Carey in April 1995 and a
Vice President in April 1997. Ms. Garbus joined W. P. Carey as a Property
Management Associate in January 1992. Ms. Garbus received a B.A. in History from
Brown University in May 1990 and an M.B.A. from the Stern School of New York
University in January 1997.

                   Susan C. Hyde, Vice President - Director of Shareholder
Services, joined W. P. Carey in 1990, became a Second Vice President in April
1995 and a Vice President in April 1997. Ms. Hyde graduated from Villanova
University in 1990 where she received a B.S. in Business Administration with a
concentration in Marketing and a B.A. in English.

                   Robert C. Kehoe, Vice President - Accounting, joined W.P.
Carey as a Senior Accountant in 1987. Mr. Kehoe became a Second Vice President
of W. P. Carey in April 1992 and a Vice President in July 1997. Prior to joining
the company, Mr. Kehoe was associated with Deloitte, Haskins & Sells for three
years and was Manager of Financial Controls at CBS Educational and Professional
Publishing for two years. Mr. Kehoe received a B.S. in Accounting from Manhattan
College in 1982 and an M.B.A. in Finance from Pace University in 1993.

                   Edward V. LaPuma, Vice President - Acquisitions, joined W. P.
Carey as an Assistant to the Chairman in July 1995, became a Second Vice
President in July 1996 and a Vice President in April 1997. A graduate of the
University of Pennsylvania, Mr. LaPuma received a B.A. in Global Economic
Strategies from The College of Arts and Sciences and a B.S. in Economics with a
Concentration in Finance from the Wharton School.


Item 11.          Executive Compensation.

                   Until January 1, 1998, under the Amended Agreement of Limited
Partnership of Registrant (the "Agreement"), 1.9% of Distributable Cash From
Operations, as defined, was payable to the Corporate General Partner and .1% of
Distributable Cash From Operations was payable to the former Individual General
Partner. The former Corporate General Partner and the former Individual General
Partner received $63,518 and $3,339 respectively, from Registrant as their share
of Distributable Cash From Operations during the year ended December 31, 1997.
As owner of 200 Limited Partnership Units, the former Corporate General Partner
received cash distributions of $9,932 ($49.66 per Unit) during the year ended
December 31, 1997. 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 former Corporate
General Partner or any other affiliate of Registrant during the year ended
December 31, 1997.

                  In the future, a special limited partner, Carey Management
LLC, will receive 1.9% of Distributable Cash From Operations, and William Polk
Carey, the former Individual General Partner will receive .1% of Distributable
Cash From Operations and each will be allocated the same percentage of the
profits and losses of Registrant.


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

                  As of December 31, 1997, no person owned of record, or was
known by Registrant to own beneficially more than 5% of the Registrant.




                                      -10-
<PAGE>   12
                  The following table sets forth as of March 20, 1998 certain
information as to the ownership by directors and executive officers of
securities of the General Partner of Registrant:

                                                    Number of Listed
                             Name of              Shares and Nature of  Percent
Title of Class          Beneficial Owner          Beneficial Ownership  of Class

Listed Shares           William Polk Carey
                        Francis J. Carey
                        Steven M. Berzin
                        Gordon F. DuGan
                        Donald E. Nickelson
                        Eberhard Faber IV
                        Barclay G. Jones III
                        Lawrence R. Klein
                        Charles C. Townsend, Jr.
                        Reginald Winssinger
                        John J. Park
                        Claude Fernandez
                        H. Augustus Carey
                        Susan K. Garbus
                        Susan C. Hyde
                        Robert C. Kehoe
                        Edward V. LaPuma

All executive officers
and directors as a
group (17 persons)


                  In connection with Consolidation of Registrant into Carey
Diversified LLC, effective January 1, 1998, no officer or director, other than
William Polk Carey, owns a direct interest in Registrant. William Polk Carey
owns a 0.1% interest in Registrant as a special limited partner and has a
controlling interest in Carey Management LLC which owns a 1.9% interest in
Registrant as a special limited partner. Effective January 1, 1998, Carey
Diversified owns an approximate 96% interest in Registrant.

                  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 and Senior Vice President, is a partner of Reed Smith Shaw & McClay
which is engaged to perform legal services for Registrant. Mr. Pollack was the
Secretary, until July 1997, of the former Corporate General Partner.

                  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.



                                      -11-
<PAGE>   13
                                     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, 1996 and 1997.

Statements of Income for the years ended December 31, 1995, 1996 and 1997.

Statements of Partners' Capital for the years ended December 31, 1995, 1996 and
1997.

Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997.

Notes to Financial Statements.


    The financial statements are hereby incorporated by reference to pages 5 to
    16 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, 1997.

Notes to Schedule III.


    Schedule III and notes thereto are hereby incorporated by reference to pages
    17 to 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.


                                      -12-
<PAGE>   14
    (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
--------          -----------                                                 ------------------------
<S>            <C>                                                            <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>




                                      -13-
<PAGE>   15
<TABLE>
<CAPTION>
Exhibit                                                                               Method of
  No.             Description                                                          Filing
--------          -----------                                                 ------------------------
<S>            <C>                                                            <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>


                                      -14-
<PAGE>   16
<TABLE>
<CAPTION>
Exhibit                                                                               Method of
  No.             Description                                                          Filing
--------          -----------                                                 ------------------------
<S>            <C>                                                            <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>



                                      -15-
<PAGE>   17
<TABLE>
<CAPTION>
Exhibit                                                                               Method of
  No.             Description                                                          Filing
--------          -----------                                                 ------------------------
<S>            <C>                                                            <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, 1995              Exhibit 10.28 to Form 10-K
               by and between Registrant and CPA(R):2, as                     dated April 8, 1996
               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, Inc.,            dated May 1, 1995
               Registrant and the Official Committee of Unsecured Creditors
               of Leslie Fay and National Union Fire Insurance Company.
</TABLE>

    (b)    Reports on Form 8-K

                   The Registrant filed a report on Form 8-K dated January 1,
1998 pursuant to Item 5 - Other Events (EX-99.1 Press Release From W. P. Carey &
Co., Inc. (December 17, 1997)).



