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, 1996

[  ]      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 42


                               Page 1 of 43 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 an affiliate 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,  the Class B limited partner  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  CAII the largest
single investor in the Partnership.  In addition,  the Class B limited partner's
interest in Distributable  Cash is subordinated to the Class A limited partners'
interest.   The   contributions  of  the  Class  B  limited  partner  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 Limited Partners during the reinvestment  period (a
period that ends  approximately  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 one to four years of the end of the
reinvestment period.

During 1996, 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, but was not limited to, point of sale  equipment,  transportation
equipment, computer equipment, above ground mining equipment and printed circuit
board   manufacturing   equipment.   See  Item  13  of  this  report,   "Certain
Relationships and Related  Transactions" for the listing of equipment  purchased
during 1996. The Partnership  expects that a majority of the equipment purchased
during 1997 will be similar in nature to that mentioned above.

The Partnership may assign the rentals from leases to financial institutions, or
acquire  leases  subject  to such  assignments,  at  fixed  interest  rates on a
nonrecourse  basis. This non-recourse debt financing will be utilized to finance
the purchase of equipment  under lease,  or to invest the proceeds  therefrom in
additional  equipment  under  lease.  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 1996, the Partnership leased equipment to investment grade lessees in the
automobile  manufacturing  and servicing,  manufacturing,  and other industries.
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 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 may limit 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 ultimate
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.  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).  Interest rates have  fluctuated
over the past several years as follows:  (i) rates decreased from 1993 until the
early part of 1994, (ii) rates then increased through the early part of 1995 and
(iii) rates have decreased to the present time. It is unclear  whether  interest
rates will  continue to decrease,  and what effect,  if any,  such interest rate
decreases will have on lease rates.

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 1996.


                                       -3-

<PAGE>




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

Currently the  Partnership  is in its  reinvestment  period (as set forth in the
Prospectus).  The Partnership will enter its liquidation period (as set forth in
the Prospectus) beginning in April 1997.

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 1997 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, 1996.


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


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

(b)       As of December 31, 1996,  the  number of  Class A limited partners was
          2,375.









                                       -4-

<PAGE>



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

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

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


                                                     Distributions Per
                                                   $250 Class A limited
            For the               Payment         partner unit (computed           Total
          Month Ended           Made During        on weighted average)        Distributions
          -----------           -----------       ----------------------       -------------

         <S>                  <C>                     <C>                    <C>
          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
                                                        =======               ===========
</TABLE>


          A substantial  portion of such distributions is expected to constitute
          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 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,  1996,  totaling
          $334,945,  was paid to the Class A  limited  partners  during  January
          1997. Distributions to the general partner and Class B limited partner
          during  1996  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 1997 to (1) meet current
          operating  requirements,  (2) enable it to fund cash  distributions to
          the Class A and Class B limited  partners at  annualized  rates of 12%
          and 11%  (substantial  portions of which are  expected  to  constitute
          returns of capital),  respectively, on their capital contributions and
          (3) reinvest in  additional  equipment  under  leases,  provided  that
          suitable equipment can be identified and acquired.

                                       -5-

<PAGE>




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


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

          The Partnership is currently in its reinvestment period and will enter
          its liquidation  period (as defined in the  Partnership  Agreement) in
          April 1997.  During the  reinvestment  period,  available cash will be
          distributed  or  reinvested  per  items (2) and (3)  described  in the
          preceding   paragraph.   However,   during  the  liquidation   period,
          reinvestment  will  cease  and  the  excess  cash,  if  any,  will  be
          distributed  to  the  partners  in  accordance  with  the  Partnership
          Agreement.  Therefore,  it is anticipated  that during the liquidation
          period in 1997,  cash  distributions  to the Class A limited  partners
          will be in excess of 12% of their contributed  capital.  Distributions
          during the liquidation period will be based upon cash availability and
          will vary and all distributions are expected to be a return of capital
          for economic purposes.


          During  1995,  the  Partnership  made  twelve  (12)  distributions  (a
          substantial portion of which constituted a return of capital) to Class
          A limited partners, as follows:
<TABLE>
<CAPTION>


                                                     Distributions Per
                                                   $250 Class A limited
            For the               Payment         partner unit (computed           Total
          Month Ended           Made During        on weighted average)        Distributions
          -----------           -----------       ----------------------       -------------

         <S>                   <C>                    <C>                    <C>
          December 31, 1994     January 1995           $   2.50               $   338,725
          January 31, 1995      February 1995              2.50                   338,725
          February 28, 1995     March 1995                 2.50                   338,725
          March 31, 1995        April 1995                 2.50                   338,075
          April 30, 1995        May 1995                   2.50                   338,075
          May 31, 1995          June 1995                  2.50                   338,075
          June 30, 1995         July 1995                  2.50                   337,575
          July 31, 1995         August 1995                2.50                   337,575
          August 31, 1995       September 1995             2.50                   337,530
          September 30, 1995    October 1995               2.50                   337,330
          October 31, 1995      November 1995              2.50                   337,330
          November 30, 1995     December 1995              2.50                   337,250
                                                       --------               -----------

                                                        $ 30.00               $ 4,054,990
                                                        =======               ============
</TABLE>






                                       -6-

<PAGE>



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

The following  selected  financial  data relates to 1996 through 1992.  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>


                                                                                      Years Ended December 31,
                                                         ---------------------------------------------------------------------------
                                                             1996            1995            1994            1993            1992
                                                             ----            ----            ----            ----            ----

<S>                                                     <C>             <C>             <C>             <C>             <C>        
Total revenue                                            $10,870,083     $12,719,445     $11,967,912     $ 6,434,945     $   583,538
Net income                                                   231,258       1,009,230         502,147         133,229           7,617
Net income per weighted average Class A
 limited partner unit outstanding                               1.40            7.09            3.52            1.43            0.43
Total assets                                              33,516,785      31,806,534      39,962,561      34,740,737      10,793,916
Discounted lease rentals                                  15,559,029      10,009,561      15,037,678      17,287,511       4,828,090
Distributions declared to partners                         4,101,808       4,131,126       3,847,041       1,735,555         293,419
Distributions declared per weighted average
  Class A limited partner unit                                 29.95           30.00           30.08           30.08           16.72
</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                         Statements of Income
                                                   for the years         The effect on          for the years          The effect on
                                                 ended December 31,      net income of        ended December 31,       net income of
                                            --------------------------      changes       --------------------------      changes 
                                                1996           1995      between years       1995            1994      between years
                                            -----------    -----------   -------------    -----------    -----------   -------------

    <S>                                    <C>            <C>            <C>            <C>            <C>            <C>        
     Leasing margin                         $ 1,470,270    $ 1,815,691    $  (345,421)   $ 1,815,691    $ 1,289,127    $   526,564
     Equipment sales margin                     189,435        248,350        (58,915)       248,350         20,437        227,913
     Interest income                            201,719         65,426        136,293         65,426        161,329        (95,903)
     Management fees paid to general
       partner                                 (286,973)      (275,888)       (11,085)      (275,888)      (260,429)       (15,459)
     Direct services from general partner      (158,770)       (81,229)       (77,541)       (81,229)       (81,024)          (205)
     General and administrative expenses       (284,423)      (153,120)      (131,303)      (153,120)      (272,293)       119,173
     Provision for losses                      (900,000)      (610,000)      (290,000)      (610,000)      (355,000)      (255,000)
                                            -----------    -----------    -----------    -----------    -----------    -----------
            Net income                      $   231,258    $ 1,009,230    $  (777,972)   $ 1,009,230    $   502,147    $   507,083
                                            ===========    ===========    ===========    ===========    ===========    ===========
</TABLE>


