##### 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: 33-69996
 COMMONWEALTH INCOME & GROWTH FUND III
  Pennsylvania
    
    23-2895714(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 registeredNone
    
    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
    
    
    11Item 1B.
    
    Unresolved Staff Comments
    
    
    12Item 2.
    
    Properties
    
    
    12Item 3.
    
    Legal Proceedings
    
    
    12Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    12PART IIItem 5.
    
    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    12Item 6.
    
    Selected Financial Data
    
    
    15Item 7.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 8.
    
    Financial Statements and Supplementary Data
    
    
    19Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    19Item 9A.
    
    Controls and Procedures
    
    
    19Item 9B.
    
    Other Information
    
    
    20PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Goverance
    
    
    20Item 11.
    
    Executive Compensation
    
    
    24Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    24Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    24Item 14.
    
    Principal Accountant Fees and Services
    
    
    30PART IVItem 15.
    
    Exhibits and Financial Statements
    
    
    31Index 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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Forward-Looking Statements
    
 PART I
 
 ITEM 1: BUSINESS
 
 GENERAL
   PRINCIPAL INVESTMENT OBJECTIVES
  3




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##### Table of Contents



(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
       4




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TYPES OF EQUIPMENT
 Computer Information Technology Equipment.
  Other Equipment-Restrictions.
 DIVERSIFICATION
  5




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##### Table of Contents



Equipment Type
    
    Approximate %Servers
    
    
    36
    %High-End Printers
    
    
    32
    %Data Communications
    
    
    18
    %Workstations
    
    
    14
    %Total
    
    
    100
    %
 DESCRIPTION OF LEASES
     6




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##### Table of Contents



BORROWING POLICIES
    7




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##### Table of Contents



REFINANCING POLICIES
   LIQUIDATION POLICIES
  MANAGEMENT OF EQUIPMENT
  8




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##### Table of Contents



COMPETITION
    Investments
   EQUIPMENT
    
    PURCHASE
    
    LIST
    
    MONTHLY
    
    LEASELESSEE
    
    MFG
    
    DESCRIPTION
    
    PRICE
    
    PRICE
    
    RENT
    
    TERMLucent
    
    SUN
    
    (12) Workstations
    
    $
    139,596
    
    
    $
    239,340
    
    
    $
    3,857
    
    
    
    32Lucent
    
    SUN
    
    Server
    
    
    445,714
    
    
    
    739,350
    
    
    
    12,120
    
    
    
    32Chase
    
    SUN
    
    Server
    
    
    252,681
    
    
    
    394,360
    
    
    
    6,493
    
    
    
    36Cendant
    
    SUN
    
    Server
    
    
    131,470
    
    
    
    221,095
    
    
    
    3,216
    
    
    
    36Cendant
    
    SUN
    
    Server upgrade
    
    
    40,382
    
    
    
    39,590
    
    
    
    1,425
    
    
    
    31Chase
    
    STK
    
    Timberline drive
    
    
    407,908
    
    
    
    1,134,830
    
    
    
    12,346
    
    
    
    24Chrysler
    
    IBM
    
    Controller
    
    
    19,496
    
    
    
    24,200
    
    
    
    731
    
    
    
    24Chrysler
    
    IBM
    
    Controller
    
    
    18,392
    
    
    
    24,200
    
    
    
    731
    
    
    
    24Kaiser
    
    IBM
    
    (7) Workstations
    
    
    373,747
    
    
    
    513,741
    
    
    
    9,952
    
    
    
    36Kaiser
    
    IBM
    
    (4) Workstations
    
    
    187,398
    
    
    
    271,949
    
    
    
    4,983
    
    
    
    36Kaiser
    
    CISCO
    
    (26) Routers
    
    
    153,093
    
    
    
    258,778
    
    
    
    3,929
    
    
    
    36International Paper
    
    DEC
    
    (2) Servers
    
    
    140,857
    
    
    
    184,372
    
    
    
    4,042
    
    
    
    32CMGI
    
    CISCO
    
    Server
    
    
    140,579
    
    
    
    187,345
    
    
    
    3,973
    
    
    
    35CMGI
    
    SUN
    
    Workstations
    
    
    24,342
    
    
    
    32,029
    
    
    
    937
    
    
    
    24
 9




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##### Table of Contents



EQUIPMENT
    
    PURCHASE
    
    LIST
    
    MONTHLY
    
    LEASELESSEE
    
    MFG
    
    DESCRIPTION
    
    PRICE
    
    PRICE
    
    RENT
    
    TERMAT&T
    
    ASX
    
    Controllers
    
    
    58,048
    
    
    
    59,106
    
    
    
    1,654
    
    
    
    36GE Medical
    
    COMPAQ
    
    Servers
    
    
    18,754
    
    
    
    28,300
    
    
    
    515
    
    
    
    36GE Medical
    
    COMPAQ
    
    Servers
    
    
    21,716
    
    
    
    32,750
    
    
    
    596
    
    
    
    36GE Medical
    
    COMPAQ
    
    Servers
    
    
    42,881
    
    
    
    64,750
    
    
    
    1,162
    
    
    
    36GE Medical
    
    COMPAQ
    
    Servers
    
    
    56,039
    
    
    
    84,525
    
    
    
    1,573
    
    
    
    36GE Medical
    
    COMPAQ
    
    Servers
    
    
    44,943
    
    
    
