10-K 1 ten-k.txt TEN-K.TXT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 33-69996 COMMONWEALTH INCOME & GROWTH FUND I (Exact name of registrant as specified in its charter) Pennsylvania 23-2735641 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 470 John Young Way Exton, PA 19341 (Address, including zip code, of principal executive offices) (610) 594-9600 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (ii) has been subject to such filing requirements for the past 90 days: YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. DOCUMENTS INCORPORATED BY REFERENCE (Specific sections incorporated are identified under applicable items herein) Certain exhibits to the Company's Registration Statement on Form S-1 (File No. 33-69996) and Annual Report on Form 10-K for the fiscal year ended December 31, 2001 are incorporated by reference as Exhibits in Part IV of this Report. PART I ITEM 1: BUSINESS GENERAL Commonwealth Income and Growth Fund I ( the "Partnership") was formed on August 26, 1993 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 December 17, 1993 (the "Offerings"). The Partnership terminated its offering of Units on May 11, 1995, with 631,358 Units ($12,623,682) admitted as Limited Partners of the Partnership. See "The Glossary" below for the definition of capitalized terms not otherwise defined in the text of this report. PRINCIPAL INVESTMENT OBJECTIVES The Partnership was formed for the purpose of acquiring various types of Equipment, including computer peripheral and other similar capital equipment. The Partnership utilized the net proceeds of the Offering to purchase IBM and IBM compatible computer peripheral and other similar capital equipment. The Partnership utilizes Retained Proceeds and debt financing (not to exceed 30% of the aggregate cost of the Equipment owned or subject to Conditional Sales Contract by the Partnership at the time the debt is incurred) to purchase additional Equipment. The Partnership acquires and leases Equipment principally to U.S. corporations and other institutions pursuant to Operating Leases. The Partnership retains the flexibility to enter into Full Payout Net Leases and Conditional Sales Contracts, but has not done so. The Partnership's principal investment objectives are to; (a) acquire, lease and sell Equipment to generate revenues from operations sufficient to provide quarterly cash distributions to Limited Partners; (b) preserve and protect Limited Partners' capital; (c) use a portion of Cash Flow and Net Disposition Proceeds derived from the sale, refinancing or other disposition of Equipment to purchase additional Equipment; and (d) refinance, sell or otherwise dispose of Equipment in a manner that will maximize the proceeds to the Partnership. THERE CAN BE NO ASSURANCE THAT ANY OF THESE OBJECTIVES WILL BE ATTAINED. Limited Partners do not have the right to vote on or otherwise approve or disapprove any particular investment to be made by the Partnership. Although the Partnership has acquired predominately new Equipment, the Partnership may purchase used Equipment. Generally, Equipment is acquired from manufacturers, distributors, leasing companies, agents, owner-users, owner-lessors, and other suppliers upon terms that vary depending upon the Equipment and supplier involved. Manufacturers and distributors usually furnish a limited warranty against defects in material and workmanship and some purchase agreements for Equipment provide for service and replacement of parts during a limited period. Equipment purchases are also made through lease brokers and on an ad hoc basis to meet the needs of a particular lessee. 2 As of December 31, 2001, 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, 2001, 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, historically, that the values of peripheral equipment have been affected less dramatically by changes in technology than have the values of central processing units. An equipment user who upgrades to a more advanced central processor generally can continue to use his existing peripheral equipment. Peripheral equipment nevertheless is subject to declines in value as new, improved models are developed and become available. Technological advances and other factors, discussed below in Management Discussion and Analysis, have at times caused dramatic reduction in the market prices of older models of IBM and IBM compatible computer peripheral equipment from the prices at which they were originally introduced. Other Equipment-Restrictions. The Partnership acquires computer peripheral equipment, such as tape drives, disk drives, tape controllers, disk controllers, printers, terminals and related control units, all of which are in some way related to the process of storing, retrieving and processing information by 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 3 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, 2001, the Partnership has acquired a diversified Equipment portfolio, which it has leased to 22 different companies located throughout the United States. Approximately 50% of the Equipment acquired by the Partnership consists of workstations, department servers and enterprise servers. Approximately 26% of the Equipment acquired by the Partnership consists of tape subsystems. Approximately 3% of the Equipment acquired by the Partnership consists of printers. Approximately 4% of the Equipment acquired by the Partnership consists of communication controllers. Approximately 9% of the Equipment acquired by the Partnership consists of Escon drivers. Approximately another 6% of the Equipment acquired by the Partnership consists of optical storage. Approximately 2% of the Equipment acquired by the Partnership consists of Routers. 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 to date has purchased, and in the future intends to continue to purchase only Equipment that is subject to a lease or for which a lease or similar agreement will be entered into contemporaneously with the consummation of the Partnership's acquisition of the Equipment. The General Partner to date has leased and in the future intends to lease most of the Equipment purchased by the Partnership to third parties pursuant to Operating Leases. Operating Leases are relatively short-term (12 to 48 month) leases under which the aggregate noncancellable rental payments during the original term of the lease are not sufficient to permit the lessor to recover the purchase price of the subject Equipment. The Equipment may also be leased pursuant to Full Payout Net Leases. Full Payout Net Leases are leases under which the aggregate noncancellable rental payments during the original term of the lease are at least sufficient to recover the purchase price of the subject Equipment. It is anticipated that the Partnership will enter into few, if any, Full Payout net Leases. The General Partner may also enter into Conditional Sales Contracts for Equipment. A Conditional Sales Contract generally provides that the noncancellable payments to the seller over the term of the contract are sufficient to recover the investment in such Equipment and to provide a return on such investment. Under a Conditional Sales Contract, the seller reserves title to, and retains a security interest in, the Equipment until the Purchase Price of the Equipment is paid. As of December 31, 2001, 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 4 lessees for Operating or Full Payout Net Leases; the type and use of Equipment and its anticipated residual value; the business of the lessee and its credit rating; the availability and cost of financing; regulatory considerations; the accounting treatment of the lease sought by the lessee or the Partnership; and competitive factors. An Operating Lease generally represents a greater risk to the Partnership than a Full Payout Net Lease, because in order to recover the purchase price of the subject Equipment and earn a return on such investment, it is necessary to renew or extend the Operating Lease, lease the Equipment to a third party at the end of the original lease term, or sell the Equipment. On the other hand, the term of an Operating Lease is generally much shorter than the term of a Full Payout Net Lease, and the lessor is thus afforded an opportunity under an Operating Lease to re-lease or sell the subject Equipment at an earlier stage of the Equipment's life cycle than under a Full Payout Net Lease. Also, the annual rental payments received under an Operating Lease are ordinarily higher than those received under a Full Payout Net Lease. The Partnership's policy is to generally enter into "triple net leases" (or the equivalent, in the case of a Conditional Sales Contract) which typically provide that the lessee or some other party bear the risk of physical loss of the Equipment; pay taxes relating to the lease or use of the Equipment; maintain the Equipment; indemnify the Partnership-lessor against any liability suffered by the Partnership as the result of any act or omission of the lessee or its agents; maintain casualty insurance in an amount equal to the greater of the full value of the Equipment and a specified amount set forth in the lease; and maintain liability insurance naming the Partnership as an additional insured with a minimum coverage which the General Partner deems appropriate. In addition, the Partnership may purchase "umbrella" insurance policies to cover excess liability and casualty losses, to the extent deemed practicable and advisable by the General Partner. As of December 31, 2001, all leases that have been entered into are "triple net leases". The General Partner has not established any standards for lessees to which it will lease Equipment and, as a result, there is not an investment restriction prohibiting the Partnership from doing business with any lessees. However, a credit analysis of all potential lessees is undertaken by the General Partner to determine the lessee's ability to make payments under the proposed lease. The General Partner may refuse to enter into an agreement with a potential lessee based on the outcome of the credit analysis. The terms and conditions of the Partnership's leases, or Conditional Sales Contracts, are each determined by negotiation and may impose substantial obligations upon the Partnership. Where the Partnership assumes maintenance or service obligations, the General Partner generally causes the Partnership to enter into separate maintenance or service agreements with manufacturers or certified maintenance organizations to provide such services. Such agreements generally require annual or more frequent adjustment of service fees. As of December 31, 2001, the Partnership has not entered into any such agreements. BORROWING POLICIES The General Partner, at its discretion, may cause the Partnership to incur debt in the maximum aggregate amount of 30% of the aggregate cost of the Equipment owned, or subject to Conditional Sales Contract, by the Partnership at the time the debt is incurred. The Partnership incurs 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, 2001, the aggregate nonrecourse debt outstanding of $501,000 was 15.1% of the aggregate cost of the Equipment owned. 5 The Partnership has and may continue to 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, 2001, the Partnership has not exercised this option. To date, the General Partner has caused the Partnership to borrow funds at fixed interest rates and plans to continue borrowing additional funds, to the fullest extent practicable. 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, 2001, 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, 2001, the Partnership has not refinanced any of its debt. Refinancing, if achievable, may permit the Partnership to retain an item of Equipment and at the same time to generate additional funds for reinvestment in additional Equipment or for distribution to the Limited Partners. 6 LIQUIDATION POLICIES The General Partner intends to cause the Partnership to begin disposing of its Equipment in approximately January 2004. Notwithstanding the Partnership's objective to sell all of its assets and dissolve by December 31, 2004, 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, 2004, 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. 7 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 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 from IBM. Investments As of March 29, 2002, the Partnership has purchased, or has made the commitment to purchase, the following Equipment:

