<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549


                                    FORM 10-Q


( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934


                For the quarterly period ended September 30, 1998

                                       or

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


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

                        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 (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days:

                                  YES   [   X   ]            NO   [     ]

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Part I: FINANCIAL INFORMATION
Item 1: Financial Statements


                      Commonwealth Income & Growth Fund II

                                 Balance Sheets

<TABLE>
<CAPTION>

                                                                                                (Audited)
                                                                         September 30,         December 31,
                                                                              1998                 1997
                                                                        ----------------      ---------------
<S>                                                                  <C>                   <C>
Assets
Cash and cash equivalents                                                    $ 336,441             $ 258,167
Lease income receivable                                                        370,693               113,500
Accounts receivable - General Partner                                                -                15,821
Interest and other receivables                                                   2,452                   100


Computer equipment, at cost                                                 14,736,504            11,764,757
Accumulated depreciation                                                    (4,731,309)           (3,175,757)
                                                                        ----------------      ---------------
                                                                            10,005,195             8,589,000

Organization costs and deferred expenses, net of
   accumulated amortization of $335,040
   in 1998 and $232,708 in 1997                                                429,644               379,821
                                                                        ----------------      ---------------
Total assets                                                              $ 11,144,425           $ 9,356,409
                                                                        ----------------      ---------------
                                                                        ----------------      ---------------

Liabilities and partners' capital
Accounts payable                                                             $ 113,560              $ 96,326
Accounts payable - Commonwealth Capital Corp.                                        -                68,265
Accounts payable - General Partner                                               3,156                     -
Unearned lease income                                                          196,475               217,503
Computer equipment payable                                                   2,491,138               502,721
Notes payable                                                                2,215,632             1,954,120
                                                                        ----------------      ---------------
Total liabilities                                                            5,019,961             2,838,935

Partners' capital:
   General partner                                                               1,000                 1,000
   Limited partners                                                          6,123,464             6,516,474
                                                                        ----------------      ---------------
Total partners' capital                                                      6,124,464             6,517,474
                                                                        ----------------      ---------------
Total liabilities and partners' capital                                   $ 11,144,425           $ 9,356,409
                                                                        ----------------      ---------------
                                                                        ----------------      ---------------

</TABLE>

See accompanying notes.

<PAGE>


                      Commonwealth Income & Growth Fund II

                            Statements of Operations

<TABLE>
<CAPTION>


                                                                  Three Months Ended                    Nine Months Ended
                                                                    September 30,                         September 30,
                                                               1998               1997              1998                1997
                                                               ----               ----              ----                ----
<S>                                                         <C>                <C>                <C>                <C>
Income:
   Lease                                                       $ 1,043,818          $ 757,629       $ 3,108,323        $ 1,601,976
   Interest and other                                               12,893             12,669            20,745             89,108
   Gain on sale of computer equipment                              165,769                  -           164,716                  -
                                                               ------------         ----------      ------------       ------------
                                                                 1,222,480            770,298         3,293,784          1,691,084

Expenses:
   Operating, excluding depreciation                                49,422                950            77,348             16,268
   Equipment management fee - General Partner                       52,191             37,882           155,416             80,099
   Interest                                                         42,394              9,942           121,649              9,942
   Depreciation                                                    886,391            666,605         2,472,175          1,393,627
   Amortization of organization costs and deferred
      expenses                                                      59,587             42,433           160,483             92,701
   Loss on sale of computer equipment                                    -                  -                 -             31,955
                                                               ------------         ----------      ------------       ------------
                                                                 1,089,985            757,812         2,987,071          1,624,592
                                                               ------------         ----------      ------------       ------------

Net income                                                       $ 132,495           $ 12,486         $ 306,713           $ 66,492
                                                               ------------         ----------      ------------       ------------
                                                               ------------         ----------      ------------       ------------

Net income per equivalent limited
    partnership unit                                                $ 0.29             $ 0.03            $ 0.66             $ 0.15
                                                               ------------         ----------      ------------       ------------
                                                               ------------         ----------      ------------       ------------

Weighted average number of equivalent limited
   partnership units outstanding during the period                 461,817            461,817           461,817            448,307
                                                               ------------         ----------      ------------       ------------
                                                               ------------         ----------      ------------       ------------

</TABLE>

See accompanying notes.

