REDWOOD EQUIPMENT LEASING INCOME FUND
                                                   L.P.
                                           Letter to Investors


                                                    1

<PAGE>




                                            1996 ANNUAL REPORT

                                              March 15, 1997

Dear Investor:

         This  annual  report for  Redwood  Equipment  Leasing  Income Fund L.P.
contains financial results for the years ended December 31, 1996, 1995 and 1994.
The Partnership began revenue producing operations as of April 1, 1990. To date,
the Partnership has acquired equipment subject to leases totaling $11,964,830.

CASH DISTRIBUTIONS

         The  Partnership  made a cash  distribution  on  February  10,  1997 to
Unitholders of $.50 per Unit, representing an 8% annualized distribution rate on
original capital. Distributions during 1996 totaled $2.00 per Unit, representing
an 8% distribution  rate on original capital.  Since inception,  the Partnership
has made total  distributions of $6,494,743 to Unitholders,  representing 64.75%
of gross offering proceeds.

OPERATIONS

         The  Partnership  was formed in October  1989 to acquire a portfolio of
equipment held for lease to third parties. Offering proceeds of $10,029,500 were
raised and the Partnership began operations on April 1, 1990.

         During 1996, direct finance lease revenue declined approximately 14% as
compared to 1995. This decrease  resulted from scheduled lease  terminations and
an expected  decline in the portion of the lease  payment  recognized as revenue
(versus a return of principal) for existing leases.

         The  Partnership  recognized a net gain of $6,575 on the sale of leased
equipment  during the year. The Partnership  also recorded as a net gain $29,516
from the sale of equipment  originally leased to Financial News Network ("FNN").
Pursuant to the  Partnership's  rights as a Class 2 Equipment  Lessor  under the
Chapter 11 Plan of Reorganization  for FNN, the Partnership had received a share
in a contingent  revenue stream.  In 1996, the Partnership  received  $29,516 in
final  settlement  of its claims  against FNN, and because the  Partnership  had
previously written off all receivables relating to the FNN transaction, recorded
the full amount received as a net gain in 1996.

ACQUISITIONS

         During 1996, the Partnership made no equipment lease acquisitions.  
The Partnership

                                                    2

<PAGE>


was not able to identify new lease  transactions which it deemed acceptable from
a risk and credit standpoint.

OUTLOOK

         The  Partnership  was  organized  in  October  1989  with  an  expected
Investment  Period of five to seven years during which the  Partnership has been
committed to investment in new equipment leases. The Partnership has reached the
end of the Investment Period, entered the Liquidation Phase (period during which
the Partnership's existing lease portfolio matures), and is now distributing the
remaining  funds (net of reserves of  approximately  $136,000) to investors.  On
March  4,  1997,  the   Partnership   distributed   $2,407,320  to  Unitholders,
representing  a return of capital of $6.00 per Unit,  which  increases the total
distributions  from the Partnership to $8,902,063 to  Unitholders,  or 88.75% of
gross operating proceeds.  Future quarterly dividends will be dependent on funds
generated from operations, principal payments and proceeds from lease sales.

Very truly yours,



John M. Prugh, President
Redwood Leasing, Inc.
General Partner

                                                3

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                                  REDWOOD EQUIPMENT LEASING INCOME FUND
                                                         L.P.
                                                 Financial Statements


                                                           4

<PAGE>


                                             INDEPENDENT AUDITORS' REPORT



The Partners
Redwood Equipment Leasing Income Fund L.P.:

We have audited the  accompanying  balance sheets of Redwood  Equipment  Leasing
Income Fund L.P.  (the  "Partnership")  as of December 31, 1996 and 1995 and the
related  statements of operations,  partners' capital and cash flows for each of
the years in the  three-year  period ended  December 31, 1996.  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 Redwood  Equipment  Leasing
Income  Fund L.P.  as of  December  31,  1996 and 1995,  and the  results of its
operations  and its cash  flows for each of the years in the  three-year  period
ended  December 31, 1996,  in  conformity  with  generally  accepted  accounting
principles.



