<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

FORM 10-K

(X)  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

( )  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934


COMMISSION FILE NUMBER:  33-89476
                      COMMONWEALTH INCOME & GROWTH FUND II

             (Exact name of registrant as specified in its charter)

         Pennsylvania                                23-2795120
(State or other jurisdiction of          (I.R.S. Employer Identification Number)
incorporation or organization)


                            1160 West Swedesford Road
                           Berwyn, Pennsylvania 19312
                                 (610) 647-6800

Indicate by check mark whether the registrant (I) 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, and (ii) has been subject to such filing requirements
for the past 90 days:

YES   [X]    NO  [  ]

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

                       DOCUMENTS INCORPORATED BY REFERENCE

  (Specific Sections Incorporated are identified under applicable items herein)

         Certain exhibits to the Company's Registration Statement on Form S-1
(File No. 33-89476) are incorporated by reference as Exhibits in Part IV of this
Report.


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PART I

ITEM 1:           BUSINESS

GENERAL

Commonwealth Income and Growth Fund II (the "Partnership") was formed on January
13, 1995, under the Pennsylvania Revised Uniform Limited Partnership Act. The
Partnership began offering $15,000,000 of Units of Limited Partnership ("Units")
to the public on May 12, 1995 (the "Offerings"). On September 22, 1995,
$2,521,380 in subscriptions from investors were released by the escrow agent and
126,118 Units were admitted as Limited Partners of the Partnership. The
Partnership terminated its offering of Units on May 12, 1997, with 461,817 Units
($9,235,185) admitted as Limited Partners of the Partnership.

See "The Glossary" below for the definition of capitalized terms not otherwise
defined in the text of this report.

PRINCIPAL INVESTMENT OBJECTIVES
The Partnership was formed for the purpose of acquiring various types of
Equipment, including computer peripheral and other similar capital equipment.
The Partnership utilized the net proceeds of the Offering to purchase IBM and
IBM compatible computer peripheral and other similar capital equipment. The
Partnership utilizes Retained Proceeds and debt financing (not to exceed 30% of
the aggregate cost of the Equipment owned or subject to Conditional Sales
Contract by the Partnership at the time the debt is incurred) to purchase
additional Equipment. The Partnership acquires Equipment which is subject to
lease principally to U.S. corporations and other institutions pursuant
predominantly to Operating Leases. The Partnership retains the flexibility to
enter into Full Payout Net Leases and Conditional Sales Contracts, but has not
done so.

The Partnership's principal investment objectives are to;

     (a) acquire, lease and sell Equipment to generate revenues from operations
         sufficient to provide quarterly cash distributions to Limited Partners;
     (b) preserve and protect Limited Partners' capital;
     (c) use a portion of Cash Flow and Net Disposition Proceeds derived from
         the sale, refinancing or other disposition of Equipment to purchase
         additional Equipment; and
     (d) refinance, sell or otherwise dispose of Equipment in a manner that will
         maximize the proceeds to the Partnership.

THERE CAN BE NO ASSURANCE THAT ANY OF THESE OBJECTIVES WILL BE ATTAINED.

Limited Partners do not have the right to vote on or otherwise approve or
disapprove any particular investment to be made by the Partnership.

Although the Partnership has acquired predominately new Equipment, the
Partnership may purchase used Equipment. Generally, Equipment is acquired from
manufacturers, distributors, leasing companies, agents, owner-users,
owner-lessors, and other suppliers upon terms that vary depending upon the
Equipment and supplier involved. Manufacturers and distributors usually furnish
a limited warranty against defects in material and workmanship and some purchase
agreements for Equipment provide for service and replacement of parts during a
limited period. Equipment purchases are also made through lease brokers and on
an ad hoc basis to meet the needs of a particular lessee.

As of December 31, 1999, all Equipment purchased by the Partnership is subject
to an Operating Lease or an Operating Lease was entered into with a third party
when the Partnership acquired an item of Equipment. The Partnership may also
engage in sale/leaseback transactions, pursuant to which the Partnership would
purchase Equipment from companies that would then immediately lease the
Equipment


                                                                               2
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from the Partnership. The Partnership may also purchase Equipment which is
leased under Full Payout Net Leases or sold under Conditional Sales Contracts at
the time of acquisition or the Partnership may enter into a Full Payout Net
Lease or Conditional Sales Contract with a third party when the Partnership
acquires an item of Equipment.

The Partnership may enter into arrangements with one or more manufacturers
pursuant to which the Partnership purchases from such manufacturers Equipment
which has previously been leased directly by the manufacturer to third parties
("vendor leasing agreements"). The Partnership and manufacturers may agree to
nonrecourse loans to the Partnership from the manufacturers to finance the
acquisition of Equipment secured by the Equipment and the receivables due to the
manufacturers from users of such Equipment. It is expected that the
manufacturers of Equipment will provide maintenance, remarketing and other
services for the Equipment subject to such agreements. As of December 31, 1999,
the Partnership has not entered into any such agreements.

The General Partner has the discretion consistent with its fiduciary duty to
change the investment objectives of the Partnership if it determines that such a
change is in the best interest of the Limited Partners and so long as such a
change is consistent with the Partnership Agreement. The General Partner will
notify the Limited Partners if it makes such a determination to change the
Partnership's investment objectives.

TYPES OF EQUIPMENT

COMPUTER PERIPHERAL EQUIPMENT. Computer peripheral equipment consists of devices
used to convey information into and out of a central processing unit (or
"mainframe") of a computer system, such as tape drives, disk drives, tape
controllers, disk controllers, printers, terminals and related control units,
all of which are in some way related to the process of storing, retrieving, and
processing information by computer.

The Partnership acquires primarily IBM manufactured or IBM compatible equipment.
The General Partner believes that dealing in IBM or IBM compatible equipment is
particularly advantageous because of the large IBM customer base, policy of
supporting users with software and maintenance services and the large amount of
IBM and IBM compatible equipment in the marketplace.

Computer technology has developed rapidly in recent years and is expected to
continue to do so. Technological advances have permitted continued reductions in
the cost of computer processing capacity, thereby permitting applications not
economically feasible a few years ago. Much of the older IBM and IBM compatible
computer peripheral equipment has not been retired from service, because
software is generally interchangeable between older and newer equipment, and
older equipment is capable of performing many of the same functions as newer
equipment. The General Partner believes that historically values of peripheral
equipment have been affected less dramatically by changes in technology than
have the values of central processing units. An equipment user who upgrades to a
more advanced central processor generally can continue to use his existing
peripheral equipment. Peripheral equipment nevertheless is subject to declines
in value as new, improved models are developed and become available.
Technological advances and other factors, including year 2000 issues discussed
below in Management Discussion and Analysis, have at times caused dramatic
reduction in the market prices of older models of IBM and IBM compatible
computer peripheral equipment from the prices at which they were originally
introduced.

OTHER EQUIPMENT-RESTRICTIONS. The Partnership acquires computer peripheral
equipment, such as tape drives, disk drives, tape controllers, disk controllers,
printers, terminals and related control units, all of which are in some way
related to the process of storing, retrieving and processing information by
computer. The General Partner is also authorized, but does not presently intend,
to cause the Partnership to invest in non-IBM compatible computer peripheral,
data processing, telecommunication or medical technology equipment. The
Partnership may not invest in any of such other types of Equipment (i) to the
extent that the purchase price of such Equipment, together with the aggregate
Purchase Price of all such other types of Equipment then owned by the
Partnership, is in excess of 25% of the total cost of all of the assets of the
Partnership at the time of the Partnership's commitment to invest therein and
(ii) unless the General Partner determines that such purchase is in the best
economic interest of the Partnership at the time


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of the purchase and, in the case of non-IBM compatible peripheral Equipment,
that such Equipment is comparable in quality to similar IBM or IBM compatible
Equipment. There can be no assurance that any Equipment investments can be found
which meet this standard. Accordingly, there can be no assurance that
investments of this type will be made by the Partnership.

DIVERSIFICATION

Diversification is generally desirable to minimize the effects of changes in
specific industries, local economic conditions or similar risks. However, the
extent of the Partnership's diversification, in the aggregate and within each
category of Equipment, depends in part upon the financing which can be assumed
by the Partnership or borrowed from third parties on satisfactory terms. The
Partnership's policy not to borrow on a recourse basis will further limit its
financing options. Diversification also depends on the availability of various
types of Equipment. As of December 31, 1999, the Partnership has acquired a
diversified Equipment portfolio, which it has leased to 23 different companies
located throughout the United States. Approximately 18% of the Equipment
acquired by the Partnership consists of Printers. Approximately another 26% of
the Equipment acquired by the Partnership consists of Workstations.
Approximately 28% of the Equipment acquired by the Partnership consists of tape
storage. Approximately 23% of the Equipment acquired by the Partnership consists
of Escon drivers. Approximately 5% of the Equipment acquired by the Partnership
consists of communication controllers. During the operational stage of the
Partnership, the Partnership may not at any one point in time to lease (or sell
pursuant to a Conditional Sales Contract) more than 25% of the Equipment to a
single Person or Affiliated group of Persons.

DESCRIPTION OF LEASES

The Partnership to date has purchased, and in the future intends to continue to
purchase only Equipment that is subject to a lease or for which a lease or
similar agreement will be entered into contemporaneously with the consummation
of the Partnership's acquisition of the Equipment. The General Partner to date
has leased and in the future intends to lease most of the Equipment purchased by
the Partnership to third parties pursuant to Operating Leases. Operating Leases
are relatively short-term (12 to 48 month) leases under which the aggregate
noncancellable rental payments during the original term of the lease are not
sufficient to permit the lessor to recover the purchase price of the subject
Equipment. The Equipment may also be leased pursuant to Full Payout Net Leases.
Full Payout Net Leases are leases under which the aggregate noncancellable
rental payments during the original term of the lease are at least sufficient to
recover the purchase price of the subject Equipment. It is anticipated that the
Partnership will enter into few, if any, Full Payout net Leases. The General
Partner may also enter into Conditional Sales Contracts for Equipment. A
Conditional Sales Contract generally provides that the noncancellable payments
to the seller over the term of the contract are sufficient to recover the
investment in such Equipment and to provide a return on such investment. Under a
Conditional Sales Contract, the seller reserves title to, and retain a security
interest in, the Equipment until the Purchase Price of the Equipment is paid. As
of December 31, 1999, the Partnership has not entered into any Full Payout Net
Leases or Conditional Sales Contracts for Equipment and does not presently
intend to do so.

In general, the terms of the Partnership's leases, whether the Equipment is
leased pursuant to an Operating lease or a Full Payout Net Lease, depend upon a
variety of factors, including: the desirability of each type of lease from both
an investment and a tax point of view; the relative demand among lessees for
Operating or Full Payout Net Leases; the type and use of Equipment and its
anticipated residual value; the business of the lessee and its credit rating;
the availability and cost of financing; regulatory considerations; the
accounting treatment of the lease sought by the lessee or the Partnership; and
competitive factors.

An Operating Lease generally represents a greater risk to the Partnership than a
Full Payout Net Lease, because in order to recover the purchase price of the
subject Equipment and earn a return on such investment, it is necessary to renew
or extend the Operating Lease, lease the Equipment to a third party at the end
of the original lease term, or sell the Equipment. On the other hand, the term
of an Operating Lease is generally much shorter than the term of a Full Payout
Net Lease, and the lessor is thus afforded an opportunity under an Operating
Lease to re-lease or sell the subject Equipment at an earlier stage of the



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Equipment's life cycle than under a Full Payout Net Lease. Also, the annual
rental payments received under an Operating Lease are ordinarily higher than
those received under a Full Payout Net Lease.

The Partnership's policy is to generally enter into "triple net leases" (or the
equivalent, in the case of a Conditional Sales Contract) which typically provide
that the lessee or some other party bear the risk of physical loss of the
Equipment; pay taxes relating to the lease or use of the Equipment; maintain the
Equipment; indemnify the Partnership-lessor against any liability suffered by
the Partnership as the result of any act or omission of the lessee or its
agents; maintain casualty insurance in an amount equal to the greater of the
full value of the Equipment and a specified amount set forth in the lease; and
maintain liability insurance naming the Partnership as an additional insured
with a minimum coverage which the General Partner deems appropriate. In
addition, the Partnership may purchase "umbrella" insurance policies to cover
excess liability and casualty losses, to the extent deemed practicable and
advisable by the General Partner. As of December 31, 1999, all leases that have
been entered into are "triple net leases".

The General Partner has not established any standards for lessees to whom it
will lease Equipment and, as a result, there is not an investment restriction
prohibiting the Partnership from doing business with any lessees. However, a
credit analysis of all potential lessees is undertaken by the General Partner to
determine the lessee's ability to make payments under the proposed lease. The
General Partner may refuse to enter into an agreement with a potential lessee
based on the outcome of the credit analysis.

The terms and conditions of the Partnership's leases, or Conditional Sales
Contracts, are each determined by negotiation and may impose substantial
obligations upon the Partnership. Where the Partnership assumes maintenance or
service obligations, the General Partner generally causes the Partnership to
enter into separate maintenance or service agreements with manufacturers or
certified maintenance organizations to provide such services. Such agreements
generally require annual or more frequent adjustment of service fees. As of
December 31, 1999, the Partnership has not entered into any such agreements.

BORROWING POLICIES

The General Partner, at its discretion, may cause the Partnership to incur debt
in the maximum aggregate amount of 30% of the aggregate cost of the Equipment
owned, or subject to Conditional Sales Contract (except that the Partnership may
not incur any indebtedness to acquire Equipment until the net proceeds of the
Offering are fully invested, or committed to investment, in Equipment). The
Partnership will incur only non-recourse debt, which is secured by Equipment and
lease income there from. Such leveraging permits the Partnership to increase the
aggregate amount of its depreciable assets, and, as a result, potentially
increases both its lease revenues and its federal income tax deductions above
those levels, which would be achieved without leveraging. There is no limit on
the amount of debt that may be incurred in connection with the acquisition of
any single item of Equipment. Any debt incurred is fully amortized over the term
of the initial lease or Conditional Sales Contract to which the Equipment
securing the debt is subject. The precise amount borrowed by the Partnership
depends on a number of factors, including the types of Equipment acquired by the
Partnership; the creditworthiness of the lessee; the availability of suitable
financing; and prevailing interest rates. The Partnership is flexible in the
degree of leverage it employs, within the permissible limit. There can be no
assurance that credit will be available to the Partnership in the amount or at
the time desired or on terms considered reasonable by the General Partner. As of
December 31, 1999, the aggregate nonrecourse debt outstanding of $3,326,191 was
22% of the aggregate cost of the Equipment owned.

