SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

[x]  Annual report  pursuant to section 13 or 15(d) of the  Securities  Exchange
     Act of 1934 For the fiscal year ended May 31, 1997

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

                         Commission file number 0-15525


                            CAPITAL ASSOCIATES, INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

            DELAWARE                                       84-1055327
(State or other  jurisdiction of                (IRS EmployerIdentification No.)
 incorporation  or  organization)

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

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

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

Securities registered  pursuant to Section 12(g) of the Act: Common Stock, $.008
par value


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

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

The  approximate  market value of stock held by  non-affiliates  was  $3,680,625
based upon  1,510,000  shares held by such persons and the closing price on July
18, 1997 of $2.4375.  The number of shares outstanding of the Registrant's $.008
par value common stock at July 18, 1997 was 5,016,232.

                      Documents incorporated by reference

Certain  portions of Registrant's  definitive proxy statement to be filed within
120 days after the end of the  Registrant's  fiscal year  pursuant to Regulation
14A are  incorporated  by reference in Part III, Items 10, 11, 12 and 13 of this
report.



Page One of 23 Pages                             Exhibit Index Begins on Page 20


<PAGE>



                                     PART I

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

Capital Associates, Inc. ("CAI" or the "Company"), was incorporated as a holding
company in October 1986. Its principal operating subsidiary,  Capital Associates
International,  Inc. ("CAII"), was incorporated in December 1976. The Company is
principally engaged in (1) buying, selling, leasing and remarketing new and used
equipment,   (2)  managing   equipment  on  and   off-lease,   (3)   sponsoring,
co-sponsoring,  managing and co-managing  publicly-  registered income funds and
(4) arranging equipment-related financing.

Historical Business and Fiscal Year 1997 Significant Accomplishments
--------------------------------------------------------------------

During fiscal years 1997,  1996,  1995, 1994 and 1993, the Company  reported net
income of $733,000, $604,000, $1,116,000, $710,000 and $1,396,000, respectively.
The  Company's  profits  during  these five years were  achieved  primarily as a
result of (1) expanding and improving its lease originations,  asset management,
remarketing  and  leased  equipment  sales  activities,  (2) the  sale of  other
corporate  assets  and  the  settlement  of  litigation  and  (3) a  substantial
reduction of operating expenses in part due to improved back office efficiency.

During fiscal year 1997, as a result of continuing  emphasis on improving  lease
originations,  operating  efficiencies  and  competitive  costs of capital,  the
Company:

*    invested  in its sales  force  through an  extensive  training  program and
     personnel expansion

*    reported profits for the fifth  consecutive year and twentieth  consecutive
     quarter

*    had lease originations exceeding $230 million, the highest level during the
     last five years

*    raised $27.6 million  through the offering of Class A Limited Partner Units
     in Capital Preferred Yield Fund IV

*    expanded  its  financing  capabilities  by  closing  $22  million  of lease
     originations into two new private investment programs

Significant factors impacting the Company's  profitability in the future include
the  ability to develop  and retain  the field  sales  force,  the amount of new
capital  available to the  Company,  the cost of that capital and the ability to
increase lease origination  levels while achieving  profitability  targets.  The
Company  continues to explore  possible  sources of new capital  including,  for
example,   obtaining  new  or  additional  recourse  debt,   securitizing  lease
transactions and selling  equipment leases  originated by the Company to private
investors.  The  Company  intends to operate  profitably  by  continuing  to (1)
generate leasing margin from investing in its own lease portfolio,  (2) remarket
equipment for a profit,  (3) sell a majority of its lease  originations  for fee
income to its  public  income  funds  ("PIFs")  and  various  private  investors
including joint venture partners and other strategic alliances,  and (4) control
its operating costs.

Leasing Activities
------------------

The Company  attempts to diversify its lease  origination and funding sources in
order to enhance its  competitiveness  regardless  of changes in  technology  or
regulations.  Lease  originations  are  diversified  (1)  through its hiring and
training practices relative to the retail originations sales force, (2) locating
the retail  originations  sales force in regional branch offices  throughout the
United States,  (3) by targeting  specific  industries  and equipment  types for
lease  originations,  (4) by buying leases equipment on a wholesale basis (i.e.,
from other  lessors),  and (5)  originating  leases  through  associations  with
equipment vendors (an area which the Company intends to further emphasize during
1998).   Funding  sources  are  diversified  by  (1)  matching  lease  equipment
originations  with the investment  needs of private  investors,  (2) originating
leases on behalf of its PIFs and (3) securitizing lease transactions for its own
portfolio.

                                     2 of 23

<PAGE>



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

Leasing Activities, continued
------------------

All  of the  Company's  lease  transactions  are  net  leases  with a  specified
noncancelable lease term. These noncancelable leases have a "hell-or-high-water"
provision  which  requires  the  lessee  to make all  lease  payments  under all
circumstances  and which  requires  the lessee to insure the  equipment  against
casualty loss, and pay all related maintenance expenses and property,  sales and
other taxes. The Company originates two basic types of leases,  direct financing
leases  ("DFLs") and operating  leases  ("OLs").  In accordance  with  generally
accepted  accounting  principles  ("GAAP"),  the primary  distinguishing  factor
between  these two types of leases is the present value of the rents in relation
to the cost of the  leased  equipment.  In the  case of a DFL,  the  Company  is
contractually entitled to recover at least 90% of its original investment in the
equipment from the present value of the initial lease rentals. In the case of an
OL,  the  Company is  contractually  entitled  to  recover  less than 90% of its
original investment in the equipment from the present value of the initial lease
rentals.  As of  May  31,  1997,  the  Company's  net  investment  in  DFLs  was
approximately  $8 million and its net  investment in OLs was  approximately  $71
million.  See  Note  1 to  Notes  to  Consolidated  Financial  Statements  for a
discussion of the Company's lease accounting policies.

Leases are  originated  for the  Company's  own  account,  its PIFs and  private
investors.  The Company's lease origination strategy is transaction driven. With
each lease origination  opportunity,  the Company evaluates both the prospective
lessee and the equipment to be leased.  With respect to each  potential  lessee,
the Company evaluates the lessee's creditworthiness as well as the importance of
the  equipment to the lessee's  business.  With  respect to the  equipment,  the
Company  evaluates the equipment's  remarketability,  upgrade  potential and the
probability that the equipment will continue to be installed in place at the end
of the initial lease term  because,  typically,  remarketing  equipment in place
produces better residual returns than equipment sold or leased to a third party.

The Company  leases  equipment to lessees in diverse  industries  throughout the
United  States.  To minimize  credit risk,  the Company has  established  credit
underwriting standards which specify that the Company generally leases equipment
to (1) lessees that have 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 (an "investment  grade credit"),  or (2)
companies,  which  although not rated by a recognized  credit rating  service or
rated below Baa, are believed by the Company to be sufficiently  creditworthy to
satisfy the financial obligations under the lease (a "less than investment grade
credit").  As of May 31, 1997,  approximately  99% of the equipment owned by the
Company was leased to companies that meet the above criteria.

Over the past three fiscal years,  the Company has diversified its own equipment
lease  portfolio  (as well as the  equipment  portfolio  it manages  for private
investors  and the  PIFs) to  include  all  types  of  equipment  that  meet the
Company's   underwriting  standards  with  emphasis  on  (i)  material  handling
equipment,  (ii) office  furniture and store  fixtures,  (iii) circuit board and
semiconductor manufacturing, production and testing equipment, (iv) machine tool
and factory automation equipment and (v) information technology equipment.

The Company only purchases  equipment  that is subject to relatively  short-term
leases  (generally  seven years or less).  The Company  finances such  equipment
purchases with the proceeds of borrowings  under the Working Capital Facility or
Warehouse Facility components of its Bank Facility or internally generated funds
pending (1) the sale of the  equipment  to a strategic  funding  partner,  joint
venture  partner,  private  investor or PIF, or (2) the  permanent  non-recourse
financing of the equipment or the securitization of the equipment/lease held for
its own  account.  In the case of leases  held for the  Company's  account,  the
typical lease transaction requires a cash investment by the Company of 5% to 30%
of the original  equipment  cost,  commonly  known in the industry as an "equity
investment",   and  all  permanent   non-recourse   borrowings  related  to  the
transaction  are secured by a first lien on the  equipment and the related lease
rental  payments.  The Company's  equity  investment is typically  financed with
either proceeds from borrowings under its Working Capital Facility or internally
generated funds.  The Company recovers its equity  investment from renewal rents
received  and/or sales proceeds  realized from the equipment  after repayment in
full of the related permanent non-recourse debt or securitization funding.

                                     3 of 23

<PAGE>



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

Leasing Activities, continued
------------------

Lease  originations  of $231 million for fiscal year 1997 were financed  through
$63 million of sales to the PIFs,  $101  million of sales to private  investors,
and the  remaining  $67  million  of leases,  which were held for the  Company's
account (a  significant  portion of which will be sold during fiscal year 1998),
were  financed  through  the  use  of  the  Company's  cash,  accounts  payable,
non-recourse bank debt and recourse bank debt under its Warehouse Facility.

As a  result  of the  present  relatively  low  interest  rate  environment  and
resulting  relatively low lease rates,  the Company sells the majority of leases
it  originates  to private  investors  having a lower  cost of capital  than the
Company.

The Company is able to  originate a certain  amount of leases with higher  lease
rates. Such leases are generally sold to the PIF's because, as PIF sponsor,  the
Company has a fiduciary  responsibility to maximize investor returns and does so
by blending higher yielding  transactions  with investment  grade credit quality
leases having lower lease rates. However,  given the present market environment,
the number of higher  yielding  transactions  having  adequate credit quality is
limited,  and  consequently,  the volume of leases sold to the PIF's is limited.
Consequently, future equipment sales to PIF's are expected to comprise a smaller
percentage of total placements of new lease originations than in the past.

The Company  continues to evaluate  additional  sources of capital (from sources
such as  securitization  or a private  debt  placement)  which will  provide the
liquidity  necessary to significantly add leases to its own portfolio.  The goal
of such  financing will be to lower the Company's cost of capital and expand the
availability of capital.  The Company  believes this will enable it to originate
leases for its own portfolio which have competitive  market lease rates and good
credit  quality.  The  Company  believes  that in the present  market  there are
significant  opportunities  to originate  leases  having these  characteristics.
However, the Company's present capital structure (i.e., both cost of capital and
amount  available)  precludes taking full advantage of market  opportunities for
such leases.  Should the Company be successful in identifying and closing on new
financing  meeting  these  criteria  (for which no assurance  can be given),  it
intends to grow its own lease portfolio.

During  fiscal years 1997,  1996 and 1995,  leasing  revenue was $14.4  million,
$10.2 million, and $7.7 million, respectively.

During fiscal year 1997 and 1996, payments from one lessee accounted for 13% and
11%, respectively,  of total leasing revenue. In addition, other equipment sales
revenue related to equipment  leased to that lessee accounted for 77% and 88% of
total  other  equipment  sales  revenue  during  fiscal  years  1997  and  1996,
respectively.  No lessee accounted for 10% or more of the Company's  revenues in
fiscal year 1995.


Underwriting Standards
----------------------

All  initial  leases are  subject  to review  under the  Company's  underwriting
standards.  Each  potential  lessee is  assigned a credit  risk rating of 1 (the
highest  rating)  through 6 (the lowest  rating),  based on the  application  of
specific  criteria  during the credit  review  process.  The Company  originates
leases for its own account  that have a credit  rating of 1, 2 or 3. The Company
originates  leases for its PIFs consistent with each PIF's own lease origination
standards,  which are similar to those of the Company.  The Company's historical
loss experience for leases originated since 1991 is less than 1%.


                                     4 of 23

<PAGE>



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

Underwriting Standards, continued
----------------------

The Company's  Transaction  Review  Committee,  which is comprised of members of
senior  management,  (1)  reviews and  approves  all  material  aspects of lease
transactions,  the credit  ratings  assigned to lessees and certain  pricing and
residual value assumptions,  (2) advises on lease documentation requirements and
deal structuring guidelines,  (3) monitors asset quality on an on-going basis in
order to estimate  and assess the net  realizable  value at the end of the lease
term for the  Company's  equipment and for reviewing and approving the quarterly
Asset  Quality  Report and (4) revises and updates the  underwriting  standards,
when  and as  necessary.  All  transactions  over  $3,000,000  with a less  than
investment grade credit and over $5,000,000 with an investment grade credit must
also be approved by the Executive Committee of the Board of Directors.

Remarketing Activities
----------------------

Remarketing activities consist of (1) lease portfolio management (i.e., managing
equipment  under  lease)  and (2) asset  management  (i.e.,  managing  off-lease
equipment).  One of the  Company's  principal  goals  is to  minimize  off-lease
equipment by proactively  managing such equipment while it is under lease (e.g.,
renewing or  extending  the lease,  or  re-leasing,  upgrading  or adding to the
equipment  before  the  end  of  the  initial  lease  term)  because  generally,
remarketing  equipment in place produces better residual  returns than equipment
sold or re-leased to a third-party.  However,  if the Company is unsuccessful in
keeping the  equipment  in place,  it will  attempt to sell or re-lease the off-
lease  equipment  to a different  lessee,  or sell the  off-lease  equipment  to
equipment  brokers or dealers.  Revenue  from  remarketing  activities  was $6.0
million, $3.0 million, and $4.6 million during fiscal years 1997, 1996 and 1995,
respectively.

The Company attempts to maximize the remarketing  proceeds from, and to minimize
the warehousing  costs for, off- lease equipment by (1) employing  qualified and
experienced   remarketing   personnel,   (2)  developing  equipment  remarketing
expertise in order to maximize the profit from sales of off-lease equipment, (3)
minimizing the amount of off-lease  equipment stored at  independently  operated
equipment  warehouses and thereby  reducing  warehousing  costs, (4) leasing and
operating  its own general  equipment  warehouse to further  reduce  warehousing
costs,  (5)  eliminating  scrap inventory from the warehouses and (6) conducting
on-site equipment inspections.  The Company further supports these activities by
carefully  monitoring  the  residual  values  of  its  equipment  portfolio  and
maintaining  adequate  reserves  on its books,  when and as  needed,  to reflect
anticipated  future  reductions  in such  values due to  obsolescence  and other
factors.


Private Investor Programs and PIFs
----------------------------------

The Company sells ownership  interests in leased equipment to private  investors
for fee income.  In accordance  with GAAP, the Company records sales revenue and
costs of sales on what is known as a  "broad"  basis,  meaning  equipment  sales
revenue is equal to the sales price of the equipment and equipment sales cost is
equal  to  the  carrying  value  of the  equipment.  In the  event  the  Company
warehouses a transaction  prior to sale, the Company records leasing revenue and
expenses during the warehouse  period.  Revenue from the sale of equipment under
lease to private investors was $131.6 million,  $91.0 million, and $24.7 million
during fiscal years 1997, 1996 and 1995, respectively.

