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 for the fiscal year ended December 31, 1997

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934

                         Commission file number 0-21382


                         CAPITAL PREFERRED YIELD FUND-II
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

           DELAWARE                                  84-1184628
   (State of organization)               (I.R.S. Employer Identification Number)

7175 W. JEFFERSON AVENUE, LAKEWOOD, COLORADO                    80235
 (Address of principal executive offices)                     (Zip Code)

       Registrant's telephone number, including area code: (303) 980-1000


Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:  Units  of  Class  A
                                                             Limited     Partner
                                                             Interest
                                                               (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. Yes   X   No
                                              -----    -----.

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K 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 [ ].

State the aggregate market value of the voting stock held by  non-affiliates  of
the registrant. Not applicable.

                        Exhibit Index Appears on Pages 35

                               Page 1 of 36 Pages


<PAGE>



Item 1.  Business
         --------

Capital  Preferred  Yield Fund-II,  L.P., a Delaware  limited  partnership  (the
"Partnership"),  was  organized  on  November  19,  1991 and is  engaged  in the
business of owning and leasing  equipment.  CAI Equipment  Leasing III Corp.,  a
Colorado  corporation and a wholly owned subsidiary of Capital Associates,  Inc.
("CAI"), is the general partner of the Partnership.

Capital Associates  International,  Inc.  ("CAII"),  an affiliate of the general
partner, is the sole Class B limited partner of the Partnership. In exchange for
its Class B limited partner interest,  CAII contributed  $330,000 (i.e., $10,000
for each $1,000,000  contribution to the Partnership made by the Class A limited
partners)  to the  Partnership  making it the  largest  single  investor  in the
Partnership.  CAII's interest in Distributable Cash is subordinated to the Class
A limited partners' interest. The contributions of CAII were made simultaneously
with the purchase of equipment by the Partnership.

The  Partnership's  overall  investment  objectives are to (i) raise the maximum
allowable   capital  from  investors  for  investment  in  accordance  with  the
Partnership's  investment  objectives  described in the Prospectus;  (ii) invest
such capital and related  indebtedness  in a diversified  portfolio of equipment
subject to leases with  creditworthy  businesses  with terms ranging from two to
seven years;  (iii) if funds are available for  distribution,  make monthly cash
distributions   to  the  Class  A  and  Class  B  Limited  Partners  during  the
reinvestment  period (a period that ended June 30,  1997);  (iv)  re-invest  all
available  undistributed  cash from operations and cash from sales in additional
equipment during the reinvestment period to increase the Partnership's portfolio
of  revenue-generating  equipment,  provided  that  suitable  equipment  can  be
identified and acquired;  and (v) sell or otherwise dispose of the Partnership's
equipment  and other assets in an orderly  manner and promptly  distribute  cash
from  sales  thereof  to the  Partners  within  four  years  of  the  end of the
reinvestment period.

Through June 30, 1997, the Partnership acquired equipment of various types under
lease to third parties on short-term  leases  (generally  less than five years).
All of the equipment was purchased by CAII directly from  manufacturers  or from
other  independent  third  parties and sold to the  Partnership.  The  equipment
generally  consisted  of  point  of sale  equipment,  transportation  equipment,
computer  equipment,  above ground mining  equipment  and printed  circuit board
manufacturing  equipment,  among others (the  "equipment").  See Item 13 of this
report,  "Certain  Relationships  and Related  Transactions"  for the listing of
equipment purchased during 1997.

The Partnership may assign the rentals from leases to financial institutions, or
acquire  leases  subject  to such  assignments,  at  fixed  interest  rates on a
non-recourse  basis.  In  the  event  of  default  by a  lessee,  the  financial
institution has a first lien on the underlying leased equipment, with no further
recourse  against  the  Partnership.  Cash  proceeds  from such  financings,  or
financings  assumed in the  acquisition  of leases,  are recorded on the balance
sheet as  discounted  lease  rentals.  As lessees  make  payments  to  financial
institutions, leasing revenue and interest expense are recorded.





                                       -2-

<PAGE>



Item 1.  Business, continued
         --------

During 1997, the  Partnership  leased  equipment to investment  grade lessees in
financial  services,  transportation  services  and  manufacturing.   Since  the
Partnership's formation,  approximately 72% of the Partnership's equipment under
lease was  leased to  investment  grade  lessees.  Pursuant  to the  Partnership
Agreement,  an  investment  grade  lessee is a  company  (i) with a net worth in
excess of $100  million  (and no debt  issues  that are  rated);  or (ii) with a
credit rating of not less than Baa as determined  by Moody's  Investor  Service,
Inc., or comparable  credit rating,  as determined by another  recognized credit
rating  service;  or (iii) a  lessee,  all of whose  lease  payments  have  been
unconditionally  guaranteed  or  supported  by a letter  of  credit  issued by a
company meeting one of the above requirements. The Partnership limits its credit
risk  through  selective  use of  non-recourse  debt  financing  of future lease
rentals, as described above.

The  Partnership  only  acquires  equipment  that  is on  lease  at the  time of
acquisition. After the initial term of its lease, each item of equipment will be
expected to produce additional investment income from its re-lease or sale. Upon
expiration of the initial lease,  the  Partnership  attempts to re-lease or sell
the equipment to the existing lessee. If a re-lease or sale to the lessee cannot
be negotiated,  the Partnership will attempt to lease or sell the equipment to a
third party.

The Partnership's business is not subject to seasonal variations.

The ultimate rate of return on leases depends,  in part, on the general level of
interest rates at the time the leases are originated as well as future equipment
values and on-going lessee  creditworthiness.  Because leasing is an alternative
to financing  equipment  purchases with debt,  lease rates tend to rise and fall
with interest rates (although  lease rate movements  generally lag interest rate
changes in the capital markets).

The Partnership has no employees.  The officers,  directors and employees of the
general  partner  and  its  affiliates   perform   services  on  behalf  of  the
Partnership. The general partner is entitled to receive certain fees and expense
reimbursements in connection with the performance of these services. See Item 10
of this Report,  "Directors and Executive  Officers of the Partnership" and Item
13 of this Report, "Certain Relationships and Related Transactions".

The  Partnership  competes  in  the  leasing  marketplace  as a  lessor  with  a
significant  number  of  other  companies,  including  equipment  manufacturers,
leasing companies and financial institutions. The Partnership competes mainly on
the basis of the  expertise  of its general  partner in  remarketing  equipment,
terms offered in its transactions, pricing and service. Although the Partnership
does not account for a significant percentage of the leasing market, the general
partner  believes  that the  Partnership's  marketing  strategies  and financing
capabilities will enable it to continue to compete  effectively in the equipment
leasing and remarketing markets.

The Partnership leases equipment to a significant  number of lessees.  No single
lessee and its  affiliates  accounted  for more than 10% of total revenue of the
Partnership during 1997.


                                       -3-

<PAGE>



Item 1.  Business, continued
         --------

The Partnership  entered its  liquidation  period (as defined in the Partnership
Agreement) in July 1997. During the liquidation  period,  purchases of equipment
have ceased (other than for prior commitments and equipment upgrades).

The  Partnership  is required to dissolve  and  distribute  all of its assets no
later than December 31, 2009. However,  the general partner anticipates that all
equipment  will be sold  prior to that  date and  that the  Partnership  will be
liquidated between 1998 and 2001.


Item 2.  Properties
         ----------

Per the  Partnership  Agreement,  the  Partnership  does  not own or  lease  any
physical properties other than the equipment discussed in Item 1 "Business",  of
this report, which is incorporated herein by reference.


Item 3.  Legal Proceedings
         -----------------

Neither the Partnership nor any of the Partnership's equipment is the subject of
any material pending legal proceedings.


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

No matters were submitted to a vote of the limited  partners of the Partnership,
through the  solicitation  of proxies or  otherwise,  during the fourth  quarter
ended December 31, 1997.


Item 5.  Market  for  the  Partnership's  Common  Equity and Related Stockholder
         -----------------------------------------------------------------------
         Matters
         -------

(a)      The Partnership's Class A limited partner units,  Class B  interest and
         general  partner  interest  are  not  publicly  traded.   There  is  no
         established  public  trading  market  for such  units and interests and
         none is expected to develop.

(b)      As  of  December 31, 1997, the  number  of Class A limited partners was
         1,774.

(c)      Distributions
         -------------

         During 1997, the Partnership made twelve (12)  distributions (a portion
         of which  constituted a return of capital) to Class A limited partners,
         as follows:


                                       -4-

<PAGE>





Item 5.  Market  for  the  Partnership's  Common  Equity and Related Stockholder
         -----------------------------------------------------------------------
         Matters, continued
         -------

(c)      Distributions, continued
         -------------

                                              Distributions Per
                                                $250 Class A 
                                               Limited Partner
           For the              Payment       Unit (computed on        Total
         Month Ended          Made During     weighted average)    Distributions
         -----------          -----------     -----------------    -------------

         December 31, 1996    January 1997     $  2.50             $   334,945
         January 31, 1997     February 1997       2.50                 334,945
         February 28, 1997    March 1997          2.50                 334,945
         March 31, 1997       April 1997          2.50                 334,945
         April 30, 1997       May 1997            2.50                 334,945
         May 31, 1997         June 1997           2.50                 334,945
         June 30, 1997        July 1997           2.50                 334,945
         July 31, 1997        August 1997         2.99                 400,000
         August 31, 1997      September 1997      3.74                 500,000
         September 30, 1997   October 1997        3.74                 500,000
         October 31, 1997     November 1997       3.74                 500,000
         November 30, 1997    December 1997       3.74                 500,000
                                               -------             -----------
                                               $ 35.45             $ 4,744,615
                                               =======             ===========

         Distributions  may be  characterized  for tax,  accounting and economic
         purposes  as a return of  capital,  a return on  capital  or both.  The
         portion of each cash  distribution  by a partnership  which exceeds its
         net income for the fiscal  period may be deemed a return of capital for
         accounting  purposes.  However, the total percentage of a partnership's
         return  on  capital  over its life can  only be  determined  after  all
         residual cash flows (which  include  proceeds from the  re-leasing  and
         sale  of  equipment)  have  been  realized  at the  termination  of the
         Partnership.