Reserves Because the Partnership's leases are on a "triple-net" basis, no permanent reserve for maintenance and repairs will be established from the Offering proceeds. However, the General Partner, in its sole discretion, may retain a portion of the Cash Flow and Net Disposition Proceeds available to the Partnership for maintenance, repairs and working capital. There are no limitations on the amount of Cash Flow and Net Disposition Proceeds that may be retained as reserves. Since no reserve will be established if available Cash Flow of the Partnership is insufficient to cover the Partnership's operating expenses and liabilities, it may be necessary for the Partnership to obtain additional funds by refinancing its Equipment or borrowing. General Restrictions Under the Partnership Agreement, the Partnership is not permitted, among other things, to: (a) invest in junior trust deeds unless received in connection with the sale of an item of Equipment in an aggregate amount which does not exceed 30% of the assets of the Partnership on the date of the investment; (b) invest in or underwrite the securities of other issuers; (c) acquire any Equipment for Units; (d) issue senior securities (except that the issuance to lenders of notes or other evidences of indebtedness in connection with the financing or refinancing of Equipment or the Partnership's business shall not be deemed to be the issuance of senior securities); (e) make loans to any Person, including the General Partner or any of its Affiliates, except to the extent a Conditional Sales Contract constitutes a loan; (f) sell or lease any Equipment to, lease any Equipment from, or enter into any sale- leaseback transactions with, the General Partner or any of its Affiliates; or (g) give the General Partner or any of its Affiliates an exclusive right or employment to sell the Partnership's Equipment. The General Partner has also agreed in the Partnership Agreement to use its best efforts to assure that the Partnership shall not be deemed an "investment company" as such term is detained in the Investment Company Act of 1940. The General Partner and its Affiliates may engage in other activities, whether or not competitive with the Partnership. The Partnership Agreement provides, however, that neither the General Partner nor any of its Affiliates may receive any rebate or "give up" in connection with the Partnership's activities or participate in reciprocal business arrangements that circumvent the restrictions in the Partnership Agreement against dealings with Affiliates. 8 EMPLOYEES The Partnership has no employees and received administrative and other services from a related party, Commonwealth Capital Corp ("Com Cap Corp"), which has 18 employees as of December 31, 2001. ITEM 2: PROPERTIES NOT APPLICABLE ITEM 3: LEGAL PROCEEDINGS On or about May 8, 2000, a complaint captioned Commonwealth Capital Corp V. Gtronics, Inc. was filed by Commonwealth Capital Corp against Gtronics, Inc. (formerly known as Wang Laboratories, Inc.) with the Federal District Court of the Eastern District of Pennsylvania, No. 00-CV-2381. The complaint alleges that the named defendant has not returned the proper equipment stated in the master lease agreement and is seeking restitution for lost monthly rentals, taxes, attorney fees and costs, plus interest. The defendant has filed for a Summary Judgment on February 20, 2001, and the plaintiff has filed an opposition to this Summary Judgment, and it remains pending. On September 29, 2001, the Federal District Court of the Eastern District of Pennsylvania denied the defendant's request for Summary Judgment. As of March 29, 2002, the pre-trial conference was completed. CCC anticipates that the date of the trial will be set up within the next quarter. 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. As of December 31, 2001, there were 936 holders of Units. The Units are not listed on any exchange or permitted to trade on any over-the-counter market. In addition, there are substantial restrictions on the transferability of Units. GENERAL LIMITATIONS Units cannot be transferred without the consent of the General Partner, which may be withheld in its absolute discretion. The General Partner monitors transfers of Units in an effort to ensure that all transfers are within certain safe harbors promulgated by the IRS to furnish guidance regarding publicly 9 traded partnerships. These safe harbors limit the number of transfers that can occur in any one year. The General Partner intends to cause the Partnership to comply with the safe harbor that permits nonexempt transfers and redemptions of Units of up to five percent of the total outstanding interest in the Partnership's capital or profits in any one year. REDEMPTION PROVISION Upon the conclusion of the 30-month period following the termination of the Offering, the Partnership may, at the sole discretion of the General Partner, repurchase a number of the outstanding Units. After such 30 month period, on a semi-annual basis, the General Partner, at its discretion, will establish an amount for redemption, generally not to exceed two percent of the outstanding Units per year, subject to the General Partner's good faith determination that such redemptions will not (a) cause the Partnership to be taxed as a corporation under Section 7704 of the Code or (b) impair the capital or operations of the Partnership. (The Partnership may redeem Units in excess of the two percent limitation if, in the good faith judgment of the General Partner, the conditions imposed in the preceding sentence would remain satisfied.) The redemption price for Units will be 105% of the selling Limited Partner's Adjusted Capital Contributions attributable to the Units for sale. Following the determination of the annual redemption amount, redemptions will occur on a semi-annual basis and all requests for redemption, which must be made in writing, must be on file as of the Record Date in which the redemption is to occur. The General Partner will maintain a master list of requests for redemption with priority being given to Units owned by estates, followed by IRAs and Qualified Plans. All other requests will be considered in the order received. Redemption requests made by or on behalf of Limited Partners who are not affiliated with the General Partner or its Affiliates will be given priority over those made by Limited Partners who are affiliated with the General Partner or its Affiliates. All redemption 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. At December 31, 2001, the General Partner has not redeemed any Units. Additionally, no Limited Partners have requested redemption of their Units. 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 sub partnership); (2) transfers at death; (3) transfers between members of a family (which include brothers and sisters, spouse, ancestors, and lineal descendants); 10 (4) transfers resulting from the issuance of Units by the Partnership in exchange for cash, property, or services; (5) transfers resulting from distributions from Qualified Plans; and (6) any transfer by a Limited Partner in one or more transactions during any 30-day period of Units representing in the aggregate more than five percent of the total outstanding interests in capital or profits of the Partnership. ADDITIONAL RESTRICTIONS ON TRANSFER Limited Partners who wish to transfer their Units to a new beneficial owner are required to pay the Partnership up to $50 for each transfer to cover the Partnership's cost of processing the transfer application and take such other actions and execute such other documents as may be reasonably requested by the General Partner. There is no charge for re-registration of a certificate in the event of a marriage, divorce, death, or trust so long as the transfer is not a result of a sale of the Units. In addition, the following restrictions apply to each transfer: (i) no transfer may be made if it would cause 25% or more of the outstanding Units to be owned by benefit plans; and (ii) no transfer is permitted unless the transferee obtains such governmental approvals as may reasonably be required by the General Partner, including without limitation, the written consents of the Pennsylvania Securities Commissioner and of any other state securities agency or commission having jurisdiction over the transfer. ALLOCATION AND DISTRIBUTION BETWEEN THE GENERAL PARTNER AND THE LIMITED PARTNERS Cash distributions, if any, are made quarterly on March 31, June 30, and September 30, and December 31, of each year. Distributions are made 99% to the Limited Partners and one percent to the General Partner until the Limited Partners have received an amount equal to their Capital Contributions plus the Priority Return; thereafter, cash distributions will be made 90% to Limited Partners and 10% to the General Partner. Distributions made in connection with the liquidation of the Partnership or a Partner's Units will be made in accordance with the Partner's positive Capital Account balance as determined under the Partnership Agreement and Treasury Regulations. The Priority Return is calculated on the Limited Partners' Adjusted Capital Contributions for their Units. The Adjusted Capital Contributions will initially be equal to the amount paid by the Limited Partners for their Units. If distributions at any time exceed the Priority Return, the excess will reduce the Adjusted Capital Contributions, decreasing the base on which the Priority Return is calculated. If the proceeds resulting from the sale of any Equipment are reinvested in Equipment, sufficient cash will be distributed to the Partners to pay the additional federal income tax resulting from such sale for a Partner in a 39.6% federal income tax bracket or, if lower, the maximum federal income tax rate in effect for individuals for such taxable year. Generally, the General Partner is allocated Net Profits equal to its cash distributions (but not less than one percent of Net Profits) and the balance is allocated to the Limited Partners. Net Profits arising from transactions in connection with the termination or liquidation of the Partnership are allocated in the following order: (1) First, to each Partner in an amount equal to the negative amount, if any, of his Capital Account; (2) Second, an amount equal to the excess of the proceeds which would be distributed to the 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. 11 Net Profits and Net Losses are computed without taking into account, in each taxable year of the Partnership, any items of income, gain, loss or deduction required to be specially allocated pursuant to Section 704(b) of the Code and the Treasury Regulation promulgated thereunder. No Limited Partner is required to contribute cash to the capital of the Partnership in order to restore a closing Capital Account deficit, and the General Partner has only a limited deficit restoration obligation under the Partnership Agreement. Quarterly distributions in the following amounts were paid to the Limited Partners during 2001, 2000, and 1999. Quarter Ended 2001 2000 1999 --------------------------------------------------------------------- March 31 $156,205 $242,529 $315,678 June 30 156,205 466,259 315,678 September 30 ---- 156,205 315,678 December 31 ---- 156,207 2,444 ------------------------------------------------ $312,410 $1,021,200 $949,478 ================================================ ALLOCATIONS AND DISTRIBUTIONS AMONG THE LIMITED PARTNERS Except during the Offering Period, Cash Available for Distribution which is allocable to the Limited Partners is apportioned among and distributed to them solely with reference to the number of Units owned by each as of the Record Date for each such distribution. During the Offering Period, Cash Available for Distribution which is allocable to the Limited Partners was apportioned among and distributed to them with reference to both (i) the number of Units owned by each as of each Record Date and (ii) the number of days since the previous Record Date (or, in the case of the first Record Date, the commencement of the Offering Period) that the Limited Partner owned the Units. After the Offering Period, Net Profits, Net Losses and Cash Available for Distribution allocable to the Limited Partners is apportioned among them in accordance with the number of Units owned by each. A different convention was utilized during the Offering Period, whereby Net Profits and Net Losses allocable to Limited Partners were apportioned among them in the ratio which the product of the number of Units owned by a Limited Partner multiplied by the number of days in which the Limited Partner owns such Units during the period bears to the sum of such products for all Limited Partners. In addition, where a Limited Partner transfers Units during a taxable year, the Limited Partner may be allocated Net Profits for a period for which such Limited Partner does not receive a corresponding cash distribution. ITEM 6: SELECTED FINANCIAL DATA The following table sets forth, in summary form, selected financial data for the Partnership as of and for each of the five years ended December 31, 2001. This table is qualified in its entirety by the more detailed information and financial statements presented elsewhere in this report, and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes thereto included herein. 12

