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, 1999

[ ]  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 Employer Identification 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.

The  approximate  market value of stock held by  non-affiliates  was  $3,810,000
based upon  1,270,000  shares  held by such  persons  and the  closing  price on
September 8, 1999 of $3.00. The number of shares outstanding of the Registrant's
$.008 par value common stock at September 8, 1999 was 5,271,626.





Page 1 of 36 Pages                               Exhibit Index Begins on Page 33



<PAGE>



                                     PART I

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

Capital Associates, Inc. ("the Company") is a commercial finance company engaged
in the leasing of a variety of equipment.  The Company is principally engaged in
(i) the  origination  of equipment  leases with equipment  users,  including the
acquisition  of leases  initially  originated  by other lessors (ii) the sale of
equipment  leases  to third  parties,  (iii) the  management  and  servicing  of
equipment  leases retained by the Company or sold to private  investors or other
lessors,  (iv) the sale and  remarketing of equipment as it comes  off-lease and
(v) the sale and  servicing  of new  information  technology  equipment.  During
fiscal years 1999 and 1998, the Company originated approximately $576 million of
equipment  leases.  The  principal  market for the  Company's  activities is the
United States.

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

The Company's lease origination  strategy is transaction driven. With each lease
origination   opportunity,   the  Company  evaluates  the  prospective  lessee's
creditworthiness  and 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
remain in place at the end of the initial lease term. Typically, equipment which
remains in place produces better residual  returns than equipment sold or leased
to a third party.

The  Company  generally  purchases  equipment  that  is  subject  to  relatively
short-term  leases  (generally  seven years or less). 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.  In addition,  the
lessee is  required  to insure the  equipment  against  casualty  loss,  pay all
related maintenance expenses and pay property, sales and other taxes.

The Company has master leases in place with approximately 538 customers.  Master
leases are contracts that establish general terms and conditions under which the
Company  conducts its leasing  business and are  frequently  a  prerequisite  in
competing for new  financing.  Master leases  simplify the approval  process for
lessees and enable the  Company to compete for new  business at all levels of an
enterprise.

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  by (i)  locating the retail
originations  sales  force in  regional  branch  offices  throughout  the United
States,  (ii) targeting a variety of specific industries and equipment types for
lease  originations  and (iii)  originating  leases on a wholesale  basis (i.e.,
acquiring  leases from other  lessors).  Funding  sources are diversified by (x)
matching individual equipment  originations with the investment needs of private
investors,  (y)  originating  leases on a  recurring  basis on behalf of private
lease  investment  programs  it  manages  on  behalf of other  lessors  (private
investment  programs) and (z) funding lease  transactions  for its own portfolio
through securitization or permanent non-recourse financing.

The Company  diversifies  lease  originations  to include a variety of equipment
types  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  seeks  to  maintain  a  diversified  lease
portfolio in order to minimize  its credit and  residual  exposure to any single
lessee,  industry or equipment category.  As of May 31, 1999, no single industry
or lessee accounted for more than 10% of the Company's portfolio of leases.

During  fiscal 1998,  the Company  acquired  DBL, Inc.  d/b/a  Connecting  Point
(subsequently  renamed  Capital  Associates  Technology  Group or "CATG").  CATG
provides  a  wide  range  of  information  technology ("IT") services, including

                                     2 of 36

<PAGE>



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

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

procurement of new PC's and networking  equipment and software,  and maintenance
of IT equipment.  In June 1999, CATG completed the purchase of substantially all
the  assets of Sento  Consulting  Corporation  ("Sento")  for  $50,000  cash and
$350,000 of contingent  consideration  based on the level of revenues during the
next thirty-six  months. The acquisition of Sento expands CATG's product line to
include  enterprise  computing  products,  including  high-end  servers and data
storage devices. CATG provides the Company with enhanced equipment expertise and
evaluation  services for our  customers  and the  capability of acquiring new IT
equipment at favorable prices.

The Company's principal sources of funding for its leasing  transactions include
(i) a $61.2  million  warehouse  facility  ("Warehouse  Facility"),  (ii) a $6.9
million working capital facility ("Working Capital  Facility"),  (iii) permanent
non-recourse financing,  including securitization of receivables,  (iv) sales of
equipment  leases to third parties or lease  investment  programs it manages and
(v) the Company's internally generated revenues.  Historically, the Company sold
a significant  portion of its lease  originations to public limited  partnership
income funds ("PIF") in which the Company was the general  partner or co-general
partner.  During fiscal 1998, the Company completed the offering of units in its
most recent PIF, Capital Preferred Yield Fund-IV,  L.P.  (CPYF-IV).  The Company
has elected not to organize additional PIFs. As a result, future equipment sales
to PIFs will reflect only the  reinvestment  needs of the existing PIFs, and are
expected to represent a smaller amount of equipment sales.

In the  case  of  leases  held  for  the  Company's  account,  a  typical  lease
transaction  requires  a  cash  investment  by the  Company  of 5% to 30% of the
original  equipment cost,  commonly known in the leasing  industry as an "equity
investment".  The  balance  of  original  equipment  cost  is  financed  through
securitization  funding or the discounting of lease rentals, also referred to as
discounted  lease  rentals.  Such  borrowings are secured by a first lien on the
equipment and the related lease rental payments. The Company's equity investment
is typically  financed  with proceeds from its Working  Capital  Facility,  Term
Loan,  securitization  proceeds,  or  internally  generated  funds.  The Company
recovers its equity investment from renewal rents received and/or sales proceeds
realized  from the  equipment  after  payment in full of the  related  permanent
non-recourse debt or securitization  funding. The Company is pursuing additional
lease investment programs and is renewing its existing securitization program to
finance its leases.

Of the  equipment  leases  originated or acquired by the Company in fiscal years
1999 and 1998, the Company retained  approximately 41% and 28%, sold 19% and 29%
to  private  leasing  investment  programs,  sold  5% and 15% to the  PIFs,  and
syndicated 35% and 28% to unaffiliated  third parties,  respectively.  Equipment
leases  retained or serviced by the Company  increased 13% to $936 million as of
May 31, 1999 from $828 million in June 1998.  The Company  serviced $176 million
and $118  million  in assets  (based on  original  equipment  cost) for  private
leasing investment programs in fiscal years 1999 and 1998,  respectively.  As of
May  31,  1999,  the  Company  had  awards  for  future  business  amounting  to
approximately  $65.1  million,  as compared to $24.9 million at May 31, 1998. On
average  approximately  93% of the  Company's  awarded  business  was closed for
fiscal year 1999.

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

All leases are subject to review under the Company's underwriting  standards. To
minimize credit risk, the Company has established credit underwriting  standards
which specify that the  Company's  lessees 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 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 "non  investment  grade
credit").  As of May 31, 1999,  approximately 98% of the  equipment owned by the


                                     3 of 36

<PAGE>







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

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

Company  was leased to  companies  that meet the above  criteria.  As of May 31,
1999, the dollar-weighted average credit rating of the Company's lessees was the
equivalent  of Baa. The Company  originates  leases for the PIFs and for private
investment  programs  in  accordance  with  each  program's  lease  underwriting
standards.  In the case of the PIFs, the  underwriting  standards are similar to
those of the Company.  The Company's  historical  losses  associated with leases
originated since 1991, are approximately 1% of the amount originated.

Residual  values are established at lease inception equal to the estimated value
to be received from the equipment at the termination of the lease. In estimating
such values,  the Company considers relevant factors regarding the equipment and
the lessee,  including, for example, (i) the equipment's  remarketability,  (ii)
upgrade potential,  and (iii) probability that the equipment will continue to be
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 quarterly assessments of its
assets to identify  other-than-temporary  losses in value.  The Company  records
allowances  for  losses as soon as any  other-than-temporary  declines  in asset
values are known.  Charge-offs  are recorded upon the termination or remarketing
of the underlying  assets. As such,  charge-offs will primarily occur subsequent
to the recording of the allowances for losses.

The  Company's  Transaction  Review  Committee  ("TRC"),  which is  comprised of
 members of senior management,  (1) reviews and approves all material aspects of
 lease transactions, including 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 in order to estimate and assess the net realizable  values at the end of
a lease  terms for the  Company's  equipment;  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 be approved by the Executive Committee.

Private Investment Programs and PIFs
------------------------------------

The majority of leases  originated by the Company are sold to private  investors
or  to  lease  investment  programs,   collectively   referred  to  as  "Private
Investors".  The Company  records  sales revenue equal to the sales price of the
equipment and equipment sales cost 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 or to lease  investment
programs was $158.7  million,  $179.4  million and $131.6  million during fiscal
years 1999, 1998 and 1997, respectively.

The Company  currently  sponsors or  co-sponsors  three PIFs.  The Company sells
certain  equipment leases it originates to these PIFs.  Revenue from the sale of
leased equipment to the PIFs was $19.0 million,  $48.6 million and $67.0 million
during  fiscal  years 1999,  1998 and 1997,  respectively.  As  discussed  under
Leasing Activities,  sales to PIF's are expected to decline significantly in the
future.

Various  subsidiaries  and affiliates of the Company are the general partners or
co-general  partners of the PIFs.  In  addition,  the Company  contributed  cash
and/or  equipment to each PIF in exchange for a Class B limited partner interest
("Class B interest") in each PIF.  Public  investors  purchased  Class A limited
partnership  units  ("Class A Units") for cash,  which the PIFs used to purchase
leased equipment.  The Company receives fees for performing various services for
the PIFs  (subject to certain  dollar  limits)  including  acquisition  fees and
management  fees, and was reimbursed for  organizational  and offering  expenses
incurred in selling the Class A Units  (subject to certain dollar  limits).  The
Company receives a Class B cash  distribution from each PIF (subordinated to the
cash  returns  on  the  Class  A  Units).  The  general  partner  receives  cash
distributions  and  reimbursement  of certain  operating  expenses  incurred  in
connection with each PIFs operations.


                                     4 of 36

<PAGE>


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

Equipment Remarketing Activities
--------------------------------

Remarketing  activities  consist of lease portfolio  management (i.e.,  managing
equipment  under  lease)  and  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 to a third party, or upgrading or
adding to the equipment  before the end of the initial lease term).  In general,
remarketing  equipment in place produces better residual  returns than equipment
sold or re-leased to third- parties.  However, if the Company is unsuccessful in
keeping the equipment in place, it will attempt to sell or release the equipment
to a different  end-user/lessee,  or sell the off-lease  equipment to brokers or
dealers.  Revenue from remarketing  activities was  approximately  $3.0 million,
$5.7  million,  and $5.7  million  during  fiscal  years  1999,  1998 and  1997,
respectively.

The  Company  maximizes  the  remarketing   proceeds  from,  and  minimizes  the
warehousing  costs for,  off-lease  equipment  by (1)  remarketing  IT equipment
through  its Name Brand  Computer  Outlet  subsidiary  ("NBCO"),  (2)  employing
qualified and experienced  remarketing  personnel,  (3) developing and acquiring
equipment  remarketing  expertise  in order to maximize the profit from sales of
off-lease equipment,  (4) minimizing the amount of off-lease equipment stored at
independently  operated  equipment  warehouses,  (5)  operating  its own storage
facilities to further reduce  warehousing costs for off-lease  material handling
and information technology equipment,  (6) eliminating scrap inventory,  and (7)
conducting  on-site equipment  inspections for on-lease  equipment.  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.

NBCO was established in December of 1998 as a subsidiary of Capital  Associates,
Inc. for the purpose of remarketing  commercial quality used personal computers,
monitors and printers.  NBCO's  operation  consists of a  distribution  facility
("the factory"), three retail stores located in the Denver metropolitan area and
one retail store located near Toledo,  Ohio. The NBCO factory is a 50,000 square
foot  facility  located  in  Aurora,  Colorado  and is a full  service  personal
computer  equipment  receiving,  reconditioning  and upgrade  center.  NBCO also
remarkets  computers  through  its  website and employs a sales staff who target
small  businesses,  school  districts,  governmental  operations and other large
users.

NBCO also acquires used personal computers, monitors and printers from a variety
of sources,  including  end-users  and other  lessors.  The equipment is sold in
quantity to third parties or to consumers through NBCO's retail facilities.
These activities are referred to as Equipment Brokerage Sales.

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  approximately  195  employees  as  of  May  31,  1999  versus
approximately 170 employees as of May 31, 1998, none of whom were represented by
a labor union. The Company believes that its employee relations are good.

                                     5 of 36


<PAGE>



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

The Company  leases  office  facilities  (approximately  25,000  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,  four retail stores, and
has seven  regional or  satellite  marketing  offices.  The Company  also leases
facilities  in Ogden and Salt Lake  City,  Utah where it  markets  and  services
information technology equipment.

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

     The Company is involved in the following legal proceedings:

     a.   Bank One Texas,  N.A. v. Capital  Associates  International,  Inc. and
          Capital  Associates,  Inc.,  United  States  District  Court  for  the
          Northern  District  of  Texas,  Dallas  Division,   Civil  Action  No.
          3-99CV0697-G

          On March 2, 1999, Bank One Texas,  N.A. ("Bank One") filed a complaint
          against the Company seeking recovery from the Company of $1,324,715.02
          together  with  interest at the lesser of 18% per annum or the maximum
          amount  permitted by law from December 30, 1991. To date, Bank One has
          not served the  complaint on the Company.  Bank One is alleging in the
          lawsuit that the Company breached the terms of its Purchase Agreement,
          dated  December  30,  1991,  with Bank One  pursuant to which Bank One
          agreed  to  purchase  from the  Company,  for an  initial  payment  of
          $1,324,715.02 (the "Bank One Payment"),  certain  furniture,  fixtures
          and equipment  (the "FF&E")  previously  leased to MBank Dallas,  N.A.
          ("MBank").  MBank  defaulted  on the lease in 1989 and was  eventually
          placed in receivership. Bank One filed a lawsuit over the ownership of
          the FF&E and certain  collateral  for MBank's lease  obligations  (the
          "MBank Collateral") in January 1992 (the "MBank Litigation").  See the
          Company's  Annual  Reports on Form 10-K for the fiscal years ended May
          31, 1994 and 1995, for the history of the MBank Litigation.  In August
          1995,  all of the  parties to the MBank  Litigation,  except Bank One,
          settled their claims with respect to the MBank Collateral. The Company
          received approximately $10.8 million as part of the settlement.  Later
          in August 1995,  the Company,  pursuant to the terms of the settlement
          agreement, delivered $2.2 million to Bank One in repayment of the Bank
          One Payment  together  with  interest  thereon.  Bank One rejected the
          tender and returned the $2.2 million to the Company  while  purporting
          to reserve all rights to make a claim to such funds in the future.  In
          August  1998,  the trial court held that Bank One was the owner of the
          FF&E. Now, a year after the trial court's  decision and more than four
          years  since it rejected  the  Company's  tender,  Bank One is seeking
          recovery of the Bank One Payment plus interest  thereon since December
          30, 1991.

          If Bank One pursues this  lawsuit,  the Company  intends to (1) defend
          vigorously the claims  asserted  against it by Bank One and (2) assert
          vigorously all counterclaims it may have against Bank One. The Company
          believes that, at very least, it has strong defenses to the running of
          any  additional  interest  on the  Bank  One  Payment  since  Bank One
          rejected  the  Company's  tender  in August  1995.  The  Company  also
          believes it may have credible defenses to the repayment of any portion
          of the Bank One Payment or any of the interest  thereon  based on Bank
          One's conduct over the past eight years.

     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,  or the matter noted  above,  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, 1999.

                                    6 of 36

<PAGE>



                                     PART II

Item 5.  Market  for  the  Registrant's  Common  Stock  and  Related Stockholder
         -----------------------------------------------------------------------
         Matters
         -------

The Company's  common stock trades on the Nasdaq Stock Market  ("NASDAQ")  under
the symbol: CAII.

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.

         2000                                            HIGH             LOW
         ----                                            ----             ---

     First Quarter (through September 8, 1999)          3 1/2            2 1/8

         1999                                            HIGH             LOW
         ----                                            ----             ---

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

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

     First Quarter                                      4                2 1/4
     Second Quarter                                     4  1/4           2 13/16
     Third Quarter                                      3  1/2           2 1/8
     Fourth Quarter                                     5  3/8           2 15/16

On September 8, 1999,  the date on which  trading  activity last  occurred,  the
closing  sales price of the  Company's  common stock was $3.00.  On September 8,
1999,  there  were  approximately  158  shareholders  of record and at least 872
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 9 of 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.

On September 1, 1999,  NASDAQ informed the Company that it was not in compliance
with the minimum requirements  for continued  listing of its common stock on the
Nasdaq National Market.

By letter dated August 31, 1999,  NASDAQ informed the Company that it was not in
compliance  with the $5 million  market  value of public float  requirement  for
continued  listing of its Common Stock on the NASDAQ  National Market (the "MVPF
Requirement").  As reported  herein,  the total number of shares of Common Stock
held by  non-affiliates is 1,270,000 (24% of the outstanding  shares),  having a
market value of $3,810,000. The letter states that, unless it regains compliance
with the MVPF  Requirement by November 30, 1999, the Company's Common Stock will
be de-listed at the opening of business on December 3, 1999.  The letter goes on
to state that the Company may apply for listing on the NASDAQ SmallCap Market if
it satisfies the  requirements for continued  listing thereon.  The Company does
not believe that it will be able to regain  compliance with the MVPF Requirement
on or  before  November  30,  1999.  The  Company  is  currently  reviewing  its
alternatives,  i.e.,  submitting  an  application  for  listing on the  SmallCap
Market, listing its Common Stock on the NASDAQ Over-The-Counter  Bulletin Board,
etc. The Company  intends to timely file a Current Report on Form 8-K announcing
any change in the listing of its Common Stock.

                                    7 of 36

<PAGE>



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 to the  financial
statements appearing elsewhere.

