<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005

[ ]  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
             (Exact name of registrant as specified in its charter)

             Pennsylvania                                  23-2735641
    (State or other jurisdiction of                     (I.R.S. Employer
     incorporation or organization)                  Identification Number)

                               470 John Young Way
                                 Exton, PA 19341
          (Address, including zip code, of principal executive offices)

                                 (610) 594-9600
               (Registrant's telephone number including area code)

           Securities registered pursuant to Section 12(b) of the Act:

           Title of each class to                  Name of exchange on
              be so registered                      which each class
                                                   is to be registered

                   None                                    N/A
                   ----                                    ---


           Securities registered pursuant to Section 12(g) of the Act:

                      Units of Limited Partnership Interest
                      -------------------------------------
                                (Title of Class)

         Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (ii) has been subject to such filing
requirements for the past 90 days: YES [X] NO [ ]

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, to the best of Registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K:
YES [X] NO [ ]

         Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12c-2 of the Act): YES [ ] NO [X]

         Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act): YES [ ] NO [X]

         Aggregate Market Value of Voting and Non-Voting Common Equity Held by
non-affiliates of the Registrant: N/A

         Indicate by check mark if the registrant is a well-known seasoned
issuer, (as defined in Rule 405 of the Act): YES [ ] NO [X]

<PAGE>

                                    FORM 10-K
                                DECEMBER 31, 2005

                                TABLE OF CONTENTS

                                         PART I
Item 1.   Business                                                             3
Item 1A.  Risk Factors                                                        11
Item 1B.  Unresolved Staff Comments                                           12
Item 2.   Properties                                                          12
Item 3.   Legal Proceedings                                                   12
Item 4.   Submission of Matters to a Vote of Security Holders                 12

                                        PART II
Item 5.   Market for Registrant's Common Equity, Related Stockholder
          Matters and Issuer Purchases of Equity Securities                   12
Item 6.   Selected Financial Data                                             15
Item 7.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations                                               16
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk          20
Item 8.   Financial Statements and Supplementary Data                         20
Item 9.   Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure                                                20
Item 9A.  Controls and Procedures                                             21
Item 9B.  Other Information                                                   21

                                        PART III
Item 10.  Directors and Executive Officers of the Registrant                  21
Item 11.  Executive Compensation                                              24
Item 12.  Security Ownership of Certain Beneficial Owners and Management      25
Item 13.  Certain Relationships and Related Transactions                      25
Item 14.  Principal Accountant Fees and Services                              31

                                        PART IV
Item 15.  Exhibits and Financial Statements                                   32

          Index to Exhibits

          Signatures

          Certifications

                                                                               2
<PAGE>

PART I

ITEM 1:    BUSINESS

GENERAL

     Commonwealth Income & Growth Fund III ("CIGF3") was formed on April 17,
1997, under the Pennsylvania Revised Uniform Limited Partnership Act. The
Partnership began offering $15,000,000 of Units of Limited Partnership to the
public on July 25, 1997. On January 27, 1998, the Partnership received and
accepted subscription proceeds of $1,526,000, which exceeded the minimum
offering amount of $1,500,000 and the funds were released from escrow. The
partnership terminated its offering of units on July 31, 2000, with 151,178
Units ($3,023,569) admitted as Limited Partners of the Partnership.

         See "The Glossary" below for the definition of capitalized terms not
otherwise defined in the text of this report.

PRINCIPAL INVESTMENT OBJECTIVES

     The Partnership was formed for the purpose of acquiring various types of
Equipment, including computer peripheral and other similar capital equipment.
The Partnership will utilize the net Proceeds of the Offering to purchase IBM
and IBM compatible computer peripheral and other similar capital equipment. The
Partnership will utilize Retained Proceeds and debt financing (not to exceed 30%
of the aggregate cost of the Equipment owned or subject to Conditional Sales
Contract by the Partnership at the time the debt is incurred) to purchase
additional Equipment. The Partnership plans to acquire and lease Equipment
principally to U.S. corporations and other institutions pursuant to Operating
Leases. The Partnership retains the flexibility to enter into Full Payout Net
Leases and Conditional Sales Contracts, but has not done so.

The Partnership's principal investment objectives are to:

         (a)      acquire, lease and sell Equipment to generate revenues from
                  operations sufficient to provide quarterly cash distributions
                  to Limited Partners;

         (b)      preserve and protect Limited Partners' capital;

         (c)      use a portion of Cash Flow and Net Disposition Proceeds
                  derived from the sale, refinancing or other disposition of
                  Equipment to purchase additional Equipment; and

         (d)      refinance, sell or otherwise dispose of Equipment in a manner
                  that will maximize the proceeds to the Partnership.

THERE CAN BE NO ASSURANCE THAT ANY OF THESE OBJECTIVES WILL BE ATTAINED.

         Limited Partners do not have the right to vote on or otherwise approve
or disapprove any particular investment to be made by the Partnership.

     Although the Partnership anticipates acquiring predominately new Equipment,
the Partnership may purchase used Equipment. Generally, Equipment is acquired
from manufacturers, distributors, leasing companies, agents, owner-users,
owner-lessor, and other suppliers upon terms that vary depending upon the
Equipment and supplier involved. Manufacturers and distributors usually furnish
a limited warranty against defects in material and workmanship and some purchase
agreements for Equipment provide for service and replacement of parts during a
limited period. Equipment purchases are also made through lease brokers and on
an ad hoc basis to meet the needs of a particular lessee.

                                                                               3
<PAGE>

     As of December 31, 2005, all Equipment purchased by the Partnership is
subject to an Operating Lease or an Operating Lease was already entered into
with a third party when the Partnership acquired an item of Equipment. The
Partnership may also engage in sale/leaseback transactions, pursuant to which
the Partnership would purchase Equipment from companies that would then
immediately lease the Equipment from the Partnership. The Partnership may also
purchase Equipment which is leased under Full Payout Net Leases or sold under
Conditional Sales Contracts at the time of acquisition or the Partnership may
enter into a Full Payout Net Lease or Conditional Sales Contract with a third
party when the Partnership acquires an item of Equipment.

     The Partnership may enter into arrangements with one or more manufacturers
pursuant to which the Partnership purchases from such manufacturers Equipment
that has previously been leased directly by the manufacturer to third parties
("vendor leasing agreements"). The Partnership and manufacturers may agree to
nonrecourse loans to the Partnership from the manufacturers to finance the
acquisition of Equipment secured by the Equipment and the receivables due to the
manufacturers from users of such Equipment. It is expected that the
manufacturers of Equipment will provide maintenance, remarketing and other
services for the Equipment subject to such agreements. As of December 31, 2005,
the Partnership has not entered into any such agreements.

     The General Partner has the discretion consistent with its fiduciary duty
to change the investment objectives of the Partnership if it determines that
such a change is in the best interest of the Limited Partners and so long as
such a change is consistent with the Partnership Agreement. The General Partner
will notify the Limited Partners if it makes such a determination to change the
Partnership's investment objectives.

     The Partnership has suffered recurring losses from operations and has a
deficit partners' capital of approximately $280,000 at December 31, 2005. The
General Partner and Commonwealth Capital Corp. (CCC) have forgiven amounts
payable by the Partnership to them and have deferred payments on other amounts
to allow for distributions to limited partners.

     The General Partner and CCC have committed to fund, either through cash
contributions and/or forgiveness of indebtedness, any necessary cash shortfalls
of the Partnership through 2006. No fees will be charged to the fund during
2006. CCC commits to fund distributions through March 2006, at which time we
will reassess the operations of the fund.

     Due to the recurring losses from operations, the General Partner feels that
it may be in the best interest of the Partnership to start the liquidation
process in 2006 and run out naturally all remaining leases in the portfolio,
making distributions when possible, after expenses have been satisfied.

     The General Partner intends to review and reassess the Partnership's
business plan on a quarterly basis during 2006.

TYPES OF EQUIPMENT

     COMPUTER PERIPHERAL EQUIPMENT. Computer peripheral equipment consists of
devices used to convey information into and out of a central processing unit (or
"mainframe") of a computer system, such as tape drives, disk drives, tape
controllers, disk controllers, printers, terminals and related control units,
all of which are in some way related to the process of storing, retrieving, and
processing information by computer.

     The Partnership acquires primarily IBM manufactured or IBM compatible
equipment. The General Partner believes that dealing in IBM or IBM compatible
equipment is particularly advantageous because of the large IBM customer base,
policy of supporting users with software and maintenance services and the large
amount of IBM and IBM compatible equipment in the marketplace.

     Computer technology has developed rapidly in recent years and is expected
to continue to do so. Technological advances have permitted continued reductions
in the cost of computer processing capacity, thereby permitting applications not
economically feasible a few years ago. Much of the older IBM and

                                                                               4
<PAGE>

IBM compatible computer peripheral equipment has not been retired from service,
because software is generally interchangeable between older and newer equipment,
and older equipment is capable of performing many of the same functions as newer
equipment. The General Partner believes that historically values of peripheral
equipment have been affected less dramatically by changes in technology than
have the values of central processing units. An equipment user who upgrades to a
more advanced central processor generally can continue to use his existing
peripheral equipment. Peripheral equipment nevertheless is subject to declines
in value as new, improved models are developed and become available.
Technological advances and other factors, discussed below in Management
Discussion and Analysis, have at times caused dramatic reduction in the market
prices of older models of IBM and IBM compatible computer peripheral equipment
from the prices at which they were originally introduced.

     OTHER EQUIPMENT-RESTRICTIONS. The Partnership plans to acquire computer
peripheral equipment, such as tape drives, disk drives, tape controllers, disk
controllers, printers, terminals and related control units, all of which are in
some way related to the process of storing, retrieving and processing
information by computer. The General Partner is also authorized, but does not
presently intend, to cause the Partnership to invest in non-IBM compatible
computer peripheral, data processing, telecommunication or medical technology
equipment. The Partnership may not invest in any of such other types of
Equipment (i) to the extent that the purchase price of such Equipment, together
with the aggregate Purchase Price of all such other types of Equipment then
owned by the Partnership, is in excess of 25% of the total cost of all of the
assets of the Partnership at the time of the Partnership's commitment to invest
therein; and (ii) unless the General Partner determines that such purchase is in
the best economic interest of the Partnership at the time of the purchase and,
in the case of non-IBM compatible peripheral Equipment, that such Equipment is
comparable in quality to similar IBM or IBM compatible Equipment. There can be
no assurance that any Equipment investments can be found which meet this
standard. Accordingly, there can be no assurance that investments of this type
will be made by the Partnership.

DIVERSIFICATION

Diversification is generally desirable to minimize the effects of changes in
specific industries, local economic conditions or similar risks. However, the
extent of the Partnership's diversification, in the aggregate and within each
category of Equipment, depends in part upon the financing which can be assumed
by the Partnership or borrowed from third parties on satisfactory terms. The
Partnership's policy not to borrow on a recourse basis will further limit its
financing options. Diversification also depends on the availability of various
types of Equipment. Through December 31, 2005, the Partnership has acquired a
diversified Equipment portfolio, which it has leased to 20 different companies
located throughout the United States. The allocations are as follows:


                       EQUIPMENT TYPE             APPROXIMATE %
                    --------------------          -------------
                          Servers                      36%
                     High-End Printers                 32%
                    Data Communications                18%
                        Workstations                   14%
                                                 -------------
                           TOTAL                      100%
                                                 -------------

During the operational stage of the Partnership, the Partnership may not at any
one point in time lease (or sell pursuant to a Conditional Sales Contract) more
than 25% of the Equipment to a single Person or Affiliated group of Persons.

DESCRIPTION OF LEASES

     The Partnership intends to purchase only Equipment that is subject to a
lease or for which a lease or similar agreement will be entered into
contemporaneously with the consummation of the Partnership's acquisition of the
Equipment. The General Partner intends to lease most of the Equipment purchased
by the

                                                                               5
<PAGE>

Partnership to third parties pursuant to Operating Leases. Operating
Leases are relatively short-term (12 to 48 month) leases under which the
aggregate noncancellable rental payments during the original term of the lease
are not sufficient to permit the lessor to recover the purchase price of the
subject Equipment. The Equipment may also be leased pursuant to Full Payout Net
Leases. Full Payout Net Leases are leases under which the aggregate
noncancellable rental payments during the original term of the lease are at
least sufficient to recover the purchase price of the subject Equipment. It is
anticipated that the Partnership will enter into few, if any, Full Payout net
Leases. The General Partner may also enter into Conditional Sales Contracts for
Equipment. A Conditional Sales Contract generally provides that the
noncancellable payments to the seller over the term of the contract are
sufficient to recover the investment in such Equipment and to provide a return
on such investment. Under a Conditional Sales Contract, the seller reserves
title to, and retain a security interest in, the Equipment until the Purchase
Price of the Equipment is paid. As of December 31 2005, the Partnership has not
entered into any Full Payout Net Leases or Conditional Sales Contracts for
Equipment and does not presently intend to do so.

     In general, the terms of the Partnership's leases, whether the Equipment is
leased pursuant to an Operating Lease or a Full Payout Net Lease, depend upon a
variety of factors, including: the desirability of each type of lease from both
an investment and a tax point of view; the relative demand among lessees for
Operating or Full Payout Net Leases; the type and use of Equipment and its
anticipated residual value; the business of the lessee and its credit rating;
the availability and cost of financing; regulatory considerations; the
accounting treatment of the lease sought by the lessee or the Partnership; and
competitive factors.

     An Operating Lease generally represents a greater risk to the Partnership
than a Full Payout Net Lease, because in order to recover the purchase price of
the subject Equipment and earn a return on such investment, it is necessary to
renew or extend the Operating Lease, lease the Equipment to a third party at the
end of the original lease term, or sell the Equipment. On the other hand, the
term of an Operating Lease is generally much shorter than the term of a Full
Payout Net Lease, and the lessor is thus afforded an opportunity under an
Operating Lease to re-lease or sell the subject Equipment at an earlier stage of
the Equipment's life cycle than under a Full Payout Net Lease. Also, the annual
rental payments received under an Operating Lease are ordinarily higher than
those received under a Full Payout Net Lease.

     The Partnership's policy is to generally enter into "triple net leases" (or
the equivalent, in the case of a Conditional Sales Contract) which typically
provide that the lessee or some other party bear the risk of physical loss of
the Equipment; pay taxes relating to the lease or use of the Equipment; maintain
the Equipment; indemnify the Partnership-lessor against any liability suffered
by the Partnership as the result of any act or omission of the lessee or its
agents; maintain casualty insurance in an amount equal to the greater of the
full value of the Equipment and a specified amount set forth in the lease; and
maintain liability insurance naming the Partnership as an additional insured
with a minimum coverage which the General Partner deems appropriate. In
addition, the Partnership may purchase "umbrella" insurance policies to cover
excess liability and casualty losses, to the extent deemed practicable and
advisable by the General Partner. As of December 31, 2005, all leases that have
been entered into are "triple net leases".