The Company  currently  sponsors or co-sponsors  seven PIFs. The Company sells a
significant  portion of the equipment it acquires for lease to its PIFs. Revenue
from the sale of  equipment  under  lease to the PIFs was $67.0  million,  $72.2
million,   and  $43.6  million   during  fiscal  years  1997,   1996  and  1995,
respectively.

                                     5 of 23

<PAGE>




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


Private Investor Programs and PIFs, continued
----------------------------------

Various  subsidiaries  and affiliates of the Company act as the general partners
or co-general  partners of the PIFs. In addition,  CAII  contributes cash and/or
equipment to each PIF in exchange for a Class B limited partner interest ("Class
B  interest").  Public  investors  purchase  Class A limited  partnership  units
("Class A Units") for cash, which the PIFs use to purchase equipment on-lease to
lessees.  The Company receives (1) fees for performing  various services for the
PIFs (subject to certain dollar limits) including  acquisition fees and on-going
management fees, (2)  reimbursement  for  organizational  and offering  expenses
incurred in selling the Class A Units  (subject to certain dollar  limits),  (3)
Class B interest  cash  distributions  from each PIF  (subordinated  to the cash
returns on the Class A Units),  (4) general partner cash  distributions  and (5)
reimbursement  of certain  operating  expenses  incurred in connection with each
PIFs operations.

Capital  Preferred  Yield Fund IV began selling units to investors  during April
1996  and is the  only  PIF  currently  offering  Class A Units  for sale to the
public. In the aggregate, the seven PIFs have sold $349 million of Class A Units
to the public  through May 31, 1997.  Up to $21 million of Class A Units will be
offered for sale to the public during fiscal year 1998. CAII's maximum remaining
obligation to make Class B partner cash contributions is $0.2 million.


Competition
-----------

The Company  competes  mainly on the basis of its lease rates,  terms offered in
its leasing  transactions,  reliability in meeting its  commitments and customer
service. Lease rates are determined primarily by the Company's funding costs and
equipment  residuals  resulting from its remarketing  capability.  The Company's
continued  ability to compete  effectively  may be  materially  affected  by the
availability  of  funding  options  and of  financing  and  the  costs  of  such
financing.  The Company competes with a large number of equipment lessors,  many
of which have greater financial resources,  greater economies of scale and lower
costs of capital than the Company.


Employees
---------

The Company had 108  employees  as of May 31, 1997 versus 96 employees as of May
31, 1996, none of whom were  represented by a labor union.  The Company believes
that its employee relations are good.


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

The Company  leases  office  facilities  (approximately  23,000  square feet) in
Lakewood,  Colorado (a suburb of Denver).  These  facilities house the Company's
administrative,  financing and  marketing  operations.  The  Lakewood,  Colorado
facility adequately provides for present and future needs, as currently planned.
In addition,  the Company  leases a warehouse  facility  and regional  marketing
offices.



                                     6 of 23

<PAGE>




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


The Company is involved in the following legal proceedings:

a.   The Company is involved in certain arbitration  proceedings pursuant to the
     requirements of the National  Association of Securities  Dealers  ("NASD"),
     representing  three claims  against CAI  Securities  Corporation,  a wholly
     owned  subsidiary  of the  Company.  All  three  claims  allege  breach  of
     fiduciary duty, breach of contract,  negligence and misrepresentation  with
     regard to the sale of limited  partnership  units in Leastec  Income Fund V
     ("LIFV"),  a limited  partnership  whose general partner is an affiliate of
     the Company.  The three claims involve investments in LIFV of approximately
     $625,000 and seek damages of $838,000  and special  punitive and  exemplary
     damages (one claim specifies $1,500,000 in such damages while the other two
     claims do not specify an amount). All three claims have been brought by the
     same  company  on behalf  of three  investors.  Management  has been of the
     belief that it has good and substantial  defenses  against these claims and
     that the Company's subsidiary will prevail. In July 1997, one of the cases,
     seeking $500,000 in damages and $1,500,000 in punitive  damages,  was heard
     by an NASD arbitration  panel and that arbitration panel has now determined
     that  there was no breach of  fiduciary  duty,  no breach of  contract,  no
     negligence  and no  misrepresentation  with  regard to the sale of  limited
     partnership  units of LIFV and the subsequent  financial  reporting thereof
     and that no award is due the claimant under any of his claims. The claimant
     was  assessed  $7,300  in  forum  fees  by the  NASD  for  the  arbitration
     proceeding.

b.   The Company is involved in other  routine legal  proceedings  incidental to
     the conduct of its business.  Management  believes that none of these legal
     proceedings will have a material adverse effect on the financial  condition
     or operations of the Company


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

There were no matters  submitted to a vote of security  holders during the three
months ended May 31, 1997.


Item 5.  Market  for  the  Registrant's  Common  Stock  and  Related Stockholder
         -----------------------------------------------------------------------
         Matters
         -------
         
The  Company's  common  stock  trades on the Nasdaq  National  Market  under the
symbol: CAII.

                                     7 of 23

<PAGE>




                                     PART II

The  following  table sets forth the high and low sales prices of the  Company's
common stock for the periods indicated, according to published sources. High and
low sales prices shown reflect  inter-dealer  quotations without retail markups,
markdowns or commissions and do not necessarily represent actual transactions.


    1998                                             HIGH          LOW
    ----                                             ----          ---

First Quarter (through July 18, 1997)               3  1/2        2  1/4


    1997                                             HIGH          LOW
    ----                                             ----          ---

First Quarter                                       4  3/8        2  1/8
Second Quarter                                      4  1/4        3  1/8
Third Quarter                                       4  1/4        2  7/8
Fourth Quarter                                      3  13/16      2  1/2


    1996                                             HIGH          LOW
    ----                                             ----          ---

First Quarter                                       2  3/8        1  1/4
Second Quarter                                      2  1/8        1  1/2
Third Quarter                                       1  7/8        1  3/8
Fourth Quarter                                      3  5/16       1  5/8


On July 18, 1997, the date on which trading activity last occurred,  the closing
sales price of the  Company's  stock was $2.4375.  On July 18, 1997,  there were
approximately   180   shareholders   of  record  and  at  least  520  beneficial
shareholders of the Company's outstanding common stock.

No  dividends  were paid during the  periods  indicated.  The  Company  does not
anticipate  that  it  will  pay  cash  dividends  on  its  common  stock  in the
foreseeable future. See Note 8 to Notes to Consolidated Financial Statements for
a discussion of  restrictions on CAII's ability to transfer funds to the Company
which, in turn, limits the Company's ability to pay dividends on its outstanding
Common Stock.


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

The table on the following page sets forth selected consolidated  financial data
for the periods  indicated  derived from the  Company's  consolidated  financial
statements.  The data should be read in  conjunction  with Item 7,  Management's
Discussion and Analysis of Financial  Condition and Results of  Operations,  and
the Company's  consolidated  financial  statements  and notes thereto  appearing
elsewhere herein.



                                     8 of 23

<PAGE>



Income Statement Data
---------------------
(in thousands, except per share and number of shares data)

<TABLE>
<CAPTION>


                                                                  Year Ended May 31,
                                            --------------------------------------------------------------
                                              1997          1996         1995          1994        1993
                                            ---------     ---------    ---------     ---------   ---------
<S>                                        <C>           <C>          <C>           <C>         <C>      
Revenue:
  Equipment sales                           $ 204,545     $ 166,242    $  81,370     $ 122,469   $  96,233
  Leasing                                      14,420        10,212        7,672        13,368      26,003
  Interest                                      4,582         6,716       11,386        15,027      15,526
  Other                                         3,987         3,511        4,516         4,101       3,638
                                            ---------     ---------    ---------     ---------   ---------
                                              227,534       186,681      104,944       154,965     141,400
                                            ---------     ---------    ---------     ---------   ---------

Costs and expenses:
  Equipment sales                             200,018       161,797       70,866       114,440      85,423
  Leasing                                       8,928         5,466        3,893         5,511      12,148
  Operating and other expenses                  9,568         8,332       11,603        12,307      14,060
  Provision for losses                            365           430        2,940         1,315       2,070
  Interest - non-recourse debt                  6,012         7,705       12,548        18,370      22,091
  Interest - recourse debt                      1,900         2,145        1,618         1,839       3,282
                                            ---------     ---------    ---------     ---------   ---------
                                              226,791       185,875      103,468       153,782     139,074
                                            ---------     ---------    ---------     ---------   ---------
Income before income taxes                        743           806        1,476         1,183       2,326
Income tax expense                                 10           202          360           473         930
                                            ---------     ---------    ---------     ---------   ---------
Net income                                  $     733     $     604    $   1,116     $     710   $   1,396
                                            =========     =========    =========     =========   =========

Earnings per common and dilutive common equivalent share:

     PRIMARY:
     Net income per share                   $     .14     $     .12    $     .21     $     .13   $     .27

     FULLY DILUTED:
     Net income per share                   $     .14     $     .11    $     .21     $     .13   $     .26

Weighted average number of common and
  dilutive common equivalent shares outstanding
  used in computing earnings per share:

     PRIMARY                                5,403,000     5,186,000    5,325,000     5,451,000   5,153,000

     FULLY DILUTED                          5,414,000     5,393,000    5,337,000     5,451,000   5,444,000

Balance Sheet Data
------------------
  (in thousands)                                                        May 31,
                                            --------------------------------------------------------------
                                              1997          1996         1995          1994        1993
                                            ---------     ---------    ---------     ---------   ---------

Total assets                                $ 146,517     $ 127,511    $ 158,956     $ 209,725   $ 280,635
Recourse bank debt                             20,712        17,538       24,520        18,767      37,857
Discounted lease rentals                       61,466        63,749       98,216       160,842     210,561
Stockholders' equity                           23,501        22,881       22,490        21,099      20,303

</TABLE>

                                     9 of 23

<PAGE>




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

I.   Results of Operations
     ---------------------  
     During fiscal years 1997,  1996,  1995, 1994 and 1993, the Company reported
     net income of $733,000,  $604,000,  $1,116,000,  $710,000  and  $1,396,000,
     respectively.

     Operating  results  are  subject to  fluctuations  resulting  from  several
     factors,  including  seasonality of lease  originations,  variations in the
     relative percentages of the Company's leases entered into during the period
     which are  classified as DFLs or OLs, or are sold for fee income as well as
     the level of fee income obtained from the sale of leases in excess of lease
     equipment  cost. The Company will adjust the mix of OLs and DFLs and volume
     of leases  sold to  private  investors  from time to time,  when and as the
     Company  determines  that it would be in its best  interests,  taking  into
     account profit opportunities, portfolio concentration and residual risk.

     In the ordinary  course of business,  the Company will continue to (1) sell
     new lease  originations  to its PIFs (to the  extent  the PIFs  have  funds
     available  for such  purpose) or private  investors  and (2) sell  seasoned
     lease  transactions  (previously  originated  leases held in the  Company's
     portfolio) to private investors.  Presented below is a schedule showing new
     lease  originations  volume and the placement of new lease  originations by
     fiscal year (in thousands).

                                                         Year ended May 31,
                                                  ------------------------------
                                                    1997       1996       1995
                                                  --------   --------   --------
     Placement:
       Equipment under lease sold to PIFs         $ 63,000   $ 67,000   $ 44,000
       Equipment under lease sold to private
         investors                                 101,000     82,000     25,000
       Leases added to the Company's lease
         portfolio (a significant portion of
         which will be/were sold during the
         subsequent fiscal years)                   67,000     43,000     27,000
                                                  --------   --------   --------

     Total lease origination volume               $231,000   $192,000   $ 96,000
                                                  ========   ========   ========

     Leasing is an alternative to financing equipment with debt. Therefore,  the
     ultimate  profitability of the Company's leasing transactions is dependent,
     in part, on the general level of interest  rates.  Lease rates tend to rise
     and fall with interest rates,  although lease rate movements  generally lag
     interest rate movements.

     Because the Company  finances  its lease  transactions  with  recourse  and
     non-recourse  debt, the ultimate  profitability of leasing  transactions is
     dependent, in part, on the difference between the interest rate inherent in
     the lease and the  underlying  debt rate  ("rate  spread").  Certain of the
     Company's  competitors  have  access to lower cost funds than the  Company.
     However,  the Company has  developed  relationships  with  various  private
     investors and formed various strategic alliances with investors that have a
     lower cost of capital  enabling the Company to originate and sell leases at
     competitive prices.

     As a result of the present  relatively  low interest rate  environment  and
     resulting  relatively  low lease rates,  the Company  sells the majority of
     leases it  originates to private  investors  having a lower cost of capital
     than the Company.

                                    10 of 23

<PAGE>

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

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

     The  Company is able to  originate  a certain  amount of leases with higher
     lease rates.  Such leases are generally sold to the PIF's  because,  as PIF
     sponsor,  the Company has a fiduciary  responsibility  to maximize investor
     returns  and  does  so  by  blending  higher  yielding   transactions  with
     investment  grade credit quality leases having lower lease rates.  However,
     given the  present  market  environment,  the  number  of  higher  yielding
     transactions  having adequate credit quality is limited,  and consequently,
     the volume of leases sold to the PIF's is limited.  The Company's  response
     to these  factors  has been to limit the amount of funds it raises from PIF
     investors.  Consequently,  future  equipment sales to PIF's are expected to
     comprise a smaller percentage of total placements of new lease originations
     than in the past.

     The Company  continues  to  evaluate  additional  sources of capital  (from
     sources  such as  securitization  or a private debt  placement)  which will
     provide the  liquidity  necessary  to  significantly  add leases to its own
     portfolio.  The goal of such  financing will be to lower the Company's cost
     of capital and expand the  availability  of capital.  The Company  believes
     this will enable it to originate  leases for its own  portfolio  which have
     competitive  market  lease  rates  and good  credit  quality.  The  Company
     believes that in the present market there are significant  opportunities to
     originate  leases  having these  characteristics.  However,  the  Company's
     present capital structure (i.e., both cost of capital and amount available)
     precludes  taking full advantage of market  opportunities  for such leases.
     Should  the  Company  be  successful  in  identifying  and  closing  on new
     financing  meeting these criteria (for which no assurance can be given), it
     intends to grow its own lease portfolio.

     Presented below are schedules showing condensed income statement categories
     and  analyses of changes in those  condensed  categories  derived  from the
     Consolidated  Statements of Income  appearing on page F-4 of this report on
     Form 10-K,  prepared  solely to  facilitate  the  discussion  of results of
     operations (in thousands).

