##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    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, 2006
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number: 33-89476
 COMMONWEALTH INCOME & GROWTH FUND II
  Pennsylvania
    
    23-2795120(State or other jurisdiction of
    
    (I.R.S. Employer Identification Number)incorporation or organization)
 
 
  Title of each class to
    
    Name of exchange onbe so registered
    
    which each classis to be registered
 None
    
    N/A
  Units of Limited Partnership Interest
 o þ
 o þ
 þ o
 þ o
  o o þ
 o þ




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##### 



FORM 10-K
DECEMBER 31, 2006
 TABLE OF CONTENTS
 PART IItem 1. Business
    
    
    3Item 1A. Risk Factors
    
    
    6Item 1B. Unresolved Staff Comments
    
    
    6Item 2. Properties
    
    
    6Item 3. Legal Proceedings
    
    
    6Item 4. Submission of Matters to a Vote of Security Holders
    
    
    7PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
    
    
    7Item 6. Selected Financial Data
    
    
    9Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    11Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    14Item 8. Financial Statements and Supplementary Data
    
    
    14Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    14Item 9A. Controls and Procedures
    
    
    15Item 9B. Other Information
    
    
    15PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    15Item 11. Executive Compensation
    
    
    18Item 12. Security Ownership of Certain Beneficial Owners and Management
    
    
    18Item 13. Certain Relationships and Related Transactions and Director Independence
    
    
    19Item 14. Principal Accountant Fees and Services
    
    
    25PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    25Index to ExhibitsSignaturesCertificationsRule 13a-14(a)/15d-14(a) Certifications by the Principal Executive OfficerRule 13a-14(a)/15d-14(a) Certifications by the Principal Financial OfficerSection 1350 Certifications by the Principal Executive Officer and Principal Financial Officer
  2




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##### Table of Contents



PART I
 
 ITEM 1: BUSINESS
 GENERAL
    PRINCIPAL INVESTMENT OBJECTIVES
  TYPES OF EQUIPMENT
 Computer Information Technology Equipment.
  3




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DESCRIPTION OF LEASES
    LIQUIDATION POLICIES
 MANAGEMENT OF EQUIPMENT
 4




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GENERAL RESTRICTIONS
 (a)
    
    invest in junior trust deeds unless received in connection with the sale of an item
of
Equipment in an aggregate amount which did 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 was not 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.
  EMPLOYEES
 
 ITEM 1A. RISK FACTORS
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2: PROPERTIES
  
 ITEM 3: LEGAL PROCEEDINGS
  
 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 PART II
 
 ITEM 5: MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
 5




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##### Table of Contents



GENERAL LIMITATIONS
 ALLOCATION AND DISTRIBUTION BETWEEN THE GENERAL PARTNER AND THE LIMITED PARTNERS
      Quarter Ended
    
    2006
    
    
    2005
    
    
    2004March 31
    
    $
    0
    
    
    $
    0
    
    
    $
    114,286June 30
    
    
    0
    
    
    
    45,725
    
    
    
    114,285September 30
    
    
    14,850
    
    
    
    56,933
    
    
    
    114,285December 31
    
    
    9,900
    
    
    
    56,831
    
    
    
    56,925$
    24,750
    
    
    $
    159,489
    
    
    $
    399,781
 6




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##### Table of Contents



ALLOCATIONS AND DISTRIBUTIONS AMONG THE LIMITED PARTNERS
    
 ITEM 6: SELECTED FINANCIAL DATA
  YEARS ENDED DECEMBER 31,Period endedStatements of Operations Data:
    
    March 31, 2005
    
    2004
    
    2003
    
    2002Lease Income
    
    $
    28,792
    
    
    $
    697,530
    
    
    $
    1,515,990
    
    
    $
    2,711,579Net (Loss) Income
    
    
    (173,477
    )
    
    
    (541,798
    )
    
    
    129,629
    
    
    
    (251,242
    )Cash Distributions
    
    
    
    
    
    
    403,419
    
    
    
    577,200
    
    
    
    519,480Net (Loss) Income allocated
to Limited Partners
    
    
    (173,477
    )
    
    
    (545,836
    )
    
    
    123,857
    
    
    
    (256,436
    )Net Income (Loss) per Limited
Partner Unit
    
    
    (0.38
    )
    
    
    (1.18
    )
    
    
    0.28
    
    
    
    (0.55
    )Cash Distribution per Limited
Partner Unit
    
    
    
    
    
    
    0.87
    
    
    
    1.24
    
    
    
    1.12
 7




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##### Table of Contents



AS OF DECEMBER 31,Period ended MarchOther Data:
    
