<PAGE>
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC  20549


                                   FORM 10-K
                                        

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

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


                         Commission File Number:   333-26933
                                        

                         COMMONWEALTH INCOME & GROWTH FUND III
               (Exact name of registrant as specified in its charter)
                                        
                                        
          Pennsylvania                                23-2895714
         (State or other jurisdiction of              (I.R.S. Employer  
          incorporation or organization)              identification No.)
                       


                           1160 West Swedesford Road
                          Berwyn, Pennsylvania  19312
         (Address, including zip code, of principal executive offices)
                                        
                                 (610) 647-6800
              (Registrant's telephone number including area code)
                                        

Indicate by check mark whether the registrant (i) has filed all reports 
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 
1934 during the preceding 12 months,  and (ii) has been  subject to such 
filing requirements for the past 90 days:
                                         YES   [ X ]     NO   [  ]

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

                      DOCUMENTS INCORPORATED BY REFERENCE
     (Specific sections incorporated are identified under applicable items
                                    herein)
                                        
     Certain exhibits to the Company's Registration Statement on Form S-1 
(File No. 333-26933) incorporated by reference as Exhibits in Part IV of this 
Report.

<PAGE>

                                 PART I

ITEM 1:  BUSINESS 

GENERAL

     Commonwealth Income and Growth Fund III (the "Partnership") 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 ("Units") to the public on July 25, 1997 (the "Offerings").   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.  As of February 23, 1999, subscribers 
for 110,063 Units ($2,201,259) had been 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 
Equipment which is subject to lease principally to U.S. corporations and 
other institutions pursuant predominantly to Operating Leases.  The 
Partnership retains the flexibility to enter into Full Payout Net Leases and 
Conditional Sales Contracts, but has not done so.

The Partnership's principal investment objectives are to;

         (a) acquire, lease and sell Equipment to generate revenues from 
         operations sufficient to provide quarterly cash distributions to 
         Limited Partners;

         (b) preserve and protect Limited Partners' capital;

         (c) use a portion of Cash Flow and Net Disposition Proceeds derived 
         from the sale, refinancing or other disposition of Equipment to 
         purchase additional Equipment; and

         (d) refinance, sell or otherwise dispose of Equipment in a manner 
         that will maximize the proceeds to the Partnership.

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

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

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

<PAGE>

     As of December 31 1998, all Equipment purchased by the Partnership is 
subject to an Operating Lease  or an Operating Lease was entered into with a 
third party when the Partnership acquired an item of Equipment. The 
Partnership may also engage in sale/leaseback transactions, pursuant to which 
the Partnership would purchase Equipment from companies that would then 
immediately lease the Equipment from the Partnership. The Partnership may 
also purchase Equipment which is leased under Full Payout Net Leases or sold 
under Conditional Sales Contracts at the time of acquisition or the 
Partnership may enter into a Full Payout Net Lease or Conditional Sales 
Contract with a third party when the Partnership acquires an item of 
Equipment.

     The Partnership may enter into arrangements with one or more 
manufacturers pursuant to which the Partnership purchases from such 
manufacturers Equipment which has previously been leased directly by the 
manufacturer to third parties ("vendor leasing agreements"). The 
Partnership and manufacturers may agree to nonrecourse loans to the 
Partnership from the manufacturers to finance the acquisition of Equipment 
secured by the Equipment and the receivables due to the manufacturers from 
users of such Equipment. It is expected that the manufacturers of Equipment 
will provide maintenance, remarketing and other services for the Equipment 
subject to such agreements. As of December 31, 1998, the Partnership has 
not entered into any such agreements.

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

TYPES OF EQUIPMENT

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

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

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

     Other Equipment-Restrictions. The Partnership  plans to acquire 
computer peripheral equipment, such as tape drives, disk drives, tape 
controllers, disk controllers, printers, terminals and related control 

<PAGE>

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. As of December 31, 1998, 
the Partnership has acquired a diversified Equipment portfolio which it has  
leased to 4 different companies located throughout the United States. 
Approximately 28% of the Equipment acquired by the Partnership consists of 
tape storage. Approximately 69% of the Equipment acquired by the 
Partnership consist of workstations, department servers and enterprise 
servers. Approximately 3% of the Equipment acquired by the Partnership 
consists of communication controllers. During the operational stage of the 
Partnership, the Partnership may not at any one point in time 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 48 month) leases under 
which the aggregate noncancellable rental payments during the original term 
of the lease are not sufficient to permit the lessor to recover the purchase 
price of the subject Equipment. The Equipment  may also be leased pursuant 
to Full Payout Net Leases. Full Payout Net Leases are leases under which the 
aggregate noncancellable rental payments during the original term of the 
lease are at least sufficient to recover the purchase price of the subject 
Equipment. It is anticipated that the Partnership will enter into few, if 
any, Full Payout net Leases. The General Partner may also enter into 
Conditional Sales Contracts for Equipment. A Conditional Sales Contract 
generally provides that the noncancellable payments to the seller over the 
term of the contract are sufficient to recover the investment in such 
Equipment and to provide a return on such investment. Under a Conditional 
Sales Contract, the seller reserves title to, and retains a security interest 
in, the Equipment until the Purchase Price of  the Equipment is paid . As of 
December 31 1998, 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.

<PAGE>

     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, 1998, all leases that have been entered into are 
"triple net leases". 

     The General Partner has not established any standards for lessees to 
which it will lease Equipment and, as a result, there is not an investment 
restriction prohibiting the Partnership from doing business with any lessees. 
However, a credit analysis of all potential lessees 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, 1998, the Partnership has 
not entered into any such agreements.

BORROWING POLICIES

     The General Partner, at its discretion, may cause the Partnership to 
incur debt in the maximum aggregate amount of 30% of the aggregate cost of 
the Equipment owned 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 which is secured by Equipment and lease income therefrom. 
Such leveraging permits the Partnership to increase the aggregate amount of 
its depreciable assets, and, as a result, potentially increases both its 
lease revenues and its federal income tax deductions above those levels which 
would be achieved without leveraging. There is no limit on the amount of 
debt that may be incurred in connection with the acquisition of any single 
item of Equipment. Any debt incurred is fully amortized over the term of the 
initial lease or Conditional Sales Contract to which the Equipment securing 
the debt is subject. The precise amount borrowed by the Partnership depends 
on a number of factors, including the types of Equipment acquired by the 
Partnership; the creditworthiness of the lessee; the availability of suitable 
financing; and prevailing interest rates. The Partnership is flexible in the 
degree of leverage it employs, within the permissible limit. There can be no 
assurance that credit will be available to the Partnership in the amount or 
at the time desired or on terms considered reasonable by the General Partner. 
As of December 31, 1998, the aggregate non recourse debt outstanding of 
$8,442 was less than 1% of the aggregate cost of Equipment owned.

<PAGE>

     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, 1998, 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 which vary 
with the "prime" or "base" rate. If lease revenues were fixed, a rise in the 
"prime" or "base" rate would increase borrowing costs and reduce the amount 
of the Partnership's income and cash available for distribution. Therefore, 
the General Partner is permitted to borrow funds to purchase Equipment at 
fluctuating rates only if the lease for such Equipment provides for 
fluctuating rental payments calculated on a similar basis.