     The General Partner has not established any standards for lessees to whom
it will lease Equipment and, as a result, there is not an investment restriction
prohibiting the Partnership from doing business with any lessees. However, a
credit analysis of all potential lessees will be undertaken by the General
Partner to determine the lessee's ability to make payments under the proposed
lease. The General Partner may refuse to enter into an agreement with a
potential lessee based on the outcome of the credit analysis.

     The terms and conditions of the Partnership's leases, or Conditional Sales
Contracts, are each determined by negotiation and may impose substantial
obligations upon the Partnership. Where the Partnership assumes maintenance or
service obligations, the General Partner generally causes the Partnership to
enter into separate maintenance or service agreements with manufacturers or
certified maintenance organizations to provide such services. Such agreements
generally require annual or more frequent adjustment of service fees. As of
December 31, 2005, the Partnership has not entered into any such agreements.

                                                                               6
<PAGE>

     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.

BORROWING POLICIES

     The General Partner, at its discretion, may cause the Partnership to incur
debt in the maximum aggregate amount of 30% of the aggregate cost of the
Equipment owned by the Partnership, or subject to Conditional Sales Contract
(except that the partnership may not incur any indebtedness to acquire Equipment
until the net proceeds of the Offering are fully invested, or committed to
investment, in Equipment. The Partnership will incur only non-recourse debt that
is secured by Equipment and lease income there from. Such leveraging permits the
Partnership to increase the aggregate amount of its depreciable assets, and, as
a result, potentially increases both its lease revenues and its federal income
tax deductions above those levels, which would be achieved without leveraging.
There is no limit on the amount of debt that may be incurred in connection with
the acquisition of any single item of Equipment. Any debt incurred is fully
amortized over the term of the initial lease or Conditional Sales Contract to
which the Equipment securing the debt is subject. The precise amount borrowed by
the Partnership depends on a number of factors, including the types of Equipment
acquired by the Partnership; the creditworthiness of the lessee; the
availability of suitable financing; and prevailing interest rates. The
Partnership is flexible in the degree of leverage it employs, within the
permissible limit. There can be no assurance that credit will be available to
the Partnership in the amount or at the time desired or on terms considered
reasonable by the General Partner. As of December 31, 2005, the aggregate
non-recourse debt outstanding of $31,000 was approximately 4.2% of the aggregate
cost of Equipment owned.

     The Partnership may purchase some items of Equipment without leverage. If
the Partnership purchases an item of Equipment without leverage and thereafter
suitable financing becomes available, it may then obtain the financing, secure
the financing with the purchased Equipment to the extent practicable and invest
any proceeds from such financing in additional items of Equipment, or it may
distribute some or all of such proceeds to the Limited Partners. Any such later
financing will be on terms consistent with the terms applicable to borrowings
generally. As of December 31, 2005, the Partnership has not exercised this
option.

     After the net proceeds of the Offering are fully invested in Equipment, the
General Partner plans to cause the Partnership to borrow funds, to the fullest
extent practicable, at interest rates fixed at the time of borrowing. However,
the Partnership may borrow funds at rates that vary with the "prime" or "base"
rate. If lease revenues were fixed, a rise in the "prime" or "base" rate would
increase borrowing costs and reduce the amount of the Partnership's income and
cash available for distribution. Therefore, the General Partner is permitted to
borrow funds to purchase Equipment at fluctuating rates only if the lease for
such Equipment provides for fluctuating rental payments calculated on a similar
basis.

     Any additional debt incurred by the Partnership must be nonrecourse.
Nonrecourse debt, in the context of the business to be conducted by the
Partnership, means that the lender providing the funds can look for security
only to the Equipment pledged as security and the proceeds derived from leasing
or selling such Equipment. Neither the Partnership nor any Partner (including
the General Partner) would be liable for repayment of any non-recourse debt.

     Loan agreements may also require that the Partnership maintain certain
reserves or compensating balances and may impose other obligations upon the
Partnership. Moreover, since a significant portion of the Partnership's revenues
from the leasing of Equipment will be reserved for repayment of debt, the use of
financing reduces the cash that might otherwise be available for distributions
until the debt has been repaid

                                                                               7
<PAGE>

and may reduce the Partnership's Cash Flow over a substantial portion of the
Partnership's operating life. As of December 31, 2005, no such agreements
existed.

     The General Partner and any of its Affiliates may, but are not required to,
make loans to the Partnership on a short-term basis. If the General Partner or
any of its Affiliates makes such a short-term loan to the Partnership, the
General Partner of Affiliate may not charge interest at a rate greater that the
interest rate charged by unrelated lenders on comparable loans for the same
purpose in the same locality. In no event is the Partnership required to pay
interest on any such loan at an annual rate greater than three percent over the
"prime rate" from time to time announced by PNC Bank, Philadelphia, Pennsylvania
("PNC Bank"). All payments of principal and interest on any financing provided
by the General Partner or any of its affiliates are due and payable by the
Partnership within 12 months after the date of the loan.

REFINANCING POLICIES

     Subject to the limitations set forth in "Borrowing Policies" above, the
Partnership may refinance its debt from time to time. With respect to a
particular item of Equipment, the General Partner will take into consideration
such factors as the amount of appreciation in value, if any, to be realized, the
possible risks of continued ownership, and the anticipated advantages to be
obtained for the Partnership, as compared to selling such Equipment. As of
December 31, 2005, the Partnership has not refinanced any of its debt.

     Refinancing, if achievable, may permit the Partnership to retain an item of
Equipment and at the same time to generate additional funds for reinvestment in
additional Equipment or for distribution to the Limited Partners.

LIQUIDATION POLICIES

     Due to the recurring losses from operations, the General Partner feels that
it may be in the best interest of the Partnership to start the liquidation
process in 2006 and run out naturally all remaining leases in the portfolio,
making distributions when possible, after expenses have been satisfied.

     Particular items of Equipment may be sold at any time if, in the judgment
of the General Partner, it is in the best interest of the Partnership to do so.
The determination of whether particular items of Partnership Equipment should be
sold or otherwise disposed of is made by the General Partner after consideration
of all relevant factors (including prevailing general economic conditions,
lessee demand, the General Partner's views of current and future market
conditions, the cash requirements of the Partnership, potential capital
appreciation, cash flow and federal income tax considerations), with a view
toward achieving the principal investment objectives of the Partnership. As
partial payment for Equipment sold, the Partnership may receive purchase money
obligations secured by liens on such Equipment.

MANAGEMENT OF EQUIPMENT

     Equipment management services for the Partnership's Equipment is provided
by the General Partner and its Affiliates and by persons employed by the General
Partner. Such services will consist of collection of income from the Equipment,
negotiation and review of leases, Conditional Sales Contracts and sales
agreements, releasing and leasing-related services, payment of operating
expenses, periodic physical inspections and market surveys, servicing
indebtedness secured by Equipment, general supervision of lessees to assure that
they are properly utilizing and operating Equipment, providing related services
with respect to Equipment, supervising, monitoring and reviewing services
performed by others in respect to Equipment and preparing monthly Equipment
operating statements and related reports.

                                                                               8
<PAGE>

COMPETITION

     The equipment leasing industry is highly competitive. The Partnership
competes with leasing companies, equipment manufacturers and their affiliated
financing companies, distributors and entities similar to the Partnership
(including other programs sponsored by the General Partner), some of which have
greater financial resources than the Partnership and more experience in the
equipment leasing business than the General Partner. Other leasing companies and
equipment manufacturers, their affiliated financing companies and distributors
may be in a position to offer equipment to prospective lessees on financial
terms that are more favorable than those that the Partnership can offer. They
may also be in a position to offer trade-in privileges, software, maintenance
contracts and other services that the Partnership may not be able to offer.
Equipment manufacturers and distributors may offer to sell equipment on terms
(such as liberal financing terms and exchange privileges), which will afford
benefits to the purchaser similar to those obtained through leases. As a result
of the advantages that certain of its competitors may have, the Partnership may
find it necessary to lease its Equipment on a less favorable basis than certain
of its competitors.

     The computer peripheral equipment industry is extremely competitive.
Competitive factors include pricing, technological innovation and methods of
financing. Certain manufacturer-lessors maintain advantages through patent
protection, where applicable, and through a policy that combines service and
hardware with payment accomplished through a single periodic charge.

     The dominant firms in the computer marketplace are Dell, IBM, Hewlett
Packard, Sun Systems and Cisco. Because of the substantial resources and
dominant position of these companies, revolutionary changes with respect to
computer systems, pricing, marketing practices, technological innovation and the
availability of new and attractive financing plans would occur at any time.
Significant action in any of these areas by these firms might materially
adversely affect the partnerships' business or the other manufacturer's with
whom the General Partner might negotiate purchase and other agreements. Any
adverse affect on these manufacturers could be reflected in the overall return
realized by the Partnership on equipment from those manufacturers.

INVESTMENTS

The Partnership, through CCC, participates in the purchase of equipment subject
to associated debt obligations and lease agreements. The purchase price, list
price and monthly rentals presented below are the Partnership's participation of
the total amounts, based on CCC's allocation of the equipment to the
Partnership, and in some instances, other affiliated partnerships.

Through March 17, 2006, the Partnership has purchased, or has made the
commitment to purchase, the following Equipment:

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

                                                                               9
<PAGE>

<TABLE>
<S>                       <C>          <C>                            <C>          <C>           <C>        <C>
CMGI                      SUN          Workstations                    24,342       32,029          937     24
AT&T                      ASX          Controllers                     58,048       59,106        1,654     36
GE Medical                COMPAQ       Servers                         18,754       28,300          515     36
GE Medical                COMPAQ       Servers                         21,716       32,750          596     36
GE Medical                COMPAQ       Servers                         42,881       64,750        1,162     36
GE Medical                COMPAQ       Servers                         56,039       84,525        1,573     36
GE Medical                COMPAQ       Servers                         44,943       67,780        1,236     36
GE Medical                LEXMARK      Printers                        31,809       48,000          849     36
GE Medical                LEXMARK      Printers                        20,655       32,000          552     36
GE Medical                TEKRONIX     Monitors                        48,252       99,350        1,845     36
CMGI                      CISCO        Routers                         88,103      115,168        2,495     36
Lennox                    BayNetwork   Routers                        441,115      598,754        3,465     36
Thomson Consumer          Printronix   Printers                       233,298      325,862        6,343     36
Thomson Consumer          NORTEL       Routers                        134,394      203,840        3,747     36
GE Medical                SUN          (32) Workstations              139,961      211,970        3,831     35
Thomson Consumer          XEROX        Printer/Scanner/Plotter         20,384       30,720          792     24
AOL                       SUN          Servers                         22,163       34,010          604     35
Morgan Stanley            SUN          Servers                        154,053      199,655        4,685     33
Hartford Insurance        IBM          Directors                      744,597      901,500       19,800     36
Training A La             COMPAQ       Workstation                      4,337        4,950          123     35
Vatterott Ed Ctr          DELL         Workstation                     32,549       39,755          844     36
Vatterott Ed Ctr          DELL         Workstation                     23,207       26,317          649     35
Vatterott Ed Ctr          DELL         Workstation                     12,899       14,746          363     35
Vatterott Ed Ctr          DELL         Workstation                     60,604       84,155        1,735     34
Triumph Pharm             DELL         Workstation                     11,094       13,178          382     28
AOL                       SUN          Servers                        110,713      116,754        3,661     27
GE Medical                SUN          Servers                         30,000       34,456          782     36
Open Systems              IBM          Workstations                     7,942       10,060          320     23
TDI                       IBM          Workstations                    12,867       15,690          394     32
Kellogg                   CANNON       Printers                        42,269       49,218        1,072     39
</TABLE>

RESERVES

Because the Partnership's leases are on a "triple-net" basis, no permanent
reserve for maintenance and repairs will be established from the Offering
Proceeds. However, the General Partner, in its sole discretion, may retain a
portion of the Cash Flow and Net Disposition Proceeds available to the
Partnership for maintenance, repairs and working capital. There are no
limitations on the amount of Cash Flow and Net Disposition Proceeds that may be
retained as reserves. Since no reserve will be established if available Cash
Flow of the Partnership is insufficient to cover the Partnership's operating
expenses and liabilities, it may be necessary for the Partnership to obtain
funds by refinancing its Equipment or borrowing.

GENERAL RESTRICTIONS

     Under the Partnership Agreement, the Partnership is not permitted, among
other things, to:

         (a)      invest in junior trust deeds unless received in connection
with the sale of an item of Equipment in an aggregate amount which does not
exceed 30% of the assets of the Partnership on the date of the investment;
         (b)      invest in or underwrite the securities of other issuers;
         (c)      acquire any Equipment for Units;
         (d)      issue senior securities (except that the issuance to lenders
of notes or other evidences of indebtedness in connection with the financing or
refinancing of Equipment or the Partnership's business shall not be deemed to be
the issuance of senior securities);

                                                                              10
<PAGE>

         (e)      make loans to any Person, including the General Partner or any
of its Affiliates, except to the extent a Conditional Sales Contract constitutes
a loan;
         (f)      sell or lease any Equipment to, lease any Equipment from, or
enter into any sale- leaseback transactions with, the General Partner or any of
its Affiliates; or
         (g)      give the General Partner or any of its Affiliates an exclusive
right or employment to sell the Partnership's Equipment.

     The General Partner has also agreed in the Partnership Agreement to use its
best efforts to assure that the Partnership shall not be deemed an "investment
company" as such term is detained in the Investment Company Act of 1940.

     The General Partner and its Affiliates may engage in other activities,
whether or not competitive with the Partnership. The Partnership Agreement
provides, however, that neither the General Partner nor any of its Affiliates
may receive any rebate or "give up" in connection with the Partnership's
activities or participate in reciprocal business arrangements that circumvent
the restrictions in the Partnership Agreement against dealings with Affiliates.

EMPLOYEES

     The Partnership had no employees during 2005 and receives administrative
and other services from a related party, CCC, which has 51 employees as of
December 31, 2005.

ITEM 1A:   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

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 limits the number
of transfers to no more than that number permitted by one of the safe harbors
available under the tax laws and regulations to prevent CIGF3 from being taxed
as a corporation. Generally, these safe harbors require that all nonexempt
transfers and redemptions of units in any calendar year not exceed two percent
of the outstanding interests in the capital or profits of CIGF3.