    31, 2005
    
    2004
    
    2003
    
    2002Net cash (used in)
provided by
operating
activities
    
    $
    (5,421
    )
    
    $
    (102,527
    )
    
    $
    61,782
    
    
    $
    480,314Net cash provided
by (used in)
investing
activities
    
    
    13,249
    
    
    
    239,177
    
    
    
    406,933
    
    
    
    13,199Net cash provided
by (used in)
financing
activities
    
    
    3,317
    
    
    
    (173,323
    )
    
    
    (464,318
    )
    
    
    (474,577
    )
 AS OF DECEMBER 31,2006
    
    2005
    
    2004
    
    2003
    
    2002Total Assets
    
    $
    
    
    
    $
    81,269
    
    
    $
    522,871
    
    
    $
    1,992,457
    
    
    $
    3,592,482Notes Payable
    
    
    
    
    
    
    32,239
    
    
    
    115,967
    
    
    
    728,365
    
    
    
    1,780,299Partners Capital
    
    
    
    
    
    
    
    
    
    
    138,826
    
    
    
    1,084,443
    
    
    
    1,532,014Net Assets in
Liquidation
    
    $
    
    
    
    $
    
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
  
 ITEM 7: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  CRITICAL ACCOUNTING POLICIES AND ESTIMATES
   8




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NET ASSETS IN LIQUIDATION
  REVENUE RECOGNITION
   LONG-LIVED ASSETS
   REIMBURSABLE EXPENSES
  LIQUIDITY AND CAPITAL RESOURCES
    9




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RESULTS OF OPERATIONS
       10




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NET INCOME / LOSS
   COMMITMENTS AND CONTINGENCIES
 Contractual Cash Obligations
  Payments due by period
 Total
    
    2005Installment notes payable due 2006:Principal
    
    $
    32,239
    
    
    $
    32,239Interest
    
    
    567
    
    
    
    567Total
    
    $
    32,806
    
    
    $
    32,806
  RECENT ACCOUNTING PRONOUNCEMENTS
 (SAB 108)
 11




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ITEM 7.A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 8: FINANCIAL STATEMENTS
  
 ITEM 9: CHANGES IN  AND DISAGREEMENTS WITH
ACCOUNTANTS ON
ACCOUNTING         AND FINANCIAL DISCLOSURE
  
 ITEM 9A: CONTROLS AND PROCEDURES
  
 ITEM 9B: OTHER INFORMATION
  
 ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 GENERAL
    12




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NAME
    
    TITLEKimberly A. Springsteen
    
    Chairman of the Board, Chief Executive Officer, Chief Compliance Officer of CCC, CCSC, & CIGF, Inc.Henry J. Abbott
    
    President of CCC & CIGF, Inc. Director of CCC, CCSC & CIGF,Inc.Katrina M. Mason
    
    President of CCSC, Due Diligence Officer, Director of CCC, CCSC & CIGF, Inc.Lynn A. Franceschina
    
    Executive Vice President, Director of CCC, CCSC & CIGF, Inc.Jay Dugan
    
    Executive Vice President & Chief Technology Officer of CCC, CCSC & CIGF, Inc. and Director of CCCPeter Daley
    
    Independent Director of CCCRichard G. Devlin III
    
    Vice President and General Counsel of CCC, CCSC & CIGF Inc.Edmond J. Enderle
    
    Vice President and Controller of CCC, CCSC, & CIGF Inc.James Green
    
    Vice President & Portfolio Manager of CCC & CIGF, Inc.James Pruett
    
    Vice President & Compliance Officer of CCC, CCSC, & CIGF, Inc.Mark Hershenson
    
    Vice President & Broker Services Manager of CCC, CCSC & CIGF, Inc.Donna Abbott
    
    Vice President & Investor Services Manager of CCC, CCSC & CIGF, Inc.
 Kimberly A. Springsteen,
 Henry J. Abbott
 13




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Katrina M. Mason ,
 Lynn A. Franceschina
 Jay Dugan
 Peter Daley
 14




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Richard G. Devlin III,
 Edmond J. Enderle,
 James Green ,
 15




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James Pruett
 Mark Hershenson
 Donnamarie D. Abbott
   CODE OF ETHICS
  
 ITEM 11: EXECUTIVE COMPENSATION
  16




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ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
  
 ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  TYPE OF COMPENSATION
    
    AMOUNT
    
    AMOUNT
    
    AMOUNTENTITY RECEIVING
    
    OPERATIONAL AND SALE
    
    INCURRED
    
    INCURRED
    
    INCURREDCOMPENSATION
    
    OR LIQUIDATION STAGES
    
    DURING 2006
    
    DURING 2005
    
    DURING 2004The General Partner
and its Affiliates
    
    Reimbursable
Expenses. The
General and its
Affiliates are
entitled to
reimbursement by the
Partnership for the
cost of goods,
supplies or services
obtained and used by
the General Partner
in connection with
the administration
and operation of the
Partnership from
third parties
unaffiliated with
the General Partner.
In addition, the
General Partner and
its affiliates are
entitled to
reimbursement of
certain expenses
incurred by the
General Partner and
its affiliates in
connection with the
administration and
operation of the
Partnership. The
amounts set forth on
this table do not
include expenses
incurred in the
offering of Units.
    