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

     Loan agreements may also require that the Partnership maintain certain 
reserves or compensating balances and may impose other obligations upon the 
Partnership. Moreover, since a significant portion of the Partnership's 
revenues from the leasing of Equipment will be reserved for repayment of 
debt, the use of financing reduces the cash which might otherwise be 
available for distributions until the debt has been repaid and may reduce the 
Partnership's Cash Flow over a substantial portion of the Partnership's 
operating life. As of December 31, 1998, 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, 1998, 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

<PAGE>

     The General Partner intends to cause the Partnership to begin disposing 
of its Equipment in approximately January 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. Subject to the General Partner's discretion the Partnership may 
extend beyond December 31, 2009, if deemed beneficial to the Partnership.

MANAGEMENT OF EQUIPMENT

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

COMPETITION

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

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

     The dominant firm in the computer marketplace is International Business 
Machines Corporation, and its subsidiary IBM Credit Corporation is the 
dominant force in the leasing of IBM equipment. Because of IBM's substantial 
resources and dominant position, revolutionary changes with respect to 
computer systems, pricing, marketing practices, technological innovation and 
the availability of new and attractive financing plans could occur at any 
time.  Significant action in any of these areas by IBM or IBM Credit 

<PAGE>

Corporation might materially adversely affect the Partnership's business or 
the other manufacturers with whom the General Partner might negotiate 
purchase and other agreements. Any adverse effect on these manufacturers 
could be reflected in the overall return realized by the Partnership on 
equipment from those manufacturers of from IBM. 

INVESTMENTS  

     As of March 18, 1999, the Partnership has purchased, or has made the 
commitment to purchase, the following Equipment:

<TABLE>
<CAPTION>

                            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       1425    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
International Paper  DEC    (2) Servers        140,857    184,372      4,042    32

</TABLE>

   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;

      (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

<PAGE>

      (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 received administrative and other 
services from the General Partner which has 12 employees.

ITEM 2: PROPERTIES

          NOT APPLICABLE

ITEM 3: LEGAL PROCEEDINGS

          NOT APPLICABLE

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

          NOT APPLICABLE

PART II

ITEM 5: MARKET FOR THE REGISTRANTS COMMON EQUITY AND

        RELATED STOCKHOLDER MATTERS

     There is no public market for the Units nor is it anticipated that one 
will develop. 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 February 23, 1999, there 
were 135 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.

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

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

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

EXEMPT TRANSFERS

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

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

         (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.

<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 December 31, March 
31, June 30, and September 30 of each year. Distributions are made 99% to 
the Limited Partners and one percent to the General Partner until the Limited 
Partners have received an amount equal to their Capital Contributions plus 
the 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.

<PAGE>

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

<TABLE>
<CAPTION>

             Quarter Ended    1998
             -------------    --------
            <S>              <C>
             March 31         $ 26,593
             June 30            43,719
             September 30       46,605
             December 31        47,843
                              --------
                              $164,760
                              --------
                              --------

</TABLE>

ALLOCATIONS AND DISTRIBUTIONS AMONG THE LIMITED PARTNERS

     Except during the Offering Period, Cash Available for Distribution which 
is allocable to the Limited Partners is apportioned among and distributed to 
them solely with reference to the number of Units owned by each as of the 
Record Date for each such distribution. During the Offering Period, Cash 
Available for Distribution which is allocable to the Limited Partners 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, certain financial data 
for the Partnership for the period January 27, 1998 (commencement of 
operations) to December 31, 1998.  This table is qualified in its entirely by 
the more detailed information and financial statement presented elsewhere in 
this report, and should be read in conjunction with "Management's Discussion 
and Analysis of Financial Condition and Results of Operations" and the 
financial statements and related notes thereto included herein.

<TABLE>
<CAPTION>

                                          Period Ended December 31, 1998
                                          ------------------------------
           <S>                           <C>
            Lease Income                             $306,249
            Net Income                                 18,250
            Cash Distributions                        166,451
            Net Income per Unit                           .16

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
           <S>                           <C>
            Cash Distribution per Unit        1.64 

                                        December 31, 1998
                                        -----------------
            Total Assets                $1,860,336
            Notes Payable                    8,442

</TABLE>

   Net income per unit is computed based upon net income 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

     The Partnership satisfied its minimum offering requirements and 
commenced operations on January 27, 1998.

     The Partnership's primary sources of capital for the period ended December 
31, 1998, was from Partners' contributions of $2,142,000, and cash from 
operations of $272,000.  The primary uses of cash for the period ended
December 31, 1998, was for capital expenditures for new equipment totaling 
$1,449,000, the payment of acquisition fees of $73,000, for the payment of 
preferred distributions to partners totaling $166,000, and for the payment of 
offering costs totaling $235,000.

     Cash is invested in money market accounts that invest directly in 
treasury obligations pending the Partnership's use of such funds to purchase 
additional computer equipment, to pay Partnership expenses or to make 
distributions to the Partners.  At December 31, 1998 and 1997, the 
Partnership had approximately $506,000 and $2,000, respectively, invested in 
these money market accounts.

     The Partnership's investment strategy of acquiring computer equipment 
and generally leasing it under triple-net leases to operators who generally 
meet specified financial standards minimizes the Partnership's operating 
expenses.  This particular industry has experienced a decrease in lease 
rates during this period due to an ongoing decrease in interest rates.  As 
of December 31, 1998, the Partnership had future minimum rentals on 
noncancellable operating leases of $489,000 for the year ended 1999, and 
$433,000 thereafter.  The Partnership intends to purchase additional 
computer equipment with existing cash, as well as when future cash becomes 
available.  In addition, the Partnership may incur debt in purchasing 
computer equipment in the future.

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

RESULTS OF OPERATIONS

1998 OPERATING RESULTS

     The Partnership commenced operation on January 27, 1998.

<PAGE>

     For the period ended December 31, 1998, the Partnership recognized income 
of $344,000 and expenses of $326,000, resulting in net income of $18,000.

     During 1998 the Partnership expended approximately $1,449,000 in cash to 
acquire 8 leases which generated approximately $306,000 in revenue.

     Interest income of $38,000 for the period ended December 31, 1998, is a 
result of capital contributions temporarily being invested in money market 
accounts until being utilized for equipment purchases.

     Operating expenses, excluding depreciation, primarily consist of 
accounting, legal and outside service fees.  An expense of $47,000 was 
recognized for the period ended December 31, 1998.

     The equipment management fee is equal to 5% of the gross lease revenue 
attributable to equipment which is subject to operating leases.  The 
equipment management fee was $15,000 for the period ended December 31, 1998.

     For the period ended December 31, 1998, the Partnership generated cash 
flow from operating activities of $272,000, which includes net income of 
$18,000 reduced by depreciation and amortization expenses of $263,000.

IMPACT OF YEAR 2000

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

     The Partnership does not have any computer programs or systems as all 
services required for the management of the Partnership are provided by the 
General Partner which receives fees and certain reimbursements for these 
services. Based on a recent assessment, the General Partner determined that 
it will be required to modify or replace portions of its software so that its 
computer systems will function property with respect to dates in the year 
2000 and thereafter. The General Partner presently believes that with 
modifications to existing software and conversions to new software, the Year 
2000 Issue will not pose significant operational problems for its computer 
systems. The General Partner expects that its modifications will be complete 
by the third quarter of 1999. The costs are not expected to exceed $15,000 
and only a small percentage of these costs would be charged to the 
Partnership. As of December 31, 1998, the General Partner has not incurred 
any significant expenses.