    67,780
    
    
    
    1,236
    
    
    
    36GE Medical
    
    LEXMARK
    
    Printers
    
    
    31,809
    
    
    
    48,000
    
    
    
    849
    
    
    
    36GE Medical
    
    LEXMARK
    
    Printers
    
    
    20,655
    
    
    
    32,000
    
    
    
    552
    
    
    
    36GE Medical
    
    TEKRONIX
    
    Monitors
    
    
    48,252
    
    
    
    99,350
    
    
    
    1,845
    
    
    
    36CMGI
    
    CISCO
    
    Routers
    
    
    88,103
    
    
    
    115,168
    
    
    
    2,495
    
    
    
    36Lennox
    
    BayNetwork
    
    Routers
    
    
    441,115
    
    
    
    598,754
    
    
    
    3,465
    
    
    
    36Thomson Consumer
    
    Printronix
    
    Printers
    
    
    233,298
    
    
    
    325,862
    
    
    
    6,343
    
    
    
    36Thomson Consumer
    
    NORTEL
    
    Routers
    
    
    134,394
    
    
    
    203,840
    
    
    
    3,747
    
    
    
    36GE Medical
    
    SUN
    
    (32) Workstations
    
    
    139,961
    
    
    
    211,970
    
    
    
    3,831
    
    
    
    35Thomson Consumer
    
    XEROX
    
    Printer/Scanner/Plotter
    
    
    20,384
    
    
    
    30,720
    
    
    
    792
    
    
    
    24AOL
    
    SUN
    
    Servers
    
    
    22,163
    
    
    
    34,010
    
    
    
    604
    
    
    
    35Morgan Stanley
    
    SUN
    
    Servers
    
    
    154,053
    
    
    
    199,655
    
    
    
    4,685
    
    
    
    33Hartford Insurance
    
    IBM
    
    Directors
    
    
    744,597
    
    
    
    901,500
    
    
    
    19,800
    
    
    
    36Training A La
    
    COMPAQ
    
    Workstation
    
    
    4,337
    
    
    
    4,950
    
    
    
    123
    
    
    
    35Vatterott Ed Ctr
    
    DELL
    
    Workstation
    
    
    32,549
    
    
    
    39,755
    
    
    
    844
    
    
    
    36Vatterott Ed Ctr
    
    DELL
    
    Workstation
    
    
    23,207
    
    
    
    26,317
    
    
    
    649
    
    
    
    35Vatterott Ed Ctr
    
    DELL
    
    Workstation
    
    
    12,899
    
    
    
    14,746
    
    
    
    363
    
    
    
    35Vatterott Ed Ctr
    
    DELL
    
    Workstation
    
    
    60,604
    
    
    
    84,155
    
    
    
    1,735
    
    
    
    34Triumph Pharm
    
    DELL
    
    Workstation
    
    
    11,094
    
    
    
    13,178
    
    
    
    382
    
    
    
    28AOL
    
    SUN
    
    Servers
    
    
    110,713
    
    
    
    116,754
    
    
    
    3,661
    
    
    
    27GE Medical
    
    SUN
    
    Servers
    
    
    30,000
    
    
    
    34,456
    
    
    
    782
    
    
    
    36Open Systems
    
    IBM
    
    Workstations
    
    
    7,942
    
    
    
    10,060
    
    
    
    320
    
    
    
    23TDI
    
    IBM
    
    Workstations
    
    
    12,867
    
    
    
    15,690
    
    
    
    394
    
    
    
    32Kellogg
    
    CANNON
    
    Printers
    
    
    42,269
    
    
    
    49,218
    
    
    
    1,072
    
    
    
    39
 RESERVES
  GENERAL RESTRICTIONS
       10




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EMPLOYEES
  
 ITEM 1A: RISK FACTORS
        11




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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
  GENERAL LIMITATIONS
  REDEMPTION PROVISION
  12




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EXEMPT TRANSFERS
        ADDITIONAL RESTRICTIONS ON TRANSFER
   ALLOCATION AND DISTRIBUTION BETWEEN THE GENERAL PARTNER AND THE LIMITED PARTNERS
  13




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Quarter Ended
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003March 31
    
    $
    15,415
    
    
    $
    78,591
    
    
    $
    78,591
    
    
    $
    78,591June 30
    
    
    14,968
    
    
    
    25,879
    
    
    
    78,591
    
    
    
    78,592September 30
    
    
    12,680
    
    
    
    18,714
    
    
    
    78,591
    
    
    
    78,591December 31
    
    
    16,452
    
    
    
    18,709
    
    
    
    78,591
    
    
    
    78,594$
    59,515
    
    
    $
    141,893
    
    
    $
    314,364
    
    
    $
    314,368
 14




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ALLOCATIONS AND DISTRIBUTIONS AMONG THE LIMITED PARTNERS
    
 ITEM 6: SELECTED FINANCIAL DATA
  Year Ended December 31
 Statements ofOperations Data:
    
    2006
    
    2005
    
    2004
    
    2003
    
    2002Lease Income
    
    $
    43,323
    
    
    $
    83,682
    
    
    $
    151,391
    
    
    $
    391,419
    
    
    $
    784,368Net (Loss)
    
    
    (22,354
    )
    
    
    (62,555
    )
    
    
    (95,141
    )
    
    
    (156,223
    )
    
    
    (291,844
    )Cash Distributions
    
    
    60,115
    
    
    
