##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
 Form 10-K
  þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2006oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934   Commission file
    no. 1-14771
 MicroFinancial
    Incorporated
 (Exact name of Registrant as
    Specified in its Charter)
  Massachusetts

04-2962824(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. Employer
    Identification No.)10M Commerce Way,
    Woburn, MA

01801(Zip Code)(Address of Principal Executive
    Offices)   Registrants telephone number, Including Area Code:
 (781) 994-4800
  Securities registered pursuant to Section 12(b) of the
    Act:
  Title of Each Class

Name of Each Exchange on
    Which RegisteredCommon Shares, $0.01 par
    value per share

American Stock Exchange   Securities registered pursuant to Section 12(g) of the
    Act:
  None
    o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
 o o þ
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE




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##### 



Table of
    Contents
  
  PageDescription



NumberPART IItem 1.


Business


2Item 1A.


Risk
    Factors


6Item 2.


Properties


11Item 3.


Legal
    Proceedings


11Item 4.


Submission of
    Matters to a Vote of Security Holders


12PART IIItem 5.


Market for
    Registrants Common Equity and Related Stockholder
    Matters


12Item 6.


Selected Financial
    Data


14Item 7.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations, Including Selected Quarterly Financial Data
    (Unaudited)


16Item 7A.


Quantitative and
    Qualitative Disclosures about Market Risk


28Item 8.


Financial
    Statements and Supplementary Data


28Item 9.


Changes In and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


28Item 9A.


Controls and
    Procedures


28Item 9B.


Other
    Information


28PART IIIItem 10.


Directors,
    Executive Officers and Corporate Governance


28Item 11.


Executive
    Compensation


29Item 12.


Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


29Item 13.


Certain
    Relationships and Related Transactions, and Director
    Independence


29Item 14.


Principal
    Accountant Fees and Services


29PART IVItem 15.


Exhibits and
    Financial Statement Schedules


30SIGNATURES


33EX-3.2 Restated Bylaws, as amendedEX-10.6.3 Form of incentive stock option agreementEX-10.6.4 Form of non-qualified stock option agreementEX-10.8  Amended and Restated Employment AgreementEX-21.1 Subsidiaries of RegistrantEX-23.1 Consent of Independent Registered Public Accounting FirmEX-31.1 Section 302 Certification of C.E.O.EX-31.2 Section 302 Certification of C.F.O.EX-32.1 Section 906 Certification of C.E.O.EX-32.2 Section 906 Certification of C.F.O.   1




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##### Table of Contents



PART I  Item 1.
    Business  General
    start-up
  point-of-sale
    Leasing,
    Servicing and Financing Programs
     2




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##### Table of Contents



Terms
    of Equipment Leases
          Residual
    Interests in Underlying Equipment
  month-to-month
  Service
    Contracts
    Dealers
   3




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##### Table of Contents



Use
    of Technology
    e-mail,
    Underwriting
       4




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##### Table of Contents



Bulk
    and Portfolio Acquisitions
    Servicing
    and Collections
      Competition
    Employees
    Executive
    Officers
  Name and Age of Executive Officers

TitleRichard F. Latour, 53

Director, President, Chief
    Executive Officer, Treasurer, Secretary and ClerkJames R. Jackson, Jr., 45

Vice President and Chief Financial
    OfficerSteven J. LaCreta, 47

Vice President, Lessee Relations
    and LegalStephen J. Constantino, 41

Vice President, Human ResourcesThomas Herlihy, 48

Vice President, Sales and
    Marketing, of TimePayment Corp.  5




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##### Table of Contents



Backgrounds
    of Executive Officers
            Availability
    of Information
  http://www.microfinancial.com Form 10-K, Form 10-Q, Form 8-K Form 10-K. http://www.sec.gov
  Item 1A.
    Risk
    Factors    We depend
    on external financing to fund leases and contracts, and adequate
    financing may not be available to us in amounts, together with
    our cash flow, sufficient to originate new leases.
   6




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The delay
    in originations caused by our former credit facilitys
    failure to renew in 2002 has decreased the size of our portfolio
    and may continue to adversely affect our financial
    performance.
      We are
    vulnerable to changes in the demand for the types of systems we
    lease or price reductions in such systems.
  point-of-sale
   7




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Even if
    we have adequate financing, our expansion strategy may be
    affected by our limited sources for originations and our
    inexperience with leasing new products.
    New Sources.
  New Products.
  We
    experience a significant rate of default under our leases, and a
    higher than expected default rate would have an adverse affect
    on our cash flow and earnings.
      We may
    face adverse consequences of litigation, including consequences
    of using litigation as part of our collection policy.
   8




