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, 1998

[ ]  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, L.P.
             ------------------------------------------------------
             (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 39

                               Page 1 of 40 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 Class B limited partner of the Partnership.  In exchange for its
Class B limited  partner  interest,  CAII  contributed  cash of $10,000 for each
$1,000,000 of investors'  capital  contribution  (i.e.,  cash investments in the
Partnership)  to the  Partnership.  The Class B limited  partner's  interest  in
Distributable  Cash is subordinated to the Class A limited  partners'  interest.
The  contributions  of CAII  were  made  simultaneously  with  the  purchase  of
equipment by the Partnership.  CAII has 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  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 1998, the Partnership  acquired equipment of various types under lease to
third  parties.  All of the  equipment  was  purchased  by  CAII  directly  from
manufacturers  or  from  other   independent  third  parties  and  sold  to  the
Partnership.   The  equipment  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  1998.  The  Partnership  expects that a
majority  of the  equipment  purchased  during 1999 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
non-recourse  basis.  The proceeds of this  non-recourse  debt financing will be
utilized  to finance  the  purchase  of  equipment  under  lease or to invest 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 1998, the  Partnership  leased  equipment to investment  grade lessees in
diverse industries including the financial services, retail, telecommunications,
energy and  manufacturing  industries.  Approximately  73% of the  Partnership's
total  equipment  under  lease was  leased to  investment  grade  lessees  as of
December 31, 1998.  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  is
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,   financing
capabilities,  and remarketing expertise 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  revenue  of
Partnership during 1998.

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, 1998.

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

(a)       The  Partnership's  Class A  limited  partner  units,  Class B limited
          partner 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, 1998, there were 2,883 Class A limited partners.

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

          During 1998, 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, 1997    January 1998          $  0.875     $    432,859
          January 31, 1998     February 1998            0.875          431,108
          February 28, 1998    March 1998               0.875          431,108
          March 31, 1998       April 1998               0.875          432,378
          April 30, 1998       May 1998                 0.875          430,058
          May 31, 1998         June 1998                0.875          429,927
          June 30, 1998        July 1998                0.875          432,072
          July 31, 1998        August 1998              0.875          429,927
          August 31, 1998      September 1998           0.875          429,870
          September 30, 1998   October 1998             0.875          432,015
          October 31, 1998     November 1998            0.875          429,870
          November 30, 1998    December 1998            0.875          429,870
                                                     --------      -----------
                                                     $  10.50      $ 5,171,062
                                                     ========      ===========


                                       -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 equip  ment)  have been  realized  at the
          termination of the Partnership.

          The  distribution  for the month ended  December  31,  1998,  totaling
          $432,015, was paid to the Class A limited partners on January 8, 1999.
          Distributions  to the  general  partner  and Class B  limited  partner
          during  1998  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 1999, 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 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
                                                     =======        ===========



                                       -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  note  1  to  Notes  to
          Consolidated Financial Statements.

                               Distribution Amount           Distribution %
                                per $100 Class A            per $100 Class A
                              Limited Partner Unit        Limited Partner Unit
                 Payment        (computed on                (computed on
              Made During      weighted average)          weighted average) (1)
              -----------     --------------------        ---------------------

                 1994              $  5.25                       10.5%
                 1995                10.50                       10.5%
                 1996                10.50                       10.5%
                 1997                10.50                       10.5%
                 1998                10.50                       10.5%
                                   -------
                                   $ 47.25
                                   =======

       (1)    Cumulative  distributions,  as  described  in note 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  1998.  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
herein.

<TABLE>
<CAPTION>

                                                                          Years Ended December 31,                                
                                                     --------------------------------------------------------------------
                                                        1998          1997          1996          1995           1994*
                                                     -----------   -----------   -----------   -----------    -----------

<S>                                                 <C>           <C>           <C>           <C>            <C>        
Total revenue                                        $18,490,540   $20,994,438   $17,245,131   $ 8,195,180    $   512,864
Net income                                             1,745,560     4,414,329     2,074,001       553,710         42,939
Net income per weighted average Class A
  limited partner unit outstanding                          3.40          8.71          4.13          1.91           0.27
Total assets                                          47,803,687    53,890,874    62,471,309    48,463,584     12,365,947
Discounted lease rentals                              12,603,909    15,828,174    23,437,868    16,863,892      1,159,380
Distributions declared to partners                     5,275,471     5,307,605     5,154,680     2,712,186        453,996
Distributions declared per weighted average
  Class A limited partner unit outstanding                 10.50         10.50         10.50         10.50           6.13

</TABLE>

       *  Period from June 14, 1994 (commencement of operations) to December 31,
          1994.



                                       -6-

<PAGE>



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

I.    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>
                                 Years Ended December 31,                    Years Ended December 31,
                                -------------------------                  --------------------------
                                   1998          1997         Change          1997            1996         Change   
                                -----------   -----------   -----------    -----------    -----------    -----------

<S>                          <C>             <C>           <C>            <C>           <C>             <C>        
Leasing margin                $  3,295,648    $ 3,496,347   $  (200,699)   $ 3,496,347   $ 2,442,000     $ 1,054,347
Equipment sales margin             450,186      1,821,419     (1,371,233)    1,821,419       110,831       1,710,588
Interest income                    165,182        112,367         52,815       112,367       320,679        (208,312)
Management fees paid to
  general partner                 (419,816)      (409,275)       (10,541)    (409,275)      (390,559)        (18,716)
Direct services from
  general partner                 (209,528)      (120,015)       (89,513)    (120,015)       (93,690)        (26,325)
General and administrative        (286,112)      (236,514)       (49,598)    (236,514)      (265,260)         28,746
Provision for losses            (1,250,000)      (250,000)    (1,000,000)    (250,000)       (50,000)       (200,000)
                              ------------    -----------   ------------   ----------    -----------     -----------
   Net income                 $  1,745,560    $ 4,414,329   $ (2,668,769)  $ 4,414,329   $ 2,074,001     $ 2,340,328
                              ============    ===========   ============   ===========   ===========     ===========

