<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, 1997

   (  )   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 No.)
 incorporation or organization)

                            1160 West Swedesford Road
                           Berwyn, Pennsylvania 19312
          (Address, including zip code, of principal executive offices)

                                 (610) 647-6800
               (Registrant's telephone number including area code)

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

                       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.



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<PAGE>

     As of December 31, 1997, 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 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, 1997,
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



                                       3
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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 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, 1997, the Partnership has acquired a
diversified Equipment portfolio which it has leased to 27 different companies
located throughout the United States. Approximately 28% of the Equipment
acquired by the Partnership consists of PrintersApproximately another 26% of the
Equipment acquired by the Partnership consists of Workstations. Approximately
22% of the Equipment acquired by the Partnership consists of tape storage.
Approximately 11% of the Equipment acquired by the Partnership consists of disk
arrays. Approximately 7% of the Equipment acquired by the Partnership 
consists of escon drivers. Approximately 6% 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 retains a security interest in, the Equipment until the Purchase
Price of the Equipment is paid. As of December 31, 1997, 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



                                       4
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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 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, 1997, all leases that have
been entered into are "triple net leases".

     The General Partner has not established any standards for lessees to which
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, 1997, 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 therefrom. 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



                                       5
<PAGE>

Partnership in the amount or at the time desired or on terms considered
reasonable by the General Partner. As of December 31, 1997, the aggregate
nonrecourse debt outstanding of $1,954,000 was 17% of the aggregate cost of the
Equipment owned.

     The Partnership may continue to purchase some items of Equipment without 
leverage. If the Partnership may 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, 1997, 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" 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,
1997, 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, 1997, 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.



                                       6
<PAGE>

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.

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 that 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 any 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



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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 16, 1998, 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>
Bellsouth                       STK      (1) 9200-XN3                  3,445,720           787,196             17,467         36
Bellsouth                       STK      (1) 9200-XN3                  2,635,720           582,671             12,929         36
Southern Pacific                IBM      (325) 4230-5S3                1,183,975           990,357             24,160         36
Southern Pacific                IBM      (50) 4028-NS1                   187,200           147,963              1,949         36
Chrysler                        STK      (2) 9490-M34                    686,158           490,110             12,001         48
Yamaha                          STK      (1) 9490-M34                  1,007,413           383,553              9,025         36
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
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             21,031         36
Charles Schwab                  IBM      (2) 9032-003                    845,043           523,399             11,910         36
Charles Schwab                  IBM      (20%)(6)9032-003              2,479,443         1,509,981              6,989         36
Equitable Life                  SUN      (2) E3000                       336,220           244,673              6,491         36
Chase                           SUN      (3) E45D                        358,562           249,561              8,386         24
Aetna                           STK      (2) 9490-M34                    535,932           193,442              4,395         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

                                       8
<PAGE>

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.

     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 15 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



                                       9
<PAGE>

     There is no public market for the Units nor is it anticipated that one will
develop. As of December 31, 1997, 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
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 request
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
request 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 nonliquidating as well as liquidating distributions by
a parent partnership to its partners of interests in a subpartnership);



                                       10
<PAGE>

         (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.

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 Priority 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 Priority Return, the Adjusted Capital
Contributions will be reduced by the excess, decreasing the base on which the
Priority 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



                                       11
<PAGE>

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 thereunder. 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 1997, 1996 and 1995.

<TABLE>
<CAPTION>
Quarter Ended                           1997             1996            1995
--------------                        --------       -----------       --------
<S>                                   <C>              <C>              <C>
March 31                              $211,022         $108,647             --

June 30                                226,789          137,297             --

September 30                           230,980          164,131             --

December 31                            230,836          191,890         $ 83,796
                                      --------       -----------       --------
                                      $899,627         $601,965         $ 83,796
                                      --------       -----------       --------
                                      --------       -----------       --------
</TABLE>

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, 1997, 1996 and for the period
September 22, 1995 (commencement of operations) to December 31, 1995. This table
is qualified in its entirely by the more detailed information and financial



                                       12
<PAGE>

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         PERIOD ENDED
                                    ---------------------------     --------------
                                         1997           1996             1995
                                    -----------    ------------     -------------
<S>                                 <C>             <C>             <C>        
Lease Income                        $ 2,444,661     $ 1,123,685     $    95,538

Net Loss                                (61,837)           (730)        (12,065)

Cash Distributions                      908,714         608,045          84,642

Net Loss per Unit                          (.16)           (.02)           (.09)

Cash Distribution per Unit                 2.00            2.00             .55

</TABLE>


<TABLE>
<CAPTION>
                                                   DECEMBER 31
                                   -------------------------------------------
                                     1997              1996             1995
                                   ----------      ------------      ----------
<S>                               <C>               <C>               <C>       
Total Assets                      $9,356,409        $6,614,654        $3,373,407

Notes Payable                      1,954,120              --                --
</TABLE>

         Net 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, 1997, 1996 and 1995, were from Partners' contributions of
$1,186,000, $4,371,000 and $3,679,000, and cash from operations of $1,957,000,
$949,000 and $56,000, respectively. The primary uses of cash for the years ended
December 31, 1997, 1996 and 1995, were for capital expenditures for new
equipment totaling $4,179,000, $1,777,000 and $2,850,000, the payment of
acquisition fees of $203,000, $147,000 and $123,000, for the payment of
preferred distributions to partners totaling $909,000, $608,000 and $85,000, and
for the payment of offering costs totaling $130,000, $487,000 and $426,000,
respectively.

         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, 1997 and 1996 the Partnership had
approximately $258,000 and $2,552,000, respectively, invested in these money
market accounts.



                                       13
<PAGE>

         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 increased by 136% from
December 31, 1996 to December 31, 1997, due to additional computer equipment
leases which commenced in 1997. This particular industry has experienced a
decrease in lease rates during this period due to an ongoing decrease in
interest rates. As of December 31, 1997, the Partnership had future minimum
rentals on noncancellable operating leases of $3,402,000 for the year ended 1998
and $3,135,000 thereafter. During 1997, the Partnership incurred debt in
connection with the purchase of computer equipment totaling $2,359,000. At
December 31, 1997, the outstanding debt was $1,954,000, with interest rates
ranging from 6.4% to 8.2% and will be payable through September 2000. 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.

