FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

(Mark One)

|X|  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended December 31, 1998

                                       OR

|_|  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from                       to
                               ---------------------    ------------------------

                         Commission file number 0-19166

                     PaineWebber Preferred Yield Fund, L.P.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

       Delaware                                         84-1130506
-----------------------                     ------------------------------------
(State of organization)                     (I.R.S. Employer Identification No.)

7175 West Jefferson Avenue, Suite 4000
          Lakewood, Colorado                              80235
---------------------------------------                   -----
Address of principal executive offices)                  Zip Code

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

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

Securities registered pursuant to Section 12(g) of the Act:

Units of Class A Limited Partner Interest  (Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes |X| No |_|

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
Registrant's   knowledge  in   definitive   proxy  or   information   statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|

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

                        Exhibit Index Appears on Page 36

                                  Page 1 of 37



<PAGE>



                     PaineWebber Preferred Yield Fund, L.P.
                       Annual Report on Form 10-K for the
                       Fiscal Year Ended December 31, 1998

                                Table of Contents

                                                                            Page
                                                                            ----
Part I

Item 1     Business                                                          3
Item 2     Properties                                                        5
Item 3     Legal Proceedings                                                 5
Item 4     Submission of Matters to a Vote of Security Holders               5

Part II

Item 5     Market for Registrant's Common Equity and Related
           Stockholder Matters                                               5
Item 6     Selected Financial Data                                           6
Item 7     Management's Discussion and Analysis of Financial
           Condition and Results of Operations                               6
Item 8     Financial Statements                                             F-1
Item 9     Changes in and Disagreements with Accountants on
           Accounting and Financial Disclosure                               32

Part III

Item 10    Directors and Executive Officers of the Registrant                32
Item 11    Executive Compensation                                            34
Item 12    Security Ownership of Certain Beneficial Owners
           and Management                                                    34
Item 13    Certain Relationships and Related Transactions                    35

Part IV

Item 14    Exhibits, Financial Statement Schedules and Reports
           on Form 8-K                                                       36


                                        2

<PAGE>



                                     PART I

Item 1.   Business

General

     PaineWebber   Preferred  Yield  Fund,  L.P.  (the   "Partnership"   or  the
"Registrant") is a limited partnership  organized under the laws of the State of
Delaware  on December  18,  1989 and  commenced  on June 22,  1990.  The general
partners of the  Partnership  are CAI Equipment  Leasing II Corp.,  the Managing
General Partner, a Colorado corporation wholly-owned by Capital Associates, Inc.
("CAI"),  and General Equipment  Management,  Inc., the  Administrative  General
Partner,  a Delaware  corporation  wholly-owned  by PaineWebber  Group Inc. (The
Managing  General Partner and the  Administrative  General Partner are sometimes
hereinafter collectively referred to as the "General Partners".)

     Capital  Associates  International,  Inc.  ("CAII"),  an  affiliate  of the
Managing  General Partner,  is the Class B Limited Partner.  The Class B Limited
Partner  contributed  equipment and cash to the Partnership  valued at an amount
equal to 12.5% of the aggregate  value of the equipment  purchased  with the net
offering proceeds received from the sale of the Units of Class A Limited Partner
Interest  ("Units")  and the equipment  and capital  contributed  by the Class B
Limited  Partner.  The  Class  B  Limited  Partner  satisfied  its  contribution
obligation during 1992.

     The  Partnership  is required to dissolve and  distribute all of its assets
not later than  December  31,  2005.  The  general  partners  approved a plan of
liquidation in 1998 and the Partnership commenced liquidation as of December 31,
1998.  As a result,  the  Partnership  has changed its basis of  accounting  for
periods   subsequent  to  December  31,  1998  from  the  going-concern  to  the
liquidation  basis of  accounting.  The  Managing  General  Partner is exploring
opportunities  for  the  sale  of  the  remaining  equipment  during  1999.  The
Partnership  gives no  assurance  that  final  liquidation  will  occur in 1999,
however,  liquidation  expenses have been accrued based on the  assumption  that
1999 will be the final year of operations.

     The Partnership  acquired,  on an all-cash basis, a portfolio of equipment,
subject to triple net leases with unaffiliated third parties.  The Partnership's
portfolio of equipment included industrial, materials handling, mining, medical,
research  and  development,   transportation   equipment,   store  fixtures  and
manufacturing testing and office technology equipment,  including, computers and
computer-related and telecommunications  equipment.  Office technology equipment
owned by the Partnership  could not exceed 60% of the value of the Partnership's
total equipment portfolio.

     A substantial amount of the equipment initially acquired by the Partnership
was purchased by CAII directly from the manufacturer or from  independent  third
parties  and  resold or  contributed  to the  Partnership.  The  balance  of the
equipment  was  purchased   directly  from  independent  third  parties  by  the
Partnership.  The purchase  price of the  equipment  acquired  from CAII and the
value of the equipment  contributed by the Class B Limited Partner were equal to
the lesser of the adjusted cost of the  equipment or the appraised  value of the
equipment at the time of its acquisition by the  Partnership.  The adjusted cost
of the  equipment  was  equal to the  price  paid by  CAII,  plus the cost of an
appraisal, CAII's cost of interim financing for the equipment and any taxes paid
by CAII,  less  certain  interim  rentals  received by CAII with  respect to the
equipment.

     The Partnership  acquired  equipment that was already subject to short-term
leases (generally,  5 years or less). The Partnership's  business is not subject
to seasonal variations.


                                        3

<PAGE>



Item 1.   Business, continued

General, continued

     At least 64% of the Partnership's  equipment  acquired over the life of the
Partnership was leased to lessees which were investment grade lessees,  or which
were operating  subsidiaries of entities which were investment  grade companies.
An investment  grade lessee was defined as a company with a credit rating of not
less than Baa, as determined by Moody's  Investor  Services,  Inc. or comparable
credit ratings, as determined by other recognized credit rating services.

     After the  reinvestment  period,  which  ended on March 31,  1996,  cash in
excess of operating requirements was distributed to the partners.

     The Partnership's principal investment objectives were:

         (i)      to generate cash distributions to the Class A Limited Partners
                  from lease  revenues (a portion of which  constituted a return
                  of capital);

         (ii)     to preserve and protect Partnership capital; and

         (iii)    to generate  additional cash distributions  through releasing,
                  remarketing  and  sales  after  the  end of  the  reinvestment
                  period.

     In order to achieve  these  objectives,  the General  Partners  adopted the
following  policies:  (a)  reinvest  the  Partnership's  excess  cash  flows  in
additional  equipment  during  the  reinvestment  period to  achieve  investment
diversification,  reduce  the  average  age of the  Partnership's  portfolio  of
equipment and enhance the overall  return to Class A Limited  Partners,  and (b)
manage the  Partnership's  assets to maximize lease rentals and amounts received
from the sale of equipment.

Equipment Portfolio

     The  following  table  describes  the  Partnership's   remaining  equipment
portfolio as of December 31, 1998.

        EQUIPMENT TYPE            ORIGINAL COST(1)            % OF PORTFOLIO
        --------------            ----------------            --------------

        Manufacturing               $2,918,736                   100.0%

(1) Amount includes related acquisition fees.

Significant Lessees

     The  Partnership  leased its equipment to a significant  number of lessees.
One lessee  accounted for more than 48% of the  Partnership's  leasing  revenues
during the year ended December 31, 1998,  and another lessee  accounted for more
than 24% of leasing  revenues  during the same  period.  The  Partnership  is no
longer  acquiring  equipment.  At December 31,  1998,  the  Partnership  had one
remaining lessee.

Employees

     The Partnership has no employees. The officers,  directors and employees of
the General  Partners  and their  affiliates  perform  services on behalf of the
Partnership.   The  General   Partners   are   entitled  to  certain   fees  and
reimbursements of certain out-of-pocket expenses incurred in connection with the
performance of these management services. See Item 10 of this Report, "Directors
and Executive Officers of the Registrant",  and Item 13 of this Report, "Certain
Relationships  and  Related  Transactions",  which  are  incorporated  herein by
reference.

                                        4

<PAGE>



Item 2.   Properties

     The  Partnership  does  not own or  lease  any  properties  other  than the
equipment  which is  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 of the fiscal year ended December 31, 1998.


                                     PART II

Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters

     There is no organized trading market for the purchase and sale of the Units
and  certain  measures  have been  adopted  and  implemented  to assure  that no
organized trading market will develop.

     As of March 1,  1999,  the  number of Class A Limited  Partners  was 3,461,
representing 142,128 Units.

     The Partnership made the following  quarterly  distributions to its Class A
Limited Partners out of cash flows during 1998 and 1997:

     Period From Which         Amount Of
     Distributable Cash       Distribution
        Was Generated           Per Unit       Record Date       Payment Date
     ------------------       ------------     -----------       ------------

     QUARTER ENDED
     March 31, 1998            $   8.00       April 1, 1998     April 25, 1998

     QUARTER ENDED
     December 31, 1997            95.00      January 1, 1998   January 23, 1998

     QUARTER ENDED
     September 30, 1997            8.00      October 1, 1997   October 24, 1997

     QUARTER ENDED
     June 30, 1997                28.00       July 1, 1997      July 25, 1997

     QUARTER ENDED
     March 31, 1997               17.50       April 1, 1997     April 25, 1997



                                        5

<PAGE>



Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters,
          continued

     Total  distributions  to all  partners  for 1998 and 1997 were  declared as
follows:

                                           1998                     1997
                                           ----                     ----

     Class A Limited Partners          $ 1,137,024             $ 21,106,008
     Class B Limited Partners              197,959                2,929,016
     General Partners                       50,155                1,179,965
                                       -----------             ------------
                                       $ 1,385,138             $ 25,214,989
                                       ===========             ============

Item 6.   Selected Financial Data

     The following  selected  financial data of the Partnership has been derived
from the audited financial statements for the indicated periods. The information
set forth below should be read in conjunction with the  Partnership's  financial
statements  and notes  thereto  and  "Management's  Discussion  and  Analysis of
Financial  Condition  and  Results  of  Operations"  included  in Items 8 and 7,
respectively, of this Report, which are incorporated herein by reference.

