SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K


(Mark One)

[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
    of 1934 for the fiscal year ended December 31, 1997

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

                         Commission file number 33-44158


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

         DELAWARE                                     84-1248907
  (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:  None


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 Page 38

                               Page 1 of 39 Pages



<PAGE>




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

Capital  Preferred Yield Fund-III,  L.P., a Delaware  limited  partnership  (the
"Partnership"), was organized on November 2, 1993 and is engaged in the business
of owning and leasing  equipment.  CAI  Equipment  Leasing IV Corp.,  a Colorado
corporation and a wholly owned subsidiary of Capital  Associates,  Inc. ("CAI"),
is the general partner of the Partnership.

Capital Associates  International,  Inc.  ("CAII"),  an affiliate of the general
partner, is the sole Class B limited partner of the Partnership. In exchange for
its Class B limited  partner  interest,  CAII was required to contribute cash of
$10,000 for each  $1,000,000  of investors'  capital  contribution  (i.e.,  cash
investments in the  Partnership) to 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  CAII  were  made
simultaneously with the purchase of equipment by the Partnership. As of December
31, 1997, CAII  contributed  $500,000 to the  Partnership  making it the largest
single investor in the Partnership.

The  Partnership's  overall  investment  objectives are to (i) raise the maximum
allowable  capital  from  investors  (which was  achieved on April 10, 1996) 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 to creditworthy  businesses
with terms  ranging from two to seven years;  (iii) if funds are  available  for
distribution, make monthly cash distributions to the Class A and Class B limited
partners during the reinvestment  period (a period that ends  approximately June
30, 2000); (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
three years of the end of the reinvestment period.

During 1997, the  Partnership  acquired  capital of various types under lease to
third  parties.  All  of  the  capital  was  purchased  by  CAII  directly  from
manufacturers  or  from  other   independent  third  parties  and  sold  to  the
Partnership.  The capital is generally comprised of material handling equipment,
computer and peripheral equipment,  industrial equipment, and telecommunications
equipment, among others (the "equipment").  See Item 13 of this report, "Certain
Relationships  and Related  Transactions"  for the detail  listing of  equipment
purchased during 1997. The Partnership  expects that a majority of the equipment
purchased during 1998 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 1997, the  Partnership  leased  equipment to investment  grade lessees in
diverse industries including the financial services, retail, telecommunications,
energy and  manufacturing  industries.  Approximately  70% of the  Partnership's
total  equipment  under  lease was  leased to  investment  grade  lessees  as of
December 31, 1997.  Pursuant to the Partnership  Agreement,  an investment grade
lessee is a company (i) with a net worth in excess of $100,000,000  (and no debt
issues  that are  rated);  or (ii) with a credit  rating of not less than Baa as
determined by Moody's Investor  Services,  Inc. or comparable  credit rating, as
determined by another  recognized credit rating service;  or (iii) a lessee, all
of whose lease payments have been  unconditionally  guaranteed or supported by a
letter of credit issued by a company meeting one of the above requirements.  The
Partnership  limits its credit risk through  selective use of non-recourse  debt
financing of future lease rentals, as described above.

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

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

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

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  enable it to compete  effectively  in the  equipment  leasing  and
remarketing markets.

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

The  Partnership  is required to dissolve  and  distribute  all of its assets no
later than December 31, 2011. However,  the general partner anticipates that all
equipment  will be sold and the  Partnership  will be  liquidated  prior to that
date.

                                       -3-

<PAGE>



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 of this Report,
"Business," which is incorporated herein by reference.

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

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

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

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


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

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

(b)      At December 31, 1997, there were 2,891 Class A limited partners.

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

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

                                                Distributions Per
                                                 $100 Investment
              For the            Payment          (computed on         Total
           Period Ended        Made During      weighted average)  Distributions
           ------------        -----------      -----------------  -------------

         December 31, 1996     January 1997          $ 0.875        $   435,790
         January 31, 1997      February 1997           0.875            433,808
         February 28, 1997     March 1997              0.875            433,807
         March 31, 1997        April 1997              0.875            435,690
         April 30, 1997        May 1997                0.875            433,388
         May 31, 1997          June 1997               0.875            433,344
         June 30, 1997         July 1997               0.875            435,313
         July 31, 1997         August 1997             0.875            432,883
         August 31, 1997       September 1997          0.875            432,839
         September 30, 1997    October 1997            0.875            434,415
         October 31, 1997      November 1997           0.875            432,576
         November 30, 1997     December 1997           0.875            431,108
                                                     -------        -----------
                                                     $ 10.50        $ 5,204,961 
                                                     =======        ===========

                                       -4-

<PAGE>



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

         Distributions  may be  characterized  for tax,  accounting and economic
         purposes  as a return of  capital,  a return on capital or a portion of
         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
         leasing  partnership's  return  on  capital  over  its life can only be
         determined  after all residual cash flows (which include  proceeds from
         the  re-leasing  and  sale of  equipment)  have  been  realized  at the
         termination of the Partnership.

         The  distribution  for the month  ended  December  31,  1997,  totaling
         $432,859,  was paid to the Class A limited partners on January 5, 1998.
         Distributions to the general partner and Class B limited partner during
         1997 are  discussed in Item 13 of this Report,  "Certain  Relationships
         and Related Transactions."

         The  general  partner  believes  that  the  Partnership  will  generate
         sufficient cash flows from operations  during 1998, to (1) meet current
         operating  requirements,  (2) enable it to fund cash  distributions  to
         both the Class A and Class B limited  partners at  annualized  rates of
         10.5% on their capital contributions (portions of which are expected to
         constitute  returns  of  capital),   and  (3)  reinvest  in  additional
         equipment  under  leases,  provided  that  suitable  equipment  can  be
         identified and acquired.