     The Partnership and the General Partner are not responsible for ensuring 
that the computer peripheral equipment that it leases to customers is Year 
2000 compliant, however, this equipment may be subject to declines in value 
or technological obsolescence due to the equipment not being Year 2000 
compliant. The Year 2000 Issue may also affect the carrying value of the 
equipment when it comes off of lease or be detrimental in negotiating release 
rates which may lead to equipment write downs or less than favorable lease 
recoveries.

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



<PAGE>

                             Financial Statements

                              Commonwealth Income &
                                 Growth Fund III

      FOR THE PERIOD FROM JANUARY 27, 1998 (COMMENCEMENT OF OPERATIONS) TO
                                DECEMBER 31, 1998


<TABLE>
<CAPTION>


<S>                                                                                  <C>

                                    CONTENTS


Report of Independent Auditors...................................................... 16
Audited Financial Statements
Balance Sheets...................................................................... 17
Statements of Operations............................................................ 18
Statements of Partners' Capital..................................................... 19
Statements of Cash Flows............................................................ 20
Notes to Financial Statements....................................................... 21
</TABLE>

<PAGE>


                                                                               1






                         Report of Independent Auditors

The Partners
Commonwealth Income & Growth Fund III

We have audited the accompanying balance sheets of Commonwealth Income & Growth
Fund III as of December 31, 1998 and 1997, and the related statements of
operations, partners' capital, and cash flows for the period from January 27,
1998 (commencement of operations) to December 31, 1998. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Commonwealth Income & Growth
Fund III at December 31, 1998 and 1997, and the results of its operations and
its cash flows for the period from January 27, 1998 (commencement of operations)
to December 31, 1998, in conformity with generally accepted accounting
principles.

                                               /s/ Ernst & Young LLP





Philadelphia, Pennsylvania
January 23, 1999
   except for Note 8 as to which
   the date is February 23, 1999



                                                                               1
<PAGE>


                                      
                              Commonwealth Income &
                                 Growth Fund III

                                 Balance Sheets



<TABLE>
<CAPTION>
                                                                                     DECEMBER 31
                                                                               1998              1997
                                                                         -----------------   --------------
<S>                                                                        <C>               <C>          
ASSETS
Cash and cash equivalents                                                  $      507,193    $       1,500
Lease income receivable                                                            65,729               --
Other receivables                                                                   1,912               --

Computer equipment, at cost                                                     1,453,742               --
Accumulated depreciation                                                         (238,240)              --
                                                                         -----------------   --------------
                                                                                1,215,502               --

Equipment acquisition costs, net of accumulated 
    amortization of $20,779
                                                                                   51,748               --
Organization costs, net of accumulated amortization
    of $4,248                                                                      18,252               --
                                                                         -----------------   --------------
Total assets                                                               $    1,860,336    $       1,500
                                                                         -----------------   --------------
                                                                         -----------------   --------------
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable                                                           $       38,355    $          --
Accounts payable - General Partner                                                    349               --
Unearned lease income                                                              52,192               --
Note payable                                                                        8,442               --
                                                                         -----------------   --------------
Total liabilities                                                                  99,338               --

Partners' capital:
    General Partner                                                                 1,000            1,000
    Limited partners                                                            1,759,998              500
                                                                         -----------------   --------------
Total partners' capital                                                         1,760,998            1,500
                                                                         -----------------   --------------
Total liabilities and partners' capital                                    $    1,860,336    $       1,500
                                                                         -----------------   --------------
                                                                         -----------------   --------------
</TABLE>


SEE ACCOMPANYING NOTES.



                                                                               2
<PAGE>


                              Commonwealth Income &
                                 Growth Fund III

                             Statement of Operations

                  January 27, 1998 (commencement of operations)
                              to December 31, 1998



<TABLE>

<S>                                                                                      <C>            
Income:
    Lease                                                                                $       306,249
    Interest and other                                                                            37,797
                                                                                       ---------------------
                                                                                                 344,046
Expenses:
    Operating, excluding depreciation                                                             46,632
    Equipment management fee - General Partner                                                    15,313
    Depreciation                                                                                 238,240
    Amortization of organization and equipment acquisition costs                                  25,027
    Interest                                                                                         584
                                                                                       ---------------------
                                                                                                 325,796
                                                                                       ---------------------
                                                                                       ---------------------
Net income                                                                               $        18,250
                                                                                       ---------------------
                                                                                       ---------------------

Net income per equivalent limited partnership unit                                       $         .16
                                                                                       ---------------------
                                                                                       ---------------------
Weighted average number of equivalent limited partnership units outstanding during
    the period                                                                                   100,707
                                                                                       ---------------------
                                                                                       ---------------------
</TABLE>


SEE ACCOMPANYING NOTES.



                                                                               3
<PAGE>


                              Commonwealth Income &
                                 Growth Fund III

                         Statement of Partners' Capital

     From January 27, 1998 (commencement of operations) to December 31, 1998




<TABLE>
<CAPTION>
                                              GENERAL       LIMITED
                                              PARTNER        PARTNER         GENERAL         LIMITED
                                               UNITS          UNITS          PARTNER        PARTNERS          TOTAL
                                          -------------------------------------------------------------------------------
<S>                                           <C>               <C>       <C>             <C>             <C>         
Initial contribution and balance at
   commencement of operations                        50              25    $      1,000    $        500    $      1,500
Contributions January 27, 1998 through
   December 31, 1998                                  -         107,117               -       2,142,340       2,142,340
Offering costs                                        -               -               -        (234,641)       (234,641)
Net income                                            -               -           1,691          16,559          18,250
Distributions                                         -               -          (1,691)       (164,760)       (166,451)
                                          -------------------------------------------------------------------------------
Partners' capital, December 31, 1998                 50         107,142    $      1,000    $  1,759,998    $  1,760,998
                                          -------------------------------------------------------------------------------
                                          -------------------------------------------------------------------------------
</TABLE>


SEE ACCOMPANYING NOTES.




                                                                               4
<PAGE>


                              Commonwealth Income &
                                 Growth Fund III

                             Statement of Cash Flows

     From January 27, 1998 (commencement of operations) to December 31, 1998

<TABLE>
<S>                                                                                     <C>             
OPERATING ACTIVITIES
Net income                                                                              $         18,250
Adjustments to reconcile net income to net cash provided by
    operating activities:
       Depreciation and amortization                                                             263,267
       Other noncash activities included in determination of
          net income                                                                             (10,454)
       Changes in operating assets and liabilities:
          Lease income receivable                                                                (65,729)
          Other receivables                                                                       (1,912)
          Accounts payable                                                                        38,355
          Accounts payable - General Partner                                                         349
          Unearned lease income                                                                   52,192
          Organization costs paid to the General Partner                                         (22,500)
                                                                                       ---------------------
Net cash provided by operating activities                                                        271,818

INVESTING ACTIVITIES
Capital expenditures                                                                          (1,448,552)
Equipment acquisition fees paid to the General Partner                                           (72,527)
                                                                                       ---------------------
Net cash used in investing activities                                                         (1,521,079)

FINANCING ACTIVITIES
Partners contributions                                                                         2,142,340
Proceeds from note payable                                                                        13,706
Offering costs paid to affiliate                                                                (192,856)
Offering costs paid to the General Partner                                                       (41,785)
Distributions to partners                                                                       (166,451)
                                                                                       ---------------------
Net cash provided by financing activities                                                      1,754,954
                                                                                       ---------------------

Net increase in cash and cash equivalents                                                        505,693
Cash and cash equivalents at beginning of period                                                   1,500
                                                                                       ---------------------
                                                                                       ---------------------
Cash and cash equivalents at end of period                                              $        507,193
                                                                                       ---------------------
                                                                                       ---------------------
</TABLE>


SEE ACCOMPANYING NOTES.