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

<TABLE>
<CAPTION>

                                          1999            1998          1997            1996            1995
                                        ---------      ----------    ----------      ----------      ----------
<S>                                    <C>            <C>           <C>             <C>             <C>
Revenue:
  Equipment sales                       $ 193,914      $  248,258    $  204,545      $  166,242      $   81,370
  Leasing                                  42,614          25,101        14,420          10,212           7,672
  Interest                                  2,219           3,487         4,828           6,943          11,386
  Other                                     4,623           4,228         3,741           3,284           4,516
                                        ---------      ----------    ----------      ----------      ----------
                                          243,370         281,074       227,534         186,681         104,944
                                        ---------      ----------    ----------      ----------      ----------

Costs and expenses:
  Equipment sales                         187,733         240,702       200,018         161,797          70,866
  Leasing                                  27,260          17,337         8,928           5,466           3,893
  Operating and other expenses             15,513          11,830         9,568           8,332          11,603
  Provision for losses                        555             705           365             430           2,940
  Interest - non-recourse debt              8,503           6,123         6,012           7,705          12,548
  Interest - recourse debt                  3,409           2,857         1,900           2,145           1,618
                                        ---------      ----------    ----------      ----------      ----------
                                          242,973         279,554       226,791         185,875         103,468
                                        ---------      ----------    ----------      ----------      ----------
Income before income taxes                    397           1,520           743             806           1,476
Income tax expense                              -               -            10             202             360
                                        ---------      ----------    ----------      ----------      ----------
Net income                              $     397      $    1,520    $      733      $      604      $    1,116
                                        =========      ==========    ==========      ==========      ==========

Earnings per common share:
     Basic                              $     .08      $      .30    $      .15      $      .12      $      .22
     Diluted                            $     .07      $      .28    $      .14      $      .12      $      .21

Weighted average number of
  common shares outstanding:
     Basic                              5,173,000       5,117,000     5,004,000       4,987,000       5,052,000
     Diluted                            5,399,000       5,449,000     5,403,000       5,186,000       5,325,000

Balance Sheet Data
  (in thousands)                                                        May 31,
                                        -----------------------------------------------------------------------
                                          1999            1998          1997            1996           1995
                                        ---------      ----------    ----------      ----------      ----------

Total assets                            $ 246,741      $  214,093    $  146,517      $  127,511       $ 158,956
Recourse debt                              50,060          49,088        20,712          17,538          24,520
Discounted lease rentals                  125,639         104,311        61,466          63,749          98,216
Stockholders' equity                       25,615          25,186        23,501          22,881          22,490

</TABLE>


                                     8 of 36


<PAGE>


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

I.   Results of Operations
     ---------------------

     During fiscal years 1999,  1998, 1997, 1996, and 1995, the Company reported
     net income of $397,000,  $1,520,000,  $733,000,  $604,000,  and $1,116,000,
     respectively.  Net income for 1999 and 1998  includes  the  results for its
     CATG subsidiary  subsequent to its acquisition  effective November 1, 1997.
     Excluding  the results for CATG,  the Company had net income of  $1,439,000
     and  $1,799,000  for 1999 and 1998,  respectively.  The  Company's  profits
     during  these five years were  achieved  primarily as a result of expanding
     and improving its lease  originations,  asset  management,  remarketing and
     leased  equipment sales  activities and the sale of other corporate  assets
     and the settlement of litigation.

     During fiscal year 1999 the Company:

     *    generated profits for the seventh consecutive year

     *    renewed  it's senior  secured  debt  facility  with an increase in the
          commitment  amount under the Warehouse Credit Facility and the Working
          Capital Facility to $61,250,000 and $6,900,000, respectively

     *    continued to invest in its sales force  through an extensive  training
          program and personnel expansion

     *    originated leases exceeding $266 million

     *    closed a new $50 million lease securitization facility

     *    added two new private investment programs

     *    established a new subsidiary to remarket off-lease  commercial quality
          used personal computers, monitors and printers

     *    increased  net   investment  in  direct   finance  leases  and  leased
          equipment, net by $56 million.

     Significant  factors  which may impact the Company's  profitability  in the
     future include the amount of capital available to the Company, it's success
     in developing and retaining the field sales force,  the cost of capital and
     the  ability  to  increase  lease   origination   levels  while   achieving
     profitability   targets.   Several  factors  cause  operating   results  to
     fluctuate,  including (i) the level of fee income obtained from the sale of
     leases in excess of lease  equipment  cost,  (ii) the  seasonality of lease
     originations,  (iii) the volume of leases  maturing in a particular  period
     and the resulting gain on remarketing,  and (iv) variations in the relative
     percentages  of  the  Company's  leases   originated  and  held  which  are
     classified  as DFLs or OLs.  The  Company  varies the volume of  originated
     leases held  relative to leases sold to private  investors  when and as the
     Company  determines  that it would be in its best  interests,  taking  into
     account cash flow needs,  profit  opportunities,  portfolio  concentration,
     residual risk and its fiduciary duty to originate leases for its PIFs.

     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 to fall with interest  rates,  although lease rate movements  generally
     lag interest rate movements.


                                    9 of 36

<PAGE>


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

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

     The Company  originates  leases with the  intention  of either  selling the
     lease to PIFs or private  investors or holding the lease through  maturity.
     Leases originated and held for sale are referred to as "warehouse  leases",
     or "warehouse  portfolio".  Leases the Company  intends to hold to maturity
     are referred to as "Company-owned leases or "Company-owned  portfolio". The
     Company  generally holds warehouse leases for one to six months before sale
     to private investors. Leases held to maturity are generally more profitable
     than leases  sold to private  investors,  i.e.,  aggregate  leasing  margin
     earned over the life of the lease is generally  greater than the fee earned
     from sale to private  investors (which includes rents retained in excess of
     interest expense during the holding period).  However,  the majority of the
     Company's leases are ultimately sold to PIFs or private  investors  because
     (i) the Company  lacks the capital  resources  to hold until  maturity  all
     leases it  originates  and (ii) in order to achieve  profitable  results of
     operations,  since revenue from a sale of a lease to a private  investor is
     recorded  in the period of sale while  leasing  revenue  associated  with a
     Company-owned  lease is recorded  over time based on the  underlying  lease
     term. Many sales to private  investors are structured to enable the Company
     to share in some of the additional  profit  associated with holding a lease
     to  maturity.  The  Company's  strategy  is to  retain an  interest  in the
     residual  value of  leases  sold to  private  investors  where it  believes
     additional profit may be available through remarketing upon lease maturity.
     The Company's  retained interest in leases it has sold to private investors
     is reflected in the accompanying  Consolidated  Balance Sheets as "Residual
     value, net, arising from equipment under lease sold to private  investors",
     (also referred to as "retained  residuals").  Presented below is a schedule
     showing  new  lease   originations   volume  and  placement  of  new  lease
     originations by fiscal year (in thousands).

<TABLE>
<CAPTION>
                                                                                                       Years Ended May 31,
                                                                                            ----------------------------------------
                                                                                               1999            1998           1997
                                                                                            ---------       ---------      ---------
    <S>                                                                                    <C>             <C>            <C>
     Placement:
       Equipment under lease sold to PIFs                                                   $  14,000       $  47,000      $  63,000
       Equipment under lease sold to private investors                                        144,000         176,000        101,000
       Leases added to the Company's lease portfolio (a significant portion
          of which will be/were sold during the subsequent fiscal years)                      108,000          87,000         67,000
                                                                                            ---------       ---------      ---------
     Total lease origination volume                                                         $ 266,000       $ 310,000      $ 231,000
                                                                                            =========       =========      =========

</TABLE>


     The Company continues to evaluate  additional sources of capital which will
     provide the  liquidity  necessary to add leases to its own  portfolio.  The
     goal of such  financing  is to 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.  Additionally,  many such leases have been
     sold to the PIFs because,  as the 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.  Consequently,  the  Company has limited the amount of
     funds it raises from PIF  investors.  During fiscal year 1998,  the Company
     completed the offering of units in its most recent PIF,  Capital  Preferred
     Yield  Fund-IV,  L.P.  (CPYF-IV).  The  Company has elected not to organize
     additional  PIFs  and  future  equipment  sales to PIF's  are  expected  to
     comprise a  significantly  smaller  percentage  of total  placements of new
     lease originations.  Should the Company be successful in identifying and in
     closing new sources of capital  (for which no assurance  can be given),  it
     intends to further grow its own lease portfolio.


                                    10 of 36

<PAGE>

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

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

     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 that follows (in thousands):

<TABLE>
<CAPTION>

                                        YEARS ENDED MAY 31,                          YEARS ENDED MAY 31,
                                     -------------------------                     -----------------------
     CAI CONSOLIDATED                   1999           1998          CHANGE          1998           1997          CHANGE
     ----------------                ----------     ----------      ---------      ---------     ---------      ---------

    <S>                             <C>            <C>             <C>            <C>           <C>            <C>
     Equipment sales margin          $   6,181      $   7,556       $ (1,375)      $  7,556      $  4,527       $  3,029
     Leasing margin                     15,354          7,764          7,590          7,764         5,492          2,272
     Other income                        4,623          4,228            395          4,228         3,741            487
     Operating and other expenses      (15,513)       (11,830)        (3,683)       (11,830)       (9,568)        (2,262)
     Provision for losses                 (555)          (705)           150           (705)         (365)          (340)
     Interest expense, net              (9,693)        (5,493)        (4,200)        (5,493)       (3,084)        (2,409)
     Income taxes                            -              -              -              -           (10)            10
                                     ---------      ---------       --------       --------      --------       --------
     Net income                      $     397      $   1,520       $ (1,123)      $  1,520      $    733       $    787
                                     =========      =========       ========       ========      ========       ========


                                        YEARS ENDED MAY 31,                          YEARS ENDED MAY 31,
                                     -------------------------                     -----------------------
     CAI WITHOUT CATG                   1999           1998          CHANGE          1998           1997          CHANGE
     ----------------                ----------     ----------      ---------      ---------     ---------      ---------

     Equipment sales margin          $  3,731       $  6,152        $ (2,421)      $  6,152      $  4,527       $  1,625
     Leasing margin                    15,354          7,764           7,590          7,764         5,492          2,272
     Other income                       4,623          4,228             395          4,228         3,741            487
     Operating and other expenses     (12,465)       (10,348)         (2,117)       (10,348)       (9,568)          (780)
     Provision for losses                (479)          (635)            156           (635)         (365)          (270)
     Interest expense, net             (9,325)        (5,361)         (3,964)        (5,361)       (3,084)        (2,277)
     Income taxes                           -              -               -              -           (10)            10
                                     --------       --------        --------       --------      --------       --------
     Net income                      $  1,439       $  1,800        $   (361)      $  1,800      $    733       $  1,067
                                     ========       ========        ========       ========      ========       ========


                                        YEARS ENDED MAY 31,                        YEAR ENDED   SEVEN MONTHS
                                     -------------------------                       MAY 31,    ENDED MAY 31,
     CATG                               1999           1998          CHANGE           1998          1997          CHANGE
     ----                            ----------     ----------      ---------      ----------   -------------   ---------

     Equipment sales margin          $  2,450       $  1,404        $  1,046       $  1,404      $      -       $  1,404
     Operating and other expenses      (3,048)        (1,482)         (1,566)        (1,482)            -         (1,482)
     Provision for losses                 (76)           (70)             (6)           (70)            -            (70)
     Interest expense, net               (368)          (132)           (236)          (132)            -           (132)
                                     --------       --------        --------       --------      --------       --------
            Net loss                 $ (1,042)      $   (280)       $   (762)      $   (280)     $      -       $   (280)
                                     ========       ========        ========       ========      ========       ========

</TABLE>


     EQUIPMENT SALES

     Equipment sales revenue and the related margin  (including  retail sales of
     new  information  technology  equipment by the Company's  CATG  subsidiary)
     consist of the following (in thousands):


                                    11 of 36

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

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

     EQUIPMENT SALES, continued

<TABLE>
<CAPTION>
                                                                      Years Ended May 31,
                                                        --------------------------------------------           Increase
                                                                 1999                   1998                  (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                 $  18,996   $    437    $  48,648   $  1,090    $ (29,652)   $   (653)
     Equipment under lease sold to private investors      143,910      2,013      179,408      2,204      (35,498)       (191)
                                                        ---------   --------    ---------   --------    ---------    --------
                                                          162,906      2,450      228,056      3,294      (65,150)       (844)
                                                        ---------   --------    ---------   --------    ---------    --------
     Transactions subsequent to initial lease
     term (remarketing revenue):
     Sales of off-lease equipment                           2,360        363        3,723        885       (1,363)       (522)
     Sales-type leases                                         56         56          322        156         (266)       (100)
     Excess collections (cash collections in excess
     of the associated residual value from equipment
     under lease sold to private investors)                   570        570        1,622      1,622       (1,052)     (1,052)
                                                        ---------   --------    ---------   --------    ---------    --------
                                                            2,986        989        5,667      2,663       (2,681)     (1,674)
     Deduct related provision for losses                        -       (555)           -       (705)           -         150
                                                        ---------   --------    ---------   --------    ---------    --------
     Realizations of value in excess of provision for
     losses                                                 2,986        434        5,667      1,958       (2,681)     (1,524)
     Add back related provision for losses                      -        555            -        705            -        (150)
                                                        ---------   --------    ---------   --------    ---------    --------
                                                            2,986        989        5,667      2,663       (2,681)     (1,674)
     Equipment brokerage sales                                874        292          650        196          224          96
     CATG sales                                            27,148      2,450       13,885      1,403       13,263       1,047
                                                        ---------   --------    ---------   --------    ---------    --------
     Total equipment sales                              $ 193,914   $  6,181    $ 248,258   $  7,556    $ (54,344)   $ (1,375)
                                                        =========   ========    =========   ========    =========    ========

                                                                      Years Ended May 31,
                                                        --------------------------------------------           Increase
                                                                 1999                   1998                  (Decrease)
                                                        ---------------------   --------------------    ---------------------
                                                         Revenue     Margin      Revenue     Margin      Revenue      Margin
                                                        ---------   --------    ---------   --------    ---------    --------
     Transactions during initial lease term:
     Equipment under lease sold to PIFs                 $  48,648   $  1,090    $  66,987   $  1,442    $ (18,339)   $   (352)
     Equipment under lease sold to private investors      179,408      2,204      131,600      1,768       47,808         436
                                                        ---------   --------    ---------   --------    ---------    --------
                                                          228,056      3,294      198,587      3,210       29,469          84
                                                        ---------   --------    ---------   --------    ---------    --------
     Transactions subsequent to initial lease
     term (remarketing revenue):
     Sales of off-lease equipment                           3,723        885        5,142        679       (1,419)        206
     Sales-type leases                                        322        156           71         69          251          87
     Excess collections (cash collections in excess
     of the associated residual value from equipment
     under lease sold to private investors)                 1,622      1,622          528        528        1,094       1,094
                                                        ---------   --------    ---------   ---------    ---------   --------
                                                            5,667      2,663        5,741      1,276          (74)      1,387
     Deduct related provision for losses                        -       (705)           -       (365)           -        (340)
                                                        ---------   --------    ---------   --------    ---------    --------
     Realizations of value in excess of provision for
     losses                                                 5,667      1,958        5,741        911          (74)      1,047
     Add back related provision for losses                      -        705            -        365            -         340
                                                        ---------   --------    ---------   --------    ---------    --------
                                                            5,667      2,663        5,741      1,276          (74)      1,387
     Equipment brokerage sales                                650        196          217         41          433         155
     CATG sales                                            13,885      1,403            -          -       13,885       1,403
                                                        ---------   --------    ---------   --------    ---------    --------
     Total equipment sales                              $ 248,258   $  7,556    $ 204,545   $  4,527    $  43,713    $  3,029
                                                        =========   =========   =========   ========    =========    ========
</TABLE>
                                    12 of 36

<PAGE>

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

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

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

     In February 1998, the Company sold the remaining  publicly offered units in
     Capital  Preferred  Yield  Fund-IV,  L.P.  The  Company  has elected not to
     organize  additional PIFs and only two PIFs are in their reinvestment stage
     and are actively  acquiring  leases.  Consequently,  equipment sales margin
     arising  from  equipment  under lease sold to PIF's has  declined  and will
     continue to decline.  In addition,  fees and  distributions  from the PIF's
     (reported as "Other Income") has also declined.

     Equipment  sales to the PIFs decreased  during fiscal year 1998 as compared
     to  fiscal  year  1997  because  three  of the PIFs  were in their  planned
     liquidation  stage and two of the PIFs had been  liquidated in 1998. Once a
     PIF enters the liquidation  stage,  it no longer  acquires  equipment under
     lease. Two PIFs were actively  acquiring leases in 1998 as compared to four
     PIFs which were actively acquiring leases in 1997.

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

     Equipment sales to private investors decreased in fiscal year 1999 compared
     to fiscal  year 1998  principally  because  1998  results  reflect a large,
     one-time  portfolio  acquisition  the majority of which was sold to private
     investors.  Equipment sales to private  investors  increased in fiscal year
     1998  compared to fiscal  year 1997  principally  because of the  increased
     volume of lease originations. The Company has, in recent years, invested in
     its lease origination sales force through extensive  training and personnel
     expansion,   adopted  a  strategy  of  vertical   integration   (i.e.,  the
     development  of  specialized  equipment  and  remarketing   expertise)  and
     established  strategic  alliances  with  investors  having a lower  cost of
     capital enabling the Company to originate and to sell leases at competitive
     prices.

     The Company defers income related to its servicing  obligation on leases it
     sells.  This income is amortized over the life of the lease and is included
     in Other Income.

     Equipment Brokerage Sales
     -------------------------

     NBCO acquires used personal computers, monitors and printers from a variety
     of sources, including end-users and other lessors. The equipment is sold in
     quantity to third parties or to consumers through NBCO's retail facilities.

     Revenue from equipment brokerage sales increased during fiscal year 1999 as
     a result of sales to consumers through NBCO's retail  facilities.  Prior to
     1999,  equipment  brokerage sales generally  consisted of quantity sales to
     third  parties.  Equipment  brokerage  sales  increased in fiscal year 1998
     compared  to  fiscal  year  1997  because  in 1998  the  Company  dedicated
     personnel to pursuing such sales.  Prior to 1998,  Company  personnel  were
     devoted only part-time to this activity.

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

     The Company  has  successfully  realized  gains on the  remarketing  of its
     portfolio  of  equipment   after  the  initial  lease  term  for  the  past
     twenty-eight  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 is
     recorded  as  provision  for  losses  (which is  typically  not known until

                                    13 of 36


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

     until remarketing after the expiration of the initial lease term). As shown
     in the tables above, the realizations from sales exceeded the provision for
     losses for fiscal  years  1999,  1998 and 1997,  even  without  considering
     realizations from remarketing activities recorded as leasing margin.

     Remarketing  revenue  and the  related  margins  from  sales  (i.e.,  sales
     occurring  after the initial lease term) are affected by the number and the
     dollar  amount of equipment  leases that mature in a  particular  year (the
     average  lease  term  is 3 to 5  years).  Remarketing  revenue  and  margin
     declined in 1999 as a result of a low-level of leases  maturing  during the
     period. That low level of leases reflects the Company's low level of leases
     originated  during the  mid-1990's.  Because lease  originations  have been
     increasing  since that time,  leases  maturing  subsequent to 1999 are also
     increasing, therefore the Company expects remarketing revenue and margin to
     increase during fiscal year 2000.

     The  provision  for losses of  $555,000  recorded  during  fiscal year 1999
     consisted of:

     *   $479,000  attributable  to leases  having a net book value of  $671,000
         with a lessee who filed for bankruptcy  protection  under Chapter 11 of
         the Bankruptcy  Code during the third quarter fiscal 1999 and has begun
         the process of  liquidating  its  business.  The carrying  value of the
         leased  equipment was reduced to reflect the Company's best estimate of
         its recoverable value upon liquidation.

     *   $76,000 arising from the write-off of bad debts for CATG.

     The  provision  for losses  recorded  during  fiscal year 1998 included the
     following significant items:

     *   Other-than-temporary  declines in the value of equipment which occurred
         primarily because lessees returned  equipment to the Company at the end
         of leases. The Company had previously  expected to realize the carrying
         value of such equipment  through lease renewals and proceeds from sales
         of the equipment to the original lessees.  The fair market value of the
         equipment  re-leased or sold to third parties is considerably less than
         was anticipated.