    143,313
    
    
    
    317,498
    
    
    
    317,500
    
    
    
    317,498Net (Loss) allocated
to Limited Partners
    
    
    (22,954
    )
    
    
    (63,975
    )
    
    
    (98,275
    )
    
    
    (159,355
    )
    
    
    (294,978
    )Net (Loss) per
Limited Partner
Unit
    
    
    (0.15
    )
    
    
    (0.42
    )
    
    
    (0.63
    )
    
    
    (1.03
    )
    
    
    (1.93
    )Cash Distribution
per Limited Partner
Unit
    
    
    0.39
    
    
    
    0.94
    
    
    
    2.08
    
    
    
    2.10
    
    
    
    2.10
 As of December 31,
 Other Data:
    
    2006
    
    2005
    
    2004
    
    2003
    
    2002Net cash provided
by operating
activities
    
    $
    21,550
    
    
    $
    42,387
    
    
    $
    269,057
    
    
    $
    255,697
    
    
    $
    183,015Net cash provided
by (used in)
investing
activities
    
    
    6,111
    
    
    
    10,850
    
    
    
    5,338
    
    
    
    61,863
    
    
    
    132,079Net cash (used in)
provided by
financing
activities
    
    
    (35,115
    )
    
    
    (48,904
    )
    
    
    (268,952
    )
    
    
    (317,500
    )
    
    
    (319,702
    )
 15




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##### Table of Contents



As of December 31
 2006
    
    2005
    
    2004
    
    2003
    
    2002Total Assets
    
    $
    31,841
    
    
    $
    71,442
    
    
    $
    167,113
    
    
    $
    336,461
    
    
    $
    766,233Notes Payable
    
    
    13,511
    
    
    
    30,817
    
    
    
    60,243
    
    
    
    91,436
    
    
    
    253,767Partners (Deficit)
Capital
    
    
    (205,748
    )
    
    
    (280,289
    )
    
    
    (291,331
    )
    
    
    2,748
    
    
    
    328,315
  
 ITEM 7: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 CRITICAL ACCOUNTING POLICIES AND ESTIMATES
   COMPUTER EQUIPMENT
  REVENUE RECOGNITION
   LONG-LIVED ASSETS
  16




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REIMBURSABLE EXPENSES
  RECENT ACCOUNTING PRONOUNCEMENTS
 (SAB 108)
 (SFAS 157) ,
 LIQUIDITY AND CAPITAL RESOURCES
     17




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##### Table of Contents



RESULTS FROM OPERATIONS
        18




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NET LOSS
  COMMITMENTS AND CONTINGENCIES
 Contractual Cash Obligations
  Payments due by period
 Total
    
    2007
    
    2008Installment notes payable due 2008:Principal
    
    $
    13,511
    
    
    $
    12,443
    
    
    $
    1,068Interest
    
    
    438
    
    
    
    433
    
    
    
    5Total
    
    $
    13,949
    
    
    $
    12,876
    
    
    $
    1,073
 
 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
  19




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ITEM 9B: OTHER INFORMATION
  
 ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 GENERAL
    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,
 20




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##### Table of Contents



Henry J. Abbott
 Katrina M. Mason ,
 Lynn A. Franceschina
 21




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##### Table of Contents



Jay Dugan
 Peter Daley
 Richard G. Devlin III,
 22




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##### Table of Contents



Edmond J. Enderle,
 James
Green ,
 James Pruett
 Mark Hershenson
 Donnamarie D. Abbott
 23




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##### Table of Contents



CODE OF ETHICS
  
 ITEM 11: EXECUTIVE COMPENSATION
  
 ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
  
 ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  ENTITY
    
    
    
    AMOUNT
    
    AMOUNT
    
    AMOUNTRECEIVING
    
    
    
    INCURRED
    
    INCURRED
    
    INCURREDCOMPENSATION
    
    TYPE OF COMPENSATION
    
    DURING 2006
    
    DURING 2005
    
    DURING 2004The General Partner
and its Affiliates
    
    Reimbursable
Expenses. The
General Partner and
its Affiliates are
entitled to
reimbursement by
the Partnership for
the cost of goods,
supplies or
services obtained
and used by the
General Partner in
connection with the
administration and
operation of the
Partnership from
third parties
unaffiliated with
the General
Partner. In
addition, the
General Partner and
its affiliates are
entitled to
reimbursement 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.
    
    $
    6,000
    
    
    $
    15,000
    
    
    $
    19,000
 24




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ENTITY
    
    
    
    AMOUNT
    
    AMOUNT
    
    AMOUNTRECEIVING
    
    
    
    INCURRED
    
    INCURRED
    
    INCURREDCOMPENSATION
    
    TYPE OF COMPENSATION
    
    DURING 2006
    
    DURING 2005
    
    DURING 2004The 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
    
    
    $
    2,500The General Partner
    
    Debt Placement Fee.
As compensation for
arranging Term Debt
to finance the
acquisition of
Equipment to the
Partnership, a fee
equal to one
percent of such
indebtedness;
provided, however,
that such fee is
reduced to the
extent the
Partnership incurs
such fees to third
Parties, un-
affiliated with the
General Partner or
the lender, with
respect to such
indebtedness and no
such fee is paid
with respect to
borrowings from the
General Partner or
its Affiliates.
    
    $
    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.
    