                                      -16-
<PAGE>   18
                                   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:     CAREY DIVERSIFIED LLC

     03/23/98    BY:      /s/ John J. Park
--------------           -----------------------
     Date                John J. Park
                         Executive Vice President, Chief Financial Officer 
                           and Treasurer
                         (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:     CAREY DIVERSIFIED LLC

     03/23/98     BY:     /s/ Francis J. Carey                         
     --------             ---------------------------------------------
     Date                 Francis J. Carey
                          Chairman of the Board, Chief Executive Officer and
                          Director
                          (Principal Executive Officer)

     03/23/98     BY:     /s/ William P. Carey                         
     --------             ---------------------------------------------
     Date                 William P. Carey
                          Chairman of the Executive Committee and Director

     03/23/98     BY:     /s/ Steven M. Berzin                         
     --------             ---------------------------------------------
     Date                 Steven M. Berzin
                          Vice Chairman, Chief Legal Officer and Director

     03/23/98     BY:     /s/ Gordon F. DuGan                          
     --------             ---------------------------------------------
      Date                Gordon F. DuGan
                          President, Chief Acquisitions Officer and Director

     03/23/98     BY:     /s/ Donald E. Nickelson                      
     --------             ---------------------------------------------
     Date                 Donald E. Nickelson
                          Chairman of the Audit Committee and Director

     03/23/98     BY:     /s/ Eberhard Faber IV                        
     --------             ---------------------------------------------
     Date                 Eberhard Faber IV
                          Director

     03/23/98     BY:     /s/ Barclay G. Jones, III                    
     --------             ---------------------------------------------
      Date                Barclay G. Jones, III
                          Director

     03/23/98     BY:     /s/ Dr. Lawrence R. Klein                    
     --------             ---------------------------------------------
     Date                 Dr. Lawrence R. Klein
                          Director

     03/23/98     BY:     /s/ Charles C. Townsend, Jr.                 
     --------             ---------------------------------------------
     Date                 Charles C. Townsend, Jr.
                          Director

     03/23/98     BY:     /s/ Reginald Winssinger                      
     --------             ---------------------------------------------
     Date                 Reginald Winssinger
                          Director

     03/23/98     BY:     /s/ John J. Park                             
     --------             ---------------------------------------------
     Date                 John J. Park
                          Executive Vice President, Chief Financial Officer 
                            and Treasurer
                          (Principal Financial Officer)

     03/23/98     BY:     /s/ Claude Fernandez
     --------             ---------------------------------------------
     Date                 Claude Fernandez
                          Executive Vice President - Financial Operations
                          (Principal Accounting Officer)



                                      -17-
<PAGE>   19
                             APPENDIX A TO FORM 10-K




                         CORPORATE PROPERTY ASSOCIATES 3
                       (A CALIFORNIA LIMITED PARTNERSHIP)





                                                              1997 ANNUAL REPORT
<PAGE>   20
SELECTED FINANCIAL DATA

(In thousands except per unit amounts)


<TABLE>
<CAPTION>
                                        1993          1994          1995             1996          1997
                                      -------       -------       -------          -------       -------
OPERATING DATA:
<S>                                   <C>           <C>           <C>              <C>           <C>
Revenues                              $ 7,554       $ 7,392       $ 7,249          $ 5,730       $ 8,105

Net income                              2,929         3,215        15,976            4,434         6,644

Net income allocated:
      To General Partners                  59            64           320               89           133
      To Limited Partners               2,870         3,151        15,656            4,345         6,511
      Per unit                          43.49         47.74        237.21            65.84         98.65

Distributions attributable (1):
      To General Partners                  93            93           168               66            68
      To Limited Partners               4,536         4,568        12,208(2)         3,268         3,330
      Per unit                          68.72         69.21        184.97            49.51         50.45



BALANCE SHEET DATA:

Total assets                           57,171        57,050        33,223           32,530        34,570

Long-term
  obligations                          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. The distribution
        attributable to the fourth quarter of 1997 was paid to Limited Partners
        in December 1997.
(2)     Includes special distribution of $120 per Limited Partnership Unit in
        1995.




                                      -1-
<PAGE>   21
MANAGEMENT'S DISCUSSION AND ANALYSIS

                  Results of Operations

                  Net income for the year ended December 31, 1997 increased by
$2,210,000 as compared with net income for the prior year. This increase was due
to an increase in lease revenues (rental income and interest income from direct
financing leases) and nonrecurring other income of $1,690,000.

                  Lease revenues were $736,000 higher in 1997 due to the
December 1996 commencement of the lease with Excel Communications, Inc. at the
Partnership's property in Reno, Nevada, a full year's rent from the Sports &
Recreation, Inc. lease for the Moorestown, New Jersey property and the benefit
from the May 1996 restructuring of the Hughes Markets, Inc. lease in connection
with extending such lease for an additional two years. Until entering into the
lease with Excel, the Reno property had been vacant since December 1994. Other
income for 1997 of $1,690,000 was received in connection with the Partnership's
bankruptcy claim against the Leslie Fay Company, a former lessee of the
Partnership. Property expenses increased due to legal costs incurred in pursuing
a bankruptcy claim against New Valley Corporation, the former lessee of the Reno
and Moorestown properties which terminated its leases on those properties in
1993 and 1994 under its bankruptcy reorganization plan. This increase was
partially offset by provisions of the Excel and Sports & Recreation leases
requiring the lessees to pay or reimburse the Partnership for all carrying costs
including property related insurance and real estate taxes at the Reno and
Moorestown properties. Prior to the commencement of these leases, the
Partnership had absorbed such costs.