                                                                               5
<PAGE>


                              Commonwealth Income &
                                 Growth Fund III

                          Notes to Financial Statements

                                December 31, 1998

                                             
1. THE PARTNERSHIP

Commonwealth Income & Growth Fund III (the "Partnership") is a limited
partnership. The Partnership is currently offering for sale up to 750,000 Units
of the limited partnership at the purchase price of $20 per unit (the
"Offering") and expect to issue such units on a monthly basis. The Offering will
terminate at the close of business on July 25, 1999 unless sooner terminated by
the General Partner or extended. The Partnership will use proceeds of the
Offering to acquire, own, lease, and sell various types of computer peripheral
equipment and other similar capital equipment, which will be leased primarily to
U.S. corporations and institutions. The Partnership's general partner is
Commonwealth Income & Growth Fund, Inc. (the "General Partner"), a Pennsylvania
corporation which is an indirect wholly-owned subsidiary of Commonwealth Capital
Corp. Approximately ten years after the commencement of operations, the
Partnership intends to have sold or otherwise disposed of all of its computer
equipment, make final distributions to partners, and to dissolve. Unless sooner
terminated, the Partnership will continue until December 31, 2009.

Allocations of income and distributions of cash are based on Commonwealth Income
& Growth Fund III, Limited Partnership Agreement (the "Agreement"). The various
allocations prevent any limited partner's capital account from being reduced
below zero and ensure the capital accounts reflect the anticipated sharing
ratios of cash distributions, as defined in the Agreement. For a limited
partner's unit outstanding from the Offering's first close on January 27, 1998,
distributions during 1998 reflected a return of capital in the amount of
approximately $1.36 per limited partnership unit. (For a limited partner's unit
acquired subsequent to the Offering's first close, the return of capital would
be less.) Annual cash distributions to limited partners in subsequent years will
be made at a rate of 10% (Preferred Distribution) of their original contributed
capital. In 1998, all Preferred Distributions were made in accordance with the
Agreement. In the event the Partnership is unable to distribute sufficient cash
to meet the intended preferred distribution, such amounts will be deferred with
no interest until sufficient cash flow is available, as determined by the
General Partner or until the liquidation of the Partnership. The Partnership may
also reduce distributions to its partners if it deems necessary. Further,
ongoing acquisition fees, equipment management fees, and financing fees payable
to the General Partner (Note 4) will also be deferred until payment of any
unpaid Preferred Distribution.





                                                                               6
<PAGE>


                              Commonwealth Income &
                                 Growth Fund III

                    Notes to Financial Statements (continued)



2. ACCOUNTING POLICIES

REVENUE RECOGNITION

Through December 31, 1998, the Partnership has only entered into operating
leases. Lease revenue is recognized on a monthly basis in accordance with the
terms of the operating lease agreements.

USE OF ESTIMATES

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

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 an 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 an 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. There were no adjustments
needed during 1998.

Depreciation on computer equipment for financial statement purposes is based on
the straight-line method over estimated useful lives of 4 years. Other assets,
consisting of organization costs and other deferred expenses, are amortized on a
straight-line basis over 2 to 5 year lives. Unamortized acquisition fees are
charged to amortization expense when the associated leased equipment is sold.

CASH AND CASH EQUIVALENTS

The Partnership considers all highly liquid investments with a maturity of three
months or less to be cash equivalents. At December 31, 1998 and 1997, cash
equivalents were invested in a money market fund investing directly in Treasury
obligations.




                                                                               7
<PAGE>


2. ACCOUNTING POLICIES (CONTINUED)

INCOME TAXES

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

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

OFFERING COSTS

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

NET INCOME PER EQUIVALENT LIMITED PARTNERSHIP UNIT

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

IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In 1998, Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-up
Activities," was issued which requires that the costs associated with such
activities be expensed as incurred. SOP 98-5 is required to be adopted in the
first quarter of 1999 and will result in the write-off of $18,000 of unamortized
organization costs.

3. COMPUTER EQUIPMENT

The Partnership is the lessor of equipment under 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.




                                                                               8
<PAGE>


3. COMPUTER EQUIPMENT (CONTINUED)

The following is a schedule of future minimum rentals on noncancelable operating
leases at December 31, 1998:

<TABLE>
    <S>                                           <C>           
      1999                                        $      489,458
      2000                                               383,677
      2001                                                48,527
                                              ---------------------
                                                  $      921,662
                                              ---------------------
                                              ---------------------
</TABLE>

Lease income from two lessees, each exceeding 10% of total lease income,
aggregated 88% of lease income for the year ended December 31, 1998.

4. RELATED PARTY TRANSACTIONS

ORGANIZATIONAL FEE

The General Partner is entitled to be paid an Organizational Fee equal to three
percent of the first $10,000,000 of Limited Partners' Capital Contributions and
two percent of the Limited Partners' Capital Contributions in excess of
$10,000,000, as compensation for the organization of the Partnership. During
1998, such organizational fees of approximately $64,000 were paid to the General
Partner.

SELLING COMMISSION AND DEALER MANAGER FEES

The Partnership will pay 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,
after the required $1,500,000 minimum subscription amount has been sold. During
1998, selling commissions and dealer manager fees of approximately $193,000 were
paid to CCSC.

REIMBURSEMENT OF EXPENSES

The General Partner and its Affiliates are entitled to reimbursement by the
Partnership for the cost of goods, supplies, or services obtained and used by
the General Partner in connection with the administration and operation of the
Partnership from third parties unaffiliated with the General Partner. In
addition, the General Partner and its affiliates are entitled to reimbursement
for certain expenses incurred by the General Partner and its affiliates in
connection with the administration and operation of the Partnership. During
1998, $7,500 of expenses were reimbursed to the General Partner.



                                                                               9
<PAGE>


4. RELATED PARTY TRANSACTIONS (CONTINUED)

EQUIPMENT ACQUISITION FEE

The General Partner is entitled to be paid an equipment Acquisition Fee of 4% of
the Purchase Price of each item of equipment purchased as compensation for the
negotiation of the acquisition of the equipment and the lease thereof or sale
under a conditional sales contract. The fee is paid upon each closing of the
Offering with respect to the equipment to be 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. During 1998, equipment acquisition fees of approximately
$73,000 were paid to the General Partner.

DEBT PLACEMENT FEE

As compensation for arranging term debt to finance the acquisition of equipment
by the Partnership, the General Partner is paid a fee equal to 1% of such
indebtedness; provided, however, that such fee shall be reduced to the extent
the Partnership incurs such fees to third parties, unaffiliated with 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 1998, no debt placement fees were paid to the General Partner.

EQUIPMENT MANAGEMENT FEE

The General Partner is entitled to be paid a monthly fee equal to the lesser of
(i) the fees which would be charged by an independent third party for similar
services for similar equipment or (ii) the sum of (a) two percent of (1) the
Gross Lease Revenues attributable to equipment which is subject to full payout
net leases which contain net lease provisions plus (2) the purchase price paid
on conditional sales contracts as received by the Partnership and (b) 5% of the
gross lease revenues attributable to equipment which is subject to operating
leases. During 1998, equipment management fees of approximately $15,000
respectively, were paid to the General Partner, as determined pursuant to
section (ii) above.