    $
    0
    
    
    $
    105,000
    
    
    $
    331,000
 17




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The General Partner
    
    Equipment
Acquisition Fee. An
Equipment
Acquisition Fee of
four percent of the
Purchase Price of
each item of
Equipment purchased
as compensation for
the negotiation of
the acquisition of
the Equipment and
the lease thereof or
sale under a
Conditional Sales
Contract. The fee
was paid upon each
closing of the
Offering with
respect to the
Equipment purchased
by the Partnership,
with the net
proceeds of the
Offering available
for investment in
Equipment. If the
Partnership acquires
Equipment in an
amount exceeding the
net proceeds of the
Offering available
for investment in
Equipment, the fee
will be paid when
such Equipment is
acquired.
    
    $
    0
    
    
    $
    0
    
    
    $
    1,000The General Partner
    
    Equipment Management
Fee. 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)
five percent of the
Gross Lease Revenues
attributable to
Equipment which is
subject to Operating
Leases.
    
    $
    1,600
    
    
    $
    3,800
    
    
    $
    36,000The General Partner
    
    Partnership Income
and Distributions.
The General Partner
has a present and
continuing one
percent interest of
$1,000 in the
Partnerships item
of income, gain,
loss, deduction,
credit, and tax
preference. In
addition, the
General Partner
receives one percent
of Cash Available
for Distribution
until the Limited
Partners have
received
distributions of
Cash Available for
Distribution equal
to their Capital
Contributions plus
the 10% Priority
Return and
thereafter, the
General Partner will
receive 10% of Cash
Available for
Distribution.
    
    $
    0
    
    
    $
    0
    
    
    $
    4,038
 GLOSSARY
    18




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20




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ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
 AUDIT FEES
  AUDIT-RELATED FEES
  21




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TAX FEES
  ALL OTHER FEES
  PRE-APPROVAL POLICIES AND PROCEDURES
   
 PART IV
 
 ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
  Report of Independent Registered Public Accounting Firm
    
    F-1This page
not used
    
    F-2Statements of Net Assets in Liquidation at December 31, 2006 and 2005
    
    F-3Statements of Changes in Net Assets in Liquidation for the year
ended December 31, 2006 and the period from April 1, 2005 to
December 31, 2005
    
    F-4Statements of Operations for the three months ended March 31, 2005
and the year ended December 31, 2004
    
    F-5Statements of Partners Capital (Deficit) for the three months
ended March 31, 2005 and the year ended December 31, 2004
    
    F-6Statements of Cash Flows for the three months ended March 31, 2005 and
year ended December 31, 2004.
    
    F-7Notes to Financial Statements
    
    F-9
 22




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Schedules are omitted because they are not applicable, not required, or because the required
information is included in the financial statements and notes thereto.(a)(3)
    
    Exhibits.* 3.1 Certificate of Limited Partnership
**3.2 Agreement of Limited Partnership* Incorporated by reference from the Partnerships Registration Statement on Form S-1
(Registration No. 33-89476)(b)
    
    Reports on Form 8-K
    (c)
    
    Exhibits.
 31.1
    
    Rule 13a-14(a)/15d-14(a) Certifications by the Principal Executive Officer31.2
    
    Rule 13a-14(a)/15d-14(a) Certifications by the Principal Financial Officer32
    
    Section 1350 Certifications by the Principal Executive Officer and Principal
Financial Officer
 23




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SIGNATURES
  COMMONWEALTH INCOME & GROWTH FUND IIBy:
    
    COMMONWEALTH INCOME & GROWTH FUND, INC., General PartnerBy:
    

/s/
Kimberly A. SpringsteenKimberly A. Springsteen, Chief Executive Officer
  SIGNATURE
    
    CAPACITY/s/ Kimberly A. Springsteen
Kimberly A. Springsteen
    
    Chairman, Chief Executive Officer, 
Commonwealth Income & Growth Fund, Inc./s/ Henry J. Abbott
Henry J. Abbott
    