                  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 a settlement of a dispute with Leslie Fay, 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 in revenue and interest expense for the comparable years.
The decrease in lease revenues was due to the restructuring of the Gibson
Greetings, Inc. 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 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. 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, in addition, Hughes agreed to make
a lump sum rental payment of $587,000 at the end of the lease term. The decrease
in interest expense was due to the elimination of all 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 decreases in scheduled rents of $2,450,000, were
more than offset by the elimination of annual debt service of $2,510,000. Prior
to the restructuring, Gibson represented 81% of the Partnership's lease
revenues. With the restructuring, Gibson accounted for 46% of such revenues in
1996 providing the Partnership with greater diversification of credit risk among
its lessees.

                  The Hughes Markets lease for a dairy processing plant in Los
Angeles, California is scheduled to expire in April 1998. Copeland Beverage
Group, Inc.'s lease for the property will commence when Hughes Markets vacates
the property. As a result, the lump sum payment of $587,000 due from Hughes
Markets at the end of its lease will not need to be used to retrofit the
property or absorb any costs during a period of vacancy as had originally been
anticipated. Rent from the Copeland Beverage lease will approximate the rent
from the Hughes Markets lease that was in effect prior to the two-year lease
extension.

                  Sports & Recreation has paid the rent on the Moorestown
property since the inception of its lease in July 1996 but has not occupied the
property and does not intend to do so. The initial term of Sports & Recreation
lease ends May 2012, and Sports & Recreation retains its obligation to pay rent
until the end of such term. The partnership is cooperating with Sports &
Recreation in seeking a new lessee for the property even though it has no
obligation to do so.



                                      -2-
<PAGE>   22
                  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, Western Union Financial
Services, Inc., Sports & Recreation and AT&T provide periodic fixed rent
increases and the lease with Cleo provides for periodic rent increases based on
a formula indexed to increases in the Consumer Price Index.


                  Financial Condition

                  The Partnership's cash balances decreased by $773,000 to
$723,000. Cash flow from operations of $4,587,000 was sufficient to pay four
quarterly distributions of $3,344,000, pay off the remaining balance of $500,000
of a note payable to an affiliate and use $645,000 in the first quarter to
retrofit the Reno property and complete its obligation to fund certain
improvements at the inception of the Excel lease. In addition, the Partnership
paid a distribution of $871,000 for the fourth quarter of 1997 which in prior
years had been declared and paid in January.

                  The distribution paid in December 1997 was due to the exchange
transaction which occurred on January 1, 1998. The majority of the Partnership's
Limited Partners and its General Partners approved a consolidation by merger of
the Partnership with a subsidiary limited partnership of Carey Diversified LLC,
as proposed in the Consent Solicitation Statement/Prospectus of Carey
Diversified dated October 16, 1997. In connection with the merger, 2,427 Limited
Partnership Unitholders owning 64,878 Limited Partnership Units elected to
exchange their limited partnership units for interests in Carey Diversified. The
December 1997 distribution was intended to (a) distribute funds in order to
align the net assets of the Partnership with the estimate of Total Exchange
Value, as defined in the Consent Solicitation Statement/Prospectus, of those
assets and (b) pay the January distribution.

                  Limited Partners owning 1,122 Limited Partnership Units who
did not elect to receive interests in Carey Diversified elected to retain a
limited partnership interest in the Partnership as a Subsidiary Partnership
Unitholder. Subsidiary Partnership Units have economic interests and legal
rights in the Partnership that are substantially similar to those of Limited
Partnership Units and represent a direct ownership interest in the Partnership.
The holder of Subsidiary Partnership Units will be paid a pro rata share of any
distribution paid by the Partnership to Carey Diversified. The Partnership will
continue to pay distributions on a quarterly basis until liquidating
distributions are made, as described in the Consent Solicitation
Statement/Prospectus. The objective with respect to Subsidiary Partnership Units
will be to pay distributions as if the Consolidation never had occurred based
upon the net cash flows generated by the Partnership.

                  In January 1998, the Partnership and Corporate Property
Associates 2, an affiliate, which together own properties formerly leased to New
Valley, were awarded $2,900,000 (of which the Partnership's share is $1,770,000)
in their bankruptcy claim against New Valley. New Valley has filed an appeal to
contest the award, and the Partnership and Corporate Property Associates 2 have
cross-appealed on different issues and are seeking to preserve the award.
Accordingly, there is no assurance that the Partnership will receive the full or
any amount from this award.

                  The Partnership and AT&T Corporation have been discussing the
funding of an expansion of the AT&T facility in Bridgeton, Missouri in exchange
for a lease extension; however, AT&T and the Partnership have not entered into
any commitment to complete a transaction. In the event that an agreement is
reached, the Partnership's share of capital costs would be approximately
$2,200,000. If necessary, any additions could be financed through the
significant borrowing capacity of the Partnership since all its properties are
unleveraged. If the lease with Sports & Recreation is terminated, improvements
would necessary for the remarketing of the Moorestown property. The Partnership
will seek to fund a portion of such improvements through a termination
settlement with Sports & Recreation.

                  Cleo's option to purchase its property 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 (i.e., rent) from the Cleo property is
$1,145,000. The Cleo leases provides for an initial term through December 2005.



                                      -3-
<PAGE>   23
                  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 that
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 Partner
believes 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, the General Partner believes 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
that were identified, the Partnership advised the affected tenant of the Phase
II findings and of its obligation to perform required remediation.

                   In June 1997, the FASB issued Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains and losses) in full set general
purpose financial statements. SFAS No. 130 is required to be adopted by 1998.
The Partnership is currently evaluating the impact, if any, of SFAS No. 130.

                  The Partnership's management company has responsibility for
maintaining the Partnership's books and records and servicing the computer
systems used in maintaining such books and records. In its preliminary
assessment of Year 2000 issues, the management company believes that such issues
will not have a material effect on the Partnership's operations; however such
assessment has not been completed. The Partnership relies on its bank and
transfer agent for certain computer-related services and has initiated
discussions to determine whether they are addressing Year 2000 issues that might
affect the Partnership.