The Partnership may continue to purchase some items of Equipment without
leverage. If the Partnership purchases an item of Equipment without leverage and
thereafter suitable financing becomes available, it may then obtain the
financing, secure the financing with the purchased Equipment to the extent
practicable and invest any proceeds from such financing in additional items of
Equipment, or it may distribute some or all of such proceeds to the Limited
Partners. Any such later financing will be on terms consistent with the terms
applicable to borrowings generally. As of December 31, 1999, the Partnership has
not exercised this option.

After the net proceeds of the offering are fully invested in Equipment, the
General Partner plans to continue to cause the Partnership to borrow funds, to
the fullest extent practicable, at interest rates fixed at the time of
borrowing. However, the Partnership may borrow funds at rates, which vary with
the "prime"


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or "base" rate. If lease revenues were fixed, a rise in the "prime" or "base"
rate would increase borrowing costs and reduce the amount of the Partnership's
income and cash available for distribution. Therefore, the General Partner is
permitted to borrow funds to purchase Equipment at fluctuating rates only if the
lease for such Equipment provides for fluctuating rental payments calculated on
a similar basis.

Any additional debt incurred by the Partnership must be nonrecourse. Nonrecourse
debt, in the context of the business to be conducted by the Partnership, means
that the lender providing the funds can look for security only to the Equipment
pledged as security and the proceeds derived from leasing or selling such
Equipment. Neither the Partnership nor any Partner (including the General
Partner) would be liable for repayment of any nonrecourse debt.

Loan agreements may also require that the Partnership maintain certain reserves
or compensating balances and may impose other obligations upon the Partnership.
Moreover, since a significant portion of the Partnership's revenues from the
leasing of Equipment will be reserved for repayment of debt, the use of
financing reduces the cash, which might otherwise be available for distributions
until the debt has been repaid and may reduce the Partnership's Cash Flow over a
substantial portion of the Partnership's operating life. As of December 31,
1999, no such agreements existed.

The General Partner and any of its Affiliates may, but are not required to, make
loans to the Partnership on a short-term basis. If the General Partner or any of
its Affiliates makes such a short-term loan to the Partnership, the General
Partner of Affiliate may not charge interest at a rate greater that the interest
rate charged by unrelated lenders on comparable loans for the same purpose in
the same locality. In no event is the Partnership required to pay interest on
any such loan at an annual rate greater than three percent over the "prime rate'
from time to time announced by PNC Bank, Philadelphia, Pennsylvania ("PNC
Bank"). All payments of principal and interest on any financing provided by the
General Partner or any of its affiliates are due and payable by the Partnership
within 12 months after the date of the loan.

REFINANCING POLICIES

Subject to the limitations set forth in "Borrowing Policies" above, the
Partnership may refinance its debt from time to time. With respect to a
particular item of Equipment, the General Partner will take into consideration
such factors as the amount of appreciation in value, if any, to be realized, the
possible risks of continued ownership, and the anticipated advantages to be
obtained for the Partnership, as compared to selling such Equipment. As of
December 31, 1999, the Partnership has not refinanced any of its debt.

Refinancing, if achievable, may permit the Partnership to retain an item of
Equipment and at the same time to generate additional funds for reinvestment in
additional Equipment or for distribution to the Limited Partners.

LIQUIDATION POLICIES

The General Partner intends to cause the Partnership to begin disposing of its
Equipment in approximately January 2006. Notwithstanding the Partnership's
objective to sell all of its assets and dissolve by December 31, 2006, the
General Partner may at any time cause the Partnership to dispose of all its
Equipment and, dissolve the Partnership upon the approval of Limited Partners
holding a Majority in Interest of Units.

Particular items of Equipment may be sold at any time if, in the judgment of the
General Partner, it is in the best interest of the Partnership to do so. The
determination of whether particular items of Partnership Equipment should be
sold or otherwise disposed of is made by the General Partner after consideration
of all relevant factors (including prevailing general economic conditions,
lessee demand, the General Partner's views of current and future market
conditions, the cash requirements of the Partnership, potential capital
appreciation, cash flow and federal income tax considerations), with a view
toward achieving the principal investment objectives of the Partnership. As
partial payment for Equipment sold, the Partnership may receive purchase money
obligations secured by liens on such Equipment. Subject to the General Partner's
discretion the Partnership may extend beyond December 31, 2006, if deemed
beneficial to the Partnership.


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MANAGEMENT OF EQUIPMENT

Equipment management services for the Partnership's Equipment is provided by the
General Partner and its Affiliates and by persons employed by the General
Partner. Such services will consist of collection of income from the Equipment,
negotiation and review of leases, Conditional Sales Contracts and sales
agreements, releasing and leasing-related services, payment of operating
expenses, periodic physical inspections and market surveys, servicing
indebtedness secured by Equipment, general supervision of lessees to assure that
they are properly utilizing and operating Equipment, providing related services
with respect to Equipment, supervising, monitoring and reviewing services
performed by others in respect to Equipment and preparing monthly Equipment
operating statements and related reports.

COMPETITION

The equipment leasing industry is highly competitive. The Partnership competes
with leasing companies, equipment manufacturers and their affiliated financing
companies, distributors and entities similar to the Partnership (including other
programs sponsored by the General Partner), some of which have greater financial
resources than the Partnership and more experience in the equipment leasing
business than the General Partner. Other leasing companies and equipment
manufacturers, their affiliated financing companies and distributors may be in a
position to offer equipment to prospective lessees on financial terms, which are
more favorable than those, which the Partnership can offer. They may also be in
a position to offer trade-in privileges, software, maintenance contracts and
other services, which the Partnership may not be able to offer. Equipment
manufacturers and distributors may offer to sell equipment on terms (such as
liberal financing terms and exchange privileges), which will afford benefits to
the purchaser similar to those obtained through leases. As a result of the
advantages, which certain of its competitors may have, the Partnership may find
it necessary to lease its Equipment on a less favorable basis than certain of
its competitors.

The computer peripheral equipment industry is extremely competitive. Competitive
factors include pricing, technological innovation and methods of financing.
Certain manufacturer-lessors maintain advantages through patent protection,
where applicable, and through a policy that combines service and hardware with
payment accomplished through a single periodic charge.

The dominant firm in the computer marketplace is International Business Machines
Corporation, and its subsidiary IBM Credit Corporation is the dominant force in
the leasing of IBM equipment. Because of IBM's substantial resources and
dominant position, revolutionary changes with respect to computer systems,
pricing, marketing practices, technological innovation and the availability of
new and attractive financing plans could occur at any time. Significant action
in any of these areas by IBM or IBM Credit Corporation might materially
adversely affect the Partnership's business or the other manufacturers with whom
the General Partner might negotiate purchase and other agreements. Any adverse
effect on these manufacturers could be reflected in the overall return realized
by the Partnership on equipment from those manufacturers of from IBM.

INVESTMENTS
As of March 29, 2000, the Partnership has purchased, or has made the commitment
to purchase, the following Equipment:

<TABLE>
<CAPTION>

                                    EQUIPMENT                     LIST         PURCHASE       MONTHLY LEASE
LESSEE                     MFG      DESCRIPTION                   PRICE          PRICE       RENT        TERM
<S>                        <C>      <C>                        <C>            <C>            <C>          <C>
Chrysler                   STK      (2) 9490-M34                 686,158        490,110      12,001       48
ADP                        IBM      (1) 3490-A20                 422,900        178,673       4,290       36
Household Intl.            STK      (3) 9490-M34                 671,898        405,628       9,100       36
Timken                     DEC      (1) Alpha server             259,507        204,781       5,308       36
Timken                     DEC      (1) Alpha server              46,657         40,928       1,062       36
Johnson Control            HP       (13) HP9000-C110             441,415        304,718       7,961       36
Honda R&D                  SGI      Onyx Infinite Reality        323,108        263,498       7,076       36
AT&T                       IBM      (1) 3900 DW1/DW2             746,485        477,466      10,205       36
Federated                  IBM      (38) 3130-020                909,910        600,000      15,162       34


                                                                               7
<PAGE>

Lucent                     SUN      (1)E6000 server              642,452        461,207      12,042       36
Lucent upgrade             SUN      Upgrade to server             97,000         69,559       2,046       34
AT&T                       STK      (9) 9490-M34               2,015,694      1,268,909      31,144       36
Avon                       IBM      (75%) (8) 3900-OW1         2,002,710      1,542,485      37,058       36
Chrysler                   IBM      (2) ES3000                 1,146,500        778,454      22,844       24
Allied Signal              HP       (20) C180 workstations       838,339        362,615      11,775       24
Transamerica               SUN      (2) ES3000 servers           212,730        154,965       3,976       36
Computer Science Corp.     SGI      (50%) (141) workstations   2,055,893        822,455      20,174       36
Charles Schwab             IBM      (2) 9032-003                 845,043        523,399      21,031       36
Charles Schwab             IBM      (20%)(6)9032-003           2,479,443        307,983       6,989       36
Equitable Life             SUN      (2) E3000                    336,220        205,863       6,491       36
Chase                      SUN      (3) E45D                     358,562        244,584       8,386       24
Aetna                      STK      (2) 9490-M34                 535,932        194,272       4,395       36
Equitable Life             SUN      6000 server                  617,310        466,946      12,186       36
Chrysler                   STK      Redwood tape drives          466,140        275,094       6,313       34
Chrysler                   STK      Redwood tape drives          310,760        183,396       4,209       36
Depository Trust           ESCON    (4) 9032  directors        1,644,436      1,312,867      33,376       31
Depository Trust           ESCON    (4) 9032  directors        1,644,436      1,225,784      33,376       27
Pitney Bowes               IBM      (1) 3590                   1,846,080      1,026,634      20,045       38
Lucent                     SUN      (1) 4500 server              184,897        120,701       3,091       36
Kaiser                     IBM      (7) RS6000                   770,611        560,621      14,928       36
Kaiser                     IBM      (2) RS170                    209,445        138,149       3,666       36
Kaiser                     CISCO    Routers                       78,172         62,538       1,637       36
Thompson                   EPSON    (16)Powelite Projectors      146,960         93,002       2,578       36
Thompson                   NORTEL   Network LLXR759              165,000        109,328       4,245       36
Great Lakes Chemical       CISCO    (100) Routers                635,385        456,368      12,073       36
AT&T                       NM       Net Ports DS3                 16,288         15,229         435       36

</TABLE>

RESERVES

Because the Partnership's leases are on a "triple-net" basis, no permanent
reserve for maintenance and repairs will be established from the Offering
proceeds. However, the General Partner, in its sole discretion, may retain a
portion of the Cash Flow and Net Disposition Proceeds available to the
Partnership for maintenance, repairs and working capital. There are no
limitations on the amount of Cash Flow and Net Disposition Proceeds that may be
retained as reserves. Since no reserve will be established if available Cash
Flow of the Partnership is insufficient to cover the Partnership's operating
expenses and liabilities, it may be necessary for the Partnership to obtain
additional funds by refinancing its Equipment or borrowing.

GENERAL RESTRICTIONS

     Under the Partnership Agreement, the Partnership is not permitted, among
other things, to:

     (a) invest in junior trust deeds unless received in connection with the
     sale of an item of Equipment in an aggregate amount which does not exceed
     30% of the assets of the Partnership on the date of the investment;

     (b) invest in or underwrite the securities of other issuers;
     (c) acquire any Equipment for Units;
     (d) issue senior securities (except that the issuance to lenders of notes
         or other evidences of indebtedness in connection with the financing or
         refinancing of Equipment or the Partnership's business shall not be
         deemed to be the issuance of senior securities);
     (e) make loans to any Person, including the General Partner or any of its
         Affiliates, except to the extent a Conditional Sales Contract
         constitutes a loan;
     (f) sell or lease any Equipment to, lease any Equipment from, or enter into
         any sale-leaseback transactions with, the General Partner or any of its
         Affiliates; or
     (g) give the General Partner or any of its Affiliates an exclusive right or
         employment to sell the Partnership's Equipment.


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<PAGE>

The General Partner has also agreed in the Partnership Agreement to use its best
efforts to assure that the Partnership shall not be deemed an "investment
company" as such term is detained in the Investment Company Act of 1940.

The General Partner and its Affiliates may engage in other activities, whether
or not competitive with the Partnership. The Partnership Agreement provides,
however, that neither the General Partner nor any of its Affiliates may receive
any rebate or "give up" in connection with the Partnership's activities or
participate in reciprocal business arrangements that circumvent the restrictions
in the Partnership Agreement against dealings with Affiliates.

EMPLOYEES

The Partnership has no employees and receives administrative and other services
from the General Partner, which has 12 employees.

ITEM 2:  PROPERTIES

NOT APPLICABLE

ITEM 3:  LEGAL PROCEEDINGS

NOT APPLICABLE

ITEM 4:  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

NOT APPLICABLE

PART II

ITEM 5:  MARKET FOR THE REGISTRANTS COMMON EQUITY AND
         RELATED STOCKHOLDER MATTERS

There is no public market for the Units nor is it anticipated that one will
develop. As of December 31, 1999, there were 501 holders of Units. The Units are
not listed on any exchange or permitted to trade on any over-the-counter market.
In addition, there are substantial restrictions on the transferability of Units.

GENERAL LIMITATIONS

Units cannot be transferred without the consent of the General Partner, which
may be withheld in its absolute discretion. The General Partner monitors
transfers of Units in an effort to ensure that all transfers are within certain
safe harbors promulgated by the IRS to furnish guidance regarding publicly
traded partnerships. These safe harbors limit the number of transfers that can
occur in any one year. The General Partner intends to cause the Partnership to
comply with the safe harbor that permits nonexempt transfers and redemptions of
Units of up to five percent of the total outstanding interest in the
Partnership's capital or profits in any one year.