<TABLE>
<CAPTION>

                                                Condensed Consolidated                 Condensed Consolidated
                                                 Statements of Income    The effect     Statements of Income     The effect
                                                    for the years       on net income      for the years        on net income
                                                    ended May 31,         of changes        ended May 31,        of changes
                                                ----------------------     between     ----------------------      between
                                                   1997        1996         years        1996       1995            years
                                                ---------    --------   -------------  ---------  -----------   -------------
    <S>                                        <C>          <C>          <C>          <C>         <C>           <C>     
     Equipment sales margin                     $  4,527     $  4,445     $     82     $  4,445    $  4,404      $     41
     MBank sales margin                                -            -            -            -       6,100        (6,100)
     Leasing margin (net of interest expense
       on discounted lease rentals)                4,062        3,757          305        3,757       2,617         1,140
     Other income                                  3,987        3,511          476        3,511       4,516        (1,005)
     Operating and other expenses                 (9,568)      (8,332)      (1,236)      (8,332)    (11,603)        3,271
     Provision for losses                           (365)        (430)          65         (430)     (2,940)        2,510
     Interest expense on recourse debt            (1,900)      (2,145)         245       (2,145)     (1,618)         (527)
     Income taxes                                    (10)        (202)         192         (202)       (360)          158
                                                --------     --------     --------    ---------    --------      --------

     Net income                                 $    733     $    604     $    129    $     604    $  1,116      $   (512)
                                                ========     ========     ========    =========    ========      ========
</TABLE>





                                    11 of 23

<PAGE>

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

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

     EQUIPMENT SALES

     Equipment sales revenue (and the related  equipment sales margin)  consists
     of the following (in thousands):

<TABLE>
<CAPTION>
                                                                      Year Ended May 31,
                                                        ----------------------------------------------             Increase
                                                                 1997                     1996                    (Decrease)
                                                        ----------------------------------------------      ---------------------
                                                         Revenue      Margin      Revenue      Margin        Revenue      Margin
                                                        ---------   ---------    ---------   ---------      ---------   ---------
    <S>                                                <C>         <C>          <C>         <C>            <C>         <C>     
     Transactions during initial lease term:
       Equipment under lease sold to PIFs               $  66,987   $   1,442    $  72,202   $   1,539
       Equipment under lease sold to private investors    131,600       1,768       91,007       1,303
                                                        ---------   ---------    --------    ---------
                                                          198,587       3,210      163,209       2,842      $ 35,378    $     368
                                                        ---------   ---------    ---------   ---------      --------    ---------
     Transactions subsequent to initial lease termination:
       Sales of off-lease equipment                         5,359         720        2,121         859
       Sales-type leases                                       71          69          359         191
       Excess collections (cash collections in excess
         of the associated residual value from equipment
         under lease sold to private investors)               528         528          553         553
                                                        ---------   ---------    --------    ---------
                                                            5,958       1,317        3,033       1,603         2,925         (286)
     Deduct related provision for losses                        -        (365)           -        (430)            -           65
                                                        ---------   ---------    ---------   ---------      --------    ---------
     Realizations of value in excess of provision for
       losses                                               5,958         952        3,033       1,173         2,925         (221)
     Add back related provision for losses                      -         365            -         430             -          (65)
                                                        ---------   ---------    ---------   ---------      --------    ---------
                                                            5,958       1,317        3,033       1,603         2,925         (286)
                                                        ---------   ---------    ---------   ---------      --------    ---------
     Total equipment sales                              $ 204,545   $   4,527    $ 166,242   $   4,445      $ 38,303    $      82
                                                        =========   =========    =========   =========      ========    =========


                                                                      Year Ended May 31,
                                                        ----------------------------------------------             Increase
                                                                 1996                     1995                    (Decrease)
                                                        ----------------------------------------------      ---------------------
                                                         Revenue      Margin      Revenue      Margin        Revenue      Margin
                                                        ---------   ---------    ---------   ---------      ---------   ---------
     Transactions during initial lease term:
       Equipment under lease sold to PIFs               $  72,202   $   1,539    $  43,638   $   1,047
       Equipment under lease sold to
         private investors                                 91,007       1,303       24,700         423
                                                        ---------   ---------    ---------   ---------      --------    ---------
                                                          163,209       2,842       68,338       1,470      $ 94,871    $   1,372
                                                        ---------   ---------    ---------   ---------      --------    ---------
     Transactions subsequent to initial lease termination:
       Sales of off-lease equipment                         2,121         859        2,505       1,269
       Sales-type leases                                      359         191        1,227         765
       Excess collections (cash collections in excess
         of the associated residual value from equipment
         under lease sold to private investors)               553         553          900         900
                                                        ---------   ---------    ---------   ---------
                                                            3,033       1,603        4,632       2,934        (1,599)      (1,331)
     Deduct related provision for losses                        -        (430)           -      (1,940)*           -        1,510
                                                        ---------   ---------    ---------   ---------      --------    ---------
     Realizations of value in excess of
       provision for losses                                 3,033       1,173        4,632         994        (1,599)         179
     Add back related provisions for losses                     -         430            -       1,940             -       (1,510)
                                                        ---------   ---------    ---------   ---------      --------    ---------
                                                            3,033       1,603        4,632       2,934        (1,599)      (1,331)
                                                        ---------   ---------    ---------   ---------      --------    ---------
     Total equipment sales                              $ 166,242   $   4,445    $  72,970   $   4,404      $ 93,272    $      41
                                                        =========   =========    =========   =========      ========    =========
</TABLE>

     * Excludes $1,000 of bankrupt  lessee credit losses  occurring prior to the
       expiration of the initial lease term (none for fiscal year 1996)

                                    12 of 23

<PAGE>

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

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

     EQUIPMENT SALES, continued

     Equipment Sales to PIFs
     -----------------------

     Equipment  sales to the PIFs decreased  during fiscal year 1997 as compared
     to fiscal year 1996 and are  expected  to  decrease  further in fiscal year
     1998 because during 1997 three of the PIFs entered the planned  liquidation
     stage.  Once a PIF  enters the  liquidation  stage,  it no longer  acquires
     equipment under lease.  Presently,  two PIFs are actively  acquiring leases
     compared to four PIFs which were actively acquiring leases in 1996.

     Equipment  sales to PIFs  increased  during fiscal year 1996 as compared to
     fiscal year 1995 principally because more leases were identified and closed
     as a result of the increased  productivity of the field lease  originations
     team (see further discussion below).


     Equipment Sales to Private Investors
     ------------------------------------

     Equipment sales to private  investors  increased  principally  because more
     leases were identified and closed as a result of increased  productivity of
     the field lease  originations team. The increased volume of the field lease
     originators  is  primarily  due to the  Company's  efforts to  improve  its
     marketing  activities,  including  focusing on customer  relationships  and
     vertical  integration  (i.e., the development of specialized  equipment and
     remarketing  expertise) and due to  establishment  of a strategic  alliance
     with an  investor  having a lower cost of capital  enabling  the Company to
     originate and sell leases at competitive prices.

     Equipment  sales to private  investors  margin as a percentage of equipment
     sales revenue decreased  primarily because leases sold to private investors
     during  fiscal year 1997 were  generally  held for a longer  period of time
     pending  sale than in prior  years.  For the period of time a lease is held
     pending sale, the Company records leasing revenue.

     Remarketing of the Portfolio and Related Provision for Losses
     -------------------------------------------------------------

     The Company has been  successful in realizing  gains on the  remarketing of
     its equipment after the initial lease term for the past twenty  consecutive
     quarters.  The remarketing of equipment for an amount greater than its book
     value is reported as equipment  sales margin (if the  equipment is sold) or
     as leasing margin (if the equipment is re-leased).  The realization of less
     than the carrying  value of equipment  (which is typically  not known until
     remarketing  after the expiration of the initial lease term) is recorded as
     provision for losses.  As shown in the tables above, the realizations  from
     sales  exceeded the  provision  for losses for fiscal years 1997,  1996 and
     1995, even without  considering  realizations  from remarketing  activities
     recorded as leasing margin.

     Residual values are established equal to the estimated value to be received
     from the equipment  following  termination of the lease. In estimating such
     values,  the Company  considers all relevant facts  regarding the equipment
     and the lessee,  including,  for example, the equipment's  remarketability,
     upgrade  potential and the probability  that the equipment will continue to
     be installed in place at the end of the initial  lease term.  The nature of
     the  Company's  leasing  activities  is that  it has  credit  exposure  and
     residual  value  exposure  and,  accordingly,  in the  ordinary  course  of
     business it will incur  losses  arising from these  exposures.  The Company
     performs ongoing quarterly assessments of its assets to identify other than
     temporary losses in value.

                                    13 of 23

<PAGE>


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

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

     Remarketing of the Portfolio and Related Provision for Losses, continued
     -------------------------------------------------------------

     Margins from  remarketing  sales (i.e.,  sales  occurring after the initial
     lease  term) are  affected  by the number and  dollar  amount of  equipment
     leases that mature in a  particular  quarter.  As shown in the table above,
     (1) because the Company sold  substantially  all new lease  originations to
     its PIFs and  retained  very few  lease  originations  for its own  account
     during the fiscal years  preceding  fiscal year 1995, and (2) in accordance
     with  GAAP,  the  Company  does not  consolidate  the  results of its PIFs,
     generally  fewer leases have matured and less  equipment has been available
     for  remarketing  each quarter  since May 31, 1993.  However,  revenue from
     remarketing sales increased during 1997,  compared to 1996 primarily due to
     the sale of  approximately  $1.5 million of earth moving  equipment and the
     early  termination  sale of  approximately  $2.5  million of  manufacturing
     equipment.  Although  fluctuations will occur as discussed in the preceding
     sentence, in general, remarketing revenue and margin are expected to remain
     at levels which are lower than fiscal 1996 and prior years.  The  Company's
     ability to remarket  additional  amounts of equipment and realize a greater
     amount of  remarketing  revenue in future  periods is  dependent  on adding
     additional leases to its portfolio. However, adding leases to the Company's
     portfolio will not immediately increase the pool of maturing leases because
     new leases  typically  are not  remarketed  until after their  initial term
     (which averages approximately four years).

     The  Company's  policy is to record  allowances  for  losses as soon as any
     other-than-temporary   declines  in  asset   values  are  known.   However,
     chargeoffs  are  recorded  upon  the  termination  or  remarketing  of  the
     underlying  assets. As such,  chargeoffs will primarily occur subsequent to
     the recording of the allowances for losses.

     The  provision  for losses  recorded  during  fiscal year 1997 included the
     following significant items:

     *   Approximately $275,000 for  other-than-temporary  declines in the value
         of  equipment  which  occurred   primarily   because  lessees  returned
         equipment  to the  Company at the end of the  lease.  The  Company  had
         previously  expected to realize the  carrying  value of that  equipment
         through  lease  renewals and proceeds from sale of the equipment to the
         original  lessee.  The fair market value of the equipment  re-leased or
         sold to a third party was considerably less than was anticipated.

     *   Approximately $90,000 as a result of a lease having a net book value of
         $245,000 at February  28, 1997 with a lessee that filed for  bankruptcy
         protection  under  Chapter 11 of the  Bankruptcy  code during the third
         quarter fiscal 1997.

     The  provision  for losses  recorded  during  fiscal year 1996 included the
     following significant items:

     *    approximately  $539,000  related to the sale of a note receivable on a
          jet aircraft, and

     *    approximately  $525,000  to write down the  carrying  value of certain
          retained residuals.

     *    A reversal of approximately  $750,000 recorded during fiscal year 1995
          for estimated loss exposure (as discussed below).


                                    14 of 23

<PAGE>

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

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

     Remarketing of the Portfolio and Related Provision for Losses, continued
     -------------------------------------------------------------

     The  provision  for losses  recorded  during  fiscal year 1995 included the
     following:

     *   approximately $750,000 to record the Company's loss exposure related to
         approximately  $3 million of net book  value of  equipment  leased to a
         lessee who filed Chapter 11 bankruptcy during July 1995

     *   approximately $550,000 recorded to write-down the carrying value of IBM
         equipment  retained  residuals to fair market values based upon current
         third-party quotes

     *   approximately $500,000 for equipment originally expected to remain with
         the lessee upon lease termination which was returned to the Company

     *   approximately $400,000 recorded to write-down the carrying value of one
         of  the  Company's  aircraft  to  fair  market  value  because  of  the
         deteriorating financial condition of the lessee at May 31, 1995

     *   approximately $250,000 to record the Company's loss exposure related to
         approximately $350,000 of net book value of equipment leased to another
         lessee that filed Chapter 11 bankruptcy during December 1994.

     The increase in equipment held for sale or re-lease  primarily reflects one
     aircraft  which was  returned to the Company  upon lease  termination.  The
     Company is  presently  evaluating  re-lease  opportunities  and  expects to
     re-lease the aircraft during fiscal year 1998.

     LEASING MARGIN

     Leasing margin consists of the following (in thousands):


                                                  Fiscal Years Ended May 31,
                                             ----------------------------------
                                               1997         1996         1995
                                             --------     --------     --------
     Leasing revenue                         $ 14,420     $ 10,212     $  7,672
     Leasing costs and expenses                (8,928)      (5,466)      (3,893)
     Net non-recourse interest expense
       on related discounted lease rentals     (1,430)        (989)      (1,162)
                                             --------     --------     --------
     Leasing margin                          $  4,062     $  3,757     $  2,617
                                             ========     ========     ========
     Leasing margin ratio                          28%          37%          34%
                                             ========     ========     ========

     The  increase in leasing  revenue,  leasing  costs and expenses and leasing
     margin  was  primarily  due to growth  in the  Company's  lease  portfolio,
     including leases subsequently sold to private investors.  These revenue and
     expense amounts are expected to increase  further as the Company  continues
     to grow its lease portfolio.



                                    15 of 23

<PAGE>

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

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

     LEASING MARGIN, continued

     Leasing  margin ratio  fluctuates  based upon (i) the mix of direct finance
     leases and operating leases, (ii) remarketing activities,  (iii) the method
     used to finance leases added to the Company's lease portfolio, as described
     above  and (iv) the  relative  age and  types of  leases  in the  portfolio
     (Operating leases have a relatively lower leasing margin early in the lease
     term and an  increasing  leasing  margin  as the  lease  term  passes.  The
     majority of leases added to CAI's  portfolio have been  operating  leases).
     Interest  expense arising from  non-recourse  bank debt  (discounted  lease
     rentals) is reflected  in leasing  margin,  but  interest  arising from the
     warehouse facility is not reflected in leasing margin.

