<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

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

                        Commission File Number: 33-69996

                      COMMONWEALTH INCOME & GROWTH FUND III
             (Exact name of registrant as specified in its charter)

         Pennsylvania                                  23-2735641
(State or other jurisdiction of          (I.R.S. Employer Identification Number)
incorporation or organization)

                               470 John Young Way
                                 Exton, PA 19341
          (Address, including zip code, of principal executive offices)

                                 (610) 594-9600
               (Registrant's telephone number including area code)

           Securities registered pursuant to Section 12(b) of the Act:

                                                 Name of exchange on
                   Title of each class to         which each class
                      be so registered           is to be registered

                          None                         N/A

           Securities registered pursuant to Section 12(g) of the Act:

                      Units of Limited Partnership Interest
                      -------------------------------------
                                (Title of Class)

        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, 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:
YES [X] NO [ ]

        Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12c-2 of the Act): YES [ ] NO [X]

<PAGE>

                                    FORM 10-K
                                DECEMBER 31, 2004

                                TABLE OF CONTENTS

<TABLE>
<S>         <C>                                                                 <C>
                                           PART I
Item 1.     Business                                                             3
Item 2.     Properties                                                          11
Item 3.     Legal Proceedings                                                   11
Item 4.     Submission of Matters to a Vote of Security Holders                 11

                                          PART II
Item 5.     Market for Registrant's Common Equity, Related Stockholder Matters  11
Item 6.     Selected Financial Data                                             14
Item 7.     Management's Discussion and Analysis of Financial Condition and
            Results of Operations                                               15
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk          19
Item 8.     Financial Statements and Supplementary Data                         19
Item 9.     Changes in and Disagreements with Accountants on Accounting and
            Financial Disclosure                                                19
Item 9A.    Controls and Procedures                                             20
Item 9B.    Other Information                                                   20

                                          PART III
Item 10.    Directors and Executive Officers of the Registrant                  20
Item 11.    Executive Compensation                                              23
Item 12.    Security Ownership of Certain Beneficial Owners and Management      23
Item 13.    Certain Relationships and Related Transactions                      23
Item 14.    Principal Accountant Fees and Services                              29

                                          PART IV
Item 15.    Exhibits and Financial Statements                                   30

            Index to Exhibits

            Signatures

            Certifications
</TABLE>

                                                                               2
<PAGE>

PART I

ITEM 1:     BUSINESS

GENERAL

    Commonwealth Income and Growth Fund III was formed on April 17, 1997, under
the Pennsylvania Revised Uniform Limited Partnership Act. The Partnership began
offering $15,000,000 of Units of Limited Partnership to the public on July 25,
1997. On January 27, 1998, the Partnership received and accepted subscription
proceeds of $1,526,000, which exceeded the minimum offering amount of $1,500,000
and the funds were released from escrow. The partnership terminated its offering
of units on July 31, 2000, with 151,178 Units ($3,023,569) 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 will utilize the net Proceeds of the Offering to purchase IBM
and IBM compatible computer peripheral and other similar capital equipment. The
Partnership will utilize 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 plans to acquire and lease Equipment
principally to U.S. corporations and other institutions pursuant 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 anticipates acquiring predominately new Equipment,
the Partnership may purchase used Equipment. Generally, Equipment is acquired
from manufacturers, distributors, leasing companies, agents, owner-users,
owner-lessor, 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.

                                                                               3
<PAGE>

    As of December 31, 2004, all Equipment purchased by the Partnership is
subject to an Operating Lease or an Operating Lease was already 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
that 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, 2004,
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.

    The Partnership has suffered recurring losses from operations and has a
deficit partners' capital of approximately $291,000 at December 31, 2004. The
General Partner and Commonwealth Capital Corp. (CCC) have forgiven amounts
payable by the Partnership to them and have deferred payments on other amounts
to allow for distributions to limited partners.

    The General Partner and CCC have committed to fund, either through cash
contributions and/or forgiveness of indebtedness, any necessary cash shortfalls
of the Partnership, including the amounts necessary to fund, if any,
distributions to limited partners, through March 31, 2005.

    Due to the recurring losses from operations, the General Partner feels that
it may be in the best interest of the Partnership to start the liquidation
process in 2005 and run out naturally all remaining leases in the portfolio,
making distributions when possible, after expenses have been satisfied.

    The General Partner intends to review and reassess the Partnership's
business plan on a quarterly basis during 2005.

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

                                                                               4
<PAGE>

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, 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 plans to acquire computer
peripheral equipment, such as tape drives, disk drives, tape controllers, disk
controllers, printers, terminals and related control units, all of which are in
some way related to the process of storing, retrieving and processing
information by computer. The General Partner is also authorized, but does not
presently intend, to cause the Partnership to invest in non-IBM compatible
computer peripheral, data processing, telecommunication or medical technology
equipment. The Partnership may not invest in any of such other types of
Equipment (i) to the extent that the purchase price of such Equipment, together
with the aggregate Purchase Price of all such other types of Equipment then
owned by the Partnership, is in excess of 25% of the total cost of all of the
assets of the Partnership at the time of the Partnership's commitment to invest
therein; and (ii) unless the General Partner determines that such purchase is in
the best economic interest of the Partnership at the time 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. Through December 31, 2004, the Partnership has acquired a
diversified Equipment portfolio, which it has leased to 20 different companies
located throughout the United States. The allocations are as follows:

                        EQUIPMENT TYPE                 APPROXIMATE %
                      -----------------                -------------
                         Workstations                         38%
                           Routers                            27%
                      High-End Printers                       29%
                        Scope Monitors                         5%
                       Low-End Printers                        1%
                            TOTAL                            100%

 During the operational stage of the Partnership, the Partnership may not at any
one point in time 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 intends 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 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

                                                                               5
<PAGE>

48 month) leases under which the aggregate noncancellable rental payments during
the original term of the lease are not sufficient to permit the lessor to
recover the purchase price of the subject Equipment. The Equipment may also be
leased pursuant to Full Payout Net Leases. Full Payout Net Leases are leases
under which the aggregate noncancellable rental payments during the original
term of the lease are at least sufficient to recover the purchase price of the
subject Equipment. It is anticipated that the Partnership will enter into few,
if any, Full Payout net Leases. The General Partner may also enter into
Conditional Sales Contracts for Equipment. A Conditional Sales Contract
generally provides that the noncancellable payments to the seller over the term
of the contract are sufficient to recover the investment in such Equipment and
to provide a return on such investment. Under a Conditional Sales Contract, the
seller reserves title to, and retain a security interest in, the Equipment until
the Purchase Price of the Equipment is paid. As of December 31 2004, the
Partnership has not entered into any Full Payout Net Leases or Conditional Sales
Contracts for Equipment and does not presently intend to do so.

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

    An Operating Lease generally represents a greater risk to the Partnership
than a Full Payout Net Lease, because in order to recover the purchase price of
the subject Equipment and earn a return on such investment, it is necessary to
renew or extend the Operating Lease, lease the Equipment to a third party at the
end of the original lease term, or sell the Equipment. On the other hand, the
term of an Operating Lease is generally much shorter than the term of a Full
Payout Net Lease, and the lessor is thus afforded an opportunity under an
Operating Lease to re-lease or sell the subject Equipment at an earlier stage of
the 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, 2004, all leases that have
been entered into are "triple net leases".

    The General Partner has not established any standards for lessees to whom it
will lease Equipment and, as a result, there is not an investment restriction
prohibiting the Partnership from doing business with any lessees. However, a
credit analysis of all potential lessees will be 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, 2004, the Partnership has not entered into any such agreements.

                                                                               6
<PAGE>

    Remarketing fees are paid to the leasing companies from which the
Partnership purchases leases. These are fees that are earned by the leasing
companies when the initial terms of the lease have been met. The General Partner
believes that this strategy adds value since it entices the leasing company to
"stay with the lease" for potential extensions, remarketing or sale of
equipment. This strategy potentially minimizes any conflicts the leasing company
may have with a potential new lease and will potentially assist in maximizing
overall portfolio performance. The remarketing fee is tied into lease
performance thresholds and is factored in the negotiation of the fee.

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 by the Partnership, 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 that
is secured by Equipment and lease income there from. Such leveraging permits the
Partnership to increase the aggregate amount of its depreciable assets, and, as
a result, potentially increases both its lease revenues and its federal income
tax deductions above those levels, which would be achieved without leveraging.
There is no limit on the amount of debt that may be incurred in connection with
the acquisition of any single item of Equipment. Any debt incurred is fully
amortized over the term of the initial lease or Conditional Sales Contract to
which the Equipment securing the debt is subject. The precise amount borrowed by
the Partnership depends on a number of factors, including the types of Equipment
acquired by the Partnership; the creditworthiness of the lessee; the
availability of suitable financing; and prevailing interest rates. The
Partnership is flexible in the degree of leverage it employs, within the
permissible limit. There can be no assurance that credit will be available to
the Partnership in the amount or at the time desired or on terms considered
reasonable by the General Partner. As of December 31, 2004, the aggregate
non-recourse debt outstanding of $60,000 was approximately 6.0% of the aggregate
cost of Equipment owned.

    The Partnership may purchase some items of Equipment without leverage. If
the Partnership purchases an item of Equipment without leverage and thereafter
suitable financing becomes available, it may then obtain the financing, secure
the financing with the purchased Equipment to the extent practicable and invest
any proceeds from such financing in additional items of Equipment, or it may
distribute some or all of such proceeds to the Limited Partners. Any such later
financing will be on terms consistent with the terms applicable to borrowings
generally. As of December 31, 2004, the Partnership has not exercised this
option.

    After the net proceeds of the Offering are fully invested in Equipment, the
General Partner plans 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 that 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 non-recourse 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 that might otherwise be available for distributions
until the debt has been repaid

                                                                               7
<PAGE>

and may reduce the Partnership's Cash Flow over a substantial portion of the
Partnership's operating life. As of December 31, 2004, 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, 2004, the Partnership has not refinanced any of its debt.

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

LIQUIDATION POLICIES

    The General Partner intends to cause the Partnership to begin disposing of
its Equipment in 2009. Notwithstanding the Partnership's objective to sell all
of its assets and dissolve in approximately by December 31, 2009, 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.

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.