    $
    2,000
    
    
    $
    4,000
    
    
    $
    8,000The General Partner
    
    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. The
payment of such fee
is subordinated to
the receipt by the
Limited Partners of
(i) a return of
their Capital
Contributions and
10% annum
cumulative return,
compounded daily,
on Adjusted Capital
Contributions and
(ii) the Net
Disposition
Proceeds from such
sale in accordance
with the
Partnership
Agreement. Such fee
is reduced to the
extent any
liquidation or
resale fees are
paid to
unaffiliated
parties.
    
    $
    200
    
    
    $
    400
    
    
    $
    400The General Partner
    
    Partnership Income
and Distribution.
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% Cumulative
Return and
thereafter, the
General Partner
will receive 10% of
Cash Available for
Distribution.
    
    $
    600
    
    
    $
    1,420
    
    
    $
    3,134
  25




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COMPETITION WITH GENERAL PARTNER AND AFFILIATES: COMPETITION FOR MANAGEMENTS TIME
    ACQUISITIONS
   26




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GLOSSARY
       27




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##### Table of Contents



28




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##### Table of Contents



29




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##### Table of Contents



ITEM
14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
 AUDIT FEES
  AUDIT-RELATED FEES
  TAX FEES
  ALL OTHER FEES
  PRE-APPROVAL POLICIES AND PROCEDURES
  30




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##### Table of Contents



PART IV
 
 ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
 FORM 10-K
  Report of Independent Registered Public Accounting Firm
    
    
    F-1Balance Sheets as of December 31, 2006 and 2005
    

F-2Statements of Operations for the years ended December 31, 2006, 2005 and 2004
    
    
    F-4Statements of Partners Capital (Deficit) for the years ended December 31, 2006,
2005 and 2004
    
    
    F-5Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
    

F-6Notes to Financial Statements
    

F-8
    * 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. 333-26933)
   31




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##### Table of Contents



31.1
    
    Rule 13a-14(a)/15d-14(a) Certifications by the Principal Executive Officer
 31.2
    
    Rule 13a-14(a)/15d-14(a) Certifications by the Principal Financial Officer
 
 32
    
    Section 1350 Certifications by the Principal Executive Officer and Principal
Financial Officer
 
 SIGNATURES
  COMMONWEALTH INCOME & GROWTH FUND IIIBy:
    
    COMMONWEALTH INCOME & GROWTH FUND, INC., General PartnerBy:
    

/s/
Kimberly A. SpringsteenKimberly A. Springsteen, Chief Executive Officer
  SIGNATURE
    
    
    
    CAPACITY/s/Kimberly A. Springsteen
    
    
    
    Chairman, Chief Executive Officer,Kimberly A. Springsteen
    
    
    
    Commonwealth Income & Growth Fund, Inc./s/ Henry J. Abbott
    
    
    
    Director, President,Henry J. Abbott
    
    
    
    Commonwealth Income & Growth Fund, Inc.
 32




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



Commonwealth Income & Growth Fund III
 Contents
 Report of Independent Registered Public Accounting Firm
    
    
    F-1Financial statementsBalance sheets
    
    
    F-2Statements of operations
    
    
    F-4Statements of partners capital (deficit)
    
    
    F-5Statements of cash flows
    
    
    F-6Notes to financial statements
    
    
    F-8




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      
 F-1




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##### Table of Contents



Commonwealth Income & Growth Fund III
 
 Balance Sheets
 December 31,
    
    2006
    
    
    2005AssetsCash and cash equivalents
    
    $
    2,878
    
    
    $
    10,333Lease income receivable, net of
reserve of $0 at December 31,
2006 and 2005
    
    
    4,285
    
    
    
    3,733Prepaid expenses
    
    
    363
    
    
    
    7,526
    
    
    
    14,066Computer equipment, at cost
    
    
    364,796
    
    
    
    738,928Accumulated depreciation
    
    
    (341,135
    )
    
    
    (683,254
    )23,661
    
    
    
    55,674Equipment acquisition costs and
deferred expenses,net of
accumulated amortization of
$2,052, and $1,392, at December
31, 2006 and 2005, respectively
    
    
    654
    
    
    
    1,702Total assets
    
    $
    31,841
    
    
    $
    71,442
 F-2




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##### Table of Contents



Commonwealth Income & Growth Fund III
 Balance Sheets
 December 31,
    
    2006
    
    
    2005Liabilities and Partners Capital (Deficit)LiabilitiesAccounts payable
    
    $
    26,094
    
    
    $
    26,728Accounts payable, Commonwealth Capital Corp.
    
    
    37,099
    
    
    
    122,565Accounts payable, General Partner
    
    
    100,576
    
    
    
    111,352Accounts payable, affiliated limited partnerships
    
    
    49,700
    
    
    
    49,657Unearned lease income
    
    
    122
    
    
    
    122Other accrued expenses
    
    
    10,487
    
    
    
    10,490Notes payable
    
    
    13,511
    
    
    
    30,817Total liabilities
    
    
    237,589
    
    
    
    351,731Partners Capital (deficit)General Partner
    
    
    1,000
    
    
    
    1,000Limited partners
    
    
    (206,748
    )
    
    
    (281,289
    )Total partners (deficit)
    
    
    (205,748
    )
    
    
    (280,289
    )Total liabilities and partners capital (deficit)
    