The Partnership is in the latter stages of its reinvestment period (scheduled to
end in March 1997, as defined in the Partnership Agreement). As the reinvestment
period  progresses,  purchases of equipment under lease are decreasing,  initial
leases  are  expiring  and the  amount  of  equipment  being  remarketed  (i.e.,
re-leased, renewed, or sold) is increasing. Because a leasing portfolio declines
in size as it matures,  these  circumstances  have  resulted in a decline in the
Partnership's   leasing  portfolio   (referred  to  in  further  discussions  as
"portfolio run-off").

                                       -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:
<TABLE>
<CAPTION>

 
                                                                   Years Ended December 31,
                                                       ----------------------------------------------
                                                            1996             1995             1994
                                                            ----             ----             ----

<S>                                                   <C>              <C>              <C>         
Operating lease rentals                                $ 10,028,052     $ 11,843,447     $ 11,150,234
Direct finance lease income                                 450,877          562,222          635,912
Depreciation and amortization                            (7,856,952)      (9,618,860)      (9,301,693)
Interest expense on discounted lease rentals               (873,433)        (971,118)      (1,195,326)
Interest expense on financed operating lease rentals       (278,274)               -                -
                                                       ------------     ------------     ------------

   Leasing margin                                      $  1,470,270     $  1,815,691     $  1,289,127
                                                       ============     ============     ============

   Leasing margin ratio                                          14%              15%              11%
                                                       ============     ============     ============
</TABLE>


All components of leasing  margin,  except  interest  expense,  decreased due to
portfolio  runoff.  Total  interest  expense  increased  due to the  increase in
non-recourse financing.

The ultimate rate of return on leases depends,  in part, on the general level of
interest  rates at the time the leases  are  originated.  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).  Interest rates have  fluctuated
over the past several years as follows:  (i) rates decreased from 1993 until the
early part of 1994, (ii) rates then increased through the early part of 1995 and
(iii) rates have decreased to the present time. It is unclear  whether  interest
rates will  continue to decrease,  and what effect,  if any,  such interest rate
decreases will have on lease rates.

EQUIPMENT SALES MARGIN

Equipment sales margin consists of the following:
<TABLE>
<CAPTION>


                                                                   Years Ended December 31,
                                                       ---------------------------------------------
                                                            1996             1995             1994
                                                            ----             ----             ----

<S>                                                   <C>              <C>              <C>        
Equipment sale revenue                                 $ 2,865,442      $   993,317      $   274,126
Cost of equipment sales                                 (2,676,007)        (744,967)        (253,689)
                                                       -----------      -----------      -----------
Equipment sales margin                                 $   189,435      $   248,350      $    20,437
                                                       ===========      ===========      ===========
</TABLE>


The  Partnership  is in the final  year of its  five-year  reinvestment  period.
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.

                                       -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  exposure 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 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.

*    $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.

                                       -9-

<PAGE>



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


PROVISION FOR LOSSES, continued

The   provisions   for  losses   recorded  in  1994   related  to  estimates  of
"other-than-temporary"  losses in value of off- lease equipment,  principally to
RISC  workstations  and computer disk drives  returned to the  Partnership.  The
Partnership  had  previously  expected  to realize  the  carrying  value of this
equipment through month-to-month rentals,  renewals or proceeds from the sale of
this  equipment  to the  lessee.  The  value  recovered  from sale was less than
initially expected.

EXPENSES

Direct  services  from the general  partners  increased in 1996 compared to 1995
primarily due to warehouse labor costs associated with off-lease equipment.

General and administrative expenses increased in 1996 compared to 1995 primarily
due  to  (i)  legal  costs  associated  with  bankrupt  lessee  litigation  (ii)
reimbursement  to the CAI general  partner for insurance  costs related to prior
years and (iii) storage costs for warehoused off-lease equipment.

General and  administrative  expenses decreased in 1995 compared to 1994, due to
higher third-party  professional fees incurred for remarketing the Partnership's
equipment in 1994.


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 1996, 1995 and 1994, the Partnership acquired equipment subject to leases
with  a  total  equipment   purchase  price  of   $14,304,831,   $3,031,560  and
$16,595,752, respectively.

During December 1995, the Partnership  assigned certain of its rights to a group
of its operating leases to an unaffiliated third-party (the "Purchaser"). Rights
assigned  included  rental  payments  due  under the  initial  leases as well as
anticipated rental payments from renewals or re-leases of the equipment.  Rights
retained primarily  included a formula-based  portion of any proceeds from sales
of  equipment.  During  January 1996,  the  Purchaser  assigned the rentals to a
financial institution and the financial institution paid the discounted value of
the rentals to the Partnership.  The underlying leases were originally purchased
by the Partnership  for $5,293,523  (including  acquisition  fees) and had a net
book value of  $3,768,228  at  December  31,  1995.  Financing  received  by the
Partnership  during January 1996 totaled  $4,272,657.  As with non-recourse debt
financing of lease rentals,  this  transaction  was also  collateralized  by the
leased equipment and related  rentals,  and in the event of a lessee default the
Partnership has no recourse liability for repayment of the related obligation.

                                      -10-

<PAGE>



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


During  1996,  1995 and 1994,  the  Partnership  declared  distributions  to the
partners of $4,101,808,  $4,131,126 and $3,847,041,  respectively. A substantial
portion of such  distributions  is expected to  constitute  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 1996 to (1) meet current operating requirements, (2)
enable it to fund cash distributions to the Class A and Class B limited partners
at annualized rates of 12% and 11%  (substantial  portions of which are expected
to constitute returns of capital),  respectively, on their capital contributions
and (3) reinvest in additional  equipment  under leases,  provided that suitable
equipment can be identified and acquired.

The  Partnership  is  currently  in its  reinvestment  period and will enter its
liquidation  period (as  defined in the  Partnership  Agreement)  in April 1997.
During the reinvestment period, available cash will be distributed or reinvested
per items (2) and (3) described in the preceding paragraph.  However, during the
liquidation period, reinvestment will cease and the excess cash, if any, will be
distributed  to the  partners  in  accordance  with the  Partnership  Agreement.
Therefore,  it is anticipated  that during the liquidation  period in 1997, cash
distributions  to the Class A limited partners will be in excess of 12% of their
contributed  capital.  Distributions during the liquidation period will be based
upon cash  availability and will vary and all distributions are expected to be a
return of capital for economic purposes.