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 CIGF3. You may be able to resell your units, if at all, only at a discount to
the offering price, which may be significant, and the redemption or sale price
may be less than the price you originally paid for your units.

INFORMATION TECHNOLOGY EQUIPMENT WE PURCHASE WILL DEPRECIATE IN VALUE AND/OR
BECOME OBSOLETE OR LOSE VALUE AS NEW TECHNOLOGY IS DEVELOPED, WHICH CAN REDUCE
THE VALUE OF YOUR UNITS AND YOUR ULTIMATE CASH RETURN.

Residual value is the amount realized upon the sale or release of equipment when
the original lease has expired. The residual value of our equipment may decline
if technological advancements make it obsolete or change market preferences. The
residual value depends on, among other factors, the condition of the equipment,
the cost of comparable new equipment, the technological obsolescence of the
equipment and supply and demand for the equipment.

In either of these events, the equipment we purchased may have little or no
residual value. This will result in insufficient assets for us to distribute
cash in a total amount equal to the invested capital of the Limited Partners
over the term of our existence. Also, such an occurrence may reduce the value of
the units. There is no limitation on the amount of used equipment which CIGF3
may acquire. The acquisitions of used

                                                                              11
<PAGE>

equipment may increase the risk that such equipment will become obsolete so that
it will have little or no residual value.

ANY DELAY IN ACQUIRING EQUIPMENT WILL DIMINISH OUR RETURNS.

Due to competition with other lessors, we may experience difficulty in obtaining
and leasing appropriate equipment. Our ability to acquire and lease equipment
may also be adversely affected by interest rates, the availability of capital or
increases in corporate liquidity, since prospective lessees may prefer to raise
capital, incur debt or use internally-generated cash to purchase equipment
rather than enter the leasing market

ITEM 1B:   UNRESOLVED STAFF COMMENTS

               NOT APPLICABLE

ITEM 2:    PROPERTIES

               NOT APPLICABLE

ITEM 3:    LEGAL PROCEEDINGS

               NOT APPLICABLE

ITEM 4:    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

               NOT APPLICABLE

PART II

ITEM 5:    MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
           AND ISSUER PURCHASES OF EQUITY SECURITIES

     There is no public market for the Units nor is it anticipated that one will
develop. The Units are not listed on any exchange or permitted to trade on any
over-the-counter market. In addition, there are substantial restrictions on the
transferability of Units. As of December 31, 2005, there were 166 holders of
Units.

GENERAL LIMITATIONS

     Units cannot be transferred without the consent of the General Partner,
which may be withheld in its absolute discretion. The General Partner monitors
transfers of Units in an effort to ensure that all transfers are within certain
safe harbors promulgated by the IRS to furnish guidance regarding publicly
traded partnerships. These safe harbors limit the number of transfers that can
occur in any one year. The General Partner intends to cause the Partnership to
comply with the safe harbor that permits nonexempt transfers and redemptions of
Units of up to five percent of the total outstanding interest in the
Partnership's capital or profits in any one year.

REDEMPTION PROVISION

     Upon the conclusion of the 30-month period following the termination of the
Offering, the Partnership may, at the sole discretion of the General Partner,
repurchase a number of the outstanding Units. After such 30 month period, on a
semi-annual basis, the General Partner, at its discretion, will establish an
amount for redemption, generally not to exceed two percent of the outstanding
Units per year, subject to the General Partner's good faith determination that
such redemptions will not (a) cause the Partnership to be taxed as a corporation
under Section 7704 of the Code or (b) impair the capital or operations of the

                                                                              12
<PAGE>

Partnership. (The Partnership may redeem Units in excess of the two percent
limitation if, in the good faith judgment of the General Partner, the conditions
imposed in the preceding sentence would remain satisfied.) The redemption price
for Units will be 105% of the selling Limited Partner's Adjusted Capital
Contributions attributable to the Units for sale. Following the determination of
the annual redemption amount, redemptions will occur on a semi-annual basis and
all requests for redemption, which must be made in writing, must be on file as
of the Record Date in which the redemption is to occur. The General Partner will
maintain a master list of requests for redemption with priority being given to
Units owned by estates, followed by IRAs and Qualified Plans. All other requests
will be considered in the order received. Redemption requests made by or on
behalf of Limited Partners who are not affiliated with the General Partner or
its Affiliates will be given priority over those made by Limited Partners who
are affiliated with the General Partner or its Affiliates. All redemption
requests will remain in effect until and unless canceled, in writing, by the
requesting Limited Partner(s).

     The Partnership will accept redemption requests beginning 30 months
following the termination of the Offering. There will be no limitations on the
period of time that a redemption request may be pending prior to its being
granted. Limited Partners will not be required to hold their interest in the
Partnership for any specified period prior to their making a redemption request.

     In order to make a redemption request, Limited Partners will be required to
advise the General Partner in writing of such request. Upon receipt of such
notification, the Partnership will provide detailed forms and instructions to
complete the request.

EXEMPT TRANSFERS

     The following six categories of transfers are exempt transfers for purposes
of calculating the volume limitations imposed by the IRS and will generally be
permitted by the General Partner:

         (1)      transfers in which the basis of the Unit in the hands of the
transferee is determined, in whole or in part, by reference to its basis in the
hands of the transferor (for example, Units acquired by corporations in certain
reorganizations, contributions to capital, gifts of Units, Units contributed to
another partnership, and non-liquidating as well as liquidating distributions by
a parent partnership to its partners of interests in a sub partnership);

         (2)      transfers at death;

         (3)      transfers between members of a family (which include brothers
and sisters, spouse, ancestors, and lineal descendants);

         (4)      transfers resulting from the issuance of Units by the
Partnership in exchange for cash, property, or services;

         (5)      transfers resulting from distributions from Qualified Plans;
and

         (6)      any transfer by a Limited Partner in one or more transactions
during any 30-day period of Units representing in the aggregate more than five
percent of the total outstanding interests in capital or profits of the
Partnership.

ADDITIONAL RESTRICTIONS ON TRANSFER

     Limited Partners who wish to transfer their Units to a new beneficial owner
are required to pay the Partnership up to $50 for each transfer to cover the
Partnership's cost of processing the transfer application and take such other
actions and execute such other documents as may be reasonably requested by the
General Partner. There is no charge for re-registration of a certificate in the
event of a marriage, divorce, death, or trust so long as the transfer is not a
result of a sale of the Units.

                                                                              13
<PAGE>

     In addition, the following restrictions apply to each transfer: (i) no
transfer may be made if it would cause 25% or more of the outstanding Units to
be owned by benefit plans; and (ii) no transfer is permitted unless the
transferee obtains such governmental approvals as may reasonably be required by
the General Partner, including without limitation, the written consents of the
Pennsylvania Securities Commissioner and of any other state securities agency or
commission having jurisdiction over the transfer.

ALLOCATION AND DISTRIBUTION BETWEEN THE GENERAL PARTNER AND THE LIMITED PARTNERS

     Cash distributions, if any, will be made quarterly on March 31, June 30,
September 30 and December 31, of each year. Distributions are made 99% to the
Limited Partners and one percent to the General Partner until the Limited
Partners have received an amount equal to their Capital Contributions plus the
Cumulative Return; thereafter, cash distributions will be made 90% to Limited
Partners and 10% to the General Partner. Distributions made in connection with
the liquidation of the Partnership or a Partner's Units will be made in
accordance with the Partner's positive Capital Account balance as determined
under the Partnership Agreement and Treasury Regulations.

     The Cumulative Return is calculated on the Limited Partners' Adjusted
Capital Contributions for their Units. The Adjusted Capital Contributions will
initially be equal to the amount paid by the Limited Partners for their Units.
If distributions at any time exceed the Cumulative Return, the Adjusted Capital
Contributions will be reduced by the excess, decreasing the base on which the
Cumulative Return is calculated.

     If the proceeds resulting from the sale of any Equipment are reinvested in
Equipment, sufficient cash will be distributed to the Partners to pay the
additional federal income tax resulting from such sale for a Partner in a 39.6%
federal income tax bracket or, if lower, the maximum federal income tax rate in
effect for individuals for such taxable year.

     Generally, the General Partner is allocated Net Profits equal to its cash
distributions (but not less than one percent of Net Profits) and the balance is
allocated to the Limited Partners. Net Profits arising from transactions in
connection with the termination or liquidation of the Partnership are allocated
in the following order: (1) First, to each Partner in an amount equal to the
negative amount, if any, of his Capital Account; (2) Second, an amount equal to
the excess of the proceeds which would be distributed to the Partners based on
the Operating Distributions to the Partners over the aggregate Capital Accounts
of all the Partners, to the Partners in proportion to their respective shares of
such excess, and (3) Third, with respect to any remaining Net Profits, to the
Partners in the same proportions as if the distributions were Operating
Distributions. Net Losses, if any, are in all cases allocated 99% to the Limited
Partners and one percent to the General Partner.

     Net Profits and Net Losses are computed without taking into account, in
each taxable year of the Partnership, any items of income, gain, loss or
deduction required to be specially allocated pursuant to Section 704(b) of the
Code and the Treasury Regulation promulgated thereunder. No Limited Partner is
required to contribute cash to the capital of the Partnership in order to
restore a closing Capital Account deficit, and the General Partner has only a
limited deficit restoration obligation under the Partnership Agreement.

     Quarterly distributions in the following amounts were declared and paid to
the Limited Partners during 2005, 2004 and 2003.

                                                                              14
<PAGE>

     QUARTER ENDED            2005           2004           2003
     ------------------   ------------   ------------   ------------
     March 31             $     78,591   $     78,591   $     78,591

     June 30                    25,879         78,591         78,592

     September 30               18,714         78,591         78,591

     December 31                18,709         78,591         78,594
                          ------------   ------------   ------------
                          $    141,893   $    314,364   $    314,368
                          ============   ============   ============

ALLOCATIONS AND DISTRIBUTIONS AMONG THE LIMITED PARTNERS

     Except during the Offering Period, Cash Available for Distribution, which
is allocable to the Limited Partners, is apportioned among and distributed to
them solely with reference to the number of Units owned by each as of the Record
Date for each such distribution. During the Offering Period, Cash Available for
Distribution which is allocable to the Limited Partners is apportioned among and
distributed to them with reference to both (i) the number of Units owned by each
as of each Record Date and (ii) the number of days since the previous Record
Date (or, in the case of the first Record Date, the commencement of the Offering
Period) that the Limited Partner owned the Units.

     After the Offering Period, Net Profits, Net Losses and Cash Available for
Distribution allocable to the Limited Partners is apportioned among them in
accordance with the number of Units owned by each. A different convention is
utilized during the Offering Period, whereby Net Profits and Net Losses
allocable to Limited Partners is apportioned among them in the ratio which the
product of the number of Units owned by a Limited Partner multiplied by the
number of days in which the Limited Partner owns such Units during the period
bears to the sum of such products for all Limited Partners.

     In addition, where a Limited Partner transfers Units during a taxable year,
the Limited Partner may be allocated Net Profits for a period for which such
Limited Partner does not receive a corresponding cash distribution.

ITEM 6:    SELECTED FINANCIAL DATA

     The following table sets forth, in summary form, selected financial data
for the Partnership as of and for each of the five years in the period ended
December 31, 2004. This table is qualified in its entirety by the more detailed
information and financial statements presented elsewhere in this report, and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
related notes thereto included herein.

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31
                                 ------------------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA:       2005           2004           2003           2002           2001
------------------------------   ------------   ------------   ------------   ------------   ------------
<S>                              <C>            <C>            <C>            <C>            <C>
     Lease Income                $     83,682   $    151,391   $    391,419   $    784,368   $  1,106,345

      Net (Loss)                      (62,555)       (95,141)      (156,223)      (291,844)      (270,627)

  Cash Distributions                  143,313        317,498        317,500        317,498        317,497

Net (Loss) allocated to
   Limited Partners                   (63,975)       (98,275)      (159,355)      (294,978)      (273,760)

Net (Loss) per Limited
     Partner Unit                       (0.42)         (0.63)         (1.03)         (1.93)         (1.81)

Cash Distribution per
 Limited Partner Unit                    0.94           2.10           2.10           2.10           2.10
</TABLE>

                                                                              15
<PAGE>

<TABLE>
<CAPTION>
                                                            AS OF DECEMBER 31,
                                 ------------------------------------------------------------------------
         OTHER DATA:                 2005           2004           2003           2002           2001
------------------------------   ------------   ------------   ------------   ------------   ------------
<S>                              <C>            <C>            <C>            <C>            <C>
     Net cash provided by
     operating activities        $     42,387   $    269,057   $    255,697   $    183,015   $    396,196

  Net cash provided by (used
   in) investing activities            10,850          5,338         61,863        132,079       (182,929)

 Net cash (used in) provided
   by financing activities            (48,904)      (268,952)      (317,500)      (319,702)      (318,892)
</TABLE>

<TABLE>
<CAPTION>
                                                            AS OF DECEMBER 31
                                 ------------------------------------------------------------------------
                                     2005           2004           2003           2002           2001
                                 ------------   ------------   ------------   ------------   ------------
<S>                              <C>            <C>            <C>            <C>            <C>
        Total Assets             $     71,442   $    167,113   $    336,461   $    766,233   $  1,427,609

        Notes Payable                  30,817         60,243         91,436        253,767        344,324

 Partners' (Deficit) Capital         (280,289)      (291,331)         2,748        328,315        937,657
</TABLE>

     Net (loss) per unit is computed based upon net (loss) allocated to the
Limited Partners and the weighted average number of equivalent Limited
Partnership Units outstanding during the period. Cash distribution per Unit is
computed based upon distributions allocated to the Limited Partners and the
weighted average number of equivalent Limited Partnership Units outstanding
during the period.

ITEM 7:    MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
           OF OPERATIONS

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Partnership's discussion and analysis of its financial condition and results
of operations are based upon its financial statements which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires the Partnership
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. The Partnership bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

The Partnership believes that its critical accounting policies affect its more
significant judgments and estimates used in the preparation of its financial
statements.

                                                                              16
<PAGE>

COMPUTER EQUIPMENT

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.

REVENUE RECOGNITION

Through December 31, 2005, the Partnership has only entered into operating
leases. Lease revenue is recognized on a monthly basis in accordance with the
terms of the operating lease agreements.

The Company reviews a customer's credit history extending credit and establishes
provisions for uncollectible accounts based upon the credit risk of specific
customers, historical trends and other information.

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.

Depreciation on computer equipment for financial statement purposes is based on
the straight-line method over estimated useful lives of four years.