         The  distribution  for the month  ended  December  31,  1997,  totaling
         $500,000, was paid to the Class A limited partners during January 1998.
         Distributions to the general partner and Class B limited partner during
         1997 are  discussed in Item 13 of this Report,  "Certain  Relationships
         and Related Transactions."

         The  general  partner  believes  that  the  Partnership  will  generate
         sufficient  cash flow from  operations  during 1998 to (1) meet current
         operating  requirements and (2) fund cash  distributions to the Class A
         limited   partners  in  accordance  with  the  Partnership   Agreement.
         Distributions  during the  liquidation  period  will be based upon cash
         availability  and will vary.  All  distributions  are  expected to be a
         return of capital for economic purposes.

                                       -5-

<PAGE>


Item 5.  Market  for  the  Partnership's  Common  Equity and Related Stockholder
         -----------------------------------------------------------------------
         Matters, continued
         -------

(c)      Distributions, continued
         -------------

         During 1996, the Partnership made twelve (12)  distributions (a portion
         of which  constituted a return of capital) to Class A limited partners,
         as follows:

                                              Distributions Per
                                                $250 Class A
                                               Limited Partner
           For the              Payment       Unit (computed on        Total
         Month Ended          Made During     weighted average)    Distributions
         -----------          -----------     -----------------    -------------

         December 31, 1995    January 1996         $  2.50         $   337,250
         January 31, 1996     February 1996           2.50             335,750
         February 28, 1996    March 1996              2.50             335,560
         March 31, 1996       April 1996              2.50             335,560
         April 30, 1996       May 1996                2.50             335,560
         May 31, 1996         June 1996               2.50             335,445
         June 30, 1996        July 1996               2.50             335,445
         July 31, 1996        August 1996             2.50             335,445
         August 31, 1996      September 1996          2.50             335,345
         September 30, 1996   October 1996            2.50             335,145
         October 31, 1996     November 1996           2.50             335,145
         November 30, 1996    December 1996           2.50             335,145
                                                   -------         -----------
                                                   $ 30.00         $ 4,026,795
                                                   =======         ===========


         The following represents annual and cumulative  distributions per Class
         A  limited  partner  unit,  as  described  in  Footnote  1 to  Notes to
         Consolidated Financial Statement.

                                               Distributions per
                                $ Per           Class A Limited
                               Class A           Partner Unit
           Payment          Limited Partner      (computed on
         Made During         Unit Invested     weighted average)        % (1)
         -----------        ---------------    -----------------        -----

            1992               $ 250               $  15.00              12%
            1993                                      30.00              12%
            1994                                      30.00              12%
            1995                                      30.00              12%
            1996                                      30.00              12%
            1997                                      35.45              14%
                                                   --------
                                                   $ 170.45
                                                   ========

         (1)  Cumulative distributions, as  described  in Footnote 1 to Notes to
              Consolidated Financial Statements began July 1992.

                                       -6-

<PAGE>

Item 6.  Selected Financial Data
         -----------------------

The following  selected  financial  data relates to 1993 through 1997.  The data
should be read in conjunction with Item 7, "Management's Discussion and Analysis
of Financial  Condition and Results of Operations" and the financial  statements
and notes thereto appearing elsewhere herein.

<TABLE>
<CAPTION>


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

<S>                                          <C>            <C>             <C>             <C>             <C>         
Total revenue                                 $ 10,309,337   $ 10,870,083    $ 12,719,445    $ 11,967,912    $  6,434,945
Net income                                       1,456,778        231,258       1,009,230         502,147         133,229
Net income per weighted average Class A
  limited partner unit outstanding                   10.40           1.40            7.09            3.52            1.43
Total assets                                    25,032,730     33,516,785      31,806,534      39,962,561      34,740,737
Discounted and financed operating
  lease rentals                                 10,218,917     15,559,029      10,009,561      15,037,678      17,287,511
Distributions declared to partners               4,995,930      4,101,808       4,131,126       3,847,041       1,735,555
Distributions declared per monthly weighted
   average Class A limited partner unit              36.69          30.00           30.00           30.00           30.00

</TABLE>


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

Results of Operations
---------------------

Presented below are schedules  (prepared  solely to facilitate the discussion of
results  of  operations  that  follows)   showing   condensed  income  statement
categories and analyses of changes in those  condensed  categories  derived from
the Statements of Income:

<TABLE>
<CAPTION>


                                                Condensed                                    Condensed
                                          Statements of Income       The effect on      Statements of Income          The effect on
                                             for the years             net income          for the years                net income
                                           ended December 31,          of changes         ended December 31,            of changes
                                        --------------------------       between      ---------------------------         between
                                            1997          1996            years           1996          1995               years
                                        -----------   ------------   -------------    ------------  -------------     -------------

 <S>                                   <C>            <C>           <C>              <C>           <C>               <C>          
  Leasing margin                        $ 1,662,250    $ 1,470,270   $   191,980      $ 1,470,270   $ 1,815,691       $   (345,421)
  Equipment sales margin                    572,363        189,435       382,928          189,435       248,350            (58,915)
  Interest income                            80,642        201,719      (121,077)         201,719        65,426            136,293
  Management fees paid to
    general partner                        (200,538)      (286,973)       86,435         (286,973)     (275,888)           (11,085)
  Direct services from general partner     (107,779)      (158,770)       50,991         (158,770)      (81,229)           (77,541)
  General and administrative expenses      (225,160)      (284,423)       59,263         (284,423)     (153,120)          (131,303)
  Provision for losses                     (325,000)      (900,000)      575,000         (900,000)     (610,000)          (290,000)
                                        -----------   ------------   -----------      -----------   -----------       ------------
            Net income                  $ 1,456,778   $    231,258   $ 1,225,520      $   231,258   $ 1,009,230       $   (777,972)
                                        ===========   ============   ===========      ===========   ===========       ============
</TABLE>

The  Partnership is in the  liquidation  period,  as defined in the  Partnership
Agreement  and,  as  expected  the  Partnership  is  not  purchasing  additional
equipment,  initial  leases  are  expiring  and the  amount of  equipment  being
remarketed (i.e., re-leased,  renewed, or sold) is increasing. As a result, both
the size of the  Partnership's  leasing  portfolio  and the  amount  of  leasing
revenue are declining.

                                       -7-

<PAGE>


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

LEASING MARGIN

Leasing margin consists of the following:

                                              Years Ended December 31,
                                   ---------------------------------------------
                                        1997            1996            1995
                                        ----            ----            ----

Operating lease rentals            $  9,251,501    $ 10,028,052    $ 11,843,447
Direct finance lease income             404,831         450,877         562,222
Depreciation                         (7,066,062)     (7,856,952)     (9,618,860)
Interest expense on discounted
  lease rentals                        (745,295)       (873,433)       (971,118)
Interest expense on financed 
  operating lease rentals              (182,725)       (278,274)              -
                                   ------------    ------------    ------------
   Leasing margin                  $  1,662,250    $  1,470,270    $  1,815,691
                                   ============    ============    ============

   Leasing margin ratio                     17%             14%             15%
                                            ==              ==              ==

All  components of leasing  margin  decreased due to portfolio  runoff.  Leasing
margin ratio fluctuates based upon remarketing  activities.  Remarketing revenue
will vary as initial lease terms expire.

The ultimate rate of return on leases depends, in part, on interest rates at the
time the leases are originated as well as future  equipment  values and on-going
lessee  creditworthiness.   Because  leasing  is  an  alternative  to  financing
equipment  purchases with debt,  lease rates tend to rise and fall with interest
rates (although lease rate movements  generally lag interest rate changes in the
capital markets).

EQUIPMENT SALES MARGIN

Equipment sales margin consists of the following:

                                              Years Ended December 31,
                                  ---------------------------------------------
                                      1997            1996            1995
                                      ----            ----            ----
Equipment sales revenue          $  2,217,177    $  2,865,442      $  993,317
Cost of equipment sales            (1,644,814)     (2,676,007)       (744,967)
                                 ------------    ------------      ----------
Equipment sales margin           $    572,363    $    189,435      $  248,350
                                 ============    ============      ==========

The  Partnership  is in its  liquidation  period (as defined in the  Partnership
Agreement).  Currently,  a  portion  of the  Partnership's  initial  leases  are
expiring and equipment is being  remarketed  (i.e.,  re-leased or sold to either
the original lessee or a third party) and, accordingly, the timing and amount of
equipment sales cannot be projected  accurately.  However equipment sales margin
is expected to increase during the liquidation period.

                                       -8-

<PAGE>


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


INTEREST INCOME

Interest  income varies due to (i) the amount of cash  available for  investment
(pending distribution or equipment purchases) and (ii) the interest rate on such
invested cash.

PROVISION FOR LOSSES

The  remarketing  of  equipment  for an amount  greater  than its book  value is
reported as equipment  sales margin (if the equipment is sold) or leasing margin
(if the equipment is re-leased). The realization of less than the carrying value
of equipment (which is typically not known until  remarketing  subsequent to the
initial lease termination has occurred) is recorded as provision for losses.

Residual values are established equal to the estimated value to be received from
the equipment following termination of the lease. In estimating such values, the
Partnership considers all relevant facts regarding the equipment and the lessee,
including,  for  example,  the  likelihood  that the lessee  will  re-lease  the
equipment.  The nature of the  Partnership's  leasing  activities is that it has
credit and residual value exposure and,  accordingly,  in the ordinary course of
business,  it will incur losses from those exposures.  The Partnership  performs
ongoing  quarterly  assessments  of its assets to identify  other-than-temporary
losses in value.