                                      -11-

<PAGE>




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

          Index to Financial Statements and
          Financial Statement Schedule

                                                                           Page
                                                                          Number
                                                                          ------
          Financial Statements
          --------------------

               Independent Auditors' Report                                 13

               Balance Sheets at December 31, 1996 and 1995                 14

               Statements of Income for the years ended
                  December 31, 1996, 1995 and 1994                          15

               Statements of Partners' Capital for the years ended
                 December 31, 1996, 1995 and 1994                           16

               Statements of Cash Flows for the years ended
                 December 31, 1996, 1995 and 1994                          17-18

               Notes to Financial Statements                               19-31


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

               Independent Auditors' Report                                 32

               Schedule II - Valuation and Qualifying Accounts              33



                                      -12-

<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, 1996 and 1995,  and the related  statements of
income,  partners'  capital,  and  cash  flows  for  each  of the  years  in the
three-year  period ended December 31, 1996.  These financial  statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the 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,  1996  and  1995,  and the  results  of its
operations  and its cash  flows for each of the years in the  three-year  period
ended  December 31, 1996,  in  conformity  with  generally  accepted  accounting
principles.

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

Denver, Colorado
January 31, 1997

                                      -13-

<PAGE>



                      CAPITAL PREFERRED YIELD FUND-II, L.P.

                                 BALANCE SHEETS

                                     ASSETS
<TABLE>
<CAPTION>


                                                                                            December 31,
                                                                                    -------------------------
                                                                                        1996          1995
                                                                                        ----          ----

<S>                                                                                <C>           <C>        
Cash and cash equivalents                                                           $ 1,768,824   $ 2,092,691
Accounts receivable, net of allowance for doubtful accounts
  of $25,000 in 1996 and 1995                                                           149,316       140,873
Equipment held for sale or re-lease                                                     448,552        60,000
Net investment in direct finance leases                                               4,978,823     5,156,688
Leased equipment, net                                                                26,171,270    24,356,282
                                                                                    -----------   -----------

         Total assets                                                               $33,516,785   $31,806,534
                                                                                    ===========   ===========

                        LIABILITIES AND PARTNERS' CAPITAL

Liabilities:
     Accounts payable and accrued liabilities                                       $   611,147   $   401,889
     Payable to affiliates                                                               26,033        25,552
     Rents received in advance                                                          110,946       159,484
     Distributions payable to partners                                                  341,384       343,712
     Discounted lease rentals                                                        12,397,890    10,009,561
     Financed operating lease rentals                                                 3,161,139             -
                                                                                    -----------   -----------

         Total liabilities                                                           16,648,539    10,940,198
                                                                                    -----------   -----------

Partners' capital:
     General partner                                                                          -             -
     Limited partners:
         Class A
           260,000 units authorized; 134,978 and 134,900 units issued
             and outstanding in 1996 and 1995, respectively                          16,637,978    20,601,723
         Class B                                                                        230,268       264,613
                                                                                    -----------   -----------
         Total partners' capital                                                     16,868,246    20,866,336
                                                                                    -----------   -----------

         Total liabilities and partners' capital                                    $33,516,785   $31,806,534
                                                                                    ===========   ===========
</TABLE>




                 See accompanying notes to financial statements.

                                      -14-

<PAGE>



                      CAPITAL PREFERRED YIELD FUND-II, L.P.

                              STATEMENTS OF INCOME
<TABLE>
<CAPTION>


                                                             Years ended December 31,
                                                    ---------------------------------------
                                                        1996          1995          1994
                                                        ----          ----          ----

<S>                                                <C>           <C>           <C>
Revenue:
     Operating lease rentals                        $10,028,052   $11,843,447   $11,150,234
     Direct finance lease income                        450,877       562,222       635,912
     Equipment sales margin                             189,435       248,350        20,437
     Interest income                                    201,719        65,426       161,329
                                                    -----------   -----------   -----------

         Total revenue                               10,870,083    12,719,445    11,967,912
                                                    -----------   -----------   -----------

Expenses:
     Depreciation and amortization                    7,856,952     9,618,860     9,301,693
     Interest on discounted lease rentals               873,433       971,118     1,195,326
     Interest on financed operating lease rentals       278,274             -             -
     Management fees paid to general partner            286,973       275,888       260,429
     Direct services from general partner               158,770        81,229        81,024
     General and administrative                         284,423       153,120       272,293
     Provision for losses                               900,000       610,000       355,000
                                                    -----------   -----------   -----------

         Total expenses                              10,638,825    11,710,215    11,465,765
                                                    -----------   -----------   -----------

Net income                                          $   231,258   $ 1,009,230   $   502,147
                                                    ===========   ===========   ===========

Net income allocated:
     To the general partner                         $    41,018   $    41,312   $    55,751
     To the Class A limited partners                    188,286       958,122       441,846
     To the Class B limited partner                       1,954         9,796         4,550
                                                    -----------   -----------   -----------

                                                    $   231,258   $ 1,009,230   $   502,147
                                                    ===========   ===========   ===========

Net income per weighted average Class
     A limited partner unit outstanding             $      1.40   $      7.09   $      3.52
                                                    ===========   ===========   ===========

Weighted average Class A limited partner
     units outstanding                                  134,388       135,108       125,582
                                                    ===========   ===========   ===========
</TABLE>




                 See accompanying notes to financial statements.

                                      -15-

<PAGE>



                      CAPITAL PREFERRED YIELD FUND-II, L.P.

                         STATEMENTS OF PARTNERS' CAPITAL
                  Years ended December 31, 1996, 1995 and 1994
<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, 1994               $          -           86,871     $ 16,701,552     $    197,957     $ 16,899,509

Capital contributions                                         -           48,863       12,215,750          120,000       12,335,750
Commissions and offering costs on
  sale of Class A limited partner units                 (17,278)               -       (1,710,541)               -       (1,727,819)
Redemptions                                                   -             (244)         (54,808)               -          (54,808)
Net income                                               55,751                -          441,846            4,550          502,147
Distributions declared to partners                      (38,473)               -       (3,777,178)         (31,390)      (3,847,041)
                                                   ------------     ------------     ------------     ------------     ------------

Partners' capital at December 31, 1994                        -          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
                                                   ============     ============     ============     ============     ============
</TABLE>












                 See accompanying notes to financial statements.