<PAGE>

                      Commonwealth Income & Growth Fund II

                         Statement of Partners' Capital


<TABLE>
<CAPTION>

                                              General      Limited
                                              Partner      Partner       General       Limited
                                               Units        Units        Partner       Partners'      Total
                                            ----------    ----------  -------------   -----------   ------------
<S>                                       <C>          <C>           <C>            <C>           <C>
Partners' capital - December 31, 1995             50        183,947    $     1,000    $ 3,155,521    $ 3,156,521
   Contributions                                            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                                             59,298           --        1,185,785      1,185,785
   Offering costs                                                             --         (129,680)      (129,680)
   Net income (loss)                                                          9,087       (70,924)       (61,837)
   Distributions                                                             (9,087)     (899,627)      (908,714)
                                            ----------    ----------  -------------   -----------   ------------
Partners' capital - December 31, 1997             50        461,817          1,000      6,516,474      6,517,474
   Net income                                                                 2,332        21,433         23,765
   Distributions                                                             (2,332)     (230,909)      (233,241)
                                            ----------    ----------  -------------   -----------   ------------
Partners' capital - March 31, 1998                50        461,817          1,000      6,306,998      6,307,998
   Net income                                                                 2,332       148,121        150,453
   Distributions                                                             (2,332)     (230,909)      (233,241)
                                            ----------    ----------  -------------   -----------   ------------
Partners' capital - June 30, 1998                 50        461,817          1,000      6,224,210      6,225,210
   Net income                                                                 2,332       130,163        132,495
   Distributions                                                             (2,332)     (230,909)      (233,241)
                                            ----------    ----------  -------------   -----------   ------------
Partners' capital - September 30, 1998            50        461,817    $     1,000    $ 6,123,464     $6,124,464
                                            ----------    ----------  -------------   -----------   ------------
                                            ----------    ----------  -------------   -----------   ------------

</TABLE>


See accompanying notes.

<PAGE>

                      Commonwealth Income & Growth Fund II

                            Statements of Cash Flows

              For the nine months ended September 30, 1998 and 1997

<TABLE>
<CAPTION>

                                                                                       1998               1997
                                                                                    -----------       -----------
<S>                                                                              <C>              <C>
Operating activities
Net income                                                                           $ 306,713       $    66,492
Adjustments to reconcile net income to net cash
   provided by operating activities:
      Depreciation and amortization                                                  2,632,658         1,579,980
      Loss (gain) on sale of computer equipment                                       (164,716)           31,955
      Other noncash activities included in the
        determination of net income                                                 (1,059,637)         (217,562)
      Changes in operating assets and liabilities:
        Lease income receivable                                                       (257,193)           16,406
        Other receivables                                                               13,469            12,283
        Accounts payable                                                               (51,031)          (22,754)
        Accounts payable - General Partner                                               3,156            82,770
        Equipment payable                                                              502,721               -
        Unearned lease income                                                          (21,028)           68,146
                                                                                    -----------       -----------
Net cash provided by operating activities                                            1,905,112         1,617,716

Investing activities
Capital expenditures                                                                (1,115,991)       (3,982,900)
Payment of computer equipment payable                                                 (502,721)              -
Net proceeds from sale of computer equipment                                           701,903            10,584
Increase in organization costs and deferred expenses                                      -             (106,102)
Equipment acquisition fees paid to the General Partner                                (198,558)         (181,669)
                                                                                    -----------       -----------
Net cash used in investing activities                                               (1,115,367)       (4,260,087)

Financing activities
Partners' contributions                                                                      -         1,185,785
Offering costs                                                                               -          (129,680)
Distributions to partners                                                             (699,723)         (675,474)
Debt placement fees paid to the General Partner                                        (11,748)          (16,632)
                                                                                    -----------       -----------

Net cash provided by (used in) financing activities                                   (711,471)          363,999
                                                                                    -----------       -----------

Net increase (decrease) in cash and cash equivalents                                    78,274        (2,278,372)
Cash and cash equivalents at beginning of period                                       258,167         2,552,352
                                                                                    -----------       -----------

Cash and cash equivalents at end of period                                           $ 336,441         $ 273,980
                                                                                    -----------       -----------
                                                                                    -----------       -----------

</TABLE>

See accompanying notes.


<PAGE>

                      Commonwealth Income & Growth Fund II

                          Notes to Financial Statements

                               September 30, 1998



Basis of Presentation

The financial information presented as of any date other than December 31 has
been prepared from the books and records without audit. Financial information as
of December 31 has been derived from the audited financial statements of
Commonwealth Income & Growth Fund I (the "Partnership"), but does not include
all disclosures required by generally accepted accounting principles. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial information for
the periods indicated have been included. For further information regarding the
Partnership's accounting policies, refer to the financial statements and related
notes included in the Partnership's annual report on Form 10-K for the year
ended December 31, 1997.

Net Income per Equivalent Limited Partnership Unit

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

<PAGE>

                      Commonwealth Income & Growth Fund II

Item 2: Management's 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. On that date, subscribers for 126,118 Units
were admitted as Limited Partners of the Partnership. On May 12, 1997, the
Partnership terminated its offering of Units with 461,817 ($9,235,185) Units
sold.

