UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

| | QUARTERLY
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934
| | -------------------------------------------------------------------------------------------------------

| | FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006
| | -------------------------------------------------

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

Commission
  File Number: 033-89476

COMMONWEALTH INCOME & GROWTH FUND II

(Exact
  name of registrant as specified in its charter)



| | Pennsylvania (State or other jurisdiction of incorporation
      or organization) | 23-2795120(I.R.S. Employer Identification Number) | 
| | --------------------------------------------------------------------------------- | ------------------------------------------------- | 

Brandywine
  Bldg. One, Suite 200

2
  Christy Drive

Chadds
  Ford, PA 19317

(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: YESNO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filerAccelerated filerNon-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YESNO






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FORM
  10-Q

September 30, 2006

TABLE OF CONTENTS



PART
          IItem
          1.
      
      Condensed
          Financial Statements
      3Item
          2.
      
      Managements
          Discussion and Analysis of Financial Condition and Results of Operations
      12Item
          3.
      
      Quantitative
          and Qualitative Disclosures About Market Risk
      13Item
          4.
      
      Controls
          and Procedures
      13PART
          IIItem
          1.
      
      Legal
          Proceedings
      13Item
          1A.
      
      Risk
          Factors
      13Item
          2.
      
      Unregistered
          Sales of Equity Securities and Use of Proceeds.
      14Item 3.


      

        Defaults Upon Senior Securities


      14Item 4.

        

        Submission of Matters to a Vote of Securities Holders

        14Item 5.

        

        Other Information

        14Item 6.

        

        Index to Exhibits

        14Signatures

        15Certifications




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Commonwealth Income & Growth Fund II, L.P.

Statement of Net Assets in Liquidation (Liquidation Basis)



September 30,2006


      

        December 31,2005(unaudited)AssetsCash and cash equivalents


      


      $


      12,172


      


      $


      3,841Lease income receivable, net of reserves of $0 as of September 30, 2006 and December 31, 2005, respectively

        

        

        10,937

        

        

        13,239Net investment in direct financing lease

        

        

        

        

        

        16,931Other receivables  Affiliated limited partnerships

        

        

        17,767

        

        

        12,782Other receivables  Commonwealth Capital Corp.

        

        

        

        

        

        6,204Prepaid Expenses

        

        

        2,202

        

        

        2543,078

        

        

        56,022Computer equipment, at cost

        

        

        943,947

        

        

        1,890,243Accumulated depreciation

        

        

        (936,389

        )

        

        (1,865,405

        )7,558

        

        

        24,838Equipment acquisition costs and deferred expenses, net

        

        

        164

        

        

        409Total Assets

        

        $

        50,800

        

        $

        81,269Liabilities and Net AssetsLiabilitiesAccounts payable

        

        $

        8,877

        

        $

        21,499Accounts payable  Commonwealth Capital Corp.

        

        

        2,740

        

        

        Accounts payable - General Partner

        

        

        29,703

        

        

        27,531Unearned lease income

        

        

        9,480

        

        

        Notes payable

        

        

        

        

        

        32,239Total Liabilities

        

        

        50,800

        

        

        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

        

        

        460,067


see accompanying notes to condensed financial statements

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Commonwealth Income & Growth Fund II, L.P.

Statement of Changes in Net Assets in Liquidation (Liquidation Basis)



Three
          MonthsEndedSeptember 302006
      
      Nine
          MonthsEndedSeptember 302006
      
      Three
          MonthsEndedSeptember 302005
      
      Six
          MonthsEndedSeptember 302005(unaudited)
      
      (unaudited)Net
          Assets in liquidation  beginning
      
      $
      
      
      $
      
      
      $
      
      
      $
      (34,651
      )Lease
          income
      
      
      9,517
      
      
      36,559
      
      
      11,948
      
      
      32,741Interest
          and other
      
      
      1,527
      
      
      1,527
      
      
      
      
      
      193Gain
          on sale of computer equipment
      
      
      7,566
      
      
      13,734
      
      
      