     *   Approximately $185,000 for two off-lease commuter aircraft. The Company
         engaged MCC  Financial  Corporation  ("MCC"),  the  Company's  majority
         stockholder  and  a  commuter  aircraft  remarketer,  to  remarket  the
         aircraft.  That agent  determined  that the aircraft  could be released
         within a reasonable remarketing period for an amount that would recover
         the  Company's  full  carrying  value  over  time,  or  sold  for  cash
         immediately  but at a book  loss.  The  Company  elected  to  sell  the
         aircraft  immediately after determining that the proceeds could be more
         effectively  redeployed in its vertical integration  activities and for
         the equity portion of a potential financing program for leases.

     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.

                                    14 of 36


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

     *    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.

     CATG

     CATG activities consist primarily of the sale of new information technology
     hardware.  In  conjunction  with  the sale of  hardware,  CATG  also  sells
     software and  services.  Revenue from such sources is not material to total
     CATG  sales.   CATG's   revenue  and  margin  have  been  included  in  the
     accompanying  financial  statements  since  November  1, 1997,  the date of
     acquisition.

     Since its  acquisition,  the  Company  has  invested  significant  time and
     capital  resources  into CATG in order to extend  its  capabilities  beyond
     CATG's traditional regional market to CAI's customers throughout the United
     States.  The costs associated with this effort primarily include additional
     salaries and wages,  training,  and travel and  expenses.  CATG has not yet
     realized a material amount of revenue from this effort. Consequently, costs
     in excess of revenues from the national effort have resulted in an increase
     in net loss from operations of approximately  $600,000 for fiscal year 1999
     compared to fiscal year 1998.  In addition,  in the fourth  quarter 1999, a
     charge of  $500,000  was  recorded  to  reflect  adjustments  to  equipment
     purchases payable. CATG interest expense increased  approximately  $200,000
     because  (i) the prior  year  results  reflected  less than  twelve  months
     results  and (ii)  the  acquisition  term  loan  utilized  to  finance  the
     acquisition  of CATG closed on May 31,  1999.  Prior to that time,  CAI had
     temporarily financed the acquisition of CATG utilizing internally generated
     funds and did not allocate any internal  interest  expense to CATG.  CAI is
     presently  evaluating its strategic  options for improving CATG's operating
     results.

     LEASING MARGIN

     Leasing margin consists of the following (in thousands):

                                                    Years Ended May 31,
                                           ------------------------------------
                                             1999          1998          1997
                                           --------      --------      --------

     Leasing revenue                       $ 42,614      $ 25,101      $ 14,420
     Leasing costs and expenses             (27,260)      (17,337)       (8,928)
                                           --------      --------      --------
     Leasing margin                        $ 15,354      $  7,764      $  5,492
                                           ========      ========      ========

     The  increase in leasing  revenue,  leasing  costs and expenses and leasing
     margin  is  due  to  the  increase  in the  volume  of  lease  originations
     warehoused  pending sale to private  investors  and growth in the Company's
     lease  portfolio.  Subject to the  Company's  ability to obtain  additional
     funding, these revenue and expense amounts are expected to increase further
     as the Company  continues  to grow its lease  portfolio,  and  increase the
     amount of leases warehoused pending sale.

     Leasing  margin  may  fluctuate  based  upon (i) the mix of direct  finance
     leases  and  operating  leases,  (ii)  remarketing  activities,  (iii)  the
     relative age and types of leases in the portfolio  (operating leases have a
     lower leasing margin early in the lease term, increasing as the term passes
     and the majority of leases  added to CAI's  portfolio  have been  operating
     leases).

                                    15 of 36

<PAGE>

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

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

     OTHER INCOME

     Other income consists of the following (in thousands):

                                                         Years Ended May 31,
                                                  ------------------------------
                                                   1999         1998      1997
                                                  -------     -------    -------

     Fees and distributions from PIFs             $ 2,757     $ 3,114    $ 2,453
     Fees from private leasing programs             1,068         451         38
     Interest on installment sale of equipment        198         443        769
     Gain on sale of installment sale note            423           -          -
     Other                                            177         220        481
                                                  -------     -------    -------
                                                  $ 4,623     $ 4,228    $ 3,741
                                                  =======     =======    =======

     For the reasons discussed under EQUIPMENT SALES TO PIFs, the amount of fees
     and distributions from PIF's declined in 1999 and is expected to decline in
     future years.

     The Company  recorded an installment  sale contract in connection  with the
     settlement agreement reached with respect to the Hemmeter Litigation (which
     is discussed in Note 12 of Notes to  Consolidated  Financial  Statements to
     the 1996  Form  10-K).  During  fiscal  years  1999 and 1998,  the  Company
     received $483,000 and $650,000,  respectively,  of cash payments related to
     the installment sale note. In the third quarter of fiscal 1999, the Company
     sold the installment sale contract, which had a carrying value of $246,000,
     to the parent company of the debtor for $669,000.

     OPERATING AND OTHER EXPENSES

     Operating and other expenses increased approximately $3.7 million (31%) for
     fiscal year 1999 compared to fiscal year 1998.  Approximately  $1.6 million
     of the  increase  was due to an  increase in CATG  expenses.  Approximately
     $1,000,000  of the  increase  in  CATG  expenses  reflects  a full  year of
     operations in 1999 compared to seven months of operations reflected in 1998
     and $600,000 of the increase reflects costs associated with building CATG's
     national sales  capabilities.  The remaining  increase was due primarily to
     costs  associated  with the Company's  investment  in its retail  marketing
     infrastructure  (i.e.,  personnel  training costs associated with new sales
     representatives)  and NBCO  subsidiary.  Operating and other  expenses also
     includes a charge of $130,000 to reflect the write-off of costs  associated
     with an unsuccessful subordinated debt offering.

     Operating and other  expenses  increased $2.3 million (24%) for fiscal year
     1998 as  compared to fiscal year 1997.  Approximately  $1.5  million of the
     increase in fiscal 1998 was due to CATG  expenses  which have been included
     in the  consolidating  financial  statements  since the acquisition date of
     November  1,  1997.  The  remaining  increase  was due  primarily  to costs
     associated   with  the  Company's   investment  in  its  retail   marketing
     infrastructure.




                                    16 of 36

<PAGE>

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

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

     INTEREST EXPENSE, NET

     Interest expense, net consists of the following (in thousands):

                                                 1999         1998        1997
                                                 ----         ----        ----

     Interest income                          $ (2,219)    $ (3,487)   $ (4,828)
     Non-recourse interest expense               8,503        6,123       6,012
                                              --------     --------    --------
       Net non-recourse interest expense         6,284        2,636       1,184
     Recourse interest expense                   3,409        2,857       1,900
                                              --------     --------    --------
       Interest expense, net                  $  9,693     $  5,493    $  3,084
                                              ========     ========    ========

     The  Company   finances  leases  for  its  own  portfolio   primarily  with
     non-recourse  debt.  Interest  income arises when  equipment  financed with
     non-recourse  debt is sold  to  investors.  As a  result,  interest  income
     reported in the accompanying  Consolidated Statements of Income includes an
     amount equal to the  non-recourse  interest  expense on financed  equipment
     sold to investors.  Therefore, net non-recourse interest expense on related
     discounted  lease rentals  pertains to the Company's owned lease portfolio.
     Such amount increased due to growth in the Company's owned portfolio. It is
     anticipated  that  net  non-recourse  interest  expense  will  continue  to
     increase in the future as the Company adds additional  leases financed with
     non-recourse debt to its portfolio.

     Recourse  interest  expense  increased  during fiscal year 1999 compared to
     fiscal  year  1998  primarily  due to (i)  increased  borrowings  under the
     Company's  Senior  Facility used to fund the growth in the number of leases
     the Company  holds for sale to private  investors,  and (ii) leases held in
     the Company's own portfolio  financed through its  Securitization  facility
     (which has a  recourse  component).  Recourse  interest  expense  increased
     during  fiscal  year 1998  compared to fiscal  year 1997  primarily  due to
     increased  borrowings under the Company's  Warehouse  Facility used to fund
     the growth in the number of leases  the  Company  holds for sale to private
     investors.

     INCOME TAXES

     As shown in the  table  in Note 12 of Notes to the  Consolidated  Financial
     Statements,  the Company's  significant  deferred tax assets consist of ITC
     carryforwards of approximately  $600,000 (which expire in fiscal years 2000
     and 2001), NOL  carryforwards of approximately  $700,000 (which expire from
     2013  through  2014) and  alternative  minimum tax ("AMT")  credits of $4.6
     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
     (see  discussion  below).  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 1999, 1998 and 1997 was approximately 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  1999,  1998 and 1997 was less than the
     effective  rate of 40%  primarily  due to the  reduction  in the  valuation
     allowance.  The decrease  in the valuation  allowance  recorded  in  fiscal

                                    17 of 36

<PAGE>

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

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

     INCOME TAXES

     1999 and 1998  represented the utilization of an ITC carryforward for which
     a valuation  allowance had been provided,  and reduction in the uncertainty
     about future  utilization of ITC  carryforwards  prior to expiration as the
     Company  continued to report net income from operations.  The reductions in
     the valuation  allowance  recorded  during the years ended May 31, 1999 and
     May 31, 1998  resulted in income tax  benefits  of $100,000  and  $464,000,
     respectively.  The reduction of the valuation  allowance recorded in fiscal
     1997  represented the utilization of an ITC carryforward and the receipt of
     a state  income  tax  refund  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 net  deferred  income tax
     assets, net of the valuation allowance.

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
     and  Securitization  proceeds,  recourse bank debt (see Note 10 of Notes to
     Consolidated Financial Statements),  rents, fees and distributions from its
     PIFs and private  investors,  and sales or re-leases of equipment after the
     expiration of the initial lease terms.  In addition,  the Company  finances
     receivables  of its CATG  subsidiary  primarily  under an agreement  with a
     specialized  finance company.  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.

     On December  20,  1998,  Capital  Associates  International  Inc.  ("CAII")
     obtained $15 million in committed  non-recourse  financing from NationsBanc
     Leasing Corporation. CAII may use the committed financing at its discretion
     to finance leases under a warehousing  arrangement.  The loan is secured by
     lease transactions financed under the facility only. The loan was primarily
     underwritten  utilizing the underlying credit quality of the leases pledged
     as collateral under the facility.  The interest rate option associated with
     the facility is Prime rate minus 0.25% or LIBOR plus 2.5% (7.75% & 4.90% at
     May 31, 1999,  respectively).  The Company is required to pay a fee of 0.2%
     of the unused  commitment  quarterly.  The  outstanding  balance  under the
     facility  at May 31,  1999 was $1.3  million.  The  loan is  included  with
     "Discounted lease rentals" in the accompanying consolidated Balance Sheets.
     The  facility  contains  general  operating  and  reporting   requirements,
     however,  no formal financial covenants are required of CAII. As of May 31,
     1999, CAII was in compliance with the terms of the facility.

     Historically,   the  Company  sold  a  significant  portion  of  its  lease
     originations  to the PIFs.  During fiscal 1998,  the Company  completed the
     offering of units in the most recent PIF, Capital  Preferred Yield Fund-IV.
     The Company has elected  not to  organize  additional  PIFs.  Consequently,
     future equipment sales to PIFs will reflect only the reinvestment  needs of
     the existing PIFs, and therefore are expected to represent  smaller amounts
     of equipment sales margin and cash flow.

                                    18 of 36

<PAGE>


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

II.  Liquidity and Capital Resources, continued
     -------------------------------

     Leases that, in the past,  would have been originated for sale to the PIF's
     are now being  retained  by the  Company.  This  strategy  is  expected  to
     increase the Company-owned  leased portfolio.  Increases in the size of the
     Company's  lease portfolio are expected to result in an increase in (a) the
     Company's revenue and ultimate  profitability and (b) the amount of capital
     needed to fund leasing activities.  The Company finances leases for its own
     portfolio  on a  long-term  basis  utilizing  the  Securitization  facility
     described  in  Note  9  to  Notes  to  Consolidated  Financial  Statements.
     Securitization  generally  provides  financing  for  90-95%  of the cost of
     leased equipment.  The remaining cost of the equipment (also referred to as
     "equity capital") is financed  utilizing  availability  under the Company's
     recourse debt facility and/or cash from operations.

     In addition,  the Company has significantly  increased the amount of leases
     it is holding in its warehouse  portfolio.  The Company generally  finances
     leases it holds  pending  sale  utilizing  borrowings  under the  Warehouse
     Credit Facility  portion of its Senior Facility equal to 95% of the cost of
     the leased equipment,  and equity capital for the remainder of the cost. In
     addition,  the Company has originated  certain leases  intended for sale to
     investors which are not eligible for financing  under the Warehouse  Credit
     Facility.  In such cases, equity capital is utilized to finance 100% of the
     cost of the leased equipment.

     The Company has  significantly  increased  its  investment in its portfolio
     (comprising both the  Company-owned  and warehouse  portfolios)  during the
     most recent two fiscal years, as reflected in the following balances, as of
     May 31 of its most recent three fiscal year ends:

                                                       Years Ended May 31,
                                                --------------------------------
                                                  1999        1998        1997
                                                ---------   ---------   --------

     Net investment in direct finance leases    $  42,116   $  31,181   $  7,700
     Leased equipment, net                        150,338     104,825     71,443
                                                ---------   ---------   --------
                                                $ 192,454   $ 136,006   $ 79,143
                                                =========   =========   ========

     The  increasing  investment in the portfolio has also caused an increase in
     accounts  receivable at May 31, 1999 compared to May 31, 1998. The trend of
     increasing  investment in leases has continued through August 31, 1999. The
     increases  in  leases  and  related   accounts   receivable  have  required
     significant investment of equity capital.

     During 1999, the Company  significantly  increased its Equipment  Brokerage
     Sales.  Such sales entail the  acquisition  of inventory  for sale to third
     parties and for sale to consumers  through the NBCO retail  stores.  At May
     31,  1999,   inventory  held  for  equipment  brokerage  sale  amounted  to
     approximately  $1 million.  The Company  finances the  inventory  utilizing
     availability under its Working Capital Facility. Utilization of the Working
     Capital Facility directly reduces the amount of "equity capital"  available
     to invest in leases.

     To enable the Company to continue to add leases to its  portfolio,  it must
     increase the  availability  of equity capital.  Its primary  strategy is to
     sell  existing  leases in its warehouse  portfolio to private  investors in
     order to "free-up"  previously  invested equity capital.  In addition,  the
     Company is evaluating  additional sources of capital which will provide the
     liquidity  necessary to continue to add leases to its portfolio,  including
     the sale of Company-owned leases, the sale of retained residuals,  a public
     debt offering and the sale of non-leasing  related assets.  There can be no
     assurance that the Company will be successful in selling existing leases to
     private investors, or in raising additional equity capital.

                                    19 of 36

<PAGE>

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

II.  Liquidity and Capital Resources, continued
     -------------------------------

     The  Company's   Senior   Facility  was  expanded  during  fiscal  1999  to
     approximately   $71  million.   The  terms  of  the  Senior   Facility  are
     substantially  unchanged  and expire on November 26,  2000.  See Note 10 to
     Notes  to  Consolidated  Financial  Statements  for a  description  of  the
     Company's  Senior  Facility.  As of May 31,  1999,  the  Company was not in
     compliance with the Interest Coverage  Covenant,  as defined,  for which it
     received a waiver from its Lenders in August  1999.  The waiver  included a
     temporary  reduction in the minimum interest  coverage ratio for the fiscal
     quarters  ended May 31,  1999,  August 31, 1999 and  November  30, 1999 and
     amended (in a manner favorable to the Company) certain  definitions used in
     calculating certain of the Company's financial covenants.  After that time,
     the minimum  interest  coverage  ratio will return to its prior  level.  In
     connection  with the execution of the waiver,  Messrs.  Buckland and Walker
     loaned the Company $350,000 on a subordinated basis. See Part III, Item 13,
     below for  discussion  of the terms of this loan. No assurance can be given
     that  the  Company  will be able to  achieve  the  level  of  profitability
     necessary to remain in compliance  with the Interest  Coverage  Covenant in
     the  future.  Should  the  Company  not  remain  in  compliance,  it  would
     constitute an Event of Default, as defined in the bank agreement, and there
     is no assurance  that the Lenders would again grant a waiver.  In the event
     of a default  there is no  assurance  that the  Lenders  would  continue to
     provide  advances  to the  Company.  Should the  Lenders no longer  provide
     advances to the  Company,  its ability to continue to operate its  business
     would be significantly impaired.

     The Company  finances  receivables  and inventory  for its CATG  subsidiary
     under an  agreement  with  Deutsche  Financial  Services.  At May 31, 1999,
     accounts receivable,  net included $4,502,000 of receivables related to the
     Company's  CATG  subsidiary  which  were  eligible   collateral  under  the
     financing agreement.

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

     YEAR 2000 ISSUES

     The  Company  has  conducted  a   comprehensive   review  of  its  internal
     information  technology  ("IT")  systems to identify  systems that could be
     affected by the Year 2000 issue.  The Year 2000 issue results from computer
     programs  being  written  using two digits  rather  than four to define the
     applicable  year.  Certain  computer  programs  which  have  time-sensitive
     software could recognize a date using "00" as the year 1900 rather than the
     year 2000. This could result in major system  failures or  miscalculations.
     The Company is in the process of upgrading or replacing  all  components of
     its IT systems  which were  identified  as being  affected by the Year 2000
     issue. At the present time, the Company has completed  upgrades and testing
     of the upgrades  for all  components  of its IT systems  except its primary
     application software which controls the Company's financial records,  asset
     management  detail,  and billing records.  The Company has fully identified
     all aspects of the application software which have Year 2000 issues and has
     commenced the process of upgrading the software.  The Company  expects that
     the new  upgrades  will be fully  operational  by December  31,  1999,  and
     therefore  will be fully Year 2000  compliant.  The Company does not expect
     any other changes  required for the Year 2000 to have a material  effect on
     its financial  position or results of operations.  As such, the Company has
     not  developed  any  specific  contingency  plans in the  event it fails to
     complete the upgrades by December 31, 1999. However,  should the Company be
     unsuccessful in completing the necessary upgrades by December 31, 1999, the
     Company  does not expect  there will be a  material  adverse  effect on the
     Company's financial position or results of operations. The Company believes
     it could continue to operate  utilizing manual  procedures until all system
     upgrades are completed.  However,  there could be a negative  impact on the
     Company's ability to realize expected cash flows from leased equipment on a
     timely  basis due to billing  or  collection  problems  which  could  arise
     related  to Year  2000  issues.  While it is  expected  that the  Company's
     ability to ultimately realize all expected cash flows will not be impacted,
     delays  in  collecting  cash  flows  would  have  a negative  impact on the
     liquidity and financial resources.