                                                                               8
<PAGE>

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 that are more favorable than those that the Partnership can offer. They
may also be in a position to offer trade-in privileges, software, maintenance
contracts and other services that the Partnership may not be able to offer.
Equipment manufacturers and distributors may offer to sell equipment on terms
(such as liberal financing terms and exchange privileges), which will afford
benefits to the purchaser similar to those obtained through leases. As a result
of the advantages that 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 firms in the computer marketplace are Dell, IBM, Hewlett
Packard, Sun Systems and Cisco. Because of the substantial resources and
dominant position of these companies, revolutionary changes with respect to
computer systems, pricing, marketing practices, technological innovation and the
availability of new and attractive financing plans would occur at any time.
Significant action in any of these areas by these firms might materially
adversely affect the partnerships' business or the other manufacturer's with
whom the General Partner might negotiate purchase and other agreements. Any
adverse affect on these manufacturers could be reflected in the overall return
realized by the Partnership on equipment from those manufacturers.

INVESTMENTS

The Partnership, through CCC, participates in the purchase of equipment subject
to associated debt obligations and lease agreements. The purchase price, list
price and monthly rentals presented below are the Partnership's participation of
the total amounts, based on CCC's allocation of the equipment to the
Partnership, and in some instances, other affiliated partnerships.

Through March 30, 2005, the Partnership has purchased, or has made the
commitment to purchase, the following Equipment:

<TABLE>
                                                   EQUIPMENT           PURCHASE      LIST        MONTHLY       LEASE
LESSEE                         MFG                DESCRIPTION           PRICE        PRICE         RENT        TERM
----------------------------   ----         -----------------------   ----------   ----------   ----------   ----------
<S>                            <C>          <C>                       <C>          <C>          <C>                  <C>
Lucent                         SUN          (12) Workstations         $  139,596   $  239,340   $    3,857           32
Lucent                         SUN          Server                       445,714      739,350       12,120           32
Chase                          SUN          Server                       252,681      394,360        6,493           36
Cendant                        SUN          Server                       131,470      221,095        3,216           36
Cendant                        SUN          Server upgrade                40,382       39,590        1,425           31
Chase                          STK          Timberline drive             407,908    1,134,830       12,346           24
Chrysler                       IBM          Controller                    19,496       24,200          731           24
Chrysler                       IBM          Controller                    18,392       24,200          731           24
Kaiser                         IBM          (7) Workstations             373,747      513,741        9,952           36
Kaiser                         IBM          (4) Workstations             187,398      271,949        4,983           36
Kaiser                         CISCO        (26) Routers                 153,093      258,778        3,929           36
International Paper            DEC          (2) Servers                  140,857      184,372        4,042           32
CMGI                           CISCO        Server                       140,579      187,345        3,973           35
CMGI                           SUN          Workstations                  24,342       32,029          937           24
</TABLE>

                                                                               9
<PAGE>

<TABLE>
<S>                            <C>          <C>                          <C>          <C>           <C>              <C>
AT&T                           ASX          Controllers                   58,048       59,106        1,654           36
GE Medical                     COMPAQ       Servers                       18,754       28,300          515           36
GE Medical                     COMPAQ       Servers                       21,716       32,750          596           36
GE Medical                     COMPAQ       Servers                       42,881       64,750        1,162           36
GE Medical                     COMPAQ       Servers                       56,039       84,525        1,573           36
GE Medical                     COMPAQ       Servers                       44,943       67,780        1,236           36
GE Medical                     LEXMARK      Printers                      31,809       48,000          849           36
GE Medical                     LEXMARK      Printers                      20,655       32,000          552           36
GE Medical                     TEKRONIX     Monitors                      48,252       99,350        1,845           36
CMGI                           CISCO        Routers                       88,103      115,168        2,495           36
Lennox                         BayNetwork   Routers                      441,115      598,754        3,465           36
Thomson Consumer               Printronix   Printers                     233,298      325,862        6,343           36
Thomson Consumer               NORTEL       Routers                      134,394      203,840        3,747           36
GE Medical                     SUN          (32) Workstations            139,961      211,970        3,831           35
Thomson Consumer               XEROX        Printer/Scanner/Plotter       20,384       30,720          792           24
AOL                            SUN          Servers                       22,163       34,010          604           35
Morgan Stanley                 SUN          Servers                      154,053      199,655        4,685           33
Hartford Insurance             IBM          Directors                    744,597      901,500       19,800           36
Training A La                  COMPAQ       Workstation                    4,337        4,950          123           35
Vatterott Ed Ctr               DELL         Workstation                   32,549       39,755          844           36
Vatterott Ed Ctr               DELL         Workstation                   23,207       26,317          649           35
Vatterott Ed Ctr               DELL         Workstation                   12,899       14,746          363           35
Vatterott Ed Ctr               DELL         Workstation                   60,604       84,155        1,735           34
Triumph Pharm                  DELL         Workstation                   11,094       13,178          382           28
AOL                            SUN          Servers                      110,713      116,754        3,661           27
GE Medical                     SUN          Servers                       30,000       34,456          782           36
Open Systems                   IBM          Workstations                   7,942       10,060          320           23
TDI                            IBM          Workstations                  12,867       15,690          394           32
Kellogg                        CANNON       Printers                      42,269       49,218        1,072           39
</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
funds by refinancing its Equipment or borrowing.

GENERAL RESTRICTIONS

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

        (a)     invest in junior trust deeds unless received in connection with
the sale of an item of Equipment in an aggregate amount which does not exceed
30% of the assets of the Partnership on the date of the investment;
        (b)     invest in or underwrite the securities of other issuers;
        (c)     acquire any Equipment for Units;
        (d)     issue senior securities (except that the issuance to lenders of
notes or other evidences of indebtedness in connection with the financing or
refinancing of Equipment or the Partnership's business shall not be deemed to be
the issuance of senior securities);
        (e)     make loans to any Person, including the General Partner or any
of its Affiliates, except to the extent a Conditional Sales Contract constitutes
a loan;

                                                                              10
<PAGE>

        (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 a related party, CCC, which has 34 employees as of December 31,
2004.

ITEM 2:     PROPERTIES

                     NOT APPLICABLE

ITEM 3:     LEGAL PROCEEDINGS

                     NOT APPLICABLE

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

                     NOT APPLICABLE

PART II

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

    There is no public market for the Units nor is it anticipated that one will
develop. 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. As of December 31, 2004, there were 166 holders 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.

                                                                              11
<PAGE>

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 requests
will be considered in the order received. Redemption requests made by or on
behalf of Limited Partners who are not affiliated with the General Partner or
its Affiliates will be given priority over those made by Limited Partners who
are affiliated with the General Partner or its Affiliates. All redemption
requests will remain in effect until and unless canceled, in writing, by the
requesting Limited Partner(s).

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

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

EXEMPT TRANSFERS

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

        (1)     transfers in which the basis of the Unit in the hands of the
transferee is determined, in whole or in part, by reference to its basis in the
hands of the transferor (for example, Units acquired by corporations in certain
reorganizations, contributions to capital, gifts of Units, Units contributed to
another partnership, and non-liquidating as well as liquidating distributions by
a parent partnership to its partners of interests in a sub partnership);

        (2)     transfers at death;

        (3)     transfers between members of a family (which include brothers
and sisters, spouse, ancestors, and lineal descendants);

        (4)     transfers resulting from the issuance of Units by the
Partnership in exchange for cash, property, or services;

        (5)     transfers resulting from distributions from Qualified Plans; and

        (6)     any transfer by a Limited Partner in one or more transactions
during any 30-day period of Units representing in the aggregate more than five
percent of the total outstanding interests in capital or profits of the
Partnership.

                                                                              12
<PAGE>

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, will be made quarterly on March 31, June 30,
September 30 and December 31, 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
Cumulative Return; thereafter, cash distributions will be made 90% to Limited
Partners and 10% to the General Partner. Distributions made in connection with
the liquidation of the Partnership or a Partner's Units will be made in
accordance with the Partner's positive Capital Account balance as determined
under the Partnership Agreement and Treasury Regulations.

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

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

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

    Net Profits and Net Losses are computed without taking into account, in each
taxable year of the Partnership, any items of income, gain, loss or deduction
required to be specially allocated pursuant to Section 704(b) of the Code and
the Treasury Regulation promulgated 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 2004, 2003 and 2002.

                                                                              13
<PAGE>

        QUARTER ENDED        2004         2003         2002
        ---------------   ----------   ----------   ----------
        March 31          $   78,591   $   78,591   $   78,591
        June 30               78,591       78,592       78,591
        September 30          78,591       78,591       78,591
        December 31           78,591       78,594       78,591
                          ----------   ----------   ----------
                          $  314,364   $  314,368   $  314,364
                          ==========   ==========   ==========

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 is 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 is
utilized during the Offering Period, whereby Net Profits and Net Losses
allocable to Limited Partners is 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, selected financial data for
the Partnership as of and for each of the five years in the period ended
December 31, 2004. This table is qualified in its entirety by the more detailed
information and financial statements presented elsewhere in this report, and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
related notes thereto included herein.

                             YEAR ENDED DECEMBER 31

<TABLE>
<CAPTION>
STATEMENTS OF
OPERATIONS DATA:                2004            2003            2002            2001            2000
-------------------------   ------------    ------------    ------------    ------------    ------------
<S>                         <C>             <C>             <C>             <C>             <C>
     Lease Income           $    151,391    $    391,419    $    784,368    $  1,106,345    $  1,250,857

      Net (Loss)                 (95,141)       (156,223)       (291,844)       (270,627)       (179,877)

  Cash Distributions             317,498         317,500         317,498         317,497         302,898

Net (Loss) per Limited
     Partner Unit                  (0.63)          (1.03)          (1.93)          (1.81)          (1.27)

 Cash Distribution per
  Limited Partner Unit              2.10            2.10            2.10            2.10            2.08
</TABLE>

                                                                              14
<PAGE>

                               AS OF DECEMBER 31,

<TABLE>
<CAPTION>
       OTHER DATA:                   2004            2003            2002            2001            2000
---------------------------      ------------    ------------    ------------    ------------    ------------
<S>                              <C>             <C>             <C>             <C>             <C>
  Net cash provided by
 operating  activities           $    269,057    $    255,697    $    183,015    $    396,196    $    332,526

Net cash provided by (used
 in) investing activities               5,338          61,863         132,079        (182,929)       (379,437)

Net cash (used in) provided
 by financing activities             (268,952)       (317,500)       (319,702)       (318,892)         18,815
</TABLE>

                                AS OF DECEMBER 31

<TABLE>
<CAPTION>
                                     2004            2003            2002            2001            2000
                                 ------------    ------------    ------------    ------------    ------------
<S>                              <C>             <C>             <C>             <C>             <C>
       Total Assets              $    167,113    $    336,461    $    766,233    $  1,427,609    $  2,335,831

       Notes Payable                   60,243          91,436         253,767         344,324         796,020

Partners' Capital (Deficit)          (291,330)          2,748         328,315         937,657       1,525,781
</TABLE>

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

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Partnership's discussion and analysis of its financial condition and results
of operations are based upon its financial statements which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires the Partnership
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. The Partnership bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

The Partnership believes that its critical accounting policies affect its more
significant judgments and estimates used in the preparation of its financial
statements.