    $
    31,841
    
    
    $
    71,442
 See accompanying notes to financial statements.
 F-3




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##### Table of Contents



Commonwealth Income & Growth Fund III
 
 Statements of Operations
 Years ended December 31,
    
    2006
    
    
    2005
    
    
    2004IncomeLease
    
    $
    43,323
    
    
    $
    83,682
    
    
    $
    151,391Interest and other
    
    
    397
    
    
    
    1,518
    
    
    
    34,462Gain on sale of computer equipment
    
    
    265
    
    
    
    
    
    
    
    5,005Total income
    
    
    43,985
    
    
    
    85,200
    
    
    
    190,858ExpensesOperating, excluding depreciation
    
    
    35,702
    
    
    
    54,132
    
    
    
    45,841Equipment management fee, General Partner
    
    
    2,166
    
    
    
    4,184
    
    
    
    7,564Depreciation
    
    
    26,167
    
    
    
    82,325
    
    
    
    222,875Amortization of equipment acquisition costs
and deferred expenses
    
    
    1,047
    
    
    
    2,436
    
    
    
    5,822Interest
    
    
    1,257
    
    
    
    2,428
    
    
    
    3,897Loss on sale of computer equipment
    
    
    
    
    
    
    2,250
    
    
    
    Total expenses
    
    
    66,339
    
    
    
    147,755
    
    
    
    285,999Net loss
    
    $
    (22,354
    )
    
    $
    (62,555
    )
    
    $
    (95,141
    )Net loss allocated to limited partners
    
    
    (22,954
    )
    
    
    (63,975
    )
    
    
    (98,275
    )Net loss per equivalent limited
partnership unit
    
    $
    (0.15
    )
    
    $
    (0.42
    )
    
    $
    (0.63
    )Weighted average number of equivalent
limited partnership units outstanding
during the year
    
    
    151,178
    
    
    
    151,178
    
    
    
    151,178
 See accompanying notes to financial statements.
 F-4




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##### Table of Contents



Commonwealth Income & Growth Fund III
 
 Statements of Partners Capital (Deficit)
 General
    
    
    LimitedPartner
    
    
    Partner
    
    
    General
    
    
    LimitedUnits
    
    
    Units
    
    
    Partner
    
    
    Partners
    
    
    TotalBalance,January 1, 2004
    
    
    50
    
    
    
    151,178
    
    
    $
    1,000
    
    
    $
    1,748
    
    
    $
    2,748Net income (loss)
    
    
    
    
    
    
    
    
    
    
    3,134
    
    
    
    (98,275
    )
    
    
    (95,141
    )Contributions  Forgiveness
of Cash
    
    
    
    
    
    
    
    
    
    
    49,116
    
    
    
    
    
    
    
    49,116Contributions  Forgiveness
of Fees
    
    
    
    
    
    
    
    
    
    
    30,496
    
    
    
    
    
    
    
    30,496Contributions  Forgiveness
of Expenses
    
    
    
    
    
    
    
    
    
    
    38,949
    
    
    
    
    
    
    
    38,949Transfer of partners capital
    
    
    
    
    
    
    
    
    
    
    (118,561
    )
    
    
    118,561
    
    
    
    Distributions
    
    
    
    
    
    
    
    
    
    
    (3,134
    )
    
    
    (314,364
    )
    
    
    (317,498
    )Balance,December 31, 2004
    
    
    50
    
    
    
    151,178
    
    
    
    1,000
    
    
    
    (292,331
    )
    
    
    (291,331
    )Net income (loss)
    
    
    
    
    
    
    
    
    
    
    1,420
    
    
    
    (63,975
    )
    
    
    (62,555
    )Contributions  Cash
    
    
    
    
    
    
    
    
    
    
    94,410
    
    
    
    
    
    
    
    94,410Contributions  Forgiveness
of Expenses
    
    
    
    
    
    
    
    
    
    
    122,500
    
    
    
    
    
    
    
    122,500Transfer of Partners Capital
    
    
    
    
    
    
    
    
    
    
    (216,910
    )
    
    
    216,910
    
    
    
    Distributions
    
    
    
    
    
    
    
    
    
    
    (1,420
    )
    
    
    (141,893
    )
    
    
    (143,313
    )Balance,December 31, 2005
    
    
    50
    
    
    
    151,178
    
    
    
    1,000
    
    
    
    (281,289
    )
    
    
    (280,289
    )Net income (loss)
    
    
    
    
    
    
    
    
    
    
    600
    
    
    
    (22,954
    )
    
    
    (22,354
    )Contributions  Cash
    
    
    
    
    
    
    
    
    
    
    25,000
    
    
    
    
    
    
    
    25,000Contributions  Forgiveness
of Fees
    
    
    
    
    
    
    
    
    
    
    107,010
    
    
    
    
    
    
    
    107,010Contributions  Forgiveness
of Expenses
    
    
    
    
    
    
    
    
    
    
    25,000
    
    
    
    
    
    
    
    25,000Transfer of Partners Capital
    
    
    
    
    
    
    
    
    
    
    (157,010
    )
    
    
    157,010
    
    
    
    Distributions
    
    
    
    
    
    
    
    
    
    
    (600
    )
    
    
    (59,515
    )
    
    
    (60,115
    )Balance,December 31, 2006
    
    
    50
    
    
    
    151,178
    
    
    $
    1,000
    
    
    $
    (206,748
    )
    