RESULTS OF OPERATIONS

1997 and 1996 OPERATING RESULTS

         For the year ended December 31, 1997 and 1996, the Partnership
recognized income of $2,540,000 and $1,194,000 and expenses of $2,602,000
and $1,195,000, resulting in net loss of $62,000 and $1,000, respectively.

         Lease income increased by 118% over 1996 primarily due to the addition
of operating leases in 1997. In 1997 the Partnership expended approximately
$4,179,000 in cash and assumed debt of $2,359,000 to acquire 11 additional
leases

         Interest income increased 36% from $70,000 for the year ended December
31, 1996 to $95,000 for the year ended December 31, 1997, as a result of the
capital contributions and rental income being temporarily invested in money
market accounts.

         Operating expenses, excluding depreciation, primarily consist of 
accounting, legal, outside service fees and reimbursement of expenses to Com 
Cap Corp for administration and operation of the Partnership. The 186% 
increase from approximately $57,000 during the year ended December 31, 1996 
to $164,000 during the year ended December 31, 1997 is primarily attributable 
to an increase in the reimbursable expenses to Com Cap Corp for costs 
incurred in connection with the administration and operation of the 
Partnership which were not changed by Com Cap Corp in 1996 and for third 
party costs incurred for certain periodic filings of the Partnership.

         The equipment management fee is equal to 5% of the gross lease revenue
attributable to equipment which is subject to operating leases. The equipment
management fee increased 118% from approximately $56,000 during the year ended
December 31, 1996 to $122,000 during the year ended December 31, 1997, 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 108% increase from approximately $1,082,000
during the year ended December 31, 1996 to $2,247,000 during the year ended
December 31, 1997 is attributable to the 146% increase in the computer equipment
portfolio being leased.



                                       14
<PAGE>

         The Partnership sold computer equipment with a net book value of
$43,000 during the year ended December 31, 1997, for a net loss of $32,000.

         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 adoption of FAS 121 had no effect on the 1997 or 1996 financial 
statements.

         For the year ended December 31, 1997, the Partnership generated cash
flow from operating activities of $1,957,000, which includes a net loss of
$62,000 reduced by depreciation and amortization expenses of $2,247,000. Other
noncash activities included in the determination of the net loss includes direct
payments of lease income by lessees to banks of $417,000.

1996 and 1995 OPERATING RESULTS

         The comparison of the results of operations is for the twelve months
ended December 31, 1996, compared to the period from September 22, 1995
(commencement of operations) through December 31, 1995.

         For the year ended December 31, 1996 and the period ended 1995, the
Partnership recognized income of $1,194,000 and $124,000, respectively, and
expenses of $1,195,000 and $136,000, resulting in net loss income of $1,000 and
$12,000, respectively.

         Lease income increased 1,040% from December 31, 1995, to December 31,
1996, primarily due to utilizing cash from Partners' contributions for the
purchase of Equipment, which in turn generated more lease income. During 1995,
the Partnership expended approximately $2,850,000 in cash to acquire 5 leases
which generated approximately $99,000 in revenue. During 1996, the Partnership
expended approximately $1,777,000 to acquire 7 leases which together with the
leases acquired in 1995 generated approximately $1,124,000 in revenue.

         Interest income increased 180% from $25,000 for the period ended
December 31, 1995 to $70,000 for the year ended December 31, 1996, as a result
of the capital contributions temporarily being invested in money market accounts
until being utilized for Equipment purchases.

         Operating expenses, excluding depreciation, primarily consist of
accounting, legal and outside service fees. The increase 147% from approximately
$23,000 during the period ended December 31, 1995 to $57,000 during the year
ended December 31, 1996 is primarily attributable to the increase in the
Partnership's business activities.

         The equipment management fee is equal to 5% of the gross lease revenue
attributable to Equipment which is subject to operating leases. The equipment
management fee increased 1,020% from approximately $5,000 during the period
ended December 31, 1995 to $56,000 during the year ended December 31, 1996,
which is consistent with the increase in lease income.

          For the year ended December 31, 1996, the Partnership generated cash
flow from operating activities of $949,000, which includes a net loss of $1,000
reduced by depreciation and amortization expenses of $1,082,000.

         For the period ended December 31, 1995, the Partnership generated cash
flows from operating activities of $56,000, which included a net loss of $12,000
and depreciation and amortization expenses of $108,000.

Impact of Year 2000

    The Year 2000 Issue is the result of computer programs being written using 
    two digits rather than four to define the applicable year. Any computer 
    programs that have time-sensitive software may recognize a date using 
    "00" as the year 1900 rather than the year 2000. This could result in a 
    system failure or miscalculations causing disruptions of operations, 
    including, among other things, a temporary inability to process 
    transactions, send invoices, or engage in similar normal business 
    activities.

    The Partnership does not have any computer programs or systems as all 
    services required for the management of the Partnership are provided by 
    the General Partner which receives fees and certain reimbursements for 
    these services. Therefore, the General Partner is responsible for any 
    costs associated with Year 2000 issues. Based on a recent assessment, the 
    General Partner determined that it will be required to modify or replace 
    portions of its software so that its computer systems will function 
    properly with respect to dates in the year 2000 and thereafter. The 
    General Partner presently believes that with modifications to existing 
    software and conversions to new software, the Year 2000 Issue will not 
    pose significant operational problems for its computer systems. The 
    General Partner expects that its modifications will be complete by 1999. 
    The General Partner and its affiliates will be entitled to reimbursement 
    for any costs associated with the Year 2000 issue. As of December 31, 1997,
    the General Partner has not incurred any significant expenses.

    The Partnership and the General Partner are not responsible for ensuring 
    that the computer peripheral equipment that it leases to customers is 
    Year 2000 compliant, however, this equipment may be subject to declines 
    in value or technological obsolescence due to the equipment not being 
    Year 2000 compliant. The Year 2000 issue may also affect the carrying 
    value of the equipment when it comes off of lease or be detrimental in 
    negotiating release rates which may lead to equipment write downs or less 
    than favorable lease recoveries. Management has considered these factors 
    in determining the recovery of its equipment at December 31, 1997 in 
    accordance with FASB Statement No. 121 "Accounting for the Impairment of 
    Long-Lived Assets and for Long-Lived Assets to be Disposed Of'. Based on 
    its current assessment the Partnership does not believe that the reduction 
    in carrying values of equipment, if any, due to the Year 2000 issue will
    have a significant effect on operations.