<TABLE>
<CAPTION>


                                          1998           1997           1996          1995           1994
                                          ----           ----           ----          ----           ----

<S>                                  <C>            <C>            <C>           <C>            <C>
Total Revenues(1)                     $ 4,315,468    $10,632,297    $16,059,351   $16,382,650    $18,149,798
Net Income                              1,315,762      2,072,522      4,258,032     3,957,086      2,670,613
Net Income per Class A Limited
  Partnership Unit(2)                        7.70          12.50          27.80         22.14          11.70
Total Assets                            4,929,301     28,944,212     41,098,131    53,302,011     49,115,873
Discounted Lease Rentals                  969,404      1,523,570      2,802,710     4,747,859      4,531,890
Partners' Equity                        2,633,017      3,044,144     26,186,611    34,113,196     41,629,451
Distributions Declared to Partners      1,385,139     25,214,989     12,184,617    11,473,341     11,473,341

</TABLE>


(1)  Includes net losses on  disposition  of equipment and other of $278,882 for
     the year ended  December 31, 1994 and net gains on disposition of equipment
     of $  1,236,378,  $461,994,  $789,154  and  $179,352  for the  years  ended
     December 31, 1998, 1997, 1996 and 1995, respectively.

(2) Calculated based upon the weighted average number of units outstanding.


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

     The following  discussions should be read in conjunction with the "Selected
Financial Data" and the Consolidated Financial Statements of the Partnership and
the Notes thereto. This report contains, in addition to historical  information,
forward-looking  statements regarding the Partnership's business and the outcome
of the liquidation that include risks and other uncertainties. The Partnership's
actual  results  may  differ   materially   from  those   anticipated  in  these
forward-looking  statements.  Factors that might cause such a difference include
those  discussed  below,  as well as general  economic and business  conditions,
competition  and  other  factors  discussed   elsewhere  in  this  report.   The
Partnership  undertakes no obligation to release publicly any revisions to these
forward-looking  statements to reflect  events or  circumstances  after the date
hereof or to reflect the occurrence of anticipated or unanticipated events.

The Partnership has changed its basis of accounting  from the  going-concern  to
the  liquidation  basis as of  December  31, 1998 in  accordance  with a plan of
liquidation  adopted by the General  Partners  effective  December 31, 1998. The
liquidation  basis of accounting  presents assets at the amounts  expected to be
realized  in  liquidation  and  liabilities  at amounts  expected  to be paid to
creditors.  Amounts expected to be paid to creditors to finalize the liquidation
were accrued at December 31, 1998, and are discussed in detail under general and
administrative expenses in Item 7.

                                        6

<PAGE>


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


Liquidity and Capital Resources

     Equipment acquisitions  (including acquisition fees and expenses) since the
commencement of operations have been as follows:

                           PURCHASED WITH
             TOTAL          NET PROCEEDS     CONTRIBUTED BY   PURCHASED PURSUANT
           ACQUISITION     FROM THE SALE      THE CLASS B       TO REINVESTMENT
              COST       OF CLASS A UNITS   LIMITED PARTNER       PROGRAM
           -----------   ----------------   ---------------   ------------------

1990      $ 45,278,316      $ 39,529,865     $  5,470,464      $    277,987
1991        27,997,203        19,292,333        2,723,225         5,981,645
1992        15,780,483         3,039,218          449,161        12,292,104
1993        16,937,818                 -                -        16,937,818
1994        11,388,058                 -                -        11,388,058
1995        14,347,283                 -                -        14,347,283
1996         8,740,536                 -                -         8,740,536
1997             3,929                 -                -             3,929(1)
          ------------      ------------     ------------      ------------
          $140,473,626      $ 61,861,416     $  8,642,850      $ 69,969,360
          ============      ============     ============      ============

(1)  Represents upgrade to an existing lease.

     From inception  through  December 31, 1998, the Partnership  sold equipment
with an original cost as follows:

                                                  Original Cost Associated
          Year Ending                                with Equipment Sold
          December 31,                              or Disposed of (1)(2)    
          ------------                            ------------------------
             1991                                     $   1,074,780
             1992                                         3,928,788
             1993                                        14,916,752
             1994                                        13,247,784
             1995                                        20,352,539
             1996                                        12,500,250
             1997                                        48,987,055
             1998                                        22,546,942
                                                      -------------
                                                      $ 137,554,890
                                                      =============

(1)  Includes investment in direct finance leases.

(2)  See "Selected  Financial  Data", set forth elsewhere herein, for disclosure
     of related gains and losses.

     The Partnership invests working capital and cash flow from operations prior
to its  distribution  to the partners in short-term  highly liquid  investments.
These  investments  are primarily  short-term  commercial  paper issued by large
domestic  corporations.  In  the  year  ended  December  31,  1998,  approximate
distributions of net cash flows provided by operations  declared and paid by the
Partnership  were $1.4  million.  Distributions  declared were $25.2 million and
$12.2 million respectively, in the years ended December 31, 1997 and 1996.

                                        7

<PAGE>


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

Liquidity and Capital Resources, continued

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
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 is 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.  The
Partnership  does not expect  that the impact of the Year 2000 issue will have a
significant  effect on its net assets in  liquidations  in any event,  given its
significantly reduced scope of operations.

Equipment Sale

     In  October  1997,  the  Partnership  entered  into  an  agreement  with an
unaffiliated  third  party to sell  certain  equipment  subject to leases for an
aggregate sale price of  $15,338,420.  The equipment,  which included  printers,
transportation,  industrial, communication, manufacturing and research equipment
was originally purchased for purchase prices aggregating  $29,855,031 and had an
aggregate net book value of $16,323,645 at September 30, 1997. The equipment had
generated  aggregate  rents of  approximately  $19,000,000  for the  Partnership
through the date of sale. The Partnership  recorded a writedown of $1,000,000 at
September  30,  1997 to reflect  the  difference  between the sale price and the
depreciated  value of the  equipment.  The sale was  consummated  and the  sales
proceeds were received on October 30, 1997. Of the proceeds  received,  $156,476
was utilized to repay related  non-recourse debt and the balance less any amount
required for  operations,  was  distributed to the partners in January 1998. The
equipment sold  represented  approximately  57% of the  Partnership's  remaining
equipment on a net book value basis at September 30, 1997, and approximately 70%
of the September 1997 monthly rental  billings.  The Managing General Partner of
the Partnership  determined that such sale  represented a dissolution  event, as
defined  in  the   Partnership   Agreement,   and  began   investigating   sales
opportunities  with respect to the remaining  portfolio of equipment in order to
complete the expeditious liquidation of the Partnership.

Sale  of Prepaid Leases

     Effective  September  30,  1998,  the  Partnership  sold the  title and its
interest in certain equipment to an unaffiliated third party (Buyer).  The lease
rentals had previously  been  discounted for cash and were recorded as a prepaid
rent  obligation  on the balance  sheet.  The Buyer  assumed  the  prepaid  rent
obligation  of  approximately  $4,569,000  at  September  30,  1998  and paid an
additional  amount  of  cash  to the  Partnership  resulting  in a net  gain  of
approximately $528,000 which is included in Gain on sale of equipment.

                                        8

<PAGE>


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


Liquidity and Capital Resources, continued

     Partnership equity declined by $411,127,  or 14%, from December 31, 1997 to
the December 31, 1998  balance of net assets as a result of the  declaration  of
cash distributions to the partners of cash flow from operating  activities which
were in excess of the  Partnership's  net income.  This  resulted  from the fact
that, unlike net income,  cash flow from operating  activities and proceeds from
sales  of  equipment,  after  deducting  the  related  repayment  of  associated
financings,  is the  source  of funds  utilized  to make cash  distributions  to
partners,  and is not reduced by depreciation  expense,  cost of equipment sold,
and  provisions  for  equipment  impairment  attributable  to the  Partnership's
equipment.

     Distributions  may  be  characterized  for  tax,  financial  reporting  and
economic  purposes  as a return of  capital,  a return on capital  or both.  The
portion of each  distribution by the  Partnership,  which exceeds its net income
for the fiscal period, may be deemed a return of capital.

     As of December 31, 1998, the Partnership has sold  substantially all of its
assets and the Managing  General  Partner is exploring the sale of the remaining
equipment. In January 1998, the Partnership distributed a substantial portion of
the proceeds  generated by the October 1997 equipment  sale  discussed  above. A
final  distribution  will be made upon  receipt of  proceeds  for the  remaining
equipment.  The calculation of such  distribution will be net of the reserve for
current and contingent liabilities, if any, incidental to the liquidation.

Results of Operations

     Substantially all of the  Partnership's  revenue since the inception of the
Partnership has been generated from the leasing of the  Partnership's  equipment
to  unaffiliated  third  parties  under  triple net leases most of which were in
effect at the time the equipment was acquired by the Partnership. The balance of
the   Partnership's   revenue   consisted  of  interest  income  from  temporary
investments and gains realized on the sale of equipment.

     Under  the terms of the  Partnership's  triple  net  leases,  all  expenses
related to the ownership and operation of the equipment from  inception  through
December  31,  1998 have  been  paid by the  lessees.  The  Partnership  records
depreciation  expense pertaining to the equipment and incurs management fees and
certain general and administrative  expenses in connection with the operation of
the  Partnership.  General and  administrative  expenses  consist  primarily  of
investor reporting expenses and transfer agent and audit fees.