                                         KPMG PEAT MARWICK LLP

Baltimore, Maryland
January 24, 1997, except for note 8 as
   to which the date is March 4, 1997

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                                      Redwood equipment leasing income fund L.P.
                                                     Balance Sheets


<TABLE>
<CAPTION>
                                                                                         December 31,

                                                                                1996                    1995


Assets

<S>                                                                       <C>                      <C>            
  Cash and cash equivalents                                               $     2,772,471          $     2,500,697
  Lease payments receivable                                                        33,098                   68,663
  Deposit                                                                          10,000                   10,000
  Investment in direct finance leases, net (Note 4)                             1,631,824                2,419,556

    Total assets                                                          $     4,447,393          $     4,998,916


Liabilities and Partners' Capital

  Accounts payable and accrued expenses                                   $        18,656          $        16,813
  Amounts due to affiliates                                                        12,403                   15,910
  Advance rentals                                                                  40,634                   18,521

    Total liabilities                                                              71,693                   51,244


  Partners' Capital (Note 6)
    General Partner                                                               (85,305)                 (73,866)
    Assignor Limited Partner
      Assignment of limited partnership interests - $25 stated
        value per unit, 401,180 units outstanding                               4,460,235                5,020,712
      Limited partnership interests - $25 stated value per
        unit, 40 units outstanding                                                    570                      626
    Special Limited Partners                                                          200                      200

    Total partners' capital                                                     4,375,700                4,947,672

    Total liabilities and partners' capital                               $     4,447,393          $     4,998,916
</TABLE>

See accompanying notes to financial statements


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<PAGE>

                                      Redwood Equipment Leasing Income und L.P.
                                               Statements of Operations
                                           For the years ended December 31,

<TABLE>
<CAPTION>
                                                              1996                  1995                1994

Revenues
<S>                                                     <C>                  <C>                   <C>            
  Direct finance lease revenue                          $       183,177      $       213,254       $       226,904
  Interest income                                               133,270              149,421               120,975
  Net gain from sale of leased equipment (Note 4)                36,091              155,569                21,725

                                                                352,538              518,244               369,604


Expenses
  Administrative expenses including
    amounts to related party                                     62,348               65,552                61,581
  Management fees to advisor (Note 3)                            13,034               16,754                21,772
  Professional fees                                              16,450               16,208                17,091
  Reserve for residual value loss (Note 4)                                  --                   --          7,862
  Amortization of acquisition and
    organization costs                                           13,862               15,141                23,694

                                                                105,694              113,655               132,000


         Net earnings                                     $     246,844        $     404,589        $      237,604


         Net earnings per unit of assignee
  limited partnership interest (Note 6)                   $        0.60        $        0.99        $         0.58
</TABLE>

See accompanying notes to financial statements


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<PAGE>

                                      Redwood equipment leasing income fund L.P.
                                            Statements of Partners' Capital
                                           For the years ended December 31,
<TABLE>
<CAPTION>
                                       Assignor Limited Partner

                                      Assignment
                                      of Limited         Limited         Special
                                      Partnership      Partnership       Limited         General
                                       Interests        Interests       Partners         Partner         Total


<S>                             <C>                    <C>           <C>           <C>                  <C>               
Balance at December 31, 1993    $    5,996,145         $   724       $     200     $    (53,958)        $  5,943,111

Net earnings                           232,829              23              --            4,752              237,604

Distributions to partners             (802,360)            (80)             --          (16,376)            (818,816)


Balance at December 31, 1994         5,426,614             667             200          (65,582)           5,361,899

Net earnings                           396,458              39              --            8,092              404,589

Distributions to partners             (802,360)            (80)             --          (16,376)            (818,816)


Balance at December 31, 1995         5,020,712             626             200          (73,866)           4,947,672

Net earnings                           241,883              24              --            4,937              246,844

Distributions to partners             (802,360)            (80)             --          (16,376)            (818,816)


Balance at December 31, 1996    $    4,460,235   $         570   $         200     $    (85,305)          $4,375,700
</TABLE>