The  provision  for losses  recorded  during the year ended  December  31,  1997
related to the following:

*    $245,000 related to lessees  returning  equipment to the  Partnership.  The
     Partnership  had previously  expected to realize the carrying value of that
     equipment  through  lease  renewals  and  proceeds  from  the  sale  of the
     equipment to the original  lessee.  The fair market value of the  equipment
     re-leased  or  sold  to  a  third  party  is  considerably  less  than  was
     anticipated.

*    $80,000  for a  deficiency  related to a lease with  Ernst Home  Center,  a
     lessee that filed for Chapter 11  bankruptcy  protection  on July 12, 1996.
     The lease was funded with  non-recourse  debt and the  lending  institution
     repossessed  and liquidated the equipment  during March 1997 resulting in a
     deficiency to the Partnership.

The provision for losses recorded during 1996 related to the following items:

*    $245,000 to record the  Partnership's  loss  exposure  related to Barney's,
     Inc., a lessee that filed for Chapter 11  bankruptcy  protection on January
     10, 1996. In July 1996,  negotiations  were  finalized and a settlement was
     received for the Partnership's claim.

*    $180,000 related to Norcross  Footwear,  a lessee that filed for Chapter 11
     bankruptcy  protection on February 9, 1996.  The lease was rejected  during
     second  quarter  1996 and the  equipment  has been sold or  returned to the
     Partnership.  The fair market value of the equipment re-leased or sold to a
     third party was considerably less than anticipated.

                                       -9-

<PAGE>



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

PROVISION FOR LOSSES, continued

*    $400,000 and $75,000 related to lessees returning computer equipment and an
     MRI  system,   respectively,   to  the  Partnership.  The  Partnership  had
     previously expected to realize the carrying value of that equipment through
     lease  renewals  and  proceeds  from sale of the  equipment to the original
     lessee. The fair market value of the equipment re-leased or sold to a third
     party is considerably less than was anticipated.

The provision for losses recorded during 1995 related to the following items:

*    $360,000 due to a lease of mass storage computer  equipment that terminated
     during 1995.

*    $150,000 due to lessees returning modular buildings and computer  equipment
     to the Partnership.

*    $100,000 due to a settlement agreement reached with a lessee that filed for
     protection under Chapter 11 of the bankruptcy code.


Liquidity and Capital Resources
-------------------------------

The Partnership funds its operating activities principally with cash from rents,
discounted lease rentals  (non-recourse  debt),  interest  income,  and sales of
off-lease  equipment.  Available cash and cash reserves of the  Partnership  are
invested  in  short-term   government  securities  pending  the  acquisition  of
equipment or distributions to the partners.

During 1997, 1996 and 1995, the Partnership acquired equipment subject to leases
with a total equipment purchase price of approximately  $1,085,000,  $14,395,000
and $3,032,000, respectively.

During  1997,  1996 and 1995,  the  Partnership  declared  distributions  to the
partners of $4,995,930,  $4,101,808 and $4,131,126,  respectively. A substantial
portion of such distributions constituted a return of capital. Distributions may
be  characterized  for tax,  accounting  and  economic  purposes  as a return of
capital, a return on capital or both. The portion of each cash distribution by a
partnership  which  exceeds its net income for the fiscal period may be deemed a
return of capital for accounting  purposes.  However,  the total percentage of a
partnership's  return on capital over its life will only be determined after all
residual  cash flows (which  include  proceeds from the  re-leasing  and sale of
equipment   after  initial  lease  terms  expire)  have  been  realized  at  the
termination of the Partnership.

The general partner believes that the Partnership will generate  sufficient cash
flow from operations during 1998 to (1) meet current operating  requirements and
(2) fund cash  distributions  to the Class A limited partners in accordance with
the Partnership  Agreement.  Distributions during the liquidation period will be
based upon cash availability and will vary. All distributions are expected to be
a return of capital for economic purposes.

                                      -10-

<PAGE>




Item 8.   Financial Statements and Supplementary Data
          -------------------------------------------

          Index to Financial Statements and
          Financial Statement Schedule

                                                                           Page
                                                                          Number
          Financial Statements                                            ------
          --------------------
 
              Independent Auditors' Report                                  12

              Balance Sheets as of December 31, 1997 and 1996               13

              Statements of Income for the years ended
                 December 31, 1997, 1996 and 1995                           14

              Statements of Partners' Capital for the years ended
                December 31, 1997, 1996 and 1995                            15

              Statements of Cash Flows for the years ended
                December 31, 1997, 1996 and 1995                            16

              Notes to Financial Statements                                17-27


          Financial Statement Schedule
          ----------------------------

              Independent Auditors' Report                                  28

              Schedule II - Valuation and Qualifying Accounts               29



                                      -11-

<PAGE>






                          INDEPENDENT AUDITORS' REPORT
                          ----------------------------




THE PARTNERS
CAPITAL PREFERRED YIELD FUND-II, L.P.:

We have  audited the  accompanying  balance  sheets of Capital  Preferred  Yield
Fund-II,  L.P. as of December 31, 1997 and 1996,  and the related  statements of
income,  partners'  capital,  and  cash  flows  for  each  of the  years  in the
three-year  period ended December 31, 1997.  These financial  statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

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

                                  /s/KPMG Peat Marwick LLP
                                  ------------------------
                                  KPMG PEAT MARWICK LLP

Denver, Colorado
February 6, 1998

                                      -12-

<PAGE>



                      CAPITAL PREFERRED YIELD FUND-II, L.P.

                                 BALANCE SHEETS
                           December 31, 1997 and 1996

                                     ASSETS

                                                          1997           1996
                                                          ----           ----

Cash and cash equivalents                             $  1,897,763  $  1,768,824
Accounts receivable, net of allowance for
  doubtful accounts of $25,000 in 1997 and 1996            620,453       149,316
Equipment held for sale or re-lease                        646,787       448,552
Net investment in direct finance leases                  3,839,687     4,978,823
Leased equipment, net                                   18,028,040    26,171,270
                                                      ------------  ------------
         Total assets                                 $ 25,032,730  $ 33,516,785
                                                      ============  ============

                        LIABILITIES AND PARTNERS' CAPITAL

Liabilities:
  Accounts payable and accrued liabilities            $    882,678  $    611,147
  Payables to affiliates                                    20,257        26,033
  Rents received in advance                                102,410       110,946
  Distributions payable to partners                        508,106       341,384
  Discounted lease rentals                               7,961,882    12,397,890
  Financed operating lease rentals                       2,257,035     3,161,139
                                                      ------------  ------------
       Total liabilities                                11,732,368    16,648,539
                                                      ------------  ------------

Partners' capital:
  General partner                                                -             -
  Limited partners:
    Class A 260,000 units authorized; 133,718 and
    134,978 units issued and outstanding in 1997
    and 1996, respectively                              13,092,164    16,637,978
    Class B                                                208,198       230,268
                                                      ------------  ------------
         Total partners' capital                        13,300,362    16,868,246
                                                      ------------  ------------
         Total liabilities and partners' capital      $ 25,032,730  $ 33,516,785
                                                      ============  ============



                 See accompanying notes to financial statements.

                                      -13-

<PAGE>



                      CAPITAL PREFERRED YIELD FUND-II, L.P.

                              STATEMENTS OF INCOME
                  Years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>


                                                     1997             1996               1995
                                                     ----             ----               ----
<S>                                             <C>            <C>               <C>         
REVENUE:
  Operating lease rentals                        $ 9,251,501    $ 10,028,052      $ 11,843,447
  Direct finance lease income                        404,831         450,877           562,222
  Equipment sales margin                             572,363         189,435           248,350
  Interest income                                     80,642         201,719            65,426
                                                 -----------    ------------      ------------
    Total revenue                                 10,309,337      10,870,083        12,719,445
                                                 -----------    ------------      ------------

EXPENSES:
  Depreciation                                     7,066,062       7,856,952         9,618,860
  Interest on discounted lease rentals               745,295         873,433           971,118
  Interest on financed operating lease rentals       182,725         278,274                 -
  Management fees paid to general partner            200,538         286,973           275,888
  Direct services from general partner               107,779         158,770            81,229
  General and administrative                         225,160         284,423           153,120
  Provision for losses                               325,000         900,000           610,000
                                                 -----------    ------------      ------------
    Total expenses                                 8,852,559      10,638,825        11,710,215
                                                 -----------    ------------      ------------
NET INCOME                                       $ 1,456,778    $    231,258      $  1,009,230
                                                 ===========    ============      ============

NET INCOME ALLOCATED:
  To the general partner                         $    49,960    $     41,018      $     41,312
  To the Class A limited partners                  1,392,588         188,286           958,122
  To the Class B limited partner                      14,230           1,954             9,796
                                                 -----------    ------------      ------------
                                                 $ 1,456,778    $    231,258      $  1,009,230
                                                 ===========    ============      ============

Net income per weighted average Class
  A limited partner unit outstanding             $     10.40    $       1.40      $       7.09
                                                 ===========    ============      ============

Weighted average Class A limited partner
  units outstanding                                  133,886         134,388           135,108
                                                 ===========    ============      ============
</TABLE>



                 See accompanying notes to financial statements.

                                      -14-

<PAGE>



                      CAPITAL PREFERRED YIELD FUND-II, L.P.