</TABLE>

LEASING MARGIN

Leasing margin consists of the following:

<TABLE>
<CAPTION>
                                                             Years Ended December 31, 
                                                 ------------------------------------------------                   
                                                     1998             1997             1996
                                                     ----             ----             ----

<S>                                             <C>              <C>              <C>          
Operating lease rentals                          $  17,367,092    $  18,695,558    $  16,399,312
Direct finance lease income                            508,080          365,094          414,309
Depreciation                                       (13,493,620)     (14,058,981)     (12,585,981)
Interest expense on discounted lease rentals        (1,085,904)      (1,505,324)      (1,785,640)
                                                 -------------    ------------     -------------

  Leasing margin                                 $   3,295,648    $   3,496,347    $   2,442,000
                                                 =============    =============    =============

  Leasing margin ratio                                      18%              18%              15%
                                                 =============    =============    =============

</TABLE>

Leasing margin ratio will vary due to changes in the portfolio, including, among
other things,  the mix of operating  leases versus direct  finance  leases,  the
average maturity of leases comprising the portfolio,  the average residual value
of leases in the portfolio, and the amount of discounted lease rentals financing
the portfolio.

All components of leasing  margin except direct  finance lease income  decreased
for  1998  compared  to  1997  due  primarily  to the  maturity  and  subsequent
remarketing  of equipment on operating  lease financed with  non-recourse  debt.
Operating lease rentals  decreased by 7% while  depreciation  decreased by 4% in
1998 compared to 1997.  Direct  finance lease income  increased due to growth in
the net  investment in direct  finance  leases.  Interest  expense on discounted
lease rentals decreased as the related non-recourse debt was repaid.


                                       -7-

<PAGE>


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

I.    Results of Operations, continued
      ---------------------

LEASING MARGIN, continued

Leasing  margin ratio  increased for the years ended  December 31, 1998 and 1997
compared  to 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 from remarketing consists of the following:

                                                Years Ended December 31,
                                      ------------------------------------------
                                         1998            1997           1996
                                         ----            ----           ----

Equipment sales revenue               $ 4,934,639    $ 6,776,782    $   454,045
Cost of equipment sales                (4,484,453)    (4,955,363)      (343,214)
                                      -----------    -----------    -----------
Equipment sales margin                $   450,186    $ 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.  Currently,  a  portion  of  the
Partnership's  initial  leases have  expired and the  equipment  is either being
re-leased  or sold to the  lessee  or  third  parties.  Equipment  sales  margin
decreased  for  1998  compared  to  1997  primarily  due to the  composition  of
equipment that was sold. The  Partnership  sold certain earth moving,  computer,
manufacturing  and  printing  equipment  at  a  lower  fair  market  value  than
originally anticipated.

INTEREST INCOME

Interest  income  increased  in 1998  compared  to 1997  due to an  increase  in
invested cash pending investment in additional  equipment or distribution to the
partners.

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.


                                       -8-

<PAGE>


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

I.    Results of Operations, continued
      ---------------------

EXPENSES

Management  fees paid to general  partner  increased  in 1998  compared  to 1997
primarily  due to an increase in the receipt of rents billed for direct  finance
leases. Direct services from general partner increased in 1998 and 1997 compared
to 1996 due to an increase in remarketing  activities  associated with equipment
returned  to the  Partnership  at lease  maturity.  General  and  administrative
expenses  increased  in 1998  compared to 1997  primarily  due to an increase in
costs associated with remarketing equipment returned to the Partnership at lease
maturity. 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 occurs) 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.

A  provision  for loss of  $1,250,000  was  recorded  for 1998.  Of this  amount
$286,000 is related to the estimated  decline in residual value on computers and
furniture, fixtures and equipment returned to the Partnership at lease maturity.
In addition,  $495,000 was  recognized  as losses on the sales of certain  earth
moving, computer, manufacturing and printing equipment. The balance is comprised
of anticipated declines in the realizable value of mining equipment for $350,000
and other miscellaneous equipment for $119,000.

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.

                                       -9-

<PAGE>


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

II.   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.

During 1998, 1997 and 1996, the Partnership acquired equipment subject to leases
with a total equipment purchase price of approximately $15,381,000,  $10,426,000
and  $35,688,000,   respectively,   net  of  non-recourse  debt  to  lenders  of
$4,759,000,  $3,240,000,  and $11,368,000,  respectively.  Also, during 1998 and
1996 the  Partnership  discounted  future rental payments from certain leases to
non-recourse  lenders  and  received  proceeds  of  $1,728,000  and  $4,767,000,
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  1998,  1997 and  1996  the  Partnership  declared  distributions  to the
partners of approximately $5,275,000, $5,308,000 and $5,155,000, 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.

The Partnership will enter its liquidation period (as defined in the Partnership
Agreement) on approximately  July 1, 2000. At that time,  except for commitments
to purchase made during the reinvestment  period, the Partnership will no longer
reinvest in additional equipment under leases.