     OTHER INCOME

     Other income consists of the following (in thousands):

<TABLE>
<CAPTION>

                                                                                     Fiscal years ended May 31,
                                                                                ------------------------------------
                                                                                  1997          1996          1995
                                                                                --------      --------      --------

    <S>                                                                        <C>           <C>           <C>    
     Fees and distributions from the Company-sponsored PIFs                     $ 2,453       $ 2,958       $ 2,908
     Gain on sale of the investment in Corporate Express, Inc. stock                  -             -           671
     Cancellation of option agreement to acquire certain mining equipment             -             -           444
     Interest on income tax refunds                                                 117            -            178
     Interest on MBank settlement and hold back                                     129           227             -
     Recovery of sales and property tax amounts previously expensed                 201           118           371
     Interest on installment sale of equipment                                      769             -             -
     Other                                                                          318           208           (56)
                                                                                -------       -------       -------
                                                                                $ 3,987       $ 3,511       $ 4,516
                                                                                =======       =======       =======
</TABLE>

     The Company  recorded an installment  sale contract in connection  with the
     settlement agreement reached with respect to the Hemmeter Litigation (which
     is discussed in Footnote 15 to Notes to Consolidated  Financial  Statements
     to the 1996 Form 10-K).  During fiscal year 1997, the Company received $2.5
     million of cash payments related to the installment  sale.  Expected future
     cash  payments and  interest  income  under the  installment  sale are $2.0
     million and $1.3 million, respectively.

     OPERATING AND OTHER EXPENSES

     Operating and other  expenses  increased $1.2 million (15%) for fiscal year
     1997 as compared to fiscal year 1996.  The  increase  included (i) $400,000
     for commissions  related to the increase in business volume,  (ii) $400,000
     for  expenses   principally  related  to  training,   travel  and  employee
     acquisitions  and (iii)  $400,000 for  consulting  fees and expenses of the
     Company's majority shareholder.

     Operating and other expenses decreased approximately $3.3 million (28%) for
     fiscal year 1996  compared  to fiscal year 1995 due to on-going  efforts to
     improve  operating  efficiency.  The decrease  included (i) $1.5 million of
     capitalized  initial direct costs due to lease origination  volume and (ii)
     $700,000  related to on-going  efforts to minimize costs. The decrease also
     included the following significant expense reductions:

     *    $500,000 of legal fees primarily  related to the MBank  litigation and
          the Hemmeter litigation.

     *    $300,000 of warehouse and other lease  portfolio and asset  management
          costs.

     *    $400,000 of current insurance costs.

                                    16 of 23

<PAGE>

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

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

     INTEREST INCOME AND EXPENSE

     Interest income arises when equipment  financed with  non-recourse  debt is
     sold to  investors.  The  accompanying  Consolidated  Statements  of Income
     reflect an equal amount of non-recourse  interest  expense.  The decline in
     interest income (and the related non-recourse interest expense) is due to a
     decline  in the  average  outstanding  balance  of  non-recourse  debt with
     respect to equipment sold to investors.

     Net  non-recourse  interest  expense on related  discounted  lease  rentals
     increased due to an increase in the average  outstanding balance of related
     discounted lease rentals. It is anticipated that net non-recourse  interest
     expense on related  discounted lease rentals will increase in the future as
     the Company adds additional  leases financed with  non-recourse debt to its
     portfolio.

     Recourse interest expense decreased during fiscal year 1997, as compared to
     fiscal  year 1996,  due to the  continuing  reductions  in the  outstanding
     balance Term Loan portion of the Company's Debt Facility.

     INCOME TAXES

     As shown in the  table  in Note 10 to Notes to the  Consolidated  Financial
     Statements, the Company's significant deferred tax assets consist of an ITC
     carryforward  of $1.3 million  (which  expires from 1998 through  2001) and
     alternative  minimum tax  ("AMT")  credits of $3.3  million  (which are not
     subject to  expiration).  These tax assets are available to offset  federal
     income  tax  liability.   However,   the  amount  of  ITC  and  AMT  credit
     carryforward  that may be utilized to reduce tax liability is significantly
     limited due to the computation of AMT liability.  As a result of the future
     expiration of the ITC carryforward, the Company has established a valuation
     allowance for deferred tax assets to reflect the  uncertainty  that the ITC
     carryforward will be fully utilized prior to expiration.

     Income tax expense is provided on income at the appropriate statutory rates
     applicable to such earnings.  The appropriate  statutory  federal and state
     income tax rate for fiscal years 1997,  1996 and 1995 was 40%.  Adjustments
     to the valuation  allowance are  recognized as a separate  component of the
     provision for income tax expense.  Consequently, the actual income tax rate
     for  fiscal  years  1997 and 1996 was less than the  effective  rate of 40%
     primarily due to the reduction in the valuation allowance. The reduction of
     the valuation  allowance recorded in fiscal 1997 represents the utilization
     of an ITC  carryforward  and the  receipt of a state  income tax refund for
     which a  valuation  allowance  had  been  provided.  The  reduction  of the
     valuation  allowance  recorded in fiscal 1996 represents the utilization of
     an ITC carryforward for which a valuation allowance had been provided.

     During fiscal year 1996, a transaction was completed in which the Company's
     largest  shareholder  obtained more than fifty percent of the ownership and
     voting  rights of the  Company  within a three  year  period  ("a change in
     control").  Upon a change in control,  provisions  of the Internal  Revenue
     Code limit the amount of ITC carryforwards and AMT carryforwards that could
     be  utilized  to reduce  income tax  liability  in any year.  However,  the
     Company had previously established a valuation allowance for deferred taxes
     due to uncertainty  that the full amount of the ITC  carryforward  would be
     utilized  prior to  expiration  and  therefore,  the change in control  and
     resulting  limitation  on the ITC and AMT  carryforward  is not expected to
     reduce the  recoverability of the amount of the deferred income tax assets,
     net of the valuation allowance.


                                    17 of 23

<PAGE>


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

II.  Liquidity and Capital Resources
     -------------------------------

     The Company's  activities are principally  funded by proceeds from sales of
     on-lease equipment (to its PIFs or private  investors),  non-recourse debt,
     recourse  bank  debt  (see  Note  8  to  Notes  to  Consolidated  Financial
     Statements),  rents,  fees  and  distributions  from  its  PIFs,  sales  or
     re-leases of equipment  after the expiration of the initial lease terms and
     other cash receipts from  non-recurring  items such as settlements of legal
     proceedings.  Management  believes the  Company's  ability to generate cash
     from  operations  is  sufficient  to  fund  operations,  as  shown  in  the
     accompanying Consolidated Statements of Cash Flows.

     The Company's  Bank Facility has been extended  through  November 30, 1997.
     See Note 8 to Notes to Consolidated  Financial Statements for a description
     of the Company's Bank Facility.

     The  Company  began  offering  units of its latest  PIF,  CPYF IV, for sale
     during  April  1996.  During  fiscal  year 1998,  the Company has up to $22
     million  of  Class  A units  in CPYF IV  available  for  sale,  which  will
     represent a source of liquidity and acquisition fee income for the Company.
     Two of the Company's PIFs,  including CPYF IV, are using a portion of their
     available  cash to purchase  additional  equipment  from the  Company.  The
     Company  expects to sell  approximately  $55 million of  equipment to these
     PIFs  during  fiscal  year 1998.  Five of the  Company's  PIFs are in their
     liquidation  stage  and  are  no  longer  purchasing  material  amounts  of
     equipment.  For two of those  PIFs,  the Company is  evaluating  whether it
     would be in the best  interests of Class A unit holders to  accelerate  the
     liquidation  of the  PIF's  portfolio  of  leases.  Should  liquidation  be
     accelerated, the Company will immediately realize its Class B investment in
     the PIFs.

     Inflation  has not had a  significant  impact  upon the  operations  of the
     Company.

III. New Accounting Pronouncements
     -----------------------------

     See Recently Issued Financial Accounting Standards under Note 1 to Notes to
     the Consolidated  Financial Statements for a discussion about the impact of
     new  accounting  pronouncements  on the  Company's  financial  position  or
     results of operations.

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

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

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

See the Index to Financial Statements and Schedule appearing at Page F-1 of this
Report.

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

None.

                                    18 of 23

<PAGE>





                                    PART III

Item 10.  Directors and Executive Officers
          --------------------------------

The  information  required  by this Item is  incorporated  by  reference  to the
Company's  definitive  proxy  statement  to be filed  within  120 days after the
Company's fiscal year end.

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

The  information  required  by this Item is  incorporated  by  reference  to the
Company's  definitive  proxy  statement  to be filed  within  120 days after the
Company's fiscal year end.

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

The  information  required  by this Item is  incorporated  by  reference  to the
Company's  definitive  proxy  statement  to be filed  within  120 days after the
Company's fiscal year end.

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

The  information  required  by this Item is  incorporated  by  reference  to the
Company's  definitive  proxy  statement  to be filed  within  120 days after the
Company's fiscal year end.

                                     PART IV

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

(a) and (d)  Financial Statements and Schedule
             ---------------------------------

The  financial  statements  and  schedule  listed on the  accompanying  Index of
Financial  Statements  and Schedule  (page F-1) are filed as part of this Annual
Report.

(b)  Reports on Form 8-K
     -------------------

None

(c)  Exhibits
     --------

Included as exhibits are the items listed in the Exhibit Index. The Company will
furnish to its  shareholders of record as of the record date for its 1997 Annual
Meeting of Stockholders, a copy of any of the exhibits listed below upon payment
of $.25 per page to cover the costs to the Company of furnishing the exhibits.

                                    19 of 23

<PAGE>





Item No.                                                           Exhibit Index
--------                                                           -------------

3.1       Certificate  of  Incorporation  of  Capital   Associates,   Inc.  (the
          "Company"),  incorporated by reference to Exhibit 3.1 of the Company's
          registration statement on Form S-1 (No. 33-9503).

3.2       Bylaws of the Company, incorporated by reference to Exhibit 3.2 of the
          Annual Report on Form 10-K for the fiscal year ended May 31, 1991 (the
          "1991 10-K").

4.2(a)    Certificate   of   Incorporation   as  filed  on  October  17,   1986,
          incorporated by reference to 4.2(a) of the December 15, 1995 Form S-3.

4.2(b)    Certificate of Amendment to Certificate of Incorporation,  as filed on
          March 3, 1987, incorporated by reference to 4.2(a) of the December 15,
          1995 Form S-3.

4.2(c)    Certificate of Amendment of Certificate of Incorporation,  as filed on
          November 2, 1995,  incorporated by reference to 4.2(a) of the December
          15, 1995 Form S-3.

10.1      Amended and Restated Stock Option Plan of the Company  incorporated by
          reference  to Exhibit  10.1 of the Annual  Report on Form 10-K for the
          fiscal year ended May 31, 1992 (the "1992 10-K").

10.2      Form of Stock Option  Agreement  between the Company and the directors
          of the Company (the "Option Agreement"),  incorporated by reference to
          Exhibit  19.12 of the  Quarterly  Report on Form 10-Q for the  quarter
          ended February 28, 1991 (the "February 1991 10-Q").

10.3(a)   Amended and  Restated  Exhibit A to the Option  Agreement  between the
          Company and James D.  Edwards,  incorporated  by  reference to Exhibit
          19.1 of the Quarterly Report on Form 10-Q for the quarter ended August
          31, 1991 (the "August 1991 10-Q").

10.3(c)   Amended and  Restated  Exhibit A to the Option  Agreement  between the
          Company and William B.  Patton,  Jr.,  incorporated  by  reference  to
          Exhibit 19.1 of the August 1991 10-Q.

10.3(d)   Amended and  Restated  Exhibit A to the Option  Agreement  between the
          Company and Peter F.  Schabarum,  incorporated by reference to Exhibit
          19.1 of the August 1991 10-Q.

10.4      Defined  Contribution  Plan and Trust,  incorporated  by  reference to
          Exhibit  10.2 of the Annual  Report on Form 10-K for the  fiscal  year
          ended May 31, 1990 (the "1990 10-K").

10.5(a)   Stockholder's  Agreement  dated  October 27,  1982 among the  Company,
          Richard  Kazan,  Jack M.  Durliat,  and Gary M.  Jacobs,  as  amended,
          incorporated   by  reference   to  exhibit   10.3  to  the   Company's
          registration statement on Form S-1 (No. 33-9503).

10.5(b)   Amendment   to   Stockholder's   Agreement   dated   August  1,  1990,
          incorporated by reference to Exhibit 10.3(b) of the 1990 10-K.

10.6      Form of  Indemnification  Agreement by and between the Company and its
          directors,  incorporated  by  reference  to Exhibit  10.16 of the 1990
          10-K.

                                    20 of 23

<PAGE>

Item No.                                                           Exhibit Index
--------                                                           -------------

10.8(a)   Executive  Employment   Agreement,   executed  October  25,  1991  and
          effective as of September 7, 1991, by and between Dennis J. Lacey, the
          Company and  Capital  Associates  International,  Inc.  ("CAII")  (the
          "Lacey  Employment  Agreement"),  incorporated by reference to Exhibit
          19.1 of the  Quarterly  Report  on Form  10-Q  for the  quarter  ended
          November 30, 1991 (the "November 1991 10-Q").

10.8(b)   Amendment  No.  1 to  the  Lacey  Employment  Agreement  dated  as  of
          September  7, 1992,  incorporated  by reference to Exhibit 19.1 of the
          Quarterly  Report on Form 10-Q for the fiscal  quarter ended  November
          30, 1992 (the "November 1992 10-Q").

10.8(c)   Amendment No. 2 to the Lacey Employment Agreement dated as of April 9,
          1993,  incorporated  by  reference  to  exhibit  10.8(c) to the Annual
          Report on Form 10-K for the fiscal  year ended May 31, 1993 (the "1993
          10-K").

10.8(d)   Form of Amendment No. 3 to the Lacey Employment  Agreement dated as of
          April 20, 1993,  incorporated  by reference to exhibit  10.8(d) to the
          1993 10-K.

10.8(e)   First Amended and Restated Lacey Employment Agreement dated as of June
          15, 1993,  incorporated  by  reference to exhibit  10.8(c) to the 1993
          10-K.

10.8(f)   Extension and Amendment of Second Amended and Restated Dennis J. Lacey
          Executive  Employment Agreement executed on July 1, 1997 and effective
          as of October 1, 1997, by and between Dennis J. Lacey, the Company and
          Capital Associates International, Inc. ("CAII") (the "Lacey Employment
          Agreement").

10.10(a)  Crisis Recovery Employee Incentive  Bonus plan dated as of December 2,
          1991,  incorporated  by reference to Exhibit 19.3 of the November 1992
          10-Q.

10.10(b)  Capital Associates, Inc.  Incentive Program to Enhance Earnings Growth
          dated June 27, 1993,  incorporated by reference to exhibit 10.10(b) to
          the 1993 10-K.

10.40     Purchase  Agreement,  dated as of December 30, 1991 by and among CAII,
          the Company and Bank One,  Texas,  N.A.,  incorporated by reference to
          Exhibit 19.11 of the November 1991 10-Q.