    $
    (205,748
    )
 See accompanying notes to financial statements.
 F-5




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##### Table of Contents



Commonwealth Income & Growth Fund III
 
 Statements of Cash Flows
 Years ended December 31,
    
    2006
    
    
    2005
    
    
    2004Cash flows from operating activitiesNet loss
    
    $
    (22,354
    )
    
    $
    (62,555
    )
    
    $
    (95,141
    )Adjustments to reconcile net loss to
net cash provided by operating activitiesDepreciation and amortization
    
    
    27,214
    
    
    
    84,761
    
    
    
    228,697(Gain) loss on sale of computer
equipment
    
    
    (265
    )
    
    
    2,250
    
    
    
    (5,005
    )Other noncash activities included in
determination of net loss
    
    
    (17,307
    )
    
    
    (29,426
    )
    
    
    (88,167
    )Changes in assets and liabilitiesLease income receivable
    
    
    (551
    )
    
    
    2,141
    
    
    
    3,306Prepaid items
    
    
    (363
    )
    
    
    
    
    
    
    Accounts payable
    
    
    (636
    )
    
    
    1,232
    
    
    
    (1,265
    )Accounts payable,
Commonwealth
Capital Corp.
    
    
    (60,465
    )
    
    
    (37,393
    )
    
    
    197,759Accounts payable,
General Partner
    
    
    96,232
    
    
    
    9,264
    
    
    
    (1,940
    )Accounts payable,
affiliated limited
partnerships
    
    
    43
    
    
    
    2,934
    
    
    
    21,016Unearned lease income
    
    
    
    
    
    
    (821
    )
    
    
    (694
    )Other accrued expenses
    
    
    
    
    
    
    
    
    
    
    10,491Net cash provided by operating activities
    
    
    21,550
    
    
    
    42,387
    
    
    
    269,057Cash flows from investing activitiesCapital expenditures
    
    
    
    
    
    
    
    
    
    
    (6,104
    )Net proceeds from sale of computer equipment
    
    
    6,111
    
    
    
    10,850
    
    
    
    13,965Equipment acquisition fees to the
General Partner
    
    
    
    
    
    
    
    
    
    
    (2,523
    )Net cash provided by investing activities
    
    
    6,111
    
    
    
    10,850
    
    
    
    5,338
 F-6




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##### Table of Contents



Commonwealth Income & Growth Fund III
 Statements of Cash Flows
 Years ended December 31,
    
    2006
    
    
    2005
    
    
    2004Cash flows from financing activitiesContributions
    
    
    25,000
    
    
    
    94,410
    
    
    
    49,116Distributions to partners
    
    
    (60,115
    )
    
    
    (143,314
    )
    
    
    (317,498
    )Debt placement fee to the General
Partner
    
    
    
    
    
    
    
    
    
    
    (570
    )Net cash (used in) financing activities
    
    
    (35,115
    )
    
    
    (48,904
    )
    
    
    (268,952
    )Net increase (decrease) in cash and
cash equivalents
    
    
    (7,454
    )
    
    
    4,333
    
    
    
    5,443Cash and cash equivalents at beginning
of year
    
    
    10,333
    
    
    
    6,000
    
    
    
    557Cash and cash equivalents at end of year
    
    $
    2,878
    
    
    $
    10,333
    
    
    $
    6,000
 See accompanying notes to financial statements.
 F-7




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##### Table of Contents



Commonwealth Income & Growth Fund III
 
 Notes to Financial Statements
 1.
    
    The Partnership
    
    Commonwealth Income & Growth Fund III (the Partnership) is a
limited partnership organized in the Commonwealth of Pennsylvania.
The Partnership offered for sale up to 750,000 Units of the limited
partnership at the purchase price of $20 per unit (the Offering).
The Offering was terminated at the close of business on July 31,
2000 by the General Partner. The Partnership uses the proceeds of
the Offering 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 (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 that is an indirect
wholly owned subsidiary of CCC. 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, 2009.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, the Partnership distributed to the limited partners $59,515,
$141,893 and $314,364 respectively. The 2006 distributions were at
an annual rate of 4.7% of the limited partners original
contributed capital. The 2005 and 2004 distributions were at an
annual rate of 10.4% of the limited partners original contributed
capital. Distributions during 2006 reflect an annual return of
capital in the amount of approximately $0.39 per limited
partnership unit. Distributions during 2005 and 2004 reflect an
annual return of capital in the amount of approximately $0.94 and
$2.08 per limited partnership unit, for units that were outstanding
for the entire year, respectively.
 F-8




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##### Table of Contents



Commonwealth Income & Growth Fund III
 Notes to Financial Statements
 2.
    
    Business Plan
    
    The Partnership has suffered recurring losses from operations and
has a deficit partners capital of approximately $206,000 at
December 31, 2006. The General Partner and CCC have forgiven
amounts payable by the Partnership to them and have deferred
payments on other amounts to allow for distributions to limited
partners. (See note 5)The General Partner and CCC have committed to fund, either through
cash contributions and/or forgiveness of indebtedness, any
necessary optional cash shortfalls of the Partnership through December 31,
2007. No fees will be charged to the Partnership during 2007. CCC has
committed to fund limited partner distributions through
September 2007, at which time CCC will reassess the operations
of the Partnership. CCC will continue to reassess
the operations on a quarterly basis throughout 2007.3.
    