Net income (loss) per unit is computed based upon net income (loss) allocated to the Limited Partners and the weighted average number of equivalent Units outstanding during the year. Cash distribution per Unit is computed based upon distributions allocated to the Limited Partners and the weighted average number of equivalent Units outstanding during the year. 13 ITEM 7: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES Financial Reporting Release No. 60, which was recently released by the Securities and Exchange Commission, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Our significant accounting policies are described in Note 1 of the Notes to the Consolidated Financial Statements. The significant accounting policies that we believe are the most critical to aid in fully understanding our reported financial results include the following: REVENUE RECOGNITION Through December 31, 2001, 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. 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. Depreciation on computer equipment for financial statement purposes is based on the straight-line method over estimated useful lives of four years. LIQUIDITY AND CAPITAL RESOURCES The Partnership's primary sources of capital for the years ended December 31, 2001, 2000, and 1999 were cash from operations of $257,000, $513,000, and $752,000, respectively and proceeds from the sale of computer equipment of $230,000, $365,000, and $590,000, respectively. The primary uses of cash were for capital expenditures for new equipment totaling $199,000, and $161,000 for the years ended December 31, 2001, and 1999, respectively, and for the payment of distributions to partners totaling $315,000 for 2001, $1,031,000 for 2000, and $959,000, in 1999. 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, 2001 and 2000 the Partnership had approximately $1,000 and $95,000, 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. Future minimum rentals on noncancellable operating leases increased to $760,000 in 2001, up from $88,000 in 2000, but down from $1,153,000 in 1999 due to the purchase of new computer equipment leases in 2001. This particular industry has experienced a decrease in lease rates during 2001 due to an ongoing decrease in interest rates. As of December 31, 2001, the Partnership had future minimum rentals on noncancellable operating leases of $308,000 for the year ended 2002 and $452,000 thereafter. The Partnership incurred debt in 2001 in the amount of $544,000. No debt was incurred in 2000 or 1999. At December 31, 2001, the outstanding debt was $501,000, with a weighted average interest rate of 7.10% and will be payable through December 2004. The Partnership intends to continue purchasing additional computer equipment with existing cash, as well as when future cash becomes available. In addition, the Partnership may incur debt in purchasing computer equipment in the future. 14 Commonwealth Capital Corp, on behalf of the Partnership and other affiliated partnerships, acquires computer equipment subject to associated debt obligations and lease revenue and allocates a participation in the cost, debt and lease revenue to the various partnerships based on certain risk factors. The Partnership's share of the computer equipment in which they participate at December 31, 2001 was approximately $469,000, which is included in the Partnership's fixed assets on their balance sheet, and the total cost of the equipment shared by the Partnership with other partnerships at December 31, 2001 was approximately $2,867,000. The Partnership's share of the outstanding debt associated with this equipment at December 31, 2001 was approximately $387,000, which is included in the Partnership's liabilities on the balance sheet, and the total outstanding debt at December 31, 2001 related to the equipment shared by the Partnership was approximately $2,338,000. There was no equipment shared by the Partnership as of December 31, 2000. The Partnership's cash flow from operations is expected to continue to be adequate to cover all operating expenses, liabilities, and distributions to Partners during the next 12-month period. If available Cash Flow or Net Disposition Proceeds are insufficient to cover the Partnership expenses and liabilities on a short and long term basis, the Partnership will attempt to obtain additional funds by disposing of or refinancing Equipment, or by borrowing within its permissible limits. The Partnership may also reduce the distributions to its Partners if it deems necessary. Since the Partnership's leases are on a "triple-net" basis, no reserve for maintenance and repairs are deemed necessary. RESULTS OF OPERATIONS For the year ended December 31, 2001, 2000 and 1999, the Partnership recognized income of $954,000, $1,797,000, and $3,005,000 and expenses of $784,000, $2,002,000, and $3,483,000, resulting in net income of $170,000 in 2001, and a net loss of $205,000 and $478,000 for 2000 and 1999, respectively. Lease income decreased to $765,000 in 2001, down from $1,790,000 and $2,996,000 in 2000 and 1999 respectively, primarily due to the expiration of leases in 2000 and entering into newer, smaller leases during 2001. Interest income decreased to $4,000 in 2001 from $7,000 in 2000 and $10,000 in 1999, as a result of rental income being utilized for Partnership distributions for the year ended December 31, 2001, whereas, for the year ended December 31, 2000 and 1999 the rental income was temporarily being invested in money market accounts until being utilized for equipment purchases. Operating expenses, excluding depreciation, consist of accounting, legal, outside service fees and reimbursement of expenses to Com Cap Corp. for administration and operation of the Partnership. The operating expenses totaled approximately $221,000 in 2001, $193,000 in 2000, and $261,000 in 1999. The increase from 2001 to 2000 is primarily attributable to an increase in the annual recalculation of the overhead charges from Com Cap Corp. of approximately $6,000, an increase in professional fees of approximately $32,000, and a decrease in postage fees of approximately $9,000. The decrease in 2000 was primarily attributable to a decrease in the annual recalculation of the overhead charges from Com Cap Corp. The equipment management fee is equal to approximately 5% of the gross lease revenue attributable to equipment, which is subject to operating leases. The equipment management fee decreased to $38,000 in 2001 from $90,000 and $150,000 for 2000 and 1999 respectively, which is consistent with the decrease in lease income. Interest expense decreased to $11,000 for 2001, from $22,000 and $105,000 for 2000 and 1999 respectively as a result of reduced debt from the sale of equipment, and/or the expiration of certain leases in 2001. The majority of new leases with associated debt obligations were acquired late in the third and fourth quarters of 2001, whereby the effect of the additional interest expense won't be seen until 2002. 15 Depreciation and amortization expenses consist of depreciation on computer equipment, amortization of organization costs (for 1999 only), equipment acquisition fees and debt placement fees. Depreciation and amortization during 2001 decreased to $413,000 from $1,476,000 and $2,809,000 in 2000 and 1999 respectively, due to the expiration of leases in 2000 and entering into newer, smaller leases during 2001. The Partnership sold computer equipment with a net book value of $44,000, $484,000, and $698,000 during the years ended December 31, 2001, 2000, and 1999, respectively, for a net gain of $185,000 for the year ended December 31, 2001, and a net loss of $118,000 and $108,000 for the years ended December 31, 2000 and 1999, respectively. The Partnership has reserved $100,000, $104,000, and $50,000 as allowances against accounts receivable for the periods ending December 31, 2001, 2000, and 1999, respectively. The Partnership identified specific computer equipment and associated equipment acquisition costs, which were reevaluated due to technological changes. The Partnership determined that no impairment had occurred for the years ended December 31, 2001 and 2000. In 1999, the Partnership determined that the carrying amount of certain assets was greater than the undiscounted cash flows to be generated by these assets and therefore recorded a charge of $10,000 to depreciation expense to record the assets at their estimated fair value in the year ended December 31, 1999. NET INCOME (LOSS) Net income increased in 2001 to $170,000 from a net (loss) of $205,000 and $478,000 in 2000 and 1999, respectively. The changes in net income (loss) were attributable to the changes in revenues and expenses as discussed above. CASH FLOWS For the year ended December 31, 2001, the Partnership generated cash flow from operating activities of $257,000, which includes net income of $170,000, and gain from the sale of computer equipment of $185,000, and was reduced by depreciation and amortization expenses of $413,000. Other noncash activities included in the determination of the net income includes direct payments of lease income by lessees to banks of $111,000. RECENT ACCOUNTING PRONOUNCEMENTS Business Combinations In June 2001, the FASB issued Statement No. 141, "Business Combinations." The Statement addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, Business Combinations, and FASB Statement No. 38, Accounting for Preacquisiton Contingencies of Purchased Enterprises. All business combinations in the scope of the Statement are to be accounted for using the purchase method. The provisions of the Statement apply to all business combinations initiated after June 30, 2001. The Statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. There was no material, financial condition, or equity upon adoption of Statement No. 141. 16 Goodwill and Other Intangible Assets In June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets." The Statement addresses financial accounting and reporting for goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. It addresses how tangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. The Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The provisions of the Statement are required to be applied starting with fiscal years beginning after December 15, 2001, except that goodwill and intangible assets acquired after June 30, 2001, will be subject immediately to the non-amortization and amortization provisions of the Statement. Early application is permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim financial statements have not previously been issued. The Statement is required to be applied at the beginning of an entity's fiscal year and to be applied to all goodwill and other intangible assets recognized in its financial statements at that date. There was no material impact on earnings, financial condition, or equity upon adoption of Statement No. 142 at January 1, 2002. Impairment or Disposal of Long-Lived Assets In August 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. However, the Statement retains the fundamental provisions of Statement 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. This Statement supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, this Statement retains the requirement of Opinion 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of (by sale, by abandonment, or in distribution to owners) or is classified as held for sale. This Statement also amends ARB No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a temporarily controlled subsidiary. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with earlier application encouraged. The provisions of this Statement generally are to be applied prospectively. The adoption of the Statement on January 1, 2002, did not have a material impact on earnings, financial condition, or equity. ITEM 7.A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Partnership believes its exposure to market risk is not material due to the fixed interest rate of its long-term debt and its associated fixed revenue streams. ITEM 8: FINANCIAL STATEMENTS See financial statements commencing in part IV Item 14. 17 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE NONE 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, 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 470 John Young Way, Suite 300, Exton, PA 19341, and its telephone number is 610-594-9600. The General Partner manages and controls the affairs of the Partnership and has sole responsibility for all aspects of the Partnership's operations. The officers of the General Partner devote such time to the affairs of the Partnership as in the opinion of the General Partner is necessary to enable it to perform its function as General Partner. The officers of the General Partner are not required to spend their full time in meeting their obligations to the Partnership. The directors and officers of the General Partner and key employees of Com Cap Corp. are as follows:

George S. Springsteen, age 67, 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. 18 Kimberly A. Springsteen, age 42, 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. Springsteen was employed with Wheat First Butcher Singer, a broker/dealer headquartered in Richmond, Virginia. While at Wheat First Butcher Singer, Ms. Springsteen, Senior Vice President, served as Marketing Manager for the Direct Investments Department, with over $450,000,000 of investments under management in real estate, equipment leasing and energy-related industries. Ms. Springsteen holds Series 7, 63 and 39 NASD licenses and is a member of the Equipment Leasing Association, Investment Partnership Association, and International Association for Financial Planning. Henry J. Abbott, age 50, 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. Salvatore R. Barila, age 31, is Vice President and Controller of the General Partner and Com Cap Corp. and certain of its subsidiaries where he has been employed since 2000. From 1992 to 2000, Mr. Barila was employed as Corporate Accounting Manager of RCG Information Technology, Inc. Mr. Barila received a BS degree in Accounting from Pace University in 1992. Mr. Barila is a member of the Equipment Leasing Association. John A. Conboy III, age 55, is Assistant Vice President and Accounting Manager of the General Partner and Com Cap Corp. and certain of its subsidiaries where he has been employed since 1999. From 1965 to 1996, Mr. Conboy was employed as a Manager of Accounting Operations of Consolidated Rail Corporation. Mr. Conboy received a BS/BA degree in Accounting and Business Administration from the University of Phoenix in 1994. Mr. Conboy is a member of the Equipment Leasing Association. Lynn A. Franceschina, age 29, is Accounting Manager of the General Partner and Com Cap Corp. and certain of its subsidiaries where she has been employed since 2001. From 1991 to 2001, Ms. Franceschina worked as an Accountant, most recently as the Business Controls Manager at Liquent, Inc. Ms. Franceschina received a B.S.B.A. degree from Robert Morris College. Ms. Franceschina is a member of the Equipment Leasing Association. Dorothy A. Ferguson, age 59, is Assistant Vice President of Com Cap Corp. and has been employed by Com Cap Corp. since 1995. She brought with her over 20 years experience in commercial banking and finance. Prior to joining Commonwealth, she held positions as a Banking Officer and Administrative Assistant to the Chairman of a large Philadelphia based bank, as well as Executive Secretary to the CEO of an international manufacturing management group. 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. 19 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.