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Increased
    interest rates may make our leases or contracts less
    profitable.
    An
    economic downturn may cause an increase in defaults under our
    leases and lower demand for the commercial equipment we
    lease.
      We face
    intense competition, which could cause us to lower our lease
    rates, hurt our origination volume and strategic position and
    adversely affect our financial results.
   9




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##### Table of Contents



Government
    regulation could restrict our business.
      We may
    face risks in acquiring other portfolios and companies,
    including risks relating to how we finance any such acquisition
    or how we are able to assimilate any portfolios or operations we
    acquire.
      If we
    were to lose key personnel, our operating results may suffer or
    it may cause a default under our debt facilities.
   10




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##### Table of Contents



Certain
    provisions of our articles and bylaws may have the effect of
    discouraging a change in control or acquisition of the
    company.
    Our stock
    price may be volatile, which could limit our access to the
    equity markets and could cause you to incur losses on your
    investment.
    There is
    no assurance that we will continue to pay dividends on our
    common stock in the future.
    Item 2.
    Properties    Item 3.
    Legal
    Proceedings   11




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##### Table of Contents



Item 4.
    Submission
    of Matters to a Vote of Security Holders   PART II  Item 5.
    Market
    for Registrants Common Equity and Related Stockholder
    Matters  Market Information
    2005


2006First


Second


Third


Fourth


First


Second


Third


FourthQuarter


Quarter


Quarter


Quarter


Quarter


Quarter


Quarter


QuarterStock PriceHigh

$
5.00


$
4.77


$
4.74


$
4.20


$
3.95


$
3.89


$
3.49


$
3.89Low

$
3.61


$
2.76


$
3.54


$
3.10


$
3.26


$
3.20


$
3.01


$
3.12   Holders
    Dividends
         12




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##### Table of Contents



Performance Graph
    Comparison
    of 5 Year Cumulative Total Return
    Assumes Initial Investment of $100
    December 2006
  
   13




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##### Table of Contents



Item 6.
    Selected
    Financial Data    Year Ended December 31,2002


2003


2004


2005


2006(Dollars in thousands, except share and per share data)Income Statement Data:Revenues:Income on financing leases

$
53,012


$
30,904


$
11,970


$
4,140


$
3,917Rental income


37,154



34,302



31,009



25,359



20,897Income on service contracts


9,734



8,593



5,897



3,467



1,870Other income(1)


26,922



17,775



11,491



6,318



5,758Total revenues


126,822



91,574



60,367



39,284



32,442Expenses:Selling, general and administrative


45,535



33,856



26,821



20,884



14,499Provision for credit losses


88,948
(2)


59,758



47,918



10,468



6,985Depreciation and amortization


18,385



16,592



14,010



9,497



5,326Interest


10,787



7,515



2,283



1,148



162Total expenses


163,655



117,721



91,032



41,997



26,972Income (loss) before provision
    (benefit) for income taxes


(36,833
)


(26,147
)


(30,665
)


(2,713
)


5,470Provision (benefit) for income
    taxes


(14,735
)


(10,460
)


(20,449
)(3)


(1,053
)


1,555Net income (loss)

$
(22,098
)

$
(15,687
)

$
(10,216
)

$
(1,660
)

$
3,915Net income (loss) per common share:Basic

$
(1.72
)

$
(1.20
)

$
(0.77
)

$
(0.12
)

$
0.28Diluted


(1.72
)


(1.20
)


(0.77
)


(0.12
)


0.28Weighted-average shares:Basic


12,821,946



13,043,744



13,182,833



13,567,640



13,791,403Diluted


12,821,946



13,043,744



13,182,833



13,567,640



13,958,759Dividends declared per common share

$
0.15


$



$



$
0.50


$
0.20  14




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##### Table of Contents



December 31,2002


2003


2004


2005


2006(Dollars in thousands)Balance Sheet Data:Cash and cash equivalents

$
5,494


$
6,533


$
9,709


$
32,926


$
28,737Restricted cash


18,516



2,376











Gross investment in leases(4)


367,173



194,898



69,181



33,004



44,314Unearned income


(67,574
)


(23,729
)


(6,313
)


(3,658
)


(13,682
)Allowance for credit losses


(69,294
)


(43,011
)


(14,963
)


(8,714
)