                                                                              10
<PAGE>


4. RELATED PARTY TRANSACTIONS (CONTINUED)

EQUIPMENT LIQUIDATION FEE

With respect to each item of equipment sold by the General Partner (other than
in connection with a Conditional Sales Contract), a fee equal to the lesser of
(i) 50% of the competitive equipment sale commission or (ii) three percent of
the sales price for such equipment is payable to the General Partner. The
payment of such fee is subordinated to the receipt by the Limited Partners of
the net disposition proceeds from such sale in accordance with the Partnership
Agreement. Such fee will be reduced to the extent any liquidation or resale fees
are paid to unaffiliated parties. There were no such fees paid to the General
Partner in l998.

5. NOTE PAYABLE

Note payable consists of an installment note payable to a bank; with an
outstanding balance of $8,442 which bears interest at 7.2%; due in monthly
installments of $685 including interest through December 1999.

This note is secured by specific computer equipment and is a nonrecourse
liability of the Partnership.

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

6. SUPPLEMENTAL CASH FLOW INFORMATION

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

<TABLE>
<S>                                                                                          <C>        
Lease income, net of interest expense on
    notes payable realized as a result of direct
    payment of principal by lessee to bank                                                   $     5,264
Lease income paid to original lessor in lieu
    of cash payment for computer equipment
    acquired                                                                                       5,190
                                                                                          -----------------
Total adjustment to net income from other
    noncash activities                                                                       $    10,454
                                                                                          -----------------
                                                                                          -----------------
</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.

                                                                              11
<PAGE>

7.    RECONCILIATION OF NET INCOME REPORTED FOR FINANCIAL REPORTING PURPOSES TO
         TAXABLE INCOME ON THE FEDERAL PARTNERSHIP RETURN
<TABLE>
<CAPTION>

                                                                                                1998
                                                                                          -----------------

<S>                                                                                       <C>   
Net income for financial reporting purposes                                                  $    18,250
    Adjustments:
       Depreciation                                                                               92,865
       Amortization                                                                               14,709
       Unearned lease income                                                                      21,345
       Other                                                                                      13,502
                                                                                          -----------------
Taxable income on the Federal Partnership Return                                             $   160,671
                                                                                          -----------------
                                                                                          -----------------
</TABLE>

<PAGE>


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

                                 Balance Sheets

                               February 28, 1998




                                    CONTENTS
<TABLE>
<CAPTION>

<S>                                                                             <C>
Report of Independent Auditors................................................. F-20

Balance Sheet.................................................................. F-21
Notes to Balance Sheet......................................................... F-22
</TABLE>





<PAGE>


                         Report of Independent Auditors

To the Stockholder
Commonwealth Income & Growth Fund, Inc.

We have audited the accompanying balance sheets of Commonwealth Income & Growth
Fund, Inc. (an indirect wholly-owned subsidiary of Commonwealth Capital Corp.)
as of February 28, 1998 and 1997. These balance sheets are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
balance sheets based on our audits.

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

In our opinion, the balance sheets referred to above present fairly, in all
material respects, the financial position of Commonwealth Income & Growth Fund,
Inc. at February 28, 1998 and 1997, in conformity with generally accepted
accounting principles.


                                                /s/ Ernst & Young LLP


Philadelphia, Pennsylvania
April 3, 1998

<PAGE>


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

                                 Balance Sheet

                               February 28, 1998

<TABLE>
<CAPTION>

<S>                                                                  <C>                
ASSETS
Cash                                                                 $              500 
Accounts receivable from Income Funds and
    Commonwealth Capital Corp.                                                        - 
Investment in Partnerships                                                        3,000 
                                                                     ------------------ 
                                                                     ------------------ 
                                                                     $            3,500 
                                                                     ------------------ 
                                                                     ------------------ 
LIABILITIES
Accounts payable to Income Funds and
    Commonwealth Capital Corp.                                       $            2,400 


STOCKHOLDERS' EQUITY 
Common stock at $1 stated value:
    Authorized shares--1,000
    Issued and outstanding shares--100                                              100 
Additional paid-in capital                                                    1,001,000 
                                                                     ------------------ 
                                                                              1,001,100 
Less: note receivable                                                        (1,000,000)
                                                                     ------------------ 
                                                                                  1,100 
                                                                     ------------------ 
                                                                     ------------------ 
                                                                     $            3,500 
                                                                     ------------------ 
                                                                     ------------------ 
</TABLE>



SEE ACCOMPANYING NOTES.


<PAGE>


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

                             Notes to Balance Sheet

                                February 28, 1998

1. THE COMPANY

Commonwealth Income & Growth Fund, Inc. (the "Company") is a wholly-owned
subsidiary of Commonwealth of Delaware, Inc. which in turn is a wholly-owned
subsidiary of Commonwealth Capital Corp. ("CCC"). The Company is the sole
General Partner of Commonwealth Income & Growth Fund I, a Pennsylvania limited
partnership, the sole General Partner of Commonwealth Income & Growth Fund II, a
Pennsylvania limited partnership, and the sole General Partner of Commonwealth
Income & Growth Fund III, a Pennsylvania limited partnership. The three limited
partnerships described above are collectively referred to herein as the
"Partnerships."

CCC has provided additional capital by means of a noninterest-bearing demand
note in the amount of $1,000,000, so that the Company will at all times have a
net worth (which includes the net equity of the Company and the demand note
receivable from CCC) of at least $1,000,000. In computing the Company's net
worth for this purpose, its interest in the Partnerships and any amounts and
notes receivable from and payable to the Partnerships will be excluded. The
Company's equity has been reduced by the note receivable from CCC resulting in
net equity of $1,100, which may be different for tax purposes. The Company's
operations will be included in the consolidated federal income tax return of
CCC.

2. INVESTMENT IN PARTNERSHIPS

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

3. RELATED PARTY TRANSACTIONS

The Company and its affiliates receive substantial fees and compensation in
connection with the offering of Units and the management of the Partnerships'
assets.



<PAGE>


                           Commonwealth Capital Corp.

                           Consolidated Balance Sheet

                            As of February 28, 1998



<TABLE>
<CAPTION>


<S>                                                                                  <C>

                                    CONTENTS


Report of Independent 
Auditors............................................................................ F-9

Consolidated Balance Sheet.......................................................... F-10
Notes to Consolidated Balance Sheet................................................. F-13
</TABLE>



<PAGE>


                         Report of Independent Auditors

The Stockholder
Commonwealth Capital Corp.

We have audited the accompanying consolidated balance sheets of Commonwealth
Capital Corp. as of February 28, 1998 and 1997, and the related consolidated
statements of operations and retained earnings and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Commonwealth
Capital Corp. at February 28, 1998 and 1997, and the consolidated results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.


                                              /s/ Ernst & Young LLP


Philadelphia, Pennsylvania
April 3, 1998

<PAGE>


                           Commonwealth Capital Corp.