21 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 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. 22 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 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 by the Partnership, whether or not actually acquired, including, but not limited to, legal fees and expenses, travel and communication expenses, costs of appraisal, accounting fees and expenses and other related expenses. "Acquisition Fees" means the total of all fees and commissions paid by any party in connection with the initial purchase of Equipment acquired by the Partnership. Included in the computation of such fees or commissions shall be the Equipment Acquisition Fee and any commission, selection fee, construction supervision fee, financing fee, non-recurring management fee or any fee of a similar nature, however designated. 23 "Adjusted Capital Contributions" means Capital Contributions of the Limited Partners reduced by any cash distribution received by the Limited Partners pursuant to the Partnership Agreement, to the extent such distributions exceed any unpaid Priority Return as of the date such distributions were made. "Affiliate" means, when used with reference to a specified Person, (i) any person, that directly or indirectly through one or more intermediaries controls or is controlled by or is under common control with the specified Person, (ii) any Person that is a director or an executive officer of, partner in, or serves in a similar capacity to, the specified Person, or any Person of which the specified Person is an executive officer or partner or with respect to which the specified Person serves in a similar capacity, (iii) any Person owning or controlling 10% or more of the outstanding voting securities of such specified Person, or (iv) if such Person is an officer, director or partner, any entity for which such Person acts in such capacity. "Capital Account" means the bookkeeping account maintained by the Partnership for each Partner. "Capital Contributions" means in the case of the General Partner, the total amount of money contributed to the Partnership by the General Partner, and in the case of Limited Partners, $20 for each Unit, or where the context requires, the total Capital Contributions of all the Partners. "Cash Available for Distribution" means Cash Flow plus Net Disposition Proceeds plus cash funds available for distribution from Partnership reserves, less such amounts as the General Partner, in accordance with the Partnership Agreement, causes the Partnership to reinvest in Equipment or interests therein, and less such amounts as the General Partner, in its sole discretion, determines should be set aside for the restoration or enhancement of Partnership reserves. "Cash Flow" for any fiscal period means the sum of (i) cash receipts from operations, including, but not limited to, rents or revenues arising from the leasing or operation of the Equipment and interest, if any, earned on funds on deposit for the Partnership, but not including Net Disposition Proceeds, minus (ii) all cash expenses and costs incurred and paid in connection with the ownership, lease, management, use and/or operation of the Equipment, including, but not limited to, fees for handling and storage; all interest expenses paid and all repayments of principal regarding borrowed funds; maintenance; repair costs; insurance premiums; accounting and legal fees and expenses; debt collection expenses; charges, assessments or levies imposed upon or against the Equipment; ad valorem, gross receipts and other property taxes levied against the Equipment; and all costs of repurchasing Units in accordance with the Partnership Agreement; but not including depreciation or amortization of fees or capital expenditures, or provisions for future expenditures, including, without limitation, Organizational and Offering Expenses. "Closing Date" means May 11, 1995. "Code" means the Internal Revenue Code of 1986, as amended, and as may be amended from tine to time by future federal tax statutes. "Competitive Equipment Sale Commission" means that brokerage fee paid for services rendered in connection with the purchase or sale of Equipment, which is reasonable, customary, and competitive in light of the size, type, and location of the Equipment. "Conditional Sales Contract" means an agreement to sell Equipment to a buyer in which the seller reserves title to, and retains a security interest in, the Equipment until the Purchase Price of the Equipment is paid. "Effective Date" means December 17, 1993, the date on which the Partnership's Registration Statement on Form S-1 was declared effective by the United States Securities and Exchange Commission. "Equipment" means each item of and all of the computer peripheral and other similar capital equipment purchased, owned, operated, and/or leased by the Partnership or in which the Partnership has acquired a direct or indirect interest, together with all appliances, parts, instruments, accessories, furnishings, or other equipment included therein and all substitutions, renewals, or replacements of, and all additions, improvements, and accessions to, any and all thereof. 24 "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 noncancelable fixed term (not including any renewal or extension period of the lease or other contract for the use of the Equipment are at least sufficient to recover the Purchase Price of the Equipment. "General Partner" means Commonwealth Income & Growth Fund, Inc. and any additional, substitute or successor general partner of the Partnership. "Gross Lease Revenues" means Partnership gross receipts from leasing or other operation of the Equipment, except that, to the extent the Partnership has leased the Equipment from an unaffiliated party, it shall mean such receipts less any lease expense. "Initial Closing" means March 14, 1994, the date after the Minimum Subscription Amount was received on which funds to acquire Units were released from the Escrow Account and distributed to the Partnership for the acquisition of Units by Limited Partners. "IRS" means the Internal Revenue Service. "Limited Partner" means a person who acquires Units and who is admitted to the Partnership as a limited partner in accordance with the terms of the Partnership Agreement. "Majority in Interest" means, with respect to the Partnership, Limited Partners holding more than 50% of the outstanding Units held by all Limited Partners at the Record Date for any vote or consent of the Limited Partners. "Minimum Subscription Amount" means an aggregate of $2,500,000 in Subscriptions. "Net Dispositions Proceeds" means the net proceeds realized by the Partnership from the refinancing, sale or other disposition of Equipment, including insurance proceeds or lessee indemnity payments arising from the loss or destruction of Equipment, less such amounts as are used to satisfy Partnership liabilities. "Net Lease" means a lease or other contract under which the owner provides equipment to a lessee or other operator in return for a payment, and the lessee assumes all obligations and pays for the operation, repair, maintenance and insuring of the equipment. "Net Profits" or "Net Losses" shall be computed in accordance with Section 703(a) of the Code (including all items of income, gain, loss or deduction required to be stated separately pursuant to Section 703(a) (1) of the Code) for each taxable year of the Partnership or shorter period prior to an interim closing of the Partnership's books with the following adjustments: (I) any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Net Profits and Net Loss pursuant to this definition shall be added to such taxable income or shall reduce such taxable loss; (ii) any expenditure of the Partnership described in Code Section 705(a) (2) (B) or treated as Code Section 705(a) (2) (B) expenditures pursuant to Treasury Regulations section 1.704-1(b) (2) (iv) (i) and not otherwise taken into account in computing Net Profits and Net Losses pursuant to this definition shall be subtracted from such taxable income or loss; (iii) items of income, gain, loss and deduction specially allocated pursuant to Section 7.3 of the Partnership Agreement shall not be included in the computation of Net Profits or Net Loss; and if property is reflected on the books of the Partnership at a book value that differs from the adjusted tax basis of the property in accordance with Treasury Regulation Section 1.704-1(b) (2) (iv) (d) or (f), depreciation, amortization, and gain or loss with respect to such property shall be determined by reference to such book value in a manner consistent with Treasury Regulation Section 1.704-1(b) (2) (iv) (g). The terms "Net Profit" or "Net Losses" shall include the Partnership's distributive share of the profit or loss of any partnership or joint venture in which it is a partner or joint venturer. 25 "Offering" means the initial public offering of Units in the Partnership. "Offering Period" means the period commencing the Effective Date and ending the last day of the calendar month in which the Closing Date occurs. "Operating Distributions" means the quarterly distributions made to the Partners pursuant to Article 8 of the Partnership Agreement. "Operating Lease" means a lease or other contractual arrangement under which an unaffiliated party agrees to pay the Partnership, directly or indirectly, for the use of the Equipment, and which is not a Full Payout Net Lease. "Organizational and Offering Expenses" means the expenses incurred in connection with the organization of the Partnership and in preparation of the Offering, including Underwriting Commissions, listing fees and advertising expenses specifically incurred in connection with the distribution of the Units. "Partner (s)" means any one or more of the General Partner and the Limited Partners. "Partnership" means Commonwealth Income & Growth Fund I, a Pennsylvania limited partnership. "Partnership Agreement" means that Limited Partnership Agreement of Commonwealth Income & Growth Fund I by and among the General Partner and the Limited Partners, pursuant to which the Partnership is governed. "Person" means an individual, partnership, limited liability company, joint venture, corporation, trust, estate or other entity. "Priority Return" means an amount equal to a return at a rate of 10% per annum, compounded daily, on the Adjusted Capital Contribution for all outstanding Units, which amount shall begin accruing at the end of the calendar quarter in which such Units are sold by the Partnership. "Proceeds" means proceeds from the sale of the Units. "Program" means a limited or general partnership, joint venture, unincorporated association or similar organization, other than a corporation formed and operated for the primary purpose of investment in and the operation of or gain from an interest in Equipment. "Purchase Price" means, with respect to any Equipment, an amount equal to the sum of (i) the invoice cost of such Equipment or any other such amount paid to the seller, (ii) any closing, delivery and installation charges associated therewith not included in such invoice cost and paid by or on behalf of the Partnership, (iii) the cost of any capitalized modifications or upgrades paid by on or behalf of the Partnership in connection with its purchase of the Equipment, and (iv) solely for purposes of the definition of Full Payout Net Lease, the amount of the Equipment Acquisition Fee and any other Acquisition Fees. "Retained Proceeds" means Cash Available for Distribution, which instead of being distributed to the Partners is retained by the Partnership for the purpose of acquiring or investing in Equipment. "Term Debt" means debt of the Partnership with a term in excess of twelve months, incurred with respect to acquiring or investing in Equipment, or refinancing non-Term Debt, but not debt incurred with respect to refinancing existing Partnership Term Debt. 26 "Unit" means a Limited Partnership interest in the Partnership. PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K (a) (1) Financial Statements Commonwealth Income & Growth Fund I Reports of Independent Certified Public Accountants Balance Sheets as of December 31, 2001 and 2000 Statements of Operations for each of the three years ended December 31, 2001, 2000 and 1999 Statements of Partners' Capital for each of the three years ended December 31, 2001, 2000 and 1999 Statements of Cash Flows for each of the three years ended December 31, 2001, 2000 and 1999 Notes to Financial Statements Commonwealth Income & Growth Fund, Inc. Report of Independent Auditors Balance sheet as of February 29, 2001 Notes to Balance Sheet Commonwealth Capital Corp. Report of Independent Auditors Consolidated Balance Sheet as of February 29, 2001 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 27 * Incorporated by reference from the Partnership's Registration Statement on Form S-1 (Registration No. 333-26933) ** Incorporated by reference from the Partnership's Annual Report on 10-K for the year ended December 31, 1993 (b) Reports on Form 8-K (c) Exhibits. 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 March 29, 2002 by the undersigned thereunto duly authorized. COMMONWEALTH INCOME & GROWTH FUND I 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 29, 2002. SIGNATURE CAPACITY --------- -------- /s/ GEORGE S. SPRINGSTEEN Chairman, President and Sole Director of ------------------------- Commonwealth Income & Growth Fund, Inc. George S. Springsteen /s/ KIMBERLY A. SPRINGSTEEN Executive Vice President Chief Operating --------------------------- Officer and Secretary Kimberly A. Springsteen /s/ SALVATORE R. BARILA Vice President and Controller ----------------------- Salvatore R. Barila 28 Commonwealth Income & Growth Fund I Financial Statements Years Ended December 31, 2001, 2000 and 1999 Commonwealth Income & Growth Fund I Contents -------------------------------------------------------------------------------- Report of Independent Certified Public Accountants 3-4 Financial statements Balance sheets 5 Statements of operations 6 Statements of partners' capital 7 Statements of cash flows 8-9 Notes to financial statements 10-23 2 Report of Independent Certified Public Accountants The Partners Commonwealth Income & Growth Fund I Exton, Pennsylvania We have audited the accompanying balance sheets of Commonwealth Income & Growth Fund I as of December 31, 2001 and 2000, and the related statements of operations, partners' capital, and cash flows for the years ended December 31, 2001 and 2000. 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 in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Commonwealth Income & Growth Fund I at December 31, 2001 and 2000, and the results of its operations and its cash flows for the years ended December 31, 2001 and 2000, in conformity with generally accepted accounting principles in the United States. /s/ BDO Seidman, LLP Philadelphia, Pennsylvania March 8, 2002 3 Report of Independent Auditors The Partners Commonwealth Income & Growth Fund I We have audited the accompanying statements of operations, partners' capital, and cash flows of Commonwealth Income & Growth Fund I for the year ended December 31, 1999. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Commonwealth Income & Growth Fund I for the year ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Philadelphia, Pennsylvania March 24, 2000 4

Commonwealth Income & Growth Fund I Balance Sheets --------------------------------------------------------------------------------

See accompanying notes to financial statements. 5 Commonwealth Income & Growth Fund I Statements of Operations --------------------------------------------------------------------------------

See accompanying notes to financial statements. 6 Commonwealth Income & Growth Fund I Statements of Partners' Capital --------------------------------------------------------------------------------

See accompanying notes to financial statements. 7 Commonwealth Income & Growth Fund I Statements of Cash Flows --------------------------------------------------------------------------------

8 Commonwealth Income & Growth Fund I Statements of Cash Flows --------------------------------------------------------------------------------