    Director, President, 
Commonwealth Income & Growth Fund, Inc.
 24




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Commonwealth Income
& Growth Fund II
 Years Ended December 31, 2006, 2005 and 2004




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Commonwealth Income
& Growth Fund II
 Financial Statements
Years Ended December 31, 2006, 2005 and 2004




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Commonwealth Income & Growth Fund II
 ContentsReport of Independent Registered Public Accounting Firm
    
    
    F-1Financial statementsThis page
not used
    
    
    F-2Statements of net assets in liquidation
    
    
    F-3Statements of changes in net assets in liquidation
    
    
    F-4Statements of operations
    
    
    F-5Statements of partners capital (deficit)
    
    
    F-6Statements of cash flows
    
    
    F-7Notes to financial statements
    
    
    F-9




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Report of Independent Registered Public Accounting Firm




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Commonwealth Income & Growth Fund II
 
 Statement of Net Assets in Liquidation
 December 31,
    
    2006
    
    2005AssetsCash and cash equivalents
    
    $
    
    
    
    $
    3,841Lease income receivable, net of reserves of $0 as of December
31, 2005
    
    
    
    
    
    
    13,239Net investment in direct financing lease
    
    
    
    
    
    
    16,931Other receivables  Affiliated limited partnerships
    
    
    
    
    
    
    12,782Other receivables  Commonwealth Capital Corp.
    
    
    
    
    
    
    6,204Prepaid expenses
    
    
    
    
    
    
    25
    
    
    
    56,022Computer equipment, at cost
    
    
    
    
    
    
    1,890,243Accumulated depreciation
    
    
    
    
    
    
    (1,865,405
    )24,838Equipment acquisition costs and deferred expenses, net
    
    
    
    
    
    
    409Total Assets
    
    $
    
    
    
    $
    81,269Liabilities and Net AssetsLiabilitiesAccounts payable
    
    $
    
    
    
    $
    21,499Accounts payable  General Partner
    
    
    
    
    
    
    27,531Notes payable
    
    
    
    
    
    
    32,239Total Liabilities
    
    
    
    
    
    
    81,269Net Assets in liquidation
    
    $
    
    
    
    $
    Net Assets in liquidation per equivalent limited partnership unit
    
    $
    
    
    
    $
    Weighted average number of equivalent
limited partnership units outstanding during the year
    
    
    
    
    
    
    460,067
 See accompanying notes to financial statements.
 F-3




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Commonwealth Income & Growth Fund II
 
 Statement of changes in Net Assets in Liquidation
 April 1,2005 toDecember 31,
    
    December 31,2006
    
    2005Net Assets in liquidation  beginning
    
    $
    
    
    
    $
    (34,651
    )Lease income
    
    
    32,054
    
    
    
    52,626Interest and other
    
    
    1,540
    
    
    
    (407
    )Gain on sale of computer equipment
    
    
    13,734
    
    
    
    37,640Operating, excluding depreciation
    
    
    (32,632
    )
    
    
    (94,865
    )Equipment management fee  General Partner
    
    
    (1,603
    )
    
    
    (3,531
    )Interest
    
    
    (569
    )
    
    
    (2,675
    )Depreciation and amortization
    
    
    (14,284
    )
    
    
    (209,899
    )Distributions to Investors
    
    
    (25,000
    )
    
    
    (161,099
    )Contributions from CCC
    
    
    26,760
    
    
    
    416,861Changes in estimated liquidation values
of assets and liabilities
    
    
    
    
    
    
    34,651Net Assets in liquidation  ending
    
    $
    
    
    
    $
    
 See accompanying notes to financial statements.
 F-4




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Commonwealth Income & Growth Fund II
 
 Statements of Operations
 Period ended
    
    Year endedMarch 31,
    
    December 31,2005
    
    2004IncomeLease
    
    $
    28,792
    
    
    $
    697,530Interest and other
    
    
    
    
    
    
    44,781Gain on sale of equipment
    
    
    
    
    
    
    Total income
    
    
    28,792
    
    
    
    742,311ExpensesOperating, excluding depreciation
    
    
    83,491
    
    
    
    398,197Equipment management fee, General Partner
    
    
    300
    
    
    
    36,016Depreciation
    
    
    109,294
    
    
    
    728,595Amortization of equipment acquisition
costs and deferred expenses
    
    
    1,473
    
    
    
    41,321Interest
    
    
    2,093
    
    
    
    26,255Loss on sale of equipment
    
    
    5,618
    
    
    
    53,725Total expenses
    
    
    202,269
    
    
    
    1,284,109Net (loss) income
    
    $
    (173,477
    )
    