    Summary of
Significant
Accounting
Policies
    
    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 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. Fair value is determined based
on estimated discounted cash flows to be generated by the asset.
The Partnership recorded charges of $4,300 in the fourth quarter of
2005 to record the assets at their estimated fair value.This impairment charge was based on market fluctuations in residual
value of computer equipment. Such amounts have been included in
depreciation expense in the accompanying financial statements. The
Partnership determined that no impairment occurred in 2006.Depreciation on computer equipment for financial statement purposes
is based on the straight-line method over estimated useful lives of
four years.
 F-9




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##### Table of Contents



Commonwealth Income & Growth Fund III
 Notes to Financial Statements
 Intangible AssetsEquipment acquisition costs and deferred expense, 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.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.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.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. Cash at December 31, 2006 and
2005 was held in the custody of one financial institution. 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.
 F-10




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##### Table of Contents



Commonwealth Income & Growth Fund III
 Notes to Financial Statements
 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. The Partnership determined that no allowance was
necessary at December 31, 2006 and 2005.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 Loss Per Equivalent Limited Partnership UnitThe net loss per equivalent limited partnership unit is computed
based upon net 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.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.
 F-11




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##### Table of Contents



Commonwealth Income & Growth Fund III
 Notes to Financial Statements
 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 ending
December 31, 2006 and did not have an impact on the financial
statements.In September 2006, the FASB issued
Statement of Financial Accounting Standards (SFAS) 157,
Fair Value Measurements (SFAS 157),
which provides guidance on measuring the fair value of assets and
liabilities. SFAS 157 will apply to other accounting pronouncements
that require or permit assets or liabilties to be measured at fair
value but does not expand the use of fair value to any new
circumstances. This standard will also require additional disclosures
in both annual and quarterly reports. SFAS 157 will be effective for
financial statements issued for fiscal years beginning after November
15, 2007 and will be adopted by the Partnership in the first quarter
of its fiscal year 2008. The Partnership is currently determining the
effect, if any, that the adoption of SFAS 157 will have on its
financial statements.4.
    
    Computer
Equipment
    
    The Partnership is the lessor of equipment under operating leases
with periods ranging from 12 to 39 months. In general, associated
costs such as repairs and maintenance, insurance and property taxes
are paid by the lessee. 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. For the
years ended December 31, 2006, 2005, and 2004, the Partnership paid
$6,000, $11,000, and $1,000, respectively.
 F-12




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##### Table of Contents



Commonwealth Income & Growth Fund III
 Notes to Financial Statements
 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, 2006 and 2005
was approximately $4,000 and $84,000 respectively, 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 affiliated partnerships at December 31, 2006 and 2005 was
approximately $13,000 and $1,434,000 respectively. There was no
outstanding debt or total outstanding debt associated with this
equipment at December 31, 2006 and 2005.The following is a schedule of future minimum rentals on
noncancelable operating leases at December 31, 2006:
 Year ending December 31,
    
    Amount2007
    
    $
    12,9002008
    
    
    1,100$
    14,000
 Significant
    
    Lessees exceeding 10% of lease income for the years ended:Customers
 Lessee
    
    2006
    
    
    2005
    
    
    2004Lessee A
    
    
    
    
    
    
    
    
    
    
    22
    %Lessee B
    
    
    
    
    
    
    14
    %
    
    
    21
    %Lessee C
    
    
    30
    %
    
    
    
    
    
    
    Lessee D
    
    
    
    
    
    
    23
    %
    
    
    17
    %Lessee E
    
    
    34
    %
    
    
    37
    %
    
    
    29
    %Lessee F
    
    
    23
    %
    
    
    15
    %
    
    
    Lessee G
    
    
    11
    %
    
    
    
    
    
    
    Total % of Lease Income
    
    
    98
    %
    
    
    89
    %
    
    
    89
    %
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##### Table of Contents



Commonwealth Income & Growth Fund III
 Notes to Financial Statements
  Lessee
    
    2006
    
    
    2005Lessee D
    
    
    
    
    
    
    100
    %Lessee E
    
    
    89
    %
    
    
    Lessee G
    
    
    11
    %
    
    
    Total % of Accounts Receivable
    
    
    100
    %
    
    
    100
    %
 5.
    
   Related Party
    
    Forgiveness of Related Party PayablesTransactions
    
    During the year ended December 31, 2006, 2005 and 2004 the General
Partner and one of its affiliates, CCC, in their discretion, forgave
payables owed to them by the Partnership in the amount of approximately
$132,010, $122,000, and $69,000, respectively. Such amounts have been
recorded as contributions to capital. Also, CCC, in its discretion,
contributed cash in the amount of $25,000 and $94,000 in 2006 and 2005,
respectively.Reimbursable ExpensesThe 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 2006, 2005 and
2004, $6,000, $15,000, and $19,000, respectively, of expenses were
incurred by the General Partner and its affiliates on behalf of the
Partnership.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.
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##### Table of Contents



Commonwealth Income & Growth Fund III
 Notes to Financial Statements
 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
earned by the General Partner in 2006 and 2005. During 2004, $2,500
was earned by the General Partner for equipment acquisition fees.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. No debt
placement fees were earned by the General Partner in 2006 and 2005.
During 2004, a debt placement fee of $1,000 was earned by the General
Partner.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 $2,000, $4,000, and $8,000 respectively, were earned by
the General Partner as determined pursuant to section (ii) above.
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##### Table of Contents



Commonwealth Income & Growth Fund III
 Notes to Financial Statements
 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. During 2006, 2005 and
2004, equipment liquidation fees of approximately $200, $400 and $400,
respectively, were earned by the General Partner.6.
    