REDEMPTION PROVISION

Upon the conclusion of the 30-month period following the termination of the
Offering, the Partnership may, at the sole discretion of the General Partner,
repurchase a number of the outstanding Units. After such 30 month period, on a
semi-annual basis, the General Partner, at its discretion, will establish an


                                                                               9
<PAGE>

amount for redemption, generally not to exceed two percent of the outstanding
Units per year, subject to the General Partner's good faith determination that
such redemptions will not (a) cause the Partnership to be taxed as a corporation
under Section 7704 of the Code or (b) impair the capital or operations of the
Partnership. (The Partnership may redeem Units in excess of the two percent
limitation if, in the good faith judgment of the General Partner, the conditions
imposed in the preceding sentence would remain satisfied.) The redemption price
for Units will be 105% of the selling Limited Partner's Adjusted Capital
Contributions attributable to the Units for sale. Following the determination of
the annual redemption amount, redemptions will occur on a semi-annual basis and
all requests for redemption, which must be made in writing, must be on file as
of the Record Date in which the redemption is to occur. The General Partner will
maintain a master list of requests for redemption with priority being given to
Units owned by estates, followed by IRAs and Qualified Plans. All other requests
will be considered in the order received. Redemption requests made by or on
behalf of Limited Partners who are not affiliated with the General Partner or
its Affiliates will be given priority over those made by Limited Partners who
are affiliated with the General Partner or its Affiliates. All redemption
requests will remain in effect until and unless canceled, in writing, by the
requesting Limited Partner(s).

The Partnership will accept redemption requests beginning 30 months following
the termination of the Offering. There will be no limitations on the period of
time that a redemption request may be pending prior to its being granted.
Limited Partners will not be required to hold their interest in the Partnership
for any specified period prior to their making a redemption request.

In order to make a redemption request, Limited Partners will be required to
advise the General Partner in writing of such request. Upon receipt of such
notification, the Partnership will provide detailed forms and instructions to
complete the request.

EXEMPT TRANSFERS

The following six categories of transfers are exempt transfers for purposes of
calculating the volume limitations imposed by the IRS and will generally be
permitted by the General Partner:

     (1) transfers in which the basis of the Unit in the hands of the transferee
         is determined, in whole or in part, by reference to its basis in the
         hands of the transferor (for example, Units acquired by corporations in
         certain reorganizations, contributions to capital, gifts of Units,
         Units contributed to another partnership, and no liquidating as well as
         liquidating distributions by a parent partnership to its partners of
         interests in a sub partnership);
     (2) transfers at death;
     (3) transfers between members of a family (which include brothers and
         sisters, spouse, ancestors, and lineal descendants);
     (4) transfers resulting from the issuance of Units by the Partnership in
         exchange for cash, property, or services;
     (5) transfers resulting from distributions from Qualified Plans; and
     (6) any transfer by a Limited Partner in one or more transactions during
         any 30-day period of Units representing in the aggregate more than five
         percent of the total outstanding interests in capital or profits of the
         Partnership.

ADDITIONAL RESTRICTIONS ON TRANSFER

Limited Partners who wish to transfer their Units to a new beneficial owner are
required to pay the Partnership up to $50 for each transfer to cover the
Partnership's cost of processing the transfer application and take such other
actions and execute such other documents as may be reasonably requested by the
General Partner. There is no charge for re-registration of a certificate in the
event of a marriage, divorce, death, or trust so long as the transfer is not a
result of a sale of the Units.

In addition, the following restrictions apply to each transfer: (i) no transfer
may be made if it would cause 25% or more of the outstanding Units to be owned
by benefit plans; and (ii) no transfer is permitted unless the transferee
obtains such governmental approvals as may reasonably be required by the General
Partner, including without limitation, the written consents of the Pennsylvania
Securities Commissioner and of any other state securities agency or commission
having jurisdiction over the transfer.


                                                                              10
<PAGE>

ALLOCATION AND DISTRIBUTION BETWEEN THE GENERAL PARTNER AND THE LIMITED PARTNERS

Cash distributions, if any, are made quarterly on December 31, March 31, June
30, and September 30 of each year. Distributions are made 99% to the Limited
Partners and one percent to the General Partner until the Limited Partners have
received an amount equal to their Capital Contributions plus the Priority
Return; thereafter, cash distributions will be made 90% to Limited Partners and
10% to the General Partner. Distributions made in connection with the
liquidation of the Partnership or a Partner's Units will be made in accordance
with the Partner's positive Capital Account balance as determined under the
Partnership Agreement and Treasury Regulations.

The Cumulative Return is calculated on the Limited Partners' Adjusted Capital
Contributions for their Units. The Adjusted Capital Contributions will
initially be equal to the amount paid by the Limited Partners for their
Units. If distributions at any time exceed the Cumulative Return, the excess
will reduce the Adjusted Capital Contributions, decreasing the base on which
the Cumulative Return is calculated.

If the proceeds resulting from the sale of any Equipment are reinvested in
Equipment, sufficient cash will be distributed to the Partners to pay the
additional federal income tax resulting from such sale for a Partner in a 39.6%
federal income tax bracket or, if lower, the maximum federal income tax rate in
effect for individuals for such taxable year.

Generally, the General Partner is allocated Net Profits equal to its cash
distributions (but not less than one percent of Net Profits) and the balance is
allocated to the Limited Partners. Net Profits arising from transactions in
connection with the termination or liquidation of the Partnership are allocated
in the following order: (1) First, to each Partner in an amount equal to the
negative amount, if any, of his Capital Account; (2) Second, an amount equal to
the excess of the proceeds which would be distributed to the Partners based on
the Operating Distributions to the Partners over the aggregate Capital Accounts
of all the Partners, to the Partners in proportion to their respective shares of
such excess, and (3) Third, with respect to any remaining Net Profits, to the
Partners in the same proportions as if the distributions were Operating
Distributions. Net Losses, if any, are in all cases allocated 99% to the Limited
Partners and one percent to the General Partner.

Net Profits and Net Losses are computed without taking into account, in each
taxable year of the Partnership, any items of income, gain, loss or deduction
required to be specially allocated pursuant to Section 704(b) of the Code and
the Treasury Regulation promulgated there under. No Limited Partner is required
to contribute cash to the capital of the Partnership in order to restore a
closing Capital Account deficit, and the General Partner has only a limited
deficit restoration obligation under the Partnership Agreement.

Quarterly distributions in the following amounts were declared and paid to the
Limited Partners during 1999, 1998 and 1997.

<TABLE>
<CAPTION>

QUARTER ENDED                       1999             1998              1997
------------------------------------------------------------------------------------
<S>                                 <C>              <C>                <C>
March 31                            230,908          $230,908           $211,022

June 30                             230,908           230,908            226,933

September 30                        230,908           230,909            230,836

December 31                         190,048           230,909            230,836
                                    ------------------------------------------------

                                    $882,772         $923,634           $899,627
                                    ================================================

</TABLE>


                                                                              11
<PAGE>

ALLOCATIONS AND DISTRIBUTIONS AMONG THE LIMITED PARTNERS

Except during the Offering Period, Cash Available for Distribution, which is
allocable to the Limited Partners, is apportioned among and distributed to them
solely with reference to the number of Units owned by each as of the Record Date
for each such distribution. During the Offering Period, Cash Available for
Distribution which is allocable to the Limited Partners was apportioned among
and distributed to them with reference to both (i) the number of Units owned by
each as of each Record Date and (ii) the number of days since the previous
Record Date (or, in the case of the first Record Date, the commencement of the
Offering Period) that the Limited Partner owned the Units.

After the Offering Period, Net Profits, Net Losses and Cash Available for
Distribution allocable to the Limited Partners is apportioned among them in
accordance with the number of Units owned by each. A different convention was
utilized during the Offering Period, whereby Net Profits and Net Losses
allocable to Limited Partners were apportioned among them in the ratio which the
product of the number of Units owned by a Limited Partner multiplied by the
number of days in which the Limited Partner owns such Units during the period
bears to the sum of such products for all Limited Partners.

In addition, where a Limited Partner transfers Units during a taxable year, the
Limited Partner may be allocated Net Profits for a period for which such Limited
Partner does not receive a corresponding cash distribution.

ITEM 6:  SELECTED FINANCIAL DATA

The following table sets forth, in summary form, certain financial data for
the Partnership for the year ended December 31,1999, 1998 and 1997. This
table is qualified in its entirely by the more detailed information and
financial statements presented elsewhere in this report, and should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and related
notes thereto included herein.

<TABLE>
<CAPTION>

                  YEAR ENDED DECEMBER 31
------------------------------------------------------
                                       1999             1998             1997
                                       -------------------------------------------
<S>                                    <C>             <C>            <C>
Lease Income                           $4,598,009      $4,212,862     $2,444,661

Net Income (Loss)                        (421,337)       (391,744)       (61,837)

Cash Distributions                        891,690         932,964        908,714

Net Income (Loss) per Unit                   (.93)           (.87)          (.08)

Cash Distribution per Unit                   1.90            2.00           2.00

</TABLE>

                                                                              12
<PAGE>

<TABLE>
<CAPTION>

                                                      DECEMBER 31

                                    1999             1998              1997
                                    -----------------------------------------------
<S>                                 <C>              <C>              <C>
Total Assets                        $7,456,422       $10,232,970       $9,356,409


Notes Payable                        3,326,191         4,769,529        1,954,120

</TABLE>

Net income (loss) per unit is computed based upon net loss allocated to the
Limited Partners and the weighted average number of equivalent Units outstanding
during the year. Cash distribution per Unit is computed based upon distributions
allocated to the Limited Partners and the weighted average number of equivalent
Units outstanding during the year.

ITEM 7:    MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES

The Partnership satisfied its minimum offering requirements and commenced
operations on September 22, 1995.

The Partnership's primary sources of capital for the years ended December 31,
1999, 1998 and 1997, were from cash from operations of $1,081,000, $1,924,000
and $1,957,000, respectively, and from Partners' contributions of $1,186,000,
for the year ended December 31, 1997. The primary uses of cash for the year
ended December 31,1999, 1998 and 1997, were for capital expenditures for new
equipment totaling $255,000, $1,702,000 and $4,179,000, the payment of
acquisition fees of $57,000, $223,000 and $203,000, for the payment of
preferred distributions to partners totaling $892,000, $933,000 and $909,000,
respectively, and for the payment of offering costs totaling $130,000, for
the year ended December 31, 1997.

Cash is invested in money market accounts that invest directly in treasury
obligations pending the Partnership's use of such funds to purchase additional
computer equipment, to pay Partnership expenses or to make distributions to the
Partners. At December 31, 1999, 1998 and 1997 the Partnership had approximately
$52,000, $136,000 and $258,000, respectively, invested in these money market
accounts.

The Partnership's investment strategy of acquiring computer equipment and
generally leasing it under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses.
Future minimum rentals on noncancellable operating leases decreased by 40% from
December 31, 1998 to December 31, 1999, due to computer equipment leases with
expirations in 2000. As of December 31, 1999, the Partnership had future minimum
rentals on noncancellable operating leases of $3,159,000 for the year ended 2000
and $959,000 thereafter. During 1999 and 1998, the Partnership incurred debt in
connection with the purchase of computer equipment totaling $1,150,000 and
$4,352,000, respectively. At December 31, 1999, the outstanding debt was
$3,326,000, with interest rates ranging from 6.4% to 9.0% and will be payable
through September 2002. The Partnership intends to continue purchasing
additional computer equipment with existing cash, as well as when future cash
becomes available. In addition, the Partnership may incur debt in purchasing
computer equipment in the future.

The Partnership's cash flow from operations is expected to continue to be
adequate to cover all operating expenses, liabilities, and preferred
distributions to Partners during the next 12-month period. If available Cash
Flow or Net Disposition Proceeds are insufficient to cover the Partnership
expenses and liabilities on a short and long term basis, the Partnership will
attempt to obtain additional funds by disposing of or refinancing Equipment, or
by borrowing within its permissible limits. The Partnership may also reduce the
distributions to its Partners if it deems necessary. Since the Partnership's
leases are on a "triple-net" basis, no reserve for maintenance and repairs are
deemed necessary.


                                                                              13
<PAGE>

RESULTS OF OPERATIONS

1999, 1998 AND 1997 OPERATING RESULTS

For the years ended December 31, 1999, 1998 and 1997, the Partnership
recognized income of $4,625,000, $4,246,000 and $2,540,000 and expenses of
$5,046,000, $4,637,000 and $2,602,000, resulting in net losses of $421,000,
and $392,000 $62,000, respectively.

Lease income increased by 9% over 1998 primarily due to the addition of
operating leases in 1999. In 1999 the partnership expended approximately
$255,000 in cash and assumed debt of $1,150,000 to acquire 7 additional leases.

Interest income decreased 71% from $95,000 for the year ended December 31, 1997
to $33,000 for the year ended December 31, 1998, to $27,000 for the year ended
December 31, 1999 as a result of the capital contributions and rental income
being used to purchase additional computer equipment.

Operating expenses, excluding depreciation, consist of accounting, legal,
outside service fees and reimbursement of expenses to Com Cap Corp. for
administration and operation of the Partnership. The 43% decrease from
approximately $164,000 during the year ended December 31, 1997 to $94,000
during the year ended December 31, 1998 is primarily attributable to
unrealized reimbursable expenses to Com Cap Corp. for cost incurred in
connection with the administration and operation of the Partnership. Certain
administration and operation expenses were not charged to the Partnership by
Com Cap. Corp. in 1998.The increase from $94,000 during the year ended
December 31, 1998 to $275,000 during the year ended December 31, 1999 is
attributable to the uncharged 1998 expenses of $42,000 for costs incurred in
connection with the administration and operation of the Partnership being
charged to and taken by Com Cap Corp., and an increase in reimbursable
expenses paid to the General Partner and its affiliates of $54,000 and an
increase in outside service fees of $85,000.

The equipment management fee is equal to 5% of the gross lease revenue
attributable to equipment that is subject to operating leases. The equipment
management fee increased 88% from approximately $122,000 during the year ended
December 31, 1997 to $211,000 during the year ended December 31, 1998 to
$230,000, during the year ended December 31, 1999, which is consistent with the
increase in lease income.

Depreciation and amortization expenses consist of depreciation on computer
equipment, amortization of organization costs, equipment acquisition fees and
debt placement fees. The 2.5% increase from approximately $4,129,000 during the
year ended December 31, 1998 to $4,235,000 during the year ended December 31,
1999 is attributable to the increase in the computer equipment portfolio being
leased, offset by a reduction of impairment charges of $247,000, as discussed
below.

In 1996, the Partnership adopted FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-lived Assets to be Disposed Of" and
identified specific computer equipment and associated equipment acquisition
costs which were evaluated due to technological changes. The Partnership
recorded a charge of $181,000 to depreciation expense to record certain assets
at their estimated fair value in the year ended December 31, 1999, and
$428,000 in the year ended December 31, 1998.

The Partnership sold computer equipment with a net book value of $59,000 during
the year ended December 31, 1999, for a net loss of $8,400.