                                      -16-

<PAGE>



                      CAPITAL PREFERRED YIELD FUND-II, L.P.
                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>


                                                                                               Years ended December 31,
                                                                                 --------------------------------------------------
                                                                                      1996              1995                1994
                                                                                      ----              ----                ----

<S>                                                                             <C>                <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income                                                                  $    231,258       $  1,009,230       $    502,147
     Adjustments to reconcile net income to net
         cash provided by operating activities:
         Depreciation and amortization                                              7,856,952          9,618,860          9,303,589
         Provision for losses                                                         900,000            610,000            355,000
         Cost of equipment sales                                                    2,676,007            740,547            253,689
         Recovery of investment in direct finance leases                              948,323          1,254,448          1,122,261
         Other                                                                              -             13,200                  -
         Changes in assets and liabilities:
           (Increase) decrease in accounts receivable                                 (20,568)           (20,105)           126,528
           Increase (decrease) in payable to affiliates                                   481             (2,907)           (49,933)
           Increase in accounts payable and accrued
             liabilities                                                              209,258             94,479            172,276
           Increase (decrease) in rents received in advance                           (48,538)            23,410             31,407
                                                                                 ------------       ------------       ------------
     Net cash provided by operating activities                                     12,753,174         13,341,162         11,816,964
                                                                                 ------------       ------------       ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchases from affiliate of equipment on operating leases                     (7,887,705)        (2,137,312)       (13,118,356)
     Investment in direct finance leases, acquired from affiliate                    (115,445)          (301,386)          (924,950)
                                                                                 ------------       ------------       ------------
     Net cash used in investing activities                                         (8,003,150)        (2,438,698)       (14,043,306)
                                                                                 ------------       ------------       ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from capital contributions                                                    -                  -         12,335,750
     Principal payments on discounted lease rentals                                (4,014,778)        (5,895,078)        (5,974,035)
     Principal payments on financed operating lease rentals                        (1,111,518)                 -                  -
     Proceeds from discounting of lease rentals                                        11,425            273,727          1,171,756
     Proceeds from financing of operating lease receivables                         4,272,657                  -                  -
     Commissions paid to affiliate in connection with
       the sale of Class A limited partner units                                            -                  -         (1,221,575)
     Organization and offering expenses paid to the
       general partner in connection with the sale of
       Class A limited partner units                                                        -                  -           (525,935)
     Distributions to partners                                                     (4,104,137)        (4,132,616)        (3,717,674)
     Redemptions of Class A limited partner units                                    (127,540)          (119,506)           (54,808)
                                                                                 ------------       ------------       ------------
         Net cash provided by (used in) financing activities                       (5,073,891)        (9,873,473)         2,013,479
                                                                                 ------------       ------------       ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                 (323,867)         1,028,991           (212,863)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                    2,092,691          1,063,700          1,276,563
                                                                                 ------------       ------------       ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                       $  1,768,824       $  2,092,691       $  1,063,700
                                                                                 ============       ============       ============
</TABLE>



                                      -17-

<PAGE>



                      CAPITAL PREFERRED YIELD FUND-II, L.P.

                            STATEMENTS OF CASH FLOWS
                                   (continued)
<TABLE>
<CAPTION>


                                                                                               Years ended December 31,
                                                                                 --------------------------------------------------
                                                                                      1996              1995                1994
                                                                                      ----              ----                ----


<S>                                                                             <C>                <C>                <C>
Supplemental disclosure of cash flow information:
     Interest paid on discounted lease rentals                                   $    873,433       $    971,118       $  1,195,326
     Interest paid on financed lease rentals                                          278,274                  -                  -

Supplemental disclosure of noncash investing and financing activities:
     Discounted lease rentals assumed in equipment
      acquisitions                                                                  6,403,107            592,862          2,552,446
</TABLE>






























                 See accompanying notes to financial statements.

                                      -18-

<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 commenced business operations on
         June 12, 1992, and from the date of commencement of operations  through
         April 15, 1994,  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 has
         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 is distributed to the partners as follows:



                                      -19-

<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
         ------------------

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

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

              Third,  any  remaining   available  cash  will  be  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.

                                      -20-

<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
         ------------------

              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)  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.

      Reclassifications

         Certain  reclassifications  have  been made to prior  years'  financial
         statements to conform to the current year's presentation.




                                      -21-

<PAGE>


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


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

      Recently Issued Financial Accounting Standards

         The Partnership adopted 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"), effective January
         1, 1996.  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.   Otherwise,   an  impairment   loss  is  not   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.  The
         adoption  of this  statement  did not  have a  material  effect  on the
         Partnership's financial condition or results of operations.

      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

                                      -22-

<PAGE>


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


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

      Net Investment in Direct Financing Leases ("DFLs"), continued

         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.

      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.

      Nonrecourse 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  nonrecourse  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  institu  tions,  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

                                      -23-

<PAGE>


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


  1.  Organization and Summary of Significant Accounting Policies, continued

      Non-recourse Financing of Operating Lease Rentals, continued

         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.

      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.


                                      -24-

<PAGE>


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


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

      Cash Equivalents, continued

         Cash  equivalents of $1,718,000 and $2,054,000 at December 31, 1996 and
         1995,  respectively,  are  comprised of an investment 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.


      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, 1996 and 1995 were:

                                                   1996           1995
                                                   ----           ----

      Minimum lease payments receivable        $ 4,989,455    $ 5,508,541
      Estimated residual values                  1,091,813      1,014,466
      Less unearned income                      (1,102,445)    (1,366,319)
                                               -----------    -----------

                                               $ 4,978,823    $ 5,156,688
                                               ===========    ===========







                                      -25-

<PAGE>


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


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

      The  Partnership's  investments in equipment on operating  leases by major
      classes as of December 31, 1996 and 1995 were:
                                                     1996            1995
                                                     ----            ----

      Transportation and industrial equipment   $ 26,364,473    $ 19,927,731
      Computers and peripherals                   11,145,021      14,999,856
      Office furniture and equipment               3,784,347       4,628,787
      Other                                        2,269,502       2,007,266
                                                ------------    ------------
                                                  43,563,343      41,563,640
      Less:
         Accumulated depreciation                (17,136,117)    (16,915,870)
         Allowance for losses                       (255,956)       (291,488)
                                                ------------    ------------

                                                $ 26,171,270    $ 24,356,282
                                                ============    ============

      Depreciation  expense for 1996, 1995 and 1994 was  $7,856,952,  $9,618,860
      and $9,301,693, respectively.


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

      Future  minimum lease payments  receivable  from  noncancelable  leases at
      December 31, 1996 are as follows:

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

                    1997                        $ 1,493,052        $   8,787,931
                    1998                          1,283,458            5,832,826
                    1999                          1,042,885            3,656,682
                    2000                            753,213            1,475,368
                    2001                            416,847              407,542
                    Thereafter                           -                20,064
                                                -----------        -------------

                            Total               $ 4,989,455        $ 20,180,413
                                                ===========        ============







                                      -26-

<PAGE>


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


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

      Discounted lease rentals outstanding at December 31, 1996 bear interest at
      rates primarily ranging between 6% and 11%.  Aggregate  maturities of such
      nonrecourse obligations are as follows:

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

                  1997                                      $   4,820,742
                  1998                                          3,359,012
                  1999                                          2,206,268
                  2000                                          1,438,741
                  2001                                            573,127
                                                            -------------

                           Total                            $  12,397,890
                                                            =============

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

      Financed  operating  lease rentals  outstanding  at December 31, 1996 bear
      interest at 8.25%.  Aggregate  maturities of such non-recourse  financings
      are as follows:

      Year Ending December 31,

                  1997                                      $ 1,742,544
                  1998                                          493,423
                  1999                                          792,475
                  2000                                          114,893
                  2001                                            5,211
                  Thereafter                                     12,593
                                                            -----------
                  Total                                     $ 3,161,139
                                                            ===========

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

      Sales Commissions and Offering Costs
      ------------------------------------

      Under the terms of the Partnership Agreement,  CAI Securities Corporation,
      an  affiliate  of the  general  partner,  is  entitled  to  receive  sales
      commissions  and  wholesaling  fees  equal to 10% of the  Class A  limited
      partners'   capital   contributions,   of  which  up  to  9%  is  paid  to
      participating   broker-dealers.   Under  the  terms  of  the   Partnership
      Agreement,  the Partnership  ceased offering Class A limited partner units
      for  sale  in  1994.  During  1994,  CAI  Securities   Corporation  earned
      commissions and fees in the amount of $1,221,575  including  $1,057,443 of
      which was paid to participating broker-dealers.