See accompanying notes to financial statements


                                                           8

<PAGE>

                                      Redwood equipment leasing income fund L.P.
                                               Statements of Cash Flows
                                           For the years ended December 31,

<TABLE>
<CAPTION>

                                                              1996                  1995                 1994


         Cash flows from operating activities
<S>                                                                       <C>             <C>            <C>            
  Net earnings                                                             $   246,844    $   404,589    $   237,604
  Adjustments to reconcile net earnings to net
    cash provided by operating activities
      Amortization of acquisition and
        organization costs                                                      13,862         15,141         23,694
      Net gain from sale of leased equipment                                   (36,091)      (155,569)       (21,725)
      Reserve for residual value loss                                             --             --            7,862
      Changes in assets and liabilities
        Decrease in lease payments receivable                                   35,565          7,624         87,513
        Increase (decrease) in accounts payable and
          accrued expenses                                                       1,843         (7,161)         9,641
        (Decrease) increase in amounts due to affiliates                        (3,507)         2,769         (2,888)
        Increase (decrease) in advance rentals                                  22,113         (5,292)        (5,293)

          Net cash provided by operating activities                            280,629        262,101        336,408

         Cash flows from investing activities
  Acquisition of direct finance leases                                            --         (543,914)    (1,485,885)
  Principal received on direct finance leases                                  710,824        692,800        883,681
  Termination of direct finance leases                                          99,137        263,334        529,105

Net cash provided by (used in) investing activities                            809,961        412,220        (73,099)

         Cash flows from financing activities-
  distributions to partners                                                   (818,816)      (818,816)      (818,816)


                    Net increase (decrease) in cash and cash equivalents       271,774       (144,495)      (555,507)

         Cash and cash equivalents
  Beginning of period                                                        2,500,697      2,645,192      3,200,699

  End of period                                                            $ 2,772,471    $ 2,500,697    $ 2,645,192
</TABLE>

See accompanying notes to financial statements

                                                           9

<PAGE>
                   REDWOOD EQUIPMENT LEASING INCOME FUND L.P.
                         Notes to Financial Statements

                                December 31, 1996

(1)    Organization

       Redwood  Equipment  Leasing  Income Fund L.P.  (the  "Partnership")  is a
       Delaware  limited  partnership  formed in  October  1989 to engage in the
       business  of  owning  and  leasing  equipment.  The  Partnership  offered
       assignee  units  of  limited  partnership   interests  (the  "Units")  to
       investors  (the  "Investors").  The General  Partner is Redwood  Leasing,
       Inc., a Maryland  corporation and an affiliate of Armata  Financial Corp.
       ("Armata"), the Partnership's selling agent. The assignor limited partner
       is Redwood  Leasing  Holding  Company,  Inc., an affiliate of the General
       Partner.  The special  limited  partners  are Maryland  National  Leasing
       Services Corporation ("MNLSC") and Realty Associates Limited Partnership,
       another affiliate of the General Partner.  The  Partnership's  management
       agent is Signet Leasing and Financial Corporation ("Signet").

  (2)  Summary of Significant Accounting Policies

       The accompanying  financial  statements have been prepared on the accrual
       basis of accounting.  The Partnership  reports its operating  results for
       income tax purposes on the accrual basis.  No provision for income tax is
       made because any  liability  for income  taxes is that of the  individual
       partners and not that of the Partnership.

       Costs  associated  with the  marketing  of the Units to the  public  were
       offset against the related partners'  capital.  Costs associated with the
       organization of the Partnership  were capitalized and were amortized on a
       straight-line basis over a period of five years, ending in 1995.

       The  Partnership  considers  all  short-term  investments  with  original
       maturities  of three  months or less as cash  equivalents.  Cash and cash
       equivalents  consist  entirely of cash,  money market  accounts and other
       liquid short term investments and are stated at cost, which  approximates
       market value at December 31, 1996 and 1995.