                         STATEMENTS OF PARTNERS' CAPITAL
                  Years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>


                                                                   Class A
                                                                   Limited         Class A            Class B
                                                     General       Partner         Limited            Limited
                                                     Partner        Units          Partners           Partner           Total
                                                     -------        -----          --------           -------           -----

<S>                                               <C>              <C>           <C>                <C>            <C>         
Partners' capital at January 1, 1995               $       -        135,490       $ 23,816,621       $ 291,117      $ 24,107,738

Redemptions                                                -           (590)          (119,506)              -          (119,506)
Net income                                            41,312              -            958,122           9,796         1,009,230
Distributions declared to partners                   (41,312)             -         (4,053,515)        (36,299)       (4,131,126)
                                                   ---------        -------       ------------       ---------      ------------

Partners' capital at December 31, 1995                     -        134,900         20,601,722         264,614        20,866,336

Redemptions                                                -           (922)          (127,540)              -          (127,540)
Net income                                            41,018              -            188,286           1,954           231,258
Distributions declared to partners                   (41,018)             -         (4,024,490)        (36,300)       (4,101,808)
                                                   ---------        -------       -------------      ----------     -------------

Partners' capital, December 31, 1996                       -        133,978         16,637,978         230,268        16,868,246

Redemptions                                                -           (260)           (28,732)              -           (28,732)
Net income                                            49,960              -          1,392,588          14,230         1,456,778
Distributions declared to partners                   (49,960)             -         (4,909,670)        (36,300)       (4,995,930)
                                                   ---------        -------       ------------       ---------      -------------
Partners' capital, December 31, 1997               $       -        133,718       $ 13,092,164       $ 208,198      $ 13,300,362
                                                   =========        =======       ============       =========      ============


</TABLE>












                 See accompanying notes to financial statements.

                                      -15-

<PAGE>



                      CAPITAL PREFERRED YIELD FUND-II, L.P.
                            STATEMENTS OF CASH FLOWS
                  Years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>


                                                                          1997                 1996              1995
                                                                          ----                 ----              ----
<S>                                                               <C>                    <C>                 <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                       $   1,456,778          $    231,258        $  1,009,230
  Adjustments to reconcile net income to net
    cash provided by operating activities:
    Depreciation                                                       7,066,062             7,856,952           9,618,860
    Provision for losses                                                 325,000               900,000             610,000
    Cost of equipment sales                                            1,644,814             2,676,007             740,547
    Recovery of investment in direct finance leases                      943,666               948,323           1,254,448
    Other                                                                      -                     -              13,200
    Changes in assets and liabilities:
      Increase in accounts receivable                                   (281,795)              (20,567)            (20,105)
      Increase (decrease) in payables to affiliates                       (5,776)                  481              (2,907)
      Increase in accounts payable and accrued
        liabilities                                                      271,531               209,258              94,479
      Increase (decrease) in rents received in advance                    (8,536)              (48,538)             23,410
                                                                   -------------          ------------        ------------
  Net cash provided by operating activities                           11,411,744            12,753,174          13,341,162
                                                                   -------------          ------------        ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of equipment on operating leases from affiliate           (1,062,284)           (7,887,705)         (2,137,312)
  Investment in direct finance leases, acquired from affiliate           (22,469)             (115,445)           (301,386)
                                                                   -------------          ------------        ------------
  Net cash used in investing activities                               (1,084,753)           (8,003,150)         (2,438,698)
                                                                   -------------          ------------        ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Principal payments on discounted lease rentals                      (4,436,008)           (4,014,778)         (5,895,078)
  Principal payments on financed operating lease rentals                (904,104)           (1,111,518)                  -
  Proceeds from discounting of lease rentals                                   -                11,425             273,727
  Proceeds from financing of operating lease receivables                       -             4,272,657                   -
  Distributions to partners                                           (4,829,208)           (4,104,137)         (4,132,616)
  Redemptions of Class A limited partner units                           (28,732)             (127,540)           (119,506)
                                                                   -------------          ------------        ------------
  Net cash used in financing activities                              (10,198,052)           (5,073,891)         (9,873,473)
                                                                   -------------          ------------        ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                     128,939              (323,867)          1,028,991
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                         1,768,824             2,092,691           1,063,700
                                                                   -------------          ------------        ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR                           $   1,897,763          $  1,768,824        $  2,092,691
                                                                   =============          ============        ============

Supplemental disclosure of cash flow information:
  Interest paid on discounted lease rentals                        $     745,295          $    873,433        $    971,118
  Interest paid on financed lease rentals                                182,725               278,274                   -
Supplemental disclosure of noncash investing and
  financing activities:
  Discounted lease rentals assumed in equipment
  acquisitions                                                                 -             6,403,107             592,862

</TABLE>

                 See accompanying notes to financial statements.

                                      -16-

<PAGE>



                      CAPITAL PREFERRED YIELD FUND-II, L.P.
                          NOTES TO FINANCIAL STATEMENTS

 1.  Organization and Summary of Significant Accounting Policies
     -----------------------------------------------------------

     Organization

       Capital Preferred Yield Fund-II, L.P. (the "Partnership"),  was organized
       on November 19, 1991 as a limited partnership under the laws of the State
       of  Delaware  pursuant  to  an  Agreement  of  Limited  Partnership  (the
       "Partnership  Agreement").  The Partnership was formed for the purpose of
       acquiring   and  leasing  a   diversified   portfolio   of  equipment  to
       unaffiliated third parties.  The Partnership will continue until December
       31, 2009 unless  terminated  earlier in accordance  with the terms of the
       Partnership  Agreement.  All Partnership equipment is expected to be sold
       and the Partnership  liquidated prior to 2009. The general partner of the
       Partnership is CAI Equipment Leasing III Corp., a wholly owned subsidiary
       of Capital Associates, Inc. ("CAI").

       The general  partner  manages the  Partnership,  including  investment of
       funds,  purchase  and sale of  equipment,  lease  negotiation  and  other
       administrative  duties.  The  Partnership  initially sold 135,774 Class A
       limited  partner units to 1,796  investors at a price of $250 per Class A
       limited partner unit.

       Capital  Associates   International,   Inc.  ("CAII"),   a  wholly  owned
       subsidiary  of CAI, is the Class B limited  partner.  The Class B limited
       partner was required to contribute  cash, upon  acquisition of equipment,
       in an amount equal to 1% of gross  offering  proceeds  received  from the
       sale of Class A  limited  partner  units.  The  Class B  limited  partner
       contributed $330,000 to the Partnership.  The Class B limited partner has
       no remaining obligation to contribute cash to the Partnership.

     Use of Estimates

       The  preparation  of financial  statements in conformity  with  generally
       accepted accounting  principles requires management to make estimates and
       assumptions  that affect the reported  amounts of assets and  liabilities
       and  disclosure of contingent  assets and  liabilities at the date of the
       financial  statements  and the  reported  amounts of revenue and expenses
       during the  reporting  period.  For leasing  entities,  this includes the
       estimate of residual  values,  as discussed  below.  Actual results could
       differ from those estimates.

     Partnership Cash Distributions and Allocations of Profit and Loss

       Cash Distributions
       ------------------

       During the Reinvestment Period (as defined in the Partnership Agreement),
       available cash was distributed to the partners as follows:

         First,  1.0% to the  general  partner  and 99.0% to the Class A limited
         partners  until  the  Class  A  limited   partners   received   annual,
         non-compounded   cumulative   distributions   equal  to  12%  of  their
         contributed capital.

                                      -17-

<PAGE>


                      CAPITAL PREFERRED YIELD FUND-II, L.P.
                    NOTES TO FINANCIAL STATEMENTS, Continued


 1.  Organization and Summary of Significant Accounting Policies, continued
     -----------------------------------------------------------

     Partnership  Cash  Distributions  and   Allocations  of  Profit  and  Loss,
     continued

       Cash Distributions, continued
       ------------------

         Second,  1.0% to the  general  partner and 99.0% to the Class B limited
         partner   until   the   Class  B  limited   partner   received   annual
         non-compounded cumulative distributions equal to 11% of its contributed
         capital.

         Third,  any remaining  available  cash was reinvested or distributed to
         the partners as specified in the Partnership Agreement.

       After the Reinvestment Period (as defined in the Partnership  Agreement),
       available cash will be distributed to the partners as follows:

         First, in accordance with the first and second  allocations  during the
         Reinvestment Period as described above.

         Second,  99.0% to the Class A limited  partners and 1.0% to the general
         partner,  until the Class A limited partners achieve Payout (as defined
         in the Partnership Agreement).

         Third,  99.0% to the Class B limited  partner  and 1.0% to the  general
         partner,  until the Class B limited partner achieves Payout (as defined
         in the Partnership Agreement).

         Fourth,  99.0% to the Class A and Class B limited partners (as a class)
         and 1.0% to the general partner,  until the Class A and Class B limited
         partners  receive  cash  distributions  equal to 170% of their  capital
         contributions.

       Thereafter,  90% to the Class A and Class B limited partners (as a class)
       and 10% to the general partner.

       Profits and Losses
       ------------------

       There  are  several   special   allocations   that  precede  the  general
       allocations of profits and losses to the partners.  The most  significant
       special allocations are as follows:

         First,  commissions  and expenses paid in  connection  with the sale of
         Class A limited partner units are allocated 1.0% to the general partner
         and 99.0% to the Class A limited partners.

         Second,  depreciation  relating to Partnership equipment and any losses
         resulting  from the sale of equipment are generally  allocated  1.0% to
         the  general  partner  and  99.0%  to  the  limited   partners  (shared
         99.0%/1.0% by the Class A and Class B limited  partners,  respectively)

                                      -18-

<PAGE>


                      CAPITAL PREFERRED YIELD FUND-II, L.P.
                    NOTES TO FINANCIAL STATEMENTS, Continued


 1.  Organization and Summary of Significant Accounting Policies, continued
     -----------------------------------------------------------

       Profits and Losses, continued
       ------------------

         until  the  cumulative  amount  of such  depreciation  and such  losses
         allocated  to  each  limited  partner  equals  such  limited  partner's
         contributed  capital  reduced by commissions and other expenses paid in
         connection  with the sale of Class A limited partner units allocated to
         such partner.  Thereafter,  gain on sale of equipment,  if any, will be
         allocated  to the  general  partner  in an  amount  equal to the sum of
         depreciation and loss on sale of equipment  previously allocated to the
         general partner.