(5,223
)Investment in service contracts,
    net


14,463



8,844



4,777



1,626



613Investment in rental contracts, net


5,633



3,758



1,785



3,025



313Total assets


295,085



156,414



71,270



65,188



59,721Notes payable


168,927



58,843



34



161



5Subordinated notes payable


3,262



3,262



4,589



2,602



Total liabilities


208,482



85,148



9,177



10,501



3,585Total stockholders equity


86,603



71,266



62,093



54,687



56,136   December 31,2002


2003


2004


2005


2006(Dollars in thousands, except statistical data)Other Data:Operating Data:Value of leases originated(5)

$
111,829


$
3,429


$
920


$
7,296


$
33,343Value of service contracts
    acquired(6)


6,773















Value of rental contracts
    originated


677



157



77



1,731



Dealer funding(7)


74,000



1,600



668



6,364



21,498Average yield on leases(8)


36.9
%


32.5
%


30.1
%


30.6
%


30.0
%Cash Flows From (Used In):Operating activities

$
120,628


$
98,052


$
58,694


$
35,228


$
26,870Investing activities


(80,141
)


(2,839
)


(813
)


(6,978
)


(22,114
)Financing activities


(35,139
)


(94,174
)


(54,705
)


(5,033
)


(8,945
)Net change in cash and cash
    equivalents

$
5,348


$
1,039


$
3,176


$
23,217


$
(4,189
)Selected Ratios:Return on average assets


(6.73
)%


(6.95
)%


(8.98
)%


(2.43
)%


6.27
%Return on average
    stockholders equity


(22.42
)


(19.87
)


(15.32
)


(2.84
)


7.07Operating margin(9)


41.09



36.70



28.58



19.74



38.39Credit Quality Statistics:Net charge-offs

$
65,081


$
86,041


$
75,967


$
16,717


$
10,476Net charge-offs as a percentage of
    average gross investment(10)


15.60
%


29.40
%


54.71
%


30.79
%


26.34
%Provision for credit losses as a
    percentage of average gross investment(10)


21.32



20.42



34.51



19.28



17.56Allowance for credit losses as a
    percentage of gross investment(11)


18.16



21.11



20.23



25.16



11.63  15




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##### Table of Contents



(1)
    
    Includes loss and damage waiver fees, service fees, interest
    income, and miscellaneous revenue.(2)
    
    Includes a provision of $35 million to reserve against
    certain dealer receivables as well as delinquent portfolio
    assets. In the past, some dealer receivables had been offset
    against the funding of new contracts. When we suspended the
    funding of new contracts, we felt that the collection of these
    receivables would be more difficult. Although we continued to
    pursue collections on these accounts, we believed that the cost
    associated with legal enforcement would outweigh the benefits
    realized.(3)
    
    Includes an income tax benefit of $7.9 million that
    resulted from a reduction in our estimate of certain tax
    liabilities.(4)
    
    Consists of receivables due in installments and estimated
    residual value.(5)
    
    Represents the amount paid to dealers upon funding of leases
    plus the associated unearned income.(6)
    
    Represents the amount paid to dealers upon the acquisition of
    service contracts.(7)
    
    Represents the amount paid to dealers upon funding of leases and
    contracts.(8)
    
    Represents the aggregate of the implied interest rate on each
    lease originated during the period weighted by the amount funded.(9)
    
    Represents income before provision (benefit) for income taxes
    and provision for credit losses as a percentage of total
    revenues.  (10)
    
    Represents a percentage of average gross investment in leases
    and net investment in service contracts.(11)
    
    Represents allowance for credit losses as a percentage of gross
    investment in leases and net investment in service contracts.  Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations, Including Selected Quarterly Financial Data
    (Unaudited)    
    our dependence on point of sale authorization systems, expansion
    into new markets and the development of a sizeable dealer base;
    our significant capital requirements;
    our ability or inability to obtain the financing we need, or to
    use internally generated funds, in order to continue originating
    contracts;
    the risks of defaults on our leases;
    possible adverse consequences associated with our collection
    policy;
    the effect of higher interest rates on our portfolio;
    increasing competition;
    increased governmental regulation of the rates and methods we
    use in financing and collecting on our leases and contracts;
    acquiring other portfolios or companies;
    dependence on key personnel; 16




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##### Table of Contents




    adverse results in litigation and regulatory matters, or
    promulgation of new or enhanced legislation or
    regulations; and
    general economic and business conditions.    Overview
  point-of-sale
  22-month
       17