                                      -4-
<PAGE>   24
                        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, 1996
and 1997, and the related statements of income, partners' capital and cash flows
for each of the three years in the period ended December 31, 1997. 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 audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by 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, 1996
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. In addition, in our opinion, the Schedule of
Real Estate and Accumulated Depreciation as of December 31, 1997, 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 23, 1998



                                      -5-
<PAGE>   25
                         CORPORATE PROPERTY ASSOCIATES 3
                       (a California limited partnership)

                                 BALANCE SHEETS

                           December 31, 1996 and 1997


<TABLE>
<CAPTION>
                                                  1996                1997
                                              -----------         -----------
<S>                                           <C>                 <C>
        ASSETS:

Real estate leased to others:
   Accounted for under the
      operating method:
         Land                                 $ 1,255,499         $ 1,255,499
         Buildings                              4,817,871           5,463,016
                                              -----------         -----------
                                                6,073,370           6,718,515
         Accumulated depreciation               1,364,095           1,579,367
                                              -----------         -----------
                                                4,709,275           5,139,148
   Net investment in direct financing leases   25,689,201          26,150,174
                                              -----------         -----------
         Real estate leased to others          30,398,476          31,289,322
Cash and cash equivalents                       1,496,001             722,942
Marketable securities, at fair value                                1,562,553
Other assets, net of reserve for uncollected
   rent of $47,380 in 1997                        635,873             995,626
                                              -----------         -----------
              Total assets                    $32,530,350         $34,570,443
                                              ===========         ===========


        LIABILITIES:

Note payable to affiliate                     $   500,000
Accounts payable and accrued expenses              63,200         $   227,952
Prepaid rental income                                                  67,241
Accounts payable to affiliates                     73,313             829,894
                                              -----------         -----------
             Total liabilities                    636,513           1,125,087
                                              -----------         -----------

Commitments and contingencies

        PARTNERS' CAPITAL:

General Partners                                  214,807            (471,319)
Limited Partners (66,000 Limited
   Partnership Units issued and
   outstanding)                                31,679,030          33,916,675
                                              -----------         -----------

             Total partners' capital           31,893,837          33,445,356
                                              -----------         -----------

             Total liabilities and
               partners' capital              $32,530,350         $34,570,443
                                              ===========         ===========
</TABLE>


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



                                      -6-
<PAGE>   26
                         CORPORATE PROPERTY ASSOCIATES 3
                       (a California limited partnership)

                              STATEMENTS of INCOME

              For the years ended December 31, 1995, 1996 and 1997



<TABLE>
<CAPTION>
                                                         1995               1996              1997
                                                      -----------       -----------       -----------
<S>                                                   <C>               <C>               <C>
Revenues:
   Rental income                                      $   290,657       $   845,257       $ 1,480,890
   Interest income from direct financing leases         6,502,361         4,735,487         4,836,315
   Other interest Income                                  230,926            74,338            97,012
   Other income                                           225,321            75,000         1,690,490
                                                      -----------       -----------       -----------
                                                        7,249,265         5,730,082         8,104,707
                                                      -----------       -----------       -----------

Expenses:
   Interest                                             1,255,047            75,158            17,744
   Depreciation                                           198,590           188,893           215,272
   General and administrative                             372,006           326,082           380,512
   Property expenses                                      781,442           705,915           847,176
   Amortization                                            19,605
   Writedown to fair value                                146,184
                                                      -----------       -----------       -----------
                                                        2,772,874         1,296,048         1,460,704
                                                      -----------       -----------       -----------

        Income before gain on settlement                4,476,391         4,434,034         6,644,003

Gain on settlement, net of $7,400,000
   writedown to fair value                             11,499,176
                                                      -----------       -----------       -----------
        Net income                                    $15,975,567       $ 4,434,034       $ 6,644,003
                                                      ===========       ===========       ===========


Net income allocated to:
   Individual General Partner                         $    15,976       $     4,434       $     6,644
                                                      ===========       ===========       ===========

   Corporate General Partner                          $   303,536       $    84,247       $   126,236
                                                      ===========       ===========       ===========

   Limited Partners                                   $15,656,055       $ 4,345,353       $ 6,511,123
                                                      ===========       ===========       ===========

Net income per Unit
   (66,000 Limited Partnership
   Units outstanding)                                 $    237.21       $     65.84       $     98.65
                                                      ===========       ===========       ===========
</TABLE>

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



                                      -7-
<PAGE>   27
                         CORPORATE PROPERTY ASSOCIATES 3
                       (a California limited partnership)

                         STATEMENTS of PARTNERS' CAPITAL

              For the years ended December 31, 1995, 1996 and 1997


<TABLE>
<CAPTION>
                                                           Partners' Capital Accounts
                                     ------------------------------------------------------------------------
                                                                                                  Limited
                                                                                                  Partners'
                                                           General             Limited           Amount Per
                                        Total              Partners            Partners           Unit  (a)
                                     ------------        ------------        ------------        ------------



<S>                                  <C>                 <C>                 <C>                 <C>
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

Distributions                          (4,232,724)            (84,624)         (4,148,100)                (63)

Accrued preferred distribution           (731,823)           (731,823)

Unrealized depreciation,
    marketable securities                (127,937)             (2,559)           (125,378)                 (2)

Net income 1997                         6,644,003             132,880           6,511,123                  99
                                     ------------        ------------        ------------        ------------

Balance, December 31, 1997           $ 33,445,356        $   (471,319)       $ 33,916,675        $        515
                                     ============        ============        ============        ============
</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>   28
                         CORPORATE PROPERTY ASSOCIATES 3
                       (a California limited partnership)