                                                                              15
<PAGE>

COMPUTER EQUIPMENT

CCC, on behalf of the Partnership and other affiliated partnerships, acquires
computer equipment subject to associated debt obligations and lease agreements
and allocates a participation in the cost, debt and lease revenue to the various
partnerships based on certain risk factors.

REVENUE RECOGNITION

Through December 31, 2004, 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.

The Company reviews a customer's credit history extending credit and establishes
provisions for uncollectible accounts based upon the credit risk of specific
customers, historical trends and other information.

LONG-LIVED ASSETS

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

Depreciation on computer equipment for financial statement purposes is based on
the straight-line method over estimated useful lives of four years.

REIMBURSABLE EXPENSES

Reimbursable expenses, which are charged to the Partnership by CCC in connection
with the administration and operation of the Partnership, are allocated to the
Partnership based upon several factors including, but not limited to, the number
of investors, compliance issues, and the number of existing leases.

LIQUIDITY AND CAPITAL RESOURCES

For the year ended December 31, 2004, the Partnership generated cash flow from
operating activities of $269,000, which includes net loss of $95,000 reduced by
depreciation and amortization expenses of $229,000. Other noncash activities
included in the determination of net income include direct payments of lease
income by lessees to banks of $88,000.

The Partnership sold computer equipment in 2004 with a net book value of $9,000
for a net gain on sale of equipment of $5,000.

The Partnership's primary sources of capital for the years ended December 31,
2004, 2003 and 2002 were cash from operations of $269,000, $256,000 and
$183,000, respectively, and proceeds from the sale of computer equipment of
$14,000, $62,000 and $208,000 in 2004, 2003 and 2002, respectively. The primary
uses of cash for the years ended December 31, 2004, 2003 and 2002, were the
payment of preferred distributions to partners totaling $317,000 for each of the
periods, capital expenditures for new equipment totaling $6,000 and $65,000 for
the years ended December 31, 2004 and 2002, respectively, the payment of
acquisition fees of $2,500 and $11,000 for the years ended December 31, 2004 and
2002, respectively. There were no capital expenditures or acquisition fees for
the year ended December 31, 2003.

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.

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

                                                                              16
<PAGE>

operating expenses. As of December 31, 2004, the Partnership had future minimum
rentals on noncancellable operating leases of $36,200 for the year ended 2005
and $32,500 thereafter. The Partnership incurred debt in 2004 and 2002, in the
amount of $57,000 and $220,000, respectively. The Partnership did not incur any
debt in 2004 and 2003. At December 31, 2004, the outstanding debt was $60,000,
with interest rates ranging from 5.5% to 6.75%, and will be payable through
January 2008.

CCC, on behalf of the Partnership and other affiliated partnerships, acquires
computer equipment subject to associated debt obligations and lease agreements
and allocates a participation in the cost, debt and lease revenue to the various
partnerships based on certain risk factors. The Partnership's share of the
computer equipment in which they participate at December 31, 2004 and 2003 was
approximately $137,000 and $277,000, respectively, which is included in the
Partnership's fixed assets on their balance sheet, and the total cost of the
equipment shared by the Partnership with other partnerships at December 31, 2004
and 2003 was approximately $1,859,000 and $2,157,000, respectively. The
Partnership's share of the outstanding debt associated with this equipment at
December 31, 2004 and 2003 was approximately $400 and $37,000, respectively,
which is included in the Partnership's liabilities on the balance sheet, and the
total outstanding debt at December 31, 2004 and 2003 related to the equipment
shared by the Partnership was approximately $1,000 and $509,000, respectively.

During the year ended December 31, 2004 and 2003, the General Partner and one of
its affiliates, CCC, forgave payables owed to them by the Partnership in the
amount of approximately $118,000 and $148,000, respectively. Such amount has
been recorded as a contribution to capital. The General Partner has forgiven
fees of approximately $30,000 and $8,000 in 2004 and 2003, respectively. CCC has
forgiven direct reimbursements of approximately $39,000 and $140,000 in 2004 and
2003, respectively. Also CCC has contributed cash in the amount of $49,000 in
2004.

The General Partner and CCC have forgiven amounts payable by the Partnership to
them and have deferred payments on other amounts owed to allow for distributions
to limited partners.

The General Partner and CCC have committed to fund, either through cash
contributions and/or forgiveness of indebtedness, any necessary cash shortfalls
of the Partnership, including the amounts necessary to fund, if any,
distributions to limited partners, through March 31, 2005.

Due to the recurring losses from operations, the General Partner feels that it
may be in the best interest of the Partnership to start the liquidation process
in 2005 and run out naturally all remaining leases in the portfolio, making
distributions when possible, after expenses have been satisfied.

The General Partner intends to review and reassess the Partnership's business
plan on a quarterly basis in 2005.

RESULTS FROM OPERATIONS

For the years ended December 31, 2004, 2003 and 2002, the Partnership recognized
income of $191,000, $408,000, and $789,000, and expenses of $286,000, $564,000
and $1,081,000, resulting in net losses of $95,000, $156,000 and $292,000,
respectively.

Lease income decreased to $151,000 in 2004, down from $391,000 and $784,000 in
2003 and 2002, respectively, primarily due to the expiration of older leases and
entering into few new leases during 2004.

The Partnership sold computer equipment with a net book value of $9,000, $45,000
and $204,000 during the years ended December 31, 2004, 2003 and 2002,
respectively, for a net gain of $5,000, $17,000 and $4,000 for the year ended
December 31, 2004, 2003 and 2002, respectively.

Operating expenses, excluding depreciation, consist of accounting, legal,
outside service fees and reimbursement of expenses to CCC for administration and
operation of the Partnership. The decrease to $46,000 during the year ended
December 31, 2004, down from $153,000 and $266,000 during the years ended
December 31, 2003 and 2002, respectively, is attributable to a decrease in
reimbursable expenses with the administration and operation of the Partnership
charged by CCC of approximately $46,000, a decrease in accounting fees of
approximately $14,000, a decrease in due diligence of approximately $15,000 and
a decrease in outside office services of approximately $10,000.

The equipment management fee is equal to approximately 5% of the gross lease
revenue attributable to equipment that is subject to operating leases. The
equipment management fee was $8,000 for the year

                                                                              17
<PAGE>

ended December 31, 2004, down from $20,000 in 2003 and $39,000 in 2002, which is
consistent with the decrease in revenue.

Interest expense decreased to $4,000 for 2004, down from $12,000 for 2003 and
$22,000 for 2002, as a result of certain notes being fully paid during 2004.

Depreciation and amortization expenses consist of depreciation on computer
equipment, impairment charges, and amortization of equipment acquisition fees
and debt placement fees. Depreciation and amortization during 2004 decreased to
$229,000 from $380,000 and $724,000 in 2003 and 2002, respectively. This is
attributable to the decrease in the computer equipment portfolio being leased.

NET LOSS

Net loss decreased to $95,000 for the year ended December 31, 2004 from $156,000
and $292,000 for the years ended December 31, 2003 and 2002, respectively. The
changes in net loss were attributable to the changes in revenues and expenses as
discussed above.

COMMITMENTS AND CONTINGENCIES

        CONTRACTUAL CASH OBLIGATIONS

The following table presents our contractual cash obligations as of December 31,
2004:

<TABLE>
<CAPTION>
                                                                                 PAYMENTS DUE BY PERIOD
                                                                              ---------------------------
                                     TOTAL          2005           2006           2007          2008
                                 ------------   ------------   ------------   ------------   ------------
<S>                              <C>            <C>            <C>            <C>            <C>
Installment notes payable
 due 2005:

     Principal                   $     10,301   $     10,301   $         --   $         --   $         --

     Interest                             109            109             --             --             --

Installment notes payable
 due 2006:

     Principal                         13,503          7,975          5,528             --             --

     Interest                             753            593            160             --             --

Installment notes payable
 due 2008:

     Principal                         36,438         11,149         11,778         12,443          1,068

     Interest                           3,261          1,726          1,097            433              5
                                 ------------   ------------   ------------   ------------   ------------

TOTAL                            $     64,365   $     31,853   $     18,563   $     12,876   $      1,073
                                 ============   ============   ============   ============   ============
</TABLE>

                                                                              18
<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS

                              INTERPRETATION NO. 46

In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable
Interest Entities" ("Interpretation No. 46"), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from the other parties. Interpretation No. 46 is applicable immediately
for variable interest entities created after January 31, 2003. In December 2003,
FASB issued a revision to Interpretation 46 ("FIN 46-R") to clarify the
provisions of FIN 46. The application of FIN 46-R is effective for public
companies, other than small business issuers, after March 15, 2004. Management
believes that the adoption of Interpretation No. 46-R did not have an impact on
the financial position and results of operations.

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

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

ITEM 8:     FINANCIAL STATEMENTS

        Our financial statements for the fiscal years ended December 31, 2004
and 2003, and the reports thereon of Asher and Company, Ltd. and BDO Seidman,
LLP respectively, are included in this annual report.

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

        Effective October 11, 2004, the registrant dismissed its principal
independent accounting firm, BDO Seidman, LLP. BDO Seidman, LLP's reports on the
registrant's financial statements for the two most recently completed fiscal
years did not contain any adverse opinion or a disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope or accounting
principles. The decision to change accountants was approved by the board of
directors of the registrant's general partner. During the registrant's two most
recent fiscal years and the interim period prior to such dismissal, the
registrant had no disagreements with BDO Seidman, LLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
BDO Seidman, LLP, would have caused BDO Seidman, LLP to make reference to the
subject matter of the disagreements in connection with its report. Further,
during the registrant's two most recent fiscal years and the interim period
prior to such dismissal, there occurred no reportable events, as set forth in
Item 304(a)(1)(v) of Regulation S-K.