For the year ended December 31, 1999, the Partnership generated cash flow
from operating activities of $1.081,000, which includes net loss of $421,000
reduced by depreciation and amortization expenses of $4,235,000. Other
noncash activities included in the determination of net income include direct
payments of lease income by lessees to banks of $2,594,000.

                                                                              14
<PAGE>

ITEM 7.A:  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Partnership believes its exposure to market risk is not material due to
the fixed interest rate of its long term debt.


ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ITEM 9:  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
         AND FINANCIAL DISCLOSURE

       NOT APPLICABLE

ITEM 9:  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

       NOT APPLICABLE

PART III

ITEM 10:  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

GENERAL

         The General Partner, a wholly-owned subsidiary of Commonwealth of
Delaware, Inc., a Delaware corporation, which is in turn a wholly-owned
subsidiary of Commonwealth Capital Corp., a Pennsylvania corporation ("Com Cap
Corp."), was incorporated in Pennsylvania on August 26, 1993. The General
Partner also acts as the General Partner for Commonwealth Income and Growth Fund
I and Commonwealth Income and Growth Fund II. The principal business office of
the General Partner is 1160 West Swedesford Road, Suite 340, Berwyn, PA 19312,
and its telephone number is 610-647-6800. The General Partner manages and
controls the affairs of the Partnership and has sole responsibility for all
aspects of the Partnership's operations. The officers of the General Partner
devote such time to the affairs of the Partnership as in the opinion of the
General Partner is necessary to enable it to perform its function as General
Partner. The officers of the General Partner are not required to spend their
full time in meeting their obligations to the Partnership.

         The directors and officers of the General Partner and key employees of
Com Cap Corp. are as follows:

NAME                       TITLE

George S. Springsteen      Chairman of the Board of Directors and President of
                           the General Partner and Com Cap Corp.

Kimberly A. MacDougall     Executive Vice President, Chief Operating Officer and
                           Secretary of the General Partner and Com Cap Corp.

Henry J. Abbott            Vice President and Portfolio Manager of Com Cap Corp.

John A. Conboy III         Assistant Vice President and Accounting Manager of
                           the General Partner and Com Cap Corp.

Dorothy A. Ferguson        Assistant Vice President of  Com Cap Corp.

         George S. Springsteen, age 65, is President of both Com Cap Corp. and
the General Partner. Mr. Springsteen is also President of the general partners
or controlling entities of several prior programs sponsored by Com Cap Corp.
with objectives similar to the Partnership's. He has been the sole shareholder
and director of Com Cap Corp. since its formation in 1978. From 1971 to 1978,
Mr. Springsteen was involved in the computer leasing business of Granite
Computer Corporation. Mr. Springsteen served as Vice President of Marketing, in
addition to other capacities, and managed a portfolio of approximately
$120,000,000 of IBM computers and peripherals. In 1978, Granite Computer
Corporation sold its


                                                                              15
<PAGE>

equipment portfolio and left the equipment leasing business. Mr. Springsteen
acquired a portion of Granite's portfolio, client base, employees and corporate
offices in Jenkintown, Pennsylvania. The new company began operations as Com Cap
Corp. in May of 1978. Mr. Springsteen received a Bachelor of Science degree from
the University of Delaware in 1957.

         Kimberly A. MacDougall, age 40, is Executive Vice President, Chief
Operating Officer and Secretary of Com Cap Corp. and the General Partner and
joined Com Cap Corp. in 1997. She is also the President of Commonwealth Capital
Securities Corp. From 1980 to 1997, Ms. MacDougall was employed with Wheat First
Butcher Singer, a broker/dealer headquartered in Richmond, Virginia. While at
Wheat First Butcher Singer, Ms. MacDougall, Senior Vice President, served as
Marketing Manager for the Direct Investments Department, with over $450,000,000
of investments under management in real estate, equipment leasing and
energy-related industries. Ms. MacDougall holds Series 7, 63 and 39 NASD
licenses and is a member of the Equipment Leasing Association, Investment
Partnership Association, and International Association for Financial Planning.

         Henry J. Abbott, age 48, is Vice President and Portfolio Manager of Com
Cap Corp. and has been employed by Com Cap Corp. since 1998. Mr. Abbot has been
active in the commercial lending industry, working primarily on asset-backed
transactions for more than twenty-seven years. Prior to joining Com Cap Corp.
Mr. Abbott was a founding partner of Westwood Capital LLC, in New York. Prior to
that, as Senior Vice President for IBJ Schroder Leasing Corporation where Mr.
Abbott managed a group specializing in providing operating lease financing
programs in the high technology sector. Mr. Abbott brings extensive knowledge
and experience in all facets of asset-backed financing and has successfully
managed $1.5 billion of secured transactions. Mr. Abbott attended St. John's
University. Mr. Abbott is a member of the Equipment Leasing Association.

         John A. Conboy III, age 53, is Assistant Vice President and Accounting
Manager of the General Partner and Com Cap Corp. and certain of its subsidiaries
where he has been employed since 1999. From 1965 to 1996, Mr. Conboy was
employed as a Manager of Accounting Operations of Consolidated Rail Corporation.
Mr. Conboy received a BS/BA degree in Accounting and Business Administration
from the University of Phoenix in 1994. Mr. Conboy is a member of the Equipment
Leasing Association.

         Dorothy A. Ferguson, age 57, is Assistant Vice President of Com Cap
Corp. and has been employed by Com Cap Corp. since 1995. She brought with her
over 20 years experience in commercial banking and finance. Prior to joining
Commonwealth, she held positions as a Banking Officer and Administrative
Assistant to the Chairman of a large Philadelphia based bank, as well as
Executive Secretary to the CEO of an international manufacturing management
group.

     The directors and officers of the General Partner are required to spend
only such time on the Partnership's affairs as is necessary in the sole
discretion of the directors of the General Partner for the proper conduct of the
Partnership's business. A substantial amount of time of such directors and
officers is expected to be spent on matters unrelated to the Partnership,
particularly after the Partnership's investments have been selected. Under
certain circumstances, such directors and officers are entitled to
indemnification from the Partnership.

ITEM 11: EXECUTIVE COMPENSATION

         The following table summarizes the types, amounts and recipients of
compensation to be paid by the Partnership directly or indirectly to the General
Partner and its Affiliates. Some of these fees are paid regardless of the
success or profitability of the Partnership's operations and investments. While
such compensation and fees were established by the General Partner and are not
based on arm's-length negotiations, the General Partner believes that such
compensation and fees are comparable to those which would be charged by an
unaffiliated entity or entities for similar services. The Partnership Agreement
limits the liability of the General Partner and its Affiliates to the
Partnership and the Limited Partners and provides indemnification to the General
Partner and its Affiliates under certain circumstances.

<TABLE>
<CAPTION>
                                                                                 AMOUNT           AMOUNT           AMOUNT
ENTITY RECEIVING                                                                 INCURRED         INCURRED          INCURED
COMPENSATION            TYPE OF COMPENSATION                                     DURING 1999      DURING 1998      DURING 1997
<S>                     <C>                                                      <C>              <C>              <C>
                        OFFERING AND ORGANIZATION STAGE

The General Partner     Organizational Fee. An Organization Fee equal to                 --               --          $36,000
                        three percent of the first $10,000,000 of Limited
                        Partners' Capital Contributions and two percent of the
                        Limited Partners' Capital Contribution in excess of
                        $#10,000,000, as compensation for the organization of
                        the Partnership. It is anticipated that all
                        Organizational and Offering Expenses which include
                        legal, accounting and printing expenses; various
                        registration and filing fees; miscellaneous expenses
                        related to the organization and formation of the
                        Partnership; other costs of registration; and costs
                        incurred in connection with the preparation, printing
                        and distribution of this Report and other sales
                        literature. The General Partner pays all Organizational
                        and Offering Expenses, other than Underwriter's
                        Commissions and a non-accountable expense allowance
                        payable to the Dealer Manager that is equal to the
                        lesser of (i) one percent of the Offering proceeds or
                        (ii) $50,000.

                        OPERATIONAL AND SALE
                        OR LIQUIDATION STAGES

The General Partner     Reimbursement of Expenses. The General and its              $126,000          $30,000         $110,000
and its Affiliates      Affiliates Partner are entitled to reimbursement
                        by the Partnership for the cost of goods, supplies or
                        services obtained and used by the General Partner in
                        connection with the administration and operation of the
                        Partnership from third parties unaffiliated with the
                        General Partner. In addition, the General Partner and
                        its affiliates are entitled to reimbursement of certain
                        expenses incurred by the General Partner and its
                        affiliates in connection with the administration and
                        operation of the Partnership. The amounts set forth on
                        this table do not include expenses incurred in the
                        offering of Units.

The General Partner     Equipment Acquisition Fee. An Equipment Acquisition          $57,000         $233,000         $203,000
                        Fee of four percent of the Purchase Price of each item
                        of Equipment purchased as compensation for the
                        negotiation of the acquisition of the Equipment and the
                        lease thereof or sale under a Conditional Sales
                        Contract. The fee was paid upon each closing of the
                        Offering with respect to the Equipment purchased by the
                        Partnership with the net proceeds of the Offering
                        available for investment in Equipment. If the
                        Partnership acquires Equipment in an amount exceeding
                        the net proceeds of the Offering available for
                        investment in Equipment, the fee will be paid when such
                        Equipment is acquired.

The General Partner     Debt Placement Fee. As compensation for arranging Term       $12,000          $40,000          $27,000
                        Debt to finance the acquisition of Equipment to the
                        Partnership, a fee equal to one percent of such
                        indebtedness; provided, however, that such fee is
                        reduced to the extent the Partnership incurs such fees
                        to third Parties, un affiliated with the General Partner
                        or the lender, with respect to such indebtedness and no
                        such fee is paid with respect to borrowings from the
                        General Partner or its Affiliates.

The General Partner     Equipment Management Fee. A monthly fee equal to the        $230,000         $211,000         $122,000
                        lesser of (I) the fees which would be charged by an
                        independent third party for similar services for similar
                        equipment or (ii) the sum of (a) two percent of (1) the
                        Gross Lease Revenues attributable to Equipment which is
                        subject to Full Payout Net Leases which contain net
                        lease provisions plus (2) the purchase price paid on
                        Conditional Sales Contracts as received by the
                        Partnership and (b) five percent of the Gross Lease
                        Revenues attributable to Equipment which is subject to
                        Operating Leases.

The General Partner     Re-Lease Fee. As Compensation for providing re-leasing            $0               $0               $0
                        services for any Equipment for which the General Partner
                        has, following the expiration of, or default under, the
                        most recent lease of Conditional Sales Contract,
                        arranged a subsequent lease of Conditional Sales
                        Contract for the use of such Equipment to a lessee or
                        other party, other than the current or most recent
                        lessee of other operator of such equipment or its
                        Affiliates ("Re-lease"), the General Partner will
                        receive, on a monthly basis, a Re3-lease Fee equal to
                        the lesser of (a) the fees which would be charged by an
                        independent third party of comparable services for
                        comparable equipment or (b) two percent of Gross Lease
                        Revenues derived from such Re-lease.

The General Partner     Equipment Liquidation Fee. With respect to each                   $0               $0               $0
                        item of Equipment sold by the General Partner (other
                        than in connection with a Conditional Sales Contract), a
                        fee equal to the lesser of (I) 50% of the Competitive
                        Equipment Sale Commission or (ii) three percent of the
                        sales price for such Equipment. The payment of such fee
                        is subordinated to the receipt by the Limited Partners
                        of (I) a return of their Capital Contributions and 10%
                        annum cumulative return, compounded daily, on Adjusted
                        Capital Contributions ("Priority Return") and (ii) the
                        Net Disposition Proceeds from such sale in accordance
                        with the Partnership Agreement. Such fee is reduced to
                        the extent any liquidation or resale fees are paid to
                        unaffiliated parties.

The General Partner     Partnership Interest. The General Partner has a               $8,917           $9,330           $9,087
                        present and continuing one percent interest of $1,000 in
                        the Partnership's item of income, gain, loss, deduction,
                        credit, and tax preference. In addition, the General
                        Partner receives one percent of Cash Available for
                        Distribution until the Limited Partners have received
                        distributions of Cash Available for Distribution equal
                        to their Capital Contributions plus the 10% Priority
                        Return and thereafter, the General Partner will receive
                        10% of Cash Available for Distribution.

to
</TABLE>

                                                                              16

<PAGE>

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         NOT APPLICABLE

ITEM 13:  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The Partnership is subject to various conflicts of interest arising out
of its relationships with the General Partner and its Affiliates. These
conflicts include the following:

COMPETITION WITH GENERAL PARTNER AND AFFILIATES: COMPETITION FOR MANAGEMENT'S
TIME

         The General Partner and its Affiliate sponsor other investor programs
which are in potential competition with the Partnership in connection with the
purchase of Equipment as well as opportunities to lease and sell such Equipment.
Competition for Equipment has occurred and is likely to occur in the future. The
General Partner and its Affiliates may also form additional investor programs
which may be competitive with the Partnership.

         If one or more investor programs and the Partnership are in a position
to acquire the same Equipment, the General Partner will determine which program
will purchase the Equipment based upon the objectives of each and the
suitability of the acquisition in light of those objectives. The General Partner
will generally afford priority to the program or entity that has had funds
available to purchase Equipment for the longest period of time. If one or more
investor programs and the Partnership are in a position to enter into lease with
the same lessee or sell Equipment to the same purchaser, the General Partner
will generally afford priority to the Equipment which has been available for
lease or sale for the longest period of time.

         Certain senior executives of the General Partner and its Affiliates
also serve as officers and directors of the other programs and are required to
apportion their time among these entities. The Partnership is, therefore, in
competition with the other programs for the attention and management time of the
General Partner and Affiliates. The officers and directors of the General
Partner are not required to devote all or substantially all of their time to the
affairs of the Partnership.