10.41     Form of Consulting Agreement,  dated as of April 30, 1993 by and among
          the Company CAII and William B. Patton, Jr., incorporated by reference
          to Exhibit 10.41 of the 1993 10-K.

10.42     Amendment to Stockholders' Agreement, dated as of June 1, 1994, by and
          between  the  Company,  Durliat,  Jacobs  and Kazan,  incorporated  by
          reference to Exhibit 10.42 of the 1994 10-K.

10.43     Confidentiality and Standstill Agreement, dated as of June 1, 1994, by
          and  between  the  Company and Kazan,  incorporated  by  reference  to
          Exhibit 10.43 of the 1994 10-K.

10.44     Indemnification  Agreement,  dated  as of  January  14,  1994,  by and
          between the Company and Jacobs,  incorporated  by reference to Exhibit
          10.44 of the 1994 10-K.

10.45     Form of Stock Option  Agreement  between the Company and the directors
          of the  Company  (with a grant  date of  August  27,  1993 for  Kazan,
          Patton, Edwards and Schabarum and a grant date of January 14, 1994 for
          Jacobs), incorporated by reference to Exhibit 10.45 of the 1994 10-K.

                                    21 of 23

<PAGE>




Item No.                                                           Exhibit Index
--------                                                           -------------

10.48     Form of Credit and Security Agreement,  dated as of November 30, 1994,
          by  and  among  CAII,  Norwest  Bank  Colorado,  National  Association
          ("Norwest"),  Norwest  Equipment  Finance,  Inc., and First Interstate
          Bank  of  Denver,  N.A.  ("First  Interstate")  (the  "New  Lenders"),
          incorporated by reference to Exhibit 10.48 of the February 1995 10-Q.

10.49     Settlement  Agreement  and  Release of Liens and  Claims,  dated as of
          December  2,  1994,  by and  among  the  Company,  CAII,  each  of the
          Company's and CAII's wholly-owned subsidiaries,  Mellon Bank, N.A., as
          Agent, and the Lenders,  incorporated by reference to Exhibit 10.49 of
          the February 1995 10-Q.

10.50     Termination  Agreement  effective  as of August 31,  1995 by and among
          Jack  Durliat,  Gary  M.  Jacobs  and CAI and  CAII,  incorporated  by
          reference to Exhibit 10.50 of the November 30, 1995 Form 10-Q.

10.51     Second  Amendment to Credit  Agreement and Notes,  dated as of January
          31,  1996,  by  and  among  Capital  Associates  International,  Inc.,
          borrower,  the Lenders (as defined  therein),  Norwest Bank  Colorado,
          National Association, as Agent and Norwest Equipment Finance, Inc., as
          Collateral  Agent,  incorporated  by reference to Exhibit 10.51 of the
          February 29, 1996 Form 10-Q.

10.52     Assignment and Assumption,  dated as of February 2, 1996,  between The
          Daiwa  Bank,  Limited,  Assignor,  and  The  Sumitomo  Bank,  Limited,
          Assignee,  incorporated  by reference to Exhibit 10.52 of the February
          29, 1996 Form 10-Q.

10.53     Third Amendment to Credit Agreement and Notes, dated as of December 3,
          1996, by and among Capital Associates  International,  Inc., borrower,
          the Lenders (as defined  therein),  Norwest  Bank  Colorado,  National
          Association,   as  Agent  and  Norwest  Equipment  Finance,  Inc.,  as
          Collateral  Agent,  incorporated  by reference to Exhibit 10.53 of the
          November 30, 1996 Form 10-Q.

11        Statement regarding Computation of Per Share Earnings

21        List of  Subsidiaries,  incorporated by reference to Exhibit 21 of the
          May 31, 1996 Form 10-K.

23        Consent of KPMG Peat Marwick LLP

27        Financial Data Schedule

                                    22 of 23

<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 by the undersigned, thereunto duly authorized.

                               CAPITAL ASSOCIATES, INC.

Dated:  August 12, 1997        By:  /s/Anthony M. DiPaolo
                                    ----------------------
                                    Anthony M. DiPaolo
                                    Senior Vice President and Chief
                                    Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons in the capacities  indicated and
on the dates listed.

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


/s/James D. Walker               Chairman of the Board and Director
------------------
James D. Walker


/s/William H. Buckland           Director
----------------------
William H. Buckland


/s/James D. Edwards              Director
-------------------
James D. Edwards


/s/Gary M. Jacobs                Director
-----------------
Gary M. Jacobs


/s/Dennis J. Lacey               President, Chief Executive Officer and Director
------------------
Dennis J. Lacey



/s/Robert A. Sharpe              Director
-------------------
Robert A. Sharpe


/s/Joseph F. Bukofski            Assistant Vice President and Controller
---------------------            (Principal Accounting Officer)
Joseph F. Bukofski               


                         Each of the above signatures is
                          affixed as of August 12, 1997

                                    23 of 23

<PAGE>



                          INDEX OF FINANCIAL STATEMENTS
                                  AND SCHEDULE





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

     Independent Auditors' Report                                          F-2

     Consolidated Balance Sheets as of
           May 31, 1997 and 1996                                           F-3

     Consolidated Statements of Income for
           the Years Ended May 31, 1997, 1996 and 1995                     F-4

     Consolidated Statements of Changes in
           Stockholders' Equity for the Years
           Ended May 31, 1997, 1996 and 1995                               F-5

     Consolidated Statements of Cash Flows for
           the Years Ended May 31, 1997, 1996 and 1995                     F-6

     Notes to Consolidated Financial Statements                      F-7 to F-23


Schedule
--------

     Independent Auditors' Report                                         F-24

     Schedule II - Valuation and Qualifying
           Accounts and Reserves for the Years
           Ended May 31, 1997, 1996 and 1995                              F-25



                                      F - 1

<PAGE>




                          INDEPENDENT AUDITORS' REPORT







The Stockholders and Directors
Capital Associates, Inc.:

We  have  audited  the  accompanying  consolidated  balance  sheets  of  Capital
Associates,  Inc. and  subsidiaries as of May 31, 1997 and 1996, and the related
consolidated  statements of income,  changes in stockholders'  equity,  and cash
flows for each of the years in the three-year  period ended May 31, 1997.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  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 consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Capital Associates,
Inc.  and  subsidiaries  as of May 31,  1997 and 1996,  and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended May 31, 1997, in conformity with generally accepted accounting principles.



                                           KPMG Peat Marwick LLP

                                           /s/ KPMG Peat Marwick LLP
                                           -------------------------



Denver, Colorado
July 11, 1997

                                      F - 2

<PAGE>



                    CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
               (Dollars in thousands, except shares and par value)

                                     ASSETS

                                                                 May 31,
                                                         ----------------------
                                                           1997         1996
                                                         ---------    ---------

Cash and cash equivalents                                $   6,194    $   2,851
Receivable from affiliated limited partnerships                726        1,849
Accounts receivable, net                                       417          945
Equipment held for sale or re-lease                          1,242          177
Residual values, net, arising from equipment under
   lease sold to private investors                           4,334        3,374
Net investment in direct finance leases                      7,700       14,967
Leased equipment, net                                       71,443       45,285
Investment in affiliated limited partnerships                6,642        8,759
Other                                                        3,674        3,497
Deferred income taxes                                        2,300        1,900
Discounted lease rentals assigned to lenders arising
   from equipment sale transactions                         41,845       43,907
                                                         ---------    ---------

                                                         $ 146,517    $ 127,511
                                                         =========    =========


                      LIABILITIES AND STOCKHOLDERS' EQUITY

Recourse bank debt                                       $  20,712    $  17,538
Accounts payable - equipment purchases                      30,231       14,071
Accounts payable and other liabilities                      10,607        9,272
Discounted lease rentals                                    61,466       63,749
                                                         ---------    ---------
                                                           123,016      104,630
                                                         ---------    ---------

Commitments and contingencies (Notes 10, 14 and 15)

Stockholders' equity:
   Common stock, $.008 par value, 15,000,000 shares
     authorized, 5,157,000 and 5,139,000 shares issued          32           32
   Additional paid-in capital                               16,897       17,026
   Retained earnings                                         6,854        6,121
   Treasury stock, at cost                                    (282)        (298)
                                                         ---------    ---------
     Total stockholders' equity                             23,501       22,881
                                                         ---------    ---------

                                                         $ 146,517    $ 127,511
                                                         =========    =========


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

                                      F - 3

<PAGE>



                    CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
            (Dollars in thousands, except shares and per share data)

<TABLE>
<CAPTION>
                                                                             Year Ended May 31,
                                                              -------------------------------------------
                                                                 1997             1996            1995
                                                              ---------         ---------       ---------
<S>                                                          <C>               <C>             <C>      
Revenue:
   Equipment sales to affiliated limited partnerships         $  66,987         $  72,202       $  43,638
   Other equipment sales                                        137,558            94,040          37,732
   Leasing                                                       14,420            10,212           7,672
   Interest                                                       4,582             6,716          11,386
   Other                                                          3,987             3,511           4,516
                                                              ---------         ---------       ---------
   Total revenue                                                227,534           186,681         104,944
                                                              ---------         ---------       ---------

Costs and expenses:
   Equipment sales                                              200,018           161,797          70,866
   Leasing                                                        8,928             5,466           3,893
   Operating and other expenses                                   9,568             8,332          11,603
   Provision for losses                                             365               430           2,940
   Interest:
     Non-recourse debt                                            6,012             7,705          12,548
     Recourse debt                                                1,900             2,145           1,618
                                                              ---------         ---------       ---------
   Total costs and expenses                                     226,791           185,875         103,468
                                                              ---------         ---------       ---------

Net income before income taxes                                      743               806           1,476
Income tax expense                                                   10               202             360
                                                              ---------         ---------       ---------
Net income                                                    $     733         $     604       $   1,116
                                                              =========         =========       =========

Earnings per common and dilutive common equivalent share:
   Primary                                                    $     .14         $     .12       $     .21
                                                              =========         =========       =========

   Fully diluted                                              $     .14         $     .11       $     .21
                                                              =========         =========       =========

Weighted average number of common and dilutive
   common equivalent shares outstanding
   used in computing earnings per share:

   Primary                                                    5,403,000         5,186,000       5,325,000
                                                              =========         =========       =========

   Fully diluted                                              5,414,000         5,393,000       5,337,000
                                                              =========         =========       =========
</TABLE>






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

                                      F - 4

<PAGE>



                    CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                             (Dollars in thousands)

<TABLE>
<CAPTION>

                                              Common Stock          Additional                     Treasury Stock
                                          ---------------------      Paid-in       Retained       -----------------    
                                           Shares       Amount       Capital       Earnings       Shares       Cost          Total
                                          ---------    --------     ----------     --------       ------       ----          -----

<S>                                      <C>            <C>         <C>            <C>           <C>        <C>           <C>     
Balance at June 1, 1994                   4,880,000      $ 60        $ 16,689       $ 4,401       16,000     $  (51)       $ 21,099

Issuance of common stock under:
  -  incentive stock option plan             82,000         1              14             -            -          -              15
  -  non-qualified stock option plan        145,000         2             200             -            -          -             202
Income tax benefit from stock
  compensation                                    -         -              58             -            -          -              58
Net income                                        -         -               -         1,116            -          -           1,116
                                          ---------      ----        --------       -------      -------     ------        --------

Balance at May 31, 1995                   5,107,000        63          16,961         5,517       16,000        (51)         22,490

Issuance of common stock under:
  -  incentive stock option plan             27,000         -              19             -            -          -              19
  -  non-qualified stock option plan          5,000         -               6             -            -          -               6
Income tax benefit from stock
  compensation                                    -         -               9             -            -          -               9
One-for-two reverse stock split                   -        (31)            31             -            -          -               -
Purchase of treasury shares                       -         -               -             -      129,000       (247)           (247)
Net income                                        -         -               -           604            -          -             604
                                          ---------      ----        --------       -------      -------     ------        --------

Balance at May 31, 1996                   5,139,000        32          17,026         6,121      145,000       (298)         22,881

Issuance of common stock under:
  -  incentive stock option plan              6,000         -               4             -            -          -               4
  -  non-qualified stock option plan         12,000         -              10             -            -          -              10
Issuance of treasury shares upon
 exercise of incentive stock options              -         -             (16)            -       (5,000)        16               -
Income tax benefit from stock
  compensation                                    -         -              11             -            -          -              11
Non-employee stock option buyout                  -         -            (138)            -            -          -            (138)
Net income                                        -         -               -           733            -          -             733
                                          ---------      ----        --------       -------      -------     ------        --------

Balance at May 31, 1997                   5,157,000      $ 32        $ 16,897       $ 6,854      140,000     $ (282)       $ 23,501
                                          =========      ====        ========       =======      =======     ======        ========

</TABLE>












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

                                      F - 5

<PAGE>



                    CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                                      Year Ended May 31,
                                                                                       --------------------------------------------
                                                                                         1997              1996             1995
                                                                                       ---------         ---------        ---------
<S>                                                                                   <C>               <C>              <C>      
Cash flows from operating activities:
  Net income                                                                           $     733         $     604        $   1,116
                                                                                       ---------         ---------        ---------
  Adjustments to reconcile net income to net cash provided by operating activities:
    Depreciation and amortization                                                          9,634             6,182            4,860
    Recovery of investment in direct financing leases                                      3,786             6,362            6,913
    Cost of sales                                                                         15,693             8,995            4,813
    Provision for losses                                                                     365               430            2,940
    Deferred income taxes                                                                   (400)             (100)          (2,630)
    Deferred financing costs                                                                (100)             (118)            (594)
    Margin on MBank sale                                                                       -                 -           (6,100)
    MBank sale proceeds                                                                        -            10,800                -
    Gain on sale of a portion of the investment in Corporate Express, Inc.                     -                 -             (671)
    Sales-type lease margin                                                                  (69)             (191)            (765)
    Decrease (increase) in accounts receivable                                             1,651            (1,947)           1,062
    Other                                                                                  1,879            (1,427)           3,390
                                                                                       ---------         ---------        ---------
      Total adjustments                                                                   32,439            28,986           13,218
                                                                                       ---------         ---------        ---------
Net cash provided by operating activities                                                 33,172            29,590           14,334
                                                                                       ---------         ---------        ---------

Cash flows from investing activities:
  Equipment purchased for leasing                                                        (35,798)          (23,979)         (17,000)
  Investment in leased office facility and in capital expenditures                          (452)             (393)            (178)
  Net receipts from affiliated public income funds                                         1,810             1,222            1,961
  Sale of a portion of the investment in Corporate Express, Inc.                               -                 -              677
                                                                                       ---------         ---------        ---------
Net cash used for investing activities                                                   (34,440)          (23,150)         (14,540)
                                                                                       ---------         ---------        ---------