YEAR 2000 ISSUES

An affiliate provides accounting and other  administrative  services,  including
data  processing  services to the  Partnership.  The  affiliate  has conducted a
comprehensive  review of its computer  systems to identify systems that could be
affected  by the Year 2000  issue.  The Year 2000 issue  results  from  computer
programs  being  written  using  two  digits  rather  than  four to  define  the
applicable year.  Certain computer programs which have  time-sensitive  software
could  recognize  a date using "00" as the year 1900  rather than the year 2000.
This could result in major system  failures or  miscalculations.  Certain of the

                                      -10-

<PAGE>


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

II.   Liquidity and Capital Resources, continued
      -------------------------------
   
YEAR 2000 ISSUES, continued

affiliate's  software has already been updated to correctly account for the Year
2000  issue.  In  addition,  the  affiliate  is engaged in a system  conversion,
whereby the affiliate's primary lease tracking and accounting software are being
replaced  with new systems which will account for the Year 2000  correctly.  The
affiliate  expects that the new system will be fully operational by December 31,
1999,  and therefore will be fully Year 2000  compliant.  The affiliate does not
expect any other changes required for the Year 2000 to have a material effect on
its financial position or results of operations.  As such, the affiliate has not
developed any specific  contingency  plans in the event it fails to complete the
conversion to a new system by December 31, 1999. In addition, the affiliate does
not expect any Year 2000 issues  relating to its customers and vendors to have a
material effect on its financial position or results of operations.

III.  New Accounting Pronouncements
      -----------------------------
In June 1997,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial   Accounting   Standards  No.  130,  Reporting   Comprehensive  Income
("Statement  130"),  which  requires   comprehensive   income  to  be  displayed
prominently within the financial statements.  Comprehensive income is defined as
all  recognized  changes in equity during a period from  transactions  and other
events and  circumstances  except those resulting from investments by owners and
distributions to owners. Net income and items that previously have been recorded
directly in equity are included in comprehensive  income.  Statement 130 affects
only the reporting and  disclosure of  comprehensive  income but does not affect
recognition  or  measurement  of income.  Statement  130 is effective for fiscal
years beginning after December 15, 1997, with earlier application permitted. The
Partnership adopted Statement 130 in the first quarter of 1998. The adoption did
not have an impact on its financial reporting.

In June 1997,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  No.  131,  Disclosures  about  Segments  of an
Enterprise and Related  Information  ("Statement  131").  Statement 131 provides
guidance for reporting  information about operating segments in annual financial
statements  and  requires  reporting  of selected  information  about  operating
segments in interim financial reports of public companies.  An operating segment
is defined as a component of a business that engages in business activities from
which it may earn  revenue  and incur  expenses,  a  component  whose  operating
results are regularly  reviewed by the company's chief operating decision maker,
and a component for which discrete financial information is available. Statement
131 establishes  quantitative thresholds for determining operating segments of a
company.  Statement 131 is effective for fiscal years  beginning  after December
15, 1997, with earlier application permitted.  The Partnership adopted Statement
131 in the first  quarter of 1998.  Since the  Partnership  operates in a single
business  segment,  the  adoption  did  not  have  an  impact  on its  financial
reporting.

In June 1998,  the  Financial  Accounting  Standards  Board issued SFAS No. 133,
Accounting for Derivative  Instruments and Hedging Activities ("Statement 133").
Statement 133  establishes  accounting  and reporting  standards for  derivative
instruments and for hedging activities. It requires that an entity recognize all

                                      -11-

<PAGE>


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

III.  New Accounting Pronouncements, continued
      -----------------------------

derivatives  as either  assets or  liabilities  in the  statement  of  financial
position and measure those instruments at fair value. Statement 133 is effective
for  fiscal  years  beginning  after June 15,  1999,  with  earlier  application
permitted.  The  Partnership  will adopt  Statement  133 in the first quarter of
1999. The General  Partner does not expect the adoption to have an impact on its
financial reporting.

IV.   "Safe Harbor" Statement Under the Private Securities Litigation Reform Act
      --------------------------------------------------------------------------
      of 1995
      -------

The statements  contained in this report which are not  historical  facts may be
deemed to  contain  forward-looking  statements  with  respect  to  events,  the
occurrence of which involve risks and uncertainties,  and are subject to factors
that could cause actual future  results to differ both  adversely and materially
from currently anticipated results, including,  without limitation; the level of
lease  originations;  realization  of residual  values;  customer  credit  risk;
competition  from other lessors,  specialty  finance  lenders or banks;  and the
availability  and cost of financing  sources.  Certain specific risks associated
with particular  aspects of the  Partnership's  business are discussed in detail
throughout Parts I and II when and where applicable.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk
          ----------------------------------------------------------

The partnership's  leases with equipment users are non-cancelable and have lease
rates which are fixed at lease inception.  The partnership  finances its leases,
in part, with  discounted  lease rentals.  Discounted  lease rentals are a fixed
rate debt.  The  partnerships  other  assets and  liabilities  are also at fixed
rates.  Consequently  the  partnership has no interest rate risk or other market
risk exposure.


                                      -12-

<PAGE>




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

          Index to Financial Statements and
          Financial Statement Schedule

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

                Independent Auditors' Report                                14

                Balance Sheets as of December 31, 1998 and 1997             15

                Statements of Income for the years ended
                  December 31, 1998, 1997 and 1996                          16

                Statements of Partners' Capital for the years ended
                  December 31, 1998, 1997 and 1996                          17

                Statements of Cash Flows for the years ended
                  December 31, 1998, 1997 and 1996                         18-19

                Notes to Financial Statements                              20-31



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

                Independent Auditors' Report                                32

                Schedule II - Valuation and Qualifying Accounts             33


                                      -13-

<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, 1998 and 1997 and the related  statements  of
income,  partners'  capital,  and  cash  flows  for  each  of the  years  in the
three-year  period ended December 31, 1998.  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,  1998 and  1997,  and the  results  of its
operations  and its cash  flows for each of the years in the  three-year  period
ended  December  31,  1998 in  conformity  with  generally  accepted  accounting
principles.

                                      /s/KPMG LLP
                                      ------------------------
                                      KPMG LLP


Denver, Colorado
February 22, 1999

                                      -14-

<PAGE>



                     CAPITAL PREFERRED YIELD FUND-III, L.P.