     The Partnership  performs  ongoing  assessments of the likelihood of lessee
defaults on existing  leases and the effect that any such  defaults  may have on
the collectability of the Partnership's  recorded amounts and the recoverability
of  recorded  equipment  residual  values  based  on  independent  and  internal
evaluations of the estimated  future value of equipment.  Impairment  losses are
recognized  when  expected  future  undiscounted  cash  flows  are less than the
assets' carrying value. Accordingly,  when indicators of impairment are present,
the Company  evaluates  the carrying  value of property,  plant and equipment in
relation to the operating  performance and future undiscounted cash flows of the
underlying  business.  In that event,  the Company adjusts the net book value of
the  underlying  assets by the  difference  between the sum of  expected  future
discounted cash flows and book value.



                                        9

<PAGE>


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

Results of Operations, continued

1998 Compared to 1997

     The  Partnership's  net income  decreased to $1,315,762  for the year ended
December 31, 1998 ("1998  Period") as compared to net income of  $2,072,522  for
the year ended  December 31, 1997 ("1997  Period") due to portfolio  run-off and
sales of  equipment  offset  by  corresponding  decreases  in  depreciation  and
interest expenses.  However,  net income as a percent of total revenue increased
by 11% in the current year.

     Rentals from operating  leases  decreased by $6,524,524 or 70%, in the 1998
Period as compared to the 1997  Period.  The  decrease  is  attributable  to the
expiration of leases in accordance with their  respective  terms and the sale of
equipment subject to operating leases.

     As  discussed  above,  the  Partnership  performs  ongoing  assessments  of
recorded  equipment  residual values based on actual sales of similar  equipment
and other  evaluations  of estimated  future  equipment  values and provides for
writedowns  when the value of the  equipment  has been impaired on an other than
temporary  basis.  Based  upon  managements  assessments  as  noted  above,  the
Partnership  recorded  writedowns  totaling  $566,670 in the 1998 Period. In the
1997 Period, the Partnership provided writedowns aggregating $1,000,000.

     Depreciation expense decreased by $4,615,862,  or 75% in the 1998 Period as
compared to the 1997 Period. The decrease was attributable to the continued sale
of equipment.

     Management  fees to general  partners  during the 1998 Period  decreased by
$144,754,  or 62%, in comparison to the 1997 Period, based upon the reduction of
leases in place and was consistent with the decline in rental revenues.

     Interest  expense  incurred during the 1998 Period decreased by $308,888 or
38%,  as  compared  to the 1997  Period.  Interest  expense is  composed  of two
components;  (i) interest expense incurred in connection with the discounting of
certain  leases  with  unaffiliated   lenders  and  (ii)  interest  incurred  in
connection with the  amortization  of the prepaid rent received  pursuant to the
Master Lease transaction.  For accounting purposes, the prepaid rent was treated
as a financing.  Income was recognized  ratably over the terms of the leases and
the  related  interest  was charged to  operations.  The  decreases  reflect the
continued repayment of discounted leases, reducing outstanding balances, and the
final amortization of the prepaid rent in September 1998.

     General and  administrative  expenses  decreased  by $57,235 or 16%, in the
1998  Period as  compared  to the 1997  Period.  The  decrease  is  attributable
principally to a decrease in costs  associated with the remarketing of equipment
at lease maturity.

     There are no  comparative  figures for the  liquidation  expenses which are
recorded in the Statement of Changes in  Shareholders'  Equity and Net Assets in
Liquidation  as this  amount was  recorded  at  December  31, 1998 to accrue for
estimated  expenses  associated  with  the  liquidation  of the  Partnership  in
accordance with the liquidation  basis of accounting.  Liquidation  expenses are
estimates  comprised  primarily of a reserve  associated with sales and property
tax  audits,  financial  statement  audit and tax return  preparation  for 1999,
investor record maintenance, and expenses reimbursable to the General Partner.

                                       10

<PAGE>


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


Results of Operations, continued

1997 Compared to 1996

     The  Partnership's net income was $2,072,522 in the year ended December 31,
1997 ("1997  Period") as compared to net income of $4,258,032 for the year ended
December 31, 1996 ("1996  Period").  The  principal  reason for the decrease was
that components of income  (including  rent,  direct  financing lease income and
gains on  disposition  of  equipment)  decreased  by a greater  percentage  than
depreciation expense due to the expiration of leases,  additional writedowns and
increases to interest  expense.  Additionally in 1996, the net income included a
reversal of certain fees  previously  accrued.  Generally  these  decreases  are
consistent with expectations based upon the expiration of the reinvestment phase
in 1996 and the continued  sale of equipment  upon lease  expirations as well as
the October 1997 sale.

     Rentals from operating  leases  decreased by $4,894,066 or 34%, in the 1997
Period as compared to the 1996  Period.  The  decrease  is  attributable  to the
expiration of leases in accordance  with their  respective  terms and either the
sale of equipment or the remarketing of the equipment at lower lease rates.

     As  discussed  above,  the  Partnership  performs  ongoing  assessments  of
accounts receivable and recorded equipment residual values based on actual sales
of similar  equipment and other evaluations of estimated future equipment values
and provides for writedowns when the value of the equipment has been impaired on
an other than  temporary  basis.  Based upon  managements  assessments  as noted
above,  the  Partnership  recorded  writedowns  totaling  $1,000,000 in the 1997
Period.  In the 1996 Period,  the Partnership  provided  writedowns  aggregating
$775,000 and wrote off an uncollectible receivable of $27,854.

     Depreciation and amortization  expense  decreased by $3,096,866,  or 30% in
the 1997 Period as compared to the 1996 Period. The decrease was attributable to
the continued sale of equipment at the end of the scheduled lease terms.

     Management  fees during the 1997 Period  decreased by $355,966,  or 60%, in
comparison  to the 1996 Period,  based upon the deduction of leases in place and
was consistent with the decline in rental revenues.

     The  Managing  General  Partner  was  entitled  to  receive a  subordinated
disposition  fee in an  amount  equal to the  lesser  of (i) 50% of the fee that
would be  charged by an  unaffiliated  party,  or (ii) 3% of the gross  contract
price relating to each sale of equipment as  compensation  for  negotiating  and
consummating sales of equipment.  At December 31, 1996, the Partnership reversed
previously accrued  subordinated  disposition fees totaling $422,828 because the
Managing  General  Partner  concluded that it was no longer  probable that these
subordinated  dispositions  fees  would be paid.  Of such  amount,  $61,693  was
incurred during 1996.

     Interest  expense  incurred during the 1997 Period decreased by $234,055 or
22%,  as  compared  to the 1996  Period.  Interest  expense is  composed  of two
components;  (i) interest expense incurred in connection with the discounting of
certain  leases  with  unaffiliated   lenders  and  (ii)  interest  incurred  in
connection  with the  application  of the prepaid rent received  pursuant to the
Master Lease transaction.  For accounting purposes,  the prepaid rent is treated
as a financing.  Income is  recognized  ratably over the terms of the leases and
the  related  interest  is charged to  operations.  The  decreases  reflect  the
continued repayment of discounted leases, reducing outstanding balances, and the
continued amortization and recognition of the prepaid rent.

                                       11

<PAGE>


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


Results of Operations, continued

1997 Compared to 1996, continued

     General and  administrative  expenses  decreased by $94,464 or $21%, in the
1997 Period as compared to the 1996  Period.  The decrease in the 1997 Period is
attributable  principally  to a decrease in insurance  premiums  incurred by the
Partnership in the 1997 Period as compared to the 1996 Period.

Inflation and Changing Prices

     Inflation  has not had a material  impact on the  operations  or  financial
condition of the Partnership from inception through December 31, 1998.  However,
inflation  and changing  prices,  in addition to other  factors,  may affect the
eventual selling price of the Partnership's equipment.

Risks and Uncertainties

     As discussed  throughout Item 7, the Partnership sold  substantially all of
its remaining  assets during 1998, and the Managing General Partner is exploring
opportunities  to  sell  the  remaining  equipment  during  1999.   Accordingly,
estimated  liquidation  expenses for the remaining life of the Partnership  have
been  recorded in the  accompanying  financial  statements  for the period ended
December 31, 1998.

New Accounting Pronouncements

     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.  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.

     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

                                       12

<PAGE>


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



Results of Operations, continued

New Accounting Pronouncements, continued

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. The adoption did
not have an impact on its financial reporting.

"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  adopted the liquidation  basis of accounting as of December 31,
1998 and all assets  and  liabilities  were  stated at  anticipated  liquidation
value. Consequently, the partnership has no market risk exposure.


                                       13

<PAGE>



                     PAINEWEBBER PREFERRED YIELD FUND, L.P.

Item 8. Financial Statements and Supplementary Data

List of Financial Statements


                                                                            Page
                                                                            ----

Report of Independent Accountants                                            F-2

Statement of Net Assets in Liquidation - December 31, 1998                   F-3

Balance Sheets - December 31,  1997                                          F-4

Statements of Operations for the years ended
         December 31, 1998, 1997 and 1996                                    F-5

Statement of Changes in Shareholders' Equity for the years
         ended December 31, 1998, 1997, and 1996                             F-6

Statements of Cash Flows for the years ended
         December 31, 1998, 1997 and 1996                                    F-7

Notes to Financial Statements                                                F-8

All  schedules  for  which  provision  is  made  in  the  applicable  accounting
regulations of the Securities  and Exchange  Commission  have been omitted since
(1) the information  required is disclosed in the financial statements and notes
thereto, (2) schedules are not required under the related  instructions;  or (3)
the schedules are inapplicable.

                                       F-1

<PAGE>




                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Partners of
PaineWebber Preferred Yield Fund, L.P.

     We have audited the accompanying statements of net assets in liquidation as
of  December  31,  1998  and  the  balance  sheet  as of  December  31,  1997 of
PaineWebber Preferred Yield Fund, L.P. and the related statements of operations,
cash flows and changes in  partners'  equity and net assets in  liquidation  for
each of the three years ended December 31, 1998. These financial  statements are
the responsibility of the Partnership's General Partners.  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 PaineWebber Preferred Yield
Fund,  L.P. in  liquidation  as of December 31, 1998 and as of December 31, 1997
and the results of its  operations and its cash flows for each of the respective
periods stated in the first  paragraph,  in conformity  with generally  accepted
accounting principles.