                            STATEMENTS of CASH FLOWS
              For the years ended December 31, 1995, 1996 and 1997


<TABLE>
<CAPTION>
                                                                   1995                1996                1997
                                                               ------------        ------------        ------------
<S>                                                            <C>                 <C>                 <C>
Cash flows from operating activities:
    Net Income                                                 $ 15,975,567        $  4,434,034        $  6,644,003
    Adjustments to reconcile net income
       to net cash provided by operating
       activities:
       Depreciation and amortization                                218,195             188,893             215,272
       Gain on settlement, net                                  (11,499,176)
       Restructuring fees received, net of costs                  8,150,941
       Securities received in connection with settlement                                                 (1,690,490)
       Straight-line adjustments and other
         noncash rent adjustments                                   (26,973)           (592,942)           (754,273)
       Writedown to fair value                                      146,184
       Provision for uncollected rents                                                                       47,380
       Net change in operating assets and liabilities               (47,161)           (123,379)            125,152
                                                               ------------        ------------        ------------
            Net cash provided by operating
               activities                                        12,917,577           3,906,606           4,587,044
                                                               ------------        ------------        ------------

Cash flows from investing activities:
    Capitalized costs                                                                  (303,443)           (645,145)
    Proceeds from sale of real estate                                                 1,853,816
    Proceeds from settlement, net                                 4,850,869
    Payments received in connection with
       exercise of purchase option                                  585,000
                                                               ------------        ------------        ------------
       Net cash provided by (used in)
               investing activities                               5,435,869           1,550,373            (645,145)
                                                               ------------        ------------        ------------

Cash flows from financing activities:
    Distributions to partners                                   (12,722,367)         (3,319,280)         (4,214,958)
    Payment of note to affiliate                                                     (1,800,000)           (500,000)
    Payment of mortgage principal                                (1,113,283)
    Prepayment of mortgage principal                            (14,510,913)
    Proceeds from issuance of note to affiliate                   2,300,000
                                                               ------------        ------------        ------------
            Net cash used in
               financing activities                             (26,046,563)         (5,119,280)         (4,714,958)
                                                               ------------        ------------        ------------

            Net (decrease) increase in cash
               and cash equivalents                              (7,693,117)            337,699            (773,059)

Cash and cash equivalents,
    beginning of year                                             8,851,419           1,158,302           1,496,001
                                                               ------------        ------------        ------------

            Cash and cash equivalents,
               end of year                                     $  1,158,302        $  1,496,001        $    722,942
                                                               ============        ============        ============


Supplemental disclosure of noncash financing activities:

       Accrued preferred distribution                                                                  $    731,823
                                                                                                       ============

Supplemental cash flows information:

Interest paid                                                  $  1,357,609        $     97,192        $     14,192
                                                               ============        ============        ============
</TABLE>


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


                                      -9-
<PAGE>   29
                         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 dates of the financial statements and the
               reported amounts of revenues and expenses during the reporting
               period. The most significant estimates relate to the assessment
               of recoverability of real estate assets. 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, rental
                      revenue is recognized on a straight-line basis over the
                      term of the leases 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 fair 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.

         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, 1996 and
               1997 were held in the custody of two financial institutions.

                                    Continued

                                      -10-
<PAGE>   30
                         CORPORATE PROPERTY ASSOCIATES 3
                       (a California limited partnership)

                    NOTES to FINANCIAL STATEMENTS, Continued

         Marketable Securities:

            The Partnership's marketable securities are classified as
               available-for-sale securities and are reported at fair value with
               the Partnership's interest in unrealized gains and losses on
               those securities reported as a separate component of partner's
               capital.

         Other Assets:

            Included in other assets are deferred costs of Consolidation (see
               Note 13) and deferred rental income. Deferred costs of
               Consolidation represent certain costs related to a Consolidation
               transaction which have been capitalized. Such Consolidation costs
               will be included in the revaluation of assets subsequent to
               December 31, 1997. Deferred rental income is the aggregate
               difference for operating leases between scheduled rents which
               vary during the lease term and income recognized on a
               straight-line basis.

         Reclassification:

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

         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 Partnership will
               terminate on December 31, 2018, or sooner, in accordance with the
               terms of the Amended Agreement of Limited Partnership (the
               "Agreement").

            Through December 31, 1997, the Agreement provided that the General
               Partners were allocated 2% (0.1% to the Individual General
               Partner, and 1.9% to the Corporate General Partner, W.P. Carey &
               Co., Inc.( "W.P. Carey")), and the Limited Partners were
               allocated 98% of the profits and losses as well as distributions
               of Distributable Cash From Operations, as defined in the
               Agreement. Effective January 1, 1998, as a result of the merger
               (see Note 13) of the Partnership with a subsidiary partnership of
               Carey Diversified LLC ("Carey Diversified"), Carey Diversified is
               the sole general partner of the Partnership. Carey Diversified
               and the holders of Subsidiary Partnership Units are allocated 98%
               of the profits and losses and distributable cash, and two special
               limited partners, Carey Management LLC ("Carey Management") and
               William P. Carey, are allocated 1.9% and 0.1% of the profits and
               losses and distributable cash, respectively.

            In connection with the merger with Carey Diversified and the listing
               on the New York Stock Exchange, the former Corporate General
               Partner satisfied the provisions for receiving a subordinated
               preferred return of $731,823, which was measured based upon the
               cumulative proceeds arising from the sale of the Partnership's
               assets. Such amount has been included in accounts payable to
               affiliates as of December 31, 1997. The preferred return, paid in
               January 1998, was subject to provisions that limited such payment
               until a specified cumulative return to limited partners was
               achieved. The Exchange Value of a Limited Partnership Unit to a
               Listed Share of Carey Diversified was included in calculating the
               cumulative return.