    $
    (541,798
    )Net (loss) income per equivalent limited
partnership unit
    
    $
    (0.38
    )
    
    $
    (1.18
    )Weighted average number of equivalent
limited partnership units outstanding
during the period
    
    
    460,067
    
    
    
    460,067
 See accompanying notes to financial statements.
 F-5




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Commonwealth Income & Growth Fund II
 
 Statements of Partners Capital
 General
    
    LimitedPartner
    
    Partner
    
    General
    
    LimitedUnits
    
    Units
    
    Partner
    
    Partners
    
    TotalBalance,January 1, 2004
    
    
    50
    
    
    
    460,067
    
    
    $
    1,000
    
    
    $
    1,083,443
    
    
    $
    1,084,443Net income (loss)
    
    
    
    
    
    
    
    
    
    
    4,038
    
    
    
    (545,836
    )
    
    
    (541,798
    )Distributions
    
    
    
    
    
    
    
    
    
    
    (4,038
    )
    
    
    (399,781
    )
    
    
    (403,819
    )Balance,December 31, 2004
    
    
    50
    
    
    
    460,067
    
    
    
    1,000
    
    
    
    137,826
    
    
    
    138,826Net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (173,477
    )
    
    
    (173,477
    )Distributions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance,March 31, 2005
    
    
    50
    
    
    
    460,067
    
    
    $
    1,000
    
    
    $
    (35,651
    )
    
    $
    (34,651
    )
 See accompanying notes to financial statements.
 F-6




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Commonwealth Income & Growth Fund II
 
 Statements of Cash Flows
 Period ended
    
    Year endedMarch 31,
    
    December 31,2005
    
    2004Cash flows from operating activitiesNet (loss)
    
    $
    (173,477
    )
    
    $
    (541,798
    )Adjustments to reconcile net (loss) to net cash
(used in) operating activitiesDepreciation and amortization
    
    
    110,767
    
    
    
    (769,917
    )Loss on sale of computer equipment
    
    
    5,618
    
    
    
    53,725Other noncash activities included in
determination of net (loss)
    
    
    (5,951
    )
    
    
    (574,117
    )Changes in assets and liabilitiesLease income receivable
    
    
    1,173
    
    
    
    (4,928
    )Minimum lease receivables
    
    
    1,155
    
    
    
    4,620Accounts receivable, affiliated
limited partnerships
    
    
    10,184
    
    
    
    (8,904
    )Deposits
    
    
    
    
    
    
    (25
    )Prepaid fees
    
    
    
    
    
    
    3,200Accounts payable
    
    
    (11,984
    )
    
    
    (2,091
    )Accounts payable, General Partner
    
    
    27,853
    
    
    
    166,777Accounts payable, Commonwealth
Capital Corp.
    
    
    30,822
    
    
    
    42,499Other accrued expenses
    
    
    
    
    
    
    (5,938
    )Unearned lease income
    
    
    (1,581
    )
    
    
    (5,464
    )Net cash (used in) operating activities
    
    
    (5,421
    )
    
    
    (102,527
    )
 F-7




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##### Table of Contents



Commonwealth Income & Growth Fund II
 Statements of Cash Flows
 Period ended
    
    Year endedMarch 31,
    
    December 31,2005
    
    2004Cash flows from investing activitiesCapital expenditures
    
    $
    
    
    
    $
    (4,049
    )Net proceeds from sale of computer equipment
    
    
    13,249
    
    
    
    244,072Equipment acquisition fees paid to the General
Partner
    
    
    
    
    
    
    (846
    )Net cash provided by investing            activities
    
    
    13,249
    
    
    
    239,177Cash flows from financing activitiesDistributions to partners
    
    
    
    
    
    
    (403,819
    )Accounts receivable  Commonwealth Capital Corp.
    
    
    3,317
    
    
    
    230,667Debt placement fee paid to the General Partner
    
    
    
    
    
    
    (171
    )Net cash provided by (used in) financing activities
    
    
    3,317
    
    
    
    (173,323
    )Net increase (decrease) in cash and cash equivalents
    
    
    11,145
    
    
    
    (36,673
    )Cash and cash equivalents at beginning of year
    
    
    1,085
    
    
    
    37,758Cash and cash equivalents at end of period
    
    $
    12,230
    
    
    $
    1,085
 See accompanying notes to financial statements.
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##### Table of Contents