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

                                                Distributions Per
                                                 $100 Investment
            For the                Payment       (computed on          Total
         Period Ended            made during    weighted average)  Distributions
         ------------            -----------    -----------------  -------------

         December 31, 1995     January 1996       $ 0.875           $   313,566
         January 31, 1996      February 1996        0.875               345,254
         February 28, 1996     March 1996           0.875               376,218
         March 31, 1996        April 1996           0.875               414,345
         April 30, 1996        May 1996             0.875               434,253
         May 31, 1996          June 1996            0.875               435,339
         June 30, 1996         July 1996            0.875               436,957
         July 31, 1996         August 1996          0.875               435,339
         August 31, 1996       September 1996       0.875               434,827
         September 30, 1996    October 1996         0.875               436,228
         October 31, 1996      November 1996        0.875               434,346
         November 30, 1996     December 1996        0.875               433,908
                                                  -------           -----------
                                                  $ 10.50           $ 4,930,580
                                                  =======           ===========

                                       -5-

<PAGE>

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

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

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

            1994               $ 100                $  5.25             10.5%
            1995                                      10.50             10.5%
            1996                                      10.50             10.5%
            1997                                      10.50             10.5%
                                                    -------
                                                    $ 36.75
                                                    =======

         (1)  Cumulative distributions, as  described  in Footnote 1 to Notes to
              Consolidated Financial Statements began July 1994.


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

The following  selected  financial  data relates to the years ended December 31,
1994  through  1997.  The  data  should  be read  in  conjunction  with  Item 7,
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" and  the financial statements and  notes thereto appearing with Item
8.

<TABLE>
<CAPTION>


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

<S>                                                           <C>               <C>               <C>               <C>        
Total revenue                                                  $20,994,438       $17,245,131       $ 8,195,180       $   512,864

Net income                                                       4,414,329         2,074,001           553,710            42,939

Net income per weighted average Class A
  limited partner unit outstanding                                    8.71              4.13              1.91              0.27

Total assets                                                    53,890,874        62,471,309        48,463,584        12,365,947

Discounted lease rentals                                        15,828,174        23,437,868        16,863,892         1,159,380

Distributions declared to Class A limited partners               5,202,029         5,052,804         2,660,332           451,009

Distributions declared per monthly weighted average
  Class A limited partner unit outstanding                           10.50             10.50             10.50              6.13

</TABLE>

                                       -6-

<PAGE>

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

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

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

<TABLE>
<CAPTION>

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

<S>                             <C>             <C>             <C>             <C>             <C>             <C>        
Leasing margin                   $ 3,496,347     $ 2,442,000     $ 1,054,347     $ 2,442,000     $ 1,044,113     $ 1,397,887
Equipment sales margin             1,821,419         110,831       1,710,588         110,831               -         110,831
Interest income                      112,367         320,679        (208,312)        320,679         238,293          82,386
Provision for losses                (250,000)        (50,000)       (200,000)        (50,000)       (275,000)        225,000
Management fees paid to
    general partner                 (409,275)       (390,559)        (18,716)       (390,559)       (156,351)       (234,208)
Direct services from
    general partner                 (120,015)        (93,690)        (26,325)        (93,690)        (93,598)            (92)
General and administrative          (236,514)       (265,260)         28,746        (265,260)       (203,747)        (61,513)
                                 -----------     -----------     -----------     -----------     -----------     -----------
      Net income                 $ 4,414,329     $ 2,074,001     $ 2,340,328     $ 2,074,001 $       553,710     $ 1,520,291
                                 ===========     ===========     ===========     ===========     ===========     ===========
</TABLE>


LEASING MARGIN

Leasing margin consists of the following:

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

Operating lease rentals          $ 18,695,558     $ 16,399,312     $  7,683,820
Direct finance lease income           365,094          414,309          273,067
Depreciation                      (14,058,981)     (12,585,981)      (5,895,602)
Interest expense on discounted
 lease rentals                     (1,505,324)      (1,785,640)      (1,017,172)
                                 ------------     ------------     ------------
  Leasing margin                 $  3,496,347     $  2,442,000     $  1,044,113
                                 ============     ============     ============
  Leasing margin ratio                     18%              15%              13%
                                 ============     ============     ============

Operating  lease rentals and  depreciation  increased 14% and 113% for the years
ended December 31, 1997 and 1996,  respectively  compared to the prior years due
to a higher average operating lease portfolio.  The decrease in interest expense
for the year ended  December 31, 1997 and the  increase in interest  expense for
the year ended  December 31, 1996  compared to the  previous  years was directly
related to the  change in the  average  outstanding  non-recourse  debt  balance
during the comparable periods.


                                      -7-

<PAGE>

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

Results of Operations, continued
---------------------

LEASING MARGIN, continued

Leasing  margin ratio  increased for the years ended December 31, 1997 and 1996,
and  is  expected  to  increase  further  primarily  because  a  portion  of the
Partnership's  portfolio consists of operating leases financed with non-recourse
debt. Leasing margin and the related leasing margin ratio for an operating lease
financed with  non-recourse  debt  increases  during the term of the lease since
rents and  depreciation  are typically fixed while interest  expense declines as
the related non-recourse debt is repaid.

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

EQUIPMENT SALES MARGIN

Equipment sales margin consists of the following:
                                                      Years ended December 31,
                                                   -----------------------------
                                                       1997             1996
                                                       ----             ----

Equipment sales revenue                            $ 6,776,782      $   454,045
Cost of equipment sales                             (4,955,363)        (343,214)
                                                   -----------      -----------
Equipment sales margin                             $ 1,821,419      $   100,831
                                                   ===========      ===========

Equipment  sales margin is affected by the number and dollar amount of equipment
leases  that  mature  in a  particular  period.  Revenue  from  equipment  sales
increased primarily due to revenue from the sales of manufacturing, earth moving
and computer equipment.