                                    20 of 36

<PAGE>


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

II.  Liquidity and Capital Resources, continued
     -------------------------------

     YEAR 2000 ISSUES, continued

     To date,  costs  associated with Year 2000 readiness have been  immaterial.
     The Company expects that any additional  costs of being Year 2000 compliant
     will be immaterial.

     Some risks  associated  with the Year 2000 problem are beyond the Company's
     ability to control,  including the extent to which  lessees,  suppliers and
     service  providers  can address their Year 2000  problems.  The Company has
     received   correspondence  from  substantially  all  significant   lessees,
     suppliers and service providers  representing  their expected  readiness in
     regards to the ability to do business  after December 31, 1999. The Company
     cannot estimate,  therefore, the impact on it if third parties are not Year
     2000 compliant.  The failure by a lessee or supplier to adequately  address
     the Year 2000 issue  could  hurt the lessor or  supplier  and  disrupt  the
     Company's business. The most likely worst case Year 2000 scenario is if one
     or more lessee's  business is disrupted by Year 2000 problems and is unable
     to  remit  lease  payments  on a  timely  basis.  Such  a  situation  could
     negatively  impact the  Company's  cash flow and  liquidity for a period of
     time. However,  because  substantially all of the Company's leases are with
     lessees  of  substantial  credit-worthiness,  it is  expected  that  such a
     disruption would be temporary,  and therefore not have a material impact on
     the Company's financial position or results of operations.


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

     In June 1997, the Financial  Accounting Standards Board issued Statement of
     Financial  Accounting  Standards No. 131,  Disclosures about Segments of an
     Enterprise  and  Related  Information   ("Statement  131").  Statement  131
     provides  guidance for reporting  information  about operating  segments in
     annual financial  statements and requires reporting of selected information
     about operating  segments in interim financial reports of public companies.
     An operating  segment is defined as a component of a business  that engages
     in business activities from which it may earn revenue and incur expenses, a
     component whose operating  results are regularly  reviewed by the company's
     chief  operating  decision  maker,  and  a  component  for  which  discrete
     financial information is available.  Statement 131 establishes quantitative
     thresholds for determining  operating segments of a company.  Statement 131
     is  effective  for fiscal years  beginning  after  December 15, 1997,  with
     earlier  application  permitted.  The Company adopted  Statement 131 in the
     first quarter of 1999 by reporting  operating  segment  information on Form
     10-Q for its leasing and equipment retailing segments.

     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
     Accounting for Derivative  Instruments and Hedging  Activities  ("Statement
     133").  Statement 133  establishes  accounting and reporting  standards for
     derivative  instruments  and for hedging  activities.  It requires  that an
     entity  recognize all  derivatives  as either assets or  liabilities in the
     statement  of  financial  position and measure  those  instruments  at fair
     value. In June 1999, the Financial  Accounting  Standards Board issued SFAS
     No. 137,  Accounting for Derivative  Instruments  and Hedging  Activities -
     Deferral of the Effective  Date of FASB Statement 133, an Amendment of FASB
     Statement 133. Statement 137 effectively  extends the required  application
     of  Statement  133 to fiscal  years  beginning  after June 15,  2000,  with
     earlier application  permitted.  The Company expects to adopt Statement 133
     in the first  quarter of 2000.  The Company does not expect the adoption of
     Statement  133 or  Statement  137  to  have  an  impact  on  its  financial
     reporting.


                                    21 of 36

<PAGE>


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

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

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


                                    PART III

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

The  following  table sets forth (i) the names of the  directors of the Company,
(ii)  their  ages at the  Record  Date and  (iii)  their  tenure on the Board of
Directors:

DIRECTORS

      Name             Age    Position(s) with Company          Director Since
      ----             ---    ------------------------          --------------

William H. Buckland     54           Director                        1995
James D. Edwards        59           Director                        1987
Gary M. Jacobs          52           Director                 1978-1990 and 1994
Robert A. Sharpe II     41           Director                        1996
James D. Walker         54     Chairman of the Board,                1994
                               President, Chief Executive
                               Officer and Director

Mr.  Buckland  has been  Chairman of the Board,  President  and Chief  Executive
Officer of MCC Financial Corporation,  an aircraft and equipment lessor ("MCC"),
since May 1998.  From May 1988 to May 1998,  Mr.  Buckland  was  Chairman of the
Board,  Secretary and Treasurer of MCC. From May 1988 to present,  Mr.  Buckland
has been and continues to be a director and 50% stockholder of MCC.  Immediately
prior to the purchase of MCC in 1988, Mr.  Buckland  held,  from 1978 to 1988, a
number of executive positions at Fairchild Industries, Inc. Mr. Buckland is also
a director of MCC Aircraft Leasing I, Inc., MCC World Aviation Associates, Inc.,
and Capital  Associates  International,  Inc., a wholly-owned  subsidiary of the
Company ("CAII").

                                    22 of 36

<PAGE>

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

DIRECTORS, continued

Mr. Edwards has been retired since 1995.  From May 1989 to May 1995, Mr. Edwards
was President,  Chief Executive Officer and a director of Tricord Systems, Inc.,
a computer  hardware  and  software  development  firm.  From 1987 to 1989,  Mr.
Edwards  was  President  and  Chief  Executive  Officer  of  Telwatch,  Inc.,  a
telecommunications  firm. From 1983 to 1987, Mr. Edwards held various  executive
positions  with AT&T,  including  President of AT&T Computer  Systems.  Prior to
1983,  Mr.  Edwards  held  executive  positions  with  IBM  Corporation,   Xerox
Corporation and Bausch & Lomb. Mr. Edwards is also a director of Chatcom,  Inc.,
Lexicor, Red Hill, Dezignz and CAII.

Mr. Jacobs has been Executive Vice President and Secretary of Corporate Express,
Inc., an office products supply company  ("CEI"),  since July 1995. From 1992 to
July 1995, Mr. Jacobs was also Chief Financial Officer of CEI. From 1990 through
November 1992, Mr. Jacobs served as the President and Chief Executive Officer of
Boulder Retail Finance Corporation, an investment firm controlled by Mr. Jacobs.
From 1978 through mid-1990, Mr. Jacobs served as Executive Vice President and in
various other senior  executive  positions  with the Company and CAII.  Prior to
joining  the  Company,  Mr.  Jacobs  served as a director of finance for Storage
Technology  Corporation,   a  company  which  manufactures  computer  peripheral
devices.  Mr.  Jacobs  served as a director  of the  Company  and CAII from 1978
through  mid-1990  and  is  currently  a  director  of  Boulder  Retail  Finance
Corporation and CAII.

Mr. Sharpe has been Executive Vice President of Fairchild Fasteners,  a fastener
manufacturer,  since July 1996. From July 1994 through June 1996, Mr. Sharpe was
Vice  President,   Corporate  Development  of  Smithfield  Foods,  Inc,  a  food
processor.  Prior to joining  Smithfield Foods,  Inc., Mr. Sharpe had a ten year
career in corporate banking. From 1987 through June 1994, Mr. Sharpe served in a
number  of  capacities  at  NationsBank  Corporation,  a bank  holding  company,
including  Senior Vice  President in charge of  Mid-Atlantic  Corporate  Banking
relationships.  Mr. Sharpe is also a director of the Fairchild  Corporation  and
CAII.

Mr.  Walker has been the President  and Chief  Executive  Officer of the Company
since April 1998.  From May 1988 to May 1998, Mr. Walker was President and Chief
Executive  Officer of MCC.  From May 1988 to  present,  Mr.  Walker has been and
continues to be a director and 50%  stockholder  of MCC. Prior to that time, Mr.
Walker was involved in equipment  lease  management  with Equipment  Leasing and
Financing Corp.  (President 1987- 1988),Thomson  McKinnon  Securities,  Regional
Vice President - Lease Originations from 1986 to 1987 and Finalco, Inc. starting
as  Marketing  Representative  in 1981 and  becoming  Senior Vice  President  of
Marketing.  Prior to that, Mr. Walker held marketing and  engineering  positions
with IBM Corporation and TRW, Inc. Mr. Walker is also a director of MCC Aircraft
Leasing I, Inc., MCC World Aviation Associates, Inc. and CAII.

DIRECTOR COMPENSATION

The Board  amended and restated the  Company's  Board of Directors  Compensation
Policy in Fiscal 1996 (the "Amended Policy"), effective on and as of October 26,
1995.  Pursuant to the Amended  Policy,  the Company  pays each  director  (1) a
$3,750 quarterly retainer ($5,000 for the Chairman of the Board), (2) $1,000 for
each Board meeting  attended,  (3) $1,000 for each committee meeting (other than
Executive  Committee  meetings)  attended,  (4)  consulting  fees for consulting
services at a rate approved by the Board,  and (5) all reasonable  out-of-pocket
expenses of attending such meetings and  performing any consulting  services for
the Company.

Pursuant to a Consulting Agreement with Mr. Buckland,  dated as of June 1, 1996,
the Company paid Mr. Buckland $112,500 for services rendered during Fiscal 1999.
Mr.  Walker became an employee of the Company  effective  April 7, 1998 at which
time his Consulting Agreement with the Company,  dated June 1, 1996,  terminated
and he entered into an Employment Agreement with the Company (the terms of which
are described in Part III, Item 11, below).  Messrs.  Buckland and Walker earned
no incentive compensation during Fiscal 1999.

                                    23 of 36

<PAGE>



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

DIRECTOR COMPENSATION, continued

For Fiscal 1997, the Board's Special  Compensation  Committee decided to provide
incentive  compensation  to each of  Messrs.  Buckland  and Walker  through  the
Company's  assignment  to each of a 2.70735  percent  interest  in the  residual
proceeds derived from certain equipment leased to General Motors.  Such residual
proceeds  will be  realized  and paid over  approximately  seven (7) years.  The
assignments of these  interests is evidenced by  non-recourse  residual  sharing
notes from the Company.  In Fiscal 1997, the Company accrued estimated  expenses
of $50,500, for each of the residual sharing notes,  reducing the Company's book
value for these residuals to reflect this assigned interest to Messrs.  Buckland
and Walker.

For  Fiscal  1998  and  1999,  the  Consulting   Agreements   provide  incentive
compensation  of 4% (the "Base Incentive  Payment  Percentage") of the Company's
pre-tax  earnings  for  each  such  fiscal  year.  The  Base  Incentive  Payment
Percentage is to be adjusted up or down by the percentage  change in the average
closing price of the Company's  stock for the last four months of the applicable
fiscal year, as compared to the same period in the prior fiscal year,  but in no
event will the Base  Incentive  Payment  Percentage be adjusted lower than 3% or
higher than 6%.

For Fiscal 1998, the total  incentive  compensation  earned by Mr.  Buckland was
$96,000 and by Mr.  Walker was  $82,000.  Mr.  Walker's  incentive  compensation
payment was pro-rated to the date his Consulting Agreement was terminated, April
7, 1998.  Of those  amounts,  payment of one-third  has been deferred to June 1,
2001 so that Messrs.  Buckland and Walker have received for Fiscal 1998, $64,000
and $54,667,  respectively, and will receive the balance of $32,000 and $27,333,
respectively, on June 1, 2001, provided each is still a director and/or employee
on that date.

The following  table sets forth the amount of quarterly  retainer fees,  meeting
fees, Executive Committee fees, consulting fees and total fees paid to directors
during Fiscal 1999:

<TABLE>
<CAPTION>

                        Quarterly                        Prior Year   Consulting
    Directors           Retainer         Meeting Fees       Fees         Fees        Total (1)
--------------------    --------         ------------    ----------   ----------     ---------

<S>                    <C>             <C>       <C>        <C>      <C>            <C>
William H. Buckland     $ 15,000        $   9,000 (3)       -0-       $ 112,500      $ 136,500
James D. Edwards        $ 15,000        $   9,000 (3)       -0-            -0-       $  24,000
Gary M. Jacobs          $ 15,000        $   8,000 (4)       -0-            -0-       $  23,000
Robert A. Sharpe II     $ 15,000        $   8,000 (4)       -0-            -0-       $  23,000
James D. Walker         $ 20,000 (2)    $   9,000 (3)    $ 6,250           -0-       $  32,250

</TABLE>

(1)  These  amounts  do not  include  (a)  expense  reimbursements  paid  to the
     directors  during Fiscal 1999 and (b) the value of stock  options that were
     granted to the directors in Fiscal 1999 and prior fiscal years.

(2)  As Chairman of the Board, Mr. Walker's quarterly retainer is $5,000. At Mr.
     Walker's  instructions,  the  Company  paid  $5,000 of  accrued  Board fees
     otherwise payable to Mr. Walker to MCC World Aviation  Associates,  Inc., a
     corporation owned 50% by Mr. Buckland and 50% by Mr. Walker.

(3)  Consists of $1,000 per meeting for 4 regular Board meetings and 4 committee
     meetings.

(4)  Consists of $1,000 per meeting for 4 regular Board meetings and 4 committee
     meetings, and (c) 2 special committee meetings.


                                    24 of 36

<PAGE>

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

DIRECTOR COMPENSATION, continued

For Fiscal 1998, the Company granted under the its  Non-Employee  Director Stock
Option  Plan (the  "Non-Employee  Director  Plan") to each of  Messrs.  Edwards,
Jacobs  and  Sharpe an  option to  acquire  5,000  shares of Common  Stock at an
exercise price of $3.25 per share and to each of Messrs.  Buckland and Walker an
option to acquire  10,000  shares at an exercise  price of $ 3.25 per share (the
"1998 Director Options"). All of the 1998 Director Options vested in full on May
31,  1998,  and will  expire  in June  2008.  The Board  determined  that it was
beneficial  to the Company that Mr.  Walker became an employee of the Company on
April 7, 1998, and waived the forfeiture of his 1998 Director Options.

For Fiscal 1999,  the Company  granted under the  Non-Employee  Director Plan to
each of Messrs.  Edwards, Jacobs and Sharpe an option to acquire 5,000 shares of
Common  Stock at an  exercise  price of $4.125 per share and to Mr.  Buckland an
option to acquire  45,000  shares at an exercise  price of $4.125 per share (the
"1999 Director Options"). All of the 1999 Director Options vested in full on May
31, 1999,  provided each recipient remains as a director and will expire in June
2009. Per Mr. Walker's Employment  Agreement,  the Company granted Mr. Walker an
option to acquire  10,000 shares of Common Stock under the Employee Stock Option
Plan, at an exercise price of $4.125 per share,  which vested in full on May 31,
1999 and will expire in June 2009.

In November  1998,  Mr.  Edwards  exercised  stock  options for 86,250 shares of
common stock with an average  exercise price of $1.53 by paying the par value in
cash of $690.00 and issuing a note payable to the Company equal to approximately
$131,000,  the remainder of the exercise  price.  The note bears interest at the
rate of 4.5% compounded semi-annually and is due November 3, 2002.

The Company believes that the  transactions,  described above,  were on terms no
less  favorable  to the Company  than could have been  obtained in arm's  length
transactions.  All  transactions or loans between the Company and its directors,
officers,  principal  stockholders  and their  affiliates have been, and similar
future  transactions  or loans will be,  approved  in  advance by  disinterested
directors  and have been or will be on terms  believed  by the  Company to be no
less favorable to the Company than those which could be obtained in arm's length
transactions.

COMPENSATION AND OPERATIONS COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Messrs.  Edwards and Walker are  directors  of the Company.  In April 1998,  Mr.
Walker became an employee of the Company. Mr. Edwards has never been an employee
of the Company.  Messrs.  Edwards and Walker also are directors of CAII. Messrs.
Buckland  and Walker are  directors  and 50%  stockholders  of MCC and MCC World
Aviation  Associates,  Inc.  ("MCC  World"),  which own of record  2,833,369 and
23,706 shares, respectively, of Common Stock. Mr. Buckland is also an officer of
MCC and MCC World. See "Certain Transactions" below. The Company leased from MCC
office space for its Southeast  Region Office and paid MCC rent in the amount of
$23,000 for Fiscal 1999. Mr. Walker is now President and Chief Executive Officer
and a director of CAII.

EXECUTIVE OFFICERS

The following  table sets forth (i) the names of the  executive  officers of the
Company (ii) their ages as of the Record Date and (iii) their positions with the
Company:

  Name of Individual     Age               Capacities in Which Served
--------------------     ---   -------------------------------------------------

James D. Walker           54   Chairman of the Board, President, Chief Executive
                               Officer and Director
Anthony M. DiPaolo        40   Senior Vice  President - Chief  Financial Officer
                               and Treasurer
John F. Olmstead          56   Senior Vice President - Capital Markets Group and
                               Assistant Secretary
Richard H. Abernethy      45   Vice President - Portfolio Management

                                    25 of 36

<PAGE>


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

EXECUTIVE OFFICERS, continued

See  "DIRECTORS"  above for a description  of Mr.  Walker's  background  and the
positions held by Mr. Walker with the Company.

Mr.  DiPaolo  has been  Senior  Vice  President  - Chief  Financial  Officer and
Treasurer of the Company  since March 1997.  Mr.  DiPaolo  joined the Company in
July 1990 and has held various  positions in the accounting and finance areas of
the Company.  Prior to July 1990, he held the offices of Chief Financial Officer
for the Mile High Kennel Club,  Inc. and Vice  President - Controller for VICORP
Restaurants, Inc. and was an audit manager for Coopers & Lybrand. Mr. DiPaolo is
an officer, but not a director, of CAII.

Mr.  Olmstead  has been Vice  President - Capital  Markets  Group and  Assistant
Secretary of the Company since  September  1991. Mr. Olmstead joined the Company
as a Vice President in December 1988. From 1969 through 1983, Mr. Olmstead was a
co-owner of Finalco,  Inc.,  an  independent  leasing  company,  and served as a
senior  officer of Finalco  Corporation.  From 1983  through  the  present,  Mr.
Olmstead  has  served as  Chairman  of the Board of  Neo-Kam  Industries,  Inc.,
Matchless Metal Polish Company,  Inc., and ACL, Inc. Mr. Olmstead is an officer,
but not a director, of CAII.

Mr.  Abernethy  has been Vice  President - Portfolio  Management  of the Company
since  October  1997.  Mr Abernethy  joined CAII in April 1992, as the Equipment
Valuation  Manager.  From September 1994 to October 1997, Mr. Abernethy was Vice
President  - Asset  Management  of the  Company.  Prior  to  joining  CAII,  Mr.
Abernethy  was  employed  by  Barclays  Leasing for six years where he served as
Equipment  Manager  with  similar  duties.  Mr.  Abernethy  is not an officer or
director of the Company but does serve as an officer of CAII.

Section 16(a) of the Securities Exchange Act of 1934, as amended, (the "Exchange
Act") requires the Company's  directors,  officers and persons who own more than
ten percent of a  registered  class of the  Company's  equity  securities  ("10%
Holders")  to file with the SEC  initial  reports of  ownership  and  reports of
changes in ownership of Common Stock and other equity securities of the Company.
Directors,  officers and 10% Holders are required by SEC  regulations to furnish
the Company with copies of all of the Section 16(a) reports they file.