See accompanying notes to financial statements. 9 Commonwealth Income & Growth Fund I Notes to Financial Statements -------------------------------------------------------------------------------- 1. Business Commonwealth Income & Growth Fund I (the "Partnership") is a limited partnership organized in the Commonwealth of Pennsylvania to acquire, own and lease various types of computer peripheral equipment and other similar capital equipment, which will be leased primarily to U.S. corporations and institutions. Commonwealth Capital Corp, on behalf of the Partnership and other affiliated partnerships, acquires computer equipment subject to associated debt obligations and lease revenue and allocates a participation in the cost, debt and lease revenue to the various partnerships based on certain risk factors. The Partnership's General Partner is Commonwealth Income & Growth Fund, Inc. (the "General Partner"), a Pennsylvania corporation which is an indirect wholly owned subsidiary of Commonwealth Capital Corp. Approximately ten years after the commencement of operations, the Partnership intends to sell or otherwise dispose of all of its computer equipment, make final distributions to partners, and to dissolve. Unless sooner terminated, the Partnership will continue until December 31, 2004. Allocations of income and distributions of cash are based on the Partnership's Limited Partnership Agreement (the "Agreement"). The various allocations under the Agreement prevent any limited partner's capital account from being reduced below zero and ensure the capital accounts reflect the anticipated sharing ratios of cash distributions, as defined in the Agreement. During 2001, the Partnership distributed to the limited partners $312,410. The 2001 distributions were at an annual rate of 2.4% of the limited partners' original contributed capital. During 2000, the Partnership distributed to the limited partners $781,097, in addition to $240,103 distributed in January 2000, which pertained to the 1999 fourth quarter distribution. The 2000 distributions, exclusive of the January 2000 distributions, were at an annual rate of 6.2% of the limited partners' original contributed capital. During 1999, the Partnership distributed to the limited partners, three quarterly distributions totaling $949,478. The three quarterly distributions in 1999 plus the payment in January 2000 noted above represented an annual rate of 9.4%. Distributions during 2001 reflect an annual return of capital in the amount of approximately $0.50 per limited partnership unit, for units which were outstanding for 10 Commonwealth Income & Growth Fund I Notes to Financial Statements -------------------------------------------------------------------------------- the entire year. Distributions during 2000 reflect an annual return of capital in the amount of approximately $1.62 per limited partnership unit, for units which were outstanding for the entire year, which includes $.38 per unit which was distributed in January 2000 for the fourth quarter of 1999. Distributions during 1999 reflect an annual return of capital in the amount of approximately $1.50 per limited partnership unit, for units, which were outstanding for the entire year. 2. Summary of Revenue Recognition Significant Accounting Through December 31, 2001, the Partnership has only Policies 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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. 11 Commonwealth Income & Growth Fund I Notes to Financial Statements -------------------------------------------------------------------------------- During 2001, 2000 and 1999, the Partnership identified specific computer equipment and associated equipment acquisition costs, which were reevaluated due to technological changes. In 2001 and 2000, the Partnership determined that no impairment had occurred. In 1999, the Partnership determined that the carrying amount of certain assets was greater than the undiscounted cash flows to be generated by these assets. The Partnership recorded charges of $10,000 in the fourth quarter of 1999 to record the assets at their estimated fair value. Such amounts have been included in depreciation expense in the accompanying financial statements. Depreciation on computer equipment for financial statement purposes is based on the straight-line method over estimated useful lives of four years. Intangible Assets Equipment acquisition costs and deferred expenses are amortized on a straight-line basis over two- to-four year lives. Unamortized acquisition fees are charged to amortization expense when the associated leased equipment is sold. Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents. Cash equivalents have been invested in a money market fund investing directly in Treasury obligations. 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. 12 Commonwealth Income & Growth Fund I Notes to Financial Statements -------------------------------------------------------------------------------- Offering Costs Offering costs are payments for selling commissions, dealer manager fees, professional fees and other offering expenses relating to the syndication. Selling commissions are 7% of the partners' contributed capital and dealer manager fees are 2% of the partners' contributed capital. These costs have been deducted from partnership capital in the accompanying financial statements. Net Income (Loss) Per Equivalent Limited Partnership Unit The net income (loss) per equivalent limited partnership unit is computed based upon net income (loss) allocated to the limited partners and the weighted average number of equivalent limited partner units outstanding during the year. 3. Computer The Partnership is the lessor of equipment under Equipment operating leases with periods ranging from 24 to 37 months. In general, associated costs such as repairs and maintenance, insurance and property taxes are paid by the lessee. The Partnership's share of the computer equipment in which they participate at December 31, 2001 was approximately $469,000, which is included in the Partnership's fixed assets on their balance sheet, and the total cost of the equipment shared by the Partnership with other partnerships at December 31, 2001 was approximately $2,867,000. The Partnership's share of the outstanding debt associated with this equipment at December 31, 2001 was approximately $387,000, which is included in the Partnership's liabilities on the balance sheet, and the total outstanding debt at December 31, 2001 related to the equipment shared by the Partnership was approximately $2,338,000. There was no equipment shared by the Partnership as of December 31, 2000. The following is a schedule of future minimum rentals on noncancelable operating leases at December 31, 2001: 13 Commonwealth Income & Growth Fund I Notes to Financial Statements -------------------------------------------------------------------------------- Year ending December 31, Amount --------------------------------------------------------- 2002 $ 308,000 2003 289,000 2004 163,000 --------------------------------------------------------- $ 760,000 ========================================================= Lease income from one lessee, exceeding 10% of lease revenue, aggregated 21% of lease income for the year ended December 31, 2001. Lease income from three lessees, each exceeding 10% of lease revenue, aggregated 38% of lease income for the year ended December 31, 2000. Lease income from one lessee, exceeding 10% of total lease income, approximated 12% of lease income for the year ended December 31, 1999. As of December 31, 2001, one lessee comprised approximately 91% of the Partnership's accounts receivable. 4. Related Party Reimbursement of Expenses Transactions 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 2001, 2000 and 1999, the Partnership recorded $82,000, $76,000 and $111,000, respectively, for reimbursement of expenses to the General Partner. 14 Commonwealth Income & Growth Fund I Notes to Financial Statements -------------------------------------------------------------------------------- Equipment Acquisition Fee The General Partner is entitled to be paid an equipment acquisition fee of 4% of the purchase price of each item of equipment purchased as compensation for the negotiation of the acquisition of the equipment and lease thereof or sale under a conditional sales contract. During 2001, equipment acquisition fees of approximately $30,000 were paid to the General Partner. During 1999, equipment acquisition fees of approximately $60,000 were paid to the General Partner. No fees were paid to the General Partner in 2000. Debt Placement Fee As compensation for arranging term debt to finance the acquisition of equipment by the Partnership, the General Partner is paid a fee equal to 1% of such indebtedness; provided, however, that such fee shall be reduced to the extent the Partnership incurs such fees to third parties, unaffiliated with the General Partner or the lender, with respect to such indebtedness and no such fee will be paid with respect to borrowings from the General Partner or its affiliates. During 2001, debt placement fees of approximately $5,000 were paid to the General Partner. No debt placement fee was paid to the General Partner in 2000 and 1999. 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 2001, 2000 and 1999, equipment management fees of approximately $38,000, $90,000 and $150,000, respectively, were paid to the General Partner as determined pursuant to section (ii) above. 15 Commonwealth Income & Growth Fund I Notes to Financial Statements -------------------------------------------------------------------------------- Release Fee As compensation for providing releasing services for any equipment for which the General Partner has, following the expiration of, or default under, the most recent lease or conditional sales contract, arranged a subsequent lease or conditional sales contract for the use of such equipment to a lessee or other party, other than the current or most recent lessee or other operator of such equipment or its affiliates ("Release"), the General Partner shall receive, on a monthly basis, a Release Fee equal to the lesser of (a) the fees which would be charged by an independent third party for comparable services for comparable equipment or (b) two percent of gross lease revenues derived from such Release. There were no such fees paid to the General Partner in 2001, 2000 and 1999. 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 2001, 2000 and 1999. 16 Commonwealth Income & Growth Fund I Notes to Financial Statements -------------------------------------------------------------------------------- 5. Notes Payable Notes payable consisted of the following: December 31, 2001 2000 --------------------------------------------------------- Installment note payable to a bank; interest at 7.0%; due in monthly installments of $5,852 including interest. The note was paid in full in September 2001 in connection with the sale of equipment. $ -- $ 67,647 Installment note payable to a bank; interest at 8.40%; due in monthly installments of $696 including interest through January 2003 8,620 -- Installment note payable to a bank; interest at 7.30%; due in monthly installments of $1,565 including interest through January 2003 37,530 -- Installment note payable to a bank; interest at 9.25%; due in monthly installments of $1,685 including interest through January 2004 38,174 -- Installment note payable to a bank; interest at 6.50%; due in monthly installments of $1,409 including interest through September 2004 42,464 -- 17 Commonwealth Income & Growth Fund I Notes to Financial Statements -------------------------------------------------------------------------------- Installment note payable to a bank; interest at 7.00%; due in monthly installments of $2,069 including interest through August 2003 60,225 -- Installment note payable to a bank; interest at 7.50%; due in monthly installments of $182 including interest through December 2003 3,964 -- Installment note payable to a bank; interest at 9.00%; due in monthly installments of $138 including interest through February 2004 3,249 -- Installment note payable to a bank; interest at 9.25%; due in monthly installments of $485 including interest through April 2004 12,172 -- Installment note payable to a bank; interest at 7.00%; due in monthly installments of $565 including interest through October 2004 17,379 -- Installment note payable to a bank; interest at 7.00%; due in monthly installments of $651 including interest through December 2004 21,083 -- 18 Commonwealth Income & Growth Fund I Notes to Financial Statements -------------------------------------------------------------------------------- Installment note payable to a bank; interest at 6.75%; due in monthly installments of $7,720 including interest through November 2004 246,003 -- Installment note payable to a bank; interest at 6.25%; due in monthly installments of $295 including interest through December 2004 9,722 -- --------------------------------------------------------- $ 500,585 $ 67,647 ========================================================= These notes are secured by specific computer equipment and are nonrecourse liabilities of the Partnership. Aggregate maturities of notes payable for each of the years subsequent to December 31, 2001 are as follows:. Year ending December 31, Amount --------------------------------------------------------- 2002 $ 181,246 2003 185,380 2004 133,959 --------------------------------------------------------- $ 500,585 ========================================================= 6. Supplemental Other noncash activities included in the determination of Cash Flow net loss are as follows: Information