                                 BALANCE SHEETS
                     Years Ended December 31, 1998 and 1997

                                     ASSETS

                                                          1998          1997
                                                       -----------   -----------

Cash and cash equivalents                              $ 2,723,454   $ 2,813,686
Accounts receivable                                      1,340,631     1,044,068
Receivable from related party                               50,521         6,523
Equipment held for sale or re-lease                        534,643       506,197
Net investment in direct finance leases                  3,560,216     3,326,833
Leased equipment, net                                   39,594,222    46,193,567
                                                       -----------   -----------

    Total assets                                       $47,803,687   $53,890,874
                                                       ===========   ===========


                       LIABILITIES AND PARTNERS' CAPITAL

Liabilities:
    Accounts payable and accrued liabilities           $ 1,508,619   $   687,727
    Payables to affiliates                                  48,360        39,276
    Rents received in advance                              554,824       632,478
    Distributions payable to partners                      440,798       441,650
    Discounted lease rentals                            12,603,909    15,828,174
                                                       -----------   -----------

    Total liabilities                                   15,156,510    17,629,305
                                                       -----------   -----------

Partners' capital:
    General partner                                              -             -
    Limited partners:
      Class A 500,000 units authorized; 492,145
        and 493,410 units issued and outstanding
        in 1998 and 1997, respectively                  32,239,114    35,818,106
    Class B                                                408,063       443,463
                                                       -----------   -----------

    Total partners' capital                             32,647,177    36,261,569
                                                       -----------   -----------

    Total liabilities and partners' capital            $47,803,687   $53,890,874
                                                       ===========   ===========




                 See accompanying notes to financial statements.

                                      -15-

<PAGE>



                     CAPITAL PREFERRED YIELD FUND-III, L.P.

                              STATEMENTS OF INCOME
                  Years Ended December 31, 1998, 1997 and 1996

                                              1998         1997         1996 
                                           -----------  -----------  -----------
REVENUE:
  Operating lease rentals                  $17,367,092  $18,695,558  $16,399,312
  Direct finance lease income                  508,080      365,094      414,309
  Equipment sales margin                       450,186    1,821,419      110,831
  Interest income                              165,182      112,367      320,679
                                           -----------  -----------  -----------

    Total revenue                           18,490,540   20,994,438   17,245,131
                                           -----------  -----------  -----------

EXPENSES:
  Depreciation                              13,493,620   14,058,981   12,585,981
  Management fees paid to general partner      419,816      409,275      390,559
  Direct services from general partner         209,528      120,015       93,690
  General and administrative                   286,112      236,514      265,260
  Interest on discounted lease rentals       1,085,904    1,505,324    1,785,640
  Provision for losses                       1,250,000      250,000       50,000
                                           -----------  -----------  -----------

    Total expenses                          16,744,980   16,580,109   15,171,130
                                           -----------  -----------  -----------

NET INCOME                                 $ 1,745,560  $ 4,414,329  $ 2,074,001
                                           ===========  ===========  ===========

NET INCOME ALLOCATED:
  To the general partner                   $    52,755  $    53,076  $    68,376
  To the Class A limited partners            1,675,705    4,317,228    1,985,340
  To the Class B limited partner                17,100       44,025       20,285
                                           -----------  -----------  -----------

                                           $ 1,745,560  $ 4,414,329  $ 2,074,001
                                           ===========  ===========  ===========

Net income per weighted average Class A
  limited partner unit outstanding         $      3.40  $      8.71  $      4.13
                                           ===========  ===========  ===========

Weighted average Class A limited
  partner units outstanding                    492,500      495,621      480,456
                                           ===========  ===========  ===========






                 See accompanying notes to financial statements.

                                      -16-

<PAGE>



                     CAPITAL PREFERRED YIELD FUND-III, L.P.

                         STATEMENTS OF PARTNERS' CAPITAL
                  Years Ended December 31, 1998, 1997 and 1996

<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, 1996        $        -    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

Redemptions                                        -     (1,265)       (84,481)             -           (84,481)
Net income                                    52,755          -      1,675,705         17,100         1,745,560
Distributions declared to partners           (52,755)         -     (5,170,216)       (52,500)       (5,275,471)
                                          ----------   --------   ------------     ----------      ------------

Partners' capital, December 31, 1998      $        -    492,145   $ 32,239,114     $  408,063      $ 32,647,177
                                          ==========   ========   ============     ==========      ============

</TABLE>










                 See accompanying notes to financial statements.