      
      
      31,771Operating,
          excluding depreciation
      
      
      (4,577
      )
      
      (25,671
      )
      
      (28,347
      )
      
      (78,683
      )Equipment
          management fee
      
      
      (363
      )
      
      (1,535
      )
      
      (617
      )
      
      (2,911
      )Interest
      
      
      
      
      
      (569
      )
      
      (879
      )
      
      (2,032
      )Depreciation
          and amortization
      
      
      (1,954
      )
      
      (12,329
      )
      
      (88,137
      )
      
      (180,105
      )Loss
          on sale of computer equipment
      
      
      
      
      
      
      
      
      (521
      )
      
      (521
      )Distributions
          to Investors
      
      
      (15,000
      )
      
      (15,000
      )
      
      (57,508
      )
      
      (103,694
      )Contributions
          from CCC
      
      
      
      
      
      
      
      
      131,764
      
      
      131,764Forgiveness
          from CCC
      
      
      3,284
      
      
      3,284
      
      
      
      
      
      Changes
          in estimated liquidation values of assets and liabilities
      
      
      
      
      
      
      
      
      32,297
      
      
      206,128Net
          Assets in liquidation  ending
      
      $
      
      
      $
      
      
      $
      
      
      $
      


see accompanying notes to condensed financial statements

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Commonwealth Income & Growth Fund II, L.P.

Condensed Statement of Operations

Three Months Ended March 31, 2005

(unaudited)



IncomeLease income


      


      $


      28,792Total Income

        

        

        28,792ExpensesOperating, excluding depreciation

        

        

        83,491Equipment management fee - General Partner

        

        

        300Interest

        

        

        2,093Depreciation

        

        

        109,294Amortization of equipment acquisition costs and deferred expenses

        

        

        1,473Loss on sale of computer equipment

        

        

        5,618Total expenses

        

        

        202,269Net (loss)

        

        $

        (173,477

        )Net (loss) allocated to limited partners

        

        

        (173,477

        )Net (loss) per equivalent limited partnership unit

        

        $

        (0.38

        )Weighted Average number of equivalent limited partnership units outstanding during the period

        

        

        460,067


see accompanying notes to condensed financial statements

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Commonwealth Income & Growth Fund II, L.P.

Condensed Statements of Cash Flow

For the Three Months Ended March 31, 2005



2005(unaudited)Net cash used in operating activities


      


      $


      (5,421


      )Investing
          activities:Net proceeds from the sale of computer equipment

        

        

        13,249Net cash provided by investing activities

        

        

        13,249Financing
          activities:Other receivables  Commonwealth Capital Corp.

        

        

        3,317Net cash provided by financing activities

        

        

        3,317Net increase in cash and cash equivalents

        

        

        11,145Cash and cash equivalents, beginning of period

        

        

        1,085Cash and cash equivalents, end of period

        

        $

        12,230


see accompanying notes to condensed financial statements

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NOTES TO CONDENSED FINANCIAL STATEMENTS



1.


      Business


      Commonwealth Income & Growth Fund II (the Partnership) is a limited partnership organized in the Commonwealth of Pennsylvania to acquire, own and lease various types of computer information technology equipment and other similar capital equipment, which will be leased primarily to U.S. corporations and institutions. Commonwealth Capital Corp (CCC), on behalf of the Partnership and other affiliated partnerships, acquires computer equipment subject to associated debt obligations and lease agreements and allocates a participation in the cost, debt and lease revenue to the various partnerships based on certain risk factors. The Partnerships General Partner is Commonwealth Income & Growth Fund, Inc. (the General Partner), a Pennsylvania corporation which is an indirect wholly
owned subsidiary of CCC. The Partnership began liquidation effective April 1, 2005. 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 will be made by the General Partner after consideration of all relevant factors (including prevailing economic 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.The Partnership began liquidation effective April 1, 2005. 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 will be made by the General Partner after consideration of all releva
nt factors (including prevailing economic 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.2.