Cash flows from financing activities:
  Proceeds from discounting of lease rentals                                              13,686             8,513            2,306
  Principal payments on discounted lease rentals                                         (12,125)           (5,821)          (9,219)
  Proceeds from sales of common stock                                                         14                25              217
  Purchase of treasury shares                                                                  -              (247)               -
  Purchase of non-employee stock options                                                    (138)                -                -
  Net borrowings (payments) on revolving credit facilities                                 7,507            (2,649)          13,638
  Payments on Term Loan                                                                   (4,333)           (4,333)          (7,885)
                                                                                       ---------         ---------        ---------
Net cash provided by (used for) financing activities                                       4,611            (4,512)            (943)
                                                                                       ---------         ---------        ---------
Net increase (decrease) in cash and cash equivalents                                       3,343             1,928           (1,149)
Cash and cash equivalents at beginning of year                                             2,851               923            2,072
                                                                                       ---------         ---------        ---------
Cash and cash equivalents at end of year                                               $   6,194         $   2,851        $     923
                                                                                       =========         =========        =========

Supplemental schedule of cash flow information:
  Recourse interest paid                                                               $   1,900         $   2,145        $   1,535
  Non-recourse interest paid                                                               1,514               983            1,112
  Income taxes paid                                                                          183             2,264            1,444
  Income tax refunds received                                                                602                83              923
Supplemental schedule of non-cash investing and financing activities:
  Discounted lease rentals assigned to lenders arising from equipment
    sales transactions                                                                    24,266            14,095            3,123
  Assumption of discounted lease rentals in lease acquisitions                            22,499            19,324            5,550
  Increase in residual values arising from equipment sale transactions                     1,130               897            2,727

</TABLE>

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

                                      F - 6

<PAGE>


                    CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

    GENERAL ACCOUNTING PRINCIPLES
    -----------------------------

    NATURE OF OPERATIONS

    Capital  Associates,  Inc.  ("CAI" or the "Company") was  incorporated  as a
    holding company in October 1986. Its principal operating subsidiary, Capital
    Associates International, Inc. ("CAII"), is primarily engaged in (1) buying,
    selling,  leasing,  and  remarketing  new and used  equipment,  (2) managing
    equipment  on and off lease,  (3)  sponsoring,  co-sponsoring,  managing and
    co-managing    publicly-registered    income   funds   and   (4)   arranging
    equipment-related   financing.   The  principal  market  for  the  Company's
    activities is the United States.

    USE OF ESTIMATES

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

    PRINCIPLES OF CONSOLIDATION

    The consolidated  financial  statements  include the accounts of CAI and its
    subsidiaries.  Intercompany  accounts and  transactions  are  eliminated  in
    consolidation.

    The Company has  investments in affiliated  public income funds (the "PIFs",
    consisting of both general partnership and subordinated  limited partnership
    interests)  and other  50%-or-less  owned  entities.  Such  investments  are
    primarily accounted for using the equity method.

    The  parent   company's   assets  consist  solely  of  its   investments  in
    subsidiaries and it has no liabilities separate from its subsidiaries.

    CASH AND CASH EQUIVALENTS

    Cash and cash equivalents include highly liquid investments with an original
    maturity of three months or less.

    INCOME TAXES

    The Company  accounts for income taxes under the  provisions of Statement of
    Financial  Accounting  Standards No. 109, Accounting for Income Taxes ("SFAS
    No. 109").  Under the asset and liability  method of SFAS No. 109,  deferred
    tax assets and  liabilities  are recognized for the future tax  consequences
    attributable to differences between the financial statement carrying amounts
    of existing assets and liabilities and their respective tax bases.  Deferred
    tax assets and  liabilities are measured using enacted tax rates expected to
    apply to taxable  income in the years in which those  temporary  differences
    are expected to be  recovered or settled.  Under SFAS No. 109, the effect on
    deferred tax assets and  liabilities  of a change in tax rates is recognized
    in income in the period that includes the enactment date.

                                      F - 7

<PAGE>


                    CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

    GENERAL ACCOUNTING PRINCIPLES, continued
    -----------------------------

    EQUIPMENT HELD FOR SALE OR RE-LEASE

    Equipment held for sale or re-lease, recorded at the lower of cost or market
    value less cost to sell,  consists  of  equipment  previously  leased to end
    users which has been returned to the Company following lease expiration. The
    May 31, 1997 carrying value consists primarily of one aircraft.

    EARNINGS PER COMMON AND DILUTIVE COMMON EQUIVALENT SHARE

    Primary and fully diluted earnings per common and dilutive common equivalent
    share are computed by dividing net income by the weighted  average number of
    shares of common stock and dilutive  common  stock  equivalents  (consisting
    solely of common stock options) outstanding during the period.

    RECLASSIFICATIONS

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

    STOCK OPTION PLAN

    Prior to June 1, 1996,  the Company  accounted  for its stock option plan in
    accordance  with the provisions of Accounting  Principles  Board Opinion No.
    25,  Accounting  for Stock Issued to Employees  ("APB Opinion No. 25"),  and
    related interpretations.  As such, compensation expense would be recorded on
    the date of grant only if the current market price of the  underlying  stock
    exceeded the exercise  price.  On June 1, 1996, the Company adopted SFAS No.
    123, Accounting for Stock-Based Compensation ("SFAS No. 123"), which permits
    entities to recognize  as expense over the vesting  period the fair value of
    all  stock-based  awards on the date of grant.  Alternatively,  SFAS No. 123
    also allows  entities to continue to apply the provisions of APB Opinion No.
    25 and  provide  pro  forma net  income  and pro  forma  earnings  per share
    disclosures  for employee  stock option  grants made in fiscal year 1996 and
    future fiscal years as if the  fair-value-based  method  defined in SFAS No.
    123 had been  applied.  The  Company  has  elected to  continue to apply the
    provisions  of APB  Opinion  No. 25 and  provide  the pro  forma  disclosure
    provisions of SFAS No. 123.

    RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS

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

    SFAS No. 128,  Earnings  per Share  ("SFAS No.  128"),  which  requires  the
    disclosure  of basic  earnings per share and diluted  earnings per share was
    issued during March 1997. SFAS No. 128 is effective for financial statements
    for both  interim  and  annual  periods  ending  after  December  15,  1997.
    Therefore,  the  Company  expects to adopt  SFAS No. 128 in fiscal  1998 and
    anticipates it will not have a material impact on the Company's  calculation
    of future earnings per share.

                                      F - 8

<PAGE>


                    CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

    GENERAL ACCOUNTING PRINCIPLES, continued
    -----------------------------

    EQUIPMENT LEASING AND SALES

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

    The Company's  accounting methods and their financial  reporting effects are
    described below:


        Lease Inception

        DIRECT  FINANCING LEASES ("DFLS") - The cost of equipment is recorded as
        net investment in DFLs.  Leasing  revenue,  which is recognized over the
        term of the lease,  consists  of the excess of lease  payments  plus the
        estimated  residual value over the  equipment's  cost.  Earned income is
        recognized  monthly  to  provide a  constant  yield and is  recorded  in
        leasing revenue in the accompanying  consolidated  statements of income.
        Initial  direct costs ("IDC") are  capitalized  and  amortized  over the
        lease  term  in  proportion  to  the   recognition   of  earned  income.
        Amortization  of IDC is  recorded as leasing  costs in the  accompanying
        consolidated  statements of income.  Residual  values are established at
        lease  inception  equal to the  estimated  value to be received from the
        equipment  following  termination of the initial lease (which in certain
        circumstances  includes  anticipated re-lease proceeds) as determined by
        the Company.  In  estimating  such  values,  the Company  considers  all
        relevant  information and circumstances  regarding the equipment and the
        lessee.


        OPERATING  LEASES  ("OLS") - The cost of equipment is recorded as leased
        equipment and is  depreciated  on a  straight-line  basis over the lease
        term to an amount  equal to the  estimated  residual  value at the lease
        termination  date.  Leasing  revenue  consists  principally  of  monthly
        rentals.  IDC are  capitalized  and  amortized  over the  lease  term in
        proportion to the recognition of rental income. Depreciation expense and
        amortization  of IDC are recorded as leasing  costs in the  accompanying
        consolidated  statements of income.  Residual  values are established at
        lease  inception  equal to the  estimated  value to be received from the
        equipment  following  termination of the initial lease (which in certain
        circumstances  includes  anticipated re-lease proceeds) as determined by
        the Company.  In  estimating  such  values,  the Company  considers  all
        relevant  information and circumstances  regarding the equipment and the
        lessee.  Because revenue,  depreciation expense and the resultant profit
        margin before interest  expense are recorded on a  straight-line  basis,
        and  interest  expense on  discounted  lease  rentals is incurred on the
        interest  method,  profit is skewed  toward  lower  returns in the early
        years of the term of an OL and higher returns in later years.

                                      F - 9

<PAGE>


                    CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

    GENERAL ACCOUNTING PRINCIPLES, continued
    -----------------------------

    EQUIPMENT LEASING AND SALES, continued

        Transactions Subsequent to Lease Inception

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


        SALES TO PRIVATE  INVESTORS OF  EQUIPMENT  UNDER LEASE - The Company may
        sell title to leased equipment that in some cases is subject to existing
        discounted lease rentals in equipment sale transactions with third-party
        investors.  In such transactions,  the investors obtain ownership of the
        equipment as well as rights to equipment rentals. Upon sale, the Company
        records  equipment  sales  revenue  equal  to  the  sales  price  of the
        equipment which may include a residual  interest retained by the Company
        (recorded  as an asset at present  value using an  appropriate  interest
        rate) and records  equipment  sales cost equal to the carrying  value of
        the related assets  (including  remaining  unamortized  IDC).  Income is
        recorded on residual  interests retained by the Company after cumulative
        cash  collections  on such  residuals  exceed the recorded asset amount.
        Fees for remarketing  equipment  associated with such  transactions  are
        reflected in operations as realized.

        Other accounts arising from private equity sales include:

           DISCOUNTED LEASE RENTALS,  ETC. - Pursuant to FASB Technical Bulletin
           No.  86-2,  although  private  investors  and  PIFs may  acquire  the
           equipment  sold to  them by the  Company  subject  to the  associated
           non-recourse debt (i.e.,  discounted lease rentals),  the debt is not
           removed  from the balance  sheet  unless  such debt has been  legally
           assumed by the  third-party  investors.  If not  legally  assumed,  a
           corresponding  asset  ("discounted  lease rentals assigned to lenders
           arising from equipment sale  transactions") is recorded  representing
           the present value of the end user rentals receivable relating to such
           transactions.  Interest  income is recorded on the  discounted  lease
           rentals  and an equal  amount  of  interest  expense  on the  related
           liability is recorded in the accompanying statements of income.

           INTEREST  INCOME -  Interest  income,  as  shown in the  accompanying
           consolidated  statements of income,  includes  interest on discounted
           lease  rentals  assigned  to  lenders  arising  from  equipment  sale
           transactions.

           SALES TO PIFS - Upon the sale of equipment  to its PIFs,  the Company
           records  equipment  sales  revenue  equal to the  sales  price of the
           equipment  (including any acquisition fees earned) and costs of sales
           equal  to  the  carrying  value  of  the  related  assets  (including
           remaining  unamortized  IDC). Fees for services the Company  performs
           for the PIFs are recognized at the time the services are performed.



                                     F - 10

<PAGE>


                    CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

    GENERAL ACCOUNTING PRINCIPLES, continued
    -----------------------------

    EQUIPMENT LEASING AND SALES, continued

        Transactions Subsequent to Initial Lease Termination

        After the initial term of equipment  under lease expires,  the equipment
        is either sold or re-leased.  When the equipment is sold,  the remaining
        net book value of equipment  sold is removed and gain or loss  recorded.
        When the equipment is  re-leased,  the Company  utilizes the  sales-type
        method (described below) or the OL method (described above).

        Sales-type Leases
        -----------------

        The  excess of the  present  value of (i)  future  rentals  and (ii) the
        estimated residual value  (collectively,  "the net investment") over the
        carrying  value of the  equipment  subject  to the  sales-type  lease is
        reflected in operations at the inception of the lease.  Thereafter,  the
        net investment is accounted for as a DFL, as described above.

    ALLOWANCE FOR LOSSES

    An allowance for losses is maintained at levels  determined by management to
    adequately provide for any other than temporary declines in asset values. In
    determining  losses,  economic  conditions,  the activity in used  equipment
    markets,  the effect of actions by equipment  manufacturers,  the  financial
    condition of lessees,  the expected courses of action by lessees with regard
    to leased  equipment at  termination  of the initial  lease term,  and other
    factors   which   management   believes  are   relevant,   are   considered.
    Recoverability of an asset value is measured by a comparison of the carrying
    amount of the asset to future net cash flows expected to be generated by the
    asset. If a loss is indicated,  the loss to be recognized is measured by the
    amount by which the carrying  amount of the asset  exceeds the fair value of
    the asset. Asset chargeoffs are recorded upon the termination or remarketing
    of the  underlying  assets.  Assets are reviewed  quarterly to determine the
    adequacy of the allowance for losses.

    The  Company  evaluates  the  realizability  of the  carrying  value  of its
    investment in its PIFs based upon all  estimated  future cash flows from the
    PIFs.  As a  result  of  such  analyses,  certain  distributions  have  been
    accounted for as a recovery of cost instead of income.

2.  Residual Values Arising from Equipment Under Lease Sold to Private Investors
    ----------------------------------------------------------------------------

    As of May 31,  1997 and 1996,  the  equipment  types  for which the  Company
    recorded the present value of the  estimated  residual  values  arising from
    sales of equipment under lease to private investors were (in thousands):

           Description                                     1997          1996
           -----------                                   --------      --------

    Material handling                                    $ 1,869        $   876
    Furniture and fixtures                                 1,220          1,220
    Mining and manufacturing                                 881            922
    Aircraft                                                 160            136
    Other miscellaneous equipment                            204            220
                                                          ------        -------
    Total equipment residuals                            $ 4,334        $ 3,374
                                                         =======        =======

                                     F - 11

<PAGE>


                    CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.  Residual   Values  Arising  from  Equipment  Under  Lease  Sold  to  Private
    ----------------------------------------------------------------------------
    Investors, continued
    ---------

    Residual values arising from equipment under lease sold to private investors
    were net of an  allowance  for losses of $157,000 and $258,000 as of May 31,
    1997 and 1996, respectively.

    In certain sale  transactions,  the Company  agreed to hold backs related to
    the  lessee's  performance.  Pursuant to such  agreements,  a portion of the
    sales proceeds was placed in an  interest-bearing  escrow account until such
    time as the  performance  objectives are met.  Escrowed  amounts  related to
    these  transactions  were  $642,000  and  $645,000 at May 31, 1997 and 1996,
    respectively,   and  are  included  in  other  assets  in  the  accompanying
    consolidated balance sheets.