INTEREST INCOME

Interest income decreased in 1997 compared to 1996 due to a decrease in invested
cash. During a significant  portion of 1996, the Partnership was in its offering
period and as such,  invested cash was  generally  higher  pending  purchases of
additional equipment.

Interest  income  increased  in 1996  compared  to 1995  due to an  increase  in
invested  cash  from  sales  of  Class  A  limited  partner  units  pending  the
Partnership's initial acquisition of equipment.

                                       -8-

<PAGE>


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

Results of Operations, continued
---------------------

EXPENSES

Management fees paid to and direct  services from general  partner  increased in
1997  compared  to 1996 due to  growth  in the  Partnership's  lease  portfolio.
General and administrative expenses decreased in 1997 compared to 1996 primarily
due to lower legal fees associated with bankrupt lessees.

PROVISION FOR LOSSES

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

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

The  provision  for  losses  recorded  during  1997  was  primarily  due  to the
Partnership's loss exposure related to troubled lessees. In addition, there were
also losses  related to the sales of equipment  having a lower fair market value
than originally anticipated.

The  provision  for losses  recorded  during 1996 was primarily for a deficiency
resulting from a lessee default under a note secured by a high pressure cleaning
unit  under  lease  to the  lessee.  Although  the  lessee  has  not  filed  for
bankruptcy,  they have  discontinued  their  operations  and have ceased  making
rental  payments.  The equipment was repossessed and sold by the lender pursuant
to the terms of the non-recourse debt agreement.  The sale of the equipment went
toward  retiring the debt and the general  partner  believes it is unlikely that
the deficiency will be recovered.

The  provision for losses  recorded  during 1995 was related to two lessees that
filed for bankruptcy protection.


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 distribution to the partners.


                                      -9-

<PAGE>

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

Liquidity and Capital Resources, continued
-------------------------------

During 1997, 1996 and 1995, the Partnership acquired equipment subject to leases
with a total equipment purchase price of approximately $10,426,000, $35,688,000,
and  $36,496,000,   respectively,   net  of  non-recourse  debt  to  lenders  of
approximately $3,240,000, $11,368,000 and $2,685,000, respectively. Also, during
1996 and 1995 the  Partnership  discounted  future rental  payments from certain
leases  to  non-recourse   lenders  and  received  proceeds  of  $4,767,000  and
$15,970,000, respectively.  Non-recourse borrowing against unleveraged leases in
the  Partnership's  lease  portfolio  may occur in the future as well,  when the
general partner, in its discretion,  determines that such non-recourse financing
is in the best interest of the Partnership.

During June 1995,  CAII and the  Partnership  entered into an  agreement  with a
lender to debt finance up to $50 million of lease receivables as part of a lease
securitization   program.  Under  this  program,  the  Partnership's   financing
obligations are collateralized by the leased equipment and related rentals,  and
the  Partnership  has no recourse  liability to the lender for  repayment of the
debt. In addition,  this securitized debt vehicle provides  attractive  interest
rates.  Aggregate  closings through December 31, 1997 were $10.3 million for the
Partnership.

During  1997,  1996 and 1995,  the  Partnership  declared  distributions  to the
partners of approximately $5,308,000, $5,155,000, and $2,712,000,  respectively.
A substantial  portion of such distributions are 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 a portion of 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 general partner believes that the Partnership will generate  sufficient cash
flows from operations during 1998, to (1) meet current  operating  requirements,
(2) enable it to fund cash distributions to both the Class A and Class B limited
partners at annualized rates of 10.5% on their capital  contributions  (portions
of which are expected to  constitute  returns of  capital),  and (3) reinvest in
additional  equipment  under leases,  provided  that  suitable  equipment can be
identified and acquired.

                                       -10-


<PAGE>




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

            Index to Financial Statements and
            Financial Statement Schedule

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

                    Independent Auditors' Report                            12

                    Balance Sheets as of December 31, 1997 and 1996         13

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

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

                    Statements of Cash Flows for the years ended
                      December 31, 1997, 1996 and 1995                     16-17

                    Notes to Financial Statements                          18-29



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

                    Independent Auditors' Report                            30

                    Schedule II - Valuation and Qualifying Accounts         31


                                      -11-

<PAGE>



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




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

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

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

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

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

Denver, Colorado
February 6, 1998

                                      -12-

<PAGE>



                     CAPITAL PREFERRED YIELD FUND-III, L.P.

                                 BALANCE SHEETS
                           December 31, 1997 and 1996

                                     ASSETS

                                                          1997          1996
                                                      ------------  ------------

Cash and cash equivalents                             $  2,813,686  $    798,140
Accounts receivable                                      1,044,068       883,201
Receivable from related party                                6,523        42,691
Equipment held for sale or re-lease                        506,197             -
Net investment in direct finance leases                  3,326,833     5,479,265
Leased equipment, net                                   46,193,567    55,261,435
Deferred financing costs                                         -         6,577
                                                      ------------  ------------
    Total assets                                      $ 53,890,874  $ 62,471,309
                                                      ============  ============


                        LIABILITIES AND PARTNERS' CAPITAL

Liabilities:
  Accounts payable and accrued liabilities            $    687,727  $    684,684
  Payables to affiliates                                    39,276        54,351
  Rents received in advance                                632,478       461,450
  Distributions payable to partners                        441,650       444,611
  Discounted lease rentals                              15,828,174    23,437,868
                                                      ------------  ------------
  Total liabilities                                     17,629,305    25,082,964
                                                      ------------  ------------

Partners' capital:
  General partner                                                -             -
  Limited partners:
    Class A 500,000 units authorized; 493,362 and
      496,660 units issued and outstanding in 1997
      and 1996, respectively                            35,818,106    36,936,407
    Class B                                                443,463       451,938
                                                      ------------  ------------

      Total partners' capital                           36,261,569    37,388,345
                                                      ------------  ------------

      Total liabilities and partners' capital         $ 53,890,874  $ 62,471,309
                                                      ============  ============

                 See accompanying notes to financial statements.