                                      -17-

<PAGE>



                     CAPITAL PREFERRED YIELD FUND-III, L.P.
                            STATEMENTS OF CASH FLOWS
                  Years Ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
                                                                       1998             1997             1996      
                                                                   ------------     ------------     ------------
<S>                                                               <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                       $  1,745,560     $  4,414,329     $  2,074,001
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Depreciation                                                     13,493,620       14,058,981       12,585,981
    Provision for losses                                              1,250,000          250,000           50,000
    Cost of equipment sales                                           4,484,453        4,955,363          343,214
    Recovery of investment in direct finance leases                   2,297,749        1,903,849        2,204,916
    Changes in assets and liabilities:
      (Increase) decrease in accounts receivable                       (103,731)        (187,747)         484,435
      (Increase) decrease in receivable from related party              (43,998)          36,168          (42,691)
      Increase in accounts payable and accrued liabilities              820,892            9,620          362,035
      Increase (decrease) in payables to affiliates                       9,084          (15,075)         (51,845)
      Increase (decrease) in rents received in advance                  (77,654)         171,028          225,264
                                                                   ------------     ------------     ------------
Net cash provided by operating activities                            23,875,975       25,596,516       18,235,310
                                                                   ------------     ------------     ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of equipment on operating leases from affiliate          (8,336,063)      (7,135,854)     (23,483,867)
  Investment in direct financing leases, acquired from affiliate     (2,286,569)         (50,602)        (836,057)
                                                                   ------------     ------------     ------------
Net cash used in investing activities                               (10,622,632)      (7,186,456)     (24,319,924)
                                                                   ------------     ------------     ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from Class A capital contributions                                 -                -       11,623,048
  Proceeds from Class B capital contributions                                 -                -          130,000
  Proceeds from discounted lease rentals                              1,728,059                -        4,767,017
  Principal payments on discounted lease rentals                     (9,710,829)     (10,849,449)      (9,561,511)
  Redemptions of Class A limited partnership units                      (84,481)        (233,500)        (130,721)
  Commissions paid to affiliate in connection with the sale of
    Class A limited partner units                                             -                -       (1,162,305)
  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)
  Distributions to partners                                          (5,276,324)      (5,310,566)      (5,030,230)
                                                                   ------------     ------------     ------------
Net cash (used in) provided by financing activities                 (13,343,575)     (16,393,515)         108,683
                                                                   ------------     ------------     ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                    (90,232)       2,015,546       (5,975,931)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                        2,813,686          798,140        6,774,071
                                                                   ------------     ------------     ------------

CASH AND CASH EQUIVALENTS AT END OF YEAR                           $  2,723,454     $  2,813,686     $    798,140
                                                                   ============     ============     ============



                                      -18-

<PAGE>



                     CAPITAL PREFERRED YIELD FUND-III, L.P.
                            STATEMENTS OF CASH FLOWS
                  Years ended December 31, 1998, 1997 and 1996
                                   (continued)

                                                                       1998             1997             1996      
                                                                   ------------     ------------     ------------


Supplemental disclosure of cash flow information:
  Interest paid on discounted lease rentals                        $  1,084,481     $  1,505,324     $  1,785,640
Supplemental disclosure of noncash investing and
  financing activities:
  Discounted lease rentals assumed in equipment acquisitions          4,758,504        3,239,755       11,368,469


</TABLE>




























                 See accompanying notes to financial statements.

                                      -19-

<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
     equipment  owned  by  the  Partnership  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
     contributed  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:


                                      -20-

<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.

       Federal Income Tax Basis 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:


                                      -21-

<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

     Federal Income Tax Basis 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 - Profits and Losses
     ----------------------------------------

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

     RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS

     In June 1997, the Financial  Accounting Standards Board issued Statement of
     Financial  Accounting  Standards No. 130,  Reporting  Comprehensive  Income
     ("Statement  130"),  which  requires  comprehensive  income to be displayed


                                      -22-

<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, continued

     prominently  within  the  financial  statements.  Comprehensive  income  is
     defined  as  all  recognized   changes  in  equity  during  a  period  from
     transactions and other events and circumstances except those resulting from
     investments  by owners and  distributions  to owners.  Net income and items
     that  previously  have been  recorded  directly  in equity are  included in
     comprehensive  income.   Statement  130  affects  only  the  reporting  and
     disclosure  of  comprehensive  income  but does not affect  recognition  or
     measurement  of  income.  Statement  130  is  effective  for  fiscal  years
     beginning after December 15, 1997, with earlier application permitted.  The
     Partnership  adopted  Statement  130 in the  first  quarter  of  1998.  The
     adoption did not have an impact on its financial reporting.

     In June 1997, the Financial  Accounting Standards Board issued Statement of
     Financial  Accounting  Standards No. 131,  Disclosures about Segments of an
     Enterprise  and  Related  Information   ("Statement  131").  Statement  131
     provides  guidance for reporting  information  about operating  segments in
     annual financial  statements and requires reporting of selected information
     about operating  segments in interim financial reports of public companies.
     An operating  segment is defined as a component of a business  that engages
     in business activities from which it may earn revenue and incur expenses, a
     component whose operating  results are regularly  reviewed by the company's
     chief  operating  decision  maker,  and  a  component  for  which  discrete
     financial information is available.  Statement 131 establishes quantitative
     thresholds for determining  operating segments of a company.  Statement 131
     is  effective  for fiscal years  beginning  after  December 15, 1997,  with
     earlier application permitted. The Partnership adopted Statement 131 in the
     first quarter of 1998. Since the Partnership  operates in a single business
     segment, the adoption did not have an impact on its financial reporting.

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
     Accounting for Derivative  Instruments and Hedging  Activities  ("Statement
     133").  Statement 133  establishes  accounting and reporting  standards for
     derivative  instruments  and for hedging  activities.  It requires  that an
     entity  recognize all  derivatives  as either assets or  liabilities in the
     statement  of  financial  position and measure  those  instruments  at fair
     value. Statement 133 is effective for fiscal years beginning after June 15,
     1999, with earlier  application  permitted.  Statement 133 is effective for
     fiscal  years  beginning  after June 15,  1999,  with  earlier  application
     permitted. The Partnership will adopt Statement 133 in the first quarter of
     1999. The General Partner does not expect the adoption to have an impact on
     its financial reporting.

     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
     equipment subject to operating leases and certain identifiable  intangibles


                                      -23-

<PAGE>


                     CAPITAL PREFERRED YIELD FUND-III, L.P.

                    NOTES TO FINANCIAL STATEMENTS, continued

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

     LONG-LIVED ASSETS, continued

     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 net cash flows  expected to result
     from the use of the asset and its eventual  disposition.  If the sum of the
     expected future net 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   equipment   subject  to  operating   leases  and   identifiable
     intangibles  held by the  Partnership,  is based  on the fair  value of the
     asset.  The fair value of the asset may be  calculated by  discounting  the
     expected future net cash flows at an appropriate interest rate.