REIMBURSABLE EXPENSES

Reimbursable 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.

LIQUIDITY AND CAPITAL RESOURCES

For the year ended December 31, 2005, the Partnership generated cash flow from
operating activities of $42,000, which includes net loss of $63,000 reduced by
depreciation and amortization expenses of $85,000. Other non-cash activities
included in the determination of net income include direct payments of lease
income by lessees to banks of $29,000.

The Partnership's primary sources of capital for the years ended December 31,
2005, 2004 and 2003 were cash from operations of $42,000, $269,000 and $256,000,
respectively, and proceeds from the sale of computer equipment of $11,000,
$14,000 and $62,000, respectively. The primary uses of cash for the years ended
December 31, 2005, 2004 and 2003, were the payment of preferred distributions to
partners totaling $143,000, $317,500 and $317,500, respectively, and capital
expenditures for new equipment totaling $6,000 for the year ended December 31,
2004. There were no capital expenditures or acquisition fees for the year ended
December 31, 2005 and 2003.

The Partnership's investment strategy of acquiring computer equipment and
generally leasing it under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses. As
of December 31, 2005, the Partnership had future minimum rentals on
noncancellable operating leases of $28,400 for the year ended 2006 and $14,000
thereafter. The Partnership did not incur any debt in 2005 and 2003. The
partnership incurred debt during 2004 in the amount of $57,000. At December 31,
2005, the outstanding debt was $31,000, with interest rates ranging from 5.5% to
6.0%, and will be payable through January 2008.

                                                                              17
<PAGE>

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 share of the
computer equipment in which they participate at December 31, 2005 and 2004 was
approximately $89,000 and $137,000, 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 partnerships at December 31, 2005
and 2004 was approximately $1,741,000 and $1,859,000, respectively. The
Partnership's share of the outstanding debt associated with this equipment at
December 31, 2005 and 2004 was approximately $0 and $400, respectively, which is
included in the Partnership's liabilities on the balance sheet, and the total
outstanding debt at December 31, 2005 and 2004 related to the equipment shared
by the Partnership was approximately $0 and $1,000, respectively.

During the year ended December 31, 2005, 2004, and 2003, the General Partner and
one of its affiliates, CCC, forgave payables owed to them by the Partnership in
the amount of approximately $122,000, $69,000, and $148,000, respectively and
have deferred payments on other amounts owed to allow for distributions to
limited partners. Such amount has been recorded as a contribution to capital.
Also, CCC has contributed cash in the amount of $94,000 and $49,000 in 2005 and
2004, respectively.

The General Partner and CCC have committed to fund, either through cash
contributions and/or forgiveness of indebtedness, any necessary cash shortfalls
of the Partnership through 2006. No fees will be charged to the fund during
2006. CCC commits to fund distributions through March 2006, at which time we
will reassess the operations of the fund.

Due to the recurring losses from operations, the General Partner feels that it
may be in the best interest of the Partnership to start the liquidation process
in 2006 and run out naturally all remaining leases in the portfolio, making
distributions when possible, after expenses have been satisfied.

The General Partner intends to review and reassess the Partnership's business
plan on a quarterly basis in 2006.

RESULTS FROM OPERATIONS

For the years ended December 31, 2005, 2004 and 2003, the Partnership recognized
income of $85,000, $191,000, and $408,000, and expenses of $148,000, $286,000
and $564,000, resulting in net losses of $63,000, $95,000 and $156,000,
respectively.

Lease income decreased to $84,000 in 2005, down from $151,000 and $391,000 in
2004 and 2003, respectively, primarily due to the expiration of older leases.

The Partnership sold computer equipment with a net book value of $13,000 during
the year ended December 31, 2005, for a net loss of $2,250. The Partnership sold
computer equipment with a net book value of $9,000 and $45,000 during the years
ended December 31, 2004 and 2003, respectively, for a net gain of $5,000 and
$17,000 for the years ended December 31, 2004 and 2003, respectively.

Operating expenses, excluding depreciation, consist of accounting, legal,
outside service fees and reimbursement of expenses to CCC for administration and
operation of the Partnership. The increase to $54,000 during the year ended
December 31, 2005, up from $46,000 and down from $153,000 during the years ended
December 31, 2004 and 2003, respectively, is attributable to a increase in
reimbursable expenses with the administration and operation of the Partnership
charged by CCC of approximately

                                                                              18
<PAGE>

$18,000, a increase in accounting fees of approximately $16,000 and a increase
in remarketing fees of approximately $10,000.

The equipment management fee is equal to approximately 5% of the gross lease
revenue attributable to equipment that is subject to operating leases. The
equipment management fee was $4,000 for the year ended December 31, 2005, down
from $8,000 in 2004 and $20,000 in 2003, which is consistent with the decrease
in revenue.

Interest expense decreased to $2,000 for 2005, down from $4,000 for 2004 and
$12,000 for 2003, as a result of certain notes being fully paid during 2005.

Depreciation and amortization expenses consist of depreciation on computer
equipment, impairment charges, and amortization of equipment acquisition fees
and debt placement fees. Depreciation and amortization during 2005 decreased to
$85,000 from $229,000 and $380,000 in 2004 and 2003, respectively. This is
attributable to the decrease in the computer equipment portfolio being leased.

NET LOSS

Net loss decreased to $63,000 for the year ended December 31, 2005 from $95,000
and $156,000 for the years ended December 31, 2004 and 2003, respectively. The
changes in net loss were attributable to the changes in revenues and expenses as
discussed above.

COMMITMENTS AND CONTINGENCIES

         CONTRACTUAL CASH OBLIGATIONS

The following table presents our contractual cash obligations as of
December 31, 2005:

                             PAYMENTS DUE BY PERIOD

                                 TOTAL        2006         2007         2008
                              ----------   ----------   ----------   ----------
Installment notes payable
due 2006:

     Principal                $    5,528   $    5,528   $     ----   $     ----

     Interest                        160          160         ----         ----

Installment notes payable
due 2008:

     Principal                    25,289       11,778       12,443        1,068

     Interest                      1,535        1,097          433            5
                              ----------   ----------   ----------   ----------
TOTAL                         $   32,512   $   18,563   $   12,876   $    1,073
                              ==========   ==========   ==========   ==========

RECENT ACCOUNTING PRONOUNCEMENTS

     In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS
No. 154, "Accounting Changes and Error Corrections" (SFAS No. 154) which
replaces APB No. 20 "Accounting

                                                                              19
<PAGE>

Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial
Statements - An Amendment of APB Opinion No. 28." SFAS No. 154 provides guidance
on the methods issuers should use to account for and report accounting changes
and error corrections. Specifically, this statement requires that issuers
retrospectively apply any voluntary change in accounting principles to prior
period financial statements, if it is practicable to do so. This principle
replaces APB No. 20, which required that most voluntary changes in accounting
principle be recognized by including the cumulative effect of the change to the
new accounting principle on prior periods in the net income reported by the
issuer in the period in which it instituted the change. SFAS No. 154 also
redefines the term "restatement" to mean the correction of an error by revising
previously issued financial statements. Unless adopted early, SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The Partnership does not expect the adoption
of SFAS No. 154 to have an impact on its financial position or results of
operations.

ITEM 7.A:  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Partnership believes its exposure to market risk is not material due to
the fixed interest rate of its long- term debt and its associated fixed revenue
streams.

ITEM 8:    FINANCIAL STATEMENTS

     Our financial statements for the fiscal year ended December 31, 2005, 2004
and 2003 and the reports thereon of Asher and Company, Ltd. and BDO Seidman,
LLP, respectively, are included in this annual report.

ITEM 9:    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE

     Effective October 11, 2004, the registrant dismissed its principal
independent accounting firm, BDO Seidman, LLP. BDO Seidman, LLP's report on the
registrant's financial statements for 2003 did not contain any adverse opinion
or a disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles. The decision to change
accountants was approved by the board of directors of the registrant's general
partner. During the registrant's 2003 fiscal year and the interim period prior
to such dismissal, the registrant had no disagreements with BDO Seidman, LLP on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of BDO Seidman, LLP, would have caused BDO Seidman, LLP to
make reference to the subject matter of the disagreements in connection with its
report. Further, during the registrant's 2003 recent fiscal year and the interim
period prior to such dismissal, there occurred no reportable events, as set
forth in Item 304(a)(1)(v) of Regulation S-K.

     The registrant provided BDO Seidman, LLP with a copy of this disclosure on
or prior to the date hereof and requested BDO Seidman, LLP to provide the
registrant with a letter addressed to the Securities and Exchange Commission
stating whether it agreed with the statements contained herein. A copy of such
letter will be filed by amendment to this report when and if it is received by
the registrant.

     Also effective October 11, 2004, the registrant retained Asher & Company,
Ltd. of Philadelphia, Pennsylvania as its principal independent accounting firm.
The registrant believes that Asher & Company, Ltd. is an accounting firm of a
size and scope of experience better suited to the registrant's current needs
than the registrant's former accounting firm.

     During 2003, we had not consulted with Asher & Company, Ltd. on any matter
that (i) involved the application of accounting principles to a specific
completed or contemplated transaction, or the type of audit opinion that might
be rendered on our financial statements, in each case where written or oral
advice was provided, that was an important factor considered by us in reaching a
decision as to the accounting, auditing or financial reporting issue; or (ii)
was either the subject of a disagreement or event, as that term is described in
item 304(a)(1)(iv)(A) of Regulation S-X.

                                                                              20
<PAGE>

ITEM 9A:   CONTROLS AND PROCEDURES

     Our management, under the supervision and with the participation of the
principal executive officer and principal financial offer, have evaluated the
effectiveness of our controls and procedures related to our reporting and
disclosure obligations as of December 31, 2005, which is the end of the period
covered by this Annual Report on Form 10-K. Based on that evaluation, the
principal executive officer and principal financial officer have concluded that
our disclosure controls and procedures are sufficient to provide that (a)
material information relating to us, including our consolidated subsidiaries, is
made known to these officers by our and our consolidated subsidiaries other
employees, particularly material information related to the period for which
this periodic report is being prepared; and (b) this information is recorded,
processed, summarized, evaluated and reported, as applicable, within the time
periods specified in the rules and forms promulgated by the Securities and
Exchange Commission. There have been no significant changes in the General
Partner's internal controls or in other factors that could significantly affect
our disclosure controls and procedures in the fourth quarter of 2005 or
subsequent to the date of the evaluation.

ITEM 9B:   OTHER INFORMATION

     NOT APPLICABLE

ITEM 10:   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

GENERAL

     The Partnership does not have any Directors or executive officers.

     The General Partner, a wholly owned subsidiary of Commonwealth of Delaware,
Inc., a Delaware corporation, which is in turn a wholly-owned subsidiary of CCC,
a Pennsylvania corporation, was incorporated in Pennsylvania on August 26, 1993.
The General Partner also acts as the General Partner for Commonwealth Income &
Growth Fund I, Commonwealth Income & Growth Fund II, Commonwealth Income &
Growth Fund IV, Commonwealth Income & Growth Fund V, and Commonwealth Income &
Growth Fund VI. The principal business office of the General Partner is 470 John
Young Way, Suite 300, Exton, PA 19341, and its telephone number is 610-594-9600.
The General Partner manages and controls the affairs of the Partnership and has
sole responsibility for all aspects of the Partnership's operations. The
officers of the General Partner devote such time to the affairs of the
Partnership as in the opinion of the General Partner is necessary to enable it
to perform its function as General Partner. The officers of the General Partner
are not required to spend their full time in meeting their obligations to the
Partnership.

The directors and officers of the General Partner and key employees of CCC are
as follows:

<TABLE>
<CAPTION>
NAME                       TITLE
------------------------   ---------------------------------------------------------------------------
<S>                        <C>
George S. Springsteen      Chairman of the Board, Treasurer and Chief Executive Officer of CCC, CCSC,
                           and Commonwealth Income & Growth Fund, Inc. ("CIGF, Inc.")

Kimberly A. Springsteen    Director, Secretary, President & Chief Operations Officers of CCC, CCSC and
                           CIGF, Inc. Chief Compliance Officer of CCSC.

Henry J. Abbott            Director, Senior Vice President & Portfolio Manager of CCC,  CCSC and
                           CIGF, Inc.

Lynn A. Franceschina       Controller, Senior Vice President of CCC, CCSC and CIGF, Inc.
</TABLE>

                                                                              21
<PAGE>

<TABLE>
<S>                        <C>
Katrina M. Mason           Due Diligence Officer, Senior Vice President of CCC, CCSC and CIGF, Inc.

Jay Dugan                  Chief Technology Officer, Senior Vice President of CCC, CCSC and CIGF, Inc.

Donald Bachmayer           Accounting and Audit Manager, Vice President of CCC, CCSC, and CIGF, Inc.

Mark Hershenson            Broker Services Manager, Vice President of CCC, CCSC and CIGF, Inc.

James Pruett               Compliance Officer, Assistant Vice President of CCC, CCSC, and CIGF, Inc.

Donnamarie D. Abbott       Investor Services Manager, Assistant Vice President of CCC, and CIGF, Inc.
</TABLE>

     GEORGE S. SPRINGSTEEN, age 71, is a founding stockholder, Chairman of the
Board and Chief Executive Officer of Commonwealth Capital Corp. since 1978. In
addition, Mr. Springsteen serves as Chairman of the Board and Chief Executive
Officer and registered principal of the broker/dealer, Commonwealth Capital
Securities Corp and the General Partner, Commonwealth Income & Growth Fund Inc.
He oversees numerous equipment investment portfolios and is responsible for
business development. Mr. Springsteen and his wife, Kim, are the sole
shareholders of the parent company and its affiliates. Mr. Springsteen oversees
the Portfolio Advisory Committee, the Audit Committee, the Disaster Recovery
Committee and the Facilities Committee. Before starting Commonwealth, Mr.
Springsteen managed a portfolio of $120 million at Granite Computer Corp.,
bought their portfolio and founded his own firm. Mr. Springsteen attended the
University of Delaware and holds his NASD Series 22, 63 and 39 licenses. Mr.
Springsteen is a member of the Equipment Leasing Association and a founding
member of the Computer Dealers Leasing Association prior to, as well as a member
of the Investment Program Association. (Mr. Springsteen is the spouse of
Kimberly A. Springsteen)

     KIMBERLY A. SPRINGSTEEN, age 46, joined Commonwealth in 1997, as a founding
registered principal and Chief Compliance Officer of its broker/dealer,
Commonwealth Capital Securities Corp. and serves as Director and Secretary,
President and Chief Operating Officer of the parent and its affiliates. Ms.
Springsteen is responsible for oversight of daily operations, due diligence and
business development. Ms. Springsteen also oversees the Portfolio Advisory
Committee, the Audit Committee, the Disaster Recovery Committee and the
Facilities Committee. Ms. Springsteen has developed and presented numerous
motivational, informational and sales training workshops over the past 25 years.
Prior to Commonwealth, Ms. Springsteen served as Senior Vice President &
Marketing Manager in the Alternative Investments Department of Wheat
First/Butcher & Singer, a broker/dealer headquartered in Richmond, Virginia,
where she raised over $450,000,000 of capital in the real estate, equipment
leasing, tax credit and energy-related industries. Ms. Springsteen holds her
NASD Series 7, 63 and 39 licenses and is a member of the Equipment Leasing
Association, the Financial Planners Association and serves on the Board of
Trustees for the Investment Program Association. Ms. Springsteen is the wife of
George Springsteen and is co-shareholder of the parent and its affiliates.