19 Commonwealth Income & Growth Fund I Notes to Financial Statements --------------------------------------------------------------------------------

No interest or principal on notes payable was paid by the Partnership because direct payment was made by lessee to the bank in lieu of collection of lease income and payment of interest and principal by the Partnership. Noncash investing and financing activities include the following:

7. Litigation The Partnership, through Commonwealth Capital Corp, has initiated a lawsuit against a customer for the non-return of leased equipment. Management believes that the Partnership will prevail in this matter; the outcome of this uncertainty will not have a material adverse impact to the financial statements of the Partnership. The complaint alleges that the named defendant has not returned the proper equipment stated in the master lease agreement and is seeking restitution for lost monthly rentals, taxes, attorney fees and costs, plus interest. 20 Commonwealth Income & Growth Fund I Notes to Financial Statements -------------------------------------------------------------------------------- 8. Reconciliation of Net Income (Loss) Reported for Financial Reporting Purposes to Taxable Income (Loss) on the Federal Partnership Return

The "Adjustments - Other" includes financial statement adjustments reflected in the tax return in the subsequent year. Adjustment for (loss) on sale of equipment is due to larger depreciation lives for tax reporting purposes. 21 Commonwealth Income & Growth Fund I Notes to Financial Statements -------------------------------------------------------------------------------- 9. Quarterly Results of Operation (Unaudited) Summarized quarterly financial data for the years ended December 31, 2001 and 2000 is as follows:

22 Commonwealth Income & Growth Fund I Notes to Financial Statements --------------------------------------------------------------------------------