       For direct  finance  leases,  the excess  rental  receivables,  including
       estimated  residual  values,  over the cost of the equipment are deferred
       and credited to earnings on a contractual basis that approximates a level
       yield on the net investment  over the base lease terms.  The  Partnership
       records the estimated residual value of leased equipment at the inception
       of a lease,  based upon  management's  evaluation  of the market value of
       such equipment at the expiration of the base lease term. The  Partnership
       and Signet  review the fair value of the  receivable  and residual  value
       components of all current leases and make appropriate  adjustments  where
       deemed necessary.

       Acquisition  costs incurred in obtaining the leases are  capitalized  and
amortized over the lease terms.


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<PAGE>

                   REDWOOD EQUIPMENT LEASING INCOME FUND L.P.

                    Notes to Financial Statements (continued)


  (2)  Summary of Significant Accounting Policies (continued)

       Management  of  the  Partnership  has  made a  number  of  estimates  and
       assumptions  relating to the reporting of assets,  liabilities,  revenues
       and expenses to prepare these  financial  statements  in conformity  with
       generally  accepted  accounting  principals.  Actual results could differ
       from those estimates.

       The fair value of financial  instruments  is  determined  by reference to
       various market data and other valuation considerations. The fair value of
       financial instruments approximate their recorded value.

  (3)  Related Party Transactions

       The General  Partner  earned an asset  management fee of $24,564 in 1996,
       1995 and 1994 and received or was due  reimbursement of $28,154,  $37,508
       and  $33,447  for  certain  costs  incurred  relating  to  administrative
       services for the  Partnership for the years ended December 31, 1996, 1995
       and 1994, respectively.

       As the  management  agent,  Signet is entitled to an equipment  and lease
       management fee equal to 1.5% of gross lease rental  payments as well as a
       fee for services  provided in acquiring and  disposing of leased  assets.
       For the years ended  December  31,  1996,  1995 and 1994,  Signet  earned
       $13,034,  $16,754 and $21,772 in  equipment  lease and  management  fees,
       respectively.  In  addition,  Signet  earned  $8,159 and $13,391 in lease
       acquisition  fees  for the  years  ended  December  31,  1995  and  1994,
       respectively.

       Commencing  in the second  quarter of 1994,  the  Partnership  also began
       acquiring lease transactions from Chesapeake Industrial Leasing Co., Inc.
       (Chesapeake).  Under the terms of the Partnership's agreement, Chesapeake
       earned  $2,669 and $3,611  during the years ended  December  31, 1995 and
       1994, respectively for providing new leases to the Partnership.

  (4)  Leases

       Investment in direct finance leases with initial terms ranging from 34 to
       82 months, at December 31, 1996 and 1995, includes the following:

<TABLE>
<CAPTION>
                                                                        1996                         1995

<S>                               <C>            <C>        
Lease payments receivable         $ 1,259,277    $ 2,178,763
Estimated residual values             542,237        572,852
Acquisition fees, net                  18,516         32,378
Unearned income                      (165,650)      (341,881)
Reserve for residual value loss       (22,556)       (22,556)

                                  $ 1,631,824    $ 2,419,556

</TABLE>

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<PAGE>


                   REDWOOD EQUIPMENT LEASING INCOME FUND L.P.

                    Notes to Financial Statements (continued)


  (4)  Leases (continued)

       In 1995,  the  Partnership  acquired  three new  investments in equipment
       under direct finance leases,  including acquisition fees, two from Signet
       for  $416,245  and one from  Chesapeake  for  $127,669.  The terms of the
       leases range from 36 to 56 months with total monthly  payments of $10,519
       due in advance. The equipment under lease consists of computer equipment,
       office furniture and restaurant equipment.

       In 1994, the  Partnership  acquired  several new investments in equipment
       under direct finance leases from Signet and  Chesapeake.  The partnership
       acquired  six  lease  schedules  from  Signet  for  $1,077,085  including
       acquisition  fees, and four lease schedules from Chesapeake for $408,800.
       The terms of the leases range from 34 to 58 months with  initial  monthly
       payments totaling $34,690,  payable in advance. The equipment under lease
       consists of an embroidery machine, computer equipment,  office furniture,
       golf course maintenance equipment, an automatic baler and forklifts.