ACQUISITIONS

         Com Cap Corp. and the General Partner or other Affiliates of the
General Partner may acquire Equipment for the Partnership provided that (i) the
Partnership has insufficient funds at the time the Equipment is acquired, (ii)
the acquisition is in the best interest of the partnership and (iii) no benefit
to the General Partner or its Affiliates arises from the acquisition except for
compensation paid to Com Cap Corp., the General Partner or such other Affiliate
as disclosed in this Report. Com Cap Corp., the General Partner or their
Affiliates will not hold Equipment for more than 60 days prior to transfer to
the Partnership. If sufficient funds become available to the Partnership within
such 60 day period, such Equipment may be resold to the Partnership for a price
not in excess of the sum of the cost of the Equipment to such entity and any
accountable Acquisition Expenses payable to third parties which are incurred by
such entity and interest on the Purchase Price from the date of purchase to the
date of transfer to the Partnership. Com Cap Corp., the General Partner or such
other Affiliate will retain any rent or other payments received for the
Equipment, and bear all expenses and liabilities, other than accountable
Acquisition Expenses payable to third parties with respect to such Equipment,
for all periods prior to the acquisition of the Equipment by the Partnership.
Except as described above, there will be no sales of Equipment to or from any
Affiliate of Com Cap Corp.

         In certain instances, the Partnership may find it necessary, in
connection with the ordering and acquisition of Equipment, to make advances to
manufacturers or vendors with funds borrowed from the General Partner for such
purpose. The Partnership does not borrow money from the General Partner or any
of its Affiliates with a term in excess of twelve months. Interest is paid on
loans or advances (in the form of deposits with manufacturers or vendors of
Equipment or otherwise) from the General Partner of its


                                                                              17
<PAGE>

Affiliates from their own funds at a rate equal to that which would be charged
by third party financing institutions on comparable loans from the same purpose
in the same geographic area, but in no event in excess of the General Partner's
or Affiliate's own cost of funds. In addition, if the General Partner or its
Affiliates borrow money and loan or advance it on a short-term basis to or on
behalf of the Partnership, the General Partnership than that which the General
Partner or such Affiliates are paying. The Partnership does not loan money to
any Person including the General Partner or its Affiliates except to the extent
that a Conditional Sales Contract constitutes a loan.

         If the General Partner or any of its Affiliates purchases Equipment in
its own name and with its own funds in order to facilitate ultimate purchase by
the Partnership, the purchaser is entitled to receive interest on the funds
expended for such purchase on behalf of the Partnership. Simple interest on any
such temporary purchases is charged on a floating rate basis not in excess of
three percent over the "prime rate" from time to time announced by PNC Bank,
from the date of initial acquisition to the date of repayment by the
Partnership/ownership transfer.

         The Partnership does not invest in equipment Limited Partnerships,
general partnerships or joint ventures, except that (a) the Partnership may
invest in general partnerships or joint ventures with persons other that
equipment Programs formed by the General Partner or its Affiliates, which
partnerships or joint ventures own specific equipment; provided that (i) the
Partnership has or acquires a controlling interest in such ventures or
partnerships, (ii) the non-controlling interest is owned by a non-Affiliated,
and (iii) the are no duplicate fees; and (b) the Partnership may invest in joint
venture arrangements with other equipment Programs formed by the General Partner
or its Affiliates if such action is in the best interest of all Programs and if
all the following conditions are met: (i) all the Programs have substantially
identical investment objectives; (ii) there are no duplicate fees; (iii) the
sponsor compensation is substantially identical in each Program; (iv) the
Partnership has a right of first refusal to buy another Program's interest in a
joint venture if the other Program wishes to sell equipment held in the joint
venture; (v) the investment of each Program is on substantially the same terms
and conditions; and (vi) the joint venture is formed either for the purpose of
effecting appropriated diversification for the Programs or for the purpose of
relieving the General Partner or its Affiliates from a commitment entered into
pursuant to certain provisions of the Partnership Agreement.

          GLOSSARY

     The following terms used in this Report shall (unless otherwise expressly
provided herein or unless the context otherwise requires) have the meanings set
forth below.

     "Acquisition Expenses" means expenses relating to the prospective selection
and acquisition of or investment in Equipment, whether or not actually acquired,
including, but not limited to, legal fees and expenses, travel and communication
expenses, costs of appraisals, accounting fees and expenses and miscellaneous
expenses.

     "Acquisition Fee" means the total of all fees and commissions paid by any
party in connection with the initial purchase of Equipment acquired by the
Partnership. Included in the computation of such fees or commissions shall be
the Equipment Acquisition Fee, any commission, selection fee, construction
supervision fee, finance fee, non-recurring management fee of a similar nature,
however designated.

     "Adjusted Capital Contributions" means Capital Contributions of the Limited
Partners reduced to not less than zero by any cash distribution received by the
Limited Partners pursuant to Sections 4/2 or 8/1, to the extent such
distributions exceed any unpaid Cumulative Return as of the date such
distributions were made.

     "Affiliate" means, when used with reference to a specified Person, (I) any
Person that directly or indirectly through one or more intermediaries controls
or is controlled by or is under common control with the specified Person, (ii)
any Person that is a director or an executive officer of, partner in, or serves
in a similar capacity to, the specified Person, or any Person which the
specified Person is an executive officer of partner or with respect to which the
specified Person serves in a similar capacity, (iii) any Person


                                                                              18
<PAGE>

owning or controlling 10% or more of the outstanding voting securities of such
specified Person, or (iv) if such Person is an officer, director or partner, any
entity for which such Person acts in such capacity.

     "Capital Account" means the separate account established for each Partner
pursuant to Section 4/.1.

     "Capital Contributions" means, in the case of the General partner, the
total amount of money contributed to the Partnership by the General Partner,
and, in the case of the Limited Partners, $20 for each Unit or where the context
requires, the total Capital Contributions of all the Partners.

     "Cash Available for Distribution" means Cash Flow plus net Disposition
Proceeds plus cash funds available for distribution from Partnership reserves,
less such amounts as the General Partner, in accordance with this Agreement,
causes the Partnership to reinvest in Equipment or interests therein, and less
such amounts as the General Partner, in its sole discretion, determines should
be set aside for the restoration or enhancement of Partnership reserves.

     "Cash Flow" for any fiscal period means the sum of (i) cash receipts from
operations, including, but not limited to, rents or other revenues arising from
the leasing or operation of the Equipment and interest, if any, earned on funds
on deposit for the Partnership, but not including Net Disposition Proceeds,
minus (ii) all cash expenses and costs incurred and paid in connection with the
ownership, lease, management, use and/or operation of the Equipment, including,
but not limited to, fees for handling and storage; all interest expenses paid
and all repayments of principal regarding borrowed funds; maintenance; repair
costs; insurance premiums; accounting and legal fees and expenses; debt
collection expenses; charges, assessments or levies imposed upon or against the
Equipment; ad valorem, gross receipts and other property taxes levied against
the Equipment; and all costs of repurchasing Units in accordance with this
Agreement; but not including depreciation or amortization of fees or capital
expenditures, or provisions for future expenditures, including, without
limitation, Organizational and Offering Expenses.

     "Closing Date" means the date, as designated by the General Partner, as of
which the Units shall cease being offered to the public pursuant to the
Offering, and shall be no later than the second anniversary of the Effective
Date.

     "Code" means the Internal Revenue Code of 1986, as amended, and as may be
amended from time to time by future federal tax statutes. Any reference this
Agreement to a particular provision of the Code shall mean, where appropriate,
the corresponding provision of any successor statute.

     "Competitive Equipment Sale Commission" means that brokerage fee paid for
services rendered in connection with the purchase or sale of Equipment which is
reasonable, customary, and competitive in light of the size, type, and location
of the Equipment.

     "Conditional Sales Contract" means an agreement to sell Equipment to a
buyer in which the seller reserves title to, and retains a security interest in,
the Equipment until the Purchase Price of the Equipment is paid.

     "Cumulative Return" means an amount equal to a return at a rate of 10% per
annum, compounded daily, on the Adjusted Capital Contribution for all
outstanding Units, which amount shall begin accruing at the end of the calendar
quarter in which such Units are sold by the Partnership.

     "Effective Date" means the date on which the Partnership's registration
statement on Form S-1 with respect to the Units, as filed with the Securities
and Exchange Commission, becomes effective under the Securities Act of 1933, as
amended.

     "Equipment" means each item of and all of the computer peripheral and other
similar capital equipment purchased, owned, operated, and/or leased by the
Partnership or in which the Partnership has acquired a direct or indirect
interest, as more fully described in this Agreement, together with all
appliances, parts, instruments, accessories, furnishings, or other equipment
included therein and all substitutions, renewals, or replacements of, and all
additions, improvements, and accessions to, any and all thereof.


                                                                              19
<PAGE>

     "Full Payout Net Lease" means an initial Net Lease of the Equipment under
which the non-cancelable rental payments due (and which can be calculated at the
commencement of the Net Lease) during the initial noncancellable fixed term (not
including any renewal or extension period) of the lease or other contract for
the use of the Equipment are at least sufficient to recover the Purchase Price
of the Equipment.

     "General Partner" means Commonwealth Income & Growth Fund, Inc. and any
additional, substitute or successor general partner of the Partnership.

     "Gross Lease Revenues" means Partnership gross receipts from leasing or
other operation of the Equipment, except that, to the extent the Partnership has
leased the Equipment from an unaffiliated party, it shall mean such receipts
less any lease expense.

     "Initial Closing" means January 27, 1998.

     "IRA" means an Individual Retirement Account as described in Section 408 of
the Code.

     "Limited Partner" means a Person who acquires Units and who is admitted to
the Partnership as a limited partner in accordance with the terms of this
Agreement.

     "Majority in Interest" means, with respect to the Partnership, Limited
Partners holding more than 40% of the outstanding Units held by all Limited
Partners at the Record Date for any vote or consent of the Limited Partners.

     "Minimum Subscription Amount" means an aggregate of $1,500,000 in
subscriptions from Limited Partners.

     "Net Disposition Proceeds" means the net proceeds realized by the
Partnership from the refinancing, sale or other disposition of Equipment,
including insurance proceeds or lessee indemnity payments arising from the loss
or destruction of Equipment, less such amounts as are used to satisfy
Partnership liabilities.

     "Net Lease" means a lease or other contract under which the owner provides
equipment to a lessee or other operator in return for a payment, and the lessee
assumes all obligations and pays for the operation, repair, maintenance, taxes
and insuring of the Equipment, so that the non-cancelable rental payments under
the lease are absolutely net to the lessor.

     "Net Profits" or "Net Losses" shall be computed in accordance with Section
703(a) of the Code (including all items of income, gain, loss or deduction
required to be stated separately pursuant to Section 703(a) (1) of the Code) for
each taxable year of the Partnership or shorter period or subsequent to an
interim closing of the Partnership's books with the following adjustments: (I)
any income of the Partnership that is exempt from federal income tax and not
otherwise taken into account in computing Net Profits and Net Loss pursuant to
this definition shall be added to such taxable income of shall reduce such
taxable loss; (ii) any expenditure of the Partnership described in Code Section
705(a) (2) (B) or treated as Code Section 705(a) (2) (B) expenditures pursuant
to Treasury Regulations Section 1.704-1(b) (2) (iv) (I) and not otherwise taken
into account in computing Net Profits and Net Losses pursuant to this definition
shall be subtracted from such taxable income or loss; (iii) items of income,
gain, loss and deduction specially allocated pursuant to Section 7.3 of this
Agreement shall not be included in the computation of Net Profits or Net Loss;
and if property is reflected on the books of the Partnership at a book value
that differs from the adjusted tax basis of the property in accordance with
Treasury Regulation Section 1.704-1 (b) (2) (iv) (d) or (f), depreciation,
amortization, and gain or loss with respect to such property shall be determined
by reference to such book value in a manner consistent with Treasury Regulation
Section 1.704-1 (b) (2) (iv) (g). The terms "Net Profit" or "Net Losses" shall
include the Partnership's distributive share of the profit or loss of any
partnership or joint venture in which it is a partner or joint venturer.

     "Offering" means the initial public offering of the Units in the
Partnership, as described in the Prospectus.


                                                                              20
<PAGE>

    "Offering Period" means the period commencing the Effective Date and ending
the last day of the calendar month in which the Closing Date occurs.

     "Operating Lease" means a lease or other contractual arrangement under
which an unaffiliated party agrees to pay the Partnership, directly or
indirectly, for the use of the Equipment, and which is not a Full Payout Net
Lease.

     "Organizational and Offering Expenses" means the expenses incurred in
connection with the organization of the Partnership and in preparation of the
offering for registration and subsequently offering and distributing it to the
public, including Underwriting Commissions, listing fees and advertising
expenses except advertising expenses related to the leasing of the Program's
Equipment.

     "Partners" means any one or more of the General Partner and the Limited
Partners.

     "Partnership" means Commonwealth Income & Growth Fund III, a Pennsylvania
limited partnership.

    "Person" means an individual, partnership, joint venture, corporation,
trust, estate or other entity.

     "Program" means a limited or general partnership, joint venture,
unincorporated association or similar organization, other than a corporation
formed and operated for the primary purpose of investment in and the operation
of or gain from an interest in Equipment.

     "Purchase Price" means, with respect to any Equipment, an amount equal to
the sum of (I) the invoice cost of such Equipment or any other such amount paid
to the seller, (ii) any closing, delivery and installation charges associated
therewith not included in such invoice cost and paid by or on behalf of the
Partnership, (iii) the cost of any capitalized modifications or upgrades paid by
or on behalf of the Partnership in connection with its purchase of the
Equipment, and (iv) the amount of the Equipment Acquisition Fee and any other
Acquisition Fees, but excluding points and prepaid interest.

     "Term Debt" means debt of the Partnership with a term in excess of twelve
months, incurred with respect to acquiring or investing in Equipment, or
refinancing non-Term Debt, but not debt incurred with respect to refinancing
existing Partnership Term Debt.

     "Underwriting Commissions" mean selling commissions and dealer-manager fees
paid to broker-dealers by the Partnership in connection with the offer and sale
of Units.

     "Unit" means a limited partnership interest in the Partnership.


                                                                              21
<PAGE>


PART IV

ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON 10-K

(a) (1)  Financial Statements.