                                      -13-

<PAGE>



                     CAPITAL PREFERRED YIELD FUND-III, L.P.

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

<TABLE>
<CAPTION>


                                                      1997             1996             1995
                                                  -----------      -----------      -----------
<S>                                              <C>              <C>              <C>        
REVENUE:
    Operating lease rentals                       $18,695,558      $16,399,312      $ 7,683,820
    Direct finance lease income                       365,094          414,309          273,067
    Equipment sales margin                          1,821,419          110,831                -
    Interest income                                   112,367          320,679          238,293
                                                  -----------      -----------      -----------
          Total revenue                            20,994,438       17,245,131        8,195,180
                                                  -----------      -----------      -----------

EXPENSES:
    Depreciation                                   14,058,981       12,585,981        5,895,602
    Management fees payable to general partner        409,275          390,559          156,351
    Direct services from general partner              120,015           93,690           93,598
    General and administrative                        236,514          265,260          203,747
    Interest on discounted lease rentals            1,505,324        1,785,640        1,017,172
    Provision for losses                              250,000           50,000          275,000
                                                  -----------      -----------      -----------
             Total expenses                        16,580,109       15,171,130        7,641,470
                                                  -----------      -----------      -----------
Net income                                        $ 4,414,329      $ 2,074,001      $   553,710
                                                  ===========      ===========      ===========

Net income allocated:
    To the general partner                        $    53,076      $    68,376      $    64,746
    To the Class A limited partners                 4,317,228        1,985,340          483,976
    To the Class B limited partner                     44,025           20,285            4,988
                                                  -----------      -----------      -----------
                                                  $ 4,414,329      $ 2,074,001      $   553,710
                                                  ===========      ===========      ===========

Net income per weighted average Class A limited
    partner unit outstanding                      $      8.71      $      4.13      $      1.91
                                                  ===========      ===========      ===========

Weighted average Class A limited partner
    units outstanding                                 495,621          480,456          253,759
                                                  ===========      ===========      ===========
</TABLE>







                 See accompanying notes to financial statements.

                                      -14-

<PAGE>



                     CAPITAL PREFERRED YIELD FUND-III, L.P.

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

<TABLE>
<CAPTION>

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

<S>                                      <C>          <C>        <C>             <C>          <C>         
Partners' capital, January 1, 1995        $       -    130,993    $ 10,799,497    $ 130,233    $ 10,929,730

Capital contributions                             -    252,777      25,277,699      240,000      25,517,699
Commissions and offering costs on
  sales of Class A limited partner units    (36,071)         -      (3,571,045)           -      (3,607,116)
Redemptions                                       -     (1,655)       (146,220)           -        (146,220)
Net income                                   64,746          -         483,976        4,988         553,710
Distributions declared to partners          (28,675)         -      (2,660,332)     (23,179)     (2,712,186)
                                          ---------   --------    ------------    ---------    ------------

Partners' capital, December 31, 1995              -    382,115      30,183,575      352,042      30,535,617

Capital contributions                             -    116,230      11,623,048      130,000      11,753,048
Commissions and offering costs on
  sales of Class A limited partner units    (16,889)         -      (1,672,031)           -      (1,688,920)
Redemptions                                       -     (1,685)       (130,721)           -        (130,721)
Net income                                   68,376          -       1,985,340       20,285       2,074,001
Distributions declared to partners          (51,487)         -      (5,052,804)     (50,389)     (5,154,680)
                                          ---------   --------    ------------    ---------    ------------

Partners' capital, December 31, 1996              -    496,660      36,936,407      451,938      37,388,345

Redemptions                                       -     (3,250)       (233,500)           -        (233,500)
Net income                                   53,076          -       4,317,228       44,025       4,414,329
Distributions declared to partners          (53,076)         -      (5,202,029)     (52,500)     (5,307,605)
                                          ---------   --------    ------------    ---------    ------------

Partners' capital, December 31, 1997      $       -    493,410    $ 35,818,106    $ 443,463    $ 36,261,569
                                          =========   ========    ============    =========    ============

</TABLE>









                 See accompanying notes to financial statements.

                                      -15-

<PAGE>



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


<TABLE>
<CAPTION>

                                                                           1997             1996             1995
                                                                       ------------     ------------     -------------
<S>                                                                   <C>              <C>              <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                           $  4,414,329     $  2,074,001     $    553,710
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Depreciation                                                         14,058,981       12,585,981        5,895,602
    Provision for losses                                                    250,000           50,000          275,000
    Cost of equipment sales                                               4,955,363          343,214                -
    Recovery of investment in direct finance leases                       1,903,849        2,204,916          737,285
    Changes in assets and liabilities:
      (Increase) decrease in accounts receivable                           (188,746)         484,435       (1,231,163)
      (Increase) decrease in receivable from related party                   36,168          (42,691)          19,917
      (Increase) decrease in deferred financing costs                         6,577           79,137          (85,714)
      Increase in accounts payable and accrued liabilities                    3,043          282,898          282,983
      Increase (decrease) in payables to affiliates                         (15,075)         (51,845)          16,301
      Increase in rents received in advance                                 171,028          225,264          229,446
                                                                       ------------     ------------     ------------
Net cash provided by operating activities                                25,595,517       18,235,310        6,693,367
                                                                       ------------     ------------     ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchases of equipment on operating leases from affiliate            (7,135,854)     (23,483,867)     (29,208,749)
    Investment in direct financing leases, acquired from affiliates         (50,602)        (836,057)      (4,602,039)
                                                                       ------------     ------------     ------------
Net cash used in investing activities                                    (7,186,456)     (24,319,924)     (33,810,788)
                                                                       ------------     ------------     ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from Class A capital contributions                                   -       11,623,048       25,277,699
    Proceeds from Class B capital contributions                                   -          130,000          240,000
    Proceeds from discounted lease rentals                                        -        4,767,017       15,969,859
    Principal payments on discounted lease rentals                      (10,849,449)      (9,561,511)      (2,950,770)
    Redemptions of Class A limited partner units                           (233,500)        (130,721)        (146,220)
    Commissions paid to affiliate in connection with the sale of
      Class A limited partner units                                               -       (1,162,305)      (2,500,740)
    Non-accountable organization and offering expense
      reimbursement paid to the general partner in
      connection with the sale of Class A limited partner units                   -         (526,615)      (1,064,160)
    Distributions to partners                                            (5,310,566)      (5,030,230)      (2,489,733)
                                                                       ------------     ------------     ------------
Net cash (used in) provided by financing activities                     (16,393,515)         108,683       32,335,935
                                                                       ------------     ------------     ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                      2,015,546       (5,975,931)       5,218,514
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                              798,140        6,774,071        1,555,557
                                                                       ------------     ------------     ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR                               $  2,813,686     $    798,140     $  6,774,071
                                                                       ============     ============     ============