To the  Company's  knowledge,  during  Fiscal  1999  all  Section  16(a)  filing
requirements  applicable to its directors,  officers and 10% Holders were timely
made by such persons.

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

THE  WALKER  EMPLOYMENT  AGREEMENT.  The  Company  entered  into  an  Employment
Agreement  with Mr.  Walker,  dated as of April 7, 1998 (the "Walker  Employment
Agreement"),  whereby: (1) Mr. Walker's employment with the Company as President
and Chief  Executive  Officer (in addition to his existing office as Chairman of
the Board)  commenced on April 7, 1998,  and  continues  until May 31, 2001 and,
thereafter, the term will be automatically renewed for successive one year terms
unless either provides the other notice to terminate 60 days prior to the end of
the then current term; (2) Mr. Walker's annual base salary is $325,000;  (3) Mr.
Walker is to receive incentive compensation equal to 4% of the Company's pre-tax
earnings  (subject  to  the  Company  achieving  certain  minimum  profitability
targets),  which  percentage  can be increased  or  decreased by the  percentage
change in the average  closing price of the Company's  common stock for the last
four  months of the  current  fiscal  year as compared to the same period in the
prior fiscal year,  but in no event will it be adjusted  lower than 3% or higher
than 6% (he earned no incentive  compensation  for fiscal 1999);  (4) Mr. Walker
will  be  granted  stock  options  annually,  equal  to  those  granted  to  the
non-employee  Directors  (see  Part  III,  Item  10,  above);  (5) Mr.  Walker's
Director's  fees will continue,  including the  additional fee for Mr.  Walker's
service as Chairman of the Board (see Part III,  Item 10,  above);  (6) payments
are to be made to MCC to reimburse it for certain  group benefit plans and MCC's
SEP/IRA plans provided to Mr. Walker; (7) reimbursement is made to Mr. Walker of
his reasonable  expenses incurred in carrying out his duties; and (8) payment is
to  be made  to Mr. Walker of severance benefits in the event of his involuntary

                                    26 of 36

<PAGE>


Item 11.  Executive Compensation, continued
          ----------------------

termination without cause or due to a change of control of the Company, equal to
the greater of (i) three times his annual base salary or (ii) his base salary to
the end of the term of the  Walker  Employment  Agreement,  plus  the pro  rated
amount of the  incentive  compensation  Mr.  Walker would have  received for the
fiscal year in which such termination occurs. The Walker's Employment  Agreement
also  acknowledges Mr. Walker's duties as an officer and director of MCC and his
duties in the event of a conflict of interest  between the Company and MCC,  and
requires  Mr.  Walker to abide by  certain  non-disclosure  and  non-use  of the
Company's confidential information and his agreement not to solicit employees or
customers of the Company.

SUMMARY  COMPENSATION  TABLE.  The  following  table  provides  certain  summary
information   for  Fiscal  1999,   Fiscal  1998  and  Fiscal  1997,   concerning
compensation  awarded  or paid to, or earned  by, the  Company's  current  Chief
Executive  Officer,  each of the three other highest paid executive  officers of
the Company and one executive officer  who  resigned  his  offices in April 1999
(collectively referred to herein as the "Named Executive Officers"):

<TABLE>
<CAPTION>


                                                                                |          Long-Term Compensation
                                                                                |--------------------------------------
                                                Annual Compensation             |      Awards (15)      |    Payouts
                                    ------------------------------------------- |-----------------------|--------------
                         Fiscal                                                 |                       |
                          Year                                       Other      |Restricted   Securities|
                         Ended                                       Annual     |  Stock      Underlying|     LTIP
 Name and Position        5/31        Salary         Bonus (2)    Compensation  |  Awards      Options  |    Payouts
---------------------    ------    -------------   ------------   ------------- |----------   ----------|--------------
<S>                     <C>       <C>              <C>            <C>              <C>       <C>        | <C>
James D. Walker,                                                                |                       |
President, Chief         1999      $ 250,000        $   -0-        $ 1,600 (6)  |   -0-         -0-     |  $   -0-
Executive, Chairman      1998      $  42,500        $ 14,000 (3)   $  -0-       |   -0-        35,000   |  $   -0-
of the Board             1997      $    -0-         $   -0-        $  -0-       |   -0-         -0-     |  $   -0-
                                                                                |                       |
Anthony M. DiPaolo                                                              |                       |
Senior Vice President    1999      $ 156,800 (1)    $   -0-        $  -0-       |   -0-         -0-     |  $   -0-
Chief Financial          1998      $ 138,030 (1)    $ 45,000 (4)   $  -0-       |   -0-        25,000   |  $   -0-
Officer & Treasurer      1997      $ 110,722 (1)    $ 20,000       $  -0-       |   -0-         -0-     |  $ 45,335 (7)
                                                                                |                       |
John F. Olmstead,                                                               |                       |
Senior Vice              1999      $ 174,300 (1)    $   -0-        $  -0-       |   -0-         -0-     |  $   -0-
President, Capital       1998      $ 173,304 (1)    $ 45,000 (5)   $ 1,600 (6)  |   -0-        25,000   |  $   -0-
Markets Group &          1997      $ 164,300 (1)    $ 40,000       $  -0-       |   -0-         -0-     |  $ 81,527 (8)
Assistant Secretary                                                             |                       |
                                                                                |                       |
Richard H. Abernethy     1999      $ 105,000        $   -0-        $  -0-       |   -0-         -0-     |  $   -0-
Vice President,          1998          N/A              N/A           N/A       |   N/A         N/A     |      N/A
Portfolio Management     1997          N/A              N/A           N/A       |   N/A         N/A     |      N/A
                                                                                |                       |
John A. Reed, Senior     1999      $ 170,715 (10)   $   -0-        $  -0-       |   -0-         -0- (13)|  $   -0-
Vice President,          1998      $ 152,045 (11)   $  6,000       $ 1,600 (12) |   -0-        15,000   |  $   -0-
Administration (9)       1997      $  88,126        $ 17,000       $  -0-       |   -0-         -0-     |  $ 21,225 (14)

</TABLE>



                                    27 of 36

<PAGE>

Item 11.  Executive Compensation, continued
          ----------------------

(1)  Includes  an  accrual of $6,800 in each of Fiscal  1999,  1998 and 1997 for
     premium  paid on behalf of the  Executive  Officer,  for a  universal  life
     insurance  policy  pursuant to an insurance  benefit  plan (the  "Insurance
     Plan"). The amount of the annual premium allowance under the Insurance Plan
     is  determined  by a  formula  based  on  the  value  of  certain  benefits
     relinquished  by the Executive  Officers  under the Company's  401(k) plan,
     from which such officers  voluntarily withdrew during the fiscal year ended
     May 31, 1991 in order to prevent the Company's  401(k) plan from being "top
     heavy" under applicable Treasury regulations.

(2)  All bonuses were paid in the following fiscal year.

(3)  $9,333 paid in Fiscal 1999 and payment of the remaining  one-third ($4,667)
     is deferred to June 1, 2001,  provided Mr. Walker  continues as an employee
     of the Company through that date.

(4)  $30,000  paid  in  Fiscal  1999  and  payment  of the  remaining  one-third
     ($15,000) is deferred to June 1, 2001, provided Mr. DiPaolo continues as an
     employee of the Company through that date.

(5)  $30,000  paid  in  Fiscal  1999  and  payment  of the  remaining  one-third
     ($15,000) is deferred to June 1, 2001,  provided Mr. Olmstead  continues as
     an employee of the Company through that date.

(6)  Travel expense paid with respect to employee's spouse accompanying employee
     on business travel.

(7)  In Fiscal 1997, Mr. DiPaolo received $45,335 of proceeds (net of the option
     exercise  prices)  from the sale of  options to  acquire  40,000  shares of
     Common  Stock  to the  Company  pursuant  to the  Stock  Option  Repurchase
     Program.

(8)  In Fiscal  1997,  Mr.  Olmstead  received  $81,527 of proceeds  (net of the
     option  exercise  prices) from the sale of options to acquire 56,250 shares
     of Common  Stock to the  Company  pursuant to the Stock  Option  Repurchase
     Program.

(9)  In April 1999, Mr. Reed resigned from his office with the Company.

(10) Includes $39,082 in commissions and $21,635 in separation pay.

(11) Includes $54,526 in commissions

(12) Travel  expense  paid with  respect to  employee's  companion  accompanying
     employee on business travel.

(13) During 1999, Mr. Reed exercised  options  underlying 5,000 shares of Common
     Stock and sold all such shares.

(14) In Fiscal 1997,  Mr. Reed  received  $21,255 of proceeds (net of the option
     exercise  prices)  from the sale of  options to  acquire  20,000  shares of
     Common  Stock  to the  Company  pursuant  to the  Stock  Option  Repurchase
     Program.

(15) There were no stock option  grants to Named  Executive  Officers  in Fiscal
     1999.

OPTION EXERCISES AND HOLDINGS

The following  table provides  information  with respect to the Named  Executive
Officers  concerning  the  exercise  of stock  options  during  Fiscal  1999 and
unexercised stock options held as of the end of Fiscal 1999:


                                    28 of 36

<PAGE>

Item 11.  Executive Compensation, continued
          ----------------------

<TABLE>
<CAPTION>
                        Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values


                        Number of                        Number of Unexercised          Value of Unexercised In-the-
                         Shares          Value            Options at Year End          money Options at Year End (2)
                       Acquired on    Realized on     ----------------------------     -----------------------------
      Name             Exercise(1)    Exercise (1)    Exercisable    Unexercisable     Exercisable     Unexercisable
      ----             -----------    ------------    -----------    -------------     -----------     -------------

<S>                        <C>           <C>            <C>            <C>             <C>                 <C>
James D. Walker            -0-         $   -0-           81,367           -0-           $ 35,100            -0-
Anthony M. DiPaolo         -0-         $   -0-           16,250         18,750          $ 27,000            -0-
John F. Olmstead           -0-         $   -0-           25,000         18,750          $ 39,200            -0-
Richard H. Abernethy       -0-         $   -0-            7,500         11,250          $  5,200            -0-
John A. Reed (3)          5,000        $ 16,600            -0-            -0-           $   -0-             -0-

</TABLE>

(1)  See "Executive Officers - Summary Compensation Table" above for information
     concerning  sales  of stock  options  by Named  Executive  Officers  to the
     Company during Fiscal 1999.

(2)  The value of unexercised  in-the-money options at the end of Fiscal 1997 is
     based  on the  closing  price  of  the  Common  Stock  as  reported  on the
     NASDAQ/NMS at May 31, 1999 ($3.375 per share),  less the exercise price per
     share of the options.

(3)  In April 1999, Mr. Reed resigned from his offices with the Company.

STOCK OPTION REPURCHASE PROGRAM

Effective  as of May 31, 1996,  the Company  adopted and  implemented  its Stock
Option  Repurchase  Program,  pursuant  to which it  repurchased  401,367  stock
options  granted  under its  employee  stock  option plan from 33 employees at a
price of $2.45 per option share less the exercise price of the repurchased stock
options (a total repurchase price, net of option exercise amounts, of $557,240).
See "Executive Compensation - Summary Compensation Table" to determine the Named
Executive Officers who participated in this program.

LONG-TERM INCENTIVE PLANS

See "Summary  Compensation  Table" above for a discussion of long-term incentive
plan awards in Fiscal 1998. See also "Stock Option Repurchase Program" above for
information concerning sales of stock options by the Named Executive Officers to
the Company during Fiscal 1997.


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

The following  table sets forth, as of the Record Date, the number of shares and
percentage of the  outstanding  Common Stock  beneficially  owned by each person
known by the Company to own more than 5% of the outstanding Common Stock ("Major
Stockholders"):


                                    29 of 36

<PAGE>

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

                                                     Beneficial Ownership(4)
                                                 Number of Shares       Percent
                                                 ----------------       -------

James D. Walker (1)                                 1,509,905            28.21%
7175 West Jefferson Avenue, Suite 4000
Lakewood, Colorado 80235

William H. Buckland (1)                             1,507,205            28.17%
8180 Greensboro Drive, Suite 1000
McLean, Virginia 22102

ROI Capital Management, Inc. (2)                      700,550            13.29%
17 East Sir Francis Drake Boulevard - #225
Larkspur, California 94939

Gary M. Jacobs (3)                                    355,904             6.71%
2995 Baseline Road
Boulder, Colorado  80303

(1)  Messrs.  Buckland and Walker,  who  otherwise  are unrelated to each other,
     each own 50% of the issued  and  outstanding  capital  stock of MCC and MCC
     World Aviation  Associates,  Inc. ("MCC  World").  MCC and MCC World,  each
     having the address of 8180 Greensboro Drive, Suite 1000,  McLean,  Virginia
     22102, are record owners of 2,833,369 and 23,706 shares,  respectively,  of
     Common Stock,  which represents  53.74% and 0.4% respectively of the issued
     and outstanding Common Stock.  Messrs.  Buckland and Walker also own 78,667
     and 81,367 vested stock options,  respectively,  for the purchase of Common
     Stock.

(2)  As  disclosed  in the  Schedule  Forms 13G  filed  with the  United  States
     Securities and Exchange Commission on February 19, 1999.

(3)  Includes (a) 30,971  shares of Common Stock that Mr.  Jacobs is entitled to
     acquire upon the exercise of vested stock options, (b) 3,000 shares held in
     the name of Mr.  Jacobs' minor  children for which he disclaims  beneficial
     ownership and (c) 321,933 shares held of record.

(4)  A person is deemed to be the  beneficial  owner of  securities  that can be
     acquired  by such person  within  sixty (60) days from the Record Date upon
     the exercise of options.  The record  ownership of each beneficial owner is
     determined  by assuming that stock options that are held by such person and
     that are exercisable  within sixty (60) days from the Record Date have been
     exercised.  The total outstanding  shares used to calculate each beneficial
     owner's percentage includes such stock options.

The following  table sets forth, as of the Record Date, the number of shares and
percentage of the outstanding  Common Stock  beneficially owned by directors who
are not Major  Stockholders,  the Named Executive Officers and the directors and
executive officers as a group:



                                    30 of 36

<PAGE>

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

                                                    Management Ownership(6)
                                                  ---------------------------
              Holder                              Number of Shares    Percent
              ------                              ----------------    -------

Richard H. Abernethy (1)                                7,550          0.14%
Anthony M. DiPaolo (2)                                 23,250          0.44%
James D. Edwards (3)                                   86,250          1.63%
John F. Olmstead (4)                                   47,500          0.90%
Robert A. Sharpe II (5)                                17,959          0.34%
Directors and Executive Officers                      182,459          3.46%
  (other than Major Stockholders)
   as a Group (5 persons)

(1)  Includes  7,500  shares of Common  Stock that Mr.  Abernethy is entitled to
     acquire upon the exercise of vested  stock  options.  This does not include
     11,250 shares subject to unvested stock options granted to Mr. Abernethy.

(2)  Includes  16,250  shares of Common  Stock that Mr.  DiPaolo is  entitled to
     acquire upon the exercise of vested  stock  options.  This does not include
     18,750 shares subject to unvested stock options granted to Mr. DiPaolo.

(3)  In November 1998, Mr. Edwards  exercised stock options for 86,250 shares of
     common  stock  with an  average  exercise  price of $1.53 by paying the par
     value in cash of $690.00 and issuing a note payable to the Company equal to
     approximately $131,000, the remainder of the exercise price. The note bears
     interest at the rate of 4.5% compounded  semi-annually  and is due November
     3, 2002.

(4)  Includes  25,000  shares of Common  Stock that Mr.  Olmstead is entitled to
     acquire upon the exercise of vested  stock  options.  This does not include
     18,750 shares subject to unvested stock options granted to Mr. Olmstead.

(5)  Includes  17,959  shares of Common  Stock that Mr.  Sharpe is  entitled  to
     acquire upon the exercise of vested stock options.

(6)  A person is deemed to be the  beneficial  owner of  securities  that can be
     acquired  by such person  within  sixty (60) days from the Record Date upon
     the exercise of options.  The record  ownership of each beneficial owner is
     determined  by assuming  that options that are held by such person and that
     are  exercisable  within  sixty  (60) days from the  Record  Date have been
     exercised.  The total outstanding  shares used to calculate each beneficial
     owner's percentage includes such options.

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

In November 1995, MCC acquired  voting control of the Company  through a private
stock  purchase  transaction  and the  delivery  to MCC of proxies for shares of
Common  Stock  subject to purchase in the future  pursuant  to  agreements  (the
"Stock Purchase Agreements") executed by and among MCC, Messrs. Jack Durliat and
Gary  M.  Jacobs,  who,  at  that  time,  were  two  of  the  Company's  largest
stockholders.  Messrs.  Buckland and Walker are each 50% owners of MCC. Pursuant
to these Stock Purchase  Agreements,  MCC acquired 65,120 shares of Common Stock
for a purchase price of $3.30 per share, or an aggregate amount of $214,896.  In
January 1995,  MCC purchased  75,000 shares of Common Stock for a purchase price
of $2.00 per  share,  or an  aggregate  amount of  $150,000.  In  addition,  MCC
acquired  (1) the right to purchase  an  additional  1,245,000  shares of Common
Stock in the  future  for an  aggregate  purchase  price of  approximately  $4.5
million and (2) proxies  from  Messrs.  Durliat and Jacobs to vote such  shares,
pending  their  purchase.  In January  1996,  1997 and 1998,  MCC  completed the
purchase of 550,000, 437,500 and 257,500 shares,  respectively,  of Common Stock
for a purchase price of $3.30,  $3.70 and $4.02 per share,  respectively,  or an
aggregate amount of $4,468,900.

                                    31 of 36

<PAGE>

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

During Fiscal 1999, 1998 and 1997, the Company paid the following amounts to the
Messrs. Buckland and Walker, who are each 50% stockholders of MCC, for Executive
Committee fees and under their consulting agreements:

                                       Fiscal 1999    Fiscal 1998    Fiscal 1997
                                       -----------    -----------    -----------

Mr. Buckland                             $ 112,500     $ 187,500     $ 187,500
Mr. Walker                                       *       218,750       250,000**

 *In April 1998,  Mr. Walker  became an employee of the Company and was paid for
  the balance of 1998 and 1999 pursuant to the terms of his employment agreement
  discussed above.

**In Fiscal 1997, the Company paid Mr. Walker $150,000 for relocation expenses.

On August 11, 1999,  the Company  borrowed  $350,000  from Messrs.  Buckland and
Walker and issued a  subordinated  note to each in the face amount of  $175,000.
The notes bear interest at 7% per year plus additional contingent interest at 9%
per year based on the  performance of certain  residual  interests  owned by the
Company.  Principal and interest (which accrues quarterly) are due on August 11,
2002, subject to certain prepayment  obligations.  The notes are subordinated to
all existing recourse bank debt.


                                     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 1999 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.

                                    32 of 36

<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.

10.8(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"),  incorporated  by reference to exhibit 10.8(f) of the May
          31, 1997 Form 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.

10.55     Consulting  Agreement,  effective  as of June 1, 1996 by and among the
          Company,  CAII and William H. Buckland,  incorporated  by reference to
          Exhibit 10.55 of the August 31, 1997 Form 10-Q.