         Commonwealth Income & Growth Fund II
         Report of Independent Auditors


                                                                              22
<PAGE>

         Balance Sheets as of December 31, 1999, 1998 and 1997.
         Statements of Operations for each of the three years ended
            December 31, 1999, 1998, 1997.
         Statements of Partners' Capital for each of the three years ended
            December 31, 1999, 1998, 1997.
         Statements of Cash Flows for each of the three years ended December 31,
            1999, 1998, 1997 and 1996.
         Notes to Financial Statements

         Commonwealth Income & Growth Fund, Inc.
         Report of Independent Auditors
         Balance Sheet as of February 28, 1999
         Notes to Balance Sheet

         Commonwealth Capital Corp.
         Report of Independent Auditors
         Consolidated Balance Sheet as of February 28, 1999
         Notes to Consolidated Balance Sheet


                                                                            23

<PAGE>

                              Financial Statements

                              Commonwealth Income &
                                 Growth Fund II

                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                       WITH REPORT OF INDEPENDENT AUDITORS

                                                                            24
<PAGE>


                      Commonwealth Income & Growth Fund II

                              Financial Statements

                  Years ended December 31, 1999, 1998 and 1997

                                    CONTENTS

<TABLE>
<S>                                                                          <C>
Report of Independent Auditors...............................................1

Audited Financial Statements

Balance Sheets...............................................................2
Statements of Operations.....................................................3
Statements of Partners' Capital..............................................4
Statements of Cash Flows.....................................................5
Notes to Financial Statements................................................6
</TABLE>

                                                                            25
<PAGE>


                         Report of Independent Auditors

The Partners
Commonwealth Income & Growth Fund II

We have audited the accompanying balance sheets of Commonwealth Income & Growth
Fund II as of December 31, 1999 and 1998, and the related statements of
operations, partners' capital, and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Commonwealth Income & Growth
Fund II at December 31, 1999 and 1998, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.

/s/ Ernst & Young LLP
------------------------------

Philadelphia, Pennsylvania
March 24, 2000


                                                                            26
<PAGE>


                      Commonwealth Income & Growth Fund II

                                 Balance Sheets

<TABLE>
<CAPTION>
                                                                      DECEMBER 31
                                                                1999               1998
                                                            ------------       ------------
<S>                                                         <C>                <C>
ASSETS
Cash and cash equivalents                                   $     52,323       $    136,208
Lease income receivable                                          300,507            246,930
Accounts receivable - General Partner                             34,918             14,510
Interest and other receivables                                    30,689             10,727

Computer equipment, at cost                                   15,099,876         14,085,926
Accumulated depreciation                                      (8,294,526)        (4,683,752)
                                                            ------------       ------------
                                                               6,805,350          9,402,174

Equipment acquisition costs and deferred expenses, net
    of accumulated amortization of $474,458 for 1999
    and $275,691 for 1998                                        232,635            372,318
Organization costs, net of accumulated amortization
    of $64,366 for 1998                                               --             50,103
                                                            ------------       ------------
Total assets                                                $  7,456,422       $ 10,232,970
                                                            ============       ============


LIABILITIES AND PARTNERS' CAPITAL
Accounts payable                                            $     87,558       $     93,063
Unearned lease income                                            162,934            177,612
Notes payable                                                  3,326,191          4,769,529
                                                            ------------       ------------
Total liabilities                                              3,576,683          5,040,204

Partners' capital:
    General partner                                                1,000              1,000
    Limited partners                                           3,878,739          5,191,766
                                                            ------------       ------------
Total partners' capital                                        3,879,739          5,192,766
                                                            ------------       ------------
Total liabilities and partners' capital                     $  7,456,422       $ 10,232,970
                                                            ============       ============
</TABLE>


SEE ACCOMPANYING NOTES.


                                                                            27
<PAGE>


                      Commonwealth Income & Growth Fund II

                            Statements of Operations

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31
                                                      1999              1998               1997
                                                   -----------       -----------       -----------
<S>                                                <C>               <C>               <C>
Income:
    Lease                                          $ 4,598,009       $ 4,212,862       $ 2,444,661
    Interest and other                                  26,894            32,798            95,346
                                                   -----------       -----------       -----------
                                                     4,624,903         4,245,660         2,540,007
Expenses:
    Operating, excluding depreciation                  274,565            93,840           163,749
    Equipment management fee paid to
       General Partner                                 229,900           210,643           122,233
    Depreciation                                     3,976,511         3,908,603         2,107,744
    Amortization of organization costs,
       equipment acquisition costs, and
       deferred expenses                               258,696           220,296           139,057
    Interest                                           298,121           204,022            37,106
    Loss on sale of computer equipment                   8,447                --            31,955
                                                   -----------       -----------       -----------
                                                     5,046,240         4,637,404         2,601,844
                                                   -----------       -----------       -----------
Net loss                                           $  (421,337)      $  (391,744)      $   (61,837)
                                                   ===========       ===========       ===========
Net loss per equivalent limited
    partnership unit                               $      (.93)      $      (.87)      $      (.16)
                                                   ===========       ===========       ===========

Weighted average number of equivalent limited
    partnership units outstanding  during the
    period                                             461,817           461,817           451,712
                                                   ===========       ===========       ===========
</TABLE>


SEE ACCOMPANYING NOTES.


                                                                            28
<PAGE>


                      Commonwealth Income & Growth Fund II

                         Statements of Partners' Capital

<TABLE>
<CAPTION>
                             GENERAL          LIMITED
                             PARTNER          PARTNER          GENERAL          LIMITED
                              UNITS            UNITS           PARTNER          PARTNERS           TOTAL
                           -----------      -----------      -----------       -----------       -----------
<S>                        <C>              <C>              <C>               <C>               <C>
Partners' capital -
    December 31, 1996               50          402,519      $     1,000       $ 6,430,920       $ 6,431,920
Contributions                       --           59,298               --         1,185,785         1,185,785
Offering costs                      --               --               --          (129,680)         (129,680)
Net income (loss)                   --               --            9,087           (70,924)          (61,837)
Distributions                       --               --           (9,087)         (899,627)         (908,714)
                           -----------      -----------      -----------       -----------       -----------
Partners' capital -
    December 31, 1997               50          461,817            1,000         6,516,474         6,517,474
Net income (loss)                   --               --            9,330          (401,074)         (391,744)
Distributions                       --               --           (9,330)         (923,634)         (932,964)
                           -----------      -----------      -----------       -----------       -----------
Partners' capital -
    December 31, 1998               50          461,817            1,000         5,191,766         5,192,766
Net income (loss)                   --               --            8,917          (430,254)         (421,337)
Distributions                       --               --           (8,917)         (882,773)         (891,690)
                           -----------      -----------      -----------       -----------       -----------
Partners' capital -
    December 31, 1999               50          461,817      $     1,000       $ 3,878,739       $ 3,879,739
                           ===========      ===========      ===========       ===========       ===========
</TABLE>



SEE ACCOMPANYING NOTES.


                                                                            29
<PAGE>


                      Commonwealth Income & Growth Fund II

                            Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31
                                                               1999              1998              1997
                                                           -----------       -----------       -----------
<S>                                                        <C>               <C>               <C>
OPERATING ACTIVITIES
Net loss                                                   $  (421,337)      $  (391,744)      $   (61,837)
Adjustments to reconcile net loss to net cash
   provided by operating activities:
     Depreciation and amortization                           4,235,207         4,128,899         2,246,801
     Loss (gain) on sale of computer equipment                   8,447              (493)           31,955
     Other noncash activities included in
       determination of net loss                            (2,626,791)       (1,558,644)         (416,823)
     Changes in operating assets and liabilities:
       Lease income receivable                                 (53,577)         (133,430)          (33,486)
       Accounts receivable/payable - General Partner           (20,408)            1,311           (15,821)
       Interest and other receivables                          (19,962)          (10,627)           19,451
       Accounts payable                                         (5,505)           (3,263)            3,372
       Accounts payable - Commonwealth Capital Corp.                --           (68,265)           68,265
       Unearned lease income                                   (14,678)          (39,891)          127,723
       Organization costs paid to the General Partner
                                                                    --                --           (12,451)
                                                           -----------       -----------       -----------
Net cash provided by operating activities                    1,081,396         1,923,853         1,957,149

INVESTING ACTIVITIES
Capital expenditures                                          (254,787)       (1,701,559)       (4,179,080)
Net proceeds from sale of computer equipment                    50,106           851,607            10,585
Equipment acquisition fees paid to the
   General Partner                                             (57,407)         (222,916)         (202,760)
                                                           -----------       -----------       -----------
Net cash used in investing activities                         (262,088)       (1,072,868)       (4,371,255)

FINANCING ACTIVITIES
Partners' contributions                                             --                --         1,185,785
Offering costs                                                      --                --          (106,556)
Offering costs paid to the General Partner                          --                --           (23,124)
Distributions to partners                                     (891,690)         (932,964)         (908,714)
Debt placement fee paid to the General Partner                 (11,503)          (39,980)          (27,470)
                                                           -----------       -----------       -----------
Net cash (used in) provided by financing activities           (903,193)         (972,944)          119,921
                                                           -----------       -----------       -----------
Net decrease in cash and cash equivalents                      (83,885)         (121,959)       (2,294,185)
Cash and cash equivalents at beginning of year                 136,208           258,167         2,552,352
Cash and cash equivalents at end of year                   $    52,323       $   136,208       $   258,167
                                                           ===========       ===========       ===========
</TABLE>


SEE ACCOMPANYING NOTES.


                                                                            30
<PAGE>


                      Commonwealth Income & Growth Fund II

                          Notes to Financial Statements

                                December 31, 1999

1. BUSINESS

Commonwealth Income & Growth Fund II (the "Partnership") is a limited
partnership organized in the Commonwealth of Pennsylvania to acquire, own,
lease, and sell various types of computer peripheral equipment and other similar
capital equipment, which will be leased primarily to U.S. corporations and
institutions. The Partnership's general partner is Commonwealth Income & Growth
Fund, Inc. (the "General Partner"), a Pennsylvania corporation which is an
indirect wholly-owned subsidiary of Commonwealth Capital Corp. Approximately ten
years after the commencement of operations, the Partnership intends to have sold
or otherwise disposed of all of its computer equipment, make final distributions
to partners, and to dissolve. Unless sooner terminated, the Partnership will
continue until December 31, 2006.

Allocations of income and distributions of cash are based on the Commonwealth
Income & Growth Fund II, Limited Partnership Agreement (the "Agreement"). The
various allocations prevent any limited partner's capital account from being
reduced below zero and ensure the capital accounts reflect the anticipated
sharing ratios of cash distributions, as defined in the Agreement. During 1999,
annual cost distributions to limited partners were made at a rate of 9.5% of
their original contributed capital. During 1998 and 1997, annual cash
distributions to limited partners have been made at a rate of 10% of their
original contributed capital. Distributions during 1999 reflect an annual return
of capital in the amount of approximately $1.90 per limited partnership unit for
units which were outstanding for the entire year. Distributions during 1998 and
1997 reflect an annual return of capital in the amount of approximately $2.00
per limited partnership unit for units which were outstanding for the entire
year.

2. ACCOUNTING POLICIES

REVENUE RECOGNITION

Through December 31, 1999, the Partnership has only entered into operating
leases. Lease revenue is recognized on a monthly basis in accordance with the
terms of the operating lease agreements.



                                                                            31
<PAGE>


                      Commonwealth Income & Growth Fund II

                    Notes to Financial Statements (continued)


2. ACCOUNTING POLICIES (CONTINUED)

USE OF ESTIMATES

The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

LONG-LIVED ASSETS

The Partnership evaluates its long-lived assets when events and circumstances
indicate that the value of the asset may not be recoverable. The Partnership
evaluates whether an impairment exists by determining the estimated undiscounted
cash flows to be generated by each asset. If the undiscounted cash flows are
less than the carrying value, then an impairment exists. The amount of the
impairment is determined based on the difference between the carrying value and
the fair value. The fair value is determined based on estimated discounted cash
flows to be generated by the asset.

During 1999 and 1998, the Partnership identified specific computer equipment and
associated equipment acquisition costs which were evaluated due to technological
changes. The Partnership determined that the carrying amount of certain assets
was greater than the undiscounted cash flows to be generated by these assets.
The Partnership recorded charges of $181,000 and $428,000 in the fourth quarter
of 1999 and 1998, respectively, to record the assets at their estimated fair
value. Such amounts have been included in depreciation expense in the
accompanying financial statements. There were no adjustments during 1997.

Depreciation on computer equipment for financial statement purposes is based on
the straight-line method over the estimated useful lives of four years. Other
deferred expenses are amortized on a straight-line basis over 2 to 5 year lives.
Unamortized acquisition fees are charged to amortization expense when the
associated leased equipment is sold.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of three
months or less to be cash equivalents. At December 31, 1999 and 1998, cash
equivalents were invested in a money market fund investing directly in Treasury
obligations.


                                                                            32
<PAGE>

                      Commonwealth Income & Growth Fund II

                    Notes to Financial Statements (continued)


2. ACCOUNTING POLICIES (CONTINUED)

INCOME TAXES

The Partnership is not subject to federal income taxes; instead, any taxable
income (loss) is passed through to the partners and included on their respective
income tax returns.

Taxable income differs from financial statement net income as a result of
reporting certain income and expense items for tax purposes in periods other
than those used for financial statement purposes, principally relating to
depreciation, amortization, and lease income.

OFFERING COSTS

Offering costs are payments for selling commissions of 7% and dealer manager
fees of 2% of the partners' contributed capital, professional fees and other
offering expenses relating to the syndication. These costs are deducted from
partnership capital in the accompanying financial statements.

NET LOSS PER EQUIVALENT LIMITED PARTNERSHIP UNIT

The net loss per equivalent limited partnership unit is computed based upon net
loss allocated to the limited partners and the weighted average number of
equivalent units outstanding during the year.

IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In 1998, Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-up
Activities," was issued which requires that the costs associated with such
activities be expensed as incurred. SOP 98-5 was required to be adopted in the
first quarter of 1999 and resulted in the write-off of approximately $50,000 of
unamortized organization costs.

3. COMPUTER EQUIPMENT

The Partnership is the lessor of equipment under operating leases with periods
ranging from 22 to 48 months. In general, associated costs such as repairs and
maintenance, insurance, and property taxes are paid by the lessee.



                                                                            33
<PAGE>

                      Commonwealth Income & Growth Fund II

                    Notes to Financial Statements (continued)


3. COMPUTER EQUIPMENT (CONTINUED)

The following is a schedule of future minimum rentals on noncancelable operating
leases at December 31, 1999.

<TABLE>
                 <S>                        <C>
                 2000                       $3,158,849
                 2001                          881,748
                 2002                           77,198
                                            ----------
                                            $4,117,795
                                            ==========
</TABLE>

Lease income from three lessees, each exceeding 10% of lease revenue, aggregated
40% of lease income for the year ended December 31, 1999. Lease income from four
lessees, each exceeding 10% of lease income, aggregated 55% of the lease income
for the year ended December 31, 1998.