        Summary ofSignificantAccountingPolicies

        Basis of Presentation

As a result of the General Partners approval of the plan of liquidation, we changed our basis of accounting to the liquidation basis effective as of April 1, 2005. This basis of accounting is considered appropriate when, among other things, liquidation of a company is probable and the net realizable value of assets is reasonably determinable. Under the liquidation basis of accounting, assets are stated at their estimated net realizable cash value and liabilities are stated at their anticipated settlement amounts. There are substantial risks and uncertainties associated with carrying out the liquidation of the Partnership. The valuations presented in the accompanying Statement of Net Assets in Liquidation represent estimates, based on present facts and circumstances, of the net realizable values of assets and the costs associated with carrying
out the liquidation. The actual costs and values are expected to differ from the amounts shown herein and could be greater or lesser than the amounts recorded.



In presenting our Statement of Net Assets in liquidation at September 30, 2006, for the quarter ended September 30, 2006, we recorded a $2,262 increase to net assets. This increase represents the present value of future minimum lease payments.



The financial information presented as of any date other than December 31, 2005 has been prepared from the books and records without audit. Financial information as of December 31, 2005 has been derived from the audited financial statements of the Partnership, but does not include all disclosures required by generally accepted accounting principles. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information for the periods indicated have been included. For further information regarding the Partnerships accounting policies, refer to the financial statements and related notes included in the Partnerships annual report on Form 10-K for the year ended December 31, 2005.


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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. The fair value is determined based on estimated discounted cash flows to be generated by the asset. The Partnership determined that no impairment existed as of September 30, 2006.Depreciation on computer equipment for financial statement purposes is based on the straight-line method over estimated useful lives of four years.Net Assets in Liquidation per Equivalent Limited Partnership Unit



In 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 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 units outstanding during the period.


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3.


      Net
          Investment in Direct Financing Leases


      The following lists the components of the net investment in direct financing leases as of  September 30, 2006 and December 31, 2005:




September 30,2006
      
      December 31,2005Minimum
          lease payments receivable
      
      $
      
      
      $
      32,808Less:
          Unearned revenue
      
      
      
      
      
      15,877Net
          investment in direct financing leases
      
      $
      
      
      $
      16,931




4.


      Computer

        Equipment


      The Partnership is the lessor of equipment under operating leases with periods ranging from 12 to 36 months. In general, the lessee pays associated costs such as repairs and maintenance, insurance and property taxes.



Through September 30, 2006, the Partnerships leasing operations consist 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.Remarketing fees are paid to the leasing companies from which the Partnership purchases leases. These are fees that are earned by the leasing companies when the initial terms of the lease have been met. The General Partner believes that this strategy adds value since it entices the leasing company to stay with the lease for potential extensions, remarketing or sale of equipment. This strategy potentially minimizes any conflicts the leasing company may have with a potential new lease and will potentially assist in maximizing overall portfolio performance. The remarketing fee is tied into lease performance thresholds and is factored in the negotiation of the fee. Remarketing fees incurred in connection with lease extensions are accounted for as operating costs. Remarketing fees incurred in connection with the sale of
computer equipment are included in our gain or loss calculations. For the nine months ended September 30, 2006 and 2005, remarketing fees were paid in the amounts of $700 and $17,000, respectively.The Partnerships share of the computer equipment in which they participate with other partnerships at September 30, 2006 and December 31, 2005 was approximately$48,000 and $785,000, respectively, which is included in the Partnerships fixed assets on their balance sheet. The total cost of the equipment shared by the Partnership with other partnerships at September 30, 2006 and December 31, 2005 was approximately$115,000 and $1,536,000, respectively.The Partnership had no outstanding debt associated with this equipment at September 30,
2006 and December 31, 2005. The Partnership also had no total outstanding debt at September 30, 2006 and December 31, 2005 related to the shared equipment.