Commonwealth Income & Growth Fund II
 
 Notes to Financial Statements
 1. Business
    
    Commonwealth Income &
Growth Fund II (the
Partnership) was 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
was leased primarily to
U.S. corporations and
institutions. Commonwealth
Capital Corp (CCC), on
behalf of the Partnership
and other affiliated
partnerships, acquires
computer equipment subject
to associated debt
obligations and lease
agreements and allocates a
participation in the cost,
debt and lease revenue to
the various partnerships
based on certain risk
factors. The Partnerships
General Partner is
Commonwealth Income &
Growth Fund, Inc. (the
General Partner), a
Pennsylvania corporation
which is an indirect wholly
owned subsidiary of CCC.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
2006, 2005, and 2004,
annual cash distributions
to limited partners were
made at rate of 0.26%,
1.7%, and 4.3%,
respectively, of their
original contributed
capital. Distributions
during 2006, 2005, and 2004
reflect an annual return of
capital in the amount of
approximately $0.05, $0.35,
and $0.87, respectively,
per weighted average number
of limited partnership
units outstanding during
the year.2. Liquidation
    
    The Board of CCC resolved
on November 30, 2006 to
fully liquidate the fund by
December 31, 2006. The
Partnership began disposing
of its Equipment in April
2005. Leases in place
April 2005 were allowed to
run through maturity and
expire. At December 31,
2006, fourteen leases were
transferred to CCC. These
fourteen leases had a net
book value at the time of
sale of $5,000. The
Partnership was no longer
conducting business at
December 31, 2006 and a
final distribution in the
amount of $10,000 was made
on December 29, 2006.
 F-9




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##### Table of Contents



Commonwealth Income & Growth Fund II
 Notes to Financial Statements
 3. Summary of
Significant 
Accounting 
Policies
    
    Revenue RecognitionThrough December 31, 2006 the Partnerships leasing operations consisted
substantially of operating leases and seven direct-financing leases. Operating
lease revenue is recognized on a monthly basis in accordance with the terms of the
lease agreement. Unearned revenue from direct financing agreements is amortized
to revenue over the lease term.Use of EstimatesThe preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.Fair Value of Financial InstrumentsStatement of Financial Accounting Standards (SFAS) No.107, Disclosures About
Fair Value of Financial Instruments, requires disclosure of the fair value of
certain instruments. The carrying values of cash, receivables and payables
approximate fair value due to the short term maturity of these instruments. For
debt, the carrying amounts approximate fair value because the interest rates
approximate current market rates.Long-Lived AssetsThe Partnership evaluates its long-lived assets when events or circumstances
indicate that the value of the asset may not be recoverable. The Partnership
determines whether impairment exists by estimating the undiscounted cash flows to
be generated by each asset. If the estimated undiscounted cash flows are less
than the carrying value of the asset then impairment exists. The amount of the
impairment is determined based on the difference between the carrying value and
the fair value. The fair value is determined based on estimated discounted cash
flows to be generated by the asset. In 2006, the Partnership determined that no
impairment existed.
 F-10




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Commonwealth Income & Growth Fund II
 Notes to Financial Statements
 In 2005 and 2004, 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 $9,000, and
$40,000, in the fourth quarter of 2005 and 2004, respectively 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 AssetsEquipment acquisition costs and deferred expenses are amortized on a straight-line
basis over two- to-four year lives. Unamortized acquisition fees and deferred
expenses are charged to amortization expense when the associated leased equipment
is sold.Cash and Cash EquivalentsThe Partnership considers all highly liquid investments with a maturity of three
months or less to be cash equivalents. Cash equivalents have been invested in a
money market fund investing directly in Treasury obligations. At times, the
balances may exceed federally insured limits. The Partnership mitigates this risk
by depositing funds with a major financial institution. The Partnership has not
experienced any losses in such accounts, and believes it is not exposed to any
significant credit risk.Accounts ReceivableAccounts receivable includes current accounts receivable, net of allowances and
other accruals. The Partnership regularly reviews the collectability of its
receivables and the credit worthiness of its customers and adjusts its allowance
for doubtful accounts accordingly.
 F-11




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##### Table of Contents



Commonwealth Income & Growth Fund II
 Notes to Financial Statements
 Income TaxesThe 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.Net Assets in Liquidation per Equivalent Limited Partnership UnitIn connection with the conversion from the going-concern basis of accounting to
the liquidation basis, the net assets in liquidation per equivalent limited
partnership unit is computed based upon net assets in liquidation allocated to the
limited partners and the weighted average number of equivalent limited partner
units outstanding during the period.Net Income (Loss) Per Equivalent Limited Partnership UnitThe 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.Reimbursable ExpensesReimbursable expenses, which are charged to the Partnership by CCC in connection
with the administration and operation of the Partnership, are allocated to the
Partnership based upon several factors including, but not limited to, the number
of investors, compliance issues, and the number of existing leases.
 F-12