        The registrant has provided BDO Seidman, LLP with a copy of this
disclosure on or prior to the date hereof and has requested BDO Seidman, LLP to
provide the registrant with a letter addressed to the Securities and Exchange
Commission stating whether it agrees with the statements contained herein. A
copy of such letter will be filed by amendment to this report when and if it is
received by the registrant.

        Also effective October 11, 2004, the registrant has retained Asher &
Company, Ltd. of Philadelphia, Pennsylvania as its principal independent
accounting firm. The registrant believes that Asher & Company, Ltd. is an
accounting firm of a size and scope of experience better suited to the
registrant's current needs than the registrant's former accounting firm.

        During our two most recent fiscal years, we have not consulted with
Asher & Company, Ltd. on any matter that (i) involved the application of
accounting principles to a specific completed or contemplated transaction, or
the type of audit opinion that might be rendered on our financial statements, in
each case where written or oral advice was provided, that was an important
factor considered by us in reaching a

                                                                              19
<PAGE>

decision as to the accounting, auditing or financial reporting issue; or (ii)
was either the subject of a disagreement or event, as that term is described in
item 304(a)(1)(iv)(A) of Regulation S-X.

ITEM 9A:    CONTROLS AND PROCEDURES

        Our management, under the supervision and with the participation of the
principal executive officer and principal financial offer, have evaluated the
effectiveness of our controls and procedures related to our reporting and
disclosure obligations as of December 31, 2004, which is the end of the period
covered by this Annual Report on Form 10-K. Based on that evaluation, the
principal executive officer and principal financial officer have concluded that
our disclosure controls and procedures are sufficient to provide that (a)
material information relating to us, including our consolidated subsidiaries, is
made known to these officers by our and our consolidated subsidiaries other
employees, particularly material information related to the period for which
this periodic report is being prepared; and (b) this information is recorded,
processed, summarized, evaluated and reported, as applicable, within the time
periods specified in the rules and forms promulgated by the Securities and
Exchange Commission. There have been no significant changes in the General
Partner's internal controls or in other factors that could significantly affect
our disclosure controls and procedures in the fourth quarter of 2004 or
subsequent to the date of the evaluation.

ITEM 9B:    OTHER INFORMATION

        NOT APPLICABLE

ITEM 10:    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

GENERAL

        The Partnership does not have any Directors or executive officers.

        The General Partner, a wholly owned subsidiary of Commonwealth of
Delaware, Inc., a Delaware corporation, which is in turn a wholly-owned
subsidiary of CCC, a Pennsylvania corporation, was incorporated in Pennsylvania
on August 26, 1993. The General Partner also acts as the General Partner for
Commonwealth Income and Growth Fund I, Commonwealth Income and Growth Fund II
and Commonwealth Income and Growth Fund IV. The principal business office of the
General Partner is 470 John Young Way, Suite 300, Exton, PA 19341, and its
telephone number is 610-594-9600. 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 CCC 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 CCC

Kimberly A. Springsteen    Executive Vice President, Chief Operating Officer and Secretary of the General
                           Partner and CCC

Henry J. Abbott            Senior Vice President, Director and Portfolio Manager of the General Partner & CCC
</TABLE>

                                                                              20
<PAGE>

<TABLE>
<S>                        <C>
Jay Dugan                  Senior Vice President & IT Manager of the General Partner & CCC

Lynn A. Franceschina       Vice President and Controller of the General Partner and CCC

Donald Bachmayer           Assistant Vice President and Accounting Manager of the General Partner and CCC

Dorothy A. Ferguson        Assistant Vice President & Compliance Manager of the General Partner & CCC

Karen Tramontano           Assistant Vice President & Marketing Manager of the General Partner & CCC

David Borham               Assistant Vice President & Investor Relations Manager of the General Partner & CCC
</TABLE>

        GEORGE S. SPRINGSTEEN, age 70, is President of both CCC and the General
Partner. Mr. Springsteen is also President of the general partners or
controlling entities of several prior programs sponsored by CCC with objectives
similar to the Partnership's. He has been the sole shareholder and director of
CCC 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 a portion of Granite's portfolio, client base, employees and corporate
offices in Jenkintown, Pennsylvania. The new company began operations as CCC in
May of 1978. Mr. Springsteen received a Bachelor of Science degree from the
University of Delaware in 1957. (Mr. Springsteen is the spouse of Kimberly A.
Springsteen)

        KIMBERLY A. SPRINGSTEEN, age 45, is Executive Vice President, Chief
Operating Officer and Secretary of CCC and the General Partner and joined CCC in
1997. She is also the President of Commonwealth Capital Securities Corp. From
1980 to 1997, Ms. Springsteen was employed with Wheat First Butcher Singer, a
broker/dealer headquartered in Richmond, Virginia. While at Wheat First Butcher
Singer, Ms. Springsteen, 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.
Springsteen 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. (Ms. Springsteen is the spouse
of George S. Springsteen)

        HENRY J. ABBOTT, age 54, is Senior Vice President and Portfolio Manager
of CCC and has been employed by CCC since 1998. Mr. Abbot has been active in the
commercial lending industry, working primarily on asset-backed transactions for
more than twenty-seven years. Prior to joining CCC Mr. Abbott was a founding
partner of Westwood Capital LLC, in New York. Prior to that, as Senior Vice
President for IBJ Schroder Leasing Corporation where Mr. Abbott managed a group
specializing in providing operating lease financing programs in the high
technology sector. Mr. Abbott brings extensive knowledge and experience in all
facets of asset-backed financing and has successfully managed $1.5 billion of
secured transactions. Mr. Abbott attended St. John's University. Mr. Abbott is a
member of the Equipment Leasing Association.

        JAY DUGAN, age 56, is Senior Vice President and Information Technology
Manager of the General Partner and CCC and has been employed by CCC since 2002.
Mr. Dugan is responsible for computer network and information systems for the
General Partner and its affiliates. Mr. Dugan was a registered securities
representative from 1988 until 1998. During that period, Mr. Dugan founded First
Securities USA, a NASD member firm, and operated that firm through 1998. From
1999 until joining CCC in 2002, Mr. Dugan was an independent due diligence
consultant.

                                                                              21
<PAGE>

        LYNN A. FRANCESCHINA, age 33, is Vice President and Controller of the
General Partner and CCC and certain of its subsidiaries after returning to the
organization in 2004. From the period of March 2004 to October 2004, Ms.
Franceschina was employed at Wilmington Trust Corp. where she was part of the
policies & procedures team responsible for Sarbanes Oxley documentation. From
November 2001 to February 2004, Ms. Franceschina was Vice President and
Accounting Manager of the General Partner and CCC and certain of its
subsidiaries. Prior to that, Ms. Franceschina served as Business Controls
Manager for Liquent, Inc., a regulatory publishing software developer. Ms.
Franceschina received a Bachelor of Science degree in Accounting from Robert
Morris University. Ms. Franceschina is a member of the Institute of Management
Accountants and the Equipment Leasing Association.

        DONALD BACHMAYER, age 40, is Assistant Vice President and Accounting
Manager of the General Partner and CCC and certain of its subsidiaries where he
has been employed since 2004. From 1997 to 2001, Mr. Bachmayer was an accountant
with Fishbein & Company, P.C., certified public accountants. Prior to joining
Commonwealth, Mr. Bachmayer was employed as Accounting Supervisor for LEAF
Financial, an equipment leasing sponsor. Mr. Bachmayer received a B.S. degree in
Accounting from LaSalle University.

        DOROTHY A. FERGUSON, age 62, is Assistant Vice President of CCC and has
been employed by CCC since 1995. She brought with her over 20 years experience
in commercial banking and finance. Prior to joining Commonwealth, she held
positions as a Banking Officer and Administrative Assistant to the Chairman of a
large Philadelphia based bank, as well as Executive Secretary to the CEO of an
international manufacturing management group.

        KAREN TRAMONTANO, age 52, Assistant Vice President & Marketing Manger,
joined Commonwealth in 2000, brining with her over a decade of experience of
international marketing and customer relations. Ms. Tramontano is responsible
for the generation and distribution of all marketing materials for the Manager's
investment programs. Prior to joining Commonwealth, Ms. Tramontano served from
1973 to 1983 as executive liaison to the President of V&V Noordland, Inc., an
international commercial company, and served as an office manager for a small
business in Florida from 1998 to 2000. Ms. Tramontano coordinates Commonwealth's
home office marketing department, which serves our broker dealer community and
registered representatives across the country. Ms. Tramontano attended Suffolk
College in New York, with a Major in Advertising/Promotion.

        DAVID BORHAM, age 27, Assistant Vice President & Marketing Manager,
joined Commonwealth in 2000, bringing with him 2 years of Customer Service
experience. Mr. Borham holds a Series 22 NASD license and is responsible for the
management of investor database maintenance and all investor inquiries and
correspondence. Prior to joining Commonwealth, Mr. Borham served as a Customer
Relations Representative in the food service industry for Dilworth Town Inn from
1996 to 2000. Mr. Borham attended Delaware County Community College. (Mr. Borham
is the son of Kimberly A. Springsteen)

        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.

        The Partnership has no audit committee financial expert, as defined
under Section 229.401 of the Exchange Act, serving on its audit committee. An
audit committee is not required because the Partnership is not a listed security
as defined by Section 240.10A-3; therefore, no audit committee financial expert
is required.

                                                                              22
<PAGE>

CODE OF ETHICS

        In view of the fiduciary obligation that the General Partner has to the
Partnership, the General Partner believes an adoption of a formal code of ethics
is unnecessary and would not benefit the Partnership, particularly, in light of
Partnership's limited business activities.

ITEM 11:    EXECUTIVE COMPENSATION

        The Partnership does not have any Directors or executive officers.