     As described in Note 1 to the financial statements, the General Partners of
the Partnership  approved a plan of liquidation  and the  Partnership  commenced
liquidation,  effective  December 31, 1998.  As a result,  the  Partnership  has
changed its basis of accounting as of and for periods subsequent to December 31,
1998 from the going concern to the liquidation basis of accounting.


                                           /s/PricewaterhouseCoopers LLP
                                           -----------------------------
                                           PricewaterhouseCoopers  LLP



New York, New York
March 19, 1999


                                       F-2

<PAGE>



                     PAINEWEBBER PREFERRED YIELD FUND, L.P.
                  STATEMENT OF NET ASSETS IN LIQUIDATION AS OF
                                DECEMBER 31, 1998



                                     ASSETS


Cash and cash equivalents                                           $3,198,407
Rents and other receivables, net                                       163,529
Equipment on operating leases, at liquidation value                  1,567,365
                                                                    ----------

     Total Assets                                                   $4,929,301
                                                                    ==========

                           LIABILITIES AND NET ASSETS

LIABILITIES:
     Accounts payable and accrued liabilities                          731,971
     Accrued liquidation expenses                                      341,750
     Payables to affiliates                                            246,884
     Accrued interest payable                                            6,275
     Discounted lease rentals                                          969,404
                                                                    ----------

         Total Liabilities                                           2,296,284
                                                                    ----------

NET ASSETS:                                                          2,633,017
                                                                    ----------

         Total Liabilities and Net Assets                           $4,929,301
                                                                    ==========




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

                                       F-3

<PAGE>



                     PAINEWEBBER PREFERRED YIELD FUND, L.P.
                       BALANCE SHEET -- DECEMBER 31, 1997



                                     ASSETS


Cash and cash equivalents                                           $19,606,352
Rents and other receivables, net                                        175,075
Equipment held for sale or lease, net                                   729,481
Net investment in direct finance leases                                 170,230
Equipment on operating leases, net                                    8,253,386
Other assets, net                                                         9,688
                                                                    -----------

     Total Assets                                                   $28,944,212
                                                                    ===========

                        LIABILITIES AND PARTNERS' EQUITY

LIABILITIES:
     Prepaid rent                                                   $ 6,072,331
     Accounts payable and accrued liabilities                         1,299,791
     Payables to affiliates                                             263,591
     Accrued interest payable                                             7,792
     Deferred rental income and deposits                                246,840
     Distributions payable to partners                               16,486,153
     Discounted lease rentals                                         1,523,570
                                                                    -----------

         Total Liabilities                                           25,900,068
                                                                    -----------
PARTNERS' EQUITY:
     General Partners                                                   110,227
     Limited Partners:
       Class A (142,128 Units outstanding at
       December 31, 1998 and 1997)                                    2,498,859
       Class B                                                          435,058
                                                                    -----------

         Total Partners' Equity                                       3,044,144
                                                                    -----------

         Total Liabilities and Partners' Equity                     $28,944,212
                                                                    ===========




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

                                       F-4

<PAGE>



                     PAINEWEBBER PREFERRED YIELD FUND, L.P.
                            STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


                                           1998          1997           1996
                                           ----          ----           ----
REVENUE:
  Rentals from operating leases        $ 2,854,305  $  9,378,829   $ 14,272,895
  Direct finance lease income               13,422       351,997        696,247
  Gain on sale of equipment              1,236,378       461,994        789,154
  Interest income                          185,924       302,541        255,463
  Other income                              25,439       136,936         45,592
                                       -----------  ------------   ------------
                                         4,315,468    10,632,297     16,059,351
                                       -----------  ------------   ------------
EXPENSES:
  Depreciation                           1,536,058     6,151,920      9,248,786
  Provision for losses on equipment        566,670     1,000,000        802,854
  Interest                                 500,730       809,618      1,043,673
  Management fees to general partners       90,097       234,851        590,817
  Disposition fees                               -             -       (342,661)
  General and administrative               306,151       363,386        457,850
                                       -----------  ------------   ------------
                                         2,999,706     8,559,775     11,801,319
                                       -----------  ------------   ------------
NET INCOME                             $ 1,315,762  $  2,072,522   $  4,258,032
                                       ===========  ============   ============

NET INCOME ALLOCATED:
  To the General Partners              $    65,788  $     74,072   $    212,901
  To the Class A Limited Partners        1,093,727     1,776,214      3,951,236
  To the Class B Limited Partner           156,247       222,236         93,895
                                       -----------  ------------   ------------
                                       $ 1,315,762  $  2,072,522   $  4,258,032
                                       ===========  ============   ============

NET INCOME PER WEIGHTED AVERAGE
  NUMBER OF UNITS OF CLASS A LIMITED
  PARTNER INTERESTS OUTSTANDING        $      7.70  $      12.50   $      27.80
                                       ===========  ============   ============

WEIGHTED AVERAGE NUMBER OF UNITS
  OF CLASS A LIMITED PARTNER
  INTERESTS OUTSTANDING                    142,128       142,128        142,128
                                       ===========  ============   ============











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

                                       F-5

<PAGE>



                     PAINEWEBBER PREFERRED YIELD FUND, L.P.
                    STATEMENT OF CHANGES IN PARTNERS' EQUITY
                          AND NET ASSETS IN LIQUIDATION
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>

                                                                 CLASS A            CLASS B
                                               GENERAL           LIMITED            LIMITED
                                               PARTNERS          PARTNERS           PARTNER          TOTAL       
                                            ------------      --------           -------          -----       

<S>                                        <C>               <C>               <C>               <C>
Balance, December 31, 1995                  $  1,612,447      $ 28,417,629      $  4,083,120      $ 34,113,196
    Net income and comprehensive income          212,901         3,951,236            93,895         4,258,032
    Distributions declared to partners          (609,228)      (10,540,212)       (1,035,177)      (12,184,617)
                                            ------------      ------------      ------------      ------------
Balance, December 31, 1996                     1,216,120        21,828,653         3,141,838        26,186,611
    Net income and comprehensive income           74,072         1,776,214           222,236         2,072,522
    Distributions declared to partners        (1,179,965)      (21,106,008)       (2,929,016)      (25,214,989)
                                            ------------      ------------      ------------      ------------
Balance, December 31, 1997                       110,227         2,498,859           435,058         3,044,144
    Net income and comprehensive income           65,788         1,093,727           156,247         1,315,762
    Distributions declared and paid
       to partners                               (50,156)       (1,137,024)         (197,959)       (1,385,139)
                                            ------------      ------------      ------------      ------------
Net assets before accrued liquidation
    expenses                                     125,809         2,455,562           393,346         2,974,767
    Accrued liquidation expenses                 (17,087)         (284,080)          (40,583)         (341,750)
                                            ------------      ------------      ------------      ------------
Net assets in liquidation,
    December 31, 1998                       $    108,772      $  2,171,482      $    352,763      $  2,633,017
                                            ============      ============      ============      ============

</TABLE>
























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

                                       F-6

<PAGE>



                     PAINEWEBBER PREFERRED YIELD FUND, L.P.
                            STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>

                                                                        1998            1997            1996
                                                                        ----            ----            ----
<S>                                                               <C>             <C>             <C>         
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                         $  1,315,762    $  2,072,522    $  4,258,032
Adjustments to reconcile net income to net cash
used in) provided by operating activities:
  Depreciation                                                        1,536,058       6,151,920       9,248,786
  Provision for losses on equipment                                     566,670       1,000,000         802,854
  Gain on sale of equipment                                          (1,236,378)       (461,994)       (789,154)
  Reversal of subordinated disposition fees                                   -               -        (342,661)
Change in assets and liabilities:
  Decrease in rents and other receivables                                  (567)        222,148         461,303
  Decrease in other assets                                                9,688               -           9,718
  (Decrease) increase in accounts payable and accrued
   liabilities                                                         (567,820)        928,851        (160,518)
  (Decrease) increase in payables to affiliates                         (16,707)       (509,744)        476,150
  Decrease in interest payable                                           (1,517)         (5,289)         (9,207)
  Decrease in deferred rental income and deposits                      (246,840)       (483,751)       (180,926)
  Decrease in prepaid rent                                           (6,072,331)     (1,731,189)     (2,116,612)
                                                                   ------------    ------------    ------------
  Net cash (used in) provided by operating activities                (4,713,982)      7,183,474      11,657,765
                                                                    -----------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Recovery of investment in direct financing leases                      30,109       1,281,404       1,606,599
  Proceeds from sale of equipment including direct
    financing leases                                                  6,701,385      19,962,866       2,771,818
  Purchases of equipment on operating leases                                  -          (3,929)     (8,649,624)
  Investment in direct financing leases                                       -               -         (90,912)
                                                                   ------------    ------------    ------------
  Net cash provided by (used in) investing activities                 6,731,494      21,240,341      (4,362,119)
                                                                   ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayment of discounted lease rentals                                (554,166)     (1,279,140)     (1,945,149)
  Cash distributions paid to partners                               (17,871,291)    (10,417,774)    (11,706,805)
                                                                   ------------    ------------    ------------
  Net cash used in financing activities                             (18,425,457)    (11,696,914)    (13,651,954)
                                                                   ------------    ------------    ------------

NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                                       (16,407,945)     16,726,901      (6,356,308)
CASH AND CASH EQUIVALENTS AT BEGINNING
  OF YEAR                                                            19,606,352       2,879,451       9,235,759
                                                                   ------------    ------------    ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR                           $  3,198,407    $ 19,606,352    $  2,879,451
                                                                   ============    ============    ============

Supplemental schedule of cash flow information:
Interest paid                                                      $    502,247    $    814,907    $  1,052,880
                                                                   ============    ============    ============

NON-CASH TRANSACTIONS
  Distribution to partners accrued but not paid                    $          -    $ 16,486,153    $  1,688,938
                                                                   ============    ============    ============
  Equipment subject to operating leases converted
    to direct financing leases at renewal                          $          -    $     87,769    $    958,724
                                                                   ============    ============    ============
  Prepaid rent applied in equipment sales                          $  5,146,636    $    728,405    $    476,187
                                                                   ============    ============    ============