     LEASE ACCOUNTING

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

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

     NET INVESTMENT IN DIRECT FINANCE 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.




                                      -24-

<PAGE>


                     CAPITAL PREFERRED YIELD FUND-III, L.P.

                    NOTES TO FINANCIAL STATEMENTS, continued

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

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

     NON-RECOURSE DISCOUNTING OF RENTALS

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

     ALLOWANCE FOR LOSSES

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

     TRANSACTIONS SUBSEQUENT TO INITIAL LEASE TERMINATION

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

                                      -25-

<PAGE>


                     CAPITAL PREFERRED YIELD FUND-III, L.P.

                    NOTES TO FINANCIAL STATEMENTS, continued

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

     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 $2,546,000 and $2,681,000 at December 31, 1998
     and 1997, 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.


     NET INCOME PER CLASS A LIMITED PARTNER UNIT

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


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

     The  components  of the net  investment  in  direct  finance  leases  as of
     December 31, 1998 and 1997 were:

                                                       1998            1997
                                                    -----------     -----------

     Minimum lease payments receivable              $ 2,099,035     $ 3,072,652
     Estimated residual values                        1,633,266         606,407
     Less unearned income                              (172,085)       (352,226)
                                                    -----------     -----------

       Total                                        $ 3,560,216     $ 3,326,833
                                                    ===========     ===========








                                      -26-

<PAGE>


                     CAPITAL PREFERRED YIELD FUND-III, L.P.

                    NOTES TO FINANCIAL STATEMENTS, continued

3.   Leased Equipment, net
     ---------------------

     The  Partnership's  investment  in equipment  on operating  leases by major
     classes as of December 31, 1998 and 1997 were:

                                                       1998            1997
                                                   ------------    ------------

     Transportation and industrial equipment       $ 39,323,302    $ 41,131,072
     Computers and peripherals                       15,279,370      13,810,207
     Furniture, fixtures and equipment               12,542,349      14,197,395
     Other                                            1,126,682       1,963,783
                                                   ------------    ------------
                                                     68,271,703      71,102,457
     Less accumulated depreciation                  (28,499,909)    (24,677,113)
     Allowance for losses                              (177,572)       (231,777)
                                                   ------------    ------------

                                                   $ 39,594,222    $ 46,193,567
                                                   ============    ============

     Depreciation  expense for 1998, 1997 and 1996 was $13,493,620,  $14,058,981
     and $12,585,981, respectively.


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

     Future minimum lease payments  receivable from  noncancelable  leases as of
     December 31, 1998 are:

          Years Ending December 31,               DFLs                  OLs 
          -------------------------            -----------          ------------

                  1999                         $ 1,723,202          $ 14,517,674
                  2000                             344,235             6,713,932
                  2001                              14,048             2,235,743
                  2002                              10,638               837,045
                  Thereafter                         6,912               315,933
                                               -----------          ------------

                      Total                    $ 2,099,035          $ 24,620,327
                                               ===========          ============








                                      -27-

<PAGE>


                     CAPITAL PREFERRED YIELD FUND-III, L.P.

                    NOTES TO FINANCIAL STATEMENTS, continued

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

     Discounted lease rentals  outstanding at December 31, 1998 bear interest at
     rates primarily  ranging between 6% and 11%.  Aggregate  maturities of such
     non-recourse obligations are:

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

                  1999                                          $  9,324,407
                  2000                                             2,831,373
                  2001                                               440,051
                  2002                                                 8,078
                                                                ------------
                                   Total                        $ 12,603,909
                                                                ============

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, CAI Securities
     Corporation  earned  commissions and fees of approximately  $1,162,000,  of
     which $992,000 were paid to participating broker-dealers.

     As provided  in the  Partnership  Agreement,  the  general  partner  earned
     approximately  $465,000 as reimbursement  for expenses incurred during 1996
     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 as reimbursement for due diligence expenses incurred
     during 1996.

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

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

     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  $516,000,  $347,000 and $1,185,000 in 1998, 1997 and
     1996,  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.

                                      -28-

<PAGE>


                     CAPITAL PREFERRED YIELD FUND-III, L.P.

                    NOTES TO FINANCIAL STATEMENTS, continued

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

     Management Fees Paid to General Partner
     ---------------------------------------

     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  $420,000,  $409,000,  and $391,000
     during 1998, 1997 and 1996, respectively.

     Direct Services from General Partner
     ------------------------------------

     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 $210,000,
     $120,000, and $94,000 during 1998, 1997 and 1996, respectively.

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

     The Partnership  purchased equipment from CAII, with a total purchase price
     of  approximately  $15,381,000,   $10,426,000  and  $35,688,000  (including
     approximately  $4,759,000,  $3,240,000 and $11,369,000 of discounted  lease
     rentals)  during  1998,  1997  and  1996,  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 $48,000 and $39,000 during 1998 and
     1997,  respectively,  consists of $9,000 for direct  services  from general
     partner, $33,000 for management fees paid to general partner and $6,000 for
     reimbursable  general and  administrative  expenses for 1998 and $8,000 for
     direct services from general  partner,  $31,000 for management fees paid to
     general partner for 1997.

     Receivable From Related Party
     -----------------------------

     The General  Partner  collects and applies rental  payments to the lessee's
     account with the  Partnership,  for those lessees who remit directly to the
     General   Partner.   The  rental  payments  are  then  transferred  to  the
     Partnership,  eliminating the receivable from related party balance. At the
     end of December  1998,  $50,521  rents were applied by the General  Partner
     that were transferred to the Partnership in January 1999.




                                      -29-

<PAGE>


                     CAPITAL PREFERRED YIELD FUND-III, L.P.