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##### Table of Contents



Critical
    Accounting Policies
    Revenue
    Recognition
  month-to-month
    Allowance
    for Credit Losses
   18




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##### Table of Contents



Income
    Taxes
    Share-Based
    Compensation
   19




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##### Table of Contents



Results
    of Operations
  Revenues
  2004


Change


2005


Change


2006(In thousands)Income on financing leases

$
11,970



(65.4
)%

$
4,140



(5.4
)%

$
3,917Rental income


31,009



(18.2
)


25,359



(17.6
)


20,897Income on service contracts


5,897



(41.2
)


3,467



(46.1
)


1,870Loss and damage waiver fees


4,016



(28.7
)


2,863



(33.8
)


1,895Service fees and other


7,444



(60.3
)


2,953



(17.1
)


2,448Interest income


31



1,519.4



502



181.9



1,415Total revenues

$
60,367



(34.9
)%

$
39,284



(17.4
)%

$
32,442         Selling,
    General and Administrative
  2004


Change


2005


Change


2006(In thousands)Selling, general and administrative

$
26,821



(22.1
)%

$
20,884



(30.6
)%

$
14,499As a percent of revenue


44.4
%






53.2
%






44.7
%    20




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##### Table of Contents



Provision
    for Credit Losses
  2004


Change


2005


Change


2006(In thousands)Provision for credit losses

$
47,918



(78.2
)%

$
10,468



(33.3
)%

$
6,985As a percent of revenue


79.4
%






26.6
%






21.5
%       Depreciation
    and Amortization
  2004


Change


2005


Change


2006(In thousands)Depreciation  fixed
    assets

$
801



(48.8
)%

$
410



(50.7
)%

$
202Depreciation  rental
    equipment


9,142



(35.1
)


5,936



(30.8
)


4,108Amortization  service
    contracts


4,067



(22.5
)


3,151



(67.8
)


1,016Total depreciation and amortization

$
14,010



(32.2
)%

$
9,497



(43.9
)%

$
5,326As a percent of revenue


23.2
%






24.2
%






16.4
%   month-to-month
 21




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##### Table of Contents



Interest
    Expense
  2004


Change


2005


Change


2006(In thousands)Interest

$
2,283



(49.7
)%

$
1,148



(85.9
)%

$
162As a percent of revenue


3.8
%






2.9
%






0.5
%       Provision
    (Benefit) for Income Taxes
  2004


Change


2005


Change


2006(In thousands)Provision (benefit) for income
    taxes

$
(20,449
)


(94.9
)%

$
(1,053
)


247.6
%

$
1,555As a percent of revenue


33.9
%






2.7
%






4.8
%    22




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##### Table of Contents



Other
    Operating Data
     23




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##### Table of Contents



Selected
    Quarterly Data
  Form 10-K.
  2005


2006First


Second


Third


Fourth


First


Second


Third


FourthQuarter


Quarter


Quarter


Quarter


Quarter


Quarter


Quarter


QuarterRevenues:Income on leases

$
1,508


$
1,103


$
832


$
697


$
672


$
724


$
1,007


$
1,514Rental income


6,429



6,431



6,469



6,030



5,721



5,594



5,121



4,461Income on service contracts


1,088



938



792



649



555



488



435



392Loss and damage waiver fees


819



751



681



612



551



493



431



420Service fees and other


985



859



439



670



1,103
(1)


535



437



373Interest income


32



88



156



226



315



323



411



366Total revenues


10,861



10,170



9,369



8,884



8,917



8,157



7,842



7,526Expenses:Selling, general and administrative


6,348



5,889



4,461



4,185



4,207



3,926



3,312



3,054Provision for credit losses


5,810



1,484



1,576



1,598



1,610



1,627



1,887



1,861Depreciation and amortization


2,484



2,465



2,465



2,083



1,765



1,674



1,195



692Interest


205



578



203



162



81



31



23



27Total expenses


14,847



10,416



8,705



8,028



7,663



7,258



6,417



5,634Income (loss) before provision
    (benefit) for income taxes


(3,986
)


(246
)


664



856



1,254



899



1,425



1,892Provision (benefit) for income
    taxes


(1,322
)


(20
)


310



(21
)


490



361



573



131
(2)Net income (loss)

$
(2,664
)

$
(226
)

$
354


$
877


$
764


$
538


$
852


$
1,761Net income (loss) per common
    share  basic

$
(0.20
)

$
(0.02
)