                                      -16-

<PAGE>



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

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

Supplemental disclosure of cash flow information:
    Interest paid on discounted lease rentals                          $  1,505,324     $  1,785,640     $  1,017,172
Supplemental disclosure of noncash investing and
  financing activities:
    Reduction in Partners' capital accounts for commissions
      and offering costs payable to affiliates                                    -                -           42,217
    Discounted lease rentals assumed in equipment acquisitions            3,239,755       11,368,469        2,685,425

</TABLE>






























                 See accompanying notes to financial statements.

                                      -17-

<PAGE>



                     CAPITAL PREFERRED YIELD FUND-III, L.P.

                          NOTES TO FINANCIAL STATEMENTS

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

     Organization

     Capital Preferred Yield Fund-III, L.P. (the "Partnership") was organized on
     November  2, 1993 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, 2011 unless  terminated
     earlier in  accordance  with the terms of the  Partnership  Agreement.  All
     Partnership equipment is expected to be sold and the Partnership liquidated
     between  2000 and 2003.  The  general  partner  of the  Partnership  is CAI
     Equipment   Leasing  IV  Corp.,  a  wholly  owned   subsidiary  of  Capital
     Associates, Inc. ("CAI").

     The general partner manages the Partnership, including investment of funds,
     purchase and sale of equipment,  lease negotiation and other administrative
     duties.  The  Partnership  initially  sold 500,000 Class A limited  partner
     units to 4,968  investors  at a price of $100 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.

     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 Allocations

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

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


                                      -18-

<PAGE>


                     CAPITAL PREFERRED YIELD FUND-III, L.P.

                    NOTES TO FINANCIAL STATEMENTS, continued

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

     Partnership Allocations, 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  10.5%  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  10.5%  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,  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:


                                      -19-

<PAGE>


                     CAPITAL PREFERRED YIELD FUND-III, L.P.

                    NOTES TO FINANCIAL STATEMENTS, continued


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

       Profits and Losses (continued)
       ------------------

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

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





                                      -20-

<PAGE>


                     CAPITAL PREFERRED YIELD FUND-III, L.P.

                    NOTES TO FINANCIAL STATEMENTS, continued

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

     Recently Issued Financial Accounting Standards

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

     Long-lived Assets

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

     Lease Accounting

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

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




                                      -21-

<PAGE>


                     CAPITAL PREFERRED YIELD FUND-III, L.P.

                    NOTES TO FINANCIAL STATEMENTS, continued

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

     Net Investment in Direct Financing Leases ("DFLs")

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

     Equipment on Operating Leases ("OLs")

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

     Non-recourse Discounting of Rentals

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



                                      -22-

<PAGE>


                     CAPITAL PREFERRED YIELD FUND-III, L.P.

                    NOTES TO FINANCIAL STATEMENTS, continued

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

     Allowance for Losses

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

     Transactions Subsequent to Initial Lease Termination

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

     Income Taxes

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

     Cash Equivalents

       The Partnership considers short-term,  highly liquid investments that are
       readily convertible to known amounts of cash to be cash equivalents.

       Cash equivalents of approximately $2,681,000 and $747,000 at December 31,
       1997 and 1996,  respectively,  are comprised of  investments  in a mutual
       fund  which  invests  solely in U.S.  Government  treasury  bills  having
       maturities of 90 days or less.

     Deferred Financing Costs

       Deferred  financing  costs,  which were  incurred by the  Partnership  in
       connection with an agreement with a lender to debt finance lease rentals,
       are charged ratably to operations as additional interest expense over the
       expected life of the underlying indebtedness.


                                      -23-

<PAGE>


                     CAPITAL PREFERRED YIELD FUND-III, L.P.

                    NOTES TO FINANCIAL STATEMENTS, continued

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

     Net Income Per Class A Limited Partner Unit

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

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

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

                                                      1997             1996
                                                  -----------      -----------

     Minimum lease payments receivable            $ 3,072,652      $ 5,340,323
     Estimated residual values                        606,407          749,760
     Less unearned income                            (352,226)        (610,818)
                                                  -----------      -----------

             Total                                $ 3,326,833      $ 5,479,265
                                                  ===========      ===========

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

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

                                                        1997            1996
                                                  --------------  -------------

     Transportation and industrial equipment      $  41,131,072   $  47,672,965
     Computers and peripherals                       13,810,207      12,437,727
     Furniture, fixtures and equipment               14,197,395      13,329,611
     Other                                            1,963,783         657,330
                                                  -------------   -------------
                                                     71,102,457      74,097,633
     Less accumulated depreciation                  (24,677,113)    (18,658,399)
     Allowance for losses                              (231,777)       (177,799)
                                                  -------------   -------------

                                                  $  46,193,567   $  55,261,435
                                                  =============   =============

     Depreciation  expense for 1997, 1996 and 1995 was $14,058,981,  $12,585,981
     and $5,895,602, respectively.