                    NOTES TO FINANCIAL STATEMENTS, continued

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,:

<TABLE>
<CAPTION>
                                                                      1998           1997           1996       
                                                                  -------------  ------------   ------------

    <S>                                                          <C>            <C>            <C>         
     Net income per financial statements                          $   1,745,560  $  4,414,329   $  2,074,001
     Direct finance leases                                            2,297,748     1,900,541      2,192,802
     Depreciation                                                    (2,401,465)   (4,277,382)    (6,587,214)
     Provision for losses                                             1,250,000       250,000         50,000
     Gain (loss) on sale of equipment                                   362,981      (937,344)        24,631
     Other                                                              397,457         4,835        570,570
                                                                  -------------  ------------   -------------
     Partnership income for federal income tax purposes           $   3,652,281  $  1,354,979   $ (1,675,210)
                                                                  =============  ============   ============

</TABLE>


     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,:

<TABLE>
<CAPTION>
                                                                      1998           1997           1996    
                                                                  -------------  -------------  ------------

    <S>                                                          <C>            <C>            <C>          
     Partners' capital per financial statements                   $  32,647,177  $  36,261,569  $  37,388,345
     Commissions and offering costs                                   7,184,603      7,184,603      7,184,603
     Direct finance leases                                            7,160,485      4,862,737      2,962,196
     Depreciation                                                   (17,585,699)   (15,184,234)   (10,906,852)
     Provision for losses                                             1,825,000        575,000        325,000
     Gain (loss) on sale of equipment                                  (549,732)      (912,713)        24,631
     Other                                                              947,953        557,231        557,627
                                                                  -------------  -------------  -------------
     Partners' capital for federal income tax purposes            $  31,629,787  $  33,344,193  $  37,535,550
                                                                  =============  =============  =============

</TABLE>

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

     Approximately 73% 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.

     The Partnership leases equipment to a significant number of lessees. No one
     lessee and its  affiliates  accounted for more than 10% of total revenue of
     Partnership during 1998.

                                      -30-

<PAGE>


                     CAPITAL PREFERRED YIELD FUND-III, L.P.

                    NOTES TO FINANCIAL STATEMENTS, continued

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, 1998 for cash and cash  equivalents,
     accounts receivable,  accounts payable and accrued liabilities,  payable to
     affiliates,  rents and sale proceeds  received in advance and distributions
     payable to partners approximate their fair values due to the short maturity
     of these instruments.

     As  of  December  31,  1998,  discounted  lease  rentals  of  approximately
     $12,604,000 had a fair value of approximately  $11,706,000.  The fair value
     was  estimated  utilizing  market rates of comparable  debt having  similar
     maturities and credit quality as of December 31, 1998.



                                      -31-

<PAGE>





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



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

Under date of February  22, 1999,  we reported on the balance  sheets of Capital
Preferred Yield Fund-III, L.P. as of December 31, 1998 and 1997, and the related
statements of income, partners' capital, and cash flows for each of the years in
the three-year  period ended December 31, 1998 as contained in the Partnership's
annual report on Form 10-K for the year 1998.  In connection  with our audits of
the  aforementioned  financial  statements,  we have also  audited  the  related
financial  statement  Schedule  II, as listed in the  accompanying  index.  This
financial   statement  schedule  is  the  responsibility  of  the  Partnership's
management.  Our  responsibility  is to express  an  opinion  on this  financial
statement schedule based on our audits.

In our opinion,  such 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 LLP
                                      ------------------------
                                      KPMG LLP

Denver, Colorado
February 22, 1999


                                      -32-

<PAGE>



                     CAPITAL PREFERRED YIELD FUND-III, L.P.
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
              for the years ended December 31, 1998, 1997 and 1996

<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 Year     Expenses    Other Accounts     Deductions (1)    of Year
--------------                    ----------  ----------   --------------     --------------    --------

             1998
-------------------------------
<S>                              <C>          <C>              <C>           <C>               <C>      

Allowance for losses:
  Accounts receivable             $       -    $    10,000      $     -       $          -      $  10,000
  Equipment on operating leases     231,777      1,240,000            -         (1,294,205)       177,572
                                  ---------    -----------      -------       ------------      ---------

                                  $ 231,177    $ 1,250,000      $     -       $  1,294,205      $ 187,572
                                  =========    ===========      =======       ============      =========

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

Allowance for losses:
  Equipment on operating leases   $ 177,799    $   250,000      $     -       $   (196,022)     $ 231,777
                                  =========    ===========      =======       ============      =========


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

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

</TABLE>









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










                  See accompanying independent auditor's report 

                                      -33-

<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

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

     Richard H. Abernethy       Vice President 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 54, 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.

ANTHONY M. DIPAOLO,  age 40, joined CAII in July 1990 as an Assistant  Treasurer
and is currently  Senior Vice  President-CFO.  He has also held the positions of
Senior   Vice   President-Controller   and   Assistant   Vice   President-Credit
Administration  for the  Company.  Mr.  DiPaolo  has held  financial  management
positions as Chief  Financial  Officer for Mile High Kennel Club, Inc. from 1988
to 1990 and was Vice President/Controller for VICORP Restaurants, Inc. from 1986
through 1988. Mr. DiPaolo holds a Bachelor of Science degree in Accounting  from
the University of Denver.

RICHARD H. ABERNETHY,  age 45, joined CAII in April 1992 as Equipment  Valuation
Manager and  currently  serves as Vice  President of Portfolio  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.


                                      -34-

<PAGE>



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

JOSEPH F. BUKOFSKI, age 43, joined CAII in June 1990 as a Financial Analyst. Mr.
Bukofski is currently the Vice President-Pricing. 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 53, 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 41, 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.