         Third,  notwithstanding  anything in the  Partnership  Agreement to the
         contrary,  and before any other allocation is made, items of income and
         gain for the current year (or period) shall be allocated, as quickly as
         possible,  to the general  partner to the extent of any deficit balance
         existing in the general  partner's  capital  account as of the close of
         the immediately  preceding year, in order to restore the balance in the
         general partner's capital account to zero.

       After giving  effect to special  allocations,  profits (as defined in the
       Partnership  Agreement) are first  allocated in proportion to, and to the
       extent of,  any  previous  losses,  in  reverse  chronological  order and
       priority.  Any  remaining  profits  are  allocated  in the same order and
       priority as cash distributions.

       After  giving  effect to special  allocations,  losses (as defined in the
       Partnership  Agreement) are allocated in proportion to, and to the extent
       of, any previous profits,  in reverse  chronological  order and priority.
       Any remaining  losses are allocated 1.0% to the general partner and 99.0%
       to the limited  partners  (shared  99.0%/1.0%  by the Class A and Class B
       limited partners, respectively).

     Financial Reporting
     -------------------

       For financial reporting purposes, net income is allocated to the partners
       in a manner consistent with the allocation of cash distributions.

     Recently Issued Financial Accounting Standards

       During  1997,  the  Partnership  adopted  SFAS No.  125,  Accounting  for
       Transfer  and  Servicing  of  Financial  Assets  and  Extinguishments  of
       Liabilities ("SFAS No. 125"). SFAS No. 125 provides consistent  standards
       for  distinguishing  transfers  of  financial  assets that are sales from
       transfers that are secured  borrowings.  The adoption of SFAS No. 125 did
       not have a material  impact on the  Partnership's  financial  position or
       results of operations.




                                      -19-

<PAGE>


                      CAPITAL PREFERRED YIELD FUND-II, L.P.
                    NOTES TO FINANCIAL STATEMENTS, Continued


 1.  Organization and Summary of Significant Accounting Policies, continued
     -----------------------------------------------------------

     Long-lived Assets

       The  Partnership  accounts for long-lived  assets under the provisions of
       Statement of Financial  Accounting  Standards No. 121, Accounting for the
       Impairment of Long-lived  Assets and for Long-lived Assets to be Disposed
       Of ("SFAS  No.  121").  SFAS No. 121  requires  that  long-lived  assets,
       including  operating leases, and certain  identifiable  intangibles to be
       held and used by an entity be reviewed for impairment  whenever events or
       changes in  circumstances  indicate that the carrying  amount of an asset
       may not be recoverable. In performing the review for recoverability,  the
       entity should  estimate the future cash flows expected to result from the
       use of the asset and its eventual disposition. If the sum of the expected
       future cash flows  (undiscounted  and without  interest  charges) is less
       than the carrying  amount of the asset, an impairment loss is recognized.
       Measurement  of an  impairment  loss  for  long-lived  assets,  including
       operating leases, and identifiable intangibles held by the Partnership is
       based on the fair  value  of the  asset  calculated  by  discounting  the
       expected future cash flows at an appropriate interest rate.

     Lease Accounting

       Statement  of  Financial  Accounting  Standards  No. 13,  Accounting  for
       Leases,  requires  that a lessor  account  for each  lease by the  direct
       finance,  sales-type or operating lease method. The Partnership currently
       utilizes  the  direct  financing  and  operating  methods  for all of the
       Partnership's equipment under lease. Direct finance leases are defined as
       those leases which transfer  substantially  all of the benefits and risks
       of ownership of the equipment to the lessee. For all types of leases, the
       determination of profit considers the estimated value of the equipment at
       lease termination, referred to as the residual value. After the inception
       of a lease, the Partnership may engage in financing of lease  receivables
       on a nonrecourse  basis (i.e.,  "non-recourse  debt" or "discounted lease
       rentals")  and/or  equipment sale  transactions  to reduce or recover its
       investment in the equipment.

     The Partnership's  accounting methods and their financial reporting effects
     are described below.

     Net Investment in Direct Financing Leases ("DFLs")

       The cost of the equipment, including acquisition fees paid to the general
       partner,  is  recorded  as net  investment  in DFLs  on the  accompanying
       balance sheet. Leasing revenue,  which is recognized over the term of the
       lease,  consists  of the  excess  of lease  payments  plus the  estimated
       residual  value over the  equipment's  cost.  Earned income is recognized
       monthly to provide a constant  yield and is  recorded  as direct  finance
       lease income on the accompanying  income statements.  Residual values are
       established  at  lease  inception  equal  to the  estimated  value  to be
       received from the equipment  following  termination  of the initial lease
       (which in certain circumstances  includes anticipated re-lease proceeds),
       as determined by the general  partner.  In  estimating  such values,  the
       general  partner  considers  all  relevant   information   regarding  the
       equipment and the lessee.

                                      -20-

<PAGE>


                      CAPITAL PREFERRED YIELD FUND-II, L.P.
                    NOTES TO FINANCIAL STATEMENTS, Continued


 1.  Organization and Summary of Significant Accounting Policies, continued
     -----------------------------------------------------------

     Equipment on Operating Leases ("OLs")

       The cost of  equipment,  including  acquisition  fees paid to the general
       partner,  is recorded as leased  equipment  in the  accompanying  balance
       sheets and is depreciated on a straight-line basis over the lease term to
       an amount equal to the estimated  residual value at the lease termination
       date.  Leasing  revenue  consists  principally  of  monthly  rents and is
       recognized  as  operating  lease  rentals  in  the  accompanying   income
       statements.  Residual  values are established at lease inception equal to
       the  estimated  value  to  be  received  from  the  equipment   following
       termination of the initial lease (which in certain circumstances includes
       anticipated re-lease proceeds),  as determined by the general partner. In
       estimating  such  values,  the general  partner  considers  all  relevant
       information  and  circumstances  regarding  the equipment and the lessee.
       Because  revenue,  depreciation  expense and the resultant  profit margin
       before  interest  expense are  recorded  on a  straight-line  basis,  and
       interest  expense  on  discounted  lease  rentals  (discussed  below)  is
       recorded on the interest method,  lower returns are realized in the early
       years of the term of an OL and higher returns in later years.

     Non-recourse Discounting of Rentals

       The  Partnership  may assign the future  rentals from leases to financial
       institutions,  or acquire  leases subject to such  assignments,  at fixed
       interest  rates on a  non-recourse  basis.  In return  for such  assigned
       future  rentals,  the  Partnership  receives the discounted  value of the
       rentals  in cash.  In the event of  default  by a lessee,  the  financial
       institution has a first lien on the underlying leased equipment,  with no
       further  recourse  against  the  Partnership.  Cash  proceeds  from  such
       financings,  or the  assumption of such  financings,  are recorded on the
       balance sheet as discounted  lease  rentals.  As lessees make payments to
       financial   institutions,  leasing   revenue  and  interest  expense  are
       recorded.

     Non-recourse Financing of Operating Lease Rentals

       The Partnership may assign  substantially all of its rights under certain
       operating leases to a purchaser and subsequently the purchaser may assign
       the rentals from such leases to a financial institution at fixed interest
       rates on a non-recourse  basis.  The Partnership  receives the discounted
       value of the  rentals  in cash from the  financial  institution.  As with
       discounted  lease rentals  discussed  above, in the event of default by a
       lessee,  the  financial  institution  has a first lien on the  underlying
       leased equipment, with no further recourse against the Partnership or the
       Partnership's  assets. The purchaser cannot be the owner of the equipment
       for  financial  reporting  purposes  because the purchaser has not made a
       sufficient  investment  in the  equipment  and does not have  significant
       risks of ownership.  Therefore,  the transaction  cannot be recorded as a
       sale.  Accordingly,   cash  proceeds  from  financings  related  to  such
       transactions  are  recorded  on the balance  sheet as financed  operating
       lease  rentals.  As lessees  make  payments  to  financial  institutions,
       leasing revenue and interest expense are recorded.

                                      -21-

<PAGE>


                      CAPITAL PREFERRED YIELD FUND-II, L.P.
                    NOTES TO FINANCIAL STATEMENTS, Continued


 1.  Organization and Summary of Significant Accounting Policies, continued
     -----------------------------------------------------------

     Allowance for Losses

       An allowance for losses is maintained at levels determined by the general
       partner to adequately  provide for any  other-than-temporary  declines in
       asset values. In determining losses, economic conditions, the activity in
       the  used  equipment   markets,   the  effect  of  actions  by  equipment
       manufacturers,  the financial condition of lessees,  the expected courses
       of action by lessees with regard to leased  equipment at  termination  of
       the  initial  lease term,  and other  factors  which the general  partner
       believes are relevant, are considered. Asset chargeoffs are recorded upon
       the  termination  or  remarketing  of the  underlying  assets.  The lease
       portfolio  is  reviewed  quarterly  to  determine  the  adequacy  of  the
       allowance for losses.

     Transactions Subsequent to Initial Lease Termination

       After the initial term of equipment under lease expires, the equipment is
       either sold or re-leased to the existing  lessee or another  third party.
       The  remaining  net book value of  equipment  sold is removed and gain or
       loss  recorded  when  equipment is sold.  The  accounting  for  re-leased
       equipment  is  consistent  with  the  accounting   described  under  "Net
       Investment  in Direct  Financing  Leases"  and  "Equipment  on  Operating
       Leases" above.

     Income Taxes

       No provision for income taxes has been made in the  financial  statements
       since  taxable  income  or loss is  recorded  in the tax  returns  of the
       individual partners.