The Partnership's primary sources of capital for the nine months ended September
30, 1998, were from cash from operations of $1,905,000. The Partnership's
primary sources of capital for the nine months ended September 30, 1997, were
from Partners' contributions of $1,186,000 and cash from operations of
$1,618,000. The primary uses of cash for the nine months ended September 30,
1998 and 1997, were for capital expenditures for new equipment totaling
$1,116,000 and $3,983,000, respectively, the payment of preferred distributions
to partners of $700,000 and $675,000 respectively, the payment of acquisition
fees of $199,000 and $182,000 respectively, and the payment of finance fees of
$12,000 and $17,000, respectively. In addition, the Partnership paid $130,000 in
offering cost for the nine months ended September 30, 1997.

Currently, Partners' contributions and rental income from the Partnership's
leases are invested in money market accounts investing 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 September 30, 1998 and December 31, 1997 the Partnership had
approximately $336,000 and $258,000, respectively, invested in these money
market accounts.

The Partnership's investment strategy of acquiring computer equipment and
generally leasing it under "triple-net leases" to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses. As
of September 30, 1998, the Partnership had future minimum rentals on
noncancellable operating leases of $1,026,000 for the year ending December 31,
1998 and $6,075,000 thereafter. At September 30, 1998, the outstanding debt was
$2,216,000, with interest rates ranging from 6.4% to 8.2%, and will be payable
through February 2001.

The Partnership's cash 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

For the quarter ended September 30, 1998, the Partnership recognized income of
$1,222,000 and expenses of $1,090,000, resulting in net income of $132,000. For
the quarter ended June 30, 1998, the Partnership recognized income of $1,148,000
and expenses of $998,000, resulting in net income of $150,000. For the quarter
ended March 31, 1998, the Partnership recognized income of $924,000 and expenses
of $900,000, resulting in net income of $24,000.

Lease income increased by 38% from $757,000 for the quarter ended September 30,
1997, to $1,044,000 for the quarter ended September 30, 1998, primarily due to
utilizing cash available from Partners' contributions for the purchase of
Equipment, which in turn generated more lease income. During the nine months
ended September 30, 1998, the Partnership expended $1,116,000 and assumed debt
and equipment payable of $3,310,000 to acquire ten leases, which generated
approximately $607,000 in revenue.

<PAGE>

                      Commonwealth Income & Growth Fund II

Interest income remained constant at $13,000 for the quarters ended September
30, 1998 and 1997.

Operating expenses, excluding depreciation, primarily consist of accounting,
legal, and outside service fees. The expense increased 4,800% from approximately
$1,000 for the quarter ended September 30, 1997, to $49,000 for the quarter
ended September 30, 1998, which is primarily attributable to the accrual of
accounting fees.

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 37% from approximately $38,000 for the quarter ended
September 30, 1997, to $52,000 for the quarter ended September 30, 1998, which
is consistent with the increase in lease income.

Depreciation and amortization expenses consist of depreciation on computer
equipment, amortization of organizational costs, and equipment acquisition fees.
The expenses increased 33% from approximately $709,000 for the quarter ended
September 30, 1997, to $946,000 for the quarter ended September 30, 1998, which
is attributable to the purchase of approximately $4,426,000 in additional
equipment.

For the nine month period ended September 30, 1998, the Partnership generated
cash flow from operating activities of $1,905,000, which includes net income of
$307,000, and depreciation and amortization expenses of $2,633,000. Other
noncash activities included in the determination of net income includes direct
payments of lease income by lessees to banks of $913,000 and lease income paid
to original lessors in lieu of cash payments for computer equipment of $147,000.

For the nine month period ended September 30, 1997, the Partnership generated
cash flow from operating activities of $1,618,000, which includes net income of
$66 1,000, and depreciation and amortization expenses of $1,580,000. Other
noncash activities included in the determination of net income includes direct
payments of lease income by lessees to banks of $196,00 and lease income paid to
original lessors in lieu of cash payments for computer equipment of $22,000.

<PAGE>


Part II:   OTHER INFORMATION

                      Commonwealth Income & Growth Fund II


        Item 1.           Legal Proceedings.

                          Inapplicable

        Item 2.           Changes in Securities.

                          Inapplicable

        Item 3.           Defaults Upon Senior Securities.

                          Inapplicable

        Item 4.           Submission of Matters to a Vote of Securities Holders.

                          Inapplicable

        Item 5.           Other Information.

                          Inapplicable

        Item 6.           Exhibits and Reports on Form 8-K.

                          a)       Exhibits:   None

                          b)       Report on Form 8-K:   None

<PAGE>

                                    SIGNATURE


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



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




-----------------------                By:
Date                                      --------------------------------------
                                       George S. Springsteen
                                       President