       During 1996, one lease expired and another lessee  purchased a portion of
       its equipment  prior to the end of its lease.  The  Partnership  received
       $69,621 and recorded a gain of $6,575 from these transactions.

       During 1995, five lease schedules from two lessees expired.  In the first
       transaction,  the Partnership  sold the equipment to a lessee for $30,000
       and used $43,752 of its existing reserves. No additional gain or loss was
       recorded on this sale.  In previous  years,  the  Partnership  and Signet
       reviewed the receivable  and residual value  components of this lease and
       recorded a reserve of $7,862  against the residual  value during 1994. In
       the remaining transactions,  the Partnership sold the equipment from four
       lease  schedules  to the  lessee  for  $148,800  and  recorded  a gain of
       $38,035. Sale proceeds of $33,000 from the final transaction was received
       by the Partnership during the first quarter of 1996.

       In  May  1996  and  June  1995,  pursuant  to  the  Chapter  11  Plan  of
       Reorganization for Financial News Network (FNN), the Partnership received
       and recorded $29,516 and $117,534,  respectively, as a net gain from sale
       of leased equipment from Data Broadcasting Corporation (successor to FNN)
       as final settlement of the  Partnership's  Class 2 claim against FNN. The
       Partnership had written off all receivables  relating to this transaction
       in 1990.

       During 1994,  one lease expired and the  Partnership  agreed to the early
       termination  of  two  other  leases.  In  the  first   transaction,   the
       Partnership sold equipment to a lessee for $185,000 which equaled the net
       value  of the  transaction  at the  expiration  of the  lease,  including
       deducted reserves.  In the two early lease terminations,  the Partnership
       received  $343,105  and  recorded a gain of $20,725  from the sale of the
       equipment.  In addition,  the partnership  received an additional  $1,000
       payment from a lessee whose lease expired in 1992.

       All current  leases in the  Partnership's  portfolio  are  classified  as
direct finance leases.

                                                          12

<PAGE>


                   REDWOOD EQUIPMENT LEASING INCOME FUND L.P.

                    Notes to Financial Statements (continued)


  (4)  Leases (continued)

       Revenues  from lessees which  individually  provided more than 10% of the
       revenues  accounted  for  approximately  87% of the direct  finance lease
       revenues for the year ended December 31, 1996 (four lessees). At December
       31, 1996,  amounts from these lessees  comprised of 89% of the investment
       in direct finance lease balance and 100% of the lease payments receivable
       balance.

       Lease payments for future years are as follows:
<TABLE>
<CAPTION>

<S>                                                                        <C>         
                                    1997                                   $    722,229
                                    1998                                        388,682
                                    1999                                        133,741
                                    2000                                         14,625

                                    Total                                  $  1,259,277
</TABLE>


  (5)  Earnings for Federal Income Tax Purposes

       The  Partnership's  earnings for federal  income tax purposes for each of
       the years in the  three-year  period ended  December 31, 1996 differ from
       the net earnings for financial  reporting  purposes due to differences in
       accounting  for  leases,  the  use of  accelerated  depreciation  for tax
       purposes and the timing of investment loss  deductions.  A reconciliation
       of net earnings for financial  reporting  purposes to earnings for income
       tax purposes is as follows:
<TABLE>
<CAPTION>

                                                                    1996          1995            1994

<S>                                                              <C>           <C>             <C>      
         Net earnings for financial reporting purposes           $246,844      $404,589        $ 237,604

         Excess lease revenue in converting direct finance
           leases to operating leases                             658,494       657,890          862,513

         Excess lease revenue (losses) from lease
           terminations                                            37,811       (14,928)         123,452

         Tax depreciation on direct finance leases
           converted to operating leases                         (515,724)     (852,146)        (997,457)

         Acquisition fee amortization relating to direct
           finance leases converted to operating leases                ---         (374)          (5,428)

         Advance rentals                                           21,868        (5,291)          (5,292)

         Reserve for investment loss not currently
           deductible for tax purposes                                 ---       (2,530)           7,862

         Earnings for income tax purposes                       $ 449,293     $ 187,210        $ 223,254

</TABLE>

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<PAGE>

                   REDWOOD EQUIPMENT LEASING INCOME FUND L.P.