                                       15

<PAGE>

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                      Commonwealth Income & Growth Fund II

                              Financial Statements

       Years ended December 31, 1997, 1996, and for the period September
         22, 1995 (commencement of operations) to December 31, 1995



<TABLE>
<CAPTION>

                                    Contents


<S>                                                                         <C>
Report of Independent Auditors...............................................17

Audited Financial Statements

Balance Sheets...............................................................18
Statements of Operations.....................................................19
Statements of Partners' Capital..............................................20
Statements of Cash Flows.....................................................21
Notes to Financial Statements................................................22
</TABLE>

                                       16

<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, 1997 and 1996, and the related statements 
of operations, partners' capital, and cash flows for the years ended December 
31, 1997 and 1996, and for the period September 22, 1995 (commencement of 
operations) to December 31, 1995. These financial statements are the 
responsibility of the Partnership's management. Our responsibility is to 
express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in 
all material respects, the financial position of Commonwealth Income & Growth 
Fund II at December 31, 1997 and 1996, and the results of its operations and 
its cash flows for the years ended December 31, 1997 and 1996, and for the 
period September 22, 1995 (commencement of operations) to December 31, 1995, 
in conformity with generally accepted accounting principles.

                                                         /s/ Ernst & Young LLP

Philadelphia, Pennsylvania
February 6, 1998

                                       17

<PAGE>


                      Commonwealth Income & Growth Fund II

                                 Balance Sheets

<TABLE>
<CAPTION>

                                                                                      December 31
                                                                                 1997             1996
                                                                                 ----             ----

<S>                                                                       <C>               <C>    
Assets
Cash and cash equivalents                                                  $      258,167   $    2,552,352
Lease income receivable                                                           113,500           80,014
Accounts receivable - General Partner                                              15,821                -
Interest and other receivables                                                        100           19,551

Computer equipment, at cost                                                    11,764,757        4,780,075
Accumulated depreciation                                                       (3,175,757)      (1,093,535)
                                                                            --------------   --------------
                                                                                8,589,000        3,686,540

Organization costs and deferred expenses, net of
    accumulated amortization of $232,708 for 1997
    and $96,375 for 1996                                                          379,821          276,197
                                                                            --------------   --------------
Total assets                                                               $    9,356,409   $    6,614,654
                                                                            --------------   --------------
                                                                            --------------   --------------

Liabilities and partners' capital
Accounts payable                                                           $       96,326   $       92,954
Accounts payable - Commonwealth Capital Corp.                                      68,265                -
Unearned lease income                                                             217,503           89,780
Equipment payable                                                                 502,721                -
Notes payable                                                                   1,954,120                -
                                                                            --------------   --------------
Total liabilities                                                               2,838,935          182,734

Partners' capital:
    General partner                                                                 1,000            1,000
    Limited partners                                                            6,516,474        6,430,920
                                                                            --------------   --------------
Total partners' capital                                                         6,517,474        6,431,920
                                                                            --------------   --------------
Total liabilities and partners' capital                                    $    9,356,409   $    6,614,654
                                                                            --------------   --------------
                                                                            --------------   --------------

</TABLE>

See accompanying notes.

                                       18

<PAGE>


                      Commonwealth Income & Growth Fund II

                            Statements of Operations

<TABLE>
<CAPTION>

                                                                                     September 22, 
                                                                                         1995
                                                                                      (commencement 
                                                                                    of operations) to
                                                       Year ended December 31          December 31,
                                                       1997             1996              1995               
                                                       ----             ----              ----

<S>                                                 <C>              <C>                 <C>   
Income:
   Lease                                             $ 2,444,661   $ 1,123,685        $  98,538
   Interest and other                                     95,346        70,429           25,340
                                                     -----------   -----------        ---------
                                                       2,540,007     1,194,114          123,878

Expenses:
   Operating, excluding depreciation                     163,749        56,707           23,059
   Equipment management fee paid to
     General Partner                                     122,233        56,184            4,927
   Depreciation                                        2,107,744       997,708           95,827
   Amortization of organization costs and
     deferred expenses                                   139,057        84,245           12,130
   Interest                                               37,106             -                -
   Loss on sale of computer equipment                     31,955             -                -
                                                     -----------   -----------        ---------
                                                       2,601,844     1,194,844          135,943
                                                     -----------   -----------        ---------
Net loss                                            $   (61,837)   $     (730)        $(12,065)
                                                     -----------   -----------        ---------
                                                     -----------   -----------        ---------

Net loss per equivalent limited
   partnership unit                                  $      (.16)  $     (.02)        $   (.09)
                                                     -----------   -----------        ---------
                                                     -----------   -----------        ---------

Weighted average number of equivalent
   limited partnership units outstanding
   during the period                                     451,712       300,982          151,415
                                                     -----------   -----------        ---------
                                                     -----------   -----------        ---------


</TABLE>
See accompanying notes.

                                       19

<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> 
Contributions
   September 22, 1995
   through December 31,
   1995                                50        183,947       $  1,000      $ 3,677,960    $   3,678,960
Offering costs                          -              -              -         (425,732)       (425,732)
Net income (loss)                       -              -            846          (12,911)        (12,065)
Distributions                           -              -           (846)         (83,796)        (84,642)
                              -----------    -----------     -----------    -------------   -------------
Partners' capital -
   December 31, 1995                   50        183,947          1,000        3,155,521        3,156,521
Contributions - through
   December 31, 1996                    -        218,572              -        4,371,440        4,371,440
Offering costs                          -              -              -         (487,266)       (487,266)
Net income (loss)                       -              -          6,080           (6,810)           (730)
Distributions                           -              -         (6,080)        (601,965)       (608,045)
                              -----------    -----------     -----------    -------------   -------------
Partners' capital -
   December 31, 1996                   50        402,519          1,000        6,430,920        6,431,920
Contributions - through
   December 31, 1997                    -         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
                              -----------    -----------     -----------    -------------   -------------
                              -----------    -----------     -----------    -------------   -------------
</TABLE>

See accompanying notes.