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The following is a schedule of future minimum rentals on noncancellable operating leases at September 30, 2006:




AmountThree
          Months ended December 31, 2006
      
      $
      1,357Year
          Ended December 31, 2007
      
      
      905$
      2,262




5.


      Related
          Party

Transactions


      Receivables/Payables



As of September 30, 2006, the Partnerships related party receivables and payables are short term, unsecured, and non-interest bearing.



Reimbursable Expenses



The General Partner and its affiliates are entitled to reimbursement by the Partnership for the cost of supplies and 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 the nine months ended September 30, 2006 and 2005, the Partnership recorded $12,000 and $100,000, respectively, for reimbursement of expenses to the General Partner.



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. There were no equipment acquisition fees earned bythe General Partner during the nine months ended September 30, 2006 and 2005.



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) 2% 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 and capital leases. During the nine months ended September 30, 2006 and 2005, equipment management fees of approximately $1,000 and $3,000, respectively, were earned bythe General Partner.


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6.


      Notes
          Payable


      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) 3% of the sales price for such equipment is payable to the General Partner. The payment of such fee is subordinated to the receipt by the limited partners of the net disposition proceeds from such sale in accordance with the Partnership Agreement. Such fee will be reduced to the extent any liquidation or resale fees are paid to unaffiliated parties. During the nine months ended September 30, 2006 and 2005, equipment liquidation fees of approximately $600 and $2,000, respectively, were earned by the General Partner.



Notes payable consisted of the following:




September 30,2006
      
      December 31,2005Installment
          notes payable to banks, interest ranging from 5.0% to 6.50%: due in
          monthly installments ranging from $507 to $1,736, including interest,
          with final payment made June 2006. All obligations have been satisfied.
      
      $
      
      
      $
      32,239




Notes are secured by specific computer equipment and are nonrecourse liabilities of the Partnership.7.

        SupplementalCash FlowInformation

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




Nine
          months ended September 30,
      
      2006
      
      2005Lease
          income, net of interest expense on notes payable realized as a result
          of direct payment of principal by lessee to bank
      
      $
      
      
      $
      15,082No
          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.


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Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations

As a result of the General Partners approval of the plan of dissolution, we changed our basis of accounting to the liquidation basis as of April 1, 2005. This basis of accounting is considered appropriate when, among other things, liquidation of a company is probable and the net realizable value of assets is reasonably determinable. Under the liquidation basis of accounting, assets are stated at their estimated net realizable cash value and liabilities are stated at their anticipated settlement amounts. 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 will be made by the General Partner after consideration of all relevant factors (including prevailing economic 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.

Liquidity and Capital Resources

The Partnerships primary sources of capital for the three months ended March 31, 2005 were net proceeds received from sale of equipment totaling approximately $13,000 and the repayment of receivables from CCC of approximately $3,000. The primary uses of cash for the three months ended March 31, 2005 were for cash used in operations of approximately $5,000.

For the three month period ended March 31, 2005 the Partnership used cash flows from operating activities of approximately $5,000. This includes a net loss of approximately $173,000 and depreciation and amortization expenses of approximately $111,000. Other noncash activities included in the determination of net income include direct payments of lease income by lessees to banks of approximately $6,000.

As of September 30, 2006, the Partnership had future minimum rentals on non-cancelable operating leases of $1,300 for the balance of the year ending December 31, 2006 and $900 thereafter. At September 30, 2006, there was no outstanding debt.

The Partnerships share of the computer equipment in which they participate with other partnerships at September 30, 2006 and December 31, 2005 was approximately$48,000 and $785,000, respectively, which is included in the Partnerships fixed assets on their balance sheet. The total cost of the equipment shared by the Partnership with other partnerships at September 30, 2006 and December 31, 2005 was approximately$115,000 and $1,536,000, respectively.The Partnership had no outstanding debt associated with this equipment at September 30, 2006 and December 31, 2005. The
partnership also had no total outstanding debt at September 30, 2006 and December 31, 2005 related to the shared equipment.