                                      -27-

<PAGE>


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


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

      Sales Commissions and Offering Costs, continued
      ------------------------------------

      As provided in the Partnership  Agreement,  the general  partner  received
      $488,630 as reimbursement for expenses incurred during 1994, in connection
      with the  organization  of the  Partnership  and the  offering  of Class A
      limited  partner  units.  The general  partner  also  received  $17,615 as
      reimbursement for due diligence expenses incurred during 1994.

      Capital Contributions
      ---------------------

      Under terms of the Partnership Agreement, the Class B limited partner made
      capital contributions to the Partnership of $120,000 during 1994.

      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 $550,185,  $116,599 and $615,770 in 1996, 1995 and
      1994,  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 receives  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.  Management  fees totaled  $286,973,  $275,888 and $260,429 for
      1996, 1995 and 1994, 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.  Such reimbursements totaled $158,770,
      $81,229 and $81,024 for 1996, 1995 and 1994, respectively.




                                      -28-

<PAGE>


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


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


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

      The Partnership  purchased equipment from CAII with a total purchase price
      of $14,304,831, $3,031,560 and $16,595,752 (including $6,403,107, $592,862
      and $2,552,446 of discounted  lease rentals)  during 1996,  1995 and 1994,
      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.


      Payable to Affiliates
      ---------------------

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


  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>



                                                                      1996           1995           1994
                                                                      ----           ----           ----

     <S>                                                         <C>            <C>            <C>        
      Net income per financial statements                         $   231,258    $ 1,009,230    $   502,147
      Differences due to:
        Direct finance leases                                         877,055      1,260,841      1,122,263
        Depreciation                                               (2,053,702)    (1,533,457)    (3,667,369)
        Provision for losses                                          900,000        610,000        355,000
        Gain/loss on sale of assets                                  (385,166)    (1,123,258)        45,471
        Other                                                       1,073,866         63,067        (70,935)
                                                                  -----------    -----------    -----------

      Partnership income (loss) for federal income tax purposes   $   643,311    $   286,423    $(1,713,423)
                                                                  ===========    ===========    ===========
</TABLE>







                                      -29-

<PAGE>


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


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

      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>


                                                               1996            1995            1994
                                                               ----            ----            ----

     <S>                                                 <C>             <C>             <C>         
      Partners' capital per financial statements          $ 16,868,246    $ 20,866,336    $ 24,107,738
      Differences due to:
        Commissions and offering costs                       4,868,944       4,868,944       4,868,944
        Direct finance leases                                3,833,666       2,956,611       1,695,770
        Depreciation                                       (10,477,433)     (8,423,731)     (6,890,274)
        Provision for losses                                   900,000         610,000         355,000
        Gain/loss on sale of assets                           (385,166)     (1,123,258)         45,471
        Other                                                1,190,636         606,406         142,867
                                                          ------------    ------------    ------------

      Partners' capital for federal income tax purposes   $ 16,798,893    $ 20,361,308    $ 24,325,516
                                                          ============    ============    ============
</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  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'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.  Bankrupt Lessees
      ----------------

      Barney's  Inc.,  one of the  Partnership's  lessees,  filed for protection
      under  Chapter  11 of  the  bankruptcy  code  on  January  10,  1996.  The
      Partnership  is a member of an unofficial  committee of equipment  lessors
      which  negotiated an interim  agreement with the debtor  pursuant to which
      the  debtor  made  four   partial   payments  of   postpetition   rent  of
      approximately  38% of the  amount  due under the lease and agreed to enter
      into further

                                      -30-

<PAGE>


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


 10.  Bankrupt Lessees, continued
      ----------------

      negotiations to extend the interim agreements.  The committee then entered
      into  negotiations  with an investor  interested in purchasing  all of the
      lessors'  claims which would  include  taking title to the  equipment  and
      accepting an assignment of all rights as lessor under each lease.  In July
      1996,  negotiations were finalized and the Partnership  received a payment
      of $872,700, representing $0.735 on the dollar for the Partnership's claim
      against  Barney's.  Based on this  recovery  a  provision  for  losses  of
      $245,000 was recorded for the period ended June 30, 1996.

      Norcross Footwear,  one of the Partnership's lessees, filed for protection
      under Chapter 11 of the bankruptcy code on February 9, 1996. During second
      quarter 1996, the lessee  rejected the lease and the equipment was 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.
      Based on this information, a provision for losses of $180,000 was recorded
      for the period ended June 30, 1996.

      Anchor Glass filed for protection  under Chapter 11 of the bankruptcy code
      on September  13, 1996.  The aggregate net book value with this lessee was
      $221,845 at  December  31,  1996.  Potential  outcomes  are (i) the lessee
      affirms its leases and the  Partnership  collects  all rents due under the
      leases or (ii) the lessee  rejects the leases and  returns the  underlying
      equipment to the Partnership. If the leases are rejected and the equipment
      is returned to the  Partnership  or sold to a third party,  it is possible
      that  remarketing  proceeds  will be less  than the net book  value of the
      equipment.  However,  if the lessee  affirms the leases,  the  Partnership
      would not be  subject to a loss.  The  lessee has not made its  intentions
      known at this time and, accordingly, the amount of loss, if any, cannot be
      determined as of December 31, 1996. Regardless of the lessee's decision to
      accept or  reject  the  leases,  the  general  partner  believes  that the
      ultimate   outcome  will  not  have  a  material  adverse  impact  on  the
      Partnership's financial position or results of operations.

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

      Statement of Financial  Standards  No. 107 ("SFAS 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, 1996 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, 1996,  discounted lease rentals and financed  operating
      lease rentals of $12,397,890 and $3,161,139, respectively, had fair values
      of $11,797,818  and $2,913,249.  The fair values were estimated  utilizing
      market  rates of  comparable  debt having  similar  maturities  and credit
      quality as of December 31, 1996.


                                      -31-

<PAGE>




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


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

Under date of January 31,  1997,  we  reported on the balance  sheets of Capital
Preferred Yield Fund-II,  L.P. as of December 31, 1996 and 1995, and the related
statements of income, partners' capital, and cash flows for each of the years in
the three-year period ended December 31, 1996, as contained in the Partnership's
annual report on Form 10-K for the year 1996.  In connection  with our audits of
the  aforementioned  financial  statements,  we have 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
January 31, 1997




                                      -32-

<PAGE>



                      CAPITAL PREFERRED YIELD FUND-II, L.P.