                                       20

<PAGE>


                      Commonwealth Income & Growth Fund II

                            Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                             September 22,    
                                                                                                 1995         
                                                                                              (commencement   
                                                                                            of operations) to 
                                                              Year ended December 31           December 31,   
                                                             1997                1996             1995        
                                                     -----------------------------------------------------------
<S>                                                  <C>                  <C>                   <C>    
Operating activities
Net loss                                                $   (61,837)        $       (730)       $    (12,065)
Adjustments to reconcile net loss to net cash
   provided by operating activities:
     Depreciation and amortization                        2,246,801            1,081,953             107,957
     Loss on sale of computer equipment                      31,955                    -                   -
     Other non-cash activities included in
       determination of net loss                           (416,823)              (4,290)                  -
     Changes in operating assets and liabilities:
       Lease income receivable                              (33,486)             (32,895)            (47,119)
       Accounts receivable - General Partner                (15,821)                   -                   -
       Interest and other receivables                        19,451               (9,975)             (9,576)
       Accounts payable                                       3,372               61,955              30,999
       Accounts payable - Commonwealth
         Capital Corp.                                       68,265             (148,141)                  -
       Unearned lease income                                127,723               52,034              37,746
       Organization costs paid to General Partner           (12,451)             (50,528)            (51,491)
Partner
                                                       -------------         ------------        ------------
Net cash provided by operating activities                 1,957,149              949,383              56,451

Investing activities
Capital expenditures                                     (4,179,080)          (1,777,488)         (2,850,156)
Net proceeds from sale of computer equipment                 10,585                    -                   -
Equipment acquisition fees paid to
   General Partner                                         (202,760)            (147,448)           (123,105)
                                                       -------------         ------------        ------------
Net cash used in investing activities                    (4,371,255)          (1,924,936)         (2,973,261)

Financing activities
Partners' contributions                                   1,185,785            4,371,440           3,678,960
Offering costs                                             (106,556)            (406,651)           (366,885)
Offering costs paid to General Partner                      (23,124)             (80,615)            (58,847)
Distributions to partners                                  (908,714)            (608,045)            (84,642)
Debt placement fee paid to General Partner                  (27,470)                   -                   -
                                                       -------------         ------------        ------------
Net cash provided by financing activities                   119,921            3,276,129           3,168,586
                                                       -------------         ------------        ------------

Net (decrease) increase in cash and cash
   equivalents                                           (2,294,185)           2,300,576             251,776
Cash and cash equivalents at beginning
   of period                                              2,552,352              251,776                   -
                                                       -------------         ------------        ------------
Cash and cash equivalents at end of period              $   258,167         $  2,552,352        $    251,776
                                                       -------------         ------------        ------------
                                                       -------------         ------------        ------------

</TABLE>

See accompanying notes.

                                       21

<PAGE>



                      Commonwealth Income & Growth Fund II

                          Notes to Financial Statements

                                December 31, 1997


1. Business

Commonwealth Income & Growth Fund II (the "Partnership") is a limited 
partnership. The Partnership was declared effective by the Securities and 
Exchange Commission on May 12, 1995, and began offering up to 750,000 units 
of the limited partnership at the purchase price of $20 per unit. The 
offering terminated on May 12, 1997, after it sold 461,817 units at a price 
of $20 per unit. The Partnership was 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 Commonwealth 
Income & Growth Fund II, Limited Partnership Agreement (the "Agreement"). The 
various allocations prevent any 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. Annual cash 
distributions to limited partners have been made at a rate of 10% (Preferred 
Distribution) of their original contributed capital. Distributions during 
1997 and 1996 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. For a limited partner's unit outstanding 
from the Offering's first close on September 22, 1995, distributions during 
1995 reflected a return of capital in the amount of approximately $.55 per 
limited partnership unit. (For a limited partner's unit acquired during 
either 1997, 1996 or 1995, the return of capital would be less than these 
amounts.) In the event the Partnership is unable to distribute sufficient 
cash to meet the intended preferred distribution, such amounts will be 
deferred with no interest until sufficient cash flow is available, as 
determined by the General Partner or until the liquidation of the 
Partnership. The Partnership may also reduce distributions to its partners if 
it deems necessary. Further, ongoing acquisition fees, equipment management 
fees, and financing fees payable to the General Partner (Note 4) will also be 
deferred until payment of any unpaid Preferred Distribution.

                                       22

<PAGE>

                      Commonwealth Income & Growth Fund II

                    Notes to Financial Statements (continued)

2. Accounting Policies

Revenue Recognition

Through December 31, 1997, 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.

Use of Estimates

The preparation of the financial statements in conformity with generally 
accepted accounting principles 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

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" 
(FAS 121). 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. The 
adoption of FAS 121 had no effect on the 1997 and 1996 financial statements.

Depreciation on computer equipment for financial statement purposes is based 
on the straight-line method over the estimated useful lives of four years. 
Other assets, consisting of organization costs and 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, 1997 and 1996, cash 
equivalents were invested in a money market fund investing directly in 
Treasury obligations.

                                       23

<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 period.

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.

The following is a schedule of future minimum rentals on noncancelable 
operating leases at December 31, 1997.

<TABLE>
<CAPTION>

                 <S>                                 <C>           
                  1998                                $    3,402,000
                  1999                                     2,307,000
                  2000                                       828,000
                                                   ---------------------
                                                      $    6,537,000
                                                   ---------------------
                                                   ---------------------
</TABLE>

                                       24

<PAGE>

                      Commonwealth Income & Growth Fund II

                    Notes to Financial Statements (continued)

3. Computer Equipment (continued)

Lease income from four lessees, each exceeding 10% of lease revenue, aggregated
55% of lease income for the year ended December 31, 1997. Lease income from
three lessees, each exceeding 10% of lease income, aggregated 75% of the lease
income for the year ended December 31, 1996. Lease income from two lessees, each
exceeding 10% of lease revenue, aggregated 93% of lease income for the period
September 22, 1995 to December 31, 1995.

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, 1996, and 1995, such organizational fees of approximately $36,000,
$131,000, and $110,000, respectively, were paid to the General Partner.

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 1997, $110,000 of expenses were reimbursed to the General 
Partner. No expenses were reimbursed in 1996 or 1995.

                                       25

<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 will be paid upon 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 1997, 1996, and 1995, equipment 
acquisition fees of approximately $203,000, $147,000, and $123,000, 
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 1997, debt placement fees of approximately $27,000 
were paid to the General Partner. There were no such fees paid to the General 
Partner in 1996 or 1995.

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 1997, 1996, and 1995, equipment 
management fees of approximately $122,000, $56,000, and $5,000, respectively, 
were paid to the General Partner, as determined pursuant to section (ii) 
above.

                                       26

<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 or (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 1997, 1996, or 1995.