                           Consolidated Balance Sheet

                               Februay 28, 1998

<TABLE>
<CAPTION>

                                                                          FEBRUARY 28
                                                                             1998  
                                                                       ----------------

<S>                                                                    <C>             
ASSETS
Cash and cash equivalents                                              $        143,089
Receivables from Income Funds                                                   190,749
Advances to Income Funds                                                        232,000
Other receivables                                                               114,607
Income taxes receivable                                                          50,000
Minimum lease payments receivable, net of
    unearned interest income of $2,480,187 in 1998
    and $4,316,972 in 1997                                                    5,785,000
Deferred tax asset                                                                    -
Investment in Income Funds                                                       15,200
Other assets                                                                     11,731
Office furniture and equipment, net of
    accumulated depreciation of $97,926
    in 1998 and $84,668 in 1997                                                  19,926
Deferred offering costs                                                         223,670
                                                                                -------
Total assets                                                           $      6,785,972
                                                                       ----------------
                                                                       ----------------

LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued expenses                                  $        252,987
Due to Income Funds                                                              46,113
Nonrecourse obligations                                                       5,785,000
                                                                              ---------
Total liabilities                                                             6,084,100

Stockholder's equity:
    Common stock, $1 par value:
       Authorized shares - 1,000
       Issued and outstanding shares - 10                                            10
    Retained earnings                                                           701,862
                                                                                -------
Total stockholder's equity                                                      701,872
                                                                                -------
Total liabilities and stockholder's equity                             $      6,785,972
                                                                       ----------------
                                                                       ----------------
</TABLE>



SEE ACCOMPANYING NOTES.

<PAGE>


                           Commonwealth Capital Corp.

                      Notes to Consolidated Balance Sheet

                               February 28, 1998

1. BUSINESS

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

2. ACCOUNTING POLICIES

BASIS OF PRESENTATION

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


<PAGE>


                           Commonwealth Capital Corp.

                 Notes to Consolidated Balance Sheet (continued)



2. ACCOUNTING POLICIES (CONTINUED)

USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. At February 28, 1998 and
1997, cash equivalents were invested in a money market fund investing directly
in treasury obligations.

OFFICE FURNITURE AND EQUIPMENT

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


<PAGE>


                           Commonwealth Capital Corp.

                Notes to Consolidated Balance Sheet (continued)



2. ACCOUNTING POLICIES (CONTINUED)

INVESTMENT IN INCOME FUNDS

The Company accounts for its 1% interests in the Income Funds by the equity
method. In 1998, certain Income Funds had liabilities in excess of their assets.
As the Company, which serves the General Partner, is obligated to fund any
liabilities in excess of assets, the Company reduced its investment in Income
Funds and recorded a Due to Income Funds of $46,113 at February 28, 1998.
Financial information of the Income Funds as of December 31, 1997 and 1996, is
as follows:

<TABLE>
<CAPTION>

<S>                                           <C>              
Total assets                                  $     29,851,000 
Nonrecourse debt                                    10,903,000 
Other liabilities                                    2,281,000 
Partners' capital                                   16,667,000 
Net income (loss)                                      280,000 
</TABLE>

The Company has guaranteed the performance of certain non-monetary obligations
of the General Partner Subsidiaries to the respective Income Funds, primarily
the responsibility for management of the Income Funds. In addition, the Company
is responsible for certain capital funding requirements of the General Partner
Subsidiaries which it satisfies through noninterest-bearing demand notes. Such
notes total approximately $4,166,000 at February 28, 1998 and 1997 and have been
eliminated in the consolidation of the accompanying financial statements.

The compensation to the Company from the Income Funds includes: (1) Equipment
Acquisition Fees (4% of the purchase price of all equipment purchased by the
Income Funds); (2) Debt Placement Fees (1% of financed equipment by the Income
Funds); (3) Sales Fees Expense (3% of gross proceeds of sold equipment by the
Income Funds); and (4) Equipment Management Fees (5% of the gross operating
lease revenues of the Income Funds). The Company earned approximately $1,352,000
and $1,509,000 in fees for managing the Income Funds during the years ended
February 28, 1998 and 1997, respectively.

Fees from two Income Funds for the years ended February 28, 1998 and 1997, each
exceeding 10% of total fee income for the year, aggregated 66% and 60%,
respectively.

<PAGE>


                           Commonwealth Capital Corp.

                  Notes to Consolidated Balance Sheet (continued)



3. LEASE COMMITMENTS

GSFF acted as lessor in a series of lease purchase transactions whereby the
underlying assets were funded by investors through certificates of participation
in the lease payments. All of GSFF's rights as lessor were assigned to a
third-party agent which administers the collection of rentals paid by the
lessee. The obligations under the certificates are nonrecourse to GSFF.
Accordingly, any reduction in the minimum lease payments receivable for
uncollectible accounts would result in an equal reduction of the nonrecourse
obligations. Amounts outstanding at February 28, 1998 and 1997 under the leases
and certificates of participation are approximately $5,785,000 and $9,045,000,
respectively. These amounts are included in minimum lease payments receivable
and nonrecourse obligations in the accompanying balance sheets. Of these
amounts, $4,530,000 and $7,690,000, respectively, are secured by mortgage
insurance policies maintained by the lessee. The certificates mature from 1998
to 2011. The Company recognized interest income and interest expense in
connection with the lease purchase transactions of $505,645 and $616,353 for
fiscal years ended February 28, 1998 and 1997, respectively.

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

<S>                                                     <C>            
1999                                                    $       920,374
2000                                                            903,828
2001                                                            906,935
2002                                                            683,324
2003                                                            684,490
Thereafter                                                    4,166,236
                                                              ---------
                                                              8,265,187
Less amount representing interest                             2,480,187
                                                              ---------
                                                              ---------
Total                                                   $     5,785,000
                                                        ---------------
                                                        ---------------
</TABLE>


The Company leases an automobile, certain office equipment and office space
under noncancelable operating leases expiring in 1999 through 2001. Rent expense
for the years ended February 28, 1998 and 1997 was approximately $183,000 and
$181,000, respectively. Future minimum lease payments under noncancelable
operating leases at February 28, 1998 are $150,000 in 1999; $11,000 in 2000; and
$4,000 in 2001.

4. PROFIT-SHARING PLAN

The Company has a profit-sharing plan covering all employees with one year of
service and 21 years of age. Profit-sharing contributions are made at the
discretion of management. There was no profit-sharing contribution for the years
ended February 28, 1998 and 1997.

<PAGE>


                           Commonwealth Capital Corp.

                 Notes to Consolidated Balance Sheet (continued)



5. INCOME TAXES

The Company files a consolidated federal income tax return with CDI and its
subsidiaries.

The Company has a net deferred tax asset of $237,000 and $307,000 at February
28, 1998 and 1997, respectively, arising primarily from investment tax credits
and net operating loss carryforwards. The deferred tax asset is net of deferred
tax liabilities associated with ownership of general partnership interests in
the various operating Income Funds of $53,000 and $78,000 at February 28, 1998
and 1997, respectively. The Company has recorded a valuation allowance of
approximately $237,000 and $185,000 at February 28, 1998 and 1997, respectively,
because the Company concluded the future realization of the assets could not be
reasonably assured based on current and expected operating results.

The Company has investment tax credit carryforwards of $129,000 at February 28,
1998 which expire in 1999 through 2001. The Company has federal net operating
loss carryforwards of $40,000 which expire in 2013. The Company also has state
net operating loss carryforwards of $1,512,000 which expire in 1999 through
2001.

The current income tax benefit recorded for the year ended February 28, 1998
reflects the carryback of the 1998 net operating loss to prior year tax returns.