The cumulative gain or loss on sale of computer equipment is included in revenues or costs as appropriate. 9. Fourth Quarter During the fourth quarter of 2001, the Partnership Adjustments recorded bad debts of approximately $50,000. During the fourth quarter of 2000, the Partnership recorded bad debts of approximately $104,000. 23 [GRAPHIC OMITTED] COMMONWEALTH INCOME & GROWTH FUND, INC. (An Indirect Wholly-Owned Subsidiary of Commonwealth Capital Corp.) BALANCE SHEET FEBRUARY 28, 2001 COMMONWEALTH INCOME & GROWTH FUND, INC. (An Indirect Wholly-Owned Subsidiary of Commonwealth Capital Corp.) FEBRUARY 28, 2001 TABLE OF CONTENTS PAGE ---- INDEPENDENT AUDITOR'S REPORT 1 BALANCE SHEET 2 NOTES TO BALANCE SHEET 3 [GRAPHIC OMITTED] Elkins Park Square -- Suite 200 8080 Old York Road Elkins Park, PA 19027-1455 215-635-3100 Fax: 215-635-5788 INDEPENDENT AUDITOR'S REPORT Stockholder Commonwealth Income & Growth Fund, Inc. We have audited the accompanying balance sheet of COMMONWEALTH INCOME & GROWTH FUND, INC. (An indirect wholly-owned subsidiary of Commonwealth Capital Corp.) as of February 28, 2001. This balance sheet is the responsibility of the Company's management. Our responsibility is to express an opinion on this balance sheet based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of Commonwealth Income & Growth Fund, Inc. as of February 28, 2001, in conformity with generally accepted accounting principles. /s/ FISHBEIN & COMPANY, P.C. ------------------------------- FISHBEIN & COMPANY, P.C. April 5, 2001 Page 2 COMMONWEALTH INCOME & GROWTH FUND, INC. (An Indirect Wholly-Owned Subsidiary of Commonwealth Capital Corp.) BALANCE SHEET FEBRUARY 28, 2001 ASSETS Cash $ 9,732 Due from parent 84,203 Investment in Partnerships 3,000 ----------- $ 96,935 =========== LIABILITIES AND STOCKHOLDER'S EQUITY LIABILITIES Due to income funds $ 95,835 ----------- STOCKHOLDER'S EQUITY Common stock - No par value Authorized 1,000 shares Issued and outstanding 100 shares 1,000 Additional paid-in capital 1,000,100 ----------- 1,001,100 Less note receivable (1,000,000) ----------- 1,100 ----------- $ 96,935 =========== See notes to balance sheet Page 3 COMMONWEALTH INCOME & GROWTH FUND, INC. (An Indirect Wholly-Owned Subsidiary of Commonwealth Capital Corp.) NOTES TO BALANCE SHEET FEBRUARY 28, 2001 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Nature of Business Commonwealth Income & Growth Fund, Inc. (the Company) is a wholly-owned subsidiary of Commonwealth of Delaware, Inc. which is a wholly-owned subsidiary of Commonwealth Capital Corp. (CCC). The Company, through its wholly-owned subsidiaries, primarily leases various types of computer peripheral equipment and related equipment to U.S. corporations and institutions. The Company is the sole General Partner of Commonwealth Income & Growth Fund I, Commonwealth Income & Growth Fund II, and Commonwealth Income & Growth Fund III, all Pennsylvania limited partnerships (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. The note receivable is reflected on the accompanying balance sheet as a reduction of the Company's equity. The Company's operations are included in the consolidated federal income tax return of CCC. b. Use of Estimates The preparation of the balance sheet in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. 2. INVESTMENT IN PARTNERSHIPS The Company contributed $3,000 in cash to the Partnerships for its general partner interests. The Company may, at its sole discretion, purchase a limited partnership interest in the Partnerships ("Units") for an additional capital contribution of $20 per Unit with a minimum investment of 125 units. 3. RELATED PARTY TRANSACTIONS The Company and its affiliates receive substantial fees and compensation in connection with the offering of Units and the management of the Partnerships' assets. The Company pays expenses to CCC equal to the fees collected from the Partnerships. [GRAPHIC OMITTED] COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2001 COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2001 TABLE OF CONTENTS PAGE ---- INDEPENDENT AUDITOR'S REPORT CONSOLIDATED FINANCIAL STATEMENTS 1 Balance sheets 2 Statements of operations and retained earnings 3 Statements of cash flows 4 Notes to financial statements 5 - 11 [GRAPHIC OMITTED] Elkins Park Square -- Suite 200 8080 Old York Road Elkins Park, PA 19027-1455 215-635-3100 Fax: 215-635-5788 INDEPENDENT AUDITOR'S REPORT Stockholder Commonwealth Capital Corp. We have audited the accompanying consolidated balance sheets of COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES as of February 28, 2001 and February 29, 2000, 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. and Subsidiaries as of February 28, 2001 and February 29, 2000, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Fishbein & Company, P.C. ------------------------------------ Elkins Park, Pennsylvania April 5, 2001 Page 2 COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS February 28, February 29, 2001 2000 ---------- ---------- Cash and cash equivalents $ 145,343 $ 27,162 Receivables from Income Funds 317,577 255,035 Other receivables 60,423 59,736 Minimum lease payments receivable - Net of unearned interest income of $1,404,050 - 2001 and $1,725,985 - 2000 4,130,000 4,715,000 Investment in income funds 11,666 12,666 Office furniture and equipment - Net of accumulated depreciation of $115,407 - 2001 and $112,918 - 2000 4,031 6,520 Deferred offering costs 8,192 Other assets 6,127 6,890 ---------- ---------- $4,675,167 $5,091,201 ========== ========== LIABILITIES AND STOCKHOLDER'S EQUITY LIABILITIES Accounts payable and accrued expenses $ 285,790 $ 75,713 Due to Income Funds 61,255 Nonrecourse obligations 4,130,000 4,715,000 ---------- ---------- 4,415,790 4,851,968 ========== ========== STOCKHOLDER'S EQUITY Common stock - Par value $1 Authorized 1,000 shares Issued and outstanding 10 shares 10 10 Retained earnings 259,367 239,223 ---------- ---------- 259,377 239,233 ---------- ---------- $4,675,167 $5,091,201 ========== ========== See notes to consolidated financial statements Page 3 COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS Year Ended -------------------------------- February 28, February 29, 2001 2000 ------------ ------------ INCOME Fee income from Income Funds $ 928,913 $ 972,246 Commission income 24,576 49,432 Interest income on minimum lease payments receivable 321,935 358,828 Equity in income of Income Funds 93,207 43,832 Interest and miscellaneous 92,252 21,822 ---------- ---------- 1,460,883 1,446,160 ---------- ---------- EXPENSES Personnel 587,067 669,538 General and administrative 429,640 534,984 Selling 99,608 167,935 Interest expense on nonrecourse obligations 321,935 358,828 Depreciation 2,489 4,129 ---------- ---------- 1,440,739 1,735,414 ---------- ---------- NET INCOME (LOSS) 20,144 (289,254) RETAINED EARNINGS - BEGINNING 239,223 528,477 ---------- ---------- RETAINED EARNINGS - ENDING $ 259,367 $ 239,223 ========== ========== See notes to consolidated financial statements. Page 4 COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to consolidated financial statements. Page 5 COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2001 1. NATURE OF BUSINESS Commonwealth Capital Corp., through its wholly-owned subsidiary, Commonwealth of Delaware, Inc. (CDI), primarily leases various types of computer peripheral equipment and related equipment to U.S. corporations and institutions. Certain wholly-owned 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. CDI's 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 & 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. Certain limited partnerships/trusts have been liquidated during the years ended February 28, 2001 (four entities) and February 29, 2000 (one entity). The Company is dependent on the compensation it receives from the Income Funds. This compensation may be reduced due to the financial performance of each Income Fund. There are certain Income Funds that have deferred the payment of fees to the Company, because distributions to the limited partners were reduced because of their financial performance. If the financial performance of additional Income Funds deteriorates and the distributions to the limited partners are reduced, there is no assurance that the Company would be able to continue to collect fees for services provided. No fees were waived or forgiven for the years ended February 28, 2001 or February 29, 2000. Commission income is earned by Commonwealth Capital Securities Corp., which sells units of its affiliated partnerships through broker-dealer firms to their respective customers throughout the United States. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company, CDI, and CDI's subsidiaries (the Company) (see Note 1). All significant intercompany transactions and balances have been eliminated. The balance sheets are presented on an unclassified basis in accordance with leasing industry practice. Page 6 COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2001 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) b. 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. c. Cash and Cash Equivalents The Company maintains its cash balances in several financial institutions. The balances in each institution are insured (up to $100,000) by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation. At times, the balances may exceed federally insured limits. The Company has not experienced any losses in such accounts, and believes it is not exposed to any significant credit risk on cash. The Company considers all highly-liquid investments purchased with a maturity of three months or less to be cash equivalents. At February 28, 2001 and February 29, 2000, cash equivalents consist of a money market fund which invests in U.S. Treasury obligations. d. Investment in Income Funds The Company accounts for its 1% interests in the Income Funds by the equity method. At February 29, 2000, certain Income Funds had liabilities in excess of their assets. As the Company 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 $61,255 at February 29, 2000, which was restored during the year ended February 28, 2001. Financial information of the Income Funds as of December 31, 2000 and 1999, is as follows: December 31, ------------------------------ 2000 1999 ----------- ----------- Total assets $11,742,000 $18,025,000 Nonrecourse debt 4,524,000 7,214,000 Other liabilities 846,000 2,216,000 Partnership capital 6,371,000 8,595,000 Net loss (921,757) (1,692,000) Page 7 COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2001 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) d. Investment in Income Funds (Continued) The Company has guaranteed the performance of certain nonmonetary 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, 2001 and February 29, 2000, and have been eliminated in consolidation. Fee income earned by the Company from the Income Funds consists of: (1) equipment acquisition fees (4% (as defined) of the purchase price of all equipment purchased by the Income Funds), (2) debt placement fees (1% of the cost of equipment financed by the Income Funds), (3) sales fees (3% of the gross proceeds of equipment sold by the Income Funds), and (4) equipment management fees (3% - 5% as defined) of the gross operating lease revenues of the Income Funds). Ongoing acquisition fees and equipment management fees may be increased as an indirect result of company loans. Approximately 79% and 58% of fee income for the years ended February 28, 2001 and February 29, 2001, was from three Income Funds. e. Office Furniture and Equipment Office furniture and equipment are stated at cost. Depreciation is provided using the declining balance method over the estimated useful lives of the assets (ranging from 5 to 7 years). f. Deferred Offering Costs Deferred offering costs represented amounts incurred by the Company for the organization of an Income Fund. These costs were recovered from the Income Fund through fees as cash proceeds were raised through the sale of Limited Partnership Units during the offering period or, if necessary, the future operations of the Income Fund. Deferred offering costs at February 29, 2000 relating to an Income Fund, expired in July, 2000. g. Revenue Recognition The Company recognizes fees as earned in accordance with the various Limited Partnership and Trust Agreements. The Company recognizes commission income and brokerage fee expense on an accrual basis based on the trade date of the underlying customer transactions. Interest income on minimum lease payments receivable is recognized as earned. Page 8 COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2001 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (h) Income Taxes Deferred income taxes are provided as necessary for temporary differences between the financial and tax bases of investment in Income Funds and office furniture and equipment. The tax basis of investment in income funds differs from financial reporting due to temporary differences associated with ownership of general partnership interests in the various Income Funds. Also, for income tax reporting, the cost of property and equipment is being recovered using the methods and lives prescribed by the Internal Revenue Code. Deferred income tax assets are also recognized for net operating losses and investment tax credit carryforwards that are available to offset future income taxes. A valuation allowance is provided as necessary to reduce the deferred income tax assets to the amount that is more likely than not to be realized. 3. EASE 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, 2001 and February 29, 2000, under these leases and certificates of participation are $4,130,000 and $4,715,000, respectively, and are reflected as minimum lease payments receivable and nonrecourse obligations in the accompanying balance sheets. The certificates mature at various dates through 2011. The Company recognized interest income and interest expense in connection with these leases of $321,935 and $358,828 for the years ended February 28, 2001 and February 29, 2000, respectively. Page 9 COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2001 3. EASE COMMITMENTS (Continued) Future minimum lease payments to be received as of February 28, 2001, are as follows: Year Ending February 28, ------------------------ 2002 $ 683,324 2003 684,490 2004 678,794 2005 676,097 2006 680,759 Thereafter 2,130,586 ---------- 5,534,050 amount representing interest 1,404,050 ---------- $4,130,000 ========== The Company leases an automobile, certain office equipment and office space under noncancelable operating leases expiring in various dates through 2006. Rent expense under all operating leases was approximately $149,000 and $155,000 for the years ended February 28, 2001 and February 29, 2000, respectively. Future minimum lease payments under noncancelable operating leases as of February 28, 2001, are as follows: Year Ending February 28, ------------------------ 2002 $ 89,955 2003 78,866 2004 58,539 2005 61,620 2006 63,161 ---------- $ 352,141 ========== 4. PROFIT SHARING PLAN The Company has a profit sharing plan which covers substantially all of its employees. Contributions to the plan may be made at the discretion of management. Profit sharing plan contributions were $20,615 for the year ended February 28, 2001 and no contributions to the plan were made or accrued for the year ended February 29, 2000. Page 10 COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2001 5. INCOME TAXES The Company and its subsidiaries file a consolidated federal income tax return. The Company has net operating loss carryforwards of approximately $537,000 and investment tax credit carryforwards of approximately $52,000 available to reduce future federal income taxes. If not used, the carryforwards will expire as follows: Net Operating Investment Year Ending February 28, Losses Tax Credits ------------------------ ------------- ----------- 2002 $ $52,000 2019 135,000 2020 452,000 -------- $587,000 $52,000 ======== ======= The Company also has net operating loss carryforwards of approximately $4,325,000 available to reduce future Pennsylvania state income taxes. If not used, the carryforwards will expire as follows: Year Ending February 28, ------------------------ 2006 $ 108,000 2007 638,000 2008 962,000 2009 899,000 2010 1,086,000 2011 632,000 ---------- $4,325,000 ========== Page 11 COMMONWEALTH CAPITAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2001 5. INCOME TAXES (Continued) At February 28, 2001 and February 29, 2000, the cumulative temporary differences resulted in net deferred tax assets or liabilities consisting primarily of: February 28, February 29, 2001 2000 ---------- ---------- Deferred tax assets: Other $ 3,000 $ 4,500 Investment tax credit carryforwards 52,000 109,000 Net operating loss carryforwards 485,000 465,000 Less valuation allowance (463,300) (483,900) ---------- ---------- Deferred tax assets, net 76,700 94,600 ---------- ---------- Deferred tax liabilities: Investment in Income Funds (76,000) (94,200) Office furniture and equipment (700) (400) ---------- ---------- Deferred tax liabilities, net (76,700) (94,600) ---------- ---------- Net deferred tax assets (liabilities) $ -- $ ========== ========== The valuation allowance was increased (decreased) by ($20,600) and $146,000, respectively, for the years ended February 28, 2001 and February 29, 2000. 6. SUPPLEMENTAL CASH FLOW INFORMATION Other noncash activities associated with lease transactions Year Ended Year Ended February 28, February 29, 2001 2000 ---------- ---------- Reduction of minimum lease receivable and repayment of nonrecourse obligation associated with direct payment made by lessee to bank $ 585,000 $ 545,000 ========== ========== Other noncash activities associated with investment in income funds Increase (decrease) in due to income funds $ (61,255) $ (2,127) ========== ==========

COMMONWEALTH INCOME & GROWTH FUND I 10-K