                     SCHEDULE II - VALUATION AND QUALIFYING
                    ACCOUNTS for the years ended December 31,
                               1996, 1995 and 1994
<TABLE>
<CAPTION>


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

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


          1994
---------------------

Allowance for losses:
  Accounts receivable                            $  50,537     $       -      $ (25,537)     $       -       $  25,000
 Equipment on operating leases                          -        355,000         25,537              -         380,537
                                                 ---------     ---------      ---------      ---------       ---------

                                                 $  50,537     $ 355,000      $       -      $       -       $ 405,537
                                                 =========     =========      =========      =========       =========
</TABLE>










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



                  See accompanying independent auditors' report

                                      -33-

<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

    John E. Christensen         Senior  Vice  President, Principal Financial and
                                Chief Administrative Officer and Director

    Anthony M. DiPaolo          Senior Vice  President,  Assistant Secretary and
                                Director

    Daniel J. Waller            Vice President and Director

    Richard H. Abernethy        Vice President and Director

    John A. Reed                Vice President, Assistant Secretary and Director

    Robert A. Golden            Vice President and Director

    David J. Anderson           Chief Accounting Officer and Secretary


JOHN F. OLMSTEAD, age 52, 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.




                                      -34-

<PAGE>



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

DENNIS J. LACEY,  age 43, 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.

JOHN E.  CHRISTENSEN,  age 49,  joined CAII as Vice  President  and Treasurer in
November  1988.  He now  serves  as Senior  Vice  President,  Finance  and Chief
Financial  Officer  of CAI and CAII.  Mr.  Christensen  previously  held  senior
management  positions at Maxicare Health Plans,  Inc.,  Global Marine,  Inc. and
Santa Fe International,  Inc. Mr.  Christensen  obtained his MBA in Finance from
the  University of Michigan and his Bachelor of Arts degree from Michigan  State
University.

ANTHONY M. DIPAOLO,  age 37, joined CAII in July 1990 as an Assistant  Treasurer
and is currently Senior Vice  President-Business  Development.  He has also held
the  positions  of  Senior  Vice   President-Controller   and   Assistant   Vice
President-Credit  Administration for the Company. Mr. DiPaolo has held financial
management  positions as Chief Financial Officer for Mile High Kennel Club, Inc.
from 1988 to 1990 and was Vice President/Controller for VICORP Restaurants, Inc.
from 1986  through  1988.  Mr.  DiPaolo  holds a Bachelor  of Science  degree in
Accounting from the University of Denver.

DANIEL J.  WALLER,  age 38,  joined CAII in July 1990,  as a manager of Investor
Relations.  Mr.  Waller  assumed  the  responsibility  for the asset  management
department a short time later, and is currently Vice President,  Capital Markets
Group.  Prior to joining  CAII,  Mr.  Waller was an audit manager with Coopers &
Lybrand for over three years and gained  considerable  experience in the leasing
industry.  While at  Coopers &  Lybrand,  Mr.  Waller  held  positions  with the
International Accounting and Auditing Committee as well as the national Auditing
Directorate.  Mr. Waller holds a Bachelor of Arts degree in accounting  from the
University of Northern Iowa.

RICHARD H. ABERNETHY,  age 42, 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 41,  joined  CAII in  January  1990 as the Tax  Director  and
Assistant  Secretary.  Mr. Reed 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. Reed
was Vice  President  of 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.

                                      -35-

<PAGE>



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

ROBERT A. GOLDEN,  age 51, 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.

DAVID J.  ANDERSON,  age 43,  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 working 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 1996.


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,  owns  100%  of  the
          Partnership's Class B limited partner interest.

          CAI Equipment Leasing III Corp. owns 100% of the Partnership's general
          partner interest.

          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


                                      -36-

<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    limited  partner  units   as of
          December 31, 1996.

  (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 1996:

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

The general  partner  receives 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  $550,185 in 1996,  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  receives  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 $286,973 for 1996,  $19,958 of which
was paid during January 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 $284,423 during
1996.


                                      -37-

<PAGE>



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

Accountable General and Administrative Expenses, 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  $41,018 and  $41,018,  respectively,  for 1996.  Distributions  and net
income  allocated  to the Class B limited  partner  totaled  $36,300 and $1,954,
respectively, for 1996.

During 1996,  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
---------     ------                       ----  ---------------------         -----------   -----------  -----------    -----------

<C>          <C>                          <C>   <C>                           <C>           <C>          <C>            <C> 
02/96         Stone Container              46    Machine tools                 $   334,836   $   348,230  $         0    $     7,262
03/96         General Motors               36    Forklifts                          84,207        87,575            0          2,332
03/96         General Motors               36    Forklifts                           3,470         3,609            0             96
03/96         Consolidated Diesel          36    Communication equipment             3,240         3,370            0             89
03/96         Atlantic Steel               59    Manufacturing - other             971,059     1,009,902            0         17,293
04/96         Cerplex                      47    Printed circuit board              51,582        53,645            0          1,208
04/96         Cerplex                      44    Printed circuit board             477,330       496,423            0         11,679
04/96         Consolidated Diesel          60    Forklifts                          22,763        23,674            0            404
04/96         Consolidated Diesel          36    Office automation                  11,100        11,544            0            327
05/96         System One                   36    Banking                           354,510       368,690            0         10,484
05/96         Forum Corporation            36    Desktop PC                         65,174        67,781       61,379          3,126
05/96         Forum Corporation            36    Desktop PC                          8,015         8,336        7,548            384
05/96         Forum Corporation            36    Desktop PC                          1,428         1,485        1,344             68
05/96         Forum Corporation            36    Desktop PC                          4,366         4,541        4,112            209
05/96         Forum Corporation            36    Desktop PC                          1,428         1,485        1,344             68
05/96         Forum Corporation            36    Desktop PC                          1,640         1,706        1,544             79
05/96         Forum Corporation            36    Desktop PC                         26,473        27,532       25,261          1,170
05/96         Forum Corporation            36    Desktop PC                         11,607        12,071       11,076            513
05/96         Forum Corporation            36    Peripheral-printers                 1,536         1,597        1,466             68
05/96         Forum Corporation            36    Desktop PC                          4,448         4,626        4,244            197
05/96         Forum Corporation            36    Peripheral-printers                 1,536         1,597        1,466             68
05/96         Forum Corporation            36    Desktop PC                          3,761         3,911        3,589            166
05/96         Forum Corporation            36    Desktop PC                         35,984        37,423       34,362          1,613
05/96         Forum Corporation            36    Desktop PC                         70,487        73,306       66,754          2,717
05/96         Forum Corporation            36    Desktop PC                          1,511         1,571        1,438             62
05/96         Forum Corporation            36    Desktop PC                         14,892        15,488       14,172            613
05/96         Forum Corporation            36    Desktop PC                          3,705         3,853        3,524            152
05/96         Forum Corporation            36    Desktop PC                          2,794         2,906        2,658            115
05/96         Forum Corporation            36    Desktop PC                          3,028         3,149        2,882            125
05/96         Forum Corporation            36    Desktop PC                        101,156       105,202       94,879          3,432
05/96         Forum Corporation            36    Desktop PC                         29,861        31,055       28,057          1,007
05/96         Forum Corporation            36    Portable PC                         6,826         7,099        6,415            235
05/96         Forum Corporation            36    Desktop PC                         12,378        12,873       11,596            413
05/96         Forum Corporation            36    Portable PC                        20,592        21,416       19,337            709
05/96         Forum Corporation            36    Desktop PC                        158,879       165,234      149,929          4,979
05/96         Ina Bearing                  60    Machine tools                     443,265       460,996      415,808         11,376
05/96         Ina Bearing                  60    Machine tools                     229,351       238,525      215,056          5,568