    During  fiscal  year 1997,  the Company  received  two  promissory  notes in
    connection  with the  settlement of  litigation,  which are also included in
    other assets in the accompanying  consolidated  balance sheets. The carrying
    values of these notes were $719,000 at May 31, 1997.

    Future  payments from the sale proceeds hold backs and promissory  notes are
    as follows (in thousands):


           Years ending                         Sales Proceeds       Promissory
              May 31,                             Hold Backs            Notes
           ------------                         --------------       ----------

               1998                               $    42             $   644
               1999                                    28                 483
               2000                                   730                  85
               2001                                     -                 661
               2002                                     -                 165
                                                  -------             -------
          Total payments                              800               2,038
          Less future interest income                (158)             (1,319)
                                                  -------             -------

          Carrying value at May 31, 1997          $   642             $   719
                                                  =======             =======


3.  Net Investment in DFLs
    ----------------------

    The  components of the  Company's net  investment in DFLs as of May 31, 1997
    and 1996 were (in thousands):

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

    Minimum lease payments receivable               $  8,133       $ 15,234
    Estimated residual values                            692          2,139
    IDC                                                   72            124
    Less unearned income                              (1,197)        (2,530)
                                                    --------       --------

                                                    $  7,700       $ 14,967
                                                    ========       ========


                                     F - 12

<PAGE>


                    CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.  Leased Equipment, net
    ---------------------

    The Company's investment in equipment under OLs, by major classes, as of May
    31, 1997 and 1996 were (in thousands):

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

    Material handling equipment                        $ 25,083    $ 29,793
    Computers and peripheral computer equipment          21,776       3,220
    Other technology and communication equipment         21,701       8,807
    Furniture and fixtures                                7,227       3,825
    Other                                                 4,885       4,466
    Aircraft                                              1,327       4,901
    IDC                                                     831         487
                                                       --------    --------
                                                         82,830      55,499
    Less accumulated depreciation                       (10,680)     (9,094)
    Less allowance for losses                              (707)     (1,120)
                                                       --------    --------
                                                       $ 71,443    $ 45,285
                                                       ========    ========

    Depreciation on leased  equipment was $8,662,000,  $5,205,000 and $3,771,000
    for fiscal years 1997, 1996 and 1995, respectively.

5.  Future Minimum Lease Payments
    -----------------------------

    Future  minimum  lease  payments  receivable  from  noncancelable  leases on
    equipment  owned by the  Company  as of May 31,  1997,  are as  follows  (in
    thousands):

           Years Ending May 31,                        DFLs               OLs
           --------------------                      -------           --------

                1998                                 $ 3,297           $ 20,566
                1999                                   2,663             18,345
                2000                                   1,683             13,619
                2001                                     284              9,142
                2002                                     105              7,569
                Thereafter                               101              1,991
                                                     -------           --------
                                                     $ 8,133           $ 71,232
                                                     =======           ========

6.  Significant Customer and Concentration of Credit Risk
    -----------------------------------------------------

    During fiscal year 1997 and 1996, payments from one lessee accounted for 13%
    and  11%,  respectively,  of  total  leasing  revenue.  In  addition,  other
    equipment sales revenue related to equipment leased to that lessee accounted
    for 77% and 88% of total other  equipment  sales revenue during fiscal years
    1997 and  1996,  respectively.  No lessee  accounted  for 10% or more of the
    Company's revenues in fiscal year 1995.


                                     F - 13

<PAGE>


                    CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.  Significant Customer and Concentration of Credit Risk, continued
    -----------------------------------------------------

    The Company  leases  various  types of  equipment  to  companies  in diverse
    industries  throughout  the United  States.  To minimize  credit  risk,  the
    Company  generally  leases  equipment  to (i)  companies  that have 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, or (ii) companies, which although not rated by a recognized
    credit rating  service or rated below Baa, are believed by the Company to be
    sufficiently  creditworthy  to satisfy the financial  obligations  under the
    lease. At May 31, 1997, substantially all equipment under OLs and DFLs owned
    by the Company was leased to companies meeting the above credit criteria.

7.  Discounted Lease Rentals
    ------------------------

    Discounted lease rentals  outstanding at May 31, 1997 bear interest at rates
    between 5% to 15% with a weighted average rate of 8.8%. Aggregate maturities
    of such non-recourse obligations are (in thousands):

           Years Ending May 31:

                1998                                                  $ 33,418
                1999                                                    21,024
                2000                                                     6,711
                2001                                                       313
                                                                      --------
                                                                      $ 61,466
                                                                      ========

8.  Recourse Bank Debt
    ------------------

    The Company extended its recourse bank debt and revolving credit  facilities
    (the "Bank  Facility")  on November  27, 1996.  The lender  group  currently
    consists of Norwest Bank  Colorado,  National  Association,  Agent,  Norwest
    Equipment  Finance,  Inc.,  Collateral Agent, The Sumitomo Bank, Limited and
    The First  National Bank of Boston.  The Borrower under the Bank Facility is
    Capital Associates  International,  Inc. ("CAII"), a wholly-owned subsidiary
    of the Company.

    The Bank Facility  consists of three  components,  a term loan facility (the
    "Term Loan"),  a revolving  working  capital  credit  facility (the "Working
    Capital  Facility")  and  a  revolving   warehousing  credit  facility  (the
    "Warehouse  Facility").  The principal terms of the three  facilities are as
    follows (in thousands):

<TABLE>
<CAPTION>

                                                                    Working Capital
                                                 Term Loan             Facility          Warehouse Facility       Total Borrowings
                                             -----------------     -----------------    --------------------      ----------------

   <S>                                      <C>                   <C>                    <C>                        <C>
    Maturity Date                            November 30, 1997     November 30, 1997      November 30, 1997             N/A
    Maximum amount                                 N/A                 $ 7,500           Lesser of $ 22,805             N/A
                                                                                          or borrowing base
    Borrowings at May 31, 1997                   $ 2,167                     -                $ 18,545               $ 20,712
                                                 =======               -------                ========               ========

    Potential availability at May 31, 1997         N/A                 $ 7,500                $      -               $  7,500
                                                 =======               =======                ========               ========

    Borrowings at May 31, 1996                   $ 6,500               $     -                $ 11,038               $ 17,538
                                                 =======               =======                ========               ========

    Interest rate at May 31, 1997             Prime* plus .75%      Prime* plus .75%        Prime* plus .50%

    *    Agent's Prime at May 31, 1997 was 8.25%.

</TABLE>

                                     F - 14

<PAGE>


                    CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.  Recourse Bank Debt, continued
    ------------------

    The Bank Facility (1) is  collateralized  by all of CAII's assets and (2) is
    senior,  in order of  priority,  to all of CAII's  indebtedness,  subject to
    certain  limited  exceptions.  The Company and certain of the  Company's and
    CAII's  subsidiaries  have  guaranteed  CAII's  obligations  under  the Bank
    Facility and have pledged all of their assets, with limited  exceptions,  to
    collateralize  their guarantees.  The Bank Facility restricts CAII's ability
    to pay dividends or loan or advance funds to the Company.

    As of May 31, 1997, the Company was in compliance with the terms of the Bank
    Facility.


9.  Related Parties
    ---------------

    PIFs:

    The Company  sponsors  or  co-sponsors  seven PIFs (five of which  purchased
    equipment  under  lease from the  Company  during  fiscal  year  1997).  The
    Company,  through its PIF  general  partner  subsidiaries,  acts as either a
    general  partner or  co-general  partner  of each PIF for which it  receives
    general  partner  distributions  and management  fees. The Company,  through
    CAII,  also  acts as the Class B  limited  partner  of each PIF for which it
    receives Class B limited partner distributions.  The Class B limited partner
    is required to make  subordinated  limited  partnership  investments  in the
    PIFs. The Class B limited partner has a maximum remaining obligation to make
    further cash contributions of approximately $0.2 million, relating solely to
    CPYF IV. Amounts related to the PIFs were as follows (in thousands):

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

    Equipment sales margin                         $ 1,442    $ 1,539   $ 1,047
    Fees and distributions                           2,453      2,958     2,908
    Investment contributions in subordinated
    limited partnership interests                      280        260       230



    OTHER RELATED PARTIES

    MCC  Financial  acquired  voting  control of the Company  during fiscal year
    1996.  Two  executive  officers of that company are directors of the Company
    and members of the  Executive  Committee  of the Board of  Directors  of the
    Company.  The  Company  has  entered  into  various  agreements  with  these
    directors for certain consulting fees and payments of other expenses. During
    fiscal  years  1997 and  1996,  the  Company  paid  $810,000  and  $387,000,
    respectively,  under these agreements and for directors' fees,  including in
    1997,  $150,000 for relocation  expenses of one director (who is Chairman of
    the Board of Directors of the Company) in connection  with his relocation to
    Company headquarters.





                                     F - 15

<PAGE>


                    CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. Income Taxes
    ------------

    The  components  of the income tax expense  (benefit)  charged to continuing
    operations were (in thousands):

                                         1997         1996          1995
                                        ------       ------       --------
    Current:
      Federal                           $  240       $  653       $  1,990
      State and local                      170         (351)         1,000
                                        ------       ------       --------
                                           410          302          2,990
                                        ------       ------       --------
    Deferred:
      Federal                             (100)        (501)        (1,800)
      State and local                     (300)         401           (830)
                                        ------       ------       --------
                                          (400)        (100)        (2,630)
                                        ------       ------       --------
         Total tax provision            $   10       $  202       $    360
                                        ======       ======       ========

    Income tax expense  differs  from the amounts  computed by applying the U.S.
    federal income tax rate of 34% to pre-tax income from continuing  operations
    as a result of the following:

<TABLE>
<CAPTION>
                                                                                             1997           1996           1995
                                                                                            ------         ------         ------

   <S>                                                                                     <C>            <C>            <C>  
    Computed "expected" tax expense                                                         $ 250          $ 272          $ 502
    State tax provisions, net of federal benefits                                              40             50             88
    Reduction in valuation allowance for deferred income tax assets                          (280)          (120)          (230)
                                                                                            -----          -----          -----
                                                                                            $  10          $ 202          $ 360
                                                                                            =====          =====          =====
</TABLE>

    Income  taxes are  provided  on income  from  continuing  operations  at the
    appropriate federal and state statutory rates applicable to such earnings.

    Components  of income tax expense  attributable  to net income before income
    taxes is as follows (in thousands):

<TABLE>
<CAPTION>

                                                                                          1997              1996             1995
                                                                                        --------          --------         --------
   <S>                                                                                  <C>               <C>             <C>     
    Current:
      Taxes on net income before carryforwards                                           $  710            $  832          $  9,390
      Benefit of loss carryforwards utilized                                                  -                 -            (5,800)
      Benefit of investment tax credit ("ITC")
        carryforward utilized                                                              (300)             (530)             (600)
                                                                                         ------            ------          --------
                                                                                            410               302             2,990
                                                                                         ------            ------          --------
    Deferred:
      Tax effect of net change in temporary differences                                    (420)             (510)           (7,200)
      Loss carryforwards utilized                                                             -                 -             5,800
      ITC carryforward utilized                                                             300               530               600
      Alternative Minimum Tax ("AMT"), net of
        utilization of investment tax credit carryforward                                     -                 -            (1,600)
      Increase (decrease) in valuation allowance for
        deferred income tax assets                                                         (280)             (120)             (230)
                                                                                         ------            ------          --------
                                                                                           (400)             (100)           (2,630)
                                                                                         ------            ------          --------
    Provision for income taxes                                                           $   10            $  202          $    360
                                                                                         ======            ======          ========
</TABLE>


                                     F - 16

<PAGE>


                    CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


10. Income Taxes, continued
    ------------

    Significant  components of the Company's deferred tax liabilities and assets
    as of May 31, 1997 and 1996, were as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                                            1997             1996
                                                                                                          --------         --------
   <S>                                                                                                  <C>               <C>     
    Deferred income tax liabilities:
      Direct finance leases accounted for as operating leases
        for income tax purposes, and equipment depreciation
        for tax purposes in excess of financial reporting depreciation                                   $      -          $  2,000
      Residual values and other receivables arising from equipment
        under lease sold to private investors recognized for financial
        reporting purposes, but not for tax reporting purposes                                              1,700             1,300
                                                                                                         --------          --------
          Total deferred income tax liabilities                                                             1,700             3,300
                                                                                                         --------          --------
    Deferred income tax assets:
      Other assets and liabilities, net                                                                       600             1,800
      Investment tax credit carryforwards                                                                   1,300             1,600
      AMT credit carryforwards                                                                              3,300             3,300
                                                                                                         --------          --------
          Total deferred income tax assets                                                                  5,200             6,700
    Valuation allowance for deferred income tax assets                                                     (1,200)           (1,500)
                                                                                                         --------          --------
          Net deferred income tax assets                                                                    4,000             5,200
                                                                                                         --------          --------

    Net deferred income tax asset                                                                        $  2,300          $  1,900
                                                                                                         ========          ========

</TABLE>

    The Company has established a valuation  allowance for deferred taxes due to
    the  uncertainty  that  the  full  amount  of the ITC  carryforward  will be
    utilized  prior to expiration.  The Company  believes that it is more likely
    than not that the  results of future  operations  will  generate  sufficient
    taxable income to realize the remaining  deferred tax assets.  The reduction
    in the valuation  allowance  recorded in fiscal 1997 of $280,000  represents
    the  utilization  of an ITC  carryforward  and receipt of a state income tax
    refund for which a valuation  allowance had been provided.  The reduction in
    the valuation allowance recorded in fiscal 1996 of $120,000,  represents the
    utilization  of an ITC  carryforward  for which a  valuation  allowance  had
    previously been provided.

    At May 31, 1997, the Company has an ITC carryforward of $1.3 million,  which
    expires  from 1998  through  2001,  and AMT credits of $3.3  million.  Under
    present federal tax law, AMT credits may be carried forward indefinitely and
    may be utilized to reduce  regular tax  liability  to an amount equal to AMT
    liability.  Due to a change in control,  provisions of the Internal  Revenue
    Code limit the annual future ITC  carryforward  and AMT credit  carryforward
    utilization to approximately $300,000 per year.


11. Common and Preferred Stock
    --------------------------

    The Company has authority to issue  2,500,000  shares of preferred  stock at
    $0.008 par value.  At May 31, 1997,  no shares of  preferred  stock had been
    issued.



                                     F - 17

<PAGE>


                    CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


12. Stock Options
    -------------

    The Company has a  qualified  incentive  stock  option  plan  whereby  stock
    options  may be granted to  employees  to purchase  shares of the  Company's
    common stock at prices equal to the market price of the  Company's  stock on
    date of grant.  The Company has a non-qualified  plan covering all directors
    except the CEO.  Common  stock  received  through the  exercise of qualified
    incentive  stock options which are sold by the optionee  within two years of
    grant or one year of  exercise  result in a tax  deduction  for the  Company
    equivalent to the taxable gain recognized by the optionee.