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##### Table of Contents



Commonwealth Income & Growth Fund II
 Notes to Financial Statements
 Forgiveness of Related Party PayablesIn accordance with Accounting Principles Board Opinion No. 26, Early
Extinguishment of Debt, the Partnership accounts for forgiveness of related party
payables as partners capital transactions.Recent Accounting PronouncementsIn September 2006, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin (SAB) 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements
(SAB 108). SAB 108 was issued to provide consistency between how registrants
quantify financial statement misstatements. SAB 108 established an approach that
requires quantification of financial statement misstatements based on the effects
of the misstatement on each of a registrants financial statements and the related
financial statement disclosures. The SEC staff believes that both a balance sheet
and an income statement approach should be employed by the registrant to quantify
errors and evaluate if either approach results in quantifying a material
misstatement. The effective date for SAB 108 is the first annual period ending
after November 15, 2006. This bulletin was implemented by the Partnership for the
year ended December 31, 2006 and did not have an impact on the financial
statements.4. Net Investment in
Direct Financing
    
    The following lists the components of the net investment in direct financing
leases as of December 31, 2006 and 2005:Leases
 December 31,
    
    2006
    
    2005Minimum lease payments receivable
    
    $
    
    
    
    $
    32,808Less: Unearned Revenue
    
    
    
    
    
    
    15,877Net investment in direct
financing leases
    
    $
    
    
    
    $
    16,931
 F-13




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##### Table of Contents



Commonwealth Income & Growth Fund II
 Notes to Financial Statements
 5.
    
    Computer Equipment
    

    The Partnership was the lessor of equipment under operating and capital leases
with periods ranging from 24 to 48 months. In general, associated costs such as
repairs and maintenance, insurance and property taxes are paid by the
lessee.The Partnership participates in leases that are shared with
other affiliated Partnerships. The Partnerships share of the computer equipment in which they participate at December 31, 2005
was approximately $840,000, which was included in the Partnerships fixed assets on their balance sheet.
The total cost of the equipment shared by the Partnership with other affiliated partnerships at December 31,
2005 was approximately $1,536,000. There was no outstanding debt associated with this equipment at December 31, 20056.
    
    Significant
    
    Lessees exceeding 10% of lease income for the years ended:Customers
 Lessee
    
    2006
    
    2005
    
    2004Lessee A
    
    
    
    
    
    
    
    
    
    
    41
    %Lessee B
    
    
    
    
    
    
    
    
    
    
    19
    %Lessee C
    
    
    45
    %
    
    
    36
    %
    
    
    11
    %Lessee D
    
    
    36
    %
    
    
    20
    %
    
    
    Lessee E
    
    
    17
    %
    
    
    
    
    
    
    Total % of Lease Income
    
    
    98
    %
    
    
    56
    %
    
    
    71
    %
 Lessees exceeding 10% of accounts receivable at December 31:
 Lessee
    
    2006
    
    2005Lessee A
    
    
    
    
    
    
    88
    %Total % of Accounts Receivable
    
    
    
    
    
    
    88
    %
 F-14




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##### Table of Contents



Commonwealth Income & Growth Fund II
 Notes to Financial Statements
 7.
    
    Related Party
Transactions
    
    Reimbursable ExpensesThe 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 2006, 2005 and 2004, the Partnership
recorded $25,000, $105,000, and $331,000, respectively, for
reimbursement of expenses to the General Partner.Equipment Acquisition FeeThe General Partner is entitled to be paid an equipment
acquisition fee of 4% of the purchase price of each item of
equipment purchased as compensation for the negotiation of
the acquisition of the equipment and lease thereof or sale
under a conditional sales contract. The fee was paid upon
each closing of the Offering with respect to the equipment
to be purchased by the Partnership with the net proceeds
for the Offering available for investment in equipment. If
the Partnership acquires equipment in an amount exceeding
the net proceeds of the Offering available for investment
in equipment, the fee will be paid when such equipment is
acquired. No equipment acquisition fees were paid to the
General Partner in 2006 and 2005. During 2004, equipment
acquisition fees of approximately $1,000 were paid to the
General Partner.Debt Placement FeeAs 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. There were no debt placement fees paid to
the General Partner in 2006, 2005 and 2004.
 F-15




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##### Table of Contents



Commonwealth Income & Growth Fund II
 Notes to Financial Statements
 Equipment Management FeeThe 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 2006, 2005 and
2004, equipment management fees of approximately $1,600,
$3,800, and $36,000, respectively, were paid to the General
Partner as determined pursuant to section (ii) above.Release FeeAs 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 2006, 2005 and 2004.Equipment Liquidation FeeWith 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 2006, 2005 and 2004.
 F-16




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##### Table of Contents



Commonwealth Income & Growth Fund II
 Notes to Financial Statements
 8.
    