</TABLE>


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

                                       F-7

<PAGE>



                     PAINEWEBBER PREFERRED YIELD FUND, L.P.
                          NOTES TO FINANCIAL STATEMENTS

1.   SIGNIFICANT ACCOUNTING POLICIES

     Basis of Presentation
     ---------------------

     PaineWebber  Preferred  Yield Fund,  L.P. (the  "Partnership"),  a Delaware
     limited  Partnership,   maintained  its  accounting  records  and  prepared
     financial  statements  on the  accrual  basis of  accounting.  The  General
     Partners  approved a plan of liquidation in 1998 and commenced  liquidation
     as of December 31, 1998. Accordingly, the Partnership has changed its basis
     of accounting from the  going-concern  to the  liquidation  basis effective
     December 31, 1998. The liquidation  basis of accounting  presents assets at
     the  amounts  expected to be realized in  liquidation  and  liabilities  at
     amounts  expected to be paid to  creditors.  The  preparation  of financial
     statements in conformity  with  generally  accepted  accounting  principles
     requires  management  to make  estimates  and  assumptions  that affect the
     reported  amounts of assets and  liabilities  and  disclosure of contingent
     assets and  liabilities  at the dates of the financial  statements  and the
     reported amounts of revenues and expenses during the reporting periods. The
     most significant estimates by management for the years prior to 1998 relate
     to the allowance for losses and estimated  residual or salvage values.  The
     liquidating  value of assets and  liabilities in liquidation are based upon
     management's  best  estimates  of their  liquidation  value at December 31,
     1998.  Such values  could  differ  substantially  from  amounts  ultimately
     realized  in  the  future  as  the   Partnership   completes  its  plan  of
     liquidation.  The Managing General Partner is exploring  opportunities  for
     the sale of the remaining  equipment during 1999. The Partnership  gives no
     assurance that final liquidation will occur in 1999,  however,  liquidation
     expenses  have been accrued based on the  assumption  that 1999 will be the
     final year of operations.

     Risks and Uncertainties
     -----------------------

     As discussed in Note 7, the Partnership has sold  substantially  all of its
     assets at December 31, 1998. No material net realizable  value  adjustments
     to  accounts  in the  financial  statements  were  deemed  necessary  after
     adoption of the liquidation basis of accounting by the General Partner.

     Cash and Cash Equivalents
     -------------------------

     The Partnership invests working capital and cash flow from operations prior
     to  its   distribution   to  the  partners  in  short-term   highly  liquid
     investments. These investments are recorded at cost which approximates fair
     market value.  For purposes of the  statement of net assets in  liquidation
     and the balance  sheets and the statements of cash flows,  the  Partnership
     considers all highly liquid investments purchased with an original maturity
     of three months or less to be cash equivalents.

     Direct Finance Leases
     ---------------------

     At lease  commencement,  the  Partnership  recorded  the lease  receivable,
     estimated residual value of the equipment and unearned income. The original
     unearned  income was equal to the  receivable  plus the estimated  residual
     value less the cost of the equipment,  including the acquisition  fees paid
     to the  Managing  General  Partner and was  recognized  as revenue over the
     lease term at a constant rate of return on the net investment in the lease.
     Residual  values were  recorded at lease  inception  equal to the estimated
     value  of the  Partnership's  leased  equipment  at lease  termination.  In
     estimating  such values,  independent  appraisals  and other  circumstances
     regarding  the  equipment  and  the  lessee  were  considered.  Thereafter,
     residual estimates were re-evaluated each quarter.


                                       F-8

<PAGE>

                     PAINEWEBBER PREFERRED YIELD FUND, L.P.
                    NOTES TO FINANCIAL STATEMENTS, continued


1.   SIGNIFICANT ACCOUNTING POLICIES, continued

     Equipment on Operating Leases
     -----------------------------

     Prior to the adoption of the liquidation basis of accounting,  rentals from
     operating leases were recognized on a straight-line  basis over the term of
     the lease.  Equipment on operating leases was stated at cost, including the
     acquisition  fees paid to the Managing  General  Partner,  less accumulated
     depreciation. Depreciation was calculated on a straight-line basis over the
     lease terms,  ranging  from two to seven  years,  to an amount equal to the
     equipment's  estimated fair market value at the lease  termination date. In
     estimating  such values,  independent  appraisals  and other  circumstances
     regarding  the  equipment  and  the  lessee  were  considered.  Thereafter,
     residual  estimates were re-evaluated each quarter.  Impairment losses were
     recognized  when  expected  future  cash flows  were less than the  assets'
     carrying  value.  Accordingly,  when indicators of impairment were present,
     the  Partnership  evaluated  the  carrying  value of  property,  plant  and
     equipment  and  intangibles  in relation to the operating  performance  and
     future undiscounted cash flows of the underlying  business.  In that event,
     the Partnership adjusted the net book value of the underlying assets by the
     difference  between the sum of expected  future  discounted  cash flows and
     book value.

     The remaining piece of manufacturing  equipment under operating lease as of
     December 31, 1998 is recorded at fair market value in the  Statement of Net
     Assets  in  Liquidation.  Such  value  was  determined  by  an  independent
     appraiser  at the  end of  1998.  The  equipment  will be  evaluated  on an
     on-going basis for  other-than-temporary  declines in fair market value and
     written down if appropriate.  In accordance  with the liquidation  basis of
     accounting,  adopted as of December 31, 1998, no further  depreciation will
     be recorded.

     Non-recourse Discounting of Rentals
     -----------------------------------

     The Partnership assigned the rentals from leases to financial  institutions
     at fixed interest rates on a non-recourse  basis. In return for such future
     lease payments, the Partnership received the discounted value of the rental
     payments in cash. The notes were  collateralized  by the lease, the related
     lease  payments  and the  underlying  equipment.  Cash  proceeds  from such
     financings were recorded on the balance sheet as discounted  lease rentals.
     As lessees make payments to the financial institutions, interest expense is
     recorded  and the  outstanding  balance  of  discounted  lease  rentals  is
     reduced.

     Disposition of Equipment
     ------------------------

     When  equipment was sold or disposed of, the asset and related  accumulated
     depreciation  and  write  down for  loss,  if any,  were  removed  from the
     accounts and a gain or loss was recognized.

     Deferred Rental Income
     ----------------------

     Lease revenues  received but not yet earned were deferred and recognized as
     income when earned.

     Income Taxes
     ------------

     No provision  for income taxes was made in the financial  statements  since
     taxes  on  Partnership  income  are the  responsibility  of the  individual
     partners rather than the Partnership.

     Net Income Per Unit of Class A Limited Partner Interest
     -------------------------------------------------------

     The net income per Unit of Class A Limited Partner Interest was computed by
     dividing the net income  allocated  to the Class A Limited  Partners by the
     weighted  average  number  of  Units of Class A  Limited  Partner  Interest
     outstanding during the period.

                                       F-9

<PAGE>

                     PAINEWEBBER PREFERRED YIELD FUND, L.P.
                    NOTES TO FINANCIAL STATEMENTS, continued


1.   SIGNIFICANT ACCOUNTING POLICIES, continued

     Accrued Liquidation Expenses
     ----------------------------

     Liquidation  expenses  are  estimates  comprised  primarily  of  a  reserve
     associated  with sales and property tax audits,  financial  statement audit
     and tax return  preparation  for 1999,  investor  record  maintenance,  and
     expenses reimbursable to the General Partner.

     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
     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 statements.

     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. 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.  The General  Partner does not
     expect the adoption to have an impact on its financial reporting.

     Long-lived Assets
     -----------------

     Prior  to  the  adoption  of  the  liquidation  basis  of  accounting,  the
     Partnership  accounted  for  long-lived  assets  under  the  provisions  of
     Statement of Financial  Accounting  Standards No. 121,  Accounting  for the
     Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of
     ("SFAS No. 121"). SFAS No. 121 requires that long-lived  assets,  including
     operating leases, and certain identifiable  intangibles to be held and used
     by an entity be  reviewed  for  impairment  whenever  events or  changes in
     circumstances  indicate  that the  carrying  amount  of an asset may not be
     recoverable. In performing the review for recoverability, the entity should

                                      F-10

<PAGE>

                     PAINEWEBBER PREFERRED YIELD FUND, L.P.
                    NOTES TO FINANCIAL STATEMENTS, continued


1.   SIGNIFICANT ACCOUNTING POLICIES, continued

     Long-lived Assets, continued
     -----------------

     estimate the future cash flows expected to result from the use of the asset
     and its eventual disposition.  If the sum of the expected future cash flows
     (undiscounted  and without  interest  charges)  was less than the  carrying
     amount of the asset, an impairment  loss was recognized.  Measurement of an
     impairment loss for long-lived  assets,  including  operating  leases,  and
     identifiable  intangibles  held by the  Partnership  was  based on the fair
     value of the asset calculated by discounting the expected future cash flows
     at an appropriate interest rate.

2.   ORGANIZATION OF THE PARTNERSHIP

     The  Partnership  was  formed  on  December  18,  1989 for the  purpose  of
     acquiring and leasing  equipment.  The Partnership  acquired a portfolio of
     equipment subject to triple net leases (e.g.  repairs,  insurance and taxes
     are paid by the lessees) with unaffiliated third parties.

     The Managing General Partner of the Partnership is CAI Equipment Leasing II
     Corp.,  a  wholly-owned  subsidiary of Capital  Associates,  Inc.,  and the
     Administrative  General Partner is General  Equipment  Management,  Inc., a
     wholly-owned  subsidiary of Paine Webber Group Inc.  (The Managing  General
     Partner and the Administrative General Partner are hereinafter collectively
     referred to as the "General Partners").  Capital Associates  International,
     Inc. ("CAII"), an affiliate of the Managing General Partner, is the Class B
     Limited Partner.  The Class B Limited Partner contributed  equipment to the
     Partnership  having a fair  market  value  equal to 12.5% of the  aggregate
     acquisition  value of the equipment  purchased  with the offering  proceeds
     received  from the sale of the  Units of Class A Limited  Partner  Interest
     ("Units") and the equipment contributed by the Class B Limited Partner. The
     Class B Limited Partner satisfied its contribution obligation during 1992.