     Cash Equivalents

       The Partnership considers short-term,  highly liquid investments that are
       readily convertible to known amounts of cash to be cash equivalents. Cash
       equivalents  of  approximately  $1,853,000 and $1,718,000 at December 31,
       1997 and 1996,  respectively,  are  comprised of  investments  in a money
       market fund which invests  solely in U.S.  Government  securities  having
       maturities of 90 days or less.

     Equipment Held for Sale or Re-lease

       Equipment  held for sale or  re-lease,  recorded  at the lower of cost or
       market value  expected to be realized,  consists of equipment  previously
       leased to end users which has been returned to the Partnership  following
       lease expiration.




                                      -22-

<PAGE>


                      CAPITAL PREFERRED YIELD FUND-II, L.P.
                    NOTES TO FINANCIAL STATEMENTS, Continued


 1.  Organization and Summary of Significant Accounting Policies, continued
     -----------------------------------------------------------

     Net Income Per Class A Limited Partner Unit

       Net income per Class A limited  partner  unit is computed by dividing the
       net income  allocated  to the Class A limited  partners  by the  weighted
       average number of Class A limited  partner units  outstanding  during the
       period.

 2.  Net Investment in Direct Finance Leases
     ---------------------------------------

     The  components  of the net  investment  in  direct  finance  leases  as of
     December 31, 1997 and 1996 were:

                                                    1997             1996
                                                    ----             ----

     Minimum lease payments receivable          $ 3,587,896     $   4,989,455
     Estimated residual values                    1,012,105         1,091,813
     Less unearned income                          (760,314)       (1,102,445)
                                                -----------     -------------
                                                $ 3,839,687     $   4,978,823
                                                ===========     =============

 3.  Leased Equipment
     ----------------

     The  Partnership's  investments  in equipment on operating  leases by major
     classes as of December 31, 1997 and 1996 were:

                                                       1997              1996
                                                       ----              ----

     Transportation and industrial equipment    $  24,733,957      $ 26,364,473
     Computers and peripherals                      5,594,147        11,145,021
     Office furniture and equipment                 3,475,088         3,784,347
     Other                                          1,025,171         2,269,502
                                                -------------      ------------
                                                   34,828,363        43,563,343
     Less:
       Accumulated depreciation                   (16,649,369)      (17,136,117)
       Allowance for losses                          (150,954)         (255,956)
                                                -------------     ------------
                                                $  18,028,040      $ 26,171,270
                                                =============      ============

     Depreciation expense for 1997, 1996 and 1995 was $7,066,062, $7,856,952 and
     $9,618,860, respectively.


                                      -23-

<PAGE>


                      CAPITAL PREFERRED YIELD FUND-II, L.P.
                    NOTES TO FINANCIAL STATEMENTS, Continued


 4.  Future Minimum Lease Payments
     -----------------------------

     Future  minimum lease payments  receivable  from  non-cancelable  leases at
     December 31, 1997 are as follows:

        Year Ending December 31,                  DFLs                    OLs
        ------------------------                  ----                    ---

                1998                          $ 1,303,503           $  6,205,073
                1999                            1,095,244              3,910,746
                2000                              795,939              1,491,996
                2001                              393,210                389,664
                2000                                    -                 12,674
                Thereafter                              -                  7,392
                                              -----------           ------------
                             Total            $ 3,587,896           $ 12,017,545
                                              ===========           ============

 5.  Discounted Lease Rentals
     ------------------------

     Discounted lease rentals  outstanding at December 31, 1997 bear interest at
     rates primarily  ranging between 6% and 11%.  Aggregate  maturities of such
     nonrecourse obligations are as follows:

         Year Ending December 31,
         ------------------------

                  1998                        $ 3,453,519
                  1999                          2,364,966
                  2000                          1,529,599
                  2001                            613,798
                                              -----------
                             Total            $ 7,961,882
                                              ===========

 6.  Financed Operating Lease Rentals
     --------------------------------

     Financed  operating  lease  rentals  outstanding  at December 31, 1997 bear
     interest at 8.25%. Aggregate maturities of such non-recourse financings are
     as follows:

          Year Ending December 31,
          ------------------------

                  1998                        $ 1,583,571
                  1999                            621,307
                  2000                             52,157
                                              -----------
                  Total                       $ 2,257,035
                                              ===========

                                      -24-

<PAGE>


                      CAPITAL PREFERRED YIELD FUND-II, L.P.
                    NOTES TO FINANCIAL STATEMENTS, Continued


 7.  Transactions With the General Partner and Affiliates
     ----------------------------------------------------

     Origination Fee and Evaluation Fee
     ----------------------------------

     The  general  partner  receives  a fee  equal to 4% of the  sales  price of
     equipment sold to the  Partnership  (up to a maximum  cumulative  amount as
     specified  in  the  Partnership   Agreement),   2%,  of  which,  represents
     compensation for selecting, negotiating and consummating the acquisition of
     the  equipment  and  another  2%, of which,  represents  reimbursement  for
     services  rendered in connection  with  evaluating  the  suitability of the
     equipment  and  the  creditworthiness  of  the  lessees.   Origination  and
     evaluation  fees totaled  approximately  $39,000,  $550,000 and $117,000 in
     1997,  1996 and 1995,  respectively,  all of which were  capitalized by the
     Partnership  as part of the cost of equipment  on operating  leases and net
     investment in direct finance leases.

     Management Fees
     ---------------

     The general  partner earns  management  fees as  compensation  for services
     performed in connection with managing the Partnership's  equipment equal to
     2% of gross rentals  received as permitted  under terms of the  Partnership
     Agreement. The general partner earned approximately $201,000,  $287,000 and
     $276,000 of management fees during 1997, 1996 and 1995, respectively.

     Direct Services
     ---------------

     The  general  partner  and  its  affiliates  provide  accounting,  investor
     relations,  billing, collecting, asset management, and other administrative
     services to the Partnership. The Partnership reimburses the general partner
     for these services  performed on its behalf as permitted under the terms of
     the Partnership Agreement. The Partnership recorded approximately $108,000,
     $159,000 and $81,000 of direct  services  from the general  partner  during
     1997, 1996 and 1995, respectively.

     Equipment Purchases
     -------------------

     The Partnership  purchased  equipment from CAII with a total purchase price
     of  approximately  $1,085,000,  $14,395,000  and $3,032,000  (including $0,
     $6,403,000 and $593,000 of discounted  lease rentals) during 1997, 1996 and
     1995,  respectively.  The  Partnership  purchased  the  equipment at CAII's
     historical  cost plus  reimbursement  of other net  acquisition  costs,  as
     provided for in the Partnership Agreement.

     Payables to Affiliates
     ----------------------

     Payables to affiliates  consists of management  fees,  direct  services and
     expenses payable to the general partner and its affiliates.


                                      -25-

<PAGE>


                      CAPITAL PREFERRED YIELD FUND-II, L.P.
                    NOTES TO FINANCIAL STATEMENTS, Continued


 8.  Tax Information, (unaudited)
     ---------------

     The following reconciles net income for financial reporting purposes to the
     income (loss) for federal  income tax purposes for the years ended December
     31,:

<TABLE>
<CAPTION>


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

    <S>                                       <C>               <C>            <C>         
     Net income per financial statements       $  1,456,778      $   231,258    $  1,009,230
     Differences due to:
       Direct finance leases                        947,137          877,055       1,260,841
       Depreciation                              (1,511,510)      (2,053,702)     (1,533,457)
       Provision for losses                         325,000          900,000         610,000
       Gain/loss on sale of assets                 (468,349)        (385,166)     (1,123,258)
       Other                                     (1,028,690)       1,073,866          63,067
                                               ------------      -----------    ------------
     Partnership income (loss) for
     federal income tax purposes               $   (279,634)     $   643,311    $    286,423
                                               ============      ===========    ============

</TABLE>

     The following reconciles partners' capital for financial reporting purposes
     to  partners'  capital for federal  income tax purposes for the years ended
     December 31,:

<TABLE>
<CAPTION>


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

    <S>                                                    <C>             <C>             <C>         
     Partners' capital per financial statements             $  13,300,362   $  16,868,246   $ 20,866,336
     Differences due to:
       Commissions and offering costs                           4,868,944       4,868,944      4,868,944
       Direct finance leases                                    4,780,803       3,833,666      2,956,611
       Depreciation                                           (11,988,943)    (10,477,433)    (8,423,731)
       Provision for losses                                       325,000         900,000        610,000
       Gain/loss on sale of assets                               (468,349)       (385,166)    (1,123,258)
       Other                                                      670,811       1,190,636        606,406
                                                            -------------   -------------   ------------
     Partners' capital for federal income tax purposes      $  11,488,628   $  16,798,893   $ 20,361,308
                                                            =============   =============   ============
</TABLE>

 9.  Concentration of Credit Risk
     ----------------------------

     Approximately 72% of the Partnership's  equipment under lease was leased to
     investment  grade  lessees.  Pursuant  to  the  Partnership  Agreement,  an
     investment  grade  lessee is a company (i) with net worth in excess of $100
     million (and no debt issues that are rated),  or (ii) with a credit  rating
     of not less than Baa as determined by Moody's  Investor  Service,  Inc., or
     comparable credit rating as determined by another  recognized credit rating
     service;  or  (iii)  a  lessee,  all of  whose  lease  payments  have  been
     unconditionally  guaranteed  or supported by a letter of credit issued by a
     company meeting one of the above requirements.


                                      -26-

<PAGE>


                      CAPITAL PREFERRED YIELD FUND-II, L.P.
                    NOTES TO FINANCIAL STATEMENTS, Continued


 9.  Concentration of Credit Risk, continued
     ----------------------------

     The  Partnership's  cash balance is maintained  with a high credit  quality
     financial institution. At times such balances may exceed the FDIC insurance
     limit  due to  receipt  of  lockbox  amounts  that  have  not  cleared  the
     presentment  bank  (generally for less than two days).  As the funds become
     available, they are invested in a money market mutual fund.