                                      -38-

<PAGE>



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

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

05/96         Kaman Corporation            60    Manufacturing - other         $    16,616   $    17,281  $    15,698    $       479
05/96         Kaman Corporation            60    Machine tools                      41,289        42,941       38,811            807
05/96         Kaman Corporation            60    Machine tools                      66,358        69,012       62,591          1,334
05/96         Kaman Corporation            60    Machine tools                     749,265       779,236      738,279         13,047
05/96         Kaman Corporation            60    PBX systems                        58,729        61,078       57,278          1,144
05/96         Robertshaw Controls          84    Printing equipment                155,844       162,078      146,219          2,871
05/96         Robertshaw Controls          84    Manufacturing - other             187,377       194,872      176,534          3,413
05/96         Robertshaw Controls          84    Printing equipment                 24,605        25,589       23,210            482
05/96         Robertshaw Controls          84    Printed circuit board              89,030        92,591       82,794          1,666
05/96         Robertshaw Controls          60    Manufacturing - other              24,031        24,992       22,640            576
05/96         Robertshaw Controls          84    Printing equipment                138,631       144,176      128,405          2,322
05/96         Robertshaw Controls          60    Manufacturing - other              40,801        42,433       37,913            947
05/96         Robertshaw Controls          60    Printed circuit board             828,001       861,121      772,756         18,533
05/96         Robertshaw Controls          36    Printing equipment                 33,554        34,896       30,458          1,219
05/96         Robertshaw Controls          36    Network equipment                  51,778        53,849       48,049          1,669
05/96         Robertshaw Controls          36    Network equipment                  15,087        15,690       13,967            448
05/96         Stop & Shop                  60    Banking equipment                  58,531        60,872       55,193          2,006
05/96         Stop & Shop                  60    Grocery FF&E                       14,275        14,846       13,435            428
05/96         Stop & Shop                  60    Grocery FF&E                       25,321        26,334       23,828            759
05/96         Stop & Shop                  60    Grocery FF&E                       25,321        26,334       23,828            759
05/96         Stop & Shop                  60    Grocery FF&E                       14,710        15,298       13,840            430
05/96         Stop & Shop                  60    Grocery FF&E                       14,625        15,210       13,761            427
05/96         Stop & Shop                  60    Grocery FF&E                       24,031        24,992       22,609            703
05/96         Stop & Shop                  60    Grocery FF&E                       26,773        27,844       25,177            768
05/96         Stop & Shop                  60    Grocery FF&E                       27,347        28,441       25,713            765
05/96         Stop & Shop                  60    Grocery FF&E                       25,338        26,352       23,825            708
05/96         Stop & Shop                  60    Grocery FF&E                       29,451        30,629       27,691            823
05/96         Stop & Shop                  60    Grocery FF&E                       15,430        16,047       14,508            431
05/96         Stop & Shop                  60    Grocery FF&E                       15,430        16,047       14,508            431
05/96         Stop & Shop                  60    Grocery FF&E                       32,869        34,184       30,914            919
05/96         Stop & Shop                  60    Grocery FF&E                       32,876        34,191       30,921            919
05/96         Stop & Shop                  60    Network equipment                 171,454       178,312      162,207          5,670
05/96         Stop & Shop                  60    Grocery FF&E                       33,661        35,007       31,695            918
05/96         Stop & Shop                  60    Grocery FF&E                       29,607        30,791       27,760            782
05/96         Stop & Shop                  60    Grocery FF&E                       18,706        19,454       17,539            494
05/96         Stop & Shop                  60    Grocery FF&E                       31,909        33,185       29,920            844
05/96         Stop & Shop                  60    Grocery FF&E                       66,812        69,484       62,585          1,741
05/96         Stop & Shop                  60    Grocery FF&E                       32,691        33,999       30,623            852
05/96         Stop & Shop                  60    Grocery FF&E                       19,191        19,959       17,977            500
05/96         Stop & Shop                  60    Grocery FF&E                       36,466        37,925       34,160            951
05/96         Stop & Shop                  60    Grocery FF&E                       17,985        18,704       16,760            450
05/96         Sybron Chemical              84    Furniture                          48,532        50,473       45,329          1,071
05/96         Sybron Chemical              84    Manufacturing - other             371,437       386,294      346,920          8,197
05/96         Sybron Chemical              84    Furniture                          14,162        14,728       13,227            313
05/96         Sybron Chemical              84    Manufacturing - other             151,453       157,511      141,456          3,342
05/96         Sybron Chemical              84    Furniture                          14,930        15,527       13,944            329

                                      -39-

<PAGE>



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

05/96         Sybron Chemical              84    Manufacturing - other         $   152,837   $   158,950  $   142,748    $     3,373
07/96         Staples                      23    Office automation                 222,077       230,960            0          8,903
07/96         Staples                      22    Office automation                  18,588        19,332            0            768
07/96         Staples                      21    Office automation                  35,951        37,389            0          1,536
07/96         Staples                      20    Office automation                  88,759        92,309            0          3,948
07/96         Staples                      19    Office automation                  51,525        53,586            0          2,368
07/96         Staples                      18    Office automation                  82,059        85,341            0          3,933
07/96         Staples                      17    Office automation                 171,105       177,950            0          8,507
07/96         Staples                      16    Office automation                 105,674       109,900            0          5,500
07/96         Staples                      15    Office automation                  43,566        45,309            0          2,376
07/96         Staples                      14    Office automation                 123,235       128,164            0          7,019
07/96         Staples                      13    Office automation                 103,625       107,770            0          6,191
07/96         Staples                      12    Office automation                  98,298       102,230            0          6,191
07/96         Lever Brothers               36    Printing equipment                  9,577         9,960            0            254
07/96         Consolidated Diesel          60    Forklifts                         296,707       308,575            0          5,444
07/96         Westchester County           36    Medical                            80,050        83,252            0          2,268
09/96         Mascotech                    60    Forklifts                          39,105        40,669            0            655
09/96         General Motors               36    Forklifts                         119,382       124,157            0          2,888
09/96         System One                   36    Network equipment                 432,280       449,571            0         12,849
10/96         Smithfield Foods             36    Forklifts                         981,679     1,020,946            0         25,938
10/96         USS/Kobe                     84    Forklifts                          76,271        79,321            0          1,056
10/96         US Sugar                     36    Construction                      378,441       393,579            0         16,670
10/96         Parke Davis                  36    Research                          174,341       181,315            0          4,165
10/96         Alliant Tech                 48    Machine tools                     186,749       194,219            0          3,291
11/96         Basic Vegetable              60    Forklifts                         225,366       234,381            0          3,572
11/96         Pacific Coast                60    Forklifts                          48,485        50,424            0            879
11/96         General Motors               36    Forklifts                          85,022        88,422            0          2,372
11/96         General Motors               36    Forklifts                          33,230        34,559            0            804
11/96         Pacific Coast                60    Forklifts                          47,133        49,018            0            768
12/96         Community General            37    Medical equipment                  90,000        90,000            0        169,164
12/96         Basic Vegetable              60    Forklifts                          24,900        25,896            0            412
12/96         System One                   36    Network equipment                 228,765       237,916            0          6,736
12/96         Owens Corning                33    Desktop PC                        450,478       468,497      388,958         14,145
                                                                               -----------   -----------  -----------    -----------