                                    Continued


                                      -11-
<PAGE>   31
                         CORPORATE PROPERTY ASSOCIATES 3
                       (a California limited partnership)

                    NOTES to FINANCIAL STATEMENTS, Continued


 3.     Transactions with Related Parties:

            Under the Agreement, a division of W.P. Carey was also entitled to
               receive a property management fee and reimbursement of certain
               expenses incurred in connection with the Partnership's
               operations. 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. Effective January 1, 1998, the fees and
               reimbursements are payable to Carey Management, an affiliate of
               Carey Diversified. Property management fee and general and
               administrative expense reimbursements are summarized as follows:

<TABLE>
<CAPTION>
                                                   1995             1996              1997
                                                ----------       ----------       ----------
<S>                                             <C>              <C>              <C>
               Property management fee          $  930,191       $  218,507       $  353,295
               General and administrative
                   expense reimbursements           86,183           84,519          110,091
                                                ----------       ----------       ----------
                                                $1,016,374       $  303,026       $  463,386
                                                ==========       ==========       ==========
</TABLE>


            During 1995, 1996 and 1997, fees and expenses aggregating $96,306,
               $284,067 and $159,903, respectively, were incurred for legal
               services performed by a firm in which the Secretary, until July
               1997, of the Corporate General Partner and other affiliates is a
               partner.

            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. Expenses incurred in 1995, 1996 and 1997 were
               $87,907, $67,625 and $43,420, respectively.

            The Partnership's ownership interests in certain properties are
               jointly held with affiliated entities as tenants-in-common with
               the Partnership's undivided 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
               noncancelable operating leases amount to approximately $1,323,000
               in 1998; $511,000 in each of the years 1999 and 2000; $519,000 in
               2001; $554,000 in 2002; and aggregate approximately $5,431,000
               through 2012.

            Contingent rents were approximately $39,000 in 1995 and $18,000 in
               1996.  No contingent rents were realized in 1997.

 5.     Net Investment in Direct Financing Leases:

            Net investment in direct financing leases is summarized as follows:

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                 ------------
                                                           1996                1997
                                                       ------------       ------------
<S>                                                    <C>                <C>
               Minimum lease payments receivable       $ 67,855,219       $ 63,479,874
               Unguaranteed residual value               33,409,444         33,409,444
                                                       ------------       ------------
                                                        101,264,663         96,889,318
               Less, Unearned income                     75,575,462         70,739,144
                                                       ------------       ------------
                                                       $ 25,689,201       $ 26,150,174
                                                       ============       ============
</TABLE>

                                    Continued

                                      -12-
<PAGE>   32
                         CORPORATE PROPERTY ASSOCIATES 3
                       (a California limited partnership)

                    NOTES to FINANCIAL STATEMENTS, Continued

            Scheduled future minimum rents, exclusive of renewals, under
               noncancelable direct financing leases amount to approximately
               $4,339,000 in 1998, $4,321,000 in 1999, $4,360,000 in 2000,
               $4,871,000 in 2001 and $4,129,000 in 2002 and aggregate
               approximately $63,480,000 through 2013.

            Contingent rents were approximately $1,142,000 in 1995.  No
               contingent rents were realized in 1996 and 1997.


6.      Distributions:

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


<TABLE>
<CAPTION>
                                    Distributions Paid
         Year Ending                  and Payable to      Distributions Paid to  Limited Partners'
         December 31,               General Partners         Limited Partners    Per Unit Amount
    ---------------------------     ------------------    ---------------------  -----------------
<S>                                 <C>                   <C>                    <C>
    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
                                        ========             ===========           =======

    1997                                $ 84,624             $ 4,148,100           $ 62.85
                                        ========             ===========           =======
</TABLE>

        Distributions for 1997 include distributions of $870,540 to Limited
Partners and $17,766 to General Partners declared in December 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>
                                                                   1995           1996            1997
                                                               ------------   ------------   ------------
<S>                                                            <C>            <C>            <C>
               Net income per Statements of Income             $ 15,975,567   $  4,434,034   $  6,644,003
               Excess tax depreciation                           (1,364,376)      (880,310)      (653,569)
               Recognition of purchase installments
                  as operating income                            (5,880,601)
               Writedown to fair value                            7,546,184
               Restructuring fee                                  8,150,941
               Other                                               (474,841)      (407,625)      (487,481)
                                                               ------------   ------------   ------------
                      Income reported for Federal income
                         tax purposes                          $ 23,952,874   $  3,146,099   $  5,502,953
                                                               ============   ============   ============
</TABLE>

                                   Continued

                                      -13-
<PAGE>   33
                         CORPORATE PROPERTY ASSOCIATES 3
                       (a California limited partnership)

                    NOTES to FINANCIAL STATEMENTS, Continued


8.      Industry Segment Information:
            The Partnership's operations consist of the investment in and the
               leasing of industrial and commercial real estate.

            In 1995, 1996 and 1997, the Partnership earned its total operating
               revenues (rental income plus interest income from direct
               financing leases) from the following lease obligors:

<TABLE>
<CAPTION>
                                             1995        %           1996       %          1997      %
                                             ----       ---          ----      ---         ----     --
<S>                                       <C>            <C>     <C>           <C>     <C>          <C>
      Gibson Greetings, Inc.              $5,525,671     81%     $2,560,499     46%    $2,625,246    42%
      CSS Industries, Inc./Cleo, Inc.        150,885      2       1,349,237     24      1,386,521    22
      Hughes Markets, Inc.                   290,657      4         747,946     13        969,397    15
      AT&T Corporation                       458,275      7         458,807      8        458,785     7
      Western Union Financial
        Services, Inc.                       367,530      6         366,944      7        365,763     6
      Excel Communications, Inc.                                      3,482               323,836     5
      Sports & Recreation, Inc.                                      93,829      2        187,657     3
                                          ----------    ----     ----------    ----    ----------   ---
                                          $6,793,018    100%     $5,580,744    100%    $6,317,205   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. Western Union Financial Services, Inc. leases 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 annual 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 termination offer. Sports & Recreation has
               paid all scheduled rents. The Partnership and CPA(R):2 will
               evaluate any other termination offers from Sports & Recreation.