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
(i) a return of their Capital Contributions and a 10% per 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 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 1997, 1996, or 1995.

                                       27

<PAGE>

                      Commonwealth Income & Growth Fund II

                    Notes to Financial Statements (continued)


5. Notes Payable

Notes payable consisted of the following:
<TABLE>
<CAPTION>

                                                                       1997                 1996
                                                                ------------------------------------
<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                                      $       387,852        $          -
Installment note payable to a bank; interest at 7.5%;
  due in monthly installments of $31,144 including interest
  through May 2000                                                        823,908                   -
Installment note payable to a bank; interest at 8.2%;
  due in monthly installments of $3,976 including      
  interest through June 2000                                              107,518                   -
Installment note payable to a bank; interest at 6.4%;
  due in monthly installments of $21,028 including     
  interest through September 2000                                         634,842                   -
                                                                 -----------------    ------------------
                                                                    $    1,954,120      $           -
                                                                 -----------------    ------------------
                                                                 -----------------    ------------------
</TABLE>

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, 1997 are as follows:

<TABLE>
<CAPTION>
                    <S>                           <C>             
                     1998                         $        835,208
                     1999                                  758,430
                     2000                                  360,482
                                                 --------------------
                                                  $      1,954,120
                                                 --------------------
                                                 --------------------
</TABLE>


The fair market value of debt approximates its carrying value at December 31,
1997 and 1996.

                                       28

<PAGE>

                      Commonwealth Income & Growth Fund II

                    Notes to Financial Statements (continued)


6. Supplemental Cash Flow Information

Other non-cash activities included in the determination of net loss are as
follows:
<TABLE>
<CAPTION>

                                                                            1997             1996
                                                                     ------------------------------------
<S>                                                                 <C>                  <C> 
Lease income, net of interest expense on notes payable
  realized as a result of direct payment of principal by
  lessee to bank                                                        $    404,913     $           -
Lease income paid to original lessor in lieu of
  cash payment for computer equipment acquired                                11,910             4,290
                                                                     ----------------     ---------------
Total adjustment to net loss from other non-cash
  activities
                                                                        $     416,823     $       4,290
                                                                     ----------------     ---------------
                                                                     ----------------     ---------------

</TABLE>

6. Supplemental Cash Flow Information (continued)

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.

Non-cash investing and financing activities include the following:
<TABLE>
<CAPTION>

                                                            1997           1996           1995
                                                     ------------------------------------------------
<S>                                                 <C>                <C>             <C>
Debt assumed in connection with the
  purchase of computer equipment                       $   2,359,033   $         -      $          -
                                                     ---------------   -------------  ---------------
Accounts payable in connection with the                                      
  purchase of computer equipment                       $     502,721   $         -      $     148,141
                                                     ---------------   -------------  ---------------
                                                     ---------------   -------------  ---------------
</TABLE>

7. Reconciliation of Net Loss Reported for Financial Reporting Purposes to
      Taxable Income
<TABLE>
<CAPTION>

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

<S>                                                   <C>                  <C>              <C>          
Net loss for financial reporting purposes             $       (61,837)     $       (730)    $    (12,065)
   Adjustments:
     Depreciation                                             387,081           167,614           28,197
     Amortization                                             112,007            68,035            9,373
     Unearned lease income                                     71,392            22,980                -
     Loss on sale of computer equipment                        (7,011)                -                -
     Other                                                     33,265                 -                -
                                                     ----------------      ------------     ------------
Taxable income                                        $       534,897      $    257,899     $     25,505
                                                     ----------------      ------------     ------------
                                                     ----------------      ------------     ------------
</TABLE>

                                       29

<PAGE>

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

                                  Balance Sheet

                                February 28, 1997

                                    Contents
<TABLE>
<S>                                                                        <C>
Report of Independent Auditors.............................................31

Balance Sheet..............................................................32
Notes to Balance Sheet.....................................................33
</TABLE>

                                      30
<PAGE>


                         Report of Independent Auditors

To the 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, 1997. 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 balance sheet 
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. at February 28, 1997, in conformity with generally accepted 
accounting principles.

                                                         /s/ Ernst & Young LLP

Philadelphia, Pennsylvania
April 28, 1997

                                      31
<PAGE>


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

                                  Balance Sheet


<TABLE>
<CAPTION>
                                                                    February 28
                                                                        1997
                                                                    -----------
<S>                                                                 <C>        
Assets
Cash .........................................................      $       500
Accounts receivable from Income Funds and
    Commonwealth Capital Corp. ...............................            2,069
Investment in Partnerships ...................................            2,000
                                                                    -----------
                                                                    $     4,569
                                                                    -----------
                                                                    -----------

Liabilities
Accounts payable to Income Funds and
    Commonwealth Capital Corp. ...............................      $     3,469

Stockholders' equity 
Common stock at $1 stated value:
    Authorized shares--1,000
    Issued and outstanding shares--100 .......................              100
Additional paid-in capital ...................................        1,001,000
                                                                    -----------
                                                                      1,001,100
Less: note receivable ........................................       (1,000,000)
                                                                    -----------
                                                                          1,100
                                                                    -----------
                                                                    $     4,569
                                                                    -----------
                                                                    -----------
</TABLE>


See accompanying notes.

                                      32
<PAGE>


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

                             Notes to Balance Sheet

                                February 28, 1997

1. The Company

Commonwealth Income & Growth Fund, Inc. (the "Company") is a wholly-owned
subsidiary of Commonwealth of Delaware, Inc. which in turn is a wholly-owned
subsidiary of Commonwealth Capital Corp. ("CCC"). The Company is the sole
General Partner of Commonwealth Income & Growth Fund I, a Pennsylvania limited
partnership and the sole General Partner of Commonwealth Income & Growth Fund
II, a Pennsylvania limited partnership. On April 28, 1997 the Company
contributed $1,000 in cash to become the sole General Partner of Commonwealth
Income & Growth Fund III, a Pennsylvania limited Partnership. The three limited
partnerships described above are collectively referred to herein as 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 $1,000,000. In computing the Company's net 
worth for this purpose, its interest in the Partnerships and any amounts and 
notes receivable from and payable to the Partnerships will be excluded. The 
Company's equity has been reduced by the note receivable from CCC resulting 
in net equity of $1,100, which may be different for tax purposes. The 
Company's operations will be included in the consolidated federal income tax 
return of CCC.