4. RELATED PARTY TRANSACTIONS

ORGANIZATIONAL FEE

The General Partner is entitled to be paid an Organizational Fee equal to three
percent of the first $10,000,000 of Limited Partners' Capital Contributions and
two percent of the Limited Partners' Capital Contributions in excess of
$10,000,000, as compensation for the organization of the Partnership. During
1997, such organizational fees of $36,000, were paid to the General Partner. No
organizational fees were paid during 1999 and 1998.

REIMBURSEMENT OF EXPENSES

The General Partner and its affiliates are entitled to reimbursement by the
Partnership for the cost of goods, supplies, or services obtained and used by
the General Partner in connection with the administration and operation of the
Partnership from third parties unaffiliated with the General Partner. In
addition, the General Partner and its affiliates are entitled to reimbursement
for certain expenses incurred by the General Partner and its affiliates in
connection with the administration and operation of the Partnership. During
1999, 1998, and 1997, $84,000, $30,000, and $110,000 respectively, of expenses
were reimbursed to the General Partner. During 1999, the General Partner also
received reimbursement of $42,000 of expenses relating to 1998.


                                                                            34
<PAGE>

                      Commonwealth Income & Growth Fund II

                    Notes to Financial Statements (continued)


4. RELATED PARTY TRANSACTIONS (CONTINUED)

EQUIPMENT ACQUISITION FEE

The General Partner is entitled to be paid an Equipment Acquisition Fee of 4% of
the purchase price of each item of equipment purchased as compensation for the
negotiation of the acquisition of the equipment and the lease thereof or sale
under a conditional sales contract. The fee was paid upon each closing of the
Offering with respect to the equipment to be purchased by the Partnership with
the net proceeds for the Offering available for investment in equipment. If the
Partnership acquires equipment in an amount exceeding the net proceeds of the
Offering available for investment in equipment, the fee will be paid when such
equipment is acquired. During 1999, 1998, and 1997, equipment acquisition fees
of approximately $57,000, $223,000, and $203,000, respectively, were paid to the
General Partner.

DEBT PLACEMENT FEE

As compensation for arranging term debt to finance the acquisition of equipment
by the Partnership, the General Partner is paid a fee equal to 1% of such
indebtedness; provided, however, that such fee shall be reduced to the extent
the Partnership incurs such fees to third parties, unaffiliated with the General
Partner or the lender, with respect to such indebtedness and no such fee will be
paid with respect to borrowings from the General Partner or its affiliates.
During 1999, 1998, and 1997, debt placement fees of approximately $12,000,
$40,000, and $27,000, respectively, were paid to the General Partner.

EQUIPMENT MANAGEMENT FEE

The General Partner is entitled to be paid a monthly fee equal to the lesser of
(i) the fees which would be charged by an independent third party for similar
services for similar equipment or (ii) the sum of (a) two percent of (1) the
gross lease revenues attributable to equipment which is subject to full payout
net leases which contain net lease provisions plus (2) the purchase price paid
on conditional sales contracts as received by the Partnership and (b) 5% of the
gross lease revenues attributable to equipment which is subject to operating
leases. During 1999, 1998, and 1997, equipment management fees of approximately
$230,000, $211,000, and $122,000, respectively, were paid to the General
Partner, as determined pursuant to section (ii) above.



                                                                            35
<PAGE>

                      Commonwealth Income & Growth Fund II

                    Notes to Financial Statements (continued)


4. RELATED PARTY TRANSACTIONS (CONTINUED)

RE-LEASE FEE

As compensation for providing re-leasing services for any equipment for which
the General Partner has, following the expiration of, or default under, the most
recent lease or conditional sales contract, arranged a subsequent lease or
conditional sales contract for the use of such equipment to a lessee or other
party, other than the current or most recent lessee or other operator of such
equipment or its affiliates ("Re-lease"), the General Partner shall receive, on
a monthly basis, a Re-lease Fee equal to the lesser of (a) the fees which would
be charged by an independent third party for comparable services for comparable
equipment or (b) two percent of gross lease revenues derived from such Re-lease.
There were no such fees paid to the General Partner in 1999, 1998, or 1997.

EQUIPMENT LIQUIDATION FEE

With respect to each item of equipment sold by the General Partner (other than
in connection with a conditional sales contract), a fee equal to the lesser of
(i) 50% of the competitive equipment sale commission or (ii) three percent of
the sales price for such equipment is payable to the General Partner. The
payment of such fee is subordinated to the receipt by the Limited Partners of
the Net Disposition Proceeds from such sale in accordance with the Partnership
Agreement. Such fee will be reduced to the extent any liquidation or resale fees
are paid to unaffiliated parties. There were no such fees paid to the General
Partner in 1999, 1998, or 1997.


                                                                            36

<PAGE>

                      Commonwealth Income & Growth Fund II

                   Notes to Financial Statements (continued)


5. NOTES PAYABLE

Notes payable consisted of the following:

<TABLE>
<CAPTION>
                                                                        1999                 1998
                                                                 --------------------   ------------------
<S>                                                              <C>                    <C>
Installment note payable to a bank; interest at 7.5%; due in
    monthly installments of $22,844 including interest through
    June 1999                                                        $            -      $      134,127
Installment note payable to a bank; interest at 7.0%; due in
    monthly installments of $8,386 including interest through
    February 2000                                                            16,626             112,424
Installment note payable to a bank; interest at 7.5%; due in
    monthly installments of $31,144 including interest through
    May 2000                                                                152,850             500,883
Installment note payable to a bank; interest at 8.2%; due in
    monthly installments of $3,976 including interest through
    June 2000                                                                23,296              67,126
Installment note payable to a bank; interest at 6.4%; due in
    monthly installments of $21,031 including interest through
    September 2000                                                          184,329             416,767
Installment note payable to a bank; interest at 6.5%; due in
    monthly installments of $11,910 including interest through
    November 2000                                                           126,857             256,927
Installment note payable to a bank; interest at 6.5%; due in
    monthly installments of $6,989 including interest through
    November 2000                                                            74,444             150,770
Installment note payable to a bank; interest at 7.0%; due in
    monthly installments of $33,736 including interest through
    December 2000                                                           383,699             748,005
Installment note payable to a bank; interest at 7.0%; due in
    monthly installments of $6,491 including interest through
    February 2001                                                            87,019             156,170
Installment note payable to a bank; interest at 7.5%; due in
    monthly installments of $4,395 including interest through
    February 2001                                                            58,920             105,741
</TABLE>


                                                                            37
<PAGE>


                      Commonwealth Income & Growth Fund II

                   Notes to Financial Statements (continued)


5. NOTES PAYABLE (CONTINUED)

<TABLE>
<CAPTION>
                                                                        1999                 1998
                                                                 --------------------   ------------------
<S>                                                              <C>                    <C>
Installment note payable to a bank; interest at 7.0%; due in
    monthly installments of $33,736 including interest through
    April 2001                                                       $      488,470      $      845,760
Installment note payable to a bank; interest at 7.1%; due in
    monthly installments of $12,186 including interest through
    May 2001                                                                196,532             323,860
Installment note payable to a bank; interest at 6.6%; due in
    monthly installments of $6,314 including interest through
    August 2001                                                             119,323             184,925
Installment note payable to a bank; interest at 6.4%; due in
    monthly installments of $4,209 including interest through
    June 2001                                                                72,084             116,473
Installment note payable to a bank; interest at 8.5%; due in
    monthly installments of $4,245 including interest through
    October 2001                                                             86,195                   -
Installment note payable to a bank; interest at 7.0%; due in
    monthly installments of $20,045 including interest through
    December 2001                                                           447,888             649,571
Installment note payable to a bank; interest at 6.6%; due in
    monthly installments of $14,928 including interest through
    December 2001                                                           347,776                   -
Installment note payable to a bank; interest at 6.6%; due in
    monthly installments of $3,666 including interest through
    January 2002                                                             85,409                   -
Installment note payable to a bank; interest at 9.0%; due in
    monthly installments of $2,578 including interest through
    September 2002                                                           75,116                   -
Installment note payable to a bank; interest at 6.95%; due in
    monthly installments of $12,098 including interest through
    September 2002                                                          299,358                   -
                                                                 --------------------   ------------------
                                                                     $    3,326,191      $    4,769,529
                                                                 --------------------   ------------------
                                                                 --------------------   ------------------
</TABLE>



                                                                            38
<PAGE>


                      Commonwealth Income & Growth Fund II

                   Notes to Financial Statements (continued)


5. NOTES PAYABLE (CONTINUED)

These notes are secured by specific computer equipment and are nonrecourse
liabilities of the Partnership. Aggregate maturities of notes payable for each
of the three years subsequent to December 31, 1999 are as follows:

<TABLE>
<S>                                                              <C>
                  2000                                            $      2,338,264
                  2001                                                     911,779
                  2002                                                      76,148
                                                                  ----------------
                                                                  $      3,326,191
                                                                  ----------------
                                                                  ----------------
</TABLE>

The fair market value of debt approximates its carrying value at December 31,
1999 and 1998.

6. SUPPLEMENTAL CASH FLOW INFORMATION

Other noncash activities included in the determination of net loss are as
follows:

<TABLE>
<CAPTION>
                                                              1999             1998             1997
                                                       -----------------   ---------------   ---------------
<S>                                                      <C>               <C>              <C>
     Lease income, net of interest expense on notes
         payable realized as a result of direct
         payment of principal by lessee to bank          $    2,593,673    $    1,536,818   $      404,913
     Lease income paid to original lessor in lieu
         of cash payment for computer equipment
         acquired                                                33,118            21,826           11,910
                                                       -----------------   ---------------   ---------------
     Total adjustment to net loss from other
         noncash activities                              $    2,626,791    $    1,558,644   $      416,823
                                                       -----------------   ---------------   ---------------
                                                       -----------------   ---------------   ---------------
</TABLE>


No interest or principal on notes payable was paid by the Partnership because
direct payment was made by lessee to the bank in lieu of collection of lease
income and payment of interest and principal by the Partnership.


                                                                            39
<PAGE>

                      Commonwealth Income & Growth Fund II

                   Notes to Financial Statements (continued)



6. SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)

Noncash investing and financing activities include the following:

<TABLE>
<CAPTION>
                                                              1999             1998             1997
                                                       -----------------   ---------------   ---------------
<S>                                                      <C>               <C>              <C>
     Debt assumed in connection with the purchase of
        computer equipment                               $    1,150,335    $    4,352,228   $    2,359,033
                                                       -----------------   ---------------   ---------------
                                                       -----------------   ---------------   ---------------
     Accounts payable in connection with the purchase
        of computer equipment                            $            -    $            -   $      502,721
                                                       -----------------   ---------------   ---------------
                                                       -----------------   ---------------   ---------------
     Computer equipment payable converted
        to a note payable                                $            -    $      502,721   $            -
                                                       -----------------   ---------------   ---------------
                                                       -----------------   ---------------   ---------------
</TABLE>

7. RECONCILIATION OF NET LOSS REPORTED FOR FINANCIAL REPORTING PURPOSES TO
       TAXABLE INCOME ON THE FEDERAL PARTNERSHIP RETURN

<TABLE>
<CAPTION>
                                                              1999             1998             1997
                                                       -----------------   ---------------   ---------------
<S>                                                      <C>               <C>              <C>
     Net loss for financial reporting purposes           $     (421,337)   $     (391,744)  $     (61,837)
         Adjustments:
            Depreciation                                        860,760         1,060,451         387,081
            Amortization                                        181,893           179,834         112,007
            Unearned lease income                               (25,485)          (65,610)         71,392
            Loss on sale of computer equipment                  (49,424)         (455,968)         (7,011)
            Other                                              (102,487)          (19,753)         33,265
                                                       -----------------   ---------------   ---------------
     Taxable income on the Federal
         Partnership Return                              $      443,920    $      307,210   $     534,897
                                                       -----------------   ---------------   ---------------
                                                       -----------------   ---------------   ---------------
</TABLE>



                                                                            40
<PAGE>
(a) (2)  Schedules.

         Schedules are omitted because they are not applicable, not required, or
         because the required information is included in the financial
         statements and notes thereto.

(a) (3)  Exhibits.

         *  3.1 Certificate of Limited Partnership
         **3.2 Agreement of Limited Partnership
         **10.1 Agency Agreement dated as of May 12, 1995 by and among the
                Partnership, the General Partner and Wheat First Securities,
                Inc.

         27 FINANCIAL DATA SCHEDULE

         *      Incorporated by reference from the Partnership's Registration
                Statement on Form S-1 (Registration No. 33-89476)

         **     Incorporated by reference for the Partnership's Annual Report on
                Form 10-K for the year ended December 31, 1995.

(b)      Reports on Form 8-K
         NOT APPLICABLE

(c)      Exhibits.

SIGNATURES

         Pursuant to the requirements of Section 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf April 14, 1999 by the undersigned thereunto duly authorized.

                                  COMMONWEALTH INCOME & GROWTH FUND II
                                       By:    COMMONWEALTH INCOME &
                                              GROWTH FUND, INC., General Partner

                                  By   /S/ GEORGE S. SPRINGSTEEN
                                       -------------------------
                                       George S. Springsteen, President


                                                                              41
<PAGE>

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on April 14, 1999.

SIGNATURE                                            CAPACITY
---------                                            --------

/S/ GEORGE S. SPRINGSTEEN               Chairman, President and Director of
-------------------------               Commonwealth Income & Growth Fund, Inc.
George S. Springsteen

/S/ KIMBERLY A. MACDOUGALL              Executive Vice President Chief Operating
--------------------------              Officer Secretary and Director
Kimberly A. MacDougall

/S/ JOHN A. CONBOY III                  Accounting Manager of Commonwealth
----------------------                  Income & Growth Fund, Inc.
John A. Conboy III




                                                                            42

<PAGE>




                     Commonwealth Income & Growth Fund, Inc.
       (an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)

                                February 28, 1999



                                TABLE OF CONTENTS


<TABLE>

<S>                                                                           <C>
Report of Independent Auditors.................................................1


Balance Sheet..................................................................2
Notes to Balance Sheet.........................................................3

</TABLE>


                                                                           43
<PAGE>

                          INDEPENDENT AUDITOR'S REPORT

Stockholder
Commonwealth Income & Growth Fund, Inc.

We have audited the accompanying balance sheet of COMMONWEALTH INCOME & GROWTH
FUND, INC. (An indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
as of February 28, 1999. This balance sheet is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. 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
audit provides a reasonable basis for our opinion.

In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Commonwealth Income & Growth Fund,
Inc. as of February 28, 1999, in conformity with generally accepted accounting
principles.



/s/ Fishbein & Company, P.C.