Changes in Net Assets in Liquidation for the quarter ended September 30, 2006

In presenting our Statement of Net Assets in Liquidation at September 30, 2006, for the quarter ended September 30, 2006, we recorded a $2,262 increase to net assets. This increase represents the present value of future minimum lease payments.

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Item 3. 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. There are no material changes to this disclosure related to these items since the filing of our Annual Report on Form 10-K for the year ended December 31, 2005.

Item 4. Controls and Procedures

The Chief Executive Officer and Financial Officer of the General Partner has conducted a review of the General Partners disclosure controls and procedures as of September 30, 2006.

The Companys disclosure controls and procedures include the Partnerships controls and other procedures designed to ensure that information required to be disclosed in this and other reports filed under the Securities Exchange Act of 1934, as amended (the  Exchange Act) is accumulated and communicated to the General Partners management, including its chief executive officer and a financial officer, to allow timely decisions regarding required disclosure and to ensure that such information is recorded, processed, summarized and reported with the required time periods.

Based upon this review, the General Partners Chief Executive Officer and Financial Officer has concluded that the Partnerships disclosure controls (as defined pursuant to Rule 13a-14 c promulgated under the Exchange Act) are sufficiently effective to ensure that the information required to be disclosed by the Partnership in the reports it files under the Exchange Act is recorded, processed, summarized and reported with adequate timeliness.

There have been no changes in the General Partners internal controls or in other factors that could materially affect our disclosure controls and procedures in the quarter ended September 30, 2006, that have materially affected or are reasonably likely to materially affect the General Partners internal controls over financial reporting.

Part II: OTHER INFORMATION

Commonwealth Income & Growth Fund II



Item 1.


      

        Legal
          Proceedings.N/AItem 1 A.

        

        Risk Factors


THERE IS NO PUBLIC MARKET FOR THE UNITS, AND YOU MAY BE UNABLE TO SELL OR TRANSFER YOUR UNITS AT A TIME AND PRICE OF YOUR CHOOSING

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There exists no public market for the units, and the General Partner does not expect a public market for units to develop. The units cannot be pledged or transferred without the consent of the General Partner. The units should be purchased as a long-term investment only.

The general partner has sole discretion in deciding whether we will redeem units in the future. Consequently, you may not be able to liquidate your investment in the event of an emergency. You must be prepared to hold your units for the life of the fund.

LIMITED PARTNERS DO NOT HAVE THE RIGHT TO VOTE ON OR OTHERWISE APPROVE OR DISAPPROVE OF ANY PARTICULAR INVESTMENT TO BE MADE BY THE PARTNERSHIP OR THE TERMS OF ANY SALE OF EQUIPMENT IN LIQUIDATION.

WE CAN GIVE NO ASSURANCE OF THE AMOUNT OR TIMING OF ANY FUTURE DISTRIBUTION TO THE LIMITED PARTNERS UNDER THE PLAN OF DISSOLUTION.

The liquidation and dissolution process is subject to numerous uncertainties and may not result in any remaining capital for future distribution to the limited partners. We cannot provide any assurances that we will actually make additional distributions.



Item 2.


      

        Changes in Securities.N/AItem 3.

        

        Defaults Upon Senior Securities.N/AItem 4.

        

        Submission of Matters to a Vote of Securities Holders.N/AItem 5.

        

        Other Information.N/AItem 6.

        

        Exhibits and Reports on Form 8-Ka)

        

        Exhibits:31.1 THE RULE 15d-14(a)31.2 THE RULE 15d-14(a)32.1 SECTION 1350 CERTIFICATION OF CEO32.2 SECTION 1350 CERTIFICATION OF CFOb)

        

        Reports on Form 8-KN/A


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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



COMMONWEALTH
          INCOME & GROWTH FUND IIBY: COMMONWEALTH
          INCOME & GROWTH FUND, INC. 
          General PartnerNovember
          14, 2006
      
      
      By:
          /s/ Kimberly A. SpringsteenDate
      
      
      Kimberly
          A. SpringsteenChief Executive Officer


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