ITEM 12:    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        NONE

ITEM 13:    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The following table summarizes the types, amounts and recipients of
compensation to be paid by the Partnership directly or indirectly to the General
Partner and its Affiliates. Some of these fees are paid regardless of the
success or profitability of the Partnership's operations and investments. While
such compensation and fees were established by the General Partner and are not
based on arm's-length negotiations, the General Partner believes that such
compensation and fees are comparable to those that 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>
      ENTITY                                                          AMOUNT       AMOUNT        AMOUNT
     RECEIVING                                                       INCURRED     INCURRED      INCURRED
   COMPENSATION                   TYPE OF COMPENSATION             DURING 2004   DURING 2003   DURING 2002
---------------------   ----------------------------------------   -----------   -----------   -----------
<S>                     <C>                                        <C>           <C>           <C>
The General Partner     REIMBURSABLE EXPENSES. The General         $    19,000   $    62,000   $   363,000
and its Affiliates      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 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   $     2,500   $         0   $    11,000
                        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 was paid upon each closing of the
                        Offering with respect to the Equipment
                        purchased by the Partnership with the
                        net proceeds of the Offering available
                        for investment in Equipment. If the
                        Partnership acquires Equipment in an
                        amount exceeding the net proceeds of the
                        Offering available for investment in
                        Equipment, the fee will be paid when
                        such Equipment is acquired.
</TABLE>

                                                                              23
<PAGE>

<TABLE>
<S>                     <C>                                        <C>           <C>           <C>
The General Partner     DEBT PLACEMENT FEE. As compensation for    $     1,000   $         0   $     2,000
                        arranging Term Debt to finance the
                        acquisition of Equipment to the
                        Partnership, a fee equal to one percent
                        of such indebtedness; provided, however,
                        that such fee is reduced to the extent
                        the Partnership incurs such fees to
                        third Parties, un affiliated with the
                        General Partner or the lender, with
                        respect to such indebtedness and no such
                        fee is paid with respect to borrowings
                        from the General Partner or its
                        Affiliates.

The General Partner     EQUIPMENT  MANAGEMENT FEE. A monthly fee   $     8,000   $    20,000   $    40,000
                        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     EQUIPMENT  LIQUIDATION FEE. With respect   $       400   $     2,000   $     7,000
                        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. The
                        payment of such fee is subordinated to
                        the receipt by the Limited Partners of
                        (i) a return of their Capital
                        Contributions and 10% annum cumulative
                        return, compounded daily, on Adjusted
                        Capital Contributions ("Priority
                        Return") and (ii) the Net Disposition
                        Proceeds from such sale in accordance
                        with the Partnership Agreement. Such fee
                        is reduced to the extent any liquidation
                        or resale fees are paid to unaffiliated
                        parties.

The General Partner     PARTNERSHIP INTEREST. The General          $     3,134   $     3,132   $     3,134
                        Partner has a present and continuing one
                        percent interest of $1,000 in the
                        Partnership's item of income, gain,
                        loss, deduction, credit, and tax
                        preference. In addition, the General
                        Partner receives one percent of Cash
                        Available for Distribution until the
                        Limited Partners have received
                        distributions of Cash Available for
                        Distribution equal to their Capital
                        Contributions plus the 10% Priority
                        Return and thereafter, the General
                        Partner will receive 10% of Cash
                        Available for Distribution.
</TABLE>

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

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

        The General Partner and its Affiliate sponsor other investor programs
that 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
that may be competitive with the Partnership.

                                                                              24
<PAGE>

        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

        CCC 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 CCC, the General Partner or such other Affiliate as disclosed in this
Report. CCC, the General Partner or their Affiliates will not hold Equipment for
more than 60 days prior to transfer to the Partnership. If sufficient funds
become available to the Partnership within such 60 day period, such Equipment
may be resold to the Partnership for a price not in excess of the sum of the
cost of the Equipment to such entity and any accountable Acquisition Expenses
payable to third parties which are incurred by such entity and interest on the
Purchase Price from the date of purchase to the date of transfer to the
Partnership. CCC, 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 CCC.

        In certain instances, the Partnership may find it necessary, in
connection with the ordering and acquisition of Equipment, to make advances to
manufacturers or vendors with funds borrowed from the General Partner for such
purpose. The Partnership does not borrow money from the General Partner or any
of its Affiliates with a term in excess of twelve months. Interest is paid on
loans or advances (in the form of deposits with manufacturers or vendors of
Equipment or otherwise) from the General Partner of its 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 Partner or such affiliates shall receive
no greater interest rate and financing charges from the Partnership than that
which unrelated lender charge on comparable loans. The Partnership will not
borrow money from the General Partner or any of its affiliates for a term in
excess of twelve months.

        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 than
equipment Programs formed by the General Partner or its Affiliates, which
partnerships or joint

                                                                              25
<PAGE>

ventures its 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-Affiliate, and (iii) there are no
duplicate fees; and (b) the Partnership may invest in joint venture arrangements
with other equipment Programs formed by the General Partner or its Affiliates if
such action is in the best interest of all Programs and if all the following
conditions are met: (i) all the Programs have substantially identical investment
objectives; (ii) there are no duplicate fees; (iii) the sponsor compensation is
substantially identical in each Program; (iv) the Partnership has a right of
first refusal to buy another Program's interest in a joint venture if the other
Program wishes to sell equipment held in the joint venture; (v) the investment
of each Program is on substantially the same terms and conditions; and (vi) the
joint venture is formed either for the purpose of effecting appropriated
diversification for the Programs or for the purpose of relieving the General
Partner or its Affiliates from a commitment entered into pursuant to certain
provisions of the Partnership Agreement.

GLOSSARY

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

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

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

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

    "Affiliate" means, when used with reference to a specified Person, (I) any
Person that directly or indirectly through one or more intermediaries controls
or is controlled by or is under common control with the specified Person, (ii)
any Person that is a director or an executive officer of, partner in, or serves
in a similar capacity to, the specified Person, or any Person which the
specified Person is an executive officer of partner or with respect to which the
specified Person serves in a similar capacity, (iii) any Person owning or
controlling 10% or more of the outstanding voting securities of such specified
Person, or (iv) if such Person is an officer, director or partner, any entity
for which such Person acts in such capacity.

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

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

    "Capital Leases" are leases under which the Equipment either transfers to
the lessee at the end of the lease term, contains a bargain purchase price
option, the lease term is equal to 75% or more of the estimated economic life of
the Equipment, or the present value at the beginning of the lease term of the
minimum lease payments is equal to or exceeds 90% of the excess of the fair
value of the Equipment.

    "Cash Available for Distribution" means Cash Flow plus net Disposition
Proceeds plus cash funds available for distribution from Partnership reserves,
less such amounts as the General Partner, in accordance with this Agreement,
causes the Partnership to reinvest in Equipment or interests therein, and less
such

                                                                              26
<PAGE>

amounts as the General Partner, in its sole discretion, determines should be set
aside for the restoration or enhancement of Partnership reserves.

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

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

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

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

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

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

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

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

    "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.

                                                                              27
<PAGE>

    "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.

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

    "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 this
Agreement.

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

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

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

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

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

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

    "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.

                                                                              28
<PAGE>

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

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

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

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

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

    "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) the amount of the Equipment Acquisition Fee and any other
Acquisition Fees, but excluding points and prepaid interest.

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

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

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

ITEM 14:    PRINCIPAL ACCOUNTING FEES AND SERVICES

AUDIT FEES

The aggregate fees billed for each of the fiscal years ended December 31, 2004
and 2003 for professional services rendered by the principal accountant for the
audit of our annual financial statements and review of the financial statements
included in our Form 10-Q or services that are normally provided by the
accountant in connection with statutory and regulatory filings or engagements
for those fiscal years were $2,000 and $16,800, respectively.

AUDIT-RELATED FEES

The aggregate fees billed in the fiscal years ended December 31, 2004 and 2003
for assurance and related services by the principal accountant that are
reasonably related to the performance of the audit or review of

                                                                              29
<PAGE>

the registrant's financial statements and are not reported under the paragraph
captioned "Audit Fees" above are $0 and $0, respectively.

TAX FEES

The aggregate fees billed in the fiscal years ended December 31, 2004 and 2003
for professional services rendered by the principal accountant for tax
compliance, tax advice and tax planning were $0 and $0, respectively.

ALL OTHER FEES

The aggregate fees billed in the fiscal years ended December 31, 2004 and 2003
for products and services provided by the principal accountant, other than the
services reported above under other captions of this Item 14 are $0 and $0,
respectively.

PRE-APPROVAL POLICIES AND PROCEDURES

All audit related services, tax planning and other services were pre-approved by
the General Partner, which concluded that the provision of such services by the
Partnership's auditors was compatible with the maintenance of that firm's
independence in the conduct of its auditing functions. The policy of the General
Partner provides for pre-approval of these services and all audit related, tax
or other services not prohibited under Section 10A(g) of the Securities Exchange
Act of 1934, as amended to be performed for us by our independent auditors,
subject to the de minimus exception described in Section 10A(i)(1)(B) of the
Exchange Act on an annual basis and on individual engagements if minimum
thresholds are exceeded.

The percentage of audit-related, tax and other services that were approved by
the board of directors is zero (-0-).

PART IV

ITEM 15:    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K

<TABLE>
<S>     <C>                                                                                <C>
(a) (1) Financial Statements

        Report of Independent Registered Public Accounting Firm                               1

        Report of Independent Registered Public Accounting Firm                               2

        Balance Sheets as of December 31, 2004 and 2003                                     3-4

        Statements of Operations for the years ended December 31, 2004, 2003 and 2002         5

        Statements of Partners' Capital (Deficit) for the years ended December 31, 2004,
        2003 and 2002                                                                         6

        Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002       7-8

        Notes to Financial Statements                                                      9-22

</TABLE>

                                                                              30
<PAGE>

        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

        *       Incorporated by reference from the Partnership's Registration
                Statement on Form S-1 (Registration No. 333-26933)

(b)     Reports on Form 8-K

(c)     Exhibits.

        31.1    Rule 13a-14(a)/15d-14(a) Certifications by the Principal
Executive Officer

        31.2    Rule 13a-14(a)/15d-14(a) Certifications by the Principal
Financial Officer

        32      Section 1350 Certifications by the Principal Executive Officer
and Principal Financial Officer

                                                                              31
<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                                        CONTENTS

        REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                1

        REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                2

        FINANCIAL STATEMENTS
            Balance sheets                                                   3-4
            Statements of operations                                           5
            Statements of partners' capital                                    6
            Statements of cash flows                                         7-8

        NOTES TO FINANCIAL STATEMENTS                                       9-22


<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
             -------------------------------------------------------

The Partners
Commonwealth Income & Growth Fund III
Exton, Pennsylvania

We have audited the accompanying balance sheet of Commonwealth Income & Growth
Fund III (the "Partnership") as of December 31, 2004 and the related statements
of operations, Partners' capital and cash flows for the year then ended. 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 audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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 III as of December 31, 2004 and the results of its operations and its cash
flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.

As discussed in Note 2 to the financial statements, due to recurring losses from
operations, the General Partner feels that it may be in the best interest of the
Partnership to start the liquidation process in 2005 and run out naturally all
remaining leases in the portfolio, making distributions when possible, after
expenses have been satisfied. The General Partner intends to review and reassess
the Partnership's business plan on a quarterly basis during 2005.