     HENRY J. ABBOTT, age 55, joined Commonwealth in 1998, as a Portfolio
Manager. Mr. Abbott serves as a Director, Senior Vice President and Portfolio
Manager of the parent and its affiliates. Mr. Abbott is a registered principal
of the broker/dealer. Mr. Abbott is responsible for lease acquisitions,
equipment dispositions and portfolio review. Additionally, Mr. Abbott is also
responsible for oversight of residual valuation, due diligence, equipment
inspections, negotiating renewal and purchase options and remarketing off lease
equipment. Mr. Abbott serves as senior member on the Portfolio Advisory
Committee, the Audit Committee, the Disaster Recovery Committee and the
Facilities Committee. Prior to Commonwealth, Mr. Abbott has been active in the
commercial lending industry, working primarily on asset-backed transactions for
more than 30 years. Mr. Abbott attended St. John's University and holds his NASD
Series 7, 63 and 24 licenses. Mr. Abbott was a founding partner of Westwood
Capital LLC in New York, a Senior Vice President for IBJ Schroeder Leasing
Corporation and has managed a group specializing

                                                                              22
<PAGE>

in the provision of operating lease finance programs in the high technology
sector. Mr. Abbott brings extensive knowledge and experience in leasing and has
managed over $1.5 billion of secured transactions. Mr. Abbott is a member of the
Equipment Leasing Association and the Investment Program Association.

     LYNN A. FRANCESCHINA, age 34, joined Commonwealth in 2001 and serves as
Senior Vice President and Controller of the parent and its affiliates. Ms.
Franceschina is responsible for the oversight of all accounting, cash
management, financial reporting and audit and tax preparation functions. During
the period of March 2004 to October 2004, Ms. Franceschina was employed with
Wilmington Trust Corp., where she was a part in the development of policies and
procedures related to Sarbanes Oxley and its documentation. Prior to
Commonwealth, in 1994 until 1999, Ms. Franceschina served as a Senior Accountant
with Duquesne University, and from 1999 to 2000, a Senior Financial Analyst for
Environ Products. Ms. Franceschina attended Robert Morris University and holds a
Bachelor of Science in Accounting. Ms. Franceschina serves on the Portfolio
Advisory Committee and the Disaster Recovery Committee, as well as a member of
the Equipment Leasing Association, the Investment Program Association and the
Institute of Management Accountants.

     KATRINA M. MASON, age 33, joined Commonwealth in 2002 and serves as Senior
Vice President, Broker/Dealer Relations Manager and Due Diligence Manager of the
parent and its affiliates. Ms. Mason is a registered principal of the
broker/dealer. Ms. Mason is responsible for managing due diligence and
broker/dealer development, as well as coordination of the national sales and
marketing effort, syndication and product development. Ms. Mason serves on the
Disaster Recovery Committee and the Website Committee. Prior to Commonwealth,
Ms. Mason worked at ICON Securities, an equipment leasing sponsor, from 1997 to
2002 and served as President from 2001 to 2002. Prior to that, Ms. Mason served
as a Regional Marketing Director of Textainer Capital, an equipment-leasing
sponsor. Ms. Mason attended the University of California at Santa Barbara and
holds a Bachelor of Arts and also attended University of San Francisco and holds
an MBA. Ms Mason holds her NASD Series 7, 22, 63 & 24 licenses. Ms. Mason is a
member of the Equipment Leasing Association, the Financial Planners Association
and the Investment Program Association.

     JAY DUGAN, age 57, joined Commonwealth in 2002 and serves as Senior Vice
President and Chief Technology Officer of the parent and its affiliates. Mr.
Dugan is responsible for the information technology vision, security and
operation and ongoing development, including network configurations, protection
of corporate assets and maximizing security and efficiency of information flow.
Prior to Commonwealth, Mr. Dugan founded First Securities USA, an NASD member
firm, in 1988 and operated that firm through 1998. From 1999 until 2002, Mr.
Dugan was an independent due diligence consultant until he came to Commonwealth
to develop that area of the firm. Mr. Dugan attended St. Petersburg College and
holds an AS Degree in Computer Networking Technology. Mr. Dugan is a Microsoft
Certified Systems Engineer, Microsoft Certified Database Administrator and
Comp-Tia Certified Computer Technician. Mr. Dugan is a senior member of the
Disaster Recovery Committee, as well as oversight member of the Website
Committee.

     DONALD A. BACHMAYER, age 41, joined Commonwealth in 2004 and serves as Vice
President and Accounting Manager of the General Partner, CCC and certain of its
subsidiaries where he has been employed since 2004. Mr. Bachmayer is responsible
for financial reporting and analysis, cash management and tax compliance. He is
a member of the Portfolio Advisory Committee. Prior to joining Commonwealth,
from 2002 to 2004, Mr. Bachmayer served as Accounting Supervisor for LEAF
Financial, an equipment-leasing sponsor, where his responsibilities included
cash management, commission and syndication reporting. From 1997 to 2001, Mr.
Bachmayer was a senior accountant/auditor with Fishbein & Company, P.C.,
certified public accountants, with responsibilities including audit, financial
reporting, cash management, commission and syndication reporting, and tax
preparation. Mr. Bachmayer attended LaSalle University and holds a Bachelor of
Science in Accounting.

     MARK HERSHENSON, age 40, joined Commonwealth in 2002 and serves as Vice
President and Broker Services Manager of the parent and its affiliates. Mr.
Hershenson is responsible for management of all custodial relationships, broker
services in the areas of product education and production goals,

                                                                              23
<PAGE>

wholesaler scheduling/support and internal sales staff. Prior to Commonwealth,
Mr. Hershenson served as part of a financial planning practice at American
United Life from 1999 through 2002. He has written a book for the Florida
Insurance Commissioner on how to sell insurance products. Additionally, in 1991
through 1998, Mr. Hershenson served as sales trainer fat MetLife for over 100
registered representatives. Mr. Hershenson attended Stonehill College and holds
a Bachelor's in Psychology, with a concentration in Marketing/Organizational
Behaviorism and Master's level coursework in Financial Planning though American
College. Mr. Hershenson holds his NASD Series 6, 7 and 63 licenses. Mr.
Hershenson is a member of the Equipment Leasing Association and the Investment
Program Association.

     JAMES PRUETT, age 40, joined Commonwealth in 2002 and serves as Assistant
Vice President and Compliance Officer of the parent and its affiliates. Mr.
Pruett is responsible for management of regulatory policies and procedures,
assisting in compliance internal audit, associate regulatory filings,
broker/dealer registrations, state and broker/dealer financial regulatory
reporting requirements. Mr. Pruett assists in the management of shareholder
records and updates. Mr. Pruett is a member of the Website Committee. Mr. Pruett
holds his NASD Series 22 and 63 licenses. Prior to joining Commonwealth, Mr.
Pruett served as Managing Editor/Associate Publisher for Caliber Entertainment,
a publishing and entertainment licensing company. Mr. Pruett's responsibilities
included oversight of production of publishing library, as well as serving as
Editor-in-Chief for all publications and additionally served as Media Relations
Liaison. Mr. Pruett is a member of the Equipment Leasing Association and the
Investment Program Association.

     DONNAMARIE D. ABBOTT, age 47, joined Commonwealth in 2001 and serves as
Assistant Vice President and Investor Services Manager of the parent and its
affiliates. Ms. Abbott is responsible for management of daily operations in
Investor Services, from pre-formation stage through issuance of investors' final
distribution, communication, audited financial report, including fund masters,
blue sky coordination, subscription processing, distributions, transfers of
interest, redemptions, reporting and tax reporting. Ms. Abbott is a member of
the Office Development Committee, the Website Committee and the Disaster
Recovery Committee. Ms. Abbott holds her NASD Series 22 and 63 licenses. Prior
to joining Commonwealth, Ms. Abbott served as a Pennsylvania licensed realtor.
Ms. Abbott is a member of the Equipment Leasing Association and a member of the
Investment Program Association.

The directors and officers of the General Partner are required to spend only
such time on the Partnership's affairs as is necessary in the sole discretion of
the directors of the General Partner for the proper conduct of the Partnership's
business. A substantial amount of time of such directors and officers is
expected to be spent on matters unrelated to the Partnership, particularly after
the Partnership's investments have been selected. Under certain circumstances,
such directors and officers are entitled to indemnification from the
Partnership.

The Partnership has no audit committee financial expert, as defined under
Section 229.401 of the Exchange Act, serving on its audit committee. An audit
committee is not required because the Partnership is not a listed security as
defined by Section 240.10A-3; therefore, no audit committee financial expert is
required.

CODE OF ETHICS

     In view of the fiduciary obligation that the General Partner has to the
Partnership, the General Partner believes an adoption of a formal code of ethics
is unnecessary and would not benefit the Partnership, particularly, in light of
Partnership's limited business activities.

ITEM 11:   EXECUTIVE COMPENSATION

     The Partnership does not have any Directors or executive officers.

                                                                              24
<PAGE>

ITEM 12:   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     NONE

ITEM 13:   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The following table summarizes the types, amounts and recipients of
compensation to be paid by the Partnership directly or indirectly to the General
Partner and its Affiliates. Some of these fees are paid regardless of the
success or profitability of the Partnership's operations and investments. While
such compensation and fees were established by the General Partner and are not
based on arm's-length negotiations, the General Partner believes that such
compensation and fees are comparable to those that would be charged by an
unaffiliated entity or entities for similar services. The Partnership Agreement
limits the liability of the General Partner and its Affiliates to the
Partnership and the Limited Partners and provides indemnification to the General
Partner and its Affiliates under certain circumstances.

<TABLE>
<CAPTION>
                                                                      AMOUNT        AMOUNT        AMOUNT
   ENTITY RECEIVING                                                  INCURRED      INCURRED      INCURRED
     COMPENSATION                 TYPE OF COMPENSATION              DURING 2005   DURING 2004   DURING 2003
---------------------   -----------------------------------------   -----------   -----------   -----------
<S>                     <C>                                         <C>           <C>           <C>
The General Partner     REIMBURSABLE   EXPENSES.   The   General    $    15,000   $    19,000   $    62,000
and its Affiliates      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.

The General Partner     EQUIPMENT  ACQUISITION FEE. An Equipment    $         0   $     2,500   $         0
                        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.

The General Partner     DEBT PLACEMENT FEE. As compensation  for    $         0   $     1,000   $         0
                        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.
</TABLE>

                                                                              25
<PAGE>

<TABLE>
<S>                     <C>                                         <C>           <C>           <C>
The General Partner     EQUIPMENT  MANAGEMENT FEE. A monthly fee    $     4,000   $     8,000   $    20,000
                        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.

The General Partner     EQUIPMENT  LIQUIDATION FEE. With respect    $       400   $       400   $     2,000
                        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 ("Priority
                        Return") 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.

The General Partner     PARTNERSHIP   INCOME  AND  DISTRIBUTION.    $     1,420   $     3,134   $     3,132
                        The General Partner has a present and
                        continuing one percent interest of
                        $1,000 in the Partnership's item of
                        income, gain, loss, deduction, credit,
                        and tax preference. In addition, the
                        General Partner receives one percent of
                        Cash Available for Distribution until
                        the Limited Partners have received
                        distributions of Cash Available for
                        Distribution equal to their Capital
                        Contributions plus the 10% Priority
                        Return and thereafter, the General
                        Partner will receive 10% of Cash
                        Available for Distribution.
</TABLE>

     The Partnership is subject to various conflicts of interest arising out of
its relationships with the General Partner and its Affiliates. These conflicts
include the following:

COMPETITION WITH GENERAL PARTNER AND AFFILIATES: COMPETITION FOR MANAGEMENT'S
TIME

     The General Partner and its Affiliate sponsor other investor programs that
are in potential competition with the Partnership in connection with the
purchase of Equipment as well as opportunities to lease and sell such Equipment.
Competition for Equipment has occurred and is likely to occur in the future. The
General Partner and its Affiliates may also form additional investor programs
that may be competitive with the Partnership.

     If one or more investor programs and the Partnership are in a position to
acquire the same Equipment, the General Partner will determine which program
will purchase the Equipment based upon the objectives of each and the
suitability of the acquisition in light of those objectives. The General Partner
will generally afford priority to the program or entity that has had funds
available to purchase Equipment for the longest period of time. If one or more
investor programs and the Partnership are in a position to enter into lease with
the same lessee or sell Equipment to the same purchaser, the General Partner
will generally afford priority to the Equipment which has been available for
lease or sale for the longest period of time.

                                                                              26
<PAGE>

     Certain senior executives of the General Partner and its Affiliates also
serve as officers and directors of the other programs and are required to
apportion their time among these entities. The Partnership is, therefore, in
competition with the other programs for the attention and management time of the
General Partner and Affiliates. The officers and directors of the General
Partner are not required to devote all or substantially all of their time to the
affairs of the Partnership.

ACQUISITIONS

     CCC and the General Partner or other Affiliates of the General Partner may
acquire Equipment for the Partnership provided that (i) the Partnership has
insufficient funds at the time the Equipment is acquired, (ii) the acquisition
is in the best interest of the partnership and (iii) no benefit to the General
Partner or its Affiliates arises from the acquisition except for compensation
paid to CCC, the General Partner or such other Affiliate as disclosed in this
Report. CCC, the General Partner or their Affiliates will not hold Equipment for
more than 60 days prior to transfer to the Partnership. If sufficient funds
become available to the Partnership within such 60 day period, such Equipment
may be resold to the Partnership for a price not in excess of the sum of the
cost of the Equipment to such entity and any accountable Acquisition Expenses
payable to third parties which are incurred by such entity and interest on the
Purchase Price from the date of purchase to the date of transfer to the
Partnership. CCC, the General Partner or such other Affiliate will retain any
rent or other payments received for the Equipment, and bear all expenses and
liabilities, other than accountable Acquisition Expenses payable to third
parties with respect to such Equipment, for all periods prior to the acquisition
of the Equipment by the Partnership. Except as described above, there will be no
sales of Equipment to or from any Affiliate of CCC.