                                      -24-

<PAGE>


                     CAPITAL PREFERRED YIELD FUND-III, L.P.

                    NOTES TO FINANCIAL STATEMENTS, continued

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

     Future minimum lease payments  receivable from  noncancelable  leases as of
     December 31, 1997 are:

          Years Ending December 31,                    DFLs            OLs
          -------------------------                    ----            ---
                  1998                            $ 1,632,178      $ 15,207,677
                  1999                              1,241,601        10,351,485
                  2000                                196,149         3,890,580
                  2001                                  2,724         1,121,646
                  2002                                      -           254,764
                  Thereafter                                -           229,962
                                                  -----------      ------------

                           Total                  $ 3,072,652      $ 31,056,114
                                                  ===========      ============

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

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

          Years Ending December 31,
          -------------------------

                  1998                                             $  8,792,271
                  1999                                                5,593,718
                  2000                                                1,203,004
                  2001                                                  231,550
                  2002                                                    7,631
                                                                   ------------

                           Total                                   $ 15,828,174
                                                                   ============

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

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

       Under the terms of the Partnership Agreement, 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,  up
       to 9% of which are paid to participating broker-dealers.  During 1996 and
       1995,  CAI  Securities   Corporation   earned  commissions  and  fees  of
       approximately   $1,162,000   and   $2,528,000,   of  which  $992,000  and
       $2,189,000, respectively, were paid to participating broker-dealers.


                                      -25-

<PAGE>


                     CAPITAL PREFERRED YIELD FUND-III, L.P.

                    NOTES TO FINANCIAL STATEMENTS, continued

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

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

       As provided in the  Partnership  Agreement,  the general  partner  earned
       approximately  $465,000 and  $1,011,000,  as  reimbursement  for expenses
       incurred  during  1996 and 1995,  respectively,  in  connection  with the
       organization  of the  Partnership  and the  offering  of Class A  limited
       partner units.  The general partner also received  approximately  $62,000
       and $68,000,  as reimbursement for due diligence expenses incurred during
       1996 and 1995, respectively.

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

       Under terms of the  Partnership  Agreement,  the Class B limited  partner
       made capital  contributions  to the  Partnership of $130,000 and $240,000
       during 1996 and 1995, respectively.

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

       The  general  partner  receives a fee equal to 3.5% of the sales price of
       equipment sold to the Partnership (up to a maximum  cumulative  amount as
       specified  in  the  Partnership  Agreement),  1.5%  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 lessees. Origination and evaluation fees
       totaled approximately  $347,000,  $1,185,000 and $1,210,000 in 1997, 1996
       and 1995, respectively,  all of which were capitalized by the Partnership
       as part of the cost of equipment on operating  leases and net  investment
       in direct financing leases.

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

       The general  partner  earns  management  fees for  services  performed in
       connection with managing the Partnership's equipment equal to 2% of gross
       rentals  received as permitted under terms of the Partnership  Agreement.
       The general partner earned approximately $409,000,  $391,000 and $156,000
       during 1997, 1996 and 1995, respectively.

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

       The  general  partner and its  affiliates  provide  accounting,  investor
       relations,    billing,    collecting,   asset   management,   and   other
       administrative  services to the Partnership.  The Partnership  reimburses
       the  general  partner  for  these  services  performed  on its  behalf as
       permitted under the terms of the Partnership  Agreement.  The Partnership
       recorded  approximately  $120,000,  $94,000 and $94,000 during 1997, 1996
       and 1995, respectively.

                                      -26-

<PAGE>


                     CAPITAL PREFERRED YIELD FUND-III, L.P.

                    NOTES TO FINANCIAL STATEMENTS, continued

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

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

       The  Partnership  purchased  equipment  from CAII,  with a total purchase
       price  of   approximately   $10,426,000,   $35,688,000   and  $36,496,000
       (including  $3,240,000,  $11,369,000  and $2,685,000 of discounted  lease
       rentals)  during  1997,  1996 and  1995,  respectively.  The  Partnership
       purchased the equipment at CAII's  historical cost plus  reimbursement of
       other  net  acquisition   costs,  as  provided  for  in  the  Partnership
       Agreement.


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

       Payables to affiliates of  approximately  $39,000 and $54,000 during 1997
       and 1996, respectively,  consists of direct services, management fees and
       expenses payable to the general partner and its affiliates.


       Receivable from Related Party
       -----------------------------

       Receivable  from related party  represents  rents received by the general
       partner for a lease that was subsequently sold to the Partnership.


7.   Tax Information (Unaudited)
     ---------------------------

     The following reconciles net income for financial reporting purposes to the
     income for  federal  income  tax  purposes  for the year and  period  ended
     December 31,:

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

     Net income per financial
       statements                    $  4,414,329   $  2,074,001   $    553,710
     Direct financing leases            1,900,541      2,192,802        737,287
     Depreciation                      (4,277,382)    (6,587,214)    (3,820,726)
     Provision for losses                 250,000         50,000        275,000
     Other                               (932,509)       595,201        (24,469)
                                     ------------   ------------   ------------

     Partnership income for
       federal income tax purposes   $  1,354,979   $ (1,675,210)  $ (2,279,198)
                                     ============   ============   ============



                                      -27-

<PAGE>


                     CAPITAL PREFERRED YIELD FUND-III, L.P.