The income tax provision is comprised of the following:
<TABLE>
<CAPTION>

                                                   1998               1997
                                               ------------------------------
<S>                                                       <C>                <C>        
Cu                                             $   (50,000)       $     8,300
Deferr                                             122,000             10,000
                                               -----------        -----------
                                               $    72,000        $    18,300
                                               -----------        -----------
                                               -----------        -----------
</TABLE>


6. RELATED PARTY TRANSACTIONS

For the years ended February 28, 1998 and 1997, certain of the General Partner
Subsidiaries agreed to waive or forgive the related Income Funds' obligations to
pay certain equipment management, acquisition, and financing fees in the amount
of $61,000 and $157,000, respectively. Accordingly, fee income from Income Funds
is reflected net of these amounts.

<PAGE>


                           Commonwealth Capital Corp.

                 Notes to Consolidated Balance Sheet (continued)



6. RELATED PARTY TRANSACTIONS (CONTINUED)

During 1998 and 1997, the Company made $697,000 and $373,388, respectively, in
cash advances to certain Income Funds to fund cash distributions to limited
partners. During 1998 and 1997, the Company determined that approximately
$176,000 and $279,000, respectively, of these advances were uncollectible and
such amounts were written off. The remaining advances of $232,000 are due on
demand. During 1998, the Company determined that $12,750 in receivables from
certain Income Funds were uncollectible and such amounts were written off.

7. SUPPLEMENTAL CASH FLOW INFORMATION

Other noncash activities associated with lease transactions:
<TABLE>
<CAPTION>

                                                                             1998               1997
                                                                       -----------------------------------
<S>                                                                    <C>                <C>             
Reduction of minimum lease receivable and repayment
    of nonrecourse obligation associated with direct
    payment made by lessee to bank                                     $      3,260,000   $        730,605
                                                                       ----------------   ----------------
                                                                       ----------------   ----------------
</TABLE>


8. LEGAL SETTLEMENT

The Company was a plaintiff in a lawsuit against a company that provided office
space and administrative support services in prior years. In fiscal 1998, the
Company was awarded a $50,000 judgment against this company which has been
included in other income. The entire balance is included in other receivables at
February 28, 1998.

In 1997, the Company settled a dispute over contract terms with a former lessee,
whereby the lessee agreed to pay $190,000 for release of all future liability.
The settlement was included in other income for the year ended February 28,
1997.


                                       F-18

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

     NOT APPLICABLE

PART III

ITEM 10:  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

GENERAL

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

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

<TABLE>
<CAPTION>

NAME                    TITLE
------                  -----
<S>                    <C> 
George S. Springsteen   Chairman of the Board of Directors and President of the General Partner and
                        Com Cap Corp.

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

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

Magdalia Cruz           Assistant Vice President of Com Cap Corp.

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

</TABLE>

     George S. Springsteen, age 64, is President of both Com Cap Corp. and 
the General Partner. Mr. Springsteen is also President of the general 
partners or controlling entities of several prior programs sponsored by Com 
Cap Corp. with objectives similar to the Partnership's. He has been the sole 
shareholder and director of Com Cap Corp. since its formation in 1978. From 
1971 to 1978, Mr. Springsteen was involved in the computer leasing business 
of Granite Computer Corporation. Mr. Springsteen served as Vice President of 
Marketing, in addition to other capacities, and managed a portfolio of 
approximately $120,000,000 of IBM computers and peripherals. In 1978, 
Granite Computer Corporation sold its equipment portfolio and left the 
equipment leasing business. Mr. Springsteen acquired a portion of Granite's 
portfolio, client base, employees and corporate offices in Jenkintown, 
Pennsylvania. The new company began operations as Com Cap Corp. in May of 
1978. Mr. Springsteen received a Bachelor of Science degree from the 
University of Delaware in 1957.

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

<PAGE>

      Kathleen S. Enscoe, age 33, is Vice President and Controller of Com Cap 
Corp. and certain of its subsidiaries where she has been employed since 1992. 
Ms. Enscoe is an active member of the Equipment Leasing Association. From 
1988 to 1992, Ms. Enscoe was employed as a staff accountant in the financial 
reporting department of WWF Paper Corporation. Ms. Enscoe received a B.S.B.A. 
degree in 1988 from Geneva College with dual majors in accounting and 
business administration.

      Magdalia Cruz, age 30, is Assistant Vice President of Com Cap Corp. and 
Vice President of Commonwealth Capital Securities Corp. Ms. Cruz has been 
employed by Com Cap Corp. since 1993. From 1990 to 1993, Ms. Cruz was 
employed as Marketing Coordinator for Shaffer DeSouza Brown. Prior to that, 
as a Computer Equipment Analyst for the Defense Industrial Supply Center, a 
government agency based in Philadelphia. She is completing her studies for a 
B.S. in Business Management and Marketing at Chestnut Hill College. Ms. Cruz 
is a member of the Equipment Leasing Association, Investment Partnership 
Association, and holds her Series 22, 63 and 39 NASD licenses.

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

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

ITEM 11: EXECUTIVE COMPENSATION

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

<PAGE>

<TABLE>
<CAPTION>
                                                         
                                                         
                                                         
                                                          Amount
 Entity Receiving                                        Incurred
   Compensation            Type of Compensation         During 1997
------------------ ------------------------------------ ------------

                         OFFERING AND ORGANIZATION STAGE

<S>                 <C>                                   <C>
Commonwealth        Underwriting Commissions. The         $192,856
Capital Securities  Partnership will pay to the Dealer    
Corp.               Manager an aggregate amount of up     
                    to nine percent of Capital            
                    Contributions as Underwriting         
                    Commissions after and only if the     
                    required $1,500,000 Minimum           
                    Subscription Amount is sold. The      
                    Dealer Manager will pay other         
                    broker-dealers ("Participating        
                    Brokers") out of Underwriting         
                    Commissions a selling commission      
                    of up to eight percent of the         
                    Capital Contributions from Units      
                    sold by such Participating Brokers.  
                    The amount of the Underwriting        
                    Commissions will be determined        
                    based upon the quantity of Units      
                    sold to a single investor.           
                    
     

The General         Organizational Fee. An Organization    $ 64,285
Partner             Fee equal to three percent of the   
                    first $10,000,000 of Limited        
                    Partners' Capital Contributions and 
                    two percent of the Limited          
                    Partners' Capital Contribution in   
                    excess of $10,000,000, as           
                    compensation for the organization   
                    of the Partnership. It is           
                    anticipated that the Organizational 
                    and Offering Expenses, which        
                    include legal, accounting and       
                    printing expenses; various          
                    registration and filing fees;       
                    miscellaneous expenses related to   
                    the organization and formation of   
                    the Partnership; other costs of     
                    registration; and costs incurred in 
                    connection with the preparation,    
                    printing and distribution of this   
                    Prospectus and other sales          
                    literature will be approximately    
                    $300,000. The General Partner will  
                    pay all Organizational and Offering 
                    Expenses, other than Underwriting   
                    Commissions.                       