ANN DANIELSON,  age 35, 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 46,  joined CAII in August 1990 as Manager of Billing &
Collections   and   currently   serves  as  Assistant   Vice-President/Assistant
Controller.  Prior to joining CAII, Mr. Anderson was Vice-  President/Controller
for Systems Marketing,  Inc., from 1985 to 1990, and previous to that working in
several senior staff  positions at the Los Alamos  National  Laboratory and with
Ernst & Whinney. Mr. Anderson holds a Bachelor of Business Administration degree
in Accounting from the University of Wisconsin.

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

No compensation was paid by the Partnership to the officers and directors of the
general partner. See Item 13 of this Report,  "Certain Relationships and Related
Transactions,"  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 1998.

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 Class B limited
          partner.

                                      -35-

<PAGE>


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


          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

          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,
          1998.

     (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 1998:

                        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  $516,000 in 1998, 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.

                                      -36-

<PAGE>

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

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 $420,000 for 1998.

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
$210,000 during 1998.

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  $52,755 and  $52,755,  respectively,  for 1998.  Distributions  and net
income  allocated to the Class B limited  partner  totaled  $52,500 and $20,647,
respectively, for 1998.

During 1998, the Partnership acquired the equipment described below from CAII:

<TABLE>
<CAPTION>
                                                                                  Cost to
                                                                                Partnership
                                                                                 Including
                                                                                Acquisition       Debt        Annual
Lessee                            Equipment Description          Cost to CAII      Fees*         Assumed       Rents     
------                            ---------------------          ------------   ------------   -----------  -----------

<S>                              <C>                            <C>            <C>            <C>          <C>        
Thomson Industries, Inc.          Personal computers             $     31,952   $     33,059   $         -  $    11,474
Lexmark International, Inc.       Conveyor system                     113,132        117,052             -       53,299
General Motors Corporation        Forklifts                         2,920,474      3,021,669             -      697,880
New York State Electric           Personal computers                1,159,117      1,199,686             -      620,884
New York State Electric           Desktop computers                   523,809        542,143             -      282,370
Oakland University                PBX systems                         497,555        514,969             -      193,260
Polo Ralph Lauren Corporation     Desktop computers                   152,165        157,490             -       82,015
Polo Ralph Lauren Corporation     Peripheral printers                  33,805         34,988             -       19,400
Polo Ralph Lauren Corporation     Personal computers                  195,021        201,846             -      105,485
Polo Ralph Lauren Corporation     PBX systems                          76,114         78,778             -       39,312
Lucent Technology                 Forklifts                           127,401        131,815             -       33,720
Darigold Incorporated             Forklifts                            11,495         11,893             -        3,734
Collins Industry                  Office automation equipment         118,920        123,041        99,710       38,410
Sony Electronics                  Forklifts                            53,808         55,673             -       12,379
Parke-Davis Pharmaceuticals       Research equipment                   93,921         97,176             -       30,050
Digital Audio Disk                Printing equipment                   91,334         94,499             -       28,277
Xerox                             Office automation equipment          34,290         35,478             -       11,112
Breckenridge                      Forklifts                            99,157        102,593             -       20,192
Parke-Davis Pharmaceuticals       Medical equipment                   101,730        105,255             -       32,439
Williams Sonoma                   Point-of-sale equipment             191,210        197,835             -       69,396
Lexmark International, Inc        Printed circuit board               567,600        587,267             -      192,384
HK System Inc.                    Communication equipment              73,986         76,550             -       33,509

                                      -37-

<PAGE>



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

Accountable General and Administrative Expenses, continued
-----------------------------------------------

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

Metris Direct Inc.                Networking equipment           $     59,324   $     61,379   $         - $     25,317
GM Powertrain Division            Forklifts                           573,275        593,139             -      144,506
Moog Incorporated                 Personal computers                1,693,170      1,751,838     1,491,725      787,380
Mitchell International            Personal computers                1,382,045      1,429,933     1,118,471      754,440
Lucent Technology                 CPU's Dec                            39,848         41,229             -       10,550
E-Trade Group Incorporated        Furniture                           899,629        930,801       767,555      306,946
Consolidated Diesel Company       Forklifts                            11,811         12,220             -        3,699
Thomson Industries Inc            Machine tools                        67,983         70,339             -       24,413
Lucent Technology                 Desktop computers.                1,519,350      1,571,996     1,281,044      555,000
General Motors Corporation        Dry Vans                             39,440         40,807             -       10,373
Treasure Chest Advertising Co.    Forklifts                            80,741         83,538             -       27,991
ICI Americas Inc.                 Networking equipment                 25,176         26,048             -        8,175
Philips Digital Video Systems     Desktop computers                    45,960         47,553             -       20,976
Schratter Foods, Inc              Forklifts                            77,815         80,511             -       28,401
Ball-Foster Glass Container       Forklifts                            22,127         22,853             -       13,996
Ball Aerospace                    Furniture                           368,520        381,290             -       44,272
ABT Associates Incorporated       Portable computers                  140,209        145,067             -       46,753
ABT Associates Incorporated       Desktop computers                   157,340        162,792             -       55,167
The C P Hall Company              Portable computers                   28,601         29,592             -        9,837
United Airlines                   Transport trucks                    342,262        354,121             -      119,275
Ball-Foster Glass Container       Transport trucks                     22,553         23,333             -        9,015
                                                                 ------------   ------------   -----------  -----------
                      Total                                      $ 14,865,176   $ 15,381,136   $ 4,758,505  $ 5,617,464
                                                                 ============   ============   ===========  ===========

</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").


                                      -38-

<PAGE>

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

         (b)   The  Partnership  did not file any reports on Form 8-K during the
               quarter ended December 31, 1998.

         (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.

                                      -39-

<PAGE>


                                   SIGNATURES

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 30, 1999             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 30, 1999.

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

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


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


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


                                      -40-