June 16, 1999



                                                                             44
<PAGE>

                     Commonwealth Income & Growth Fund, Inc.
       (an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)

                                  Balance Sheet

                                February 28, 1999

                                     ASSETS

<TABLE>

<S>                                                            <C>
Cash                                                           $       500

Receivable from Income Funds                                       128,803

Investment in Partnerships                                           3,000
                                                               -----------
                                                               $   132,303

                      LIABILITIES AND STOCKHOLDER'S EQUITY

LIABILITIES

         Accounts payable and accrued expenses                 $     3,422
         Due to parent                                             127,781
                                                              ------------

                                                                   131,203
                                                              ------------

STOCKHOLDERS EQUITY
         Common stock - No par value
            Authorized 1,000 shares
               Issued and outstanding 100 shares                     1,000
         Additional paid-in capital                              1,000,100
                                                              ------------
                                                                 1,001,100
         Less note receivable                                   (1,000,000)
                                                                     1,100
                                                                     -----
                                                                   132,303
                                                                   -------

</TABLE>


                                                                             45
<PAGE>


                     Commonwealth Income & Growth Fund, Inc.
       (an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)

                              NOTE TO BALANCE SHEET

                                February 28, 1999

1. NATURE OF BUSINESS

Commonwealth Income & Growth Fund, Inc. (the Company) is a wholly-owned
subsidiary of Commonwealth of Delaware, Inc. which is a wholly- owned subsidiary
of Commonwealth Capital Corp. (CCC). The Company is the sole General Partner of
Commonwealth Income & Growth Fund I, Commonwealth Income & Growth Fund II, and
Commonwealth Income & Growth Fund III, all Pennsylvania limited partnerships
(the "Partnerships).

CCC has provided additional capital by means of a noninterest-bearing demand
note in the amount of $1,000,000, so that the Company will at all times have a
net worth (which includes the net equity of the Company and the demand note
receivable from CCC) of at least $1,000,00. The note receivable is reflected on
the accompanying balance sheet as a reduction of the Company's equity.

The Company's operations are included in the consolidated federal income tax
return of CCC.

2. INVESTMENT IN PARTNERSHIPS

The Company contributed $3,000 in cash to the Partnerships for its general
partner interests. The Company may, at its sole discretion, purchase a limited
partnership interest in the Partnerships ("Units") for an additional capital
contribution of $20 per Unit with a minimum investment of 125 units.

3. RELATED PARTY TRANSACTIONS

The Company and its affiliates receive substantial fees and compensation in
connection with the offering of Units and the management of the Partnerships'
assets. See "Compensation of General Partner and Affiliates, " and "Allocations
and Distributions" elsewhere in the Prospectus of Commonwealth Income & Growth
Fund III for information with respect to the compensation to be paid to the
Company and its affiliates and the allocations of income, losses, and cash
distributions.


                                                                             46
<PAGE>

                   COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET

                                FEBRUARY 28, 1999

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>

                                                                       PAGE

<S>                                                                    <C>
INDEPENDENT AUDITOR'S REPORT                                           1

CONSOLIDATED BALANCE SHEET                                             2

NOTES TO CONSOLIDATED BALANCE SHEET                                    3

</TABLE>


                                                                             47
<PAGE>

                          INDEPENDENT AUDITOR'S REPORT

Stockholder
Commonwealth Capital Corp.

         We have audited the accompanying consolidated balance sheet of
Commonwealth Capital Corp. and Subsidiaries as of February 28, 1999, and the
related consolidated statements of operations and retained earnings and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

         We conducted our audit 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 audit provides a reasonable basis for our opinion.

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Commonwealth Capital Corp. and Subsidiaries as of February 28, 1999, and the
consolidated results of their operations and their consolidated cash flows for
the year ended in conformity with generally accepted accounting principles.


                                                 /s/ Fishbein & Company, P.C.

June 16, 1999


                                                                             48
<PAGE>

                           COMMONWEALTH CAPITAL CORP.

                           CONSOLIDATED BALANCE SHEET

                                FEBRUARY 28, 1999

<TABLE>

<S>                                             <C>
ASSETS

Cash and cash equivalents                       $   28,544
Receivables from Income Funds                      346,272
Other receivables                                   64,754
Minimum lease payments receivable - Net of
     unearned interest income of $2,084,813      5,260,000
Investment in income funds                          16,200
Office furniture and equipment - Net of
     accumulated depreciation of $108,789           10,649
Deferred offering costs                            257,673
Other assets                                         9,042
                                                ----------

                                                $5,993,134
                                                ==========


           LIABILITIES AND STOCKHOLDER'S EQUITY

LIABILITIES

Accounts payable and accrued expenses           $  141,265
Due to Income Funds                                 63,382
Nonrecourse obligations                          5,260,000
                                                ----------
                                                 5,464,647
                                                ----------

STOCKHOLDER'S EQUITY

Common stock -Par value $1
 Authorized 1,000 shares
   Issued and outstanding 10 shares                     10
Retained Earnings                                  528,477
                                                ----------

                                                   528,487
                                                ----------
                                                $5,993,134
                                                ==========

</TABLE>

See notes to consolidated financial statements


                                                                             49
<PAGE>

1. BUSINESS

Commonwealth Capital Corp. (the Company), through its subsidiary, Commonwealth
of Delaware, Inc. (CDI), is primarily engaged in leasing various types of
computer peripheral equipment and other similar equipment, which are leased
primarily to U.S. corporations and institutions. Certain subsidiaries of CDI
were formed for the purpose of functioning as general partners/managing trustees
which own a 1% interest in limited partnerships/trusts (the "Income Funds"),
which were organized to acquire, own, and act as lessor with respect to certain
computer equipment. As of February 28, 1998, the subsidiaries include
Commonwealth Capital Fund 1987-I, Inc., Commonwealth Capital Fund 1988-I, Inc.,
Commonwealth Capital Fund No. 3, Inc., Commonwealth Capital Fund No. 4, Inc.,
Commonwealth Capital Fund V, Inc., Commonwealth Capital Private Fund-I, Inc.,
Commonwealth Capital Fund VI, Inc., Commonwealth Capital Fund VII, Inc.,
Commonwealth Capital Private Fund - II, Inc., Commonwealth Capital Trustee VIII,
Inc., Commonwealth Capital Trustee IX, Inc., Commonwealth Capital Trustee X,
Inc., Commonwealth Capital Private Fund-III, Inc., Commonwealth Income and
Growth Fund, Inc., Commonwealth Capital Private Fund IV, Inc., Commonwealth
Capital Private Fund V, Inc., and Commonwealth Capital Private Fund VI, Inc.
(collectively the "General Partner Subsidiaries"), Commonwealth Capital
Securities Corp., Garden State Facilities Funding, Inc. (GSFF), and Commonwealth
Capital Delaware Trustee, Inc.

The Company is dependent on the compensation it receives from the Income Funds.
This compensation may be reduced due to the financial performance of each Income
Fund. There are certain Income Funds that have deferred fees subsequent to
February 28, 1998 because distributions to the limited partners were reduced
because of their financial performance. If the financial performance of
additional Income Funds deteriorates and the distributions to the limited
partners are reduced, there is no assurance that the Company would be able to
continue to collect fees for services provided. Management believes that fees
currently being collected will be sufficient to enable it to support its
operations during the next year. Commission income is derived from Commonwealth
Capital Securities Corp. which sells units of its affiliated partnerships
through broker dealer firms to their respective customers throughout the United
States.

2. ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the
Company, CDI, and CDI's subsidiaries (the Company) (See Note 1). All significant
interCompany transactions and balances have been eliminated.


                                                                             50
<PAGE>

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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. At February 28, 1999 cash
equivalents were invested in a money market fund investing directly in treasury
obligations.

REVENUE RECOGNITION

The Company recognizes fees as earned in accordance with the various General
Partnership and Trust Agreements. The Company recognizes commission income and
brokerage fee expense on an accrual basis based on the trade date of the
underlying customer transactions. Interest income on minimum lease payments
receivable is recognized as earned.

INVESTMENT IN INCOME FUNDS

The Company accounts for its 1% interests in the Income Funds by the equity
method. In 1998, certain Income Funds had liabilities in excess of their assets.
As the Company, which serves the General Partner, is obligated to fund any
liabilities in excess of assets, the Company reduced its investment in Income
Funds and recorded a Due to Income

INVESTMENT IN INCOME FUNDS (CONTINUED)

Funds of $63,382 at February 28, 1999 of which $17,269 was incurred during the
year ended February 28, 1999. Financial information of the Income Funds as of
December 31, 1998 is as follows:

<TABLE>
<CAPTION>

                                                  1998
                                          ------------------
<S>                                        <C>
Total assets                               $     24,883,000
Nonrecourse debt                                  9,234,000
Other liabilities                                 1,068,000
Partners' capital                                14,581,000
Net income (loss)                                  (721,000)

</TABLE>

The Company has guaranteed the performance of certain non-monetary obligations
of the General Partner Subsidiaries to the respective Income Funds, primarily
the responsibility


                                                                           51
<PAGE>

for management of the Income Funds. In addition, the Company is responsible for
certain capital funding requirements of the General Partner Subsidiaries which
it satisfies through noninterest-bearing demand notes. Such notes total
approximately $4,166,000 at February 28, 1999 and have been eliminated in the
consolidation of the accompanying financial statements.

Fee income earned by the Company from the Income Funds includes: (1) Equipment
Acquisition Fees (4% of the purchase price of all equipment purchased by the
Income Funds); (2) Debt Placement Fees (1% of financed equipment by the Income
Funds); (3) Sales Fees Expense (3% of gross proceeds of sold equipment by the
Income Funds); and (4) Equipment Management Fees (5% of the gross operating
lease revenues of the Income Funds).

Approximately 64% of fee income for the year ended February 28, 1999, was from
two Income Funds.

OFFICE FURNITURE AND EQUIPMENT

Office furniture and equipment are stated at cost. Depreciation is provided
using the declining balance method over the estimated useful lives of the assets
(ranging from 5 to 7 years

DEFERRED OFFERING COSTS

Deferred offering costs represent amounts incurred by the Company for the
organization of an Income Fund. These costs are recovered from the Income Fund
through fees as cash proceeds are raised through the sale of Limited Partnership
Units during the offering period or if necessary the future operations of the
Income Fund. Deferred offering costs at February 28, 1999, relate to an Income
Fund whose offering period expires in July 2000.

3. LEASE COMMITMENTS

GSFF acted as lessor in a series of lease purchase transactions whereby the
underlying assets were funded by investors through certificates of participation
in the lease payments. All of GSFF's rights as lessor were assigned to a
third-party agent which administers the collection of rentals paid by the
lessee. The obligations under the certificates are nonrecourse to GSFF.
Accordingly, any reduction in the minimum lease payments receivable for
uncollectible accounts would result in an equal reduction of the nonrecourse
obligations. Amounts outstanding at February 28, 1999 under these leases and
certificates of participation are approximately $5,260,000 and are reflected as
minimum lease payments receivable and nonrecourse obligations in the
accompanying balance sheet. Of these amounts, $4,110,000 are secured by mortgage
insurance policies maintained by the lessee. The certificates mature at various
dates through 2011. The Company recognized interest income and interest expense
in connection with the lease purchase transactions of $395,375 for the year
ended February 28, 1999.


                                                                           52
<PAGE>

Future minimum lease payments to be received as of February 28, 1998 are as
follows:

<TABLE>

     <S>                                         <C>
     2000                                              903,828
     2001                                              906,935
     2002                                              683,324
     2003                                              684,490
     Thereafter                                      4,166,236
                                               ---------------
                                                     7,344,913
     Less amount representing interest               2,084,813
                                               ---------------
     Total                                       $   5,260,000
                                               ===============

</TABLE>


The Company leases an automobile, certain office equipment and office space
under noncancelable operating leases expiring in various dates through 2004.
Rent expense under all operating leases was approximately $174,000 for the year
ended February 28, 1999. Future minimum lease payments under noncancelable
operating leases at February 28, 1999 are as follows: $150,000 in 1999; $11,000
in 2000; and $4,000 in 2001.

<TABLE>
<CAPTION>

            YEAR ENDING FEBRUARY 28,
                   <S>                                   <C>
                   2000                                  $ 154,000
                   2001                                    146,000
                   2002                                    141,000
                   2003                                    143,000
                   2004                                    146,000
                                                           -------

                                                         $ 730,000

</TABLE>

PROFIT-SHARING PLAN

The Company has a profit-sharing plan covering all employees with one year of
service and 21 years of age. Profit-sharing contributions are made at the
discretion of management. There was no profit-sharing contribution for the years
ended February 28, 1999.

RELATED PARTY TRANSACTIONS

For the years ended February 28, 1999, certain of the General Partner
Subsidiaries agreed to waive or forgive the related Income Funds' obligations to
pay certain equipment management, acquisition, and financing fees in the amount
of $28,907. Accordingly, fee income from Income Funds is reflected net of these
amounts.


                                                                           53
<PAGE>

INCOME TAXES

The Company and its subsidiaries file a consolidated federal income tax return.

The Company has net operating loss carryforwards of approximately $235,000 and
investment tax credit carryforwards of approximately $129,000 available to
reduce future federal income taxes. If not used, the carryforwards will expire
as follows

<TABLE>
<CAPTION>

                                     NET OPERATING               INVESTMENT
YEAR ENDING FEBRUARY 28,               LOSSES                    TAX CREDITS
                <S>                  <C>                         <C>
                2000                 $                           $ 20,000
                2001                                               57,000
                2002                                               52,000
                2013                      38,000
                2019                     197,000
                                         -------

                                         235,000                $ 129,000

</TABLE>

The Company also has net operating loss carryforwards of approximately
$1,983,000 available to reduce future Pennsylvania state income taxes. If not
used, the carryforwards will expire as follows:

<TABLE>
<CAPTION>

Year Ending February 28,
                <S>                                <C>
                2006                               $  158,000
                2007                                  651,000
                2008                                  977,000
                2009                                  197,000
                                                      -------

                                                   $1,983,000

</TABLE>

At February 28, 1999, the Company has deferred income tax assets of $370,000
arising primarily from net operating loss and investment tax credit
carryforwards, and deferred income tax liabilities of approximately $104,000
associated with ownership of general partnership interests in the various
operating Income Funds. The Company has recorded a valuation allowance for the
net deferred income tax assets of approximately $266,000 at February 28, 1999,
because the Company concluded the future realization of the assets could not be
reasonably assured based on current and expected operating results.



                                                                          54