     In certain instances, the Partnership may find it necessary, in connection
with the ordering and acquisition of Equipment, to make advances to
manufacturers or vendors with funds borrowed from the General Partner for such
purpose. The Partnership does not borrow money from the General Partner or any
of its Affiliates with a term in excess of twelve months. Interest is paid on
loans or advances (in the form of deposits with manufacturers or vendors of
Equipment or otherwise) from the General Partner of its Affiliates from their
own funds at a rate equal to that which would be charged by third party
financing institutions on comparable loans from the same purpose in the same
geographic area, but in no event in excess of the General Partner's or
Affiliate's own cost of funds. In addition, if the General Partner or its
Affiliates borrow money and loan or advance it on a short-term basis to or on
behalf of the Partnership, the General Partner or such affiliates shall receive
no greater interest rate and financing charges from the Partnership than that
which unrelated lender charge on comparable loans. The Partnership will not
borrow money from the General Partner or any of its affiliates for a term in
excess of twelve months.

     If the General Partner or any of its Affiliates purchases Equipment in its
own name and with its own funds in order to facilitate ultimate purchase by the
Partnership, the purchaser is entitled to receive interest on the funds expended
for such purchase on behalf of the Partnership. Simple interest on any such
temporary purchases is charged on a floating rate basis not in excess of three
percent over the "prime rate" from time to time announced by PNC Bank, from the
date of initial acquisition to the date of repayment by the
Partnership/ownership transfer.

     The Partnership does not invest in equipment Limited Partnerships, general
partnerships or joint ventures, except that (a) the Partnership may invest in
general partnerships or joint ventures with persons other than equipment
Programs formed by the General Partner or its Affiliates, which partnerships or
joint ventures its specific equipment; provided that (i) the Partnership has or
acquires a controlling interest in such ventures or partnerships, (ii) the
non-controlling interest is owned by a non-Affiliate, and (iii) there are no
duplicate fees; and (b) the Partnership may invest in joint venture arrangements
with other equipment Programs formed by the General Partner or its Affiliates if
such action is in the best interest of all Programs and if all the following
conditions are met: (i) all the Programs have substantially identical investment
objectives; (ii) there are no duplicate fees; (iii) the sponsor compensation is
substantially identical in each Program; (iv) the Partnership has a right of
first refusal to buy another Program's interest in a joint venture if the other
Program wishes to sell equipment held in the joint venture; (v) the investment
of each Program is on substantially the same terms and conditions; and (vi) the
joint venture is formed either for the purpose

                                                                              27
<PAGE>

of effecting appropriated diversification for the Programs or for the purpose of
relieving the General Partner or its Affiliates from a commitment entered into
pursuant to certain provisions of the Partnership Agreement.

GLOSSARY

     The following terms used in this Report shall (unless otherwise expressly
provided herein or unless the context otherwise requires) have the meanings set
forth below.

     "Acquisition Expenses" means expenses relating to the prospective selection
and acquisition of or investment in Equipment, whether or not actually acquired,
including, but not limited to, legal fees and expenses, travel and communication
expenses, costs of appraisals, accounting fees and expenses and miscellaneous
expenses.

     "Acquisition Fee" means the total of all fees and commissions paid by any
party in connection with the initial purchase of Equipment acquired by the
Partnership. Included in the computation of such fees or commissions shall be
the Equipment Acquisition Fee, any commission, selection fee, construction
supervision fee, finance fee, non-recurring management fee of a similar nature,
however designated.

     "Adjusted Capital Contributions" means Capital Contributions of the Limited
Partners reduced to not less than zero by any cash distribution received by the
Limited Partners pursuant to Sections 4/2 or 8/1, to the extent such
distributions exceed any unpaid Cumulative Return as of the date such
distributions were made.

     "Affiliate" means, when used with reference to a specified Person, (I) any
Person that directly or indirectly through one or more intermediaries controls
or is controlled by or is under common control with the specified Person, (ii)
any Person that is a director or an executive officer of, partner in, or serves
in a similar capacity to, the specified Person, or any Person which the
specified Person is an executive officer of partner or with respect to which the
specified Person serves in a similar capacity, (iii) any Person owning or
controlling 10% or more of the outstanding voting securities of such specified
Person, or (iv) if such Person is an officer, director or partner, any entity
for which such Person acts in such capacity.

     "Capital Account" means the separate account established for each Partner
pursuant to Section 4/.1.

     "Capital Contributions" means, in the case of the General partner, the
total amount of money contributed to the Partnership by the General Partner,
and, in the case of the Limited Partners, $20 for each Unit or where the context
requires, the total Capital Contributions of all the Partners.

     "Capital Leases" are leases under which the Equipment either transfers to
the lessee at the end of the lease term, contains a bargain purchase price
option, the lease term is equal to 75% or more of the estimated economic life of
the Equipment, or the present value at the beginning of the lease term of the
minimum lease payments is equal to or exceeds 90% of the excess of the fair
value of the Equipment.

   "Cash Available for Distribution" means Cash Flow plus net Disposition
Proceeds plus cash funds available for distribution from Partnership reserves,
less such amounts as the General Partner, in accordance with this Agreement,
causes the Partnership to reinvest in Equipment or interests therein, and less
such amounts as the General Partner, in its sole discretion, determines should
be set aside for the restoration or enhancement of Partnership reserves.

     "Cash Flow" for any fiscal period means the sum of (i) cash receipts from
operations, including, but not limited to, rents or other revenues arising from
the leasing or operation of the Equipment and interest, if any, earned on funds
on deposit for the Partnership, but not including Net Disposition Proceeds,
minus (ii) all cash expenses and costs incurred and paid in connection with the
ownership, lease, management, use and/or operation of the Equipment, including,
but not limited to, fees for handling and storage; all interest expenses paid
and all repayments of principal regarding borrowed funds; maintenance; repair
costs;

                                                                              28
<PAGE>

insurance premiums; accounting and legal fees and expenses; debt collection
expenses; charges, assessments or levies imposed upon or against the Equipment;
ad valorem, gross receipts and other property taxes levied against the
Equipment; and all costs of repurchasing Units in accordance with this
Agreement; but not including depreciation or amortization of fees or capital
expenditures, or provisions for future expenditures, including, without
limitation, Organizational and Offering Expenses.

     "Closing Date" means the date, as designated by the General Partner, as of
which the Units shall cease being offered to the public pursuant to the
Offering, and shall be no later than the second anniversary of the Effective
Date.

     "Code" means the Internal Revenue Code of 1986, as amended, and as may be
amended from time to time by future federal tax statues. Any reference this
Agreement to a particular provision of the Code shall mean, where appropriate,
the corresponding provision of any successor statute.

     "Competitive Equipment Sale Commission" means that brokerage fee paid for
services rendered in connection with the purchase or sale of Equipment that is
reasonable, customary, and competitive in light of the size, type, and location
of the Equipment.

     "Conditional Sales Contract" means an agreement to sell Equipment to a
buyer in which the seller reserves title to, and retains a security interest in,
the Equipment until the Purchase Price of the Equipment is paid.

     "Cumulative Return" means an amount equal to a return at a rate of 10% per
annum, compounded daily, on the Adjusted Capital Contribution for all
outstanding Units, which amount shall begin accruing at the end of the calendar
quarter in which such Units are sold by the Partnership.

     "Effective Date" means the date on which the Partnership's registration
statement on Form S-1 with respect to the Units, as filed with the Securities
and Exchange Commission, becomes effective under the Securities Act of 1933, as
amended.

     "Equipment" means each item of and all of the computer peripheral and other
similar capital equipment purchased, owned, operated, and/or leased by the
Partnership or in which the Partnership has acquired a direct or indirect
interest, as more fully described in this Agreement, together with all
appliances, parts, instruments, accessories, furnishings, or other equipment
included therein and all substitutions, renewals, or replacements of, and all
additions, improvements, and accessions to, any and all thereof.

     "Full Payout Net Lease" means an initial Net Lease of the Equipment under
which the non-cancelable rental payments due (and which can be calculated at the
commencement of the Net Lease) during the initial noncancellable fixed term (not
including any renewal or extension period) of the lease or other contract for
the use of the Equipment are at least sufficient to recover the Purchase Price
of the Equipment.

     "General Partner" means Commonwealth Income & Growth Fund, Inc. and any
additional, substitute or successor general partner of the Partnership.

     "Gross Lease Revenues" means Partnership gross receipts from leasing or
other operation of the Equipment, except that, to the extent the Partnership has
leased the Equipment from an unaffiliated party, it shall mean such receipts
less any lease expense.

     "IRA" means an Individual Retirement Account as described in Section 408 of
the Code.

     "IRS" means the Internal Revenue Service.

     "Limited Partner" means a Person who acquires Units and who is admitted to
the Partnership as a limited partner in accordance with the terms of this
Agreement.

                                                                              29
<PAGE>

     "Majority in Interest" means, with respect to the Partnership, Limited
Partners holding more than 40% of the outstanding Units held by all Limited
Partners at the Record Date for any vote or consent of the Limited Partners.

     "Minimum Subscription Amount" means an aggregate of $1,500,000 in
subscriptions from Limited Partners.

     "Net Disposition Proceeds" means the net proceeds realized by the
Partnership from the refinancing, sale or other disposition of Equipment,
including insurance proceeds or lessee indemnity payments arising from the loss
or destruction of Equipment, less such amounts as are used to satisfy
Partnership liabilities.

     "Net Lease" means a lease or other contract under which the owner provides
equipment to a lessee or other operator in return for a payment, and the lessee
assumes all obligations and pays for the operation, repair, maintenance, taxes
and insuring of the Equipment, so that the non-cancelable rental payments under
the lease are absolutely net to the lessor.

     "Net Profits" or "Net Losses" shall be computed in accordance with Section
703(a) of the Code (including all items of income, gain, loss or deduction
required to be stated separately pursuant to Section 703(a) (1) of the Code) for
each taxable year of the Partnership or shorter period or subsequent to an
interim closing of the Partnership's books with the following adjustments: (i)
any income of the Partnership that is exempt from federal income tax and not
otherwise taken into account in computing Net Profits and Net Loss pursuant to
this definition shall be added to such taxable income of shall reduce such
taxable loss; (ii) any expenditure of the Partnership described in Code Section
705(a) (2) (B) or treated as Code Section 705(a) (2) (B) expenditures pursuant
to Treasury Regulations Section 1.704-1(b) (2) (iv) (I) and not otherwise taken
into account in computing Net Profits and Net Losses pursuant to this definition
shall be subtracted from such taxable income or loss; (iii) items of income,
gain, loss and deduction specially allocated pursuant to Section 7.3 of this
Agreement shall not be included in the computation of Net Profits or Net Loss;
and if property is reflected on the books of the Partnership at a book value
that differs from the adjusted tax basis of the property in accordance with
Treasury Regulation Section 1.704-1 (b) (2) (iv) (d) or (f), depreciation,
amortization, and gain or loss with respect to such property shall be determined
by reference to such book value in a manner consistent with Treasury Regulation
Section 1.704-1 (b) (2) (iv) (g). The terms "Net Profit" or "Net Losses" shall
include the Partnership's distributive share of the profit or loss of any
partnership or joint venture in which it is a partner or joint venturer.

     "Offering" means the initial public offering of the Units in the
Partnership, as described in the Prospectus.

     "Offering Period" means the period commencing the Effective Date and ending
the last day of the calendar month in which the Closing Date occurs.

     "Operating Distributions" means the quarterly distributions made to the
Partners pursuant to Article 8 of the Partnership Agreement.

     "Operating Lease" means a lease or other contractual arrangement under
which an unaffiliated party agrees to pay the Partnership, directly or
indirectly, for the use of the Equipment, and which is not a Full Payout Net
Lease.

     "Organizational and Offering Expenses" means the expenses incurred in
connection with the organization of the Partnership and in preparation of the
offering for registration and subsequently offering and distributing it to the
public, including Underwriting Commissions, listing fees and advertising
expenses except advertising expenses related to the leasing of the Program's
Equipment.

     "Partners" means any one or more of the General Partner and the Limited
Partners.

     "Partnership" means Commonwealth Income & Growth Fund III, a Pennsylvania
limited partnership.

                                                                              30
<PAGE>

     "Person" means an individual, partnership, joint venture, corporation,
trust, estate or other entity.

     "Priority Return" means an amount equal to a return at a rate of 10% per
annum, compounded daily, on the Adjusted Capital Contribution for all
outstanding Units, which amount shall begin accruing at the end of the calendar
quarter in which such Units are sold by the Partnership.

     "Proceeds" means proceeds from the sale of the Units.

     "Program" means a limited or general partnership, joint venture,
unincorporated association or similar organization, other than a corporation
formed and operated for the primary purpose of investment in and the operation
of or gain from an interest in Equipment.

     "Purchase Price" means, with respect to any Equipment, an amount equal to
the sum of (i) the invoice cost of such Equipment or any other such amount paid
to the seller, (ii) any closing, delivery and installation charges associated
therewith not included in such invoice cost and paid by or on behalf of the
Partnership, (iii) the cost of any capitalized modifications or upgrades paid by
or on behalf of the Partnership in connection with its purchase of the
Equipment, and (iv) the amount of the Equipment Acquisition Fee and any other
Acquisition Fees, but excluding points and prepaid interest.

     "Term Debt" means debt of the Partnership with a term in excess of twelve
months, incurred with respect to acquiring or investing in Equipment, or
refinancing non-Term Debt, but not debt incurred with respect to refinancing
existing Partnership Term Debt.

     "Underwriting Commissions" mean selling commissions and dealer-manager fees
paid to broker-dealers by the Partnership in connection with the offer and sale
of Units.

     "Unit" means a limited partnership interest in the Partnership.

ITEM 14:   PRINCIPAL ACCOUNTING FEES AND SERVICES

AUDIT FEES

The aggregate fees billed for each of the fiscal years ended December 31, 2005
and 2004 for professional services rendered by the Partnership's independent
registered public accounting firm for the audit of our annual financial
statements and review of the financial statements included in our Form 10-K or
services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements for those fiscal years were
$13,000 and $2,000, respectively.