                    NOTES TO FINANCIAL STATEMENTS, continued

7.   Tax Information (Unaudited), continued
     ---------------------------

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

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

     Partners' capital per
       financial statements         $  36,261,569   $  37,388,345  $ 30,535,617
     Commissions and offering costs     7,184,603       7,184,603     5,495,683
     Direct financing leases            4,862,737       2,962,196       769,394
     Depreciation                     (15,184,234)    (10,906,852)   (4,319,638)
     Provision for losses                 575,000         325,000       275,000
     Other                               (355,482)        582,258        (8,487)
                                    -------------   ------------- -------------

     Partners' capital for federal
       income tax purposes          $  33,344,193   $  37,535,550  $ 32,747,569
                                    =============   =============  ============

8.   Concentration of Credit Risk
     ----------------------------

     Approximately 70% of the Partnership's  equipment under lease was leased to
     investment  grade  companies.  Pursuant to the  Partnership  Agreement,  an
     investment  grade  lessee  is a  company  (i) with a net worth in excess of
     $100,000,000  (and no debt issues  that are  rated),  or (ii) with a credit
     rating of not less than Baa as  determined  by Moody's  Investor  Services,
     Inc. or comparable credit rating as determined by another recognized credit
     rating  service;  or (iii) a lessee,  all of whose lease payments have been
     unconditionally  guaranteed  or supported by a letter of credit issued by a
     company meeting one of the above requirements.

     The  Partnership's  cash balance is maintained  with a high credit  quality
     financial institution. At times, such balances may be in excess of the FDIC
     insurance limit due to the 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.

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

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


                                      -28-

<PAGE>


                     CAPITAL PREFERRED YIELD FUND-III, L.P.

                    NOTES TO FINANCIAL STATEMENTS, continued

9.   Disclosures about Fair Value of Financial Instruments, continued
     -----------------------------------------------------

     As  of  December  31,  1997,  discounted  lease  rentals  of  approximately
     $15,828,000 had a fair value of approximately  $15,132,000.  The fair value
     was  estimated  utilizing  market rates of comparable  debt having  similar
     maturities and credit quality as of December 31, 1997.

                                      -29-

<PAGE>





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



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

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

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

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

Denver, Colorado
February 6, 1998


                                      -30-

<PAGE>



                     CAPITAL PREFERRED YIELD FUND-III, L.P.
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
              for the years ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>


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

             1997
-------------------------------
<S>                              <C>           <C>          <C>            <C>              <C>
Allowance for losses:
  Equipment on leases             $ 177,799     $250,000     $       -      $ (196,022)      $ 231,777
                                  =========     ========     =========      ==========       =========


             1996
-------------------------------
Allowance for losses:
  Equipment on leases             $ 275,000    $ 50,000      $   1,331      $ (148,532)      $ 177,799
                                  =========     ========     =========      ==========       =========


             1995
-------------------------------
Allowance for losses:
  Equipment on leases             $       -     $275,000     $       -      $        -       $ 275,000
                                  =========     ========     =========      ==========      = ========



</TABLE>





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












                  See accompanying independent auditor's report

                                      -31-

<PAGE>



Item 9.  Changes  in  and  Disagreements  with  Accountants  on  Accounting  and
         -----------------------------------------------------------------------
         Financial Disclosure
         --------------------

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 IV Corporation

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

    John F. Olmstead        President and Director

    Dennis J. Lacey         Senior Vice President and Director

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

    Richard H. Abernethy    Vice President and Director

    John A. Reed            Vice President, Assistant Secretary and Director

    Joseph F. Bukofski      Vice President, Assistant Secretary and Director

    Robert A. Golden        Director

    Mick Myers              Director

    Ann Danielson           Assistant Vice President

    David J. Anderson       Chief Accounting Officer and Secretary

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

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

                                      -32-

<PAGE>



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

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

RICHARD H. ABERNETHY,  age 43, joined CAII in April 1992 as Equipment  Valuation
Manager  and  currently  serves  as Vice  President  of  Asset  Management.  Mr.
Abernethy has thirteen years experience in the leasing industry, including prior
positions with Barclays  Leasing Inc.,  from November 1986 to February 1992, and
Budd Leasing  Corporation,  from January 1981 to November  1986.  Mr.  Abernethy
holds a Bachelor of Arts in Business Administration from the University of North
Carolina at Charlotte.

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

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

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

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




                                      -33-

<PAGE>



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

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

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


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

No compensation was paid by the Partnership to the officers and directors of the
general partner. See Item 13 of this Report,  "Certain Relationships and Related
Transactions,"  which is incorporated herein by reference,  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,  is the sole Class B limited
         partner.

         CAI Equipment Leasing IV Corp. is the general partner.

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

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

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



                                      -34-

<PAGE>



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

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

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

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

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


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

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

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


                        ACQUISITION AND OPERATING STAGES


Acquisition Fee and Acquisition Cost Reimbursement
--------------------------------------------------

The general partner receives a fee equal to 3.5% of the sales price of equipment
sold to the Partnership,  1.5% of which  represents  compensation for selecting,
negotiating  and  consummating  the acquisition of the equipment and 2% of which
represents reimbursement for services rendered in connection with evaluating the
suitability  of  the  equipment  and  the  credit   worthiness  of  the  Lessee.
Origination and evaluation fees totaled  approximately  $347,000 in 1997, all of
which were  capitalized  by the  Partnership as part of the cost of equipment on
operating leases and net investment in direct financing leases.


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

The general partner earns management fees as compensation for services  rendered
in connection  with managing the  Partnership's  equipment  equal to 2% of gross
rentals received. Such fees totaled approximately $409,000 for 1997.


                                      -35-

<PAGE>



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

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

The general  partner is entitled to  reimbursement  of certain  expenses paid on
behalf  of  the   Partnership   which  are  incurred  in  connection   with  the
Partnership's  operations.  Such reimbursable expenses amounted to approximately
$120,000 during 1997.