10.  Disclosures about Fair Value of Financial Instruments
     -----------------------------------------------------

     Statement of Financial  Standards No. 107,  Disclosures about Fair Value of
     Financial   Instruments   specifically  excludes  certain  items  from  its
     disclosure  requirements  such as the  Partnership's  investment  in leased
     assets.  The  carrying  amounts  at  December  31,  1997  for cash and cash
     equivalents, accounts receivable, accounts payable and accrued liabilities,
     payable to  affiliates,  rents and sale  proceeds  received  in advance and
     distributions  payable to partners approximate their fair values due to the
     short maturity of these instruments.

     As of December 31, 1997,  discounted  lease rentals and financed  operating
     lease rentals of approximately $7,962,000 and $2,257,000, respectively, had
     fair values of $7,082,000  and  $2,031,000.  The fair values were estimated
     utilizing  market rates of comparable  debt having  similar  maturities and
     credit quality as of December 31, 1997.


                                      -27-

<PAGE>








                          INDEPENDENT AUDITORS' REPORT
                          ----------------------------



THE PARTNERS
CAPITAL PREFERRED YIELD FUND-II, L.P.:

Under date of  February 6, 1998,  we  reported on the balance  sheets of Capital
Preferred Yield Fund-II,  L.P. as of December 31, 1997 and 1996, and the related
statements of income, partners' capital, and cash flows for each of the years in
the three-year period ended December 31, 1997, as contained in the Partnership's
annual report on Form 10-K for the year 1997.  In connection  with our audits of
the aforementioned  financial statements,  we also audited the related financial
statement  Schedule  II, as listed in the  accompanying  index.  This  financial
statement  schedule is the responsibility of the Partnership's  management.  Our
responsibility  is to express an opinion on this  financial  statement  schedule
based on our audits.

In our opinion,  the related financial  statement  schedule,  when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.

                                    /s/KPMG Peat Marwick LLP
                                    ------------------------
                                    KPMG PEAT MARWICK LLP

Denver, Colorado
February 6, 1998




                                      -28-

<PAGE>



                      CAPITAL PREFERRED YIELD FUND-II, L.P.

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
              for the years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>


COLUMN A                              COLUMN B          COLUMN C         COLUMN D          COLUMN E
--------                              --------          --------        ----------         --------
                                     Balance at         Additions                           Balance
                                     beginning          charged to                          at end
Classification                       of period           expenses      Deductions (1)      of period
--------------                       ----------         ----------     --------------     -----------
<S>                                  <C>                <C>              <C>               <C>      

            1997
-------------------------------

Allowance for losses:
  Accounts receivable                 $   25,000         $       -        $        -        $  25,000
  Equipment on operating leases          255,956           325,000          (430,002)         150,954
                                      ----------         ---------        ----------        ---------

                                      $  280,956         $ 325,000        $ (430,002)       $ 175,954
                                      ==========         =========        ==========        =========


           1996
-------------------------------

Allowance for losses:
  Accounts receivable                 $   25,000         $       -        $       -         $  25,000
  Equipment on operating leases          291,488           900,000         (935,532)          255,956
                                      ----------         ---------        ---------         ---------

                                      $  316,488         $ 900,000        $(935,532)        $ 280,956
                                      ==========         =========        ==========        =========


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

Allowance for losses:
  Accounts receivable                 $   25,000         $        -       $        -        $  25,000
  Equipment on operating leases          380,537            610,000         (699,049)         291,488
                                      ----------         ----------       ----------        ---------

                                      $  405,537         $  610,000       $ (699,049)       $ 316,488
                                      ==========         ==========       ==========        =========


</TABLE>







1) Principally charge-offs of assets against the established allowances.




                  See accompanying independent auditors' report

                                      -29-

<PAGE>



Item 9.  Disagreements on Accounting and Financial Disclosures
         -----------------------------------------------------

None

Item 10. Directors and Executive Officers of the Partnership
         ---------------------------------------------------

The Partnership  has no officers and directors.  The general partner manages and
controls  the  affairs of the  Partnership  and has general  responsibility  and
authority in all matters  affecting its  business.  Information  concerning  the
directors and executive officers of the general partner is as follows:

                      CAI Equipment Leasing III Corporation

            Name                       Positions Held
            ----                       --------------

      John F. Olmstead          President and Director

      Dennis J. Lacey           Senior Vice President and Director

      Anthony M. DiPaolo        Senior Vice President, Principle Financial and
                                Chief Administrative Officer and Director

      Richard H. Abernethy      Vice President and Director

      John A. Reed              Vice President, Assistant Secretary and Director

      Joseph F. Bukofski        Vice President, Assistant Secretary and Director

      Robert A. Golden          Director

      Mick Myers                Director

      Ann Danielson             Assistant Vice President

      David J. Anderson         Chief Accounting Officer and Secretary

JOHN F. OLMSTEAD, age 53, joined CAII as Vice President in December,  1988, is a
Senior  Vice  President  of CAI and CAII  and is head of  CAII's  Public  Equity
division.  He has served as Chairman of the Board for Neo-kam Industries,  Inc.,
Matchless Metal Polish Company, Inc. and ACL, Inc. for more than 5 years. He has
over 20 years of experience  holding various  positions of responsibility in the
leasing  industry.  Mr. Olmstead holds a Bachelor of Science degree from Indiana
University and a Juris Doctorate degree from Indiana Law School.

DENNIS J. LACEY,  age 44, joined CAI as Vice President,  Operations,  in October
1989.  Mr. Lacey was  appointed  Treasurer on January 1, 1991,  Chief  Financial
Officer on April 11, 1991, a director on July 19, 1991,  and President and Chief
Executive  Officer on September 6, 1991.  Prior to joining CAI, Mr. Lacey was an
audit partner for the public accounting firm of Coopers & Lybrand.  Mr. Lacey is
also a director and senior officer of CAII, CAI Equipment  Leasing I Corp.,  CAI
Equipment  Leasing II Corp.,  CAI  Equipment  Leasing III Corp.,  CAI  Equipment
Leasing IV Corp., CAI Equipment  Leasing V Corp., CAI Leasing Canada,  Ltd., CAI
Partners   Management   Company,   CAI   Securities   Corporation,   CAI   Lease
Securitization I Corp. and Capital Equipment Corporation  (collectively referred
to  herein as the "CAI  Affiliates"),  all of which  are  first- or  second-tier
wholly-owned subsidiaries of CAI.

                                      -30-

<PAGE>



Item 10. Directors and Executive Officers of the Partnership, continued
         ---------------------------------------------------

ANTHONY M. DIPAOLO,  age 39, joined CAII in July 1990 as Assistant Treasurer and
is currently Senior Vice  President-Chief  Financial  Officer.  He also held the
positions   of   Senior   Vice    President-Controller    and   Assistant   Vice
President-Credit  Administration  for the Company.  Mr. DiPaolo has held similar
senior financial management positions with two public companies between 1986 and
June 1990, and prior to then was an audit manager for the public accounting firm
of  Coopers &  Lybrand.  Mr.  DiPaolo  holds a  Bachelor  of  Science  degree in
Accounting from the University of Denver.

RICHARD H. ABERNETHY,  age 44, joined CAII in April 1992 as Equipment  Valuation
Manager  and  currently  serves  as Vice  President  of  Asset  Management.  Mr.
Abernethy has thirteen years experience in the leasing industry, including prior
positions with Barclays  Leasing Inc.,  from November 1986 to February 1992, and
Budd Leasing  Corporation,  from January 1981 to November  1986.  Mr.  Abernethy
holds a Bachelor of Arts in Business Administration from the University of North
Carolina at Charlotte.

JOHN A. REED,  age 42,  joined  CAII in  January  1990 as the Tax  Director  and
Assistant Secretary.  Mr. Reed is currently the Vice President-Manager,  Capital
Markets Group and is  responsible  for  obtaining  off balance sheet  financing,
syndications and private  programs.  Prior to joining the Capital Markets Group,
Mr. Reed was Vice President of both Marketing Administration and Credit and Debt
Administration.  He spent seven and one half years with Coopers & Lybrand in the
Tax Department and served on CAII's tax consulting  engagement during that time.
Mr.  Reed holds a Bachelor  of Arts  degree in Social  Sciences  and  Masters of
Science in Accounting, from Colorado State University.

JOSEPH F. BUKOFSKI, age 43, joined CAII in June 1990 as a Financial Analyst. Mr.
Bukofski is currently the Vice President of Marketing and is responsible for all
lease  documentation  and management of transaction  structuring and processing.
Prior to joining the  Marketing  Department,  Mr.  Bukofski was  Assistant  Vice
President and Controller.  Prior to joining the Company, he was a geologist with
Barringer  Geoservices,  Inc. for eleven years. Mr. Bukofski holds a Bachelor of
Science degree in Secondary Education - Earth Science from Bloomsburg University
and a Masters of Science in Accounting from the University of Colorado.

ROBERT A. GOLDEN,  age 52, is Vice  President and the National  Sales Manager of
the Company.  Mr. Golden joined the Company in 1993 as a Branch Manager.  He was
promoted  to his  current  position  in  September  1994.  Prior to joining  the
Company, he was an Executive Vice President with the U.S. Funds Group, President
of BoCon Capital  Group and Vice  President  with  Ellco/GE  Capital for fifteen
years. Mr. Golden is an officer, but not a director, of CAII.

MICK MYERS, age 40, joined CAI in February 1992 as a Senior  Portfolio  Manager.
Currently he is Assistant Vice President of Asset Management. Mr. Myers has nine
years experience in the leasing industry.  Previously,  he has held the position
of Senior End of Lease  Negotiator  with  ELLCO/GE  Capital.  Mr.  Myers holds a
Bachelor of Science degree from the University of Wyoming.