    Notes Payable
    
    Notes payable consisted of the following:
 December 31,
    
    2006
    
    
    2005Installment notes
payable to banks;
interest at 6.0%,
were due in monthly
installments
ranging from $320
to $394, including
interest, with
final payments from
March through
December 2006.
    
    $
    
    
    
    
    5,528Installment notes
payable to banks;
interest at 5.5%,
due in monthly
installments of
$1,073, including
interest, with
final payments in
January 2008.
    
    
    13,511
    
    
    
    25,289$
    13,511
    
    
    $
    30,817
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##### Table of Contents



Commonwealth Income & Growth Fund III
 Notes to Financial Statements
 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, 2006 are as follows:
 Year ending December 31,
    
    Amount2007
    
    $
    12,4432008
    
    
    1,068$
    13,511
 7.
    
    Supplemental
Cash Flow
    
    Other noncash activities included in the
determination of net income are as follows:Information
 Year ended December 31,
    
    2006
    
    
    2005
    
    
    2004Lease income, net of interest expense on
notes payable realized as a result of
direct payment of principal by lessee
to bank
    
    $
    17,307
    
    
    $
    29,426
    
    
    $
    88,167
 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.
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##### Table of Contents



Commonwealth Income & Growth Fund III
 Notes to Financial Statements
 Noncash investing and financing activities include the following:
 Year ended December 31,
    
    2006
    
    
    2005
    
    
    2004Forgiveness of payables by related
parties recorded as capital
contributions (see Note 5)
    
    $
    132,010
    
    
    $
    122,500
    
    
    $
    69,445Debt assumed in connection with
purchase of computer equipment
    
    $
    
    
    
    $
    
    
    
    $
    56,974
 8.
    
    Reconciliation of Net (Loss) Reported for Financial Reporting
Purposes to Taxable (Loss) on the Federal Partnership Return
 Year ended December 31,
    
    2006
    
    
    2005
    
    
    2004Net (loss) for financial reportingPurposes to taxable (loss)
    
    $
    (22,354
    )
    
    $
    (62,555
    )
    
    $
    (95,141
    )Adjustments(Loss) on sale of
computer equipment
    
    
    (25,144
    )
    
    
    (11,949
    )
    
    
    (71,960
    )Depreciation
    
    
    1,433
    
    
    
    (33,384
    )
    
    
    (68,520
    )Amortization
    
    
    (758
    )
    
    
    2,252
    
    
    
    4,856Unearned lease income
    
    
    
    
    
    
    
    
    
    
    (692
    )Other
    
    
    (60,716
    )
    
    
    (8,798
    )
    
    
    22,511Taxable (loss) on the Federal
Partnership Return
    
    $
    (57,851
    )
    
    $
    (114,434
    )
    
    $
    (208,946
    )
 The Adjustments  Other includes financial statement adjustments
reflected on the tax return in the subsequent year.Adjustment for (loss) on sale of equipment is due to longer useful lives for
tax reporting purposes.
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##### Table of Contents



9. 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 312006RevenuesLease and other
    
    $
    15,268
    
    
    $
    12,776
    
    
    $
    8,071
    
    
    $
    7,605(Loss) gain on sale of
computer equipment
    
    
    56
    
    
    
    113
    
    
    
    96
    
    
    
    Total revenues
    
    
    15,324
    
    
    
    12,889
    
    
    
    8,167
    
    
    
    7,605Total costs and expenses
    
    
    21,364
    
    
    
    24,016
    
    
    
    13,523
    
    
    
    7,436Net
income (loss)
    
    $
    (6,040
    )
    
    $
    (11,127
    )
    
    $
    (5,356
    )
    
    $
    169Net (loss) allocated to
limited partners
    
    $
    (6,196
    )
    
    $
    (11,277
    )
    
    $
    (5,484
    )
    
    $
    (Loss)
per limited partner unit
    
    $
    (0.04
    )
    
    $
    (0.07
    )
    
    $
    (0.04
    )
    
    $
    
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##### Table of Contents



Quarter endedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 312005RevenuesLease and other
    
    $
    26,705
    
    
    $
    24,574
    
    
    $
    17,925
    
    
    $
    15,996(Loss) gain on sale of
computer equipment
    
    
    (9,576
    )
    
    
    (1,396
    )
    
    
    1,168
    
    
    
    7,554Total revenues
    
    
    17,129
    
    
    
    23,178
    
    
    
    19,093
    
    
    
    23,550Total costs and expenses
    
    
    54,344
    
    
    
    35,617
    
    
    
    23,750
    
    
    
    31,794Net (loss)
    
    $
    (37,215
    )
    
    $
    (12,439
    )
    
    $
    (4,657
    )
    
    $
    (8,244
    )Net (loss) allocated to
limited partners
    
    $
    (37,998
    )
    
    $
    (12,698
    )
    
    $
    (4,846
    )
    
    $
    (8,433
    )(Loss) per limited partner unit
    
    $
    (0.25
    )
    
    $
    (0.08
    )
    
    $
    (0.03
    )
    
    $
    (0.06
    )
 
 F-20