Total equipment on operating leases sold to Partnership                         12,847,795    13,358,107    5,470,402        514,035
                                                                               -----------   -----------  -----------    -----------

01/96         Alliant Techsystems          36    Research                            7,878         8,193            0            216
03/96         Consolidated Diesel          36    Peripheral-printers                20,260        21,070            0            644
05/96         Robertshaw Controls          84    Printing equipment                 46,693        48,561       43,599            876
05/96         Robertshaw Controls          84    Printing equipment                 15,142        15,748       13,715            263
05/96         Robertshaw Controls          48    Desktop PC                         20,811        21,643       19,732            712
05/96         Robertshaw Controls          48    Cpu's IBM                         215,123       223,728      210,276          7,000
05/96         Stop & Shop                  60    Network equipment                   7,918         8,235        7,543            251
05/96         Stop & Shop                  60    Desktop PC                         10,692        11,120       10,162            330
05/96         Stop & Shop                  60    Desktop PC                         10,386        10,801        9,871            321
05/96         Stop & Shop                  60    Desktop PC                          8,320         8,653        7,907            257
05/96         Stop & Shop                  60    Desktop PC                          8,320         8,653        7,907            257
05/96         Stop & Shop                  60    Desktop PC                          8,320         8,653        7,907            257
05/96         Stop & Shop                  60    Desktop PC                          5,874         6,109        5,582            178
05/96         Stop & Shop                  60    Desktop PC                         16,997        17,677       16,153            515
05/96         Stop & Shop                  60    Desktop PC                          6,381         6,636        6,064            193
05/96         Stop & Shop                  60    Desktop PC                          6,371         6,626        6,053            189

                                      -40-

<PAGE>



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

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

05/96         Stop & Shop                  60    Desktop PC                    $     6,371   $     6,626  $     6,053    $       189
05/96         Stop & Shop                  60    Network equipment                  12,238        12,728       11,627            363
05/96         Stop & Shop                  60    Network equipment                  10,173        10,580        9,664            301
05/96         Stop & Shop                  60    Network equipment                  10,173        10,580        9,664            301
05/96         Stop & Shop                  60    Network equipment                  10,173        10,580        9,664            301
05/96         Stop & Shop                  60    Network equipment                  10,173        10,580        9,664            301
05/96         Stop & Shop                  60    Network equipment                  10,173        10,580        9,664            301
05/96         Stop & Shop                  60    Network equipment                  10,173        10,580        9,664            301
05/96         Stop & Shop                  60    Network equipment                 338,738       352,288      319,447          9,076
05/96         Stop & Shop                  60    Desktop PC                          3,428         3,565        3,233             92
05/96         Stop & Shop                  60    Desktop PC                          3,428         3,565        3,233             92
05/96         Stop & Shop                  60    Desktop PC                          3,428         3,565        3,233             92
05/96         Stop & Shop                  60    Desktop PC                          3,428         3,565        3,233             92
05/96         Stop & Shop                  60    Desktop PC                          3,428         3,565        3,233             92
05/96         Stop & Shop                  60    Desktop PC                          3,428         3,565        3,233             92
05/96         Stop & Shop                  60    Desktop PC                          3,428         3,565        3,233             92
05/96         Stop & Shop                  60    Desktop PC                          3,428         3,565        3,233             92
05/96         Stop & Shop                  60    Desktop PC                          3,428         3,565        3,233             92
05/96         Stop & Shop                  60    Desktop PC                          3,428         3,565        3,233             92
05/96         Stop & Shop                  60    Desktop PC                          3,428         3,565        3,233             92
05/96         Stop & Shop                  60    Desktop PC                          3,428         3,565        3,233             92
05/96         Stop & Shop                  60    Desktop PC                          3,428         3,565        3,233             92
05/96         Stop & Shop                  60    Desktop PC                          3,428         3,565        3,233             92
05/96         Stop & Shop                  60    Desktop PC                          3,428         3,565        3,233             92
05/96         Stop & Shop                  60    Desktop PC                          3,428         3,565        3,233             92
05/96         Stop & Shop                  60    Desktop PC                          3,428         3,565        3,233             92
05/96         Stop & Shop                  60    Desktop PC                          6,544         6,806        6,171            175
05/96         Stop & Shop                  60    Desktop PC                          6,544         6,806        6,171            175
05/96         Stop & Shop                  60    Desktop PC                          6,544         6,806        6,171            175
05/96         Stop & Shop                  60    Desktop PC                          6,544         6,806        6,171            175
05/96         Stop & Shop                  60    Desktop PC                          6,544         6,806        6,171            175
05/96         Stop & Shop                  60    Desktop PC                          6,544         6,806        6,171            175
05/96         Stop & Shop                  60    Desktop PC                          6,544         6,806        6,171            175
05/96         Stop & Shop                  60    Desktop PC                          6,544         6,806        6,171            175
05/96         Stop & Shop                  60    Desktop PC                          6,544         6,806        6,171            175
05/96         Stop & Shop                  60    Desktop PC                          6,544         6,806        6,171            175
05/96         Stop & Shop                  60    Desktop PC                          6,544         6,806        6,171            175
05/96         Stop & Shop                  60    Desktop PC                          6,544         6,806        6,171            175
05/96         Stop & Shop                  60    Desktop PC                          6,544         6,806        6,171            175
05/96         Stop & Shop                  60    Desktop PC                          6,544         6,806        6,171            175
05/96         Stop & Shop                  60    Desktop PC                          6,544         6,806        6,171            175
05/96         Stop & Shop                  60    Desktop PC                          6,544         6,806        6,171            175
                                                                               -----------   -----------  -----------    -----------
Total equipment on direct finance leases sold to Partnership                       996,851     1,036,724      921,279         28,261
                                                                               -----------   -----------  -----------    -----------

Total sold to Partnership                                                      $13,844,646   $14,394,831  $ 6,391,681    $   542,296
                                                                               ===========   ===========  ===========    ===========
</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.

                                      -41-

<PAGE>



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, 1996.

  (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.

                                      -42-

<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 11, 1997           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 11, 1997.

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/John E. Christensen
------------------------
John E. Christensen             Senior Vice  President, Principal  Financial and
                                Chief Administrative Officer and Director

/s/Anthony M. DiPaolo
------------------------
Anthony M. DiPaolo              Senior Vice  President,  Assistant Secretary and
                                Director


/s/Daniel J. Waller
------------------------
Daniel J. Waller                Vice President 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/Robert A. Golden
------------------------
Robert A. Golden                Vice President and Director


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

                                      -43-