                    Notes to Financial Statements (continued)


  (6)  Partners' Capital

       The  Partnership  Agreement  provides,  among other  provisions,  for the
following:

       (a) The Partnership consists of the General Partner, the assignee limited
           partners, the assignor limited partner and special limited partners.

       (b) Distributions   to  the  Partners   relating  to  operations  of  the
           Partnership  are  based on  distributable  cash,  as  defined  in the
           Partnership  Agreement.  Assignee limited partners receive 98% of net
           cash flow and the General Partner  receives 2%. Net earnings per Unit
           disclosed  on the  Statements  of  Operations  is based upon  401,180
           Units.

       (c) Net proceeds of sale or financing of the leases will be distributed
           as follows:

           o  99% to assignee  limited  partners  and 1% to the General  Partner
              until each  assignee  limited  partner has  recovered his original
              capital contribution in full and received a cumulative, compounded
              daily annual return of 12% of his adjusted  capital balance to the
              extent that such return has not been provided  from  distributable
              cash and net disposition proceeds.

           o  To the General  Partner until the General  Partner has received an
              amount equal to its original capital contribution.

           o  Any  remainder  will be  distributed  90% to the assignee  limited
              partners,  1% to the General Partner and 9% to the special limited
              partners.

       (d) The assignee limited partners may elect to become substitute  limited
           partners, as defined in the Partnership  Agreement.  Assignee limited
           partners who elect to become substitute limited partners will receive
           one limited partnership  interest for each Unit they convert and will
           not be able to  reexchange  their  limited  partnership  interest for
           Units.

       (e) Restrictions exist regarding transferability or disposition of 
           partnership interests.

  (7)  Distributions to Investors

       Distributions  of cash to investors  during  1996,  1995 and 1994 totaled
       $818,816 in each year,  of which 98% was  allocated  to assignee  limited
       partnership unit holders.  These distributions were derived from net cash
       provided by operating  activities,  principal  payments on direct finance
       leases and certain other investing activities.

                                                          14

<PAGE>


                   REDWOOD EQUIPMENT LEASING INCOME FUND L.P.

                    Notes to Financial Statements (continued)


  (8)  Subsequent Events (unaudited)

       In  February  1997  the  Partnership  made a cash  distribution  totaling
       $204,704 of which 98% was allocated to assignee  limited  partners.  This
       distribution  was derived from net cash provided by operating  activities
       plus  cash  available  from  certain  investing  activities.  Holders  of
       assignee limited  partnership  interests  received cash  distributions of
       $.50 per $25 Unit.

       The Partnership made a liquidating cash distribution  totaling $2,431,636
       in March 1997 of which 99% was  allocated to assignee  limited  partners.
       This distribution was derived from the  partnership's  cash reserves (net
       of  reserves of  approximately  $136,000).  Holders of  assignee  limited
       partnership interests received a return of capital distribution of $6 per
       $25 Unit.

                                                          15

<PAGE>


  Directors and Executive Officers


  Redwood Leasing, Inc.
  General Partner

           John M. Prugh
           President and Director

           Peter E. Bancroft
           Vice President and Director

           Terry F. Hall
           Secretary

           Timothy M. Gisriel
           Treasurer

           Form 10-K

  A copy of the Partnership's  Annual Report on Form 10-K for 1996 as filed with
the Securities and Exchange Com mission is available to partners  without charge
on request by writing to:

           Investor Relations
           Redwood Leasing, Inc.
           225 East Redwood Street
           Baltimore, Maryland 21202

                                                  Auditors

           KPMG Peat Marwick LLP
           111 South Calvert Street
           Baltimore, Maryland 21202

                                               Legal Counsel

           Piper & Marbury
           1100 Charles Center South
           36 South Charles Street
           Baltimore, Maryland 21201


                                            Further Information

Please submit changes in name, address,    For further information or questions
investment representative and distributionregarding your investment, please call
instructions to Investor Relations at the Denise Shaduk, Investment Coordinator,
at the above address                                      at (410) 727-4083.


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