/s/ Asher & Company, Ltd.

Philadelphia, Pennsylvania
April 4, 2005

                                                                               1

<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Partners
Commonwealth Income & Growth Fund III
Exton, Pennsylvania

We have audited the accompanying balance sheets of Commonwealth Income & Growth
Fund III as of December 31, 2003 and the related statements of operations,
partners' capital, and cash flows for each of the two years ended December 31,
2003. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits 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 III at December 31, 2003 and the results of its operations and its cash
flows for each of the two years ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States.




                                                            /s/ BDO Seidman, LLP

Philadelphia, Pennsylvania
March 12, 2004

                                                                               2
<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                                  BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,                                                                2004            2003
-----------------------------------------------------------------       ------------    ------------
<S>                                                                     <C>             <C>
ASSETS

Cash and cash equivalents                                               $      6,000    $        557
Lease income receivable, net of reserve of $0 at December 31,
 2004 and 2003                                                                 5,875           9,181
                                                                        ------------    ------------
                                                                              11,875           9,738
                                                                        ------------    ------------
COMPUTER EQUIPMENT, at cost                                                  995,456       1,955,197
ACCUMULATED DEPRECIATION                                                    (844,357)     (1,635,341)
                                                                        ------------    ------------
                                                                             151,099         319,856
                                                                        ------------    ------------
EQUIPMENT ACQUISITION COSTS AND DEFERRED EXPENSES, net of
 accumulated amortization of $11,563 and $20,820, at December 31,
 2004 and 2003, respectively                                                   4,139           6,867
                                                                        ------------    ------------
TOTAL ASSETS                                                            $    167,113    $    336,461
                                                                        ============    ============
</TABLE>

                                                                               3

<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                                  BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,                                                                2004           2003
-----------------------------------------------------------------       ------------    ------------
<S>                                                                     <C>             <C>
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)

LIABILITIES
  Accounts payable                                                      $     25,497    $     26,762
  Accounts payable, Commonwealth Capital Corp.                               212,458          53,648
  Accounts payable, General Partner                                          102,089         134,524
  Accounts payable, affiliated limited partnerships                           46,723          25,707
  Unearned lease income                                                          943           1,636
  Other Accrued Expenses                                                      10,491              --
  Notes payable                                                               60,243          91,436
                                                                        ------------    ------------

TOTAL LIABILITIES                                                            458,444         333,713
                                                                        ------------    ------------

PARTNERS' CAPITAL (DEFICIT)
  General Partner                                                              1,000           1,000
  Limited partners                                                          (292,331)          1,748
                                                                        ------------    ------------

TOTAL PARTNERS' CAPITAL (DEFICIT)                                           (291,331)          2,748
                                                                        ------------    ------------

TOTAL LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)                       $    167,113    $    336,461
                                                                        ============    ============
</TABLE>

                                 See accompanying notes to financial statements.

                                                                               4

<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                        STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Years ended December 31,                                                      2004            2003            2002
-------------------------------------------------------------------   ------------    ------------    ------------
<S>                                                                   <C>             <C>             <C>
INCOME
  Lease                                                               $    151,391    $    391,419    $    784,368
  Interest and other                                                        34,462              80             352
  Gain on sale of computer equipment                                         5,005          16,865           4,343
                                                                      ------------    ------------    ------------

TOTAL INCOME                                                               190,858         408,364         789,063
                                                                      ------------    ------------    ------------

EXPENSES
  Operating, excluding depreciation                                         45,841         153,142         265,918
  Equipment management fee, General Partner                                  7,564          19,571          39,218
  Depreciation                                                             222,875         367,551         696,104
  Amortization of equipment acquisition costs
   and deferred expenses                                                     5,822          12,303          27,409
  Interest                                                                   3,897          12,020          22,247
  Provision for uncollectible lease income receivable                           --              --          30,011
                                                                      ------------    ------------    ------------

TOTAL EXPENSES                                                             285,999         564,587       1,080,907
                                                                      ------------    ------------    ------------

NET (LOSS)                                                            $    (95,141)   $   (156,223)   $   (291,844)
                                                                      ============    ============    ============

NET (LOSS) PER EQUIVALENT LIMITED PARTNERSHIP UNIT                    $      (0.63)   $      (1.03)   $      (1.93)

WEIGHTED AVERAGE NUMBER OF EQUIVALENT
  LIMITED PARTNERSHIP UNITS OUTSTANDING DURING
  THE YEAR                                                                 151,178         151,178         151,178
                                                                      ============    ============    ============
</TABLE>

                                 See accompanying notes to financial statements.

                                                                               5

<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                       STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)

<TABLE>
<CAPTION>
                                           General         Limited
                                           Partner         Partner        General         Limited
                                             Units           Units        Partner        Partners            Total
                                      ------------    ------------   ------------    ------------     ------------
<S>                                             <C>        <C>       <C>             <C>              <C>
BALANCE, December 31, 2001                      50         151,178   $      1,000    $    936,657     $    937,657
Net income (loss)                               --              --          3,134        (294,978)        (291,844)
Distributions                                   --              --         (3,134)       (314,364)        (317,498)
                                      ------------    ------------   ------------    ------------     ------------

BALANCE, December 31, 2002                      50         151,178          1,000         327,315          328,315
Net income (loss)                               --              --          3,132        (159,355)        (156,223)
Forgiveness of payables
 recorded as capital contributions              --              --        148,156              --          148,156
Transfer of partners' capital                   --              --       (148,156)        148,156               --
Distributions                                   --              --         (3,132)       (314,368)        (317,500)
                                      ------------    ------------   ------------    ------------     ------------

BALANCE, December 31, 2003                      50         151,178          1,000           1,748            2,748
Net income (loss)                               --              --          3,134         (98,275)         (95,141)
Contributions - Cash                                                       49,116              --           49,116
Contributions - Forgiveness of fees                                        30,496              --           30,496
Contributions - Forgiveness of
 Expenses                                                                  38,949              --           38,949
Transfer of Partners' Capital                                            (118,561)        118,561               --
Distributions                                   --              --         (3,134)       (314,364)        (317,498)
                                      ------------    ------------   ------------    ------------     ------------
BALANCE, December 31, 2004                      50         151,178   $      1,000    $   (292,331)    $   (291,331)
                                      ============    ============   ============    ============     ============
</TABLE>

                                 See accompanying notes to financial statements.

                                                                               6

<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                        STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Years ended December 31,                             2004            2003            2002
----------------------------------------------   ------------    ------------    ------------
<S>                                              <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net (loss)                                     $    (95,141)   $   (156,223)   $   (291,844)
  Adjustments to reconcile net (loss) to
   net cash provided by operating activities
     Depreciation and amortization                    228,697         379,854         723,513
     (Gain) loss on sale of computer equipment         (5,005)        (16,865)         (4,343)
     Other noncash activities included in
      determination of net (loss)                     (88,167)       (162,331)       (310,970)
     Changes in assets and liabilities
       Lease income receivable                          3,306           4,980          28,136
       Accounts payable                                (1,265)         (4,387)          4,220
       Accounts payable,
         Commonwealth Capital Corp.                   197,759         138,848          29,311
       Accounts receivable / payable,
        General Partner                                (1,940)         83,913         (32,330)
       Accounts payable, affiliated limited
        partnerships                                   21,016          23,534              60
       Unearned lease income                             (694)        (35,626)         37,262
       Other accrued expense                           10,491              --              --
                                                 ------------    ------------    ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES             269,057         255,697         183,015
                                                 ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES
  Capital expenditures                                 (6,104)             --         (64,989)
  Net proceeds from sale of computer equipment         13,965          61,863         208,484
  Equipment acquisition fees to the
   General Partner                                     (2,523)             --         (11,416)
                                                 ------------    ------------    ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES               5,338          61,863         132,079
                                                 ------------    ------------    ------------
</TABLE>

                                                                               7

<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                        STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Years ended December 31,                             2004            2003            2002
----------------------------------------------   ------------    ------------    ------------
<S>                                              <C>             <C>             <C>
CASH FLOWS FROM FINANCING ACTIVITIES
  Contributions                                        49,116              --              --
  Distributions to partners                          (317,498)       (317,500)       (317,498)
  Debt placement fee to the General Partner              (570)             --          (2,204)
                                                 ------------    ------------    ------------
NET CASH (USED IN) FINANCING ACTIVITIES              (268,952)       (317,500)       (319,702)
                                                 ------------    ------------    ------------

NET INCREASE (DECREASE) IN CASH AND CASH
 EQUIVALENTS                                            5,443              60          (4,608)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR            557             497           5,105
                                                 ------------    ------------    ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR         $      6,000    $        557    $        497
                                                 ============    ============    ============
</TABLE>

                                 See accompanying notes to financial statements.

                                                                               8

<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                   NOTES TO FINANCIAL STATEMENTS

1.  THE PARTNERSHIP      Commonwealth Income & Growth Fund III (the
                         "Partnership") is a limited partnership organized in
                         the Commonwealth of Pennsylvania. The Partnership
                         offered for sale up to 750,000 Units of the limited
                         partnership at the purchase price of $20 per unit (the
                         "Offering"). The Offering was terminated at the close
                         of business on July 31, 2000 by the General Partner.
                         The Partnership uses the proceeds of the Offering to
                         acquire, own and lease various types of computer
                         peripheral equipment and other similar capital
                         equipment, which will be leased primarily to U.S.
                         corporations and institutions. Commonwealth Capital
                         Corp ("CCC"), on behalf of the Partnership and other
                         affiliated partnerships, acquires computer equipment
                         subject to associated debt obligations and lease
                         agreements and allocates a participation in the cost,
                         debt and lease revenue to the various partnerships
                         based on certain risk factors. The Partnership's
                         General Partner is Commonwealth Income & Growth Fund,
                         Inc. (the "General Partner"), a Pennsylvania
                         corporation that is an indirect wholly owned subsidiary
                         of CCC. Approximately ten years after the commencement
                         of operations, the Partnership intends to sell or
                         otherwise dispose of all of its computer equipment,
                         make final distributions to partners, and to dissolve.
                         Unless sooner terminated, the Partnership will continue
                         until December 31, 2009.