AUDIT-RELATED FEES

The aggregate fees billed in the fiscal years ended December 31, 2005 and 2004
for assurance and related services by the Partnership's independent registered
public accounting firm that are reasonably related to the performance of the
audit or review of the registrant's financial statements and are not reported
under the paragraph captioned "Audit Fees" above are $0 and $0, respectively.

TAX FEES

The aggregate fees billed in the fiscal years ended December 31, 2005 and 2004
for professional services rendered by the Partnership's independent registered
public accounting firm for tax compliance, tax advice and tax planning were $0
and $0, respectively.

                                                                              31
<PAGE>

ALL OTHER FEES

The aggregate fees billed in the fiscal years ended December 31, 2005 and 2004
for products and services provided by the Partnership's independent registered
public accounting firm, other than the services reported above under other
captions of this Item 14 are $0 and $0, respectively.

PRE-APPROVAL POLICIES AND PROCEDURES

All audit related services, tax planning and other services were pre-approved by
the Board of Directors of the General Partner, which concluded that the
provision of such services by the Partnership's independent registered public
accounting firm was compatible with the maintenance of that firm's independence
in the conduct of its auditing functions. The policy of the General Partner
provides for pre-approval of these services and all audit related, tax or other
services not prohibited under Section 10A(g) of the Securities Exchange Act of
1934, as amended to be performed for us by our independent auditors, subject to
the de minimus exception described in Section 10A(i)(1)(B) of the Exchange Act
on an annual basis and on individual engagements if minimum thresholds are
exceeded.

The percentage of audit-related, tax and other services that were approved by
the board of directors is zero (-0-).

PART IV

ITEM 15:   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON

           FORM 10-K

<TABLE>
<S>        <C>                                                                                    <C>
(a) (1)    Financial Statements

           Report of Independent Registered Public Accounting Firm                                   1

           Report of Independent Registered Public Accounting Firm                                   2

           Balance Sheets as of December 31, 2005 and 2004                                         3-4

           Statements of Operations for the years ended December 31, 2005, 2004 and 2003             5

           Statements of Partners' Capital (Deficit) for the years ended December 31, 2005,
           2004 and 2003                                                                             6

           Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003           7-8

           Notes to Financial Statements                                                          9-22
</TABLE>

(a) (2)    Schedules.

           Schedules are omitted because they are not applicable, not required,
or because the required information is included in the financial statements and
notes thereto.

(a) (3)    Exhibits.

           * 3.1  Certificate of Limited Partnership

           * 3.2  Agreement of Limited Partnership

                                                                              32
<PAGE>

           *      Incorporated by reference from the Partnership's
                  Registration Statement on Form S-1
                  (Registration No. 333-26933)

(b)        Reports on Form 8-K

(c)        Exhibits.

           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

                                                                              33
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf on March 31, 2006 by the undersigned thereunto duly authorized.


                                        COMMONWEALTH INCOME & GROWTH FUND III

                                        By:  COMMONWEALTH INCOME & GROWTH FUND,
                                             INC., General Partner

                                        By:  /s/ George S. Springsteen
                                             -----------------------------------
                                             George S. Springsteen,
                                             Chief Executive Officer


     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 31, 2006.

SIGNATURE                               CAPACITY
-------------------------------         ----------------------------------------

/s/ George S. Springsteen               Chairman, Chief Executive Officer, and
-------------------------------         Sole Director of Commonwealth Income &
George S. Springsteen                   Growth Fund, Inc.

/s/ Kimberly A. Springsteen             President, and Chief Operating Officer
------------------------------
Kimberly A. Springsteen

                                                                              34
<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                                        CONTENTS

--------------------------------------------------------------------------------

         REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM             F-2

         REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM             F-3

         FINANCIAL STATEMENTS
           Balance sheets                                                    F-5
           Statements of operations                                          F-6
           Statements of partners' capital (deficit)                         F-7
           Statements of cash flows                                          F-8

         NOTES TO FINANCIAL STATEMENTS                                      F-10

                                       F-1
<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                                        CONTENTS

--------------------------------------------------------------------------------


             Report of Independent Registered Public Accounting Firm



The Partners
Commonwealth Income & Growth Fund III
Exton, Pennsylvania


         We have audited the accompanying balance sheets of Commonwealth Income
& Growth Fund III ("Partnership") as of December 31, 2005 and 2004 and the
related statements of operations and Partners' deficit and cash flows for each
of the two years then ended. These financial statements are the responsibility
of the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

         We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Partnership is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Commonwealth Income
& Growth Fund III as of December 31, 2005 and 2004 and the results of its
operations and cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.





/s/ ASHER & COMPANY, Ltd.

Philadelphia, Pennsylvania
March 29, 2006



                                       F-2
<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                                        CONTENTS

--------------------------------------------------------------------------------


REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Partners
Commonwealth Income & Growth Fund III
Exton, Pennsylvania

We have audited the accompanying statements of operations, partners' capital,
and cash flows of Commonwealth Income & Growth Fund III for the year ended
December 31, 2003. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Commonwealth
Income & Growth Fund III for the year ended December 31, 2003, in conformity
with accounting principles generally accepted in the United States.


                                                     /s/ BDO Seidman, LLP

Philadelphia, Pennsylvania
March 12, 2004


                                       F-3
<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                                  BALANCE SHEETS

--------------------------------------------------------------------------------

December 31,                                           2005           2004
------------------------------------------------   ------------   ------------
ASSETS
Cash and cash equivalents                          $     10,333   $      6,000
Lease income receivable, net of reserve
 of $0 at December 31, 2005 and 2004                      3,733          5,875
                                                   ------------   ------------
                                                         14,066         11,875
                                                   ------------   ------------
COMPUTER EQUIPMENT, at cost                             738,928        995,456
ACCUMULATED DEPRECIATION                               (683,254)      (844,357)
                                                   ------------   ------------
                                                         55,674        151,099
                                                   ------------   ------------
EQUIPMENT ACQUISITION COSTS AND DEFERRED
 EXPENSES, net of accumulated amortization
 of $1,392, and $11,563, at December 31,
 2005 and 2004, respectively                              1,702          4,139
                                                   ------------   ------------
TOTAL ASSETS                                       $     71,442   $    167,113
                                                   ============   ============

                                       F-4
<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                                  BALANCE SHEETS

--------------------------------------------------------------------------------

December 31,                                           2005           2004
------------------------------------------------   ------------   ------------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)

LIABILITIES
   Accounts payable                                $     26,728   $     25,497
   Accounts payable, Commonwealth Capital Corp.         122,565        212,458
   Accounts payable, General Partner                    111,352        102,089
   Accounts payable, affiliated limited
    partnerships                                         49,657         46,723
   Unearned lease income                                    122            943
   Other accrued expenses                                10,490         10,491
   Notes payable                                         30,817         60,243
                                                   ------------   ------------
TOTAL LIABILITIES                                       351,731        458,444
                                                   ------------   ------------
PARTNERS' (DEFICIT)
   General Partner                                        1,000          1,000
   Limited partners                                    (281,289)      (292,331)
                                                   ------------   ------------
TOTAL PARTNERS' (DEFICIT)                              (280,289)      (291,331)
                                                   ------------   ------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)  $     71,442   $    167,113
                                                   ============   ============

                                 See accompanying notes to financial statements.

                                       F-5
<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                        STATEMENTS OF OPERATIONS

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Years ended December 31,                           2005            2004            2003
--------------------------------------------   ------------    ------------    ------------
<S>                                            <C>             <C>             <C>
INCOME
   Lease                                       $     83,682    $    151,391    $    391,419
   Interest and other                                 1,518          34,462              80
   Gain on sale of computer equipment                    --           5,005          16,865
                                               ------------    ------------    ------------
TOTAL INCOME                                         85,200         190,858         408,364
                                               ------------    ------------    ------------
EXPENSES
   Operating, excluding depreciation                 54,132          45,841         153,142
   Equipment management fee, General
    Partner                                           4,184           7,564          19,571
   Depreciation                                      82,325         222,875         367,551
   Amortization of equipment acquisition
    costs and deferred expenses                       2,436           5,822          12,303
   Interest                                           2,428           3,897          12,020
   Loss on sale of computer equipment                 2,250              --              --
                                               ------------    ------------    ------------
TOTAL EXPENSES                                      147,755         285,999         564,587
                                               ------------    ------------    ------------
NET LOSS                                       $    (62,555)   $    (95,141)   $   (156,223)
                                               ============    ============    ============
NET LOSS ALLOCATED TO LIMITED PARTNERS              (63,975)        (98,275)       (159,355)

NET LOSS PER EQUIVALENT LIMITED
 PARTNERSHIP UNIT                              $      (0.42)   $      (0.63)   $      (1.03)

WEIGHTED AVERAGE NUMBER OF EQUIVALENT
 LIMITED PARTNERSHIP UNITS OUTSTANDING
 DURING THE YEAR                                    151,178         151,178         151,178
                                               ============    ============    ============
</TABLE>

                                 See accompanying notes to financial statements.

                                       F-6
<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                       STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                        General        Limited
                                        Partner        Partner        General        Limited
                                         Units          Units         Partner        Partners        Total
                                      ------------   ------------   ------------   ------------   ------------
<S>                                             <C>       <C>       <C>            <C>            <C>
BALANCE, December 31, 2002                      50        151,178   $      1,000   $    327,315   $    328,315
Net income (loss)                               --             --          3,132       (159,355)      (156,223)
Contributions - Forgiveness of
Expenses                                        --             --        148,156             --        148,156
Transfer of partners' capital                   --             --       (148,156)       148,156             --
Distributions                                   --             --         (3,132)      (314,368)      (317,500)
                                      ------------   ------------   ------------   ------------   ------------
BALANCE, December 31, 2003                      50        151,178          1,000          1,748          2,748
Net income (loss)                               --             --          3,134        (98,275)       (95,141)
Contributions - Cash                                                      49,116             --         49,116
Contributions - Forgiveness of fees                                       30,496             --         30,496
Contributions - Forgiveness of
Expenses                                                                  38,949             --         38,949
Transfer 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             --         94,410
Contributions - Forgiveness of
Expenses                                                                 122,500             --        122,500
Transfer 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)
                                      ============   ============   ============   ============   ============
</TABLE>

                                 See accompanying notes to financial statements.

                                       F-7
<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                        STATEMENTS OF CASH FLOWS

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Years ended December 31,                              2005           2004           2003
-----------------------------------------------   ------------   ------------   ------------
<S>                                               <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss                                       $    (62,555)  $    (95,141)  $   (156,223)
   Adjustments to reconcile net loss to
    net cash provided by operating activities
       Depreciation and amortization                    84,761        228,697        379,854
        (Gain) loss on sale of computer
        equipment                                        2,250         (5,005)       (16,865)
       Other noncash activities included in
         determination of net loss                     (29,426)       (88,167)      (162,331)
       Changes in assets and liabilities
           Lease income receivable                       2,141          3,306          4,980
           Accounts payable                              1,232         (1,265)        (4,387)
           Accounts payable,
               Commonwealth Capital Corp.              (37,393)       197,759        138,848
           Accounts payable, General Partner             9,264         (1,940)        83,913
           Accounts payable, affiliated limited
            partnerships                                 2,934         21,016         23,534
           Unearned lease income                          (821)          (694)       (35,626)
           Other accrued expenses                           --         10,491             --
                                                  ------------   ------------   ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES               42,387        269,057        255,697
                                                  ------------   ------------   ------------
CASH FLOWS FROM INVESTING ACTIVITIES
   Capital expenditures                                     --         (6,104)            --
   Net proceeds from sale of computer equipment         10,850         13,965         61,863
   Equipment acquisition fees to the                                                      --
    General Partner                                                    (2,523)            --
                                                  ------------   ------------   ------------
NET CASH PROVIDED BY INVESTING ACTIVITIES               10,850          5,338         61,863
                                                  ------------   ------------   ------------
</TABLE>

                                       F-8
<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                        STATEMENTS OF CASH FLOWS

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Years ended December 31,                                  2005           2004           2003
---------------------------------------------------   ------------   ------------   ------------
<S>                                                   <C>            <C>            <C>
CASH FLOWS FROM FINANCING ACTIVITIES
   Contributions                                            94,410         49,116             --
   Distributions to partners                              (143,314)      (317,498)      (317,500)
   Debt placement fee to the General
     Partner                                                    --           (570)            --
                                                      ------------   ------------   ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES        (48,904)      (268,952)      (317,500)
                                                      ------------   ------------   ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS                    4,333          5,443             60
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR               6,000            557            497
                                                      ------------   ------------   ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR              $     10,333   $      6,000   $        557
                                                      ============   ============   ============
</TABLE>

                                 See accompanying notes to financial statements.

                                       F-9
<PAGE>

                                           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 2005, 2004, and 2003, the
                            Partnership distributed to the limited partners
                            $141,893, $314,364, and $314,368, respectively. The
                            2005 distributions were at an annual rate of 4.7% of
                            the limited partners' original contributed capital.
                            The 2004 and 2003 distributions were at an annual
                            rate of 10.4% of the limited partners' original
                            contributed capital. Distributions during 2005
                            reflect an annual return of capital in the amount of
                            approximately $0.94 per limited partnership unit.
                            Distributions during 2004 and 2003 reflect an annual
                            return of capital in the amount of approximately
                            $2.08 per limited partnership unit, for units that
                            were outstanding for the entire year, respectively.

                                      F-10
<PAGE>

                                           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 $280,000 at December 31, 2005. 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 cash shortfalls of
                            the Partnership through 2006. No fees will be
                            charged to the fund during 2006. CCC commits to fund
                            distributions through March 2006, at which time we
                            will reassess the operations of the fund. CCC will
                            continue to reassess the operations on a quarterly
                            basis throughout 2006.

                            Due to the recurring losses from operations, the
                            General Partner feels that it may be in the best
                            interest of the Partnership to start the liquidation
                            process in 2006 and run out naturally all remaining
                            leases in the portfolio, making distributions when
                            possible, after expenses have been satisfied.

3.   SUMMARY OF             LONG-LIVED ASSETS
     SIGNIFICANT
     ACCOUNTING             The Partnership evaluates its long-lived assets when
     POLICIES               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 and $8,800, respectively
                            in the fourth quarter of 2005 and 2004 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.

                                      F-11
<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                   NOTES TO FINANCIAL STATEMENTS

--------------------------------------------------------------------------------

                            The Partnership determined that no impairment
                            occurred in 2003.

                            Depreciation on computer equipment for financial
                            statement purposes is based on the straight-line
                            method over estimated useful lives of four years.