2. Investment in Partnerships

The Company contributed $2,000 in cash through February 28, 1997 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.

                                      33
<PAGE>


                           Commonwealth Capital Corp.

                           Consolidated Balance Sheet

                             As of February 28, 1997

                                    Contents

<TABLE>
<S>                                                                          <C>
Report of Independent Auditors...............................................35

Audited Consolidated Balance Sheet...........................................36

Notes to Consolidated Balance Sheet..........................................37
</TABLE>


                                      34
<PAGE>






                         Report of Independent Auditors

The Stockholder
Commonwealth Capital Corp.

We have audited the accompanying consolidated balance sheet of Commonwealth
Capital Corp. as of February 28, 1997. 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 balance sheet 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 consolidated financial position of Commonwealth Capital
Corp. at February 28, 1997, in conformity with generally accepted accounting
principles.

                                                           Ernst & Young, LLP

Philadelphia, Pennsylvania
April 28, 1997


                                      35
<PAGE>


                           Commonwealth Capital Corp.

                           Consolidated Balance Sheet

                                February 28, 1997

<TABLE>
<S>                                                                  <C>        
Assets
Cash and cash equivalents ..................................         $   162,028
Receivables from Income Funds ..............................             308,686
Advances to Income Funds ...................................             317,400
Other receivables ..........................................             134,335
Income taxes receivable ....................................              33,000
Minimum lease payments receivable, net of
    unearned interest income of $4,316,972 .................           9,045,000
Deferred tax asset .........................................             122,000
Investment in Income Funds .................................              18,200
Other assets ...............................................              10,976
Office furniture and equipment, net of
    accumulated depreciation of $84,668 ....................              32,323
                                                                     -----------
Total assets ...............................................          10,183,948
                                                                     -----------
                                                                     -----------
Liabilities and stockholder's equity
Accounts payable and accrued expenses ......................             118,144
Nonrecourse obligations ....................................           9,045,000
                                                                     -----------
Total liabilities ..........................................           9,163,144

Stockholder's equity:
    Common stock, $1 par value:
       Authorized shares - 1,000
       Issued and outstanding shares - 10 ..................                  10
    Retained earnings ......................................           1,020,794
                                                                     -----------
Total stockholder's equity .................................           1,020,804
                                                                     -----------
Total liabilities and stockholder's equity .................         $10,183,948
                                                                     -----------
                                                                     -----------
</TABLE>

See accompanying notes.

                                      36
<PAGE>


                           Commonwealth Capital Corp.

                       Notes to Consolidated Balance Sheet

                                February 28, 1997

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, 1997, 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.

2. Accounting Policies

Basis of Presentation

The accompanying consolidated balance sheet includes the accounts of the
Company, its wholly-owned subsidiary, CDI, and its wholly-owned subsidiaries
(Note 1). All significant intercompany accounts and transactions have been
eliminated in the accompanying consolidated balance sheet. The balance sheet is
presented on an unclassified basis in accordance with leasing industry practice.

Use of Estimates

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


                                      37
<PAGE>


                           Commonwealth Capital Corp.

                 Notes to Consolidated Balance Sheet (continued)



2. Accounting Policies (continued)

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, 1997, cash
equivalents were invested in a money market fund investing directly in treasury
obligations.

Office Furniture and Equipment

Office furniture and equipment are carried at cost and are depreciated over the
estimated useful lives of the related assets ranging from 5 to 7 years using
accelerated methods.

Investment in Income Funds

The Company accounts for its 1% interests in the Income Funds by the equity
method. Distributions were received from these Income Funds and approximated the
Company's equity in the income of the Income Funds. Financial information of the
Income Funds as of December 31, 1996 is as follows:

<TABLE>
<S>                                                                  <C>        
Total assets .........................................               $34,502,000
Nonrecourse debt .....................................                10,450,000
Other liabilities ....................................                 2,952,000
Partners' capital ....................................                21,067,000
</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 for management of the Income Funds. In addition, the Company
is responsible for certain capital funding requirements of the General Partner
Subsidiaries and, accordingly, holds noninterest-bearing demand notes of
approximately $4,166,000 at February 28, 1997. Such notes have been eliminated
in the consolidation of the accompanying balance sheet.

The compensation to 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). The Company earned approximately $1,509,000
in fees for managing the Income Funds during the year ended February 28, 1997.


                                      38
<PAGE>

                           Commonwealth Capital Corp.

                 Notes to Consolidated Balance Sheet (continued)


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, 1997 under the leases and 
certificates of participation are approximately $9,045,000. These amounts are 
included in minimum lease payments receivable and nonrecourse obligations in 
the accompanying balance sheet. Of these amounts, $7,690,000 are secured by 
mortgage insurance policies maintained by the lessee. The certificates mature 
from 1997 to 2011.

Future minimum lease payments to be received as of February 28, 1997 are as 
follows:


<TABLE>
<C>                                                                  <C>        
1998 ........................................................        $ 1,190,923
1999 ........................................................          1,202,479
2000 ........................................................          1,190,739
2001 ........................................................          1,192,935
2002 ........................................................           972,677
Thereafter ..................................................          7,675,669
                                                                     -----------
                                                                      13,425,422
Less amount representing interest                                      4,380,422
                                                                     -----------
Total                                                                $ 9,045,000
                                                                     -----------
                                                                     -----------
</TABLE>


The Company leases an automobile, certain office equipment and office space
under noncancelable operating leases expiring in 1998 through 2000. Future
minimum lease payments under noncancelable operating leases at February 28, 1997
are $184,000 in 1998; $143,000 in 1999; and $3,000 in 2000.

4. 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. It is the Company's policy to fund profit-sharing
costs as accrued.


                                      39
<PAGE>


5. Income Taxes

The Company files a consolidated federal income tax return with CDI and its
subsidiaries. The Company has investment tax credit carryforwards of $266,000 at
February 28, 1997. The investment tax credits expire in 1998 through 2001 and
are available to reduce future federal income tax liabilities. The Company also
has state net operating loss carryforwards of approximately $508,000, which
expire during 1997 through 1999.

The Company has a federal deferred tax asset of $259,000 at February 28, 1997,
arising primarily from the carryforward of investment tax credits. At February
28, 1997, the Company recorded a valuation allowance of approximately $137,000
because the Company concluded the future realization of all of the tax benefits
underlying the asset could not be reasonably assured based on current and
expected operating results. The Company believes that the remaining asset of
$122,000 is more likely than not to be realized. In addition, the Company has a
state deferred tax asset of $48,000 at February 28, 1997; however, the future
realization of the tax benefits underlying the state deferred tax asset could
not be reasonably assured and, accordingly, a valuation allowance was recorded
in the amount of $48,000.