                                      -31-

<PAGE>



Item 10. Directors and Executive Officers of the Partnership, continued
         ---------------------------------------------------

ANN DANIELSON,  age 34, joined CAII in February 1990 and is currently  Assistant
Vice  President,  Assistant  Treasurer and is responsible for the Company's cash
management and collections functions. Prior to joining the Company, she was with
U.S.  West  financial  Services  and Coopers & Lybrand.  Ms.  Danielson  holds a
Bachelor of Arts Degree from the University of Northern Iowa.

DAVID J.  ANDERSON,  age 45,  joined CAII in August 1990 as Manager of Billing &
Collections and currently  serves as Assistant  Vice-President/Chief  Accounting
Officer. Prior to joining CAII, Mr. Anderson was Vice-  President/Controller for
Systems  Marketing,  Inc.,  from 1985 to 1990,  and  previous to that worked  in
several senior staff  positions at the Los Alamos  National  Laboratory and with
Ernst & Whinney. Mr. Anderson holds a Bachelor of Business Administration degree
in Accounting from the University of Wisconsin.


Item 11. Executive Compensation
         ----------------------

No compensation was paid by the Partnership to the officers and directors of the
general partner. See Item 13 of this Report,  "Certain Relationships and Related
Transactions",  for a  description  of the  compensation  and  fees  paid to the
general partner and its affiliates by the Partnership during 1997.


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

     (a)    As of the date hereof,  no person is known by the  Partnership to be
            the beneficial  owner of more than 5% of the Class A limited partner
            units  of the  Partnership.  The  Partnership  has no  directors  or
            officers,  and neither  the general  partner nor the Class B limited
            partner of the Partnership own any Class A limited partner units.

            CAII,  an  affiliate  of the  general  partner  is the sole  Class B
            limited partner.

            CAI Equipment Leasing III Corp. is the general partner.

            The names  and  addresses  of the  general  partner  and the Class B
            limited partner are as follows:


            General Partner
            ---------------

            CAI Equipment Leasing III Corp.
            7175 West Jefferson Avenue
            Suite 4000
            Lakewood, Colorado 80235



                                      -32-

<PAGE>



Item 12. Security   Ownership  of  Certain  Beneficial  Owners  and  Management,
         -----------------------------------------------------------------------
         continued

            Class B Limited Partner
            -----------------------

            Capital Associates International, Inc.
            7175 West Jefferson Avenue
            Suite 4000
            Lakewood, Colorado 80235

     (b)    No  directors  or  officers  of the  general  partner or the Class B
            limited  partner  owned  any  Class A  limited  partner  units as of
            December 31, 1997.

     (c)    The Partnership knows of no arrangements, the operation of which may
            at  a  subsequent  date  result  in  a  change  in  control  of  the
            Partnership.


Item 13. Certain Relationships and Related Transactions
         ----------------------------------------------

The general partner and its affiliates  receive  certain types of  compensation,
fees  or  other   distributions   in  connection  with  the  operations  of  the
Partnership.

Following is a summary of the amounts paid or payable to the general partner and
its affiliates during 1997:

Origination Fee and Evaluation Fee
----------------------------------

The general partner earns a fee equal to 4% of the sales price of equipment sold
to  the  Partnership,   2%  of  which  represents  compensation  for  selecting,
negotiating  and  consummating  the acquisition of the equipment and 2% of which
represents reimbursement for services rendered in connection with evaluating the
suitability  of  the  equipment  and  the  credit   worthiness  of  the  lessee.
Origination  and evaluation fees totaled  approximately  $39,000 in 1997, all of
which were  capitalized  by the  Partnership as part of the cost of equipment on
operating leases and net investment in direct finance leases.

Management Fees
---------------

The general partner earns management fees as compensation for services  rendered
in connection  with managing the  Partnership's  equipment  equal to 2% of gross
rentals received. Such fees totaled approximately $201,000 for 1997.

Accountable General and Administrative Expenses
-----------------------------------------------

The general  partner is entitled to  reimbursement  of certain  expenses paid on
behalf  of  the   Partnership   which  are  incurred  in  connection   with  the
Partnership's  operations.  Such reimbursable expenses amounted to approximately
$225,000 during 1997.

                                      -33-

<PAGE>



Item 13. Certain Relationships and Related Transactions, continued
         ----------------------------------------------

Additionally,   the  general  partner  is  allocated  1%  of  Partnership   cash
distributions  and net income  relating to its general  partner  interest in the
Partnership.  Distributions  and net income  allocated  to the  general  partner
totaled approximately $50,000 and $50,000, respectively, for 1997. Distributions
and net income  allocated to the Class B limited partner  totaled  approximately
$36,000 and $14,000, respectively, for 1997.

During 1997,  the  Partnership  acquired the  equipment as described  below from
CAII:

<TABLE>
<CAPTION>


                                                                                               Cost to
                                                                                             Partnership
                                                                                              Including
   Date                                                                         Cost to      Acquisition      Debt         Annual
Purchased   Lessee                   Term    Equipment Description               CAII            Fees*       Assumed        Rents
---------   ------                   ----    ---------------------            -----------    -----------     -------      ---------

 <S>       <C>                       <C>    <C>                              <C>            <C>             <C>          <C>      
  01/97     System One                36     Network equipment                $   126,250    $   131,300     $    0       $  44,775
  01/97     Consolidated Diesel       36     Furniture                             23,035         23,956          0           7,448
  02/97     General Motors Corp.      36     Transport - trucks                    20,947         21,785          0           6,605
  02/97     General Motors Corp.      36     FF & E                                32,425         33,722          0           9,412
  03/97     General Motors Corp.      36     FF & E                                15,163         15,770          0           5,076
  05/97     E Trade                   31     Desktop PC                           496,447        512,991          0         188,319
  06/97     General Motors Corp.      36     FF & E                                 9,631         10,016          0           3,224
  07/97     Texas Instruments         36     Manufacturing-semiconductor          300,558        312,581          0          83,675
                                                                              -----------    -----------     ------       ---------
            Total operating leases sold to Partnership                          1,024,451      1,062,284          0         348,534
                                                                              -----------    -----------     ------       ---------
  03/97     Consolidated Diesel       36     Office automation                     21,605         22,469          0           7,805
                                                                              -----------    -----------     ------       ---------
            Total direct finance leases sold to Partnership                        21,605         22,469          0           7,805
                                                                              -----------    -----------     ------       ---------
            Total sold to Partnership                                         $ 1,046,056    $ 1,084,753     $    0       $ 356,339
                                                                              ===========    ===========     ======       =========
</TABLE>

*    The lower of (a) the price for the  equipment  plus all costs  incurred  in
     maintaining the equipment (including,  without limitation,  the reasonable,
     necessary and actual  expenses,  as determined in accordance with generally
     accepted accounting principles, of storage, carrying, warehousing,  repair,
     marketing,  financing  and  taxes)  from the date of  acquisition  thereof,
     provided  that any proceeds  accrued from the first basic rent date thereof
     and retained by the general  partner or an  affiliate  thereof from leasing
     the equipment or any other  arrangement with respect to the equipment shall
     be deemed a credit towards the purchase price paid by the  Partnership,  or
     (b)  the  fair  market  value  of  such  equipment,  as  determined  by  an
     independent   nationally  recognized  appraiser  selected  by  the  general
     partner.

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

(a) and (d)   The following documents are filed as part of this Report:

         1.   Financial Statements: (Incorporated by reference to Item 8 of this
              Report, "Financial Statements and Supplementary Data").

         2.   Financial Statement Schedule: (Incorporated by reference to Item 8
              of this Report, "Financial Statements and Supplementary Data").

              (b)     The  Partnership  did not  file  any  reports  on Form 8-K
                      during the quarter ended December 31, 1997.

                                      -34-

<PAGE>



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

              (c)     Exhibits required to be filed.

              Exhibit                              Exhibit
              Number                                Name
              ------                                ----

                4.1*      Capital  Preferred  Yield Fund-II Limited  Partnership
                          Agreement

                4.2*      First Amendment to Limited Partnership Agreement dated
                          June 12, 1992

                4.3*      Amended  and Restated Agreement of Limited Partnership
                          of Capital Preferred Yield Fund-II, L.P.

                 *        Not filed herewith. In  accordance with Rule 12b-32 of
                          the   General   Rules   and   Regulations   under  the
                          Securities  Exchange Act of 1934, reference is made to
                          the document previously filed with the Commission.

                                      -35-

<PAGE>


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

Dated:   March 25, 1998          Capital Preferred Yield Fund-II, L.P.

                                 By:  CAI Equipment Leasing III Corporation

                                 By:  /s/John F. Olmstead
                                      -------------------------------------
                                      John F. Olmstead
                                      President and Director

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 general partner
of the Partnership and in the capacities indicated on March 25, 1998.

Signature                            Title
---------                            -----

/s/John F. Olmstead
-------------------------
John F. Olmstead            President and Director

/s/Dennis J. Lacey
-------------------------
Dennis J. Lacey             Senior Vice President and Director

/s/Anthony M. DiPaolo    
-------------------------   Senior Vice President, Principle Financial and Chief
Anthony M. DiPaolo          Administrative Officer and Director

/s/Richard H. Abernethy
-------------------------
Richard H. Abernethy        Vice President and Director

/s/John A. Reed
-------------------------
John A. Reed                Vice President, Assistant Secretary and Director

/s/Joseph F. Bukofski
-------------------------
Joseph F. Bukofski          Vice President, Assistant Secretary and Director

/s/Robert A. Golden
-------------------------
Robert A. Golden            Director

/s/Mick Myers
-------------------------
Mick Myers                  Director

/s/Ann Danielson
-------------------------
Ann Danielson               Assistant Vice President

/s/David J. Anderson
-------------------------
David J. Anderson           Chief Accounting Officer and Secretary

                                      -39-