$
0.03


$
0.06


$
0.06


$
0.04


$
0.06


$
0.13Net income (loss) per common
    share  diluted


(0.20
)


(0.02
)


0.03



0.06



0.05



0.04



0.06



0.13Dividends declared per common share


0.10







0.10



0.30



0.05



0.05



0.05



0.05Dividends paid per common share


0.05



0.05



0.05



0.05



0.30



0.05



0.05



0.05     (1)
    
    Includes a $212,000 gain on the sale of rental contracts.(2)
    
    Includes a net benefit of $385,000 resulting from the settlement
    of the IRS audit. 24




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##### Table of Contents



Exposure
    to Credit Losses
    December 31, 2004


December 31, 2005


December 31, 2006(Dollars in thousands)Current

$
19,945



33.4
%

$
8,486



29.1
%

$
29,027



71.8
%31-60 days
    past due


1,079



1.8



637



2.2



1,607



4.061-90 days
    past due


987



1.7



601



2.1



825



2.0Over 90 days past due


37,668



63.1



19,415



66.6



8,996



22.2Receivables due in installments

$
59,679



100.0
%

$
29,139



100.0
%

$
40,455



100.0
%   Liquidity
    and Capital Resources
  General
           25




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##### Table of Contents



Borrowings
    December 31, 2005

December 31, 2006MaximumAmounts


Interest

Amounts


Interest


Unused


FacilityOutstanding


Rate

Outstanding


Rate


Capacity


Amount(Dollars in thousands)Revolving credit facility(1)

$
161


8.75%

$
5



9.75
%

$
29,995


$
30,000Subordinated notes payable


2,602


8.00-12.5%














$
2,763




$
5






$
29,995


$
30,000     (1)
    
    The unused capacity is subject to limitations based on lease
    eligibility and the borrowing base formula  90-day 90-day
      Financial
    Covenants
    Contractual
    Obligations and Lease Commitments
  Contractual
    Obligations
    Lease
    Commitments
   26




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##### Table of Contents



Market
    Risk and Financial Instruments
        90-day
    Recently
    Issued Accounting Pronouncements
  Accounting for Servicing of Financial Assets  An
    Amendment of FASB Statement No. 140. available-for-sale
  Accounting for Uncertainty in
    Income Taxes  An Interpretation of FASB Statement
    No. 109. Accounting for Income Taxes.
 27




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##### Table of Contents



Share-Based
    Payment
  Item 7A.
    Quantitative
    and Qualitative Disclosures about Market Risk    Item 8.
    Financial
    Statements and Supplementary Data  Form 10-K.
  Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Disclosure
    controls and procedures
  Rule 13a-15.
  Internal
    controls
    Item 9B.
    Other
    Information   PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance   28




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##### Table of Contents



Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    Item 13.
    Certain
    Relationships and Related Transactions and Director
    Independence    Item 14.
    Principal
    Accountant Fees and Services   29




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##### Table of Contents



PART IV  Item 15.
    Exhibits and
    Financial Statement Schedules  (a) (1)
    Financial Statements  Form 10-K
      ExhibitNumber

Description3
.1

Restated Articles of Organization,
    as amended. Incorporated by reference to the Exhibit with the
    same exhibit number in the Registrants Registration
    Statement on
    Form S-1
    (Registration Statement
    No. 333-56639)
    filed with the Securities and Exchange Commission on
    June 9, 1998.3
.2

Restated Bylaws, as amended.10
.1

Warrant Purchase Agreement dated
    April 14, 2003 among the Company, Fleet National Bank, as
    agent, and the other Lenders named therein. Incorporated by
    reference to Exhibit 10.2 in the Registrants
    Quarterly Report on
    Form 10-Q
    filed with the Securities and Exchange Commission on
    May 15, 2003.10
.2

Form of Warrants to purchase
    Common Stock of the Company issued April 14, 2003, together
    with schedule of warrant holders. Incorporated by reference to
    Exhibit 10.3 in the Registrants Quarterly Report on
    Form 10-Q
    filed with the Securities and Exchange Commission on
    May 15, 2003.10
.3

Co-Sale Agreement dated
    April 14, 2003 among the Company, Peter R. Bleyleben,
    Torrence C. Harder, Brian E. Boyle, Richard F. Latour,
    Alan J. Zakon, and James R. Jackson, Jr., and the Lenders
    named therein. Incorporated by reference to Exhibit 10.4 in
    the Registrants Quarterly Report on
    Form 10-Q
    filed with the Securities and Exchange Commission on
    May 15, 2003.10
.4