10.57     Residual  Sharing  Note,  dated as of June 1,  1997 by and  among  the
          Company,  CAII and William H. Buckland,  incorporated  by reference to
          Exhibit 10.57 of the August 31, 1997 Form 10-Q.

10.58     Residual  Sharing  Note,  dated as of June 1,  1997 by and  among  the
          Company,  CAII and  James D.  Walker,  incorporated  by  reference  to
          Exhibit 10.58 of the August 31, 1997 Form 10-Q.

10.59     Loan and  Security  Agreement,  dated as of  November  26, 1997 by and
          among the Company and CAII as Borrowers and CoreStates  Bank, N.A., as
          Agent and Issuing Bank and each of the Financial  Institutions  now or
          hereafter shown on the Signature pages of this Agreement, incorporated
          by reference to Exhibit 10.59 of the November 30, 1997 Form 10-Q.

10.60     First Amendment to Loan and Security  Agreement,  dated as of April 7,
          1998 by and between Capital  Associates,  Inc., and Capital Associates
          International,  Inc. as Borrowers and CoreStates  Bank, N. A. as Agent
          and Issuing Bank and the four  participating  financial  institutions,
          incorporated  by reference  to Exhibit  10.60 of the May 31, 1998 Form
          10-K.

10.61     Employment  Agreement,  dated as of April 7,  1998,  by and  among the
          Company,  CAII and  James D.  Walker,  incorporated  by  reference  to
          Exhibit 10.61 of the May 31, 1998 Form 10-K.


                                    33 of 36

<PAGE>



Item No.                          Exhibit Index


10.62     Business Financing Agreement, Addendum to Business Financing Agreement
          and Agreement for Wholesale Financing, Corporate Guaranty and Addendum
          to  Guaranty,  dated  as of  April  21,  1998 by and  between  Capital
          Associates  Technology  Group,  Inc. and Deutsche  Financial  Services
          Corporation, incorporated by reference to Exhibit 10.62 of the May 31,
          1998 Form 10-K.

10.63     Second Amendment to Loan and Security  Agreement,  dated as of May 29,
          1998 by and between Capital  Associates,  Inc., and Capital Associates
          International,  Inc. as Borrowers and CoreStates  Bank, N. A. as Agent
          and Issuing Bank and the four  participating  financial  institutions,
          incorporated  by reference  to Exhibit  10.63 of the May 31, 1998 Form
          10-K.

10.64     Amendment  to the  Business  Financing  Agreement  and  Agreement  for
          Wholesale  Financing  dated July 15, 1991 between  Capital  Associates
          Technology Group, Inc. and Deutsche  Financial  Services  Corporation,
          incorporated by reference to Exhibit 10.64 of the August 31, 1998 Form
          10-Q.

10.65     Credit  Agreement  dated  as  of  August  19,  1998  among  CAI  Lease
          Securitization-II    Corp.,    as   Borrower,    Capital    Associates
          International,  Inc., as Servicer,  Concord Minutemen Capital Company,
          LLC,  as Senior  Lender  and Key  Corporate  Capital  Inc.,  as Junior
          Lender, as Residual Lender and as Agent,  incorporated by reference to
          Exhibit 10.65 of the August 31, 1998 Form 10-Q.

10.66     Lease  Receivables Sale and Contribution  Agreement dated as of August
          19, 1998 between CAI Lease  Securitization-II  Corp.  as the Buyer and
          Capital Associates International, Inc. as the Originator, incorporated
          by reference to Exhibit 10.66 of the August 31, 1998 Form 10-Q.

10.67     Custody  Agreement  between  CAI  Lease   Securitization-II  Corp.  as
          Borrower,  Capital Associates  International,  Inc. as the Originator,
          Key  Corporate  Capital Inc. as Agent and Bankers  Trust Company dated
          August 19, 1998 requesting  Bankers Trust Company to act as Collateral
          Custodian  and hold  financial  instruments  on behalf of all parties,
          incorporated by reference to Exhibit 10.67 of the August 31, 1998 Form
          10-Q.

10.68     International Swap Dealers  Association,  Inc. (ISDA) Master Agreement
          dated as of August 24, 1998 between KeyBank  National  Association and
          CAI  Lease  Securitization-II  Corp.,  incorporated  by  reference  to
          Exhibit 10.68 of the August 31, 1998 Form 10-Q.

10.69     Schedule  to the ISDA  Master  Agreement  dated as of August 19,  1998
          between KeyBank National  Association and CAI Lease  Securitization-II
          Corp.,  incorporated  by reference to Exhibit  10.69 of the August 31,
          1998 Form 10-Q.

10.70     Third  Amendment to Loan and Security  Agreement  dated as of November
          25,  1998  by  and  between  Capital  Associates,   Inc.  and  Capital
          Associates  International,  Inc. as borrowers and First Union National
          Bank, as Agent and Issuing Bank and the four  participating  financial
          institutions,  incorporated  by  reference  to  Exhibit  10.70  of the
          November 30, 1998 Form 10-Q.

10.71     Promissory  Note, dated as of November 4, 1998, in the original amount
          of  $131,069.25  made  by  James  D.  Edwards,   Director  of  Capital
          Associates,  Inc.  and  Capital  Associates  International,  Inc.  and
          payable  to the order of  Capital  Associates,  Inc.  in  payment of a
          portion of the exercise  price for the  purchase of CAI common  stock,
          par value  $.008 per  share,  upon the  exercise  by Mr.  Edwards of a
          portion of his stock  options,  incorporated  by  reference to Exhibit
          10.71 of the November 30, 1998 Form 10-Q.


                                    34 of 36

<PAGE>


Item No.                          Exhibit Index

10.72     Security Agreement and Stock Pledge Agreement, dated as of November 4,
          1998,  pledging 86,250 shares of CAI common stock, par value $.008 per
          share,  executed by James D. Walker,  Director of Capital  Associates,
          Inc.  and Capital  Associates  International,  Inc.  and  delivered to
          Capital  Associates,  Inc. to secure  payment and  performance  of Mr.
          Edwards promissory note to Capital Associates  International,  Inc, in
          the  original   principal  amount  of  $131,069.25,   incorporated  by
          reference to Exhibit 10.72 of the November 30, 1998 Form 10-Q.

10.73     Fourth  Amendment to Loan and Security  Agreement dated as of December
          22,  1998  by  and  between  Capital  Associates,   Inc.  and  Capital
          Associates  International,  Inc. as borrowers and First Union National
          Bank, as Agent and Issuing Bank and the four  participating  financial
          institutions,  incorporated  by  reference  to  Exhibit  10.73  of the
          February 28, 1999 Form 10-Q.

10.74     Warehousing Loan and Security  Agreement dated as of December 20, 1998
          by and between Capital Associates International, Inc. as borrowers and
          NationsBanc  Leasing  Corporation  as  Lender  with  respect  to a $15
          million Lease-Collateralized Loan Facility,  incorporated by reference
          to Exhibit 10.74 of the February 28, 1999 Form 10-Q.

10.75     Fifth Amendment to Loan and Security  Agreement dated as of August 11,
          1999 by and between Capital  Associates,  Inc. and Capital  Associates
          International,  Inc. as borrowers  and First Union  National  Bank, as
          Agent  and  Issuing   Bank  and  the  four   participating   financial
          institutions.

10.76     Subordination  Agreement  dated as of August 13,  1999 by and  between
          Capital Associates, Inc. and Capital Associates International, Inc. as
          borrowers and James D. Walker and First Union  National Bank, as Agent
          and Issuing Bank and the four participating financial institutions.

10.77     Subordination  Agreement  dated as of August 13,  1999 by and  between
          Capital Associates, Inc. and Capital Associates International, Inc. as
          borrowers  and William H. Buckland and First Union  National  Bank, as
          Agent  and  Issuing   Bank  and  the  four   participating   financial
          institutions.

21        List of Subsidiaries

23        Consent of KPMG LLP

27        Financial Data Schedule

                                    35 of 36

<PAGE>


                                   SIGNATURES

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

                                  CAPITAL ASSOCIATES, INC.

Dated:  September 13, 1999        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                 President, CEO and Chairman of the Board
-----------------------
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/Robert A. Sharpe                Director
-----------------------
Robert A. Sharpe


/s/Dana T. Martin                  Assistant Vice President and Controller
-----------------------            (Principal Accounting Officer)
Dana T. Martin






                         Each of the above signatures is
                        affixed as of September 13, 1999

                                    36 of 36

<PAGE>

                          INDEX OF FINANCIAL STATEMENTS
                                  AND SCHEDULE





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

   Independent Auditors' Report                                          F-2

   Consolidated Balance Sheets as of May 31, 1999 and 1998               F-3

   Consolidated Statements of Income for
       the Years Ended May 31, 1999, 1998 and 1997                       F-4

   Consolidated Statements of Changes in Stockholders' Equity
       for the Years Ended May 31, 1999, 1998 and 1997                   F-5

   Consolidated Statements of Cash Flows for
       the Years Ended May 31, 1999, 1998 and 1997                       F-6

   Notes to Consolidated Financial Statements                        F-7 to F-24


Schedule
--------

   Independent Auditors' Report                                          F-25

   Schedule II - Valuation and Qualifying Accounts and Reserves
       for the Years Ended May 31, 1999, 1998 and 1997                   F-26













                                      F-1
<PAGE>




                          INDEPENDENT AUDITORS' REPORT







The Board of Directors and Stockholders
Capital Associates, Inc.:

We  have  audited  the  accompanying  consolidated  balance  sheets  of  Capital
Associates,  Inc. and  subsidiaries as of May 31, 1999 and 1998, 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, 1999.  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,  1999 and 1998 and the  results  of their
operations and their cash flows for each of the years in the  three-year  period
ended May 31, 1999, in conformity with generally accepted accounting principles.




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



Denver, Colorado
September 10, 1999











                                      F-2

<PAGE>



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

                                     ASSETS

                                                                May 31,
                                                         ----------------------
                                                           1999         1998
                                                         ---------    ---------

Cash and cash equivalents                                $   7,926    $  17,684
Receivable from affiliated limited partnerships                744          352
Accounts receivable, net                                     7,992        5,835
Inventory                                                    2,578        1,141
Residual values, net, arising from equipment under
  lease sold to private investors                            4,469        4,277
Net investment in direct finance leases                     42,116       31,181
Leased equipment, net                                      150,338      104,825
Investment in affiliated limited partnerships                1,957        3,589
Other                                                        5,448        4,883
Deferred income taxes                                        3,400        2,500
Discounted lease rentals assigned to lenders arising
  from equipment sale transactions                          19,773       37,626
                                                         ---------    ---------

                                                         $ 246,741    $ 213,893
                                                         =========    =========


                      LIABILITIES AND STOCKHOLDERS' EQUITY

Recourse debt                                            $  50,060    $  49,088
Accounts payable - equipment purchases                      29,806       25,029
Accounts payable and other liabilities                      15,621       10,279
Discounted lease rentals                                   125,639      104,311
                                                         ---------    ---------
                                                           221,126      188,707
                                                         ---------    ---------

Commitments and contingencies (Notes 9, 11, 16 and 17)

Stockholders' equity:
Common stock, $.008 par value, 15,000,000 shares
authorized, 5,254,000 and 5,165,000 shares issued               42           41
Additional paid-in capital                                  16,829       16,854
Retained earnings                                            8,771        8,374
Treasury stock, at cost                                        (27)         (83)
                                                         ---------    ---------
Total stockholders' equity                                  25,615       25,186
                                                         ---------    ---------

                                                         $ 246,741    $ 213,893
                                                         =========    =========






          See accompanying notes to consolidated financial statements.





                                      F-3


<PAGE>



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

                                                     Years Ended May 31,
                                           ------------------------------------
                                              1999         1998         1997
                                           ----------   ----------   ----------

Revenue:
   Equipment sales to PIFs                 $   18,996   $   48,648   $   66,987
   Other equipment sales                      174,918      199,610      137,558
   Leasing                                     42,614       25,101       14,420
   Interest                                     2,219        3,487        4,828
   Other                                        4,623        4,228        3,741
                                           ----------   ----------   ----------
   Total revenue                              243,370      281,074      227,534
                                           ----------   ----------   ----------

Costs and expenses:
   Equipment sales to PIFs                     18,559       47,558       65,545
   Other equipment sales                      169,174      193,144      134,473
   Leasing                                     27,260       17,337        8,928
   Operating and other expenses                15,513       11,830        9,568
   Provision for losses                           555          705          365
   Interest:
   Non-recourse debt                            8,503        6,123        6,012
   Recourse debt                                3,409        2,857        1,900
                                           ----------   ----------   ----------
   Total costs and expenses                   242,973      279,554      226,791
                                           ----------   ----------   ----------

Income before income taxes                        397        1,520          743
Income tax expense                                  -            -           10
                                           ----------   ----------   ----------
Net income                                 $      397   $    1,520   $      733
                                           ==========   ==========   ==========

Earnings per common share:
   Basic                                   $      .08   $      .30   $      .15
                                           ==========   ==========   ==========

   Diluted                                 $      .07   $      .28   $      .14
                                           ==========   ==========   ==========

Weighted average number of common
   shares outstanding:
   Basic                                    5,173,000    5,117,000    5,004,000
                                           ==========   ==========   ==========

   Diluted                                  5,399,000    5,449,000    5,403,000
                                           ==========   ==========   ==========











          See accompanying notes to 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, 1996                     5,139,000      $   41      $ 17,017      $ 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          41        16,888        6,854     140,000       (282)      23,501

Issuance of common stock under
  incentive stock option plan                   8,000           -            14            -           -          -           14
Issuance of treasury shares upon
 exercise of incentive stock options                -           -           (82)           -     (98,000)       199          117
Income tax benefit from stock
  compensation                                      -           -            34            -           -          -           34
Net income                                          -           -             -        1,520           -          -        1,520
                                           ----------      ------      --------      -------    --------     ------     --------

Balance at May 31, 1998                     5,165,000          41        16,854        8,374      42,000        (83)      25,186

Issuance of common stock under:
  incentive stock option plan                   3,000           -            31            -           -          -           31
  non-qualified stock option plan              86,000           1           131            -           -          -          132
Issuance of treasury shares upon
 exercise of incentive stock options                -           -           (56)           -     (24,000)        56            -
Note receivable from sale of stock                  -           -          (131)           -           -          -         (131)
Net income                                          -           -             -          397           -          -          397
                                           ----------      ------      --------      -------    --------     ------     --------

Balance at May 31, 1999                     5,254,000      $   42      $ 16,829      $ 8,771      18,000     $  (27)    $ 25,615
                                           ==========      ======      ========      =======    ========     ======     ========

</TABLE>














          See accompanying notes to consolidated financial statements.


                                      F-5



<PAGE>



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

<TABLE>
<CAPTION>
                                                                                                     Years Ended May 31,
                                                                                              -----------------------------------
                                                                                                1999         1998         1997
                                                                                              ---------    ---------    ---------
<S>                                                                                          <C>          <C>          <C>
Cash flows from operating activities:
  Net income                                                                                  $     397    $   1,520    $     733
                                                                                              ---------    ---------    ---------
  Adjustments to reconcile net income to net cash provided by operating activities:
    Depreciation and amortization                                                                29,088       18,172        9,634
    Recovery of investment in direct financing leases                                            13,404        5,200        3,786
    Proceeds from the sales of leases, net                                                       48,433       23,536       15,693
    Provision for losses                                                                            555          705          365
    Deferred income tax benefit                                                                    (900)        (200)        (400)
    Deferred financing costs                                                                       (245)        (262)        (100)
    Sales-type lease margin                                                                         (56)        (157)         (69)
    Decrease (increase) in accounts receivable                                                   (2,549)      (3,450)       1,651
    Other                                                                                        (2,060)       1,836        1,879
                                                                                              ---------    ---------    ---------
  Total adjustments                                                                              85,670       45,380       32,439
                                                                                              ---------    ---------    ---------
Net cash provided by operating activities                                                        86,067       46,900       33,172
                                                                                              ---------    ---------    ---------

Cash flows from investing activities:
  Equipment purchased for leasing                                                              (101,191)     (71,495)     (35,798)
  Investment in leased office facility and in capital expenditures                                 (562)      (1,236)        (452)
  Net receipts from affiliated public income funds                                                1,632        3,427        1,810
  Acquisition, net of cash acquired                                                                   -         (767)           -
                                                                                              ---------    ---------    ---------
Net cash used for investing activities                                                         (100,121)     (70,071)     (34,440)
                                                                                              ---------    ---------    ---------

Cash flows from financing activities:
  Proceeds from securitization                                                                   24,708            -            -
  Principal payments on securitization                                                           (3,930)           -            -
  Proceeds from discounting of lease rentals                                                     34,404       23,127       13,686
  Principal payments on discounted lease rentals                                                (48,515)     (14,716)     (12,125)
  Proceeds from sales of common stock                                                                32           14           14
  Purchase of non-employee stock options                                                              -            -         (138)
  Net borrowings (payments) on revolving credit facilities                                       (1,975)      25,953        7,507
  Net borrowings (payments) on Term Loan                                                           (428)         283       (4,333)
                                                                                              ---------    ---------    ---------
Net cash provided by financing activities                                                         4,296       34,661        4,611
                                                                                              ---------    ---------    ---------
Net (decrease) increase in cash and cash equivalents                                             (9,758)      11,490        3,343
Cash and cash equivalents at beginning of year                                                   17,684        6,194        2,851
                                                                                              ---------    ---------    ---------
Cash and cash equivalents at end of year                                                      $   7,926    $  17,684    $   6,194
                                                                                              =========    =========    =========

Supplemental schedule of cash flow information:
  Recourse interest paid                                                                      $   3,409    $   2,857    $   1,900
  Non-recourse interest paid                                                                      6,291        2,892        1,514
  Income taxes paid                                                                                 175          928          183
  Income tax refunds received                                                                       308           91          602
Supplemental schedule of non-cash investing and financing activities:
  Discounted lease rentals assigned to lenders arising from equipment
    sales transactions                                                                            8,018        7,583       24,266
  Assumption of discounted lease rentals in lease acquisitions                                   43,905       46,236       22,499
  Fair value of assets acquired, including cash                                                       -        5,284            -
  Liabilities assumed and incurred in acquisition                                                     -        4,017            -

</TABLE>

          See accompanying notes to consolidated financial statements.