     On March 12,  1990,  the  General  Partners  each  contributed  $100 to the
     capital  of the  Partnership.  Between  May 21,  1990 and April  19,  1991,
     142,128  Units were sold at a price of $500 per Unit.  Nine  closings  were
     held  pursuant  to which  the  Partnership  received  $71,064,000  of gross
     offering proceeds.  The Partnership  incurred $8,952,640 of commissions and
     other offering  expenses in connection  with the sale of these Units,  thus
     receiving $62,111,360 of net offering proceeds.

     The Partnership  commenced operations on June 22, 1990 and acquired a total
     of $140,473,626 of leased  equipment over the life of the  Partnership,  of
     which $3,929 (for an upgrade) and $8,740,536  were acquired during 1997 and
     1996, respectively.

     The  Partnership  is required to dissolve and  distribute all of its assets
     not later than December 31, 2005. The Partnership liquidated  substantially
     all of its remaining leased equipment,  and all of its off-lease equipment,
     in 1998. The Managing  General  Partner is negotiating  for the sale of the
     remaining equipment.

3.   PARTNERSHIP ALLOCATIONS
                               Cash Distributions

     Cash distributions, which are based upon the results of operations and cash
     generated  from  operations  other  than  liquidating  distributions,   are
     distributed  5% to the  General  Partners  and 95% to the  Class A  Limited
     Partners  and the  Class B  Limited  Partner  (collectively,  the  "Limited
     Partners").  The 95%  distributed  to the  Limited  Partners  is  generally
     allocated  between  the  Class A Limited  Partners  and the Class B Limited
     Partner in the manner set forth in the table below.

                                      F-11

<PAGE>

                     PAINEWEBBER PREFERRED YIELD FUND, L.P.
                    NOTES TO FINANCIAL STATEMENTS, continued


3.   PARTNERSHIP ALLOCATIONS, continued

     1.  During the reinvestment period (ended March 31, 1996).

<TABLE>
<CAPTION>
                                                                                       Class A      Class B
                                                                                       Limited       Limited
                                                                                       Partners      Partner     Reinvested
                                                                                       --------      -------     ----------

     <S>                                                                                <C>          <C>            <C> 
     (A)      Until the Class A Limited  Partners  receive a 3.5% quarterly (14%
              annualized), cumulative distribution
              on their capital contributions                                             100.0%         -              -

     (B)      Cash  remaining  after  (A)  above  and  until the Class B Limited
              Partner receives a 2.75% quarterly (11%
              annualized) distribution on its capital contributions                        -          100.0%           -

     (C)      Cash  remaining  after  (B)  above  is  reinvested  in  additional 
              equipment                                                                    -            -            100.0%

     2. After the reinvestment period:

     (A)      Until the Class A Limited  Partners  receive a 3.5% quarterly (14%
              annualized), cumulative
              distribution on their capital contributions                                100.0%         -              -

     (B)      Cash  remaining  after  (A)  above  and  until the Class B Limited
              Partner receives a 2.75% quarterly (11%
              annualized) distribution on its capital contributions                        -          100.0%           -

     (C)      Cash  remaining  after  (B)  above  and  until the Class A Limited
              Partners receive a return of their capital  contributions,  plus a
              10% annual,  cumulative distribution compounded quarterly on their
              adjusted
              capital  contributions ("Payout")                                           87.5%        12.5%           -

     (D)      Cash  remaining  after  (C)  above  and  until the Class B Limited
              Partner receives any previously undistributed portion of its 2.75%
              quarterly (11%
              annualized) distribution on its capital contributions                        -          100.0%           -

     (E)      Cash  remaining  after  (D)  above  and  until the Class B Limited
              Partner achieves Payout                                                     12.5%        87.5%           -

     (F)      Cash remaining after (E) above                                              70.0%       30.0%*           -

              *subject to certain specified limitations.
</TABLE>


                                      F-12

<PAGE>

                     PAINEWEBBER PREFERRED YIELD FUND, L.P.
                    NOTES TO FINANCIAL STATEMENTS, continued


3.   PARTNERSHIP ALLOCATIONS, continued

     In 1997,  the  Partnership  sold a  substantial  portion of its  portfolio,
     thereby  triggering an event of dissolution  as defined in the  Partnership
     Agreement.  As a result,  the fourth  quarter  1997 and first  quarter 1998
     distribution, and all future distributions,  have been and will be based on
     the respective  partners' capital accounts after all allocations of profits
     and losses, as provided for in the Partnership Agreement.

     Profits and Losses

     Profits (not including the special allocations  discussed below) were first
     allocated to offset prior year losses, if any.  Remaining profits were then
     allocated  among the  partners in the same  manner that cash  distributions
     were  allocated,  or  would  be  allocated  (as set  forth  above)  if cash
     distributions were equal to the allocable profits.

     Losses (not including the special  allocations  discussed below) were first
     allocated to offset prior year profits and then 1% to the General  Partners
     and 99% to the Limited Partners.  The 99% allocated to the Limited Partners
     was shared 87.5% for the Class A Limited Partners and 12.5% for the Class B
     Limited Partner.

     There are several special allocation provisions included in the Partnership
     Agreement  of  which  the  two  most  significant  are as  follows:  First,
     commissions  and expenses  paid in  connection  with the sale of Units were
     allocated 1% to the General Partners and 99% to the Limited  Partners.  The
     99%  allocated  to the Limited  Partners  was shared  87.5% for the Class A
     Limited  Partners  and  12.5%  for the  Class B  Limited  Partner.  Second,
     depreciation  with respect to the equipment and any losses  resulting  from
     the sale of equipment was  allocated 1% to the General  Partners and 99% to
     the Limited  Partners,  until the  cumulative  amount of  depreciation  and
     losses so allocated to the Limited Partners equaled their aggregate capital
     contributions, net of the commissions and other expenses paid in connection
     with the sale of the Units.  The 99% allocated to the Limited  Partners was
     shared  by the  Class A  Limited  Partners  and  the  Class  B  Partner  in
     proportion  to their  respective  net  capital  contributions.  The General
     Partners were also specially  allocated  items of income to offset their 1%
     allocation of these two items.

4.   CASH AND CASH EQUIVALENTS

     Cash equivalents are primarily short-term  commercial paper issued by large
     domestic   corporations.   At  December  31,  1998,  the  Partnership  held
     short-term commercial paper issued as follows:

     Ford Motor Company purchased on December 29, 1998 for $1,995,777 (Par Value
     2,000,000),  and commercial paper issued by American Express Inc. purchased
     on December 29, 1998 for a price of $299,665 (Par Value $300,000).

5.   RENTS AND OTHER RECEIVABLES, NET

     Rents and other  receivables,  net consists primarily of rents and property
     taxes that had been billed and were due, but have not been  collected,  and
     accrued interest receivable.



                                      F-13

<PAGE>

                     PAINEWEBBER PREFERRED YIELD FUND, L.P.
                    NOTES TO FINANCIAL STATEMENTS, continued


6.   NET INVESTMENT IN DIRECT FINANCE LEASES

     During 1998, the remaining  direct finance leases were sold to the original
     lessee or to third  parties.  The  investment in direct  finance  leases at
     December 31, 1997 consisted of the following:

                                                                1997
                                                                ----

         Minimum lease payments receivable                   $ 144,121
         Estimated unguaranteed residual values                 57,961
         Unearned lease income                                 (31,852)
                                                             ---------
                                                             $ 170,230
                                                             =========
7.   EQUIPMENT ON OPERATING LEASES, NET

     The following schedule provides an analysis of the Partnership's investment
     in equipment on operating leases as of December 31, 1998 and 1997:

                                                          1998           1997
                                                          ----           ----

     Office technology and communications
       equipment                                     $         -   $  2,434,870
     General equipment, at estimated liquidation
       value in 1998                                   1,567,365     18,085,571
                                                     -----------   ------------
                                                                     20,520,441
     Less:
     Accumulated depreciation                                  -    (11,966,110)
     Allowances for losses                                     -       (300,945)
                                                     -----------   ------------
                                                     $ 1,567,365   $  8,253,386
                                                     ===========   ============

     Additionally,  equipment with original costs  aggregating  $4,945,237  (net
     book value of $729,481),  was off-lease and being held for sale at December
     31, 1997.

     As  discussed  above,  the  Partnership  performs  ongoing  assessments  of
     recorded  equipment  residual  values  based on  actual  sales  of  similar
     equipment and other  evaluations of estimated  future  equipment values and
     provides for  writedowns  when the value of the equipment has been impaired
     on an other than temporary  basis.  Based upon  managements  assessments as
     noted above, the Partnership  recorded  writedowns totaling $566,670 in the
     1998  Period.  In the 1997  Period,  the  Partnership  provided  writedowns
     aggregating $1,000,000.

     a.) Minimum Future Rentals

         The  following  is a  schedule  by years of minimum  future  rentals on
         operating leases as of December 31, 1998:

              Eight Months Ending
                   August 31,                      Amount
              -------------------                  ------

                   1999                          $ 461,464


                                      F-14

<PAGE>

                     PAINEWEBBER PREFERRED YIELD FUND, L.P.
                    NOTES TO FINANCIAL STATEMENTS, continued


7.   EQUIPMENT ON OPERATING LEASES, NET, continued

         The rentals in the table represent  rentals assigned to partially repay
         the discounted lease rentals ($969,404). The General Partner expects to
         collect the remainder of the discounted  lease rentals from the sale of
         the equipment.

     b.) Sale of Prepaid Leases

         Effective  September 30, 1998, the  Partnership  sold the title and its
         interest in certain  equipment to an unaffiliated  third party (Buyer).
         The lease  rentals had  previously  been  discounted  for cash and were
         recorded as prepaid rent on the balance  sheet.  The Buyer  assumed the
         prepaid rent  obligation of  approximately  $4,569,000 at September 30,
         1998 and paid a nominal amount of cash to the Partnership  resulting in
         a net gain of approximately  $528,000 which is included in Gain on sale
         of equipment.