Registration Rights Agreement
    dated April 14, 2003 among the Company and the Lenders
    named therein. Incorporated by reference to Exhibit 10.5 in
    the Registrants Quarterly Report on
    Form 10-Q
    filed with the Securities and Exchange Commission on
    May 15, 2003.10
.5.1

Commercial Lease, dated
    November 3, 1998, between Cummings Properties Management,
    Inc. and MicroFinancial Incorporated. Incorporated by reference
    to Exhibit 10.25 in the Registrants Amendment
    No. 2 to Registration Statement on
    Form S-1
    (Registration Statement
    No. 333-56639)
    filed with the Securities and Exchange Commission on
    January 11, 1999.10
.5.2

Amendment to Lease #1, dated
    November 3, 1998, between Cummings Properties Management,
    Inc. and MicroFinancial Incorporated. Incorporated by reference
    to Exhibit 10.26 in the Registrants Amendment
    No. 2 to Registration Statement on
    Form S-1
    (Registration Statement
    No. 333-56639)
    filed with the Securities and Exchange Commission on
    January 11, 1999.10
.5.3

Lease Extension for the facility
    at 10-M Commerce Way, Woburn, MA dated September 16, 2003
    among MicroFinancial Incorporated and Cummings Properties, LLC.
    Incorporated by reference to Exhibit 10.1 in the
    Registrants Quarterly Report on
    Form 10-Q
    filed with the Securities and Exchange Commission on
    November 14, 2003.10
.5.4

Lease Extension #2 for the
    facility at 10-M Commerce Way, Woburn, MA dated July 15,
    2005 among MicroFinancial Incorporated and Cummings Properties,
    LLC. Incorporated by reference to Exhibit 10.1 in the
    Registrants Quarterly Report on
    Form 10-Q
    filed with the Securities and Exchange Commission on
    August 12, 2005.10
.6.1*

1998 Equity Incentive Plan.
    Incorporated by reference to Exhibit 10.12 in the
    Registrants Amendment No. 2 to Registration Statement
    on
    Form S-1
    (Registration Statement
    No. 333-56639)
    filed with the Securities and Exchange Commission on
    January 11, 1999.10
.6.2*

Forms of Restricted Stock
    Agreement grant under 1998 Equity Incentive Plan. Incorporated
    by reference to Exhibit 10.27 in the Registrants
    Annual Report on
    Form 10-K
    filed with the Securities and Exchange Commission on
    March 30, 2004.10
.6.3*

Form of incentive stock option
    agreement under 1998 Equity Incentive Plan.10
.6.4*

Form of non-qualified stock option
    agreement under 1998 Equity Incentive Plan. 30




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##### Table of Contents



ExhibitNumber

Description10
.7*

Second Amended and Restated
    Employment Agreement between the Company and Peter R. Bleyleben
    dated July 15, 2005. Incorporated by reference to
    Exhibit 10.2 in the Registrants Quarterly Report on
    Form 10-Q
    filed with the Securities and Exchange Commission on
    August 12, 2005.10
.8*

Amended and Restated Employment
    Agreement between the Company and Richard F. Latour dated
    March 15, 2004.10
.9*

Employment Agreement between the
    Company and James R. Jackson, Jr. dated May 4, 2005.
    Incorporated by reference to Exhibit 10.3 in the
    Registrants Quarterly Report on
    Form 10-Q
    filed with the Securities and Exchange Commission on
    August 12, 2005.10
.10*

Employment Agreement between the
    Company and Stephen Constantino dated May 4, 2005.
    Incorporated by reference to Exhibit 10.4 in the
    Registrants Quarterly Report on
    Form 10-Q
    filed with the Securities and Exchange Commission on
    August 12, 2005.10
.11*

Employment Agreement between the
    Company and Steven LaCreta dated May 4, 2005. Incorporated
    by reference to Exhibit 10.5 in the Registrants
    Quarterly Report on
    Form 10-Q
    filed with the Securities and Exchange Commission on
    August 12, 2005.10
.12

Warrant Certificate to purchase
    100,000 shares of Common Stock, dated June 10, 2004
    issued to Acorn Capital Group, LLC by MicroFinancial
    Incorporated. Incorporated by reference to Exhibit 10.9 of
    the Registrants
    Form 8-K
    filed on June 15, 2004.10
.13