                                      F-6



<PAGE>


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

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

     NATURE OF OPERATIONS

     Capital  Associates,  Inc. ("the Company") is a commercial  finance company
     engaged  in  the  leasing  of  a  variety  of  equipment.  The  Company  is
     principally  engaged  in (i)  the  origination  of  equipment  leases  with
     equipment users,  including the acquisition of leases initially  originated
     by other lessors (ii) the sale of equipment leases to third parties,  (iii)
     the management and servicing of equipment leases retained by the Company or
     sold to private  investors or other lessors,  (iv) the sale and remarketing
     of equipment as it comes  off-lease  and (v) the sale and  servicing of new
     information  technology  equipment.  During fiscal years 1999 and 1998, the
     Company  originated  $266  million  and  $310  million,   respectively,  of
     equipment leases. 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 the Company,  these are  principally the
     estimates of residual  values,  collectibility  of accounts  receivable and
     valuation of inventory. 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 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  recognizes  deferred tax assets and liabilities 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  Statement of  Financial  Accounting  Standard  ("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
     ------------------------------------------

     INVENTORY

     Inventory consists of the following (in thousands):

                                                            1999         1998
                                                           ------       -------

     Retail inventory                                      $ 1,195      $   666
     Equipment brokerage inventory                           1,032          319
     Equipment held for sale or re-lease                       351          156
                                                           -------      -------
                                                           $ 2,578      $ 1,141
                                                           =======      =======

     Retail inventory consists primarily of new information  technology hardware
     and is stated at the lower of cost (first-in,  first-out method) or market.
     Equipment brokerage inventory consists primarily of used equipment that has
     been  acquired  for resale and is  recorded  at the lower of cost or market
     value less cost to sell.  Equipment  held for sale or re-lease  consists of
     equipment  recorded at the lower of cost or market  value less cost to sell
     returned to the Company following lease expiration.

     EARNINGS PER SHARE

     Basic earnings per share is computed by dividing income available to common
     stockholders  by the weighted  average number of common shares  outstanding
     during the  period.  Diluted  earnings  per share is  computed  by dividing
     income  available to common  stockholders by all dilutive  potential common
     shares outstanding during the period.

     STOCK OPTION PLAN

     The  Company  accounts  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 is recorded on the date of
     grant only if the current market price of the underlying stock exceeded the
     exercise  price.  SFAS No. 123,  Accounting  for  Stock-Based  Compensation
     ("SFAS No. 123"), 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 allows entities to apply the provisions of APB
     Opinion No. 25, as the Company has elected to do, 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.

     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

                                      F-8


<PAGE>


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

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

     EQUIPMENT LEASING AND SALES, continued

     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.

     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.

                                      F-9


<PAGE>


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

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

     EQUIPMENT LEASING AND SALES, continued

     SECURITIZATION OF LEASES - Cash proceeds from securitization  financing are
     recorded on the balance sheet as discounted  lease  rentals.  See Note 9 to
     Notes  to  Consolidated  Financial  Statements  for a  description  of  the
     Company's Securitization Facility.

     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.

        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.

        SERVICING  FEES - The Company  defers  income  related to its  servicing
        obligation on certain leases it sells. This income is amortized over the
        life of the lease and is included in other income.

     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.


                                      F-10


<PAGE>

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

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

     EQUIPMENT LEASING AND SALES, continued

     EQUIPMENT BROKERAGE SALES

     The Company's NBCO subsidiary purchases various types of used equipment for
     resale.  The cost of the  equipment  is  recorded  as  inventory.  When the
     equipment  is sold,  the  inventory  value is removed and a gain or loss is
     recorded.  Revenue is recognized upon receipt of cash from the customer, if
     the Company has no significant obligations to the customer after delivery.

     REVENUE  RECOGNITION  FOR  SALES OF  INFORMATION  TECHNOLOGY  HARDWARE  AND
     SOFTWARE

     Revenue is recognized upon shipment to the customer,  if the Company has no
     significant obligations to the customer after delivery.

     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  customers,  the  expected  courses of action by lessees with
     regard to leased  equipment  at  termination  of the  initial  lease  term,
     changes in  technology  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.

     RECLASSIFICATIONS

     Certain  prior year  amounts  have been  reclassified  to conform  with the
     current year presentation.

2.   Acquisition
     -----------

     Effective  November 1, 1997, CAII acquired all of the outstanding shares of
     DBL, Inc. d/b/a Connecting  Point. DBL, Inc. has been renamed (and is doing
     business as) Capital Associates Technology Group ("CATG").  CATG provides a
     wide range of information technology ("IT") services, including procurement
     of  software  and  PC's  and   networking   equipment,   and  IT  equipment
     maintenance.  The purchase  price  consisted of $1,200,000 in cash (paid in
     December 1997) and a $2,140,000 four year note. The Company may be required
     to make  additional  payments of up to $221,750 per year ending October 31,
     2001,  contingent upon the results of CATG's  operations over the course of
     that period.

                                      F-11


<PAGE>

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

2.   Acquisition, continued
     -----------

     The  $2,140,000  note payable to the sellers earns  interest at the rate of
     10% per annum and is payable in monthly  installments of $58,000  beginning
     December 12, 1997 through November 12, 2000, and $42,057 beginning December
     12, 2000 and continuing through November 12, 2001. The outstanding  balance
     at May 31,  1999 was  $1,375,000.  Interest  expense  for  fiscal  1999 was
     approximately $169,000.

     The  acquisition  has been  accounted  for  using  the  purchase  method of
     accounting, and accordingly, the purchase price was allocated to the assets
     purchased  and the  liabilities  assumed  based on their fair values at the
     date of acquisition.  The excess of the purchase price over the fair values
     of the net assets  acquired  of  approximately  $1.7  million  (which  will
     increase for any future  contingent  cash  payment),  has been  recorded as
     goodwill  (included  in  other  assets),   and  is  being  amortized  on  a
     straight-line  basis over 15 years.  Goodwill  amortized  during the fiscal
     1999 was approximately $117,000.  Accumulated  amortization of goodwill was
     approximately $188,000 at May 31, 1999.

3.   Residual  Values and Other  Receivables  Arising from Equipment Under Lease
     ---------------------------------------------------------------------------
     Sold to Private Investors
     -------------------------

     As of May 31,  1999 and 1998,  the  equipment  types for which the  Company
     recorded  the  present  value of the  estimated  residual  values and other
     receivables  arising  from  sales  of  equipment  under  lease  to  private
     investors were (in thousands):

                  Description                              1999           1998
                  -----------                             -------        -------

     Material handling                                    $ 2,388        $ 2,134
     Computer equipment                                       782            500
     Mining and manufacturing                                 771             10
     Furniture and fixtures                                    43            105
     Other miscellaneous equipment                            285            431
                                                          -------        -------
     Total equipment residuals                              4,269          3,180
     Notes receivable due directly from investors             200          1,097
                                                          -------        -------
                                                          $ 4,469        $ 4,277
                                                          =======        =======

     Residual  values  arising  from  equipment  under  lease  sold  to  private
     investors  were net of an allowance  for losses of $3,000 and $64,000 as of
     May 31, 1999 and 1998, respectively.

4.   Net Investment in DFLs
     ----------------------

     The  components of the Company's net  investment in DFLs as of May 31, 1999
     and 1998 were (in thousands):

                                                            1999         1998
                                                          --------     --------

     Minimum lease payments receivable                    $ 38,812     $ 32,264
     Estimated residual values                               9,601        4,217
     IDC                                                       452          336
     Less unearned income                                   (6,749)      (5,636)
                                                          --------     --------
                                                          $ 42,116     $ 31,181
                                                          ========     ========

                                      F-12


<PAGE>

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

5.   Leased Equipment, net
     ---------------------
     The Company's  investment in equipment  under OLs, by major classes,  as of
     May 31, 1999 and 1998 were (in thousands):

                                                       1999             1998
                                                     ---------        ---------

     Information technology                          $  86,793        $  45,861
     Material handling                                  40,067           36,312
     Other technology and communication                 19,541           19,349
     Manufacturing                                      13,532                -
     Furniture and fixtures                             10,113           11,213
     Other                                              11,060            8,017
     Aircraft                                              339              343
     IDC                                                 1,567            1,128
                                                     ---------        ---------
                                                       183,012          122,223
     Less accumulated depreciation                     (31,647)         (16,811)
     Less allowance for losses                          (1,027)            (587)
                                                     ---------        ---------
                                                     $ 150,338        $ 104,825
                                                     =========        =========

     Depreciation   expense  related  to  leased   equipment  was   $26,630,000,
     $16,907,000,   and  $8,662,000  for  fiscal  years  1999,  1998  and  1997,
     respectively.

6.   Future Minimum Lease Payments
     -----------------------------

     Future  minimum lease  payments  receivable  from  noncancelable  leases on
     equipment  owned by the  Company as of May 31,  1999,  are as  follows  (in
     thousands):

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

                  2000                          $ 17,078             $  48,129
                  2001                            10,894                37,491
                  2002                             5,855                21,368
                  2003                             3,216                10,240
                  2004                             1,607                 7,657
              Thereafter                             162                 1,175
                                                --------             ---------
                                                $ 38,812             $ 126,060
                                                ========             =========

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

     During  1999 and 1998,  no lessee  accounted  for more than 10% of  leasing
     revenue. During fiscal year 1997, leasing revenue from one lessee accounted
     for 13% of total  leasing  revenue.  In  addition,  other  equipment  sales
     revenue related to equipment  leased to that lessee  accounted for 34%, 30%
     and 77% of total other  equipment  sales  revenue  during fiscal year 1999,
     1998 and 1997, respectively.

                                      F-13


<PAGE>

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

7.   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,  1999,  approximately  98% of
     equipment  under OLs and DFLs owned by the Company was leased to  companies
     meeting the above credit criteria.

8.   Discounted Lease Rentals
     ------------------------

     Discounted lease rentals outstanding at May 31, 1999 bear interest at rates
     between  6% and  16%  with a  weighted  average  rate  of  8.6%.  Aggregate
     maturities of such non-recourse obligations are (in thousands):

              Years Ending May 31:

                  2000                                 $  59,619
                  2001                                    40,037
                  2002                                    15,408
                  2003                                     6,504
                  Thereafter                               4,071
                                                       ---------
                                                       $ 125,639
                                                       =========

     On December  20,  1998,  Capital  Associates  International  Inc.  ("CAII")
     obtained $15 million in committed  non-recourse  financing from NationsBanc
     Leasing Corporation. CAII may use the committed credit at its discretion to
     finance  leases  under a  warehousing  arrangement.  The loan is secured by
     lease transactions financed under the facility only. The loan was primarily
     underwritten  utilizing the underlying credit quality of the leases pledged
     as collateral under the facility.

     The interest rate option  associated  with the facility is Prime rate minus
     0.25% or LIBOR plus 2.5% (7.75% & 4.90% at May 31, 1999, respectively). The
     Company is required to pay a non-usage fee of 0.2% of the unused commitment
     quarterly.  The outstanding  balance under the facility at May 31, 1999 was
     $1.3 million.  The loan is included with "Discounted  lease rentals" in the
     accompanying consolidated Balance Sheets.

     The  facility  contains  general  operating  and  reporting   requirements,
     however,  no formal financial covenants are required of CAII. As of May 31,
     1999, CAII was in compliance with the terms of the facility.

9.   Securitization Facility
     -----------------------

     The Company  established a  securitization  facility  (the  "Securitization
     Facility") in August 1998 through a wholly-owned special purpose subsidiary
     ("SPS") which  purchases  from the Company  equipment  subject to lease and
     related  lease  rental  payments.  The SPS in  turn  borrows  from  Concord
     Minuteman  Capital  Company,  LLC, a commercial  paper conduit  entity,  as
     Senior Lender, and Key Corporate Capital,  Inc., as Junior Lender, based on
     the present value of the lease rental  payments  after being  discounted by
     various factors.  The  Securitization  Facility  includes a firm commitment
     allowing the Company to add leases during its initial term of 364 days. The
     Securitization  Facility  is  comprised  of a senior  loan  with a  maximum
     principal  amount of  $50,000,000  ("Senior  Loan"),  a junior  loan with a
     maximum principal amount of $5,000,000  ("Junior Loan") and a residual loan
     with a maximum principal amount of $10,000,000 ("Residual Loan").

                                      F-14


<PAGE>

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

9.   Securitization Facility, continued
     -----------------------

     The Senior  Loan and the Junior  Loan are each a  revolving  securitization
     supported by a security  interest in the SPS's  ownership of leases and the
     related lease rental  payments.  The SPS is required to enter into interest
     rate  hedges  to  provide  protection  against  increasing  interest  rates
     attributable  to the outstanding  Senior and Junior Loans.  The Senior Loan
     and the Junior Loan are each repaid out of the collections  from the rental
     payments  attributable to the leases and are recourse only to the extent of
     the  underlying  leases.  The  Senior and Junior  Loans are  included  with
     "Discounted lease rentals" in the accompanying Consolidated Balance Sheets.

     The Residual Loan by Key Corporate Capital, Inc. is secured by the residual
     value of the  equipment  acquired  by the SPS and is  expected to be repaid
     from the proceeds  related to any remarketing of the equipment.  As the SPS
     borrows  money under the  Residual  Loan,  the SPS lends those funds to the
     Company.  The loan to the Company is evidenced by a demand  promissory note
     which can be called only in the event of certain  bankruptcy  or insolvency
     events  relating to the Company,  or if the  remarketing  proceeds from the
     equipment,  together  with any other funds that the SPS has available to it
     after  payment  of  amounts  owed to the  Senior  and  Junior  Lenders  are
     inadequate to pay the amounts then due on the Residual  Loan.  The Residual
     Loan is included  with  "Recourse  debt" in the  accompanying  Consolidated
     Balance Sheets.

     The Company services the leases subject to the Securitization  Facility and
     has been  appointed  the  remarketer  of the  equipment  that  secures  the
     Residual Loan. The Securitization Facility terminates, and the right of the
     Company  to  continue  as  servicer  and  remarketer  terminates,  upon the
     occurrence of various events,  including the Company's  failure to maintain
     certain  financial  ratios and  defaults  under other  indebtedness  of the
     Company.

     The Company had approximately $20 million  outstanding under the Senior and
     Junior Loans and approximately  $3.4 million under the Residual Loan on May
     31,  1999.  Interest on the Senior Loan is equal to the LIBO rate (4.90% at
     May 31,  1999) per annum.  Interest on the Junior Loan is equal to the LIBO
     rate plus 2.8% per annum.  Interest  on the  Residual  Loan is equal to the
     LIBO rate plus 3.25% per annum.

10.  Recourse Bank Debt
     ------------------

     The  Company's  senior,  secured  debt  facility  (the  "Senior  Facility")
     consists of a term loan, a working capital  revolving credit loan ("Working
     Capital Facility") and a warehouse revolving credit loan ("Warehouse Credit
     Facility").  The lender  group  consists  of the agent  bank,  First  Union
     National  Bank,  and  participating  lenders,  BankBoston,  N.A.,  US Bank,
     Norwest  Bank  Colorado,  N.A.,  and  European  America  Bank (the  "Lender
     Group").  The Senior  Facility was renewed on December  23,  1998,  expires
     November  30,  2000,  and may be  renewed  annually  at the  Lender's  sole
     discretion.  Interest on the Senior  Facility is tied to the Lender Group's
     prime  rate or the LIBO rate (8.5% and 5.7%,  respectively at May 31, 1999)
     plus the Applicable  Margin.  The principal  terms of the Warehouse  Credit
     Facility and Working Capital Facility are as follows:

                                                  Warehouse           Working
     (Dollars in thousands)                   Credit Facility   Capital Facility
                                              ---------------   ----------------
     Maximum Amount                             $ 61,250,000       $ 6,900,000
     Borrowings at May 31, 1999                   33,942,024         6,900,000
     Potential availability at May 31, 1999       27,307,976                 -
     Applicable Prime Rate Margin                          -              .25%
     Applicable LIBO Rate Margin                        2.5%             2.75%


                                      F-15

<PAGE>

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

10.  Recourse Bank Debt, continued
     ------------------

     The Term Loan commitment amount is $4 million with a four-year amortization
     schedule to a balloon payment of $2 million due on November 30, 1999. As of
     May 31, 1999, the Term Loan balance was $2,550,000 as a result of scheduled
     quarterly principal repayments.  The Term Loan bears interest at Prime plus
     .75%, and principal and interest are payable quarterly in arrears.

     The Company is required to pay a quarterly commitment fee equal to .375% of
     the unused portion of the Working Capital Facility and the Warehouse Credit
     Facility.  The  Senior  Facility  is  collateralized  by all  assets of the
     Company,  except for the assets which  collateralize the loan from Deutsche
     Financial  Services  ("Deutsche")  described  below.  The  Senior  Facility
     contains  certain  provisions  which  limit the  Company  as to  additional
     indebtedness,   sale  of  assets,  liens,  guarantees,  and  distributions.
     Additionally, the Company must maintain certain specified financial ratios.
     As of May 31,  1999,  the Company was in  compliance  with the terms of the
     Senior  Facility,  except for one financial  ratio  covenant,  for which it
     received a waiver from the Lenders on August 11, 1999.

     On May 29, 1998,  the Company  obtained $6 million in  committed  revolving
     credit  financing  from  Deutsche  for its  CATG  subsidiary.  The  loan is
     collateralized by specific accounts  receivable and inventory  generated or
     purchased  by CATG.  The  facility  is  renewable  annually  at  Deutsche's
     discretion. The outstanding balance related to this portion of the facility
     at May 31, 1999 was approximately  $1,919,110,  which is due on demand. The
     interest rate associated with this facility is Deutsche's  Prime rate (8.5%
     at May 31,  1998)  plus 0.5%.  The  Company  is  required  to pay an annual
     facility fee of 0.125% of the total commitment.  Balances outstanding under
     the facility are guaranteed by Capital Associates International,  Inc. This
     guaranty  obligation is subordinate to the Company's  obligations under the
     Senior Facility.  The Deutsche facility  contains  provisions which require
     CATG to maintain certain minimum levels of capitalization and liquidity. In
     addition, the agreement contains a minimum  capitalization  requirement for
     the Company.

     As of May 31,  1999,  both  the  Company  and its CATG  subsidiary  were in
     compliance  with  the  terms  of the  Deutsche  facility,  except  for  one
     financial ratio covenant.  The Company believes it will be able to obtain a
     waiver from Deutsche. However, should it not be able to obtain a waiver, it
     does not  believe  that  there  would be a material  adverse  effect on the
     financial contition or operations of the Company.

11.  Related Parties
     ---------------

     PIFs

     The Company  sponsors  or  co-sponsors  three PIFs (two of which  purchased
     equipment  under lease from the  Company  during  fiscal  year  1999).  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 no  obligation to make further cash
     contributions.  Amounts  related  to the PIFs for the  years  ended May 31,
     1999, 1998 and 1997 were as follows (in thousands):

                                                      1999      1998      1997
                                                     -------   -------   -------

     Equipment sales margin                          $   437   $ 1,090   $ 1,442
     Fees and distributions
     (included in other income)                        2,757     3,114     2,453
     Investment contributions in
     subordinated limited partnership interests            -       220       280

                                      F-16


<PAGE>

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

11.  Related Parties, continued
     ---------------

     OTHER RELATED PARTIES

     MCC Financial  Corporation  ("MCC")  acquired voting control of the Company
     during fiscal year 1996. Two executive officers of that company, Mr. Walker
     and Mr.  Buckland,  are directors of the Company.  In addition,  Mr. Walker
     became  President  and CEO of the  Company in April  1998.  The Company has
     entered into a consulting  agreement  with Mr.  Buckland and an  employment
     agreement  with Mr.  Walker.  During fiscal years 1999,  1998 and 1997, the
     Company paid approximately $555,000,  $650,000 and $810,000,  respectively,
     under these  agreements  including  $150,000 for expenses of Mr.  Walker in
     connection with his relocation to the Company's headquarters in 1997.