6. Related Party Transactions

During 1997, the Company made $373,388 in cash advances to certain Income Funds
to fund cash distributions to limited partners. The remaining advances of
$317,400 are due on demand.

7. Legal Settlement

In 1997, the Company settled a dispute over contract terms with a former lessee,
whereby the lessee agreed to pay $190,000 for release of all future liability.
The Company received $95,000 through February 28, 1997 and the remaining
$95,000, included in other receivables at February 28, 1997, was subsequently
received.

                                      40


<PAGE>

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 III. 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:

<TABLE>
<CAPTION>

NAME                       TITLE
----                       ------
<S>                        <C>
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.

David A. Kintzer           Vice President and Chief Financial Officer of the
                           General Partner and Com Cap Corp.

Kathleen S. Enscoe         Assistant Vice President and Controller of the
                           General Partner and Com Cap Corp.

Gregory M. Lorenz          Vice President of Com Cap Corp.

Magdalia Cruz              Assistant Vice President of Com Cap Corp.

</TABLE>

         George S. Springsteen, age 63, 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 equipment portfolio and left the equipment leasing
business. Mr. Springsteen acquired



                                       41
<PAGE>

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 38, is Executive Vice President, Chief
Operating Officer and Secretary of Com Cap Corp. and the General Partner and
joined ComCap 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.

         David A. Kintzer, age 38, is Vice President and Chief Financial Officer
of both Com Cap Corp. and the General Partner and has been employed at Com Cap
Corp. since 1991. Mr. Kintzer also serves as Vice President and Chief Financial
Officer of the general partners or controlling entities of several prior
programs sponsored by Com Cap Corp. with objectives similar to the
Partnership's. From 1984 to 1990, Mr. Kintzer was employed by Continental
Computer Leasing Corporation, a computer leasing company with an equipment lease
portfolio of $40,000,000 and annual revenue of $20,000,000. While at
Continental, Mr. Kintzer served as Controller and Chief Financial Officer and
managed its accounting, financial, EDP, banking relationships and personnel
functions. Prior to 1984, Mr. Kintzer was employed by the international public
accounting firm of Ernst & Young LLP. Mr. Kintzer is a member of both the
American Institute of Certified Public Accountants and The Pennsylvania
Institute of Certified Public Accountants. Mr. Kintzer received an A.B. degree
in accounting from Franklin & Marshall College in 1981.

         Kathleen S. Enscoe, age 32, is Assistant Vice President and Controller
of Com Cap Corp. and certain of its subsidiaries where she has been employed
since 1992. Ms. Enscoe is an active member of the Equipment Leasing Association.
From 1988 to 1992, Ms. Enscoe was employed as a staff accountant in the
financial reporting department of WWF Paper Corporation. Ms. Enscoe received a
B.S.B.A. degree in 1988 from Geneva College with dual majors in accounting and
business administration.

         Gregory M. Lorenz, age 35, is Vice President of Com Cap Corp. and has
been employed by Com Cap Corp. since April of 1994. From 1985 to 1993, Mr.
Lorenz was employed by Daley Marketing Corp. where he served as Vice President
of Marketing and Director of Sales and Marketing. Mr. Lorenz is a member of the
Equipment Leasing Association and received an Associates of Arts degree from
Orange Coast College in 1984.

         Magdalia Cruz, age 29, is Assistant Vice President of Com Cap Corp. and
Vice President of Commonwealth Capital Securities Corp. Ms. Cruz has been
employed by ComCap Corp. since 1993. From 1990 to 1993, Ms. Cruz was employed as
Marketing Coordinator for Shaffer DeSouza Brown. Prior to that, as a Computer
Equipment Analyst for the Defense Industrial Supply Center, a government agency
based in Philadelphia. She is completing her studies for a B.S. in Business
Management at West Chester University. Ms. Cruz is a member of the Equipment
Leasing Association, Investment Partnership Association, and holds her Series
22, 63 and 39 NASD licenses.

         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.



                                       42
<PAGE>

ITEM 11: EXECUTIVE COMPENSATION

         The following table summarized the types, amounts and recipients of
compensation 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     INCURRED
 COMPENSATION         TYPE OF COMPENSATION                                   DURING 1997       DURING 1996  DURING 1995
----------------  ---------------------------------------------------        -----------       -----------  -----------
<S>                   <C>                                                     <C>               <C>          <C> 
                      OFFERING AND ORGANIZATION STAGE
                                                                                         
The General Partner   Organizational Fee. An Organization Fee                 $36,000           $131,000     $110,000
                      equal to 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 which 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                 $110,000          $0           $0
and its Affiliates    and its 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                $203,000          $147,000     $123,000
                      Acquisition 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                        
                      is paid upon 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                                  
</TABLE>
                                       43
<PAGE>

<TABLE>
<CAPTION>

                                                                           AMOUNT           AMOUNT           AMOUNT
ENTITY RECEIVING                                                           INCURRED         INCURRED         INCURRED
COMPENSATION         TYPE OF COMPENSATION                                  DURING           DURING           DURING
                                                                           1997             1996             1995
-----------------  --------------------------------------------------     -----------    ---------------  -------------- 
<S>                  <C>                                                 <C>                   <C>          <C>
                                                                                         
                      Offering available for                                             
                      investment in Equipment, the fee is paid                           
                      when such Equipment is acquired                                    
                                                                                         
                                                                                         
The General Partner   Debt Placement Fee. As compensation for              $27,000             $0           $0
                      arranging Term Debt to finance the                                 
                      acquisition of Equipment by 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,                                 
                      unaffiliated 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             $122,000             $56,000      $5,000
                      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) 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               $0             $0           $0
                      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 will                             
                      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.                               
                                                                                         
The General Partner   Equipment Liquidation Fee. With respect to                $0             $0           $0
                      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 fo such                                 
                      Equipment.                                                         
</TABLE>

                                      44
<PAGE>

<TABLE>
<CAPTION>

                                                                             AMOUNT            AMOUNT       AMOUNT
ENTITY RECEIVING                                                             INCURRED          INCURRED     INCURRED
COMPENSATION          TYPE OF COMPENSATION                                   DURING            DURING       DURING
                                                                             1997              1996         1995
---------------  ----------------------------------------------------      ------------    -------------  ----------------
<S>                   <C>                                                  <C>                 <C>          <C>  
                                                                                         
                      The payment of such fee is                                         
                      subordinated to the receipt by the Limited                         
                      Partners of (I) a return of their Capital                          
                      Contributions and 10% per annum cummmulative                       
                      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 extend                       
                      any liquidation or resale fees are paid to                         
                      unaffiliated parties.                                              
                                                                                         
                      INTEREST IN THE PARTNERSHIP                                        
                                                                                         
The General Partner   Partnership Interest. The General Partner               $9,087           $6,080       $846
                      has a present and continuing one percent                           
                      interest of $1,000 in the Partnership's                            
                      items 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.                                                  
</TABLE>



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 on 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



                                       45


<PAGE>

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 finds 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 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.