Registration Rights Agreement
    dated June 10, 2004 by and among MicroFinancial
    Incorporated, Acorn Capital Group, LLC and Ampac Capital
    Solutions, LLC. Incorporated by reference to Exhibit 10.12
    of the Registrants
    Form 8-K
    filed on June 15, 2004.10
.14

Revolving Credit Agreement dated
    as of September 29, 2004, by and among Leasecomm
    Corporation and TimePayment Corp. LLC, as Borrowers,
    MicroFinancial Incorporated, The CIT Group/Commercial Services,
    Inc., as Agent, and the other financial institutions from time
    to time party thereto, as Lenders. Incorporated by reference to
    Exhibit 10.1 of the Registrants
    Form 8-K
    filed on October 4, 2004.10
.15

$30,000,000 Revolving Credit Note,
    dated as of September 29, 2004, issued by Leasecomm
    Corporation and TimePayment Corp. LLC and payable to the order
    of The CIT Group/Commercial Services, Inc. Incorporated by
    reference to Exhibit 10.2 of the Registrants
    Form 8-K
    filed on October 4, 2004.10
.16

Guaranty dated as of
    September 29, 2004, by MicroFinancial Incorporated in favor
    of The CIT Group/Commercial Services, Inc., as Agent.
    Incorporated by reference to Exhibit 10.3 of the
    Registrants
    Form 8-K
    filed on October 4, 2004.10
.17

Pledge Agreement, dated as of
    September 29, 2004, by and between MicroFinancial
    Incorporated and The CIT Group/Commercial Services, Inc., as
    Secured Party, on behalf of the Lenders. Incorporated by
    reference to Exhibit 10.4 of the Registrants
    Form 8-K
    filed on October 4, 2004.10
.18

Security Agreement dated as of
    September 29, 2004, by and among Leasecomm Corporation,
    TimePayment Corp. LLC and The CIT Group/Commercial Services,
    Inc., as Agent. Incorporated by reference to Exhibit 10.5
    of the Registrants
    Form 8-K
    filed on October 4, 2004.10
.19

Intellectual Property Security
    Agreement dated as of September 29, 2004, by and among
    Leasecomm Corporation, TimePayment Corp. LLC and The CIT
    Group/Commercial Services, Inc., as Agent. Incorporated by
    reference to Exhibit 10.6 of the Registrants
    Form 8-K
    filed on October 4, 2004.10
.20

Revolving Credit Assignment of
    Leases dated as of September 29, 2004, by and among
    Leasecomm Corporation, TimePayment Corp. LLC and The CIT
    Group/Commercial Services, Inc., as Agent. Incorporated by
    reference to Exhibit 10.7 of the Registrants
    Form 8-K
    filed on October 4, 2004.10
.21

Warrant Purchase Agreement, dated
    as of September 29, 2004, by and between MicroFinancial
    Incorporated and The CIT Group/Commercial Services, Inc., as
    Investor. Incorporated by reference to Exhibit 10.8 of the
    Registrants
    Form 8-K
    filed on October 4, 2004.10
.22

Warrant Certificate, dated as of
    September 29, 2004, for the purchase of 50,000 shares
    of common stock, issued by MicroFinancial Incorporated in favor
    of The CIT Group/Commercial Services, Inc. Incorporated by
    reference to Exhibit 10.9 of the Registrants
    Form 8-K
    filed on October 4, 2004.10
.23

Registration Rights Agreement
    dated as of September 29, 2004, by and between
    MicroFinancial Incorporated and The CIT Group/Commercial
    Services, Inc., as Holder. Incorporated by reference to
    Exhibit 10.10 of the Registrants
    Form 8-K
    filed on October 4, 2004. 31




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##### Table of Contents



ExhibitNumber

Description10
.24.1

Warrant Certificate, dated as of
    September 29, 2004 for the purchase of 75,000 shares
    of common stock, issued by MicroFinancial Incorporated in favor
    of Stonebridge Associates, LLC. Incorporated by reference to
    Exhibit 10.11 of the Registrants
    Form 10-Q
    filed on November 15, 2004.10
.25.2

Amendment to Warrant Certificate,
    dated as of September 29, 2004 for the purchase of
    75,000 shares of common stock, issued by MicroFinancial
    Incorporated in favor of Stonebridge Associates, LLC.
    Incorporated by reference to Exhibit 10.1 of the
    Registrants
    Form 8-K
    filed on December 2, 2004.21
.1

Subsidiaries of Registrant23
.1

Consent of Vitale,
    Caturano & Company, Ltd.31
.1

Certification of Chief Executive
    Officer pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002.31
.2