    Notes Payable
    
    Notes payable consisted of the following:
 December 31,
    
    2006
    
    2005Installment notes
payable to banks;
interest ranging
from 5.95% to
6.50%, was due in
monthly
installments
ranging from $507
to $1,892,
including interest,
with final payments
due June 2006.
    
    
    
    
    
    
    32,339$
    
    
    
    $
    32,339
 These notes are secured by specific computer equipment and are nonrecourse
liabilities of the Partnership.
 9.
    
    Supplemental
Cash Flow
    
    Other noncash activities included in the
determination of net loss are as follows:Information
 Period ended
    
    Year endedMarch 31,
    
    December 31,2005
    
    2004Lease income, net of interest expense on
notes payable realized as a result of
direct payment of principal by lessee
to bank
    
    $
    5,951
    
    
    $
    574,117
 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.
 F-17




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##### Table of Contents



Commonwealth Income & Growth Fund II
 Notes to Financial Statements
 10.
    
    Reconciliation of Net (Loss) Reported for Financial ReportingPurposes
to Taxable (Loss) on the Federal Partnership Return
 Year ended December 31,
    
    2006
    
    
    2005
    
    
    2004Net (loss) for financial reporting purposes
    
    $
    (1,760
    )
    
    $
    (394,088
    )
    
    $
    (541,798
    )Adjustments
Depreciation
    
    
    (127,406
    )
    
    
    (22,507
    )
    
    
    195,721Amortization
    
    
    315
    
    
    
    1,997
    
    
    
    34,496Unearned lease income
    
    
    (1,033
    )
    
    
    (547
    )
    
    
    (5,464
    )Loss on sale of computer equipment
    
    
    (21,832
    )
    
    
    (207,516
    )
    
    
    (227,770
    )Other
    
    
    (12,719
    )
    
    
    10,085
    
    
    
    (78,311
    )Taxable loss on the Federal Partnership Return
    
    $
    (164,435
    )
    
    $
    (612,576
    )
    
    $
    (623,126
    )
   F-18




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##### Table of Contents



Commonwealth Income & Growth Fund II
 Notes to Financial Statements
 11.
    
    Quarterly Results
of Operation
(Unaudited)
    
    Summarized quarterly financial data for the
years ended December 31, 2006 and 2005 is as
follows:
 Quarter endedMarch 31*
    
    June 30*
    
    September 30*
    
    December 31*2006RevenuesLease and other
    
    $
    11,837
    
    
    $
    11,605
    
    
    $
    8,782
    
    
    $
    1,370Gain (loss) on
sale of computer
equipment
    
    
    5,882
    
    
    
    286
    
    
    
    7,566
    
    
    
    Total revenues
    
    
    17,719
    
    
    
    11,891
    
    
    
    16,348
    
    
    
    1,370Total costs and expenses
    
    
    19,440
    
    
    
    14,112
    
    
    
    8,632
    
    
    
    6,904Net income (loss)
    
    $
    (1,721
    )
    
    $
    (2,221
    )
    
    $
    7,716
    
    
    $
    (5,534
    )
 
 *
    
    Liquidation basis effective April 1, 2005. F-19




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##### Table of Contents



Commonwealth Income & Growth Fund II
 Notes to Financial Statements
 Quarter endedMarch 31
    
    June 30*
    
    September 30*
    
    December 31*2005RevenuesLease and other
    
    $
    28,792
    
    
    $
    20,985
    
    
    $
    11,948
    
    
    $
    11,978(Loss) gain on
sale of computer
equipment
    
    
    (5,618
    )
    
    
    31,772
    
    
    
    (521
    )
    
    
    6,389Total revenues
    
    
    23,174
    
    
    
    52,757
    
    
    
    11,427
    
    
    
    18,367Total costs and expenses
    
    
    196,651
    
    
    
    145,750
    
    
    
    117,981
    
    
    
    39,432Net income (loss)
    
    $
    (173,477
    )
    
    $
    (92,993
    )
    
    $
    (106,554
    )
    
    $
    (21,065
    )Income (loss) per limited
partner unit
    
    $
    (0.38
    )
    
    
    
    
    
    
    
    
    
    
    
 Total costs and expenses includes an impairment adjustment of approximately
$9,000 that was recorded in the fourth quarter of 2005.
 
 *
    
    Liquidation basis effective April 1, 2005. F-20