                         Allocations of income and distributions of cash are
                         based on the Partnership's Limited Partnership
                         Agreement (the "Agreement"). The various allocations
                         under the Agreement prevent any limited partner's
                         capital account from being reduced below zero and
                         ensure the capital accounts reflect the anticipated
                         sharing ratios of cash distributions, as defined in the
                         Agreement. During 2004, 2003 and 2002, the Partnership
                         distributed to the limited partners $314,364, $314,368
                         and $314,364, respectively. The 2004, 2003 and 2002
                         distributions were at an annual rate of 10.4% of the
                         limited partners' original contributed capital.
                         Distributions during 2004, 2003 and 2002 reflect an
                         annual return of capital in the amount of approximately
                         $2.08 per limited partnership unit, for units that were
                         outstanding for the entire year, respectively.

                                                                               9

<PAGE>
                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                   NOTES TO FINANCIAL STATEMENTS

2.  BUSINESS PLAN        The Partnership has suffered recurring losses from
                         operations and has a deficit partners' capital of
                         approximately $291,000 at December 31, 2004. The
                         General Partner and CCC have forgiven amounts payable
                         by the Partnership to them and have deferred payments
                         on other amounts to allow for distributions to limited
                         partners.

                         The General Partner and CCC have committed to fund,
                         either through cash contributions and/or forgiveness of
                         indebtedness, any necessary cash shortfalls of the
                         Partnership, including the amounts necessary to fund
                         distributions to limited partners, through March 31,
                         2005.

                         Due to the recurring losses from operations, the
                         General Partner feels that it may be in the best
                         interest of the Partnership to start the liquidation
                         process in 2005 and run out naturally all remaining
                         leases in the portfolio, making distributions when
                         possible, after expenses have been satisfied.

                         The General Partner intends to review and reassess the
                         Partnership's business plan on a quarterly basis during
                         2005.

3.  SUMMARY OF           REVENUE RECOGNITION
    SIGNIFICANT
    ACCOUNTING           Through December 31, 2004, the Partnership's leasing
    POLICIES             operations consist substantially of operating leases.
                         Operating lease revenue is recognized on a monthly
                         basis in accordance with the terms of the lease
                         agreements, which generally provide for fixed
                         straight-line payments.

                         The Partnership reviews a customer's credit history
                         before extending credit and establishes a provision
                         for uncollectible accounts receivable based upon the
                         credit risk of specific customers, historical trends
                         and other information.

                         LONG-LIVED ASSETS

                         The Partnership evaluates its long-lived assets when
                         events or circumstances indicate that the value of the
                         asset may not be recoverable. The Partnership
                         determines whether impairment exists by estimating the
                         undiscounted cash flows to be generated by each asset.
                         If the estimated undiscounted cash flows are less than
                         the carrying value of the asset then impairment exists.
                         The amount of the impairment is determined based on the
                         difference between the carrying value and the fair
                         value. Fair value is determined based on estimated
                         discounted cash flows to be generated by the asset. At
                         December 31, 2004, the Partnership had seven of its ten
                         remaining operating leases due to expire in 2005, and
                         therefore, evaluated its computer equipment for
                         impairment. The Partnership recorded charges of $8,800
                         in the fourth quarter of 2004 to record the assets at
                         their estimated fair value. This impairment charge was
                         based on market fluctuations in residual value of
                         computer equipment. Such amounts have been included in
                         depreciation expense in the accompanying financial
                         statements. The Partnership determined that no
                         impairment occurred during 2003, and 2002.


                                                                              10

<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                   NOTES TO FINANCIAL STATEMENTS

                         Depreciation on computer equipment for financial
                         statement purposes is based on the straight-line method
                         over estimated useful lives of four years.

                         INTANGIBLE ASSETS

                         Equipment acquisition costs and deferred expenses, are
                         amortized on a straight-line basis over two- to-four
                         year lives. Unamortized acquisition fees and deferred
                         expenses are charged to amortization expense when the
                         associated leased equipment is sold.

                         FAIR VALUE OF FINANCIAL INSTRUMENTS

                         Statement of Financial Accounting Standards ("SFAS")
                         No.107, Disclosures About Fair Value of Financial
                         Instruments, requires disclosure of the fair value of
                         certain instruments. The carrying values of cash,
                         receivables and payables approximate fair value due to
                         the short term maturity of these instruments. For debt,
                         the carrying amounts approximate fair value because the
                         interest rates approximate current market rates.

                         USE OF ESTIMATES

                         The preparation of financial statements in conformity
                         with U.S. generally accepted accounting principles
                         requires management to make estimates and assumptions
                         that affect the reported amounts of assets and
                         liabilities and disclosure of contingent assets and
                         liabilities at the date of the financial statements and
                         the reported amounts of revenues and expenses during
                         the reporting period. Actual results could differ from
                         those estimates.

                         CASH AND CASH EQUIVALENTS

                         The Partnership considers all highly liquid investments
                         with a maturity of three months or less to be cash
                         equivalents. Cash equivalents have been invested in a
                         money market fund investing directly in Treasury
                         obligations. Cash at December 31, 2004 and 2003 was
                         held in the custody of one financial institution. At
                         times, the balances may exceed federally insured
                         limits. The Partnership mitigates this risk by
                         depositing funds with a major financial

                                                                              11

<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                   NOTES TO FINANCIAL STATEMENTS

                         institution. The Partnership has not experienced any
                         losses in such accounts, and believes it is not exposed
                         to any significant credit risk.

                         ACCOUNTS RECEIVABLE

                         Accounts receivable includes current accounts
                         receivable, net of allowances and other accruals. The
                         Partnership regularly reviews the collectability of its
                         receivables and the credit worthiness of its customers
                         and adjusts its allowance for doubtful accounts
                         accordingly. The Partnership determined that no
                         allowance was necessary at December 31, 2004 and 2003.

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

                         NET INCOME (LOSS) PER EQUIVALENT LIMITED PARTNERSHIP
                         UNIT

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

                                                                              12

<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                   NOTES TO FINANCIAL STATEMENTS

                         REIMBURSABLE EXPENSES

                         Reimbursable expenses, which are charged to the
                         Partnership by CCC in connection with the
                         administration and operation of the Partnership, are
                         allocated to the Partnership based upon several factors
                         including, but not limited to, the number of investors,
                         compliance issues, and the number of existing leases.

                         RECENT ACCOUNTING PRONOUNCEMENTS

                                         INTERPRETATION NO. 46

                         In January 2003, FASB issued Interpretation No. 46,
                         "Consolidation of Variable Interest Entities"
                         ("Interpretation No. 46"), which clarifies the
                         application of Accounting Research Bulletin No. 51,
                         "Consolidated Financial Statements," to certain
                         entities in which equity investors do not have the
                         characteristics of a controlling financial interest or
                         do not have sufficient equity at risk for the entity to
                         finance its activities without additional subordinated
                         financial support from the other parties.
                         Interpretation No. 46 is applicable immediately for
                         variable interest entities created after January 31,
                         2003. In December 2003, FASB issued a revision to
                         Interpretation 46 ("FIN 46-R") to clarify the
                         provisions of FIN 46. The application of FIN 46-R is
                         effective for public companies, other than small
                         business issuers, after March 15, 2004. Management
                         believes that the adoption of Interpretation No. 46-R
                         did not have an impact on the financial position and
                         results of operations.

4.  COMPUTER             The Partnership is the lessor of equipment under
    EQUIPMENT            operating leases with periods ranging from 24 to 36
                         months. In general, associated costs such as repairs
                         and maintenance, insurance and property taxes are paid
                         by the lessee. Remarketing fees are paid to the leasing
                         companies from which the Partnership purchases leases.
                         These are fees that are earned by the leasing companies
                         when the initial terms of the lease have been met. The
                         General Partner believes that this strategy adds value
                         since it entices the leasing company to "stay with the
                         lease" for potential extensions, remarketing or sale of
                         equipment. This strategy potentially minimizes any
                         conflicts the leasing company may have with a

                                                                              13

<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                   NOTES TO FINANCIAL STATEMENTS

                         potential new lease and will potentially assist in
                         maximizing overall portfolio performance. The
                         remarketing fee is tied into lease performance
                         thresholds and is factored in the negotiation of the
                         fee. For the years ended December 31, 2004, 2003, and
                         2002, the Partnership paid $1,000, $8,000, and $4,000,
                         respectively.

                         The Partnership participates in leases that are shared
                         with other affiliated partnerships. The Partnership's
                         share of the computer equipment in which they
                         participate at December 31, 2004 and 2003 was
                         approximately $137,000 and $277,000 respectively, which
                         is included in the Partnership's fixed assets on their
                         balance sheet, and the total cost of the equipment
                         shared by the Partnership with other affiliated
                         partnerships at December 31, 2004 and 2003 was
                         approximately $1,859,000 and $2,157,000 respectively.
                         The Partnership's share of the outstanding debt
                         associated with this equipment at December 31, 2004 and
                         2003 was approximately $400 and $37,000, respectively,
                         which is included in the Partnership's liabilities on
                         the balance sheet, and the total outstanding debt at
                         December 31, 2004 and 2003 related to the equipment
                         shared by the Partnership was approximately $1,000 and
                         $509,000, respectively.

                         The following is a schedule of future minimum rentals
                         on noncancelable operating leases at December 31, 2004:

                         Year ending December 31,                         Amount
                         ---------------------------------------   -------------
                           2005                                    $      36,200
                           2006                                           18,600
                           2007                                           12,900
                           2008                                            1,000
                                                                   -------------
                                                                   $      68,700
                                                                   =============

                                                                              14

<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                   NOTES TO FINANCIAL STATEMENTS

    SIGNIFICANT          Lessees exceeding 10% of lease income for the
    CUSTOMERS            years ended:

<TABLE>
<CAPTION>
                         Lessee                                 2004        2003        2002
                         --------------------------------   --------    --------    --------
                         <S>                                      <C>         <C>         <C>
                         Lessee A                                 22%         13%         --
                         Lessee B                                 21%         26%         18%
                         Lessee C                                 --          --          10%
                         Lessee D                                 --          11%         22%
                         Lessee E                                 17%         27%         17%
                         Lessee F                                 29%         11%         --
                                                            --------    --------    --------
                         TOTAL % OF LEASE INCOME                  89%         88%         67%
                                                            --------    --------    --------
</TABLE>

                         Lessees exceeding 10% of accounts receivable at
                         December 31:

<TABLE>
<CAPTION>
                         Lessee                                  2004        2003
                         ---------------------------------   --------    --------
                         <S>                                       <C>         <C>
                         Lessee A                                  30%         --
                         Lessee E                                  64%         82%
                         Lessee G                                  --          16%
                                                             --------    --------
                         TOTAL % OF ACCOUNTS RECEIVABLE            94%         98%
                                                             --------    --------
</TABLE>

5.  RELATED PARTY        SELLING COMMISSION AND DEALER MANAGER FEES
    TRANSACTIONS

                         The Partnership paid to Commonwealth Capital Securities
                         Corp. (CCSC), an affiliate of Commonwealth Capital
                         Corp., an aggregate of up to 9% of the partners'
                         contributed capital as selling commissions and dealer
                         manager fees, and after the required $1,500,000 minimum
                         subscription amount has been sold. There were no fees
                         paid to the General Partner in 2004, 2003 and 2002.