8.   DISCOUNTED LEASE RENTALS

     Discounted  lease  rentals  outstanding  at December 31, 1998 and 1997 were
     $969,404  and  $1,523,570,   respectively.  Only  one  obligation  remained
     outstanding  at December 31, 1998,  which carried  interest at 10.83%.  The
     non-recourse obligation of $969,404 matures September 30, 1999 (including a
     balloon of $570,441).

9.   CONCENTRATION OF CREDIT RISK

     Approximately 64% of the Partnership's  equipment acquired since inception,
     based upon original cost, was leased to lessees that were investment  grade
     lessees,  or entities that were operating  subsidiaries of investment grade
     companies.  An investment grade lessee is a company with a credit rating of
     not less than Baa, as  determined  by Moody's  Investor  Services,  Inc. or
     comparable credit ratings,  as determined by other recognized credit rating
     services.

     The  following  table (which  includes  equipment  accounted  for as direct
     finance  leases)  describes  the  Partnership's  equipment  portfolio as of
     December  31,  1998 and 1997 by  significant  equipment  type.  This  table
     excludes equipment held for sale or lease at December 31, 1997.

                                        December 31 1998        December 31 1997
           Equipment Type(1)             % of Portfolio          % of Portfolio
           -----------------            ----------------        ----------------

     Industrial (Includes Forklifts)                                 43.43%
     Manufacturing                            100%                   16.31
     Transportation                                                  11.25
     Furniture and Fixtures                                           7.50
     Communication                                                    1.57
     PCs and Workstations                                             3.98
     Mining and Construction                                          6.74
     Peripherals and Printers                                         6.31
     Medical and Research                                             2.91
                                              ---                   ------
     Total                                    100%                  100.00%
                                              ===                   ======

     (1)Includes equipment subject to direct finance leases.

                                      F-15

<PAGE>

                     PAINEWEBBER PREFERRED YIELD FUND, L.P.
                    NOTES TO FINANCIAL STATEMENTS, continued


10.  TRANSACTIONS WITH AFFILIATES

                        Acquisition and Operating Stages

     Acquisition Fee
     ---------------

     The  Managing  General  Partner  received  a fee  equal to (i) 2.25% of the
     purchase price of equipment purchased with gross offering proceeds from the
     sale of Units,  and (ii) 3.0% of the purchase price of equipment  purchased
     with  reinvested   Partnership   income  as  compensation  for  evaluating,
     selecting,  negotiating and  consummating the acquisition of the equipment.
     There  was no  acquisition  fee  payable  with  respect  to  the  equipment
     contributed by the Class B Limited  Partner.  The Managing  General Partner
     earned  $253,898 of acquisition  fees  attributable  to the  acquisition of
     equipment  during 1996.  No  acquisition  fees were earned during the years
     ended December 31, 1998 and 1997.  Acquisition fees were capitalized in the
     cost of equipment and depreciated or amortized according to lease type.

     Management Fees to General Partners
     -----------------------------------

     The General  Partners receive a quarterly fee in an amount equal to 2.0% of
     gross  rentals  for Full  Payout  Leases,  as  defined  in the  Partnership
     Agreement,  and 5.0% of gross rentals for other leases  (payable 55% to the
     Managing General Partner and 45% to the Administrative  General Partner) as
     compensation for services rendered in connection with the management of the
     equipment. Management fees of $90,097, $234,851 and $590,817 were earned by
     the General  Partners with regard to the rentals earned by the  Partnership
     during 1998, 1997 and 1996, respectively.

     As part of the class action  settlement,  beginning  January 1996, all fees
     and distributions paid to the Administrative General Partner and all future
     fees and distributions paid to the Administrative General Partner have been
     assigned  by an  affiliate  to an escrow  account  for the benefit of class
     members.

     Disposition Fees
     ----------------

     The  Managing  General  Partner  was  entitled  to  receive a  subordinated
     disposition fee in an amount equal to the lesser of (i) 50% of the fee that
     would be charged by an unaffiliated party, or (ii) 3% of the gross contract
     price relating to each sale of equipment as  compensation  for  negotiating
     and consummating sales of equipment.  At December 31, 1996, the Partnership
     reversed  previously  accrued  subordinated  disposition  fees of  $422,828
     because  the  Managing  General  Partner  concluded  that it was no  longer
     probable that these subordinated disposition fees would be paid.

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

     The General Partners are entitled to reimbursement of certain expenses,  up
     to $25,000 per year, paid on behalf of the  Partnership  which are incurred
     in connection with the  administration  and management of the  Partnership.
     The Managing General Partner, billed, for administrative services,  $25,000
     for each of the years ended December 31, 1998, 1997 and 1996.




                                      F-16

<PAGE>

                     PAINEWEBBER PREFERRED YIELD FUND, L.P.
                    NOTES TO FINANCIAL STATEMENTS, continued


11.  RECONCILIATION TO INCOME TAX METHOD OF ACCOUNTING

     The  following  is a  reconciliation  of the net  income  as  shown  in the
     accompanying  financial  statements  to the  taxable  income  reported  for
     federal income tax purposes:

<TABLE>
<CAPTION>

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

    <S>                                                            <C>                <C>                <C>        
     Net income per financial statements                            $ 1,315,762        $ 2,072,522        $ 4,258,032
     Increase (decrease) resulting from:
       Depreciation                                                      92,153           (491,034)        (2,012,678)
       Direct finance leases                                            (13,422)           929,406          1,272,639
       Provisions for losses on equipment                               566,670          1,000,000            802,854
       (Loss) gain on sale of equipment                              (1,759,946)         5,859,007            259,071
       Prepaid rent                                                  (1,173,420)        (2,885,416)        (2,411,873)
       Liquidation expenses                                            (341,750)
       Other                                                            137,347            (78,167)          (155,367)
                                                                    -----------        -----------        -----------
     Taxable (loss) income per federal income tax return            $(1,176,606)       $ 6,406,318        $ 2,012,678
                                                                    ===========        ===========        ===========
</TABLE>

     The following is a reconciliation  of the amount of the  Partnership's  net
     equity as shown in the accompanying  financial  statements to the tax bases
     of the Partnership's net assets:

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

    <S>                                                           <C>                <C>                 <C>         
     Net assets per financial statements                           $  2,633,017       $  3,044,144        $ 26,186,611
     Increase (decrease) resulting from:
       Commission and expenses paid in connection
         with the sale of Class A limited partner units               8,952,640          8,952,640           8,952,640
       Distributions payable to partners                                      -         16,485,153           1,688,938
       Direct finance lease income and other                                  -            119,165           5,728,510
       Deferred rental income and deposits                                    -                153             483,904
       Writedowns                                                             -            586,599             715,956
       Accumulated depreciation                                        (541,674)        (5,029,304)        (17,688,688)
       Basis of contributed equipment                                         -                  -            (290,785)
       Prepaid rent/payables                                            139,000          6,072,331           8,531,925
                                                                   ------------       ------------        ------------
     Tax bases of net assets                                       $ 11,182,983       $ 30,230,881        $ 34,309,011
                                                                   ============       ============        ============
</TABLE>

12.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     SFAS No.  107,  "Disclosures  about Fair Value of  Financial  Instruments,"
     requires disclosure of fair value of certain financial instruments, whether
     or not  reported in the  balance  sheet.  Where  quoted  market  prices are
     unavailable, the values are based on estimates using present value or other
     valuation  techniques.  The  results  are  significantly  affected  by  the
     assumptions  used  including the discount rate and estimates of future cash
     flows.  In addition,  because SFAS No. 107 excludes  certain assets such as
     leased equipment owned by the Partnership, the aggregate fair value amounts
     discussed  below do not purport to represent  and should not be  considered
     representative of the underlying market value of the Partnership.

                                      F-17

<PAGE>

                     PAINEWEBBER PREFERRED YIELD FUND, L.P.
                    NOTES TO FINANCIAL STATEMENTS, continued


12.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     The methods and  assumptions  used to estimate the fair value of each class
     of the financial instruments are described below.

     Cash  equivalents  and  rents and other  receivables.  For these  balances,
     carrying value approximates fair value due to their short-term nature.

     Discounted  lease  rentals.  For discounted  lease rentals,  carrying value
     approximates  fair value based upon the current  rate offered for a note of
     similar maturity.

     Accounts payable and accrued expenses,  payable to affiliates,  and accrued
     interest payable. For these balances carrying value approximates fair value
     due to their short-term nature.


                                      F-18

<PAGE>



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

There were no changes in  accountants or  disagreements  with  accountants  with
respect to accounting or financial disclosure issues during 1998 or 1997.

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

The  Partnership  has no officers and directors.  The General  Partners  jointly
manage  and   control  the  affairs  of  the   Partnership   and  have   general
responsibility and authority in all matters affecting its business.  Information
concerning  the directors and executive  officers of the General  Partners is as
follows:

                         CAI Equipment Leasing II Corp.
                         ------------------------------

            NAME                                       POSITIONS HELD
     --------------------                     ----------------------------------

     John F. Olmstead                         President and Director
     Anthony M. DiPaolo                       Senior Vice President and Director
     Richard H. Abernethy                     Vice President and Director
     Joe Bukofski                             Vice President and Director
     Robert A. Golden                         Director
     Mick Myers                               Director

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

Richard H. Abernethy,  age 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.



                                       32

<PAGE>



Item 10.  Directors and Executive Officers of the Registrant, 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.