                            INTANGIBLE ASSETS

                            Equipment acquisition costs and deferred 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 INSTRUMENTS

                            Statement 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 ESTIMATES

                            The 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 EQUIVALENTS

                            The 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, 2005
                            and 2004 was held in the custody of one financial
                            institution. At times,

                                      F-12
<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                   NOTES TO FINANCIAL STATEMENTS

--------------------------------------------------------------------------------

                            the balances may exceed federally insured limits.
                            The Partnership mitigates this risk by depositing
                            funds with a major financial institution. The
                            Partnership has not experienced any losses in such
                            accounts, and believes it is not exposed to any
                            significant credit risk.

                            ACCOUNTS RECEIVABLE

                            Accounts 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, 2005
                            and 2004.

                            INCOME TAXES

                            The Partnership is not subject to federal income
                            taxes; instead, any taxable income (loss) is passed
                            through to the partners and included on their
                            respective income tax returns.

                            Taxable income differs from financial statement net
                            income as a result of reporting certain income and
                            expense items for tax purposes in periods other than
                            those used for financial statement purposes,
                            principally relating to depreciation, amortization,
                            and lease income.

                            NET LOSS PER EQUIVALENT LIMITED PARTNERSHIP UNIT

                            The 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 EXPENSES

                            Reimbursable 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,

                                      F-13
<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                   NOTES TO FINANCIAL STATEMENTS

--------------------------------------------------------------------------------

                            compliance issues, and the number of existing
                            leases.

                            FORGIVENESS OF RELATED PARTY PAYABLES

                            In accordance with Accounting Principles Board
                            Opinion No. 26, Early Extinguishment of Debt, the
                            Partnership accounts for forgiveness of related
                            party payables as partner's capital transactions.

                            RECENT ACCOUNTING PRONOUNCEMENTS

                            In May 2005, the Financial Accounting Standards
                            Board (FASB) issued SFAS No. 154, "Accounting
                            Changes and Error Corrections" (SFAS No. 154) which
                            replaces APB No. 20 "Accounting Changes" and SFAS
                            No. 3, "Reporting Accounting Changes in Interim
                            Financial Statements - An Amendment of APB Opinion
                            No. 28." SFAS No. 154 provides guidance on the
                            methods issuers should use to account for and report
                            accounting changes and error corrections.
                            Specifically, this statement requires that issuers
                            retrospectively apply any voluntary change in
                            accounting principles to prior period financial
                            statements, if it is practicable to do so. This
                            principle replaces APB No. 20, which required that
                            most voluntary changes in accounting principle be
                            recognized by including the cumulative effect of the
                            change to the new accounting principle on prior
                            periods in the net income reported by the issuer in
                            the period in which it instituted the change. SFAS
                            No. 154 also redefines the term "restatement" to
                            mean the correction of an error by revising
                            previously issued financial statements. Unless
                            adopted early, SFAS No. 154 is effective for
                            accounting changes and corrections of errors made in
                            fiscal years beginning after December 15, 2005. The
                            Partnership does not expect the adoption of SFAS No.
                            154 to have an impact on its financial position or
                            results of operations.

4.   COMPUTER               The Partnership is the lessor of equipment under
     EQUIPMENT              operating leases with periods ranging from 24 to 36
                            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

                                      F-14
<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                   NOTES TO FINANCIAL STATEMENTS

--------------------------------------------------------------------------------

                            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, 2005, 2004,
                            and 2003, the Partnership paid $11,000, $1,000, and
                            $8,000, respectively.

                            The Partnership participates in leases that are
                            shared with other affiliated partnerships. The
                            Partnership's share of the computer equipment in
                            which they participate at December 31, 2005 and 2004
                            was approximately $84,000 and $137,000 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, 2005 and
                            2004 was approximately $1,434,000 and $1,859,000
                            respectively. The Partnership's share of the
                            outstanding debt associated with this equipment at
                            December 31, 2005 and 2004 was approximately $0 and
                            $400, respectively, which is included in the
                            Partnership's liabilities on the balance sheet, and
                            the total outstanding debt at December 31, 2005 and
                            2004 related to the equipment shared by the
                            Partnership was approximately $0 and $1,000,
                            respectively.

                            The following is a schedule of future minimum
                            rentals on noncancelable operating leases at
                            December 31, 2005:

                            Year ending December 31,                  Amount
                            ------------------------              -------------
                            2006                                  $      28,400
                            2007                                         12,900
                            2008                                          1,100
                                                                  -------------
                                                                  $      42,400
                                                                  =============

                                      F-15
<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                   NOTES TO FINANCIAL STATEMENTS

--------------------------------------------------------------------------------

     SIGNIFICANT            Lessees exceeding 10% of lease income for the years
     CUSTOMERS              ended:

                            Lessee                      2005     2004     2003
                            ------------------------   ------   ------   ------
                            Lessee A                       --       22%      13%
                            Lessee B                       14%      21%      26%
                            Lessee C                       --       --       11%
                            Lessee D                       23%      17%      27%
                            Lessee E                       37%      29%      11%
                            Lessee F                       15%      --       --
                                                       ------   ------   ------
                            TOTAL % OF LEASE INCOME        89%      89%      88%
                                                       ======   ======   ======

                            Lessees exceeding 10% of accounts receivable at
                            December 31:

                            Lessee                       2005     2004
                            ------------------------   ------   ------
                            Lessee A                       --       30%
                            Lessee D                      100%      64%
                                                       ------   ------
                            TOTAL % OF ACCOUNTS
                             RECEIVABLE                   100%      94%
                                                       ======   ======

5.   RELATED PARTY          FORGIVENESS OF RELATED PARTY PAYABLES
     TRANSACTIONS
                            During the year ended December 31, 2005, 2004, and
                            2003 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 $122,000, $69,000, and $148,000
                            respectively. Such amounts have been recorded as
                            contributions to capital. Also, CCC, in its
                            discretion, contributed cash in the amount of
                            $94,000 and $49,000 in 2005 and 2004, respectively.

                            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

                                      F-16
<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                   NOTES TO FINANCIAL STATEMENTS

--------------------------------------------------------------------------------

                            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 2005, 2004 and 2003,
                            $15,000 and $19,000, and $62,000, respectively, of
                            expenses were incurred by the General Partner and
                            its affiliates on behalf of the Partnership.

                            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. 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 2005 and 2003. During
                            2004, equipment acquisition fees of approximately
                            $2,500 were earned by the General Partner.

                            DEBT PLACEMENT FEE

                            As compensation for arranging term debt to finance
                            the acquisition of equipment by the Partnership, the
                            General Partner is paid a fee equal to 1% of such
                            indebtedness; provided, however, that such fee shall
                            be reduced to the extent the Partnership incurs such
                            fees to third parties, unaffiliated with the General
                            Partner or the lender, with respect to such
                            indebtedness and no such fee will be paid with
                            respect to borrowings from the General Partner or
                            its affiliates. No debt placement fees were earned
                            by the General Partner in 2005 and 2003. During
                            2004, debt placement fees of approximately $1,000
                            were earned by the General Partner.

                                      F-17
<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                   NOTES TO FINANCIAL STATEMENTS

--------------------------------------------------------------------------------

                            EQUIPMENT MANAGEMENT FEE

                            The General Partner is entitled to be paid a monthly
                            fee equal to the lesser of (i) the fees which would
                            be charged by an independent third party for similar
                            services for similar equipment or (ii) the sum of
                            (a) two percent of (1) the gross lease revenues
                            attributable to equipment which is subject to full
                            payout net leases which contain net lease provisions
                            plus (2) the purchase price paid on conditional
                            sales contracts as received by the Partnership and
                            (b) 5% of the gross lease revenues attributable to
                            equipment which is subject to operating leases.
                            During 2005, 2004 and 2003, equipment management
                            fees of approximately $4,000, $8,000, and $20,000
                            respectively, were earned by the General Partner as
                            determined pursuant to section (ii) above.

                            EQUIPMENT LIQUIDATION FEE

                            With respect to each item of equipment sold by the
                            General Partner (other than in connection with a
                            conditional sales contract), a fee equal to the
                            lesser of (i) 50% of the competitive equipment sale
                            commission or (ii) three percent of the sales price
                            for such equipment is payable to the General
                            Partner. The payment of such fee is subordinated to
                            the receipt by the limited partners of the net
                            disposition proceeds from such sale in accordance
                            with the Partnership Agreement. Such fee will be
                            reduced to the extent any liquidation or resale fees
                            are paid to unaffiliated parties. During 2005, 2004
                            and 2003, equipment liquidation fees of
                            approximately $400, $400 and $2,000, respectively,
                            were earned by the General Partner.

6.   NOTES PAYABLE          Notes payable consisted of the following:

                                      F-18
<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                   NOTES TO FINANCIAL STATEMENTS

--------------------------------------------------------------------------------

                            December 31,                       2005       2004
                            ------------------------------   --------   --------
                            Installment notes payable
                            to banks; interest
                            ranging from 6.25% to
                            6.75%, due in monthly
                            installments ranging
                            from $123 to $1,735,
                            including interest, with
                            final payments from
                            February through April 2005.        -----   $ 10,302

                            Installment notes payable to
                            banks; interest at 6.0%, due
                            in monthly installments
                            ranging from $320 to $394,
                            including interest, with final
                            payments from March through
                            December 2006.                   $  5,528     13,503

                            Installment notes payable to
                            banks; interest at 5.5%, due
                            in monthly installments of
                            $1,073, including interest,
                            with final payments in
                            January 2008.                      25,289     36,438
                                                             --------   --------
                                                             $ 30,817   $ 60,243
                                                             ========   ========

                            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,
                            2005 are as follows:

                            Year ending December 31,                  Amount
                            ------------------------                -----------
                                    2006                            $    17,307
                                    2007                                 12,443
                                    2008                                  1,067
                                                                    -----------
                                                                    $    30,817
                                                                    ===========

                                      F-19
<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                   NOTES TO FINANCIAL STATEMENTS

--------------------------------------------------------------------------------

7.   SUPPLEMENTAL CASH      Other noncash activities included in the
     FLOW INFORMATION       determination of net income are as follows:

Year ended December 31,                    2005         2004         2003
-------------------------------------   ----------   ----------   ----------
Lease income, net of interest expense
  on notes payable realized as a
  result of direct payment of
  principal by lessee to bank           $   29,426   $   88,167   $  162,331
                                        ==========   ==========   ==========

                            No interest or principal on notes payable was paid
                            by the Partnership because direct payment was made
                            by lessee to the bank in lieu of collection of lease
                            income and payment of interest and principal by the
                            Partnership.


                            Noncash investing and financing activities include
                            the following:

Year ended December 31,                   2005         2004         2003
-------------------------------------  ----------   ----------   ----------
Forgiveness of payables by related
  parties recorded as capital
  contributions (see Note 5)           $  122,500   $   69,445   $  148,156
                                       ----------   ----------   ----------
Debt assumed in connection with
  purchase of computer equipment       $       --   $   56,974   $       --
                                       ==========   ==========   ==========

                                      F-20
<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                   NOTES TO FINANCIAL STATEMENTS

--------------------------------------------------------------------------------

8.   RECONCILIATION OF NET (LOSS) REPORTED FOR FINANCIAL REPORTING PURPOSES TO
     TAXABLE (LOSS) ON THE FEDERAL PARTNERSHIP RETURN

Year ended December 31,                  2005           2004           2003
----------------------------------   ------------   ------------   ------------
Net (loss) for financial reporting
  Purposes to taxable (loss)         $    (62,555)  $    (95,141)  $   (156,223)
    Adjustments
      (Loss) on sale of computer
        equipment                         (11,949)       (71,960)      (174,813)
       Depreciation                       (33,384)       (68,520)       (79,198)
       Amortization                         2,252          4,856          9,886
       Bad debt expense                        --             --        (28,096)
       Unearned lease income                   --           (692)       (35,627)
       Other                               (8,798)        22,511        (16,265)
                                     ------------   ------------   ------------
Taxable (loss) on the Federal
  Partnership Return                 $   (114,434)  $   (208,946)  $   (480,336)
                                     ============   ============   ============

                            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.

                                      F-21
<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                   NOTES TO FINANCIAL STATEMENTS

--------------------------------------------------------------------------------

9.   QUARTERLY RESULTS      Summarized quarterly financial data for the years
     OF OPERATION           ended December 31, 2005 and 2004 is as follows:
     (UNAUDITED)

<TABLE>
<CAPTION>
                                                               Quarter ended
                                         ---------------------------------------------------------
                                           March 31       June 30      September 30    December 31
                                         ------------   ------------   ------------   ------------
<S>                                      <C>            <C>            <C>            <C>
2005
REVENUES
   Lease and other                       $     26,705   $     24,574   $     17,925   $     15,996
   (Loss) gain on sale of
      computer equipment                       (9,576)        (1,396)         1,168          7,554
                                         ------------   ------------   ------------   ------------
TOTAL REVENUES                                 17,129         23,178         19,093         23,550

TOTAL COSTS AND EXPENSES                       54,344         35,617         23,750         31,794
                                         ------------   ------------   ------------   ------------
NET (LOSS)                               $    (37,215)  $    (12,439)  $     (4,657)  $     (8,244)
                                         ============   ============   ============   ============
(LOSS) PER LIMITED
  PARTNER UNIT                           $      (0.25)  $      (0.08)  $      (0.03)  $      (0.06)
                                         ============   ============   ============   ============
</TABLE>

                                      F-22
<PAGE>

                                           COMMONWEALTH INCOME & GROWTH FUND III

                                                   NOTES TO FINANCIAL STATEMENTS

--------------------------------------------------------------------------------

 <TABLE>
<CAPTION>
                                                               Quarter ended
                                         ---------------------------------------------------------
                                           March 31       June 30      September 30    December 31
                                         ------------   ------------   ------------   ------------
<S>                                      <C>            <C>            <C>            <C>
2004
Revenues
  Lease and other                        $     53,925   $     38,801   $     38,264   $     54,863
   (Loss) gain on sale of
      computer equipment                       (1,116)         2,928          2,407         (1,446)
                                         ------------   ------------   ------------   ------------
Total revenues                                 55,041         41,729         40,671         53,417

Total costs and expenses                      110,193         70,606         42,346         62,854
                                         ------------   ------------   ------------   ------------
Net (loss)                               $    (55,152)  $    (28,877)  $     (1,675)  $     (9,437)
                                         ============   ============   ============   ============
(Loss) per limited
 partner unit                            $      (0.36)  $      (0.19)  $      (0.01)  $      (0.06)
                                         ============   ============   ============   ============
</TABLE>

                            The cumulative gain or loss on sale of equipment is
                            included in revenue or cost, as appropriate.

                                      F-23