            In August 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 Communications, Inc. The initial lease
               term commenced on December 26, 1996.

            In connection with the bankruptcy claim, the Bankruptcy Court
               entered a judgment in January 1998 which awarded the Partnership
               and CPA(R):2 $2,900,000 (of which the Partnership's share is
               $1,770,000) on their claim. New Valley has elected to appeal the
               Bankruptcy Court's judgment to the United States District Court
               for the District of New Jersey (Newark). The Partnership and
               CPA(R):2 have cross-appealed on different issues and are seeking
               to preserve the award. There


                                   Continued

                                      -14-
<PAGE>   34
                         CORPORATE PROPERTY ASSOCIATES 3
                       (a California limited partnership)

                    NOTES to FINANCIAL STATEMENTS, Continued



               is no assurance that the Partnership will receive the full amount
               or any of the judgment. Accordingly, no amount that the
               Partnership may ultimately receive has 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 of accrued interest, offset by a writedown on the Leslie
               Fay property of $7,400,000 and aggregate management fees, payable
               to an affiliate, of $323,280 accrued since the beginning of the
               dispute in 1992. Under the settlement agreement, Leslie Fay was
               required to dismiss with prejudice all of its suits filed against
               the Partnership, and established the Partnership's bankruptcy
               claim against Leslie Fay, as an unsecured creditor, at
               $2,650,000.

            As the fair value of the property was no longer affected 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
               was netted against the 1995 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.

            In January 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.

            During 1997, the Partnership received distributions on the
               bankruptcy claim totaling $1,690,490 consisting of 45,720 shares
               of common stock of Sassco Fashions, Ltd. ("Sassco"), 22,860
               shares of common stock of the Leslie Fay Company, Inc. and 12.75%
               senior notes due March 31, 2004 of Sassco which have a stated
               principal of $739,592. The securities received, which are carried
               as available-for-sale, are stated in the accompanying financial
               statements as marketable securities, based on their fair value as
               of December 31, 1997.


11.     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.
               In the event that the Partnership absorbs a portion of the costs
               to comply with environmental statutes, the General Partner
               believes such expenditures will not have a material adverse
               effect on the Partnership's financial condition, liquidity or
               results of operations.

                                   Continued


                                      -15-
<PAGE>   35
                         CORPORATE PROPERTY ASSOCIATES 3
                       (a California limited partnership)

                    NOTES to FINANCIAL STATEMENTS, Continued

            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.


12.     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.


13.     Exchange of Limited Partnership Units:

            On October 16, 1997, Carey Diversified distributed a Consent
               Solicitation Statement/Prospectus to the Limited Partners that
               described a proposal to consolidate the Partnership with the
               other CPA(R) Partnerships. The General Partners' proposals that
               each of the nine CPA(R) limited partnerships be merged with a
               corresponding subsidiary partnership of Carey Diversified, of
               which Carey Diversified is the general partner, was approved by
               the Limited Partners of all nine of the CPA(R) limited
               partnerships. Each limited partner had the option of either
               exchanging his or her limited partnership interest for an
               interest in Carey Diversified ("Listed Shares") or to retain a
               limited partnership interest in the subsidiary partnership
               ("Subsidiary Partnership Units"). On January 1, 1998, 2,427
               holders owning 64,878 of the 66,000 limited partnership units
               exchanged such units for 2,460,368 Listed Shares with 44 holders
               with the remaining 1,122 limited partnership units exchanging
               such units for Subsidiary Partnership Units. The General Partners
               received 295,327 Listed Shares for its interest in its share of
               the appreciation in Partnership properties.

            Listed Shares commenced public trading on the New York Stock
               Exchange on January 21, 1998. Subsidiary Partnership Units
               provide substantially the same economic interest and legal rights
               as those of a limited partnership unit in the Partnership, but
               are not listed on a securities exchange. A liquidating
               distribution to holders of Subsidiary Partnership Units will be
               made after an appraisal of the Partnership's properties which
               appraisal date is to be no later than December 31, 1998.

14.     Accounting Pronouncements:

            June 1997, the FASB issued Statement of Financial Accounting
               Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
               SFAS No. 130 establishes standards for reporting and display of
               comprehensive income and its components (revenues, expenses,
               gains and losses) in full set general purpose financial
               statements. SFAS No. 130 and is required to be adopted by 1998.
               The Partnership is currently evaluating the impact, if any, of
               SFAS No. 130.


                                      -16-
<PAGE>   36
                         CORPORATE PROPERTY ASSOCIATES 3
                       (a California limited partnership)

              SCHEDULE OF REAL ESTATE and ACCUMULATED DEPRECIATION

                             as of December 31, 1997



<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>
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 Commun-
  ications, Inc.                                692,644         2,054,223           952,417           (750,696)
                                            -----------       -----------       -----------        -----------
                                            $ 1,444,633       $ 6,662,856       $   956,774        $(2,345,748)
                                            ===========       ===========       ===========        ===========


Direct financing method:
 Centralized telephone
  bureau leased to
  Western Union
  Financial Services, Inc.                  $   542,884       $ 3,069,669                          $   (56,482)

  Computer Center
  leased to AT&T
  Corporation                                   224,642         4,245,903       $     2,006             22,415

 Warehouse and
  manufacturing
  buildings leased to
  Gibson Greetings, Inc.                      1,361,493        12,325,776                           (3,929,972)

 Warehouse and
  manufacturing
  building leased to
  CSS Industries,                               810,639        10,826,432                           (3,295,231)
                                            -----------       -----------       -----------       ------------
  Inc./Cleo, Inc.                           $ 2,939,658       $30,467,780       $     2,006        $(7,259,270)
                                            ===========       ===========       ===========       ============
</TABLE>