    Effective on May 31, 1996, the Company purchased 401,000 outstanding options
    issued to current employees at a cost to the Company of $557,000,  which was
    equal to the  difference  of $2.45  and the  exercise  price of each  option
    purchased.  The cost was  included in  operating  and other  expenses in the
    accompanying consolidated statements of income for the fiscal year ended May
    31, 1996.

    During July 1996, the Company purchased 104,000  outstanding  options issued
    to  non-employees  at a cost to the Company of $138,000,  which was equal to
    the difference of $2.45 and the exercise price of each option purchased. The
    cost  was  reflected  as a  charge  to  additional  paid-in  capital  in the
    accompanying May 31, 1997 consolidated balance sheets.

    The Company  applies APB Opinion No. 25 in  accounting  for its stock option
    plans. Accordingly and since the Company awards stock options at fair market
    value, no compensation cost has been recognized for its stock options in the
    financial statements.  Had the Company determined compensation cost based on
    the fair value at the grant date for its  options  under SFAS No.  123,  the
    Company's net income and earnings per common and dilutive common  equivalent
    share would have been reduced to the pro forma amounts indicated below:

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

    Net income                         As Reported     $ 733,000       $ 604,000
                                       Pro forma       $ 667,000       $ 576,000

    Primary earnings per share         As Reported     $    0.14       $    0.12
                                       Pro forma       $    0.12       $    0.11

    Fully diluted earnings per share   As Reported     $    0.14       $    0.11
                                       Pro forma       $    0.12       $    0.11

    For purposes of calculating  the  compensation  cost in accordance with SFAS
    No. 123,  the fair value of each option  grant is  estimated  on the date of
    grant  using  the  Black-Scholes  option-pricing  model  with the  following
    weighted-average  assumptions  used for  grants  in  fiscal  1997 and  1996,
    respectively:  no dividend yield; expected volatility of 111% and 164%; risk
    free interest rates of 6.58% and 6.40%; and expected lives of five years.






                                     F - 18

<PAGE>


                    CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. Stock Options, continued
    -------------

    Additional information on shares subject to options is as follows:

<TABLE>
<CAPTION>
                                                         1997                       1996                          1995
                                               ----------------------     -------------------------    -------------------------
                                                            Weighted-                     Weighted-                    Weighted-
                                                 Number      average        Number         average      Number          average
                                                  of         exercise         of           exercise       of            exercise
                                                options       price         options         price       options          price
                                               ---------    ---------     -----------     ---------    ----------      ---------

     <S>                                        <C>         <C>           <C>             <C>          <C>             <C>   
      Outstanding at beginning of year           693,000     $ 1.23        1,047,000       $ 1.10       1,132,000       $ 1.02
      Granted                                     90,000       2.88          130,000         1.62         246,000         1.63
      Exercised                                  (19,000)       .81          (32,000)         .94        (227,000)         .96
      Purchased                                 (104,000)      1.13         (401,000)         .94               -            -
      Forfeited                                  (11,000)      2.10          (51,000)        1.24        (104,000)        1.83
                                               ---------                  ----------                   ----------
      Outstanding at the end of the year         649,000       1.47          693,000         1.23       1,047,000         1.10
                                               =========                  ==========                   ==========

      Options exercisable at year-end            606,000                     641,000                      835,000
      Weighted-average fair value of options
           granted during the year             $    2.35                  $     1.53

</TABLE>

    The following table summarizes  information about stock options  outstanding
    at May 31, 1997:

                                 Options outstanding         Options exercisable
                         -------------------------------    --------------------
                                    Weighted-
                                    average     Weighted                Weighted
                          Number   remaining    average     Number      average
        Range of           of      contractual  exercise      of        exercise
     exercise prices     options      life        price     options      price
    -----------------    -------   -----------  --------    -------     --------

     $ 0.01 - $ 1.00     128,000    4.5 years    $ 0.71     128,000      $ 0.71
     $ 1.01 - $ 2.00     375,000    5.0 years      1.29     373,000        1.29
     $ 2.01 - $ 3.00     146,000    8.0 years      2.62     105,000        2.48
                         -------                            -------
                         649,000    5.5 years      1.47     606,000        1.37
                         =======                            =======


13. Quarterly Financial Data (unaudited)
    ------------------------------------

    The following information has not been reviewed by the Company's independent
    auditors.  Summarized  quarterly  financial data for the years ended May 31,
    1997 and 1996 are (in thousands, except per share data):


                               Total          Net        Income Per Common and
    Fiscal year 1997:         Revenue       Income      Common Equivalent Share
    -----------------         -------       ------      -----------------------

    First quarter             $ 36,967      $ 138            $   .03
    Second quarter              69,611        246                .05
    Third quarter               74,002        298                .06
    Fourth quarter              46,954         51                .01


                                     F - 19

<PAGE>


                    CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



13. Quarterly Financial Data (unaudited), continued
    ------------------------------------

                               Total          Net        Income Per Common and
    Fiscal year 1996:         Revenue       Income      Common Equivalent Share
    -----------------         -------       ------      -----------------------

    First quarter             $ 31,210      $  57             $   .01
    Second quarter              33,718         60                 .01
    Third quarter               59,089        136                 .03
    Fourth quarter              62,664        351                 .07


14. Legal Proceedings
    -----------------

    The Company is involved in the following legal proceedings:

    a.  The Company is involved in certain arbitration  proceedings  pursuant to
        the  requirements  of the National  Association  of  Securities  Dealers
        ("NASD"),  representing three claims against CAI Securities Corporation,
        a wholly owned subsidiary of the Company. All three claims allege breach
        of fiduciary duty, breach of contract,  negligence and misrepresentation
        with regard to the sale of limited  partnership  units in Leastec Income
        Fund V  ("LIFV"),  a limited  partnership  whose  general  partner is an
        affiliate of the Company.  The three claims involve  investments in LIFV
        of  approximately  $625,000  and seek  damages of  $838,000  and special
        punitive and exemplary  damages (one claim specifies  $1,500,000 in such
        damages while the other two claims do not specify an amount).  All three
        claims  have  been  brought  by the  same  company  on  behalf  of three
        investors.  Management  has  been of the  belief  that it has  good  and
        substantial  defenses  against  these  claims  and  that  the  Company's
        subsidiary  will  prevail.  In  July  1997,  one of the  cases,  seeking
        $500,000 in damages and $1,500,000 in punitive damages,  was heard by an
        NASD  arbitration  panel and that  arbitration  panel has now determined
        that there was no breach of fiduciary  duty,  no breach of contract,  no
        negligence and no  misrepresentation  with regard to the sale of limited
        partnership units of LIFV and the subsequent financial reporting thereof
        and that no award  is due the  claimant  under  any of his  claims.  The
        claimant  was  assessed  $7,300  in  forum  fees  by the  NASD  for  the
        arbitration proceeding.

    b.  The Company is involved in other routine legal proceedings incidental to
        the  conduct of its  business.  Management  believes  that none of these
        legal  proceedings  will have a material adverse effect on the financial
        condition or operations of the Company


15. Commitments
    -----------

    The  Company   leases   office   space  under   long-term   and   short-term
    non-cancelable  operating  leases.  The leases contain  renewal  options and
    provide for annual  escalation for utilities,  taxes and service costs. Rent
    expense was $502,000,  $425,000 and $783,000 for fiscal years 1997, 1996 and
    1995, respectively.




                                     F - 20

<PAGE>


                    CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. Commitments, continued
    -----------

    Minimum  future rental  payments  required by such leases are as follows (in
    thousands):

           Year Ending May 31,

              1998                                      $   452
              1999                                          395
              2000                                          367
                                                        -------
                                                        $ 1,214
                                                        =======

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

    The  following   disclosure  of  the  estimated   fair  value  of  financial
    instruments was made in accordance  with  Statements of Financial  Standards
    No.  107  ("SFAS  No.  107"),  Disclosures  about  Fair  Value of  Financial
    Instruments.  SFAS No.  107  specifically  excludes  certain  items from its
    disclosure  requirements such as the Company's  investment in leased assets.
    Accordingly,  the aggregate fair value amounts presented are not intended to
    represent the underlying value of the net assets of the Company.

    The carrying amounts at May 31, 1997 for cash and cash equivalents, accounts
    receivable,  recourse bank debt,  accounts  payable-equipment  purchases and
    accounts payable and other liabilities  approximate their fair values due to
    the short  maturity of these  instruments,  or because the related  interest
    rates approximate current market rates.

    As of May 31, 1997,  discounted  lease rentals and discounted  lease rentals
    assigned to lenders arising from equipment sale  transactions of $61,466,000
    and  $41,845,000,   respectively,   have  fair  values  of  $57,817,000  and
    $39,361,000,  respectively.  The fair values were estimated utilizing market
    rates of comparable debt having similar  maturities and credit quality as of
    May 31, 1997.

                                     F - 21

<PAGE>



                          INDEPENDENT AUDITORS' REPORT









The Stockholders and Directors
Capital Associates, Inc.:

Under date of July 11, 1997, we reported on the  consolidated  balance sheets of
Capital  Associates,  Inc. and subsidiaries as of May 31, 1997 and 1996, and the
related consolidated  statements of income, changes in stockholders' equity, and
cash flows for each of the years in the three-year period ended May 31, 1997, as
contained  in the  Company's  annual  report on Form 10-K for the year 1997.  In
connection  with  our  audits  of  the  aforementioned   consolidated  financial
statements,  we also have audited the related  financial  statement  schedule as
listed in the  accompanying  index.  This  financial  statement  schedule is the
responsibility of the Company's management.  Our responsibility is to express an
opinion on this financial statement schedule based on our audits.

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





                                     KPMG Peat Marwick LLP

                                     /s/KPMG Peat Marwick LLP
                                     ------------------------

Denver, Colorado
July 11, 1997


                                     F - 22

<PAGE>





                    CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
                     SCHEDULE II - VALUATION AND QUALIFYING
                              ACCOUNTS AND RESERVES
                 for the years ended May 31, 1997, 1996 and 1995
                                 (in thousands)

<TABLE>
<CAPTION>


      COLUMN A                                COLUMN B                   COLUMN C                   COLUMN D        COLUMN E
      --------                               ----------      -------------------------------      ------------     ---------
                                             Balance at       Charged to            Charged                         Balance
                                             Beginning        Costs and             to Other                       at End of
     Description                             of Period        Expenses              Accounts      Deductions(1)      Period
     -----------                             ---------       -----------            --------      -------------    ---------

<S>                                          <C>            <C>                     <C>            <C>             <C>    
Year ended May 31, 1997:
------------------------
Allowance for doubtful accounts:
-  accounts receivable                        $    44        $     -                 $    -         $    (14)       $    30
Allowance for losses:
-  residual values arising from equipment
   under lease sold to private investors          258              -                      -             (101)           157
-  leased equipment                             1,120            365                      -             (778)           707
                                              -------        -------                 ------         --------        -------
                                              $ 1,422        $   365                 $    -         $   (893)       $   894
                                              =======        =======                 ======         ========        =======


Year ended May 31, 1996:
------------------------
Allowance for doubtful accounts:
-  accounts receivable                        $    48        $     -                 $    -         $     (4)       $    44
Allowance for losses:
-  residual values arising from equipment
   under lease sold to private investors        1,654            524                      -           (1,920)           258
-  leased equipment                             2,416            (94)(2)                  -           (1,202)         1,120
                                              -------        -------                 ------         --------        -------

                                              $ 4,118        $   430                 $    -         $ (3,126)       $ 1,422
                                              =======        =======                 ======         ========        =======
Year ended May 31, 1995:
------------------------
Allowance for doubtful accounts:
-  accounts receivable                        $   343        $     -                 $ (260)        $    (35)       $    48
Allowance for losses:
-  residual values arising from equipment
   under lease sold to private investors        6,934            532                      -           (5,812)         1,654
-  leased equipment                             1,741          2,408                      -           (1,733)         2,416
                                              -------        -------                 ------         --------        -------

                                              $ 9,018        $ 2,940                 $ (260)        $ (7,580)       $ 4,118
                                              =======        =======                 ======         ========        =======

</TABLE>


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

(2)      Includes $750,000 recovery from litigation settlement.







                 See accompanying independent auditors' report.

                                     F - 23

<PAGE>





                                                                      Exhibit 11

                    CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
                    COMPUTATION OF PRIMARY EARNINGS PER SHARE


                                                     Year Ended May 31,
                                            -----------------------------------
                                              1997          1996        1995
                                            ---------   ----------  -----------

Shares outstanding at
  beginning of period                       4,994,000    5,091,000    4,864,000

Repurchases of common stock                         -     (129,000)           -

Shares issued during the
  period (weighted average)                    10,000       25,000      188,000

Dilutive shares contingently issuable
  upon exercise of options
  (weighted average)                          729,000      999,000      953,000

Less shares assumed to have been
  purchased for treasury with assumed
  proceeds from exercise of stock options
  (weighted average)                         (266,000)    (626,000)    (680,000)

Effect of non-employee stock option buyout    (64,000)           -            -

Effect of employee stock option buyout              -     (174,000)           -
                                            ---------    ---------  -----------

Total shares, primary                       5,403,000    5,186,000    5,325,000
                                            =========    =========  ===========

Net income                                  $ 733,000    $ 604,000  $ 1,116,000
                                            =========    =========  ===========

Income per common and common
  equivalent share, primary                 $     .14    $     .12  $       .21
                                            =========    =========  ===========

                                     F - 24

<PAGE>





                                                                      Exhibit 11

                    CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
                 COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE

                                                     Year Ended May 31,
                                            -----------------------------------
                                              1997         1996        1995
                                            ---------   ----------  -----------

Shares outstanding at
  beginning of period                       4,994,000    5,091,000    4,864,000

Repurchases of common stock                         -     (129,000)          -

Shares issued during the period
  (weighted average)                           10,000       25,000      188,000

Dilutive shares contingently issuable
  upon exercise of options
  (weighted average)                          729,000      999,000      953,000

Less shares assumed to have been
  purchased for treasury with assumed
  proceeds from exercise of stock options
  (weighted average)                         (248,000)    (338,000)    (668,000)

Effect of non-employee stock option buyout    (71,000)           -            -

Effect of employee stock option buyout              -     (255,000)            -
                                            ---------    ---------  -----------

Total shares, fully diluted                 5,414,000    5,393,000    5,337,000
                                            =========    =========  ===========


Net income                                  $ 733,000    $ 604,000  $ 1,116,000
                                            =========    =========  ===========

Income per common and common
     equivalent share, fully diluted        $     .14    $     .11  $       .21
                                            =========    =========  ===========


                                     F - 25