                         FORGIVENESS OF RELATED PARTY PAYABLES

                         During the year ended December 31, 2004 and 2003,
                         respectively, the General Partner and one of its
                         affiliates, CCC, forgave payables owed to them by the
                         Partnership in the amount of approximately $118,000 and
                         $148,000, respectively. Such amount has been recorded
                         as a contribution to capital. The General Partner has
                         forgiven fees of approximately $30,000 and $8,000 in
                         2004 and 2003, respectively. CCC has forgiven direct
                         reimbursements of approximately $39,000 and $140,000 in
                         2004 and 2003, respectively. Also, CCC contributed cash
                         in the amount of $49,000 in 2004.

                         REIMBURSABLE EXPENSES

                         The General Partner and its affiliates are entitled to
                         reimbursement by the Partnership for the cost of
                         supplies and services obtained

                                                                              15

<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                   NOTES TO FINANCIAL STATEMENTS

                         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 2004, 2003 and 2002, $19,000,
                         $62,000, and $363,000, respectively, of expenses were
                         incurred by the General Partner and its affiliates on
                         behalf of the Partnership.

                         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
                         lease thereof or sale under a conditional sales
                         contract. The fee was paid upon each closing of the
                         Offering with respect to the equipment to be purchased
                         by the Partnership with the net proceeds for the
                         Offering available for investment in equipment. If the
                         Partnership acquires equipment in an amount exceeding
                         the net proceeds of the Offering available for
                         investment in equipment, the fee will be paid when such
                         equipment is acquired. During 2004, 2003 and 2002,
                         equipment acquisition fees of approximately $2,500, $0,
                         and $11,000, respectively, were earned by 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 2004,
                         2003 and 2002, debt placement fees of approximately
                         $1,000, $0, and $2,000 respectively, were earned by the
                         General Partner.

                                                                              16

<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                   NOTES TO FINANCIAL STATEMENTS

                         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 2004, 2003
                         and 2002, equipment management fees of approximately
                         $8,000, $20,000, and $40,000 respectively, were earned
                         by the General Partner as determined pursuant to
                         section (ii) above.

                         EQUIPMENT LIQUIDATION FEE

                         With respect to each item of equipment sold by the
                         General Partner (other than in connection with a
                         conditional sales contract), a fee equal to the lesser
                         of (i) 50% of the competitive equipment sale commission
                         or (ii) three percent of the sales price for such
                         equipment is payable to the General Partner. The
                         payment of such fee is subordinated to the receipt by
                         the limited partners of the net disposition proceeds
                         from such sale in accordance with the Partnership
                         Agreement. Such fee will be reduced to the extent any
                         liquidation or resale fees are paid to unaffiliated
                         parties. During 2004, 2003 and 2002, equipment
                         liquidation fees of approximately $400, $2,000 and
                         $7,000, respectively, were earned by the General
                         Partner.

                                                                              17

<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                   NOTES TO FINANCIAL STATEMENTS

6.  NOTES PAYABLE        Notes payable consisted of the following:

<TABLE>
<CAPTION>
                         December 31,                                            2004         2003
                         -----------------------------------------------   ----------   ----------
                         <S>                                               <C>          <C>
                         Installment notes payable to banks; interest
                         ranging from 6.75% to 8.00%, due in monthly
                         installments ranging from $382 to $3,831,
                         including interest, with final payments from
                         January through November 2004.                    $       --   $   38,222

                         Installment notes payable to banks; interest
                         ranging from 6.25% to 6.75%, due in monthly
                         installments ranging from $123 to $1,735,
                         including interest, with final payments from
                         February through April 2005.                          10,302       53,214
                                                                           ----------   ----------

                         Installment notes payable to banks; interest at
                         6.0%, due in monthly installments ranging from
                         $320 to $394, including interest, with final
                         payments from March through December 2006.            13,503           --

                         Installment notes payable to banks; interest at
                         5.5%, due in monthly installments of $1,073,
                         including interest, with final payments in
                         January 2008.                                         36,438           --
                                                                           ==========   ==========
                                                                           $   60,243   $   91,436
                                                                           ==========   ==========
</TABLE>

                                                                              18

<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                   NOTES TO FINANCIAL STATEMENTS

                         These notes are secured by specific computer equipment
                         and are nonrecourse liabilities of the Partnership.
                         Aggregate maturities of notes payable for each of the
                         years subsequent to December 31, 2004 are as follows:

                         Year ending December 31,                         Amount
                         ------------------------------               ----------
                           2005                                       $   29,426
                           2006                                           17,307
                           2007                                           12,443
                           2008                                            1,067
                                                                      ----------
                                                                      $   60,243
                                                                      ==========

7.  SUPPLEMENTAL         Other noncash activities included in the determination
    CASH FLOW            of net income are as follows:
    INFORMATION

<TABLE>
<CAPTION>
Year ended December 31,                                2004         2003         2002
----------------------------------------------   ----------   ----------   ----------
<S>                                              <C>          <C>          <C>
Lease income, net of interest expense on
 notes payable realized as a result of direct
 payment of principal by lessee to bank          $   88,167   $  162,331   $  310,970
                                                 ----------   ----------   ----------
Total adjustment to net (loss) from other
 noncash activities                              $   88,167   $  162,331   $  310,970
                                                 ==========   ==========   ==========
</TABLE>

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

                         Noncash investing and financing activities include the
                         following:

                                                                              19

<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                   NOTES TO FINANCIAL STATEMENTS

Year ended December 31,                     2004         2003         2002
-----------------------------------   ----------   ----------   ----------
Forgiveness of payables by related
  parties recorded as capital
  contributions (see Note 5)          $   69,445   $  148,156   $       --
                                      ----------   ----------   ----------
Debt assumed in connection with
  purchase of computer equipment      $   56,974   $       --   $  220,413
                                      ==========   ==========   ==========

8.  RECONCILIATION OF NET (LOSS) REPORTED FOR FINANCIAL REPORTING PURPOSES TO
    TAXABLE (LOSS) ON THE FEDERAL PARTNERSHIP RETURN

<TABLE>
<CAPTION>
Year ended December 31,                              2004            2003            2002
------------------------------------------   ------------    ------------    ------------
<S>                                          <C>             <C>             <C>
Net (loss) for financial reporting
  Purposes to taxable (loss)                 $    (95,141)   $   (156,223)   $   (291,844)
    Adjustments
      (Loss) on sale of computer equipment        (71,960)       (174,813)       (197,112)
      Depreciation                                (68,520)        (79,198)         (9,592)
      Amortization                                  4,856           9,886          19,000
      Bad debt expense                                 --         (28,096)         28,096
      Unearned lease income                          (692)        (35,627)         37,262
      Other                                        22,511         (16,265)       (100,016)
                                             ------------    ------------    ------------
Taxable (loss) on the Federal
 Partnership Return                          $   (208,946)   $   (480,336)   $   (514,206)
                                             ============    ============    ============
</TABLE>

                         The "Adjustments - Other" includes financial statement
                         adjustments reflected on the tax return in the
                         subsequent year.

                         Adjustment for (loss) on sale of equipment is due to
                         longer useful lives for tax reporting purposes.

                                                                              20

<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                   NOTES TO FINANCIAL STATEMENTS

9.  QUARTERLY RESULTS    Summarized quarterly financial data for the years ended
    OF OPERATION         December 31, 2004 and 2003 is as follows:
    (UNAUDITED)

<TABLE>
<CAPTION>
                                                           Quarter ended
                                    -----------------------------------------------------------
                                      March 31         June 30      September 30    December 31
                                    ------------    ------------    ------------    -----------
<S>                                 <C>             <C>             <C>             <C>
2004

REVENUES
  Lease and other                   $     53,925    $     38,801    $     38,264    $    54,863
  (Loss) gain on sale of computer
   equipment                               1,116           2,928           2,407         (1,446)
                                    ------------    ------------    ------------    -----------
TOTAL REVENUES                            55,041          41,729          40,671         53,417
TOTAL COSTS AND EXPENSES                 110,193          70,606          42,346         62,854
                                    ------------    ------------    ------------    -----------
NET (LOSS)                          $    (55,152)   $    (28,877)   $     (1,675)   $    (9,437)
                                    ============    ============    ============    ===========
(LOSS) PER LIMITED PARTNER UNIT     $      (0.36)   $      (0.19)   $      (0.01)   $     (0.06)
                                    ============    ============    ============    ===========
</TABLE>

                                                                              21

<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                   NOTES TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                           Quarter ended
                                    -----------------------------------------------------------
                                      March 31        June 30       September 30    December 31
                                    ------------    ------------    ------------    -----------
<S>                                 <C>             <C>             <C>             <C>
2003

Revenues
  Lease and other                   $    139,517    $    107,493    $     77,461    $    67,028
  (Loss) gain on sale of computer
   equipment                              (2,982)          6,299          13,861           (313)
                                    ------------    ------------    ------------    -----------
Total revenues                           136,535         113,792          91,322         66,715
Total costs and expenses                 205,692         153,873         115,402         89,620
                                    ------------    ------------    ------------    -----------
Net (loss)                          $    (69,157)   $    (40,081)   $    (24,080)   $   (22,905)
                                    ============    ============    ============    ===========
(Loss) per limited partner unit     $      (0.46)   $      (0.27)   $      (0.16)   $     (0.14)
                                    ============    ============    ============    ===========
</TABLE>

                         The cumulative gain or loss on sale of equipment is
                         included in revenue or cost, as appropriate.

                                                                              22

<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 11, 2005 by the undersigned thereunto duly authorized.

                                    COMMONWEALTH INCOME & GROWTH FUND III

                                    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 11, 2005.

SIGNATURE                           CAPACITY

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

/s/ Kimberly A. Springsteen         Executive Vice President, Chief Operating
---------------------------         Officer
Kimberly A. Springsteen