     On August 11, 1999, the Company borrowed $350,000 from Messrs. Buckland and
     Walker  and  issued  a  subordinated  note to each in the  face  amount  of
     $175,000. The notes bear interest at 7% per year plus additional contingent
     interest  at 9% per  year  based on the  performance  of  certain  residual
     interests  owned by the  Company.  Principal  and interest  (which  accrues
     quarterly)  are due on August  11,  2002,  subject  to  certain  prepayment
     obligations. The notes are subordinated to all existing recourse bank debt.

12.  Income Taxes
     ------------

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

                                           1999          1998         1997
                                          ------        ------       ------
     Current:
       Federal                            $  765        $   -0-      $  240
       State and local                       135           200          170
                                          ------        ------       ------
                                             900           200          410
                                          ------        ------       ------
     Deferred:
       Federal                              (765)           -0-        (100)
       State and local                      (135)         (200)        (300)
                                          ------        ------       ------
                                            (900)         (200)        (400)
                                          ------        ------       ------
     Total tax provision                  $    0        $    0       $   10
                                          ======        ======       ======

     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:

                                           1999          1998         1997
                                          ------        ------       ------

     Computed "expected" tax expense      $  135        $  515       $  250
     State tax provisions, net of
       federal benefits                       65            85           40
     Reduction in valuation allowance
       for deferred income tax assets       (200)         (600)        (280)
                                          ------        ------       ------
                                          $    0        $    0       $   10
                                          ======        ======       ======

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

                                      F-17


<PAGE>

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

12.  Income Taxes, continued
     ------------

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

<TABLE>
<CAPTION>
                                                                                                   1999         1998        1997
                                                                                                 --------     --------    --------
    <S>                                                                                         <C>          <C>         <C>
     Current:
       Taxes on net income before carryforwards                                                  $ 1,200      $   200     $   710
       Benefit of investment tax credit ("ITC") carryforward utilized                               (300)           -        (300)
                                                                                                 -------      -------     -------
                                                                                                     900          200         410
                                                                                                 -------      -------     -------
     Deferred:
       Tax effect of net change in temporary differences                                             100        1,300        (420)
       Net operating loss ("NOL") carryforwards                                                     (200)        (500)          -
       ITC carryforward utilized                                                                     300           -          300
       ITC carryforward expired                                                                      100          300           -
       Alternative Minimum Tax ("AMT")                                                              (900)        (400)          -
       Decrease in valuation allowance for deferred income tax assets                               (300)        (900)       (280)
                                                                                                 -------      -------     -------
                                                                                                    (900)        (200)       (400)
                                                                                                 -------      -------     -------
     Provision for income taxes                                                                  $     0      $     0     $    10
                                                                                                 =======      =======     =======

     Significant components of the Company's deferred tax liabilities and assets
     as of May 31, 1999 and 1998, were as follows (in thousands):

                                                                                                                1999        1998
                                                                                                              -------     -------
     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     $   200
       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                                                 1,600       1,300
       Other assets and liabilities, net                                                                            -         900
                                                                                                              -------     -------
     Total deferred income tax liabilities                                                                      3,600       2,400
                                                                                                              -------     -------
     Deferred income tax assets:
     Other assets and liabilities, net                                                                          1,100           -
       NOL carryforwards                                                                                          700         500
       ITC carryforwards                                                                                          600       1,000
       AMT credit carryforwards                                                                                 4,600       3,700
                                                                                                              -------     -------
     Total deferred income tax assets                                                                           7,000       5,200
     Valuation allowance for deferred income tax assets                                                             -        (300)
                                                                                                              -------     -------
          Net deferred income tax assets                                                                        7,000       4,900
                                                                                                              -------     -------
          Net deferred income tax asset                                                                       $ 3,400     $ 2,500
                                                                                                              =======     =======

</TABLE>


     At May 31,  1999,  the  Company  has  ITC  carryforwards  of  approximately
     $600,000,  which  expire  from 2000  through  2001,  NOL  carryforwards  of
     approximately  $700,000,  which  expire  from 2013  through  2014,  and AMT
     credits of approximately  $4.6 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.

                                      F-18


<PAGE>

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

12.  Income Taxes, continued
     ------------

     The Company had established a valuation allowance for deferred taxes due to
     the  uncertainty  that the full  amount  of the ITC  carryforwards  will be
     utilized prior to expiration. The valuation allowance was reduced in fiscal
     1999  and  1998  to  reflect  the   utilization   and   expiration  of  ITC
     carryforwards  for  which  the  valuation  allowance  had  previously  been
     provided (approximately $400,000 and $300,000,  respectively). In addition,
     the valuation  allowance was reduced by an additional $600,000 and $300,000
     in  fiscal  1998  and  1997,  respectively,   to  reflect  a  reduction  in
     uncertainty about the utilization of ITC carryforwards in future years. The
     reductions in the valuation  allowance for fiscal years 1999, 1998 and 1997
     were  recorded in the  respective  fiscal  fourth  quarter and  resulted in
     income tax  benefits  of  $100,000,  $464,000  and  $227,000.  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
     net deferred tax assets.

13.  Preferred Stock and Earnings Per Common Share
     ---------------------------------------------

     PREFERRED STOCK

     The Company has authority to issue  2,500,000  shares of preferred stock at
     $0.008 par value.  At May 31, 1999,  no shares of preferred  stock had been
     issued.

     EARNINGS PER COMMON SHARE

     The following is a reconciliation  of the weighted average number of common
     shares used in the calculation of basic and diluted  earnings per share for
     the years ended May 31:
                                                1999         1998        1997
                                              ---------    ---------   ---------

     Weighted average number of
       common shares - basic                  5,173,000    5,117,000   5,004,000
     Common stock options
       (utilizing treasury stock method)        226,000      332,000     399,000
                                              ---------    ---------   ---------
     Weighted average number of common
       shares-assuming dilution               5,399,000    5,449,000   5,403,000
                                              =========    =========   =========

     Common  stock  options  totaling  296,000  were not included in the diluted
     earnings  per share  calculation  for the year ended May 31,  1999  because
     their effect would have been anti-dilutive.

14.  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  eighteen
     months of grant or one year of exercise  result in a tax  deduction for the
     Company equivalent to the taxable gain recognized by the optionee.

     In November  1998, a director of the Company  exercised  stock  options for
     86,250  shares of common stock with an average  exercise  price of $1.53 by
     paying the par value in cash of $690.00 and  issuing a note  payable to the
     Company  equal to  approximately  $131,000,  the  remainder of the exercise
     price. The outstanding  balance at May 31, 1999 was approximately  $131,000
     and was included in the equity section of the balance sheet. The note bears
     interest at the rate of 4.5% compounded  semi-annually  and is due November
     3, 2002.

                                      F-19

<PAGE>

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


14.  Stock Options, continued
     -------------

     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.  Options generally
     become exercisable over a four-year period and have a term of ten years.

     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 of  options  at the grant date
     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:

<TABLE>
<CAPTION>

                                                              1999         1998         1997
                                                            ---------   -----------   ---------

    <S>                                     <C>            <C>         <C>           <C>
     Net income                              As Reported    $ 397,000   $ 1,520,000   $ 733,000
                                             Pro forma      $ 288,000   $ 1,349,000   $ 585,000

     Basic earnings per share                As Reported    $     .08   $      0.30   $    0.15
                                             Pro forma      $     .06   $      0.25   $    0.13

     Earnings per share assuming dilution    As Reported    $     .07   $      0.28   $    0.14
                                             Pro forma      $     .05   $      0.25   $    0.11

</TABLE>


     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 1999, 1998 and 1997,
     respectively:  no dividend  yield;  expected  volatility of 110%,  104% and
     110%;  risk free  interest  rates of 5.61%,  5.62% and 6.58%;  and expected
     lives of five years.

     Additional information on shares subject to options is as follows:

<TABLE>
<CAPTION>
                                                      1999                        1998                           1997
                                             -----------------------     -------------------------      ------------------------
                                                           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           881,000     $  2.50          649,000      $  1.47           693,000     $  1.23
    Granted                                     56,000        3.69          349,000         3.99            90,000        2.88
    Exercised                                 (113,000)       1.41         (112,000)        1.18           (19,000)        .81
    Purchased                                       -                             -            -          (104,000)       1.13
    Forfeited                                  (57,000)       3.74           (5,000)        2.97           (11,000)       2.10
                                             ---------     -------       ----------                     ----------
    Outstanding at the end of the year         767,000        2.65          881,000         2.50           649,000        1.47
                                             =========     =======       ==========                     ==========

    Options exercisable at year-end            582,000                      542,000                        606,000

    Weighted-average fair value of
         options granted during the year     $    2.98                   $     3.60                     $     2.35

</TABLE>
                                      F-20

<PAGE>

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

14.  Stock Options, continued
     -------------

     The following table summarizes  information about stock options outstanding
     at May 31, 1999:

                                 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     63,000    2.45 years    $ 0.73       63,000    $ 0.73
     $ 1.01 - $ 2.00    250,000    8.75 years      1.29      250,000      1.29
     $ 2.01 - $ 3.00    122,000    9.05 years      2.72       85,000      2.60
     $ 3.01 - $ 4.00     40,000    9.57 years      3.25       32,000      3.25
     $ 4.01 - $ 5.00    292,000    9.32 years      4.13      152,000         -
                        -------                              -------
                        767,000    8.54 years      2.65      582,000      2.27
                        =======                              =======

15.  Employee Benefit Plan
     ---------------------

     The Company has a defined  contribution  retirement plan whereby  employees
     who have  completed six months of service may contribute up to 15% of their
     annual  salaries.  The  Company  will match 50% of  non-highly  compensated
     employees contributions subject to a maximum of the lesser of (i) 4% of the
     employee's eligible compensation or (ii) $1,000. The Company contributed an
     aggregate of $162,000 for the years ended May 31, 1999, 1998 and 1997.

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

     Summarized  quarterly  financial  data for the years ended May 31, 1999 and
     1998 are (in thousands, except per share data):

     Fiscal Year 1999:     Total Revenue     Net Income   Basic Income Per Share
     -----------------     -------------     ----------   ----------------------

     First quarter           $ 67,960           $ 143            $ .03
     Second quarter            52,558             146              .03
     Third quarter             58,645             375              .07
     Fourth quarter            64,259            (267)            (.05)

     Fiscal Year 1998:     Total Revenue     Net Income   Basic Income Per Share
     -----------------     -------------     ----------   ----------------------

     First quarter            $ 42,038          $ 141            $ .03
     Second quarter             73,239            735              .15
     Third quarter              82,309            515              .10
     Fourth quarter             83,488            129              .03

     In the fourth quarter fiscal 1999, the Company  recorded a $500,000  charge
     to  reflect   adjustments  to  equipment  purchases  payable  at  its  CATG
     subsidiary.

                                      F-21

<PAGE>

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

17.  Legal Proceedings
     -----------------

     The Company is involved in the following legal proceedings:

     a.   BANK ONE TEXAS,  N.A. V. CAPITAL  ASSOCIATES  INTERNATIONAL,  INC. AND
          CAPITAL  ASSOCIATES,  INC.,  UNITED  STATES  DISTRICT  COURT  FOR  THE
          NORTHERN  DISTRICT  OF TEXAS,  DALLAS  DIVISION,  CIVIL  ACTION NO. 3-
          99CV0697-G

          On March 2, 1999, Bank One Texas,  N.A. ("Bank One") filed a complaint
          against the Company seeking recovery from the Company of $1,324,715.02
          together  with  interest at the lesser of 18% per annum or the maximum
          amount  permitted by law from December 30, 1991. To date, Bank One has
          not served the  complaint on the Company.  Bank One is alleging in the
          lawsuit that the Company breached the terms of its Purchase Agreement,
          dated  December  30,  1991,  with Bank One  pursuant to which Bank One
          agreed  to  purchase  from the  Company,  for an  initial  payment  of
          $1,324,715.02 (the "Bank One Payment"),  certain  furniture,  fixtures
          and equipment  (the "FF&E")  previously  leased to MBank Dallas,  N.A.
          ("MBank").  MBank  defaulted  on the lease in 1989 and was  eventually
          placed in receivership. Bank One filed a lawsuit over the ownership of
          the FF&E and certain  collateral  for MBank's lease  obligations  (the
          "MBank Collateral") in January 1992 (the "MBank Litigation").  See the
          Company's  Annual  Reports on Form 10-K for the fiscal years ended May
          31, 1994 and 1995, for the history of the MBank Litigation.  In August
          1995,  all of the  parties to the MBank  Litigation,  except Bank One,
          settled their claims with respect to the MBank Collateral. The Company
          received approximately $10.8 million as part of the settlement.  Later
          in August 1995,  the Company,  pursuant to the terms of the settlement
          agreement, delivered $2.2 million to Bank One in repayment of the Bank
          One Payment  together  with  interest  thereon.  Bank One rejected the
          tender and returned the $2.2 million to The Company  while  purporting
          to reserve all rights to make a claim to such funds in the future.  In
          August  1998,  the trial court held that Bank One was the owner of the
          FF&E. Now, a year after the trial court's  decision and more than four
          years  since it rejected  The  Company's  tender,  Bank One is seeking
          recovery of the Bank One Payment plus interest  thereon since December
          30, 1991.

          If Bank One pursues this  lawsuit,  the Company  intends to (1) defend
          vigorously the claims  asserted  against it by Bank One and (2) assert
          vigorously all counterclaims it may have against Bank One. The Company
          believes that, at very least, it has strong defenses to the running of
          any  additional  interest  on the  Bank  One  Payment  since  Bank One
          rejected  the  Company's  tender  in August  1995.  The  Company  also
          believes it may have credible defenses to the repayment of any portion
          of the Bank One Payment or any of the interest  thereon  based on Bank
          One's conduct over the past eight years.

     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,  or the matter noted  above,  will have a material
          adverse  effect  on  the  financial  condition  or  operations  of the
          Company.

18.  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 $821,000,  $650,000,  and $502,000 for fiscal years 1999,  1998
     and 1997, respectively.


                                      F-22

<PAGE>

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

18.  Commitments, continued
     -----------

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

          Years Ending May 31,

              2000                      $   805
              2001                          333
              2002                          284
                                        -------
                                        $ 1,422
                                        =======

19.  Business Units
     --------------

     The  Company  conducts   business  with  external   customers  through  the
     operations of its Capital  Associates  ("Leasing")  and Capital  Associates
     Technology  Group  ("Technology  Group")  business  units.  Certain  legal,
     accounting and finance, personnel and other administrative support services
     are provided by employees of Leasing on behalf of Technology Group.  Direct
     costs  of  $150,000  in 1999  associated  with  these  services  have  been
     allocated from Leasing to Technology Group. During 1998, services performed
     by Leasing on behalf of Technology Group were immaterial.

     In evaluating the financial  performance of each business unit,  management
     focuses  on  revenue  and net  income  before  taxes,  on total  assets and
     recourse debt. In 1999, interest expense, net for Technology Group includes
     interest  associated with the term loan utilized to finance the acquisition
     of CATG.  Recourse debt for Technology Group includes amounts borrowed from
     Deutsche  only.   Financial   performance   measurements  for  Leasing  and
     Technology  Group are set forth  below for each of the  Company's  business
     units for fiscal years  ending May 31, 1999 and 1998.  The results for 1998
     reflect information for Technology after its acquisition effective November
     1, 1997.

                                                     1999               1998
                                                   ---------          ---------

     Revenue:
       Leasing                                     $ 216,222          $ 267,188
       Technology Group                               27,148             13,886
                                                   ---------          ---------
                                                   $ 243,370          $ 281,074
                                                   =========          =========

     Interest expense, net:
       Leasing                                     $   9,325          $   5,361
       Technology Group                                  368                132
                                                   ---------          ---------
                                                   $   9,693          $   5,493
                                                   =========          =========

     Net income before taxes:
       Leasing                                     $   1,439          $   1,799
       Technology Group                               (1,042)              (279)
                                                   ---------          ---------
                                                   $     397          $   1,520
                                                   =========          =========
     Total assets:
       Leasing                                     $ 240,536          $ 209,253
       Technology Group                                6,205              4,840
                                                   ---------          ---------
                                                   $ 246,741          $ 214,093
                                                   =========          =========

     Recourse debt:
       Leasing                                     $  48,141          $  47,379
       Technology Group                                1,919              1,709
                                                   ---------          ---------
                                                   $  50,060          $  49,088
                                                   =========          =========

                                      F-23

<PAGE>

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


20.  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,  1999 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, 1999,  discounted  lease rentals and discounted lease rentals
     assigned  to  lenders   arising  from   equipment  sale   transactions   of
     $125,639,000   and   $19,773,000,   respectively,   have  fair   values  of
     $120,107,000 and $18,627,000,  respectively. The fair values were estimated
     utilizing  market rates of comparable  debt having  similar  maturities and
     credit quality as of May 31, 1999.


                                      F-24

<PAGE>



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


                          INDEPENDENT AUDITORS' REPORT







The Board of Directors and Stockholders
Capital Associates, Inc.:

Under date of September 10, 1999, we reported on the consolidated balance sheets
of Capital  Associates,  Inc. and  subsidiaries as of May 31, 1999 and 1998, 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,
1999,  as contained  in the  Company's  annual  report on Form 10-K for the year
1999. 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.






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


Denver, Colorado
September 10, 1999

                                      F-25


<PAGE>

                    CAPITAL ASSOCIATES, INC. AND SUBSIDIARIES
                     SCHEDULE II - VALUATION AND QUALIFYING
                              ACCOUNTS AND RESERVES
                 for the Years Ended May 31, 1999, 1998 and 1997
                                 (in thousands)

<TABLE>
<CAPTION>


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

Year ended May 31, 1999:
-----------------------
<S>                                            <C>            <C>             <C>            <C>
Allowance for doubtful accounts:
-  accounts receivable                          $    90        $   76          $  (30)        $   136
Allowance for losses:
-  residual values arising from equipment
   under lease sold to private investors             64             -             (61)              3
-  leased equipment                                 587           479             (39)          1,027
                                                -------        ------          ------         -------

                                                $   741        $  555          $ (130)        $ 1,166
                                                =======        ======          ======         =======

Year ended May 31, 1998:
-----------------------
Allowance for doubtful accounts:
-  accounts receivable                          $    30        $  60           $    -         $    90
Allowance for losses:
-  residual values arising from equipment
   under lease sold to private investors            157            -              (93)             64
-  leased equipment                                 707          645             (765)            587
                                                -------        -----           ------         -------

                                                $   894        $ 705           $ (858)        $   741
                                                =======        =====           ======         =======

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
                                                =======        =====           ======         =======
</TABLE>



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



                 See accompanying independent auditors' report.


                                      F-26