Additionally,   the  general  partner  is  allocated  1%  of  Partnership   cash
distributions  and net income  relating to its general  partner  interest in the
Partnership.  Distributions  and net income  allocated  to the  general  partner
totaled approximately $13,000 and $13,000, respectively, for 1997. Distributions
and net income  allocated to the Class B limited partner  totaled  approximately
$13,000 and $9,000, respectively, for 1997.

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

<TABLE>
<CAPTION>


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

<S>       <C>                            <C>  <C>                          <C>            <C>            <C>           <C>        
02/28/97   HK Systems, Inc.               45   Phone system                 $     38,568   $     39,904   $         -   $    12,447
04/28/97   Maryland Casualty              24   Mail sorter system upgrade          8,523          8,818             -        46,275
04/30/97   Texas Utilities                36   Cisco routers                     137,936        142,329             -        44,619
05/13/97   System One                     33   Computer network                  670,650        693,166             -       250,015
05/09/97   General Motors                 36   Material handling equipment         6,320          6,539             -         2,116
05/09/97   General Motors                 36   Material handling equipment        38,079         39,398             -        12,746
05/16/97   General Motors                 36   Forklift                            7,681          7,947             -         2,571
05/15/97   Thomson Industries             60   Gear shaper                        64,304         66,532             -        11,897
06/09/97   Owens Corning                  30   Computer equipment              1,074,472      1,111,702             -       399,852
06/10/97   William Sonoma                 36   POS equipment                     237,154        245,372             -        73,344
06/13/97   General Motors                 36   Scrubbers                          12,904         13,351             -         4,320
06/24/97   Paramount                       7   Printing equipment                 96,442         99,784             -       108,154
07/25/97   Alliant Techsystems, Inc.      24   Reflow oven                        68,786         71,170             -        24,818
07/21/97   HK Systems                     52   Computer equipment                 10,339         10,697             -         3,639
08/11/97   Diamond Shamrock Refining      31   POS equipment                   1,692,369      1,751,009             -       577,814
08/11/97   Analysis & Technology, Inc.    36   Computer equipment                114,693        118,557        97,601        38,030
08/29/97   General Motors Corp.           60   Material handling equipment       113,364        117,293             -        22,655
08/29/97   General Motors Corp.           60   Material handling equipment        83,701         86,602             -        16,393
08/29/97   General Motors Corp.           60   Material handling equipment        21,717         22,470             -         4,092
08/29/97   General Motors Corp.           60   Material handling equipment        22,994         23,791             -         4,493
08/29/97   General Motors Corp.           60   Material handling equipment       187,773        194,279             -        36,720
08/29/97   General Motors Corp.           60   Material handling equipment       241,831        250,210             -        49,562
08/29/97   General Motors Corp.           60   Material handling equipment        54,123         55,999             -        10,231
08/29/97   General Motors Corp.           60   Material handling equipment        55,777         57,710             -        10,440
08/29/97   General Motors Corp.           60   Material handling equipment        75,371         77,982             -        14,323
09/26/97   General Motors Corp.           36   Material handling equipment        14,236         14,729             -         4,765
09/26/97   General Motors Corp.           36   Material handling equipment        38,852         40,199             -        12,265
10/07/97   General Motors Corp.           36   Material handling equipment        52,414         54,434             -        17,611
10/07/97   Apple Computer                 23   Phone system                      572,898        592,749       419,271       225,516
10/07/97   Norlight, Inc.                 46   Phone system                       86,672         89,675        75,026        23,520


                                      -36-

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

10/07/97   Norlight, Inc.                 46   Phone system                 $    120,861   $    125,049   $   120,861   $    35,808
10/07/97   Texas Utilities Company        32   Phone system                      661,868        684,802       455,233       243,960
10/07/97   Texas Utilities Company        32   Phone system                       46,588         48,202        32,043        17,172
10/07/97   Texas Utilities Company        32   Phone system                       36,779         38,054        25,314        13,740
10/07/97   Apple Computer                 24   Phone system                      178,983        185,185       136,250        70,920
10/07/97   Apple Computer                 24   Phone system                      441,862        457,172       328,138       171,204
10/07/97   GE Appliances                  27   Phone system                      309,902        320,641       217,755       101,712
10/07/97   Norlight, Inc.                 42   Phone system                      487,269        504,152       399,340       123,720
10/07/97   Norlight, Inc.                 43   Phone system                    1,131,474      1,170,679       932,923        25,544
10/17/97   Honeywell, Inc.                36   Computer equipment                 41,728         43,174             -        14,056
10/31/97   Shisedo America, Inc.          62   Material handling equipment        64,500         66,735             -        12,423
10/31/97   Honeywell, Inc.                33   Laptop computers                  110,117        113,707             -        39,138
11/07/97   General Motors Corp.           36   Material handling equipment        17,301         17,900             -         5,791
11/20/97   Analysis & Technology, Inc.    34   Computer equipment                110,384        113,984             -        38,845
11/20/97   Analysis & Technology, Inc.    35   Computer equipment                219,949        227,134             -        75,533
12/24/97   Lexmark International, Inc.    24   Material handling equipment       113,132        117,052             -        53,299
12/30/97   Thomson Saginaw                60   Material handling equipment        85,239         88,192             -        16,714
                                                                            ------------   ------------   -----------   -----------
                                                                            $ 10,078,879   $ 10,426,211   $ 3,239,755   $ 3,124,822
                                                                            ============   ============   ===========   ===========

</TABLE>

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


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

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

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

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

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




                                      -37-

<PAGE>



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

     (c) Exhibits required to be filed.

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

          4.1*    Capital Preferred Yield Fund-III Limited Partnership Agreement

          4.2*    First  Amendment  to  Limited Partnership Agreement dated June
                  14, 1994

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

                                      -38-

<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 26, 1998            Capital Preferred Yield Fund-III, L.P.

                                  By:  CAI Equipment Leasing IV 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 26, 1998.

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

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

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

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

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

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

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

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

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

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

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

                                      -39-