         As of December 31, 1997, the Partnership was indebted to Com Cap Corp.
for approximately $68,000 in connection with the Partnership's reimbursable
expenses. The entire debt was satisfied in 1998.

         As of December 31, 1995, the Partnership was indebted to Com Cap Corp.
for approximately $148,000 in connection with the Partnership's acquisition of
Equipment. The entire debt was satisfied in January 1996.

                                       46

<PAGE>

                                    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 by the Partnership, whether or not
actually acquired, including, but not limited to, legal fees and expenses,
travel and communication expenses, costs of appraisal, accounting fees and
expenses and other related expenses.
 
    "Acquisition Fees" 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 and any commission, selection fee, construction
supervision fee, financing fee, non-recurring management fee or any fee of a
similar nature, however designated.
 
    "Adjusted Capital Contributions" means Capital Contributions of the Limited
Partners reduced by any cash distribution received by the Limited Partners
pursuant to the Partnership Agreement, to the extent such distributions exceed
any unpaid Priority Return as of the date such distributions were made.
 

                                       47
<PAGE>

    "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 of which the
specified Person is an executive officer or partner or with respect to which the
specified Person serves in a similar capacity, (iii) any Person 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 bookkeeping account maintained by the 
Partnership for each Partner.
 
    "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 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 the Partnership
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 the
Partnership 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 May 12, 1997.
 
    "Code" means the Internal Revenue Code of 1986, as amended, and as may be
amended from time to time by future federal tax statutes.
 
    "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.
 
    "Effective Date" means January 13, 1995, the date on which the Partnership's
Registration Statement on Form S-1 was declared effective by the United States
Securities and Exchange Commission.
 
    "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, 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.
 
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<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 September 22, 1995, the date after the Minimum
Subscription Amount was received on which funds to acquire Units were released
from the Escrow Account and distributed to the Partnership for the acquisition
of Units by Limited Partners.
 
    "IRS" means the Internal Revenue Service.
 
    "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 the 
Partnership Agreement.
 
    "Majority in Interest" means, with respect to the Partnership, Limited 
Partners holding more than 50% 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 $2,500,000 in
Subscriptions.
 
    "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 and insuring of the equipment.
 
    "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 prior 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 or 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 the Partnership 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 Units in the Partnership.
 


                                       49
<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 Distributions" means the quarterly distributions made to the 
Partners pursuant to Article 8 of the Partnership Agreement.
 
    "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, including Underwriting Commissions, listing fees and advertising 
expenses specifically incurred in connection with the distribution of the 
Units.
 
    "Partner(s)" means any one or more of the General Partner and the Limited 
Partners.
 
    "Partnership" means Commonwealth Income & Growth Fund II, a Pennsylvania
limited partnership.
 
    "Partnership Agreement" means that Limited Partnership Agreement of
Commonwealth Income & Growth Fund II by and among the General Partner and the
Limited Partners, pursuant to which the Partnership is governed.
 
    "Person" means an individual, partnership, limited liability company, 
joint venture, corporation, trust, estate or other entity.
 
    "Priority 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.
 
    "Proceeds" means proceeds from the sale of the Units.
 
    "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) solely for purposes of the definition of 
Full Payout Net Lease, the amount of the Equipment Acquisition Fee and any 
other Acquisition Fees.
 
    "Retained Proceeds" means Cash Available for Distribution, which instead 
of being distributed to the Partners is retained by the Partnership for the 
purpose of acquiring or investing in Equipment.
 
    "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.
 
    "Unit" means a limited partnership interest in the Partnership.
 


                                       50
<PAGE>
                                    PART IV
 
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
(a)(1) FINANCIAL STATEMENTS.
 
    Commonwealth Income & Growth Fund II
       Report of Independent Auditors
       Balance Sheet as of December 31, 1997 and 1996
       Statements of Operations for the year ended December 31, 1997 and 1996
    Statements of Partners' Capital for the year ended December 31, 1997 
           and 1996
    Statements of Cash Flows for the year ended December 31, 1997, and 
           1996
    Notes to Financial Statements
 
    Commonwealth Income & Growth Fund, Inc.
       Report of Independent Auditors
       Balance Sheet as of February 28, 1997
       Notes to Balance Sheet
 
    Commonwealth Capital Corp.
       Report of Independent Auditors
       Consolidated Balance Sheet as of February 28, 1997
       Notes to Consolidated Balance Sheet

(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 Decmeber
                 31, 1995.
 
(b) REPORTS ON FORM 8-K.
 
     NOT APPLICABLE
 
(c) EXHIBITS.

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<PAGE>
                                   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
on April 9, 1998 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
 
    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 9, 1998.
 
          SIGNATURE                      CAPACITY                   
------------------------------  ---------------------------  
 
  /s/ GEORGE S. SPRINGSTEEN     Chairman, President and Sole Director of
------------------------------  Commonwealth Income & Growth Fund, Inc.  
  George S. Springsteen         
 


  /s/ KIMBERLY A. MACDOUGALL    Executive Vice President, 
------------------------------  Chief Operating Officer 
  Kimberly A. MacDougall              
                                

  /s/ DAVID A. KINTZER          Vice President and Chief Financial Officer 
------------------------------  of Commonwealth Income & Growth 
  David A. Kintzer              Fund, Inc.
                                  
 
    /s/ KATHLEEN S. ENSCOE      Controller of Commonwealth Income & Growth Fund,
------------------------------  Inc.
  Kathleen S. Enscoe         

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