<TABLE>
<CAPTION>
                                                                                                                   Life on which
                                  Gross Amount at which Carried                                                    Depreciation
                                    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     $ 1,166,647      June 1, 1993       5-36 years

 Building leased to                                                                              November 24,
  Sports & Recreation, Inc.    218,352          1,581,648         1,800,000         250,427         1981            30 years

 Centralized telephone
  bureau leased to
  Excel Commun-                                                                                  November 24,
  ications, Inc.                692,644         2,255,944          2,948,588         162,293         1981           30 years
                            -----------       -----------        -----------    ------------     ------------       ------------
                            $ 1,255,499       $  5,463,016      $  6,718,515    $  1,579,367
                            ===========       ============      ============    ============


Direct financing method:
 Centralized telephone
  bureau leased to
  Western Union                                                                                  November 24,
  Financial Services, Inc.                                      $ 3,556,071                          1981

  Computer Center
  leased to AT&T                                                                                 November 24,
  Corporation                                                     4,494,966                         1981

 Warehouse and
  manufacturing
  buildings leased to                                                                            January 26,
  Gibson Greetings, Inc.                                          9,757,297                          1982

 Warehouse and
  manufacturing
  building leased to                                                                             January 26,
  CSS Industries,                                                 8,341,840                          1982
                                                               ------------
  Inc./Cleo, Inc.                                               $26,150,174
                                                               ============
</TABLE>


See accompanying notes to Schedule.



                                      -17-
<PAGE>   37
                         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 and does not include lease
                payments received which at times may be greater or less than
                such amortization and the writedowns to fair value of the
                Moorestown, New Jersey and Reno, Nevada properties and
                adjustments relating to deferred gains on lease restructurings.

        (c)     At December 31, 1997, the aggregate cost of real estate owned
                for Federal income tax purposes is $42,473,706.

        (d)
<TABLE>
<CAPTION>
                                       Reconciliation of Real Estate Accounted
                                       ---------------------------------------
                                            for Under the Operating Method
                                            ------------------------------

                                                     December 31,
                                           -------------------------------
                                               1996                1997
                                           ----------           ----------
<S>                                        <C>                  <C>
         Balance at beginning of year      $5,769,927           $6,073,370

         Additions                            303,443              645,145
                                           ----------           ----------


         Balance at close of year          $6,073,370           $6,718,515
                                           ==========           ==========
</TABLE>





<TABLE>
<CAPTION>
                                     Reconciliation of Accumulated Depreciation
                                     ------------------------------------------
                                          for Under the Operating Method
                                          ------------------------------

                                                   December 31,
                                         -------------------------------
                                             1996                1997
                                         ----------           ----------
<S>                                      <C>                  <C>
       Balance at beginning of year      $1,175,202           $1,364,095

       Depreciation expense                 188,893              215,272
                                         ----------           ----------

       Balance at close of year          $1,364,095           $1,579,367
                                         ==========           ==========
</TABLE>



                                      -18-
<PAGE>   38
PROPERTIES



<TABLE>
<CAPTION>
      LEASE                                                                     TYPE OF OWNERSHIP
    OBLIGOR               TYPE OF PROPERTY               LOCATION                    INTEREST
-----------------         ----------------               --------               -----------------

<S>                       <C>                            <C>                    <C>
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


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


WESTERN UNION             Land and                       Bridgeton,             Ownership of a
FINANCIAL SERVICES,       Centralized                    Missouri               61% interest
INC.                      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 COMM-               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
</TABLE>


                                      -19-
<PAGE>   39
MARKET FOR THE PARTNERSHIP'S EQUITY AND RELATED
         UNITHOLDER MATTERS



                   As of December 31, 1997 there were 2,471 holders of record of
the Limited Partnership Units of the Partnership. On January 1, 1998, 2,427
holders of Limited Partnership Units exchanged such units for interests in Carey
Diversified LLC and 44 holders exchanged such units for Subsidiary Partnership
Units. There is no established public trading market for Subsidiary Partnership
Units.


                   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 1994:


<TABLE>
<CAPTION>
                                      Cash Distributions Per Unit
                                    1995              1996              1997
                                  -------           ------            ------
<S>                               <C>               <C>               <C>
        First quarter             $ 17.34           $12.19            $12.40
        Second quarter              17.39            12.34             12.41
        Third quarter               17.58            12.38             12.42
        Fourth quarter             137.81 (a)        12.39             25.62(b)
                                  -------           ------            ------
                                  $190.12           $49.30            $62.85
                                  =======           ======            ======
</TABLE>




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

(b)     Includes distributions of $12.43 and $13.19 per Limited Partnership Unit
        paid in October 1997 and December 1997, respectively.


                  On October 16, 1997, the Partnership began the solicitation of
consents from limited partners to approve the merger of the Partnership with all
of the CPA(R) Partnerships into Carey Diversified LLC, a Delaware limited
liability company. Limited Partners were offered the opportunity to vote to
approve or disapprove the merger and to choose either interests ("Listed
Shares") in the Carey Diversified LLC or interests ("Subsidiary Partnership
Units") in the partnership which survived the merger. The solicitation period
ended on December 16, 1997. The results of the voting were as follows:

<TABLE>
<CAPTION>
                           Units Voted               Units Voted            Units Voted          Units Not
                           Yes                       No                     Abstaining           Voting
                           ------                    -----                  ----------           ------
<S>                        <C>      <C>              <C>      <C>             <C>     <C>        <C>        <C>
Merger of Partnership
with Carey Diversified     48,293   73.17%           1,891    2.87%           146     .22%       15,670     23.74%
</TABLE>

<TABLE>
<CAPTION>
                                                                       Subsidiary
                           Listed Shares                               Partnership Units
                           -------------                               -----------------
<S>                        <C>                                         <C>

Number of Units
Electing                   64,878                                      1,122
</TABLE>


                                      -20-