Certification of Chief Financial
    Officer pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002.32
.1

Certification of Chief Executive
    Officer pursuant to 18 U.S.C. Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 200232
.2

Certification of Chief Financial
    Officer pursuant to 18 U.S.C. Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002     
    
    Filed herewith.*
    
    Management contract or compensatory plan or arrangement required
    to be filed as an exhibit pursuant to Item 14(c) of this
    Report.     32




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##### Table of Contents



SIGNATURES    MicroFinancial
    Incorporated
  By:
    /s/  Richard
    F. Latour  President and Chief Executive Officer
  By:
    /s/  James
    R. Jackson Jr.  Vice President and Chief Financial Officer
      Signature

Title

Date/s/  Peter
    R.
    BleylebenPeter
    R. Bleyleben

Chairman of the Board of Directors

March 27, 2007/s/  Richard
    F. LatourRichard
    F. Latour

President, Chief Executive
    Officer, Treasurer, Clerk, Secretary and Director

March 27, 2007/s/  James
    R. Jackson
    Jr.James
    R. Jackson Jr.

Vice President and Chief Financial
    Officer

March 27, 2007/s/  Brian
    E. BoyleBrian
    E. Boyle

Director

March 27, 2007/s/  John
    W. EveretsJohn
    W. Everets

Director

March 27, 2007/s/  Torrence
    C. HarderTorrence
    C. Harder

Director

March 27, 2007/s/  Fritz
    Von MeringFritz
    Von Mering

Director

March 27, 2007/s/  Alan
    J. ZakonAlan
    J. Zakon

Director

March 27, 2007  33




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##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS
  Report of
    Independent Registered Public Accounting Firm


F-2Financial Statements:Consolidated
    Balance Sheets as of December 31, 2005 and 2006


F-3Consolidated
    Statements of Operations for the Years Ended December 31,
    2004, 2005 and 2006


F-4Consolidated
    Statements of Stockholders Equity for the Years Ended
    December 31, 2004, 2005 and 2006


F-5Consolidated
    Statements of Cash Flows for the Years Ended December 31,
    2004, 2005 and 2006


F-6Notes to
    Consolidated Financial Statements


F-7  F-1




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   
          Vitale,
    Caturano & Company, Ltd.
    F-2




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##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  CONSOLIDATED
    BALANCE SHEETS
  December 31,2005


2006(In thousands,except shareand per share data)ASSETSCash and cash equivalents

$
32,926


$
28,737Net investment in leases:Receivables due in installments


29,139



40,455Estimated residual value


3,865



3,859Initial direct costs


98



302Less:Advance lease payments and deposits


(35
)


(50
)Unearned income


(3,658
)


(13,682
)Allowance for credit losses


(8,714
)


(5,223
)Net investment in leases


20,695



25,661Investment in service contracts,
    net


1,626



613Investment in rental contracts, net


3,025



313Property and equipment, net


587



655Other assets


1,447



652Deferred income taxes, net


4,882



3,090Total assets

$
65,188


$
59,721LIABILITIES AND
    STOCKHOLDERS EQUITYNotes payable

$
161


$
5Subordinated notes payable


2,602



Accounts payable


1,099



1,038Dividends payable


4,114



691Other liabilities


2,094



1,110Income taxes payable


431



741Total liabilities


10,501



3,585Commitments and contingenciesStockholders equity:Preferred stock, $.01 par
    value; 5,000,000 shares authorized; no shares issued at
    December 31, 2005 and 2006






Common stock, $.01 par value;
    25,000,000 shares authorized; 13,713,899 and
    13,811,442 shares issued and outstanding at
    December 31, 2005 and 2006, respectively


137



138Additional paid-in capital


43,839



44,136Retained earnings


10,711



11,862Total stockholders equity


54,687



56,136Total liabilities and
    stockholders equity

$
65,188


$
59,721    F-3




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##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  CONSOLIDATED STATEMENTS OF OPERATIONS
  Year Ended December 31,2004


2005


2006(In thousands, except share and per share data)Revenues:Income on financing leases

$
11,970


$
4,140


$
3,917Rental income


31,009



25,359



20,897Income on service contracts


5,897



3,467



1,870Loss and damage waiver fees


4,016



2,863



1,895Service fees and other


7,444



2,952



2,448Interest income


31



503



1,415Total revenues


60,367



39,284



32,442Expenses:Selling, general and administrative


26,821



20,884