                       General Equipment Management, Inc.
                       ----------------------------------

            NAME                                  POSITIONS HELD
     --------------------            -------------------------------------------

     Stephen R. Dyer                 President and Director

     Carmine Fusco                   Vice President, Secretary, Treasurer, Chief
                                     Financial and Accounting Officer

     Clifford B. Wattley             Vice  President,  Assistant  Secretary  and
                                     Director

Stephen R. Dyer,  age 39, is  President  and a  Director  of the  Administrative
General Partner. He joined PaineWebber Incorporated in June 1988 as a Divisional
Vice  President and is currently a Senior Vice President and Director of Private
Investments.  Prior  to  joining  PaineWebber  Incorporated,  Mr.  Dyer had been
employed, since June 1987, as an Assistant Vice President in the Retail National
Products  Group of L.F.  Rothschild  & Co.  Incorporated.  Prior to joining L.F.
Rothschild,  he was employed,  beginning in January 1985, as an Associate in the
Real Estate  Department of Thomson  McKinnon  Securities  Inc. From July 1981 to
August 1983,  Mr. Dyer was on the audit staff of the  accounting  firm of Arthur
Young & Company.  He received his Bachelor of Science  degree in  Accounting  in
1981 from Boston College and a Masters of Business  Administration  from Indiana
University in December 1984. Mr. Dyer is a Certified Public Accountant.

Carmine  Fusco,  age 30,  is Vice  President,  Secretary,  Treasurer  and  Chief
Financial and Accounting Officer of the Administrative  General Partner, he also
serves as an Assistant Vice President within the Private Investments  Department
of  PaineWebber  Incorporated.  Mr.  Fusco had  previously  been  employed  as a
Financial  Valuation  Consultant in the Business  Valuation  Group of Deloitte &
Touche,  LLP from January  1997 to August  1998.  He was employed as a Commodity
Fund  Analyst  in  the  Managed  Futures  Department  of  Dean  Witter  Reynolds
Incorporated,  from October 1994 to November 1995. Prior to joining Dean Witter,
Mr.  Fusco  was a Mutual  Fund  Accountant  with  the  Bank of New York  Company
Incorporated.  He received  his  Bachelor of Science  degree in  Accounting  and
Finance  in  May  1991  from  Rider   University   and  a  Master  of   Business
Administration from Seton Hall University in June 1996.

                                       33

<PAGE>



Item 10.  Directors and Executive Officers of the Registrant, continued

Clifford B.  Wattley,  age 49, is a Vice  President,  Assistant  Secretary and a
Director of the Administrative  General Partner. Mr. Wattley is a Corporate Vice
President with PaineWebber Incorporated, having joined the firm in 1986. He also
was employed  previously by Paine,  Webber,  Jackson & Curtis from 1979 to 1980.
From  1986  to  1992,  Mr.  Wattley  participated  in  PaineWebber's   Principal
Transactions  Group.  From 1992,  Mr.  Wattley  has been a member of the Private
Investment Department. He holds a Bachelor of Science degree in engineering from
Columbia  University  and a Masters  in  Business  Administration  from  Harvard
University.


Item 11.  Executive Compensation

No compensation was paid by the Partnership to the officers and directors of the
General Partners. 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 Partners and their 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  Units of the  Partnership.  The
     Partnership has no directors or officers,  and neither the General Partners
     nor the Class B Limited Partner of the Partnership own any Units. ATL, Inc.
     an  affiliate  of the  Administrative  General  Partner,  owns 1,551  Units
     purchased pursuant to legal settlements with certain partnerships.

     CAII,  an  affiliate  of the  Managing  General  Partner,  owns 100% of the
     Partnership's Class B Units.

     The names and  addresses  of the General  Partners  and the Class B Limited
     Partner are as follows:

     Managing General Partner:

     CAI Equipment Leasing II Corp.
     7175 W. Jefferson Avenue, Suite 4000
     Lakewood, CO 80235

     Administrative General Partner:

     General Equipment Management, Inc.
     1200 Harbor Boulevard, 5th Floor
     Weehawken, NJ 07087

     Class B Limited Partner:

     Capital Associates International, Inc.
     7175 W. Jefferson Avenue, Suite 4000
     Lakewood, CO 80235

(b)  No   directors   or  officers  of  the  Managing   General   Partner,   the
     Administrative  General  Partner or the Class B Limited  Partner  owned any
     Units as of March 1, 1999.

                                       34

<PAGE>


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


(c)  The  Partnership  knows of no  arrangements,  the operation of the terms 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  Partners and their affiliates have received or will receive certain
types of  compensation,  fees, or other  distributions  in  connection  with the
operations of the  Partnership.  The fees and  compensation  were  determined in
accordance with the applicable provisions of the Partnership Agreement.

Following  is a summary of the amounts  paid or payable to the General  Partners
and their affiliates during 1998.

                        Acquisition and Operating Stages

Acquisition of Equipment
------------------------

The  Partnership  did not  acquire any  equipment  from CAII  during  1998.  The
Partnership ceased committing funds for reinvestment as of March 31, 1996. There
were no acquisition  fees earned by the Managing General Partner during the year
ended December 31, 1998.

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

The General Partners receive a quarterly fee in an amount equal to 2.0% of gross
rentals  for Full Payout  Leases as defined and 5.0% of gross  rentals for other
leases   (payable  55%  to  the  Managing   General   Partner  and  45%  to  the
Administrative  General  Partner)  as  compensation  for  services  rendered  in
connection with the management of the equipment. Management fees of $90,097 were
earned  by the  General  Partners  with  regard  to the  rentals  earned  by the
Partnership during 1998.

As part of the class action  settlement,  beginning  January 1996,  all fees and
distributions paid to the Administrative General Partner and all future fees and
distributions paid to the  Administrative  General Partner have been assigned by
an affiliate to an escrow account for the benefit of class members.

Disposition Fees
----------------

At December 31, 1996, the Partnership  reversed previously accrued  subordinated
disposition  fees of  $422,828  recorded in prior  years  because  the  Managing
General Partner concluded that it is no longer probable that these  subordinated
disposition fees would be paid.

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

The Managing General Partner is entitled to  reimbursement of certain  expenses,
up to $25,000 per year, paid on behalf of the Partnership  which are incurred in
connection  with the  administration  and  management  of the  Partnership.  The
Managing General Partner billed $25,000 for administrative services during 1998.



                                       35

<PAGE>



                                     PART IV

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").

(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 NO.                        DESCRIPTION

            4.1          Amended and Restated  Agreement of Limited  Partnership
                         of  PaineWebber  Preferred   Yield  Fund,   L.P.  dated
                         June  22,  1990.   Filed   a   Exhibit   4.1   to   the
                         Registrant's Quarterly Report  on  Form  10-Q  for  the
                         quarter ended June 30, 1990.(1,2)

            4.2          Amendment  No. 7 to the  Amended and Restated Agreement
                         of Limited  Partnership of PaineWebber  Preferred Yield
                         Fund,  L.P.,  dated  February 7, 1991. Filed as Exhibit
                         4.2 to the Registrant's  Annual Report on Form 10-K for
                         the year ended December 31, 1990.*

            4.3          Amendment No. 8 to the Amended  and Restated  Agreement
                         of Limited Partnership of  PaineWebber  Preferred Yield
                         Fund L.P.,  dated  August 31, 1992.  Filed  as  Exhibit
                         4(d) to the Registrant's Quarterly Report on Form  10-Q
                         for the quarter ended September 30, 1992.*

            4.4          Amendment No. 11 to the Amended and  Restated Agreement
                         of Limited  Partnership  of PaineWebber Preferred Yield
                         Fund, L.P., dated April 30, 1993. Filed as Exhibit  4.4
                         to the Registrant's  Quarterly  Report on Form 10-Q for
                         the quarter ended June 30, 1993.*

            10.          Net Worth  Maintenance  Agreement, dated March 1, 1990,
                         by  and  among  Capital Associates, Inc., CAI Equipment
                         Leasing II Corp. and the Registrant.  Filed as  Exhibit
                         10(c)  to  Amendment   No.   2  to   the   Registrant's
                         Registration Statement on Form S-1 (Commission File No.
                         33-33025) on March 16, 1990.*

            11           Partnership's  policy  regarding  requests  for partner
                         lists.

            27           Financial Data Schedule


                                       36

<PAGE>



                                   SIGNATURES

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

Date:  April 15, 1999           PaineWebber Preferred Yield Fund, L.P.
                                By:  General Equipment Management, Inc.
                                     Administrative General Partner

                                By:  /s/Stephen R. Dyer
                                     -------------------------------------------
                                     Stephen R. Dyer
                                     President and Director

                                By:  General Equipment Management, Inc.
                                     Administrative General Partner

                                By:  /s/Carmine Fusco
                                     -------------------------------------------
                                     Carmine Fusco
                                     Vice President, Secretary, Treasurer, Chief
                                     Financial and Accounting Officer

                                By:  CAI Equipment Leasing II Corp.
                                     Managing General Partner

                                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  Registrant and
in the capacities indicated on April 15, 1999.

Signature                                 Title

/s/John F. Olmstead              President and Director of CAI Equipment Leasing
----------------------------     II Corp.
John F. Olmstead

/s/Anthony M. DiPaolo            Senior Vice President , Assistant Secretary and
----------------------------     Director of CAI Equipment Leasing II Corp.
Anthony M. DiPaolo

/s/Richard H. Abernethy          Vice  President  and Director of CAI  Equipment
----------------------------     Leasing II Corp.
Richard H. Abernethy


/s/Stephen R. Dyer               President  and  Director  of General  Equipment
----------------------------     Management, Inc.
Stephen R. Dyer

/s/Carmine Fusco                 Vice  President,  Secretary,  Treasurer,  Chief
----------------------------     Financial and Financial and Accounting Officer
Carmine Fusco

/s/Clifford B. Wattley           Vice  P resident,  Assistant   Secretary,   and
----------------------------     Director of General Equipment Management, Inc.
Clifford B. Wattley

                                       37