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                                        
                                                        
                                                        
                                                          Amount 
 Entity Receiving                                        Incurred
   Compensation            Type of Compensation         During 1998
------------------ ------------------------------------ ------------

                   OPERATIONAL AND SALE OR LIQUIDATION STAGES

<S>                 <C>                                   <C>
The General         Reimbursement of Expenses. The        $7,500
Partner             General Partner and its Affiliates  
and its             are entitled, under Section 5.2 of  
Affiliates          the Partnership Agreement, 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. The amounts set forth on    
                    this table are approximations of     
                    reimbursable expenses for the first  
                    year of the Partnership's operation  
                    and do not include expenses          
                    incurred in the offering of Units.  
</TABLE>
                    

<PAGE>

<TABLE>
<CAPTION>
                                                        
                                                        
                                                        
                                                          Amount 
 Entity Receiving                                        Incurred
   Compensation            Type of Compensation         During 1998
------------------ ------------------------------------ ------------
<S>                 <C>                                   <C>
The General         Equipment Acquisition Fee. An         $73,000
Partner             Equipment 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 will be paid upon closing of             
                    the Offering with respect to the             
                    Equipment to be purchased by the             
                    Partnership with the net proceeds            
                    of the Offering available for                
                    investment in Equipment except for           
                    fees on the leveraged portion of             
                    the Purchase Price which are paid            
                    when the Equipment is purchased. If          
                    the Partnership does not purchase            
                    Equipment with all the net proceeds          
                    of the Offering, the General                 
                    Partner will return a pro rata               
                    portion of the fee to the                    
                    Partnership. If the Partnership              
                    acquires Equipment in an amount              
                    exceeding the net proceeds of the            
                    Offering available for investment            
                    in Equipment, the fee will be paid           
                    when such Equipment is acquired.            
                    The estimated amounts set forth in           
                    this table include fees on                   
                    Equipment assuming the maximum               
                    allowable leverage, but exclude              
                    such fees earned on Equipment                
                    purchased with Retained Proceeds.           
                    Such excluded fees may be                    
                    significant in amount. Equipment             
                    Acquisition Fees will be lower than          
                    the estimated maximum if a lower             
                    level of acquisition borrowing is            
                    utilized.                                   

</TABLE>

<PAGE>

<TABLE>
<CAPTION>



                                                          Amount
 Entity Receiving                                        Incurred
   Compensation            Type of Compensation         During 1998
------------------ ------------------------------------ ------------
<S>                 <C>                                   <C>
The General         Debt Placement Fee. As compensation   $0
Partner             for arranging Term Debt to finance                  
                    the acquisition of Equipment by the                 
                    Partnership, a fee equal to one                     
                    percent of such indebtedness;                       
                    provided, however, that such fee                    
                    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.                 
                    The estimated amounts set forth in                  
                    this table assume the expected                      
                    maximum allowable leverage                          
                    ($535,135 if the minimum number of                  
                    Units are sold and $5,371,620 if                    
                    the maximum number of Units are                     
                    sold), but exclude such fees earned                 
                    on refinancings or debt incurred                    
                    with respect to Equipment purchased                 
                    with Retained Proceeds and                          
                    borrowings.                                        
                    
The General         Equipment Management Fee. A monthly   $15,313
Partner             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)       
                    five percent of the Gross Lease           
                    Revenues attributable to Equipment        
                    which is subject to Operating             
                    Leases.                                  
                    
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                                         
                                                         
                                                         
                                                          Amount
 Entity Receiving                                        Incurred
   Compensation            Type of Compensation         During 1998
------------------ ------------------------------------ ------------
<S>                 <C>                                 <C>
The General         Equipment Liquidation Fee. With     $0
Partner             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 of 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 a    
                    10% per annum cumulative return,     
                    compounded daily, on Adjusted        
                    Capital Contributions ("Cumulative   
                    Return") and (ii) the Net            
                    Disposition Proceeds from such sale  
                    in accordance with the Partnership   
                    Agreement. Such fee will be reduced  
                    to the extent any liquidation or     
                    resale fees are paid to              
                    unaffiliated parties.               
                    

                             INTEREST IN THE PARTNERSHIP

The General         Partnership Interest. The General   $1,691
Partner             Partner will have a present and     
                    continuing one percent interest in  
                    the Partnership's items of income,  
                    gain, loss, deduction, credit, and    
                    tax preference. In addition, the   
                    General Partner will receive 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%         
                    Cumulative Return and thereafter,  
                    the General Partner will receive   
                    10% of Cash Available for          
                    Distribution. See "Risk Factors -  
                    Dilution."                         
</TABLE>

<PAGE>

ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 


        NOT APPLICABLE

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

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

<PAGE>

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

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

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

ACQUISITIONS

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

     In certain instances, the Partnership may find it necessary, in 
connection with the ordering and acquisition of Equipment, to make advances 
to manufacturers or vendors with funds borrowed from the General Partner for 
such purpose. The Partnership does not borrow money from the General Partner 
or any of its Affiliates with a term in excess of twelve months. Interest is 
paid on loans or advances (in the form of deposits with manufacturers or 
vendors of Equipment or otherwise) from the General Partner of its Affiliates 
from their own funds at a rate equal to that which would be charged by third 
party financing institutions on comparable loans from the same purpose in the 
same geographic area, but in no event in excess of the General Partner's or 
Affiliate's own cost of funds. In addition, if the General Partner or its 
Affiliates borrow money and loan or advance it on a short-term basis to or on 
behalf of the Partnership, the General Partnership than that which the 
General Partner or such Affiliates are paying. The Partnership does not loan 
money to any Person including the General Partner or its Affiliates except to 
the extent that a Conditional Sales Contract constitutes a loan.

     If the General Partner or any of its Affiliates purchases Equipment in  
its own name and with its own funds in order to facilitate ultimate purchase 
by the Partnership, the purchaser is entitled to 

<PAGE>

receive interest on the funds expended for such purchase on behalf of the 
Partnership. Simple interest on any such temporary purchases is charged on a 
floating rate basis not in excess of three percent over the "prime rate" from 
time to time announced by PNC Bank, from the date of initial acquisition to 
the date of repayment by the Partnership/ownership transfer.

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

  GLOSSARY

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

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

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

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

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

<PAGE>

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

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

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

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

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

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

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

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

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

     "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.

<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.

     "Initial Closing " means January 27, 1998.

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

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

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

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

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

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

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

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

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

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

<PAGE>

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

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

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

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

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

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

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

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

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

ITEM 14:  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) (1) Financial Statements

        Commonwealth Income & Growth Fund III

         Report of Independent Auditors

          Balance Sheets as of December 31, 1998 and 1997

          Statement of Operations for the period January 27, 1998 
          (commencement of operations) to December 31, 1998

          Statement of Partners' Capital for the period January 27, 1998 
          (commencement of operations) to December 31, 1998

          Statement of Cash Flows for the period January 27, 1998 
          (commencement of operations) to December 31, 1998

<PAGE>

          Notes to Financial Statements

        Commonwealth Income & Growth Fund, Inc.

         Report of Independent Auditors

         Balance sheet as of February 28, 1998

         Notes to Balance Sheet

        Commonwealth Capital Corp.

         Report of Independent Auditors

         Consolidated Balance Sheet as of February 28, 1998

         Notes to Consolidated Balance Sheet

(a) (2) Schedules.

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

(a) (3) Exhibits.

         * 3.1 Certificate of Limited Partnership

         * 3.2 Agreement of Limited Partnership

         27 Financial Data Schedule

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

(b) Reports on Form 8-K.

    NOT APPLICABLE

(c) Exhibits.

<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 March 27, 1998 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 March 31, 1999.
 
          SIGNATURE                      CAPACITY                   
------------------------------  ---------------------------  
 
  /s/ GEORGE S. SPRINGSTEEN     Chairman, President and Sole Director of
------------------------------  Commonwealth Income & Growth Fund, Inc. 
  George S. Springsteen         
 


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


    /s/ KATHLEEN S. ENSCOE      Controller of Commonwealth Income & Growth Fund,
------------------------------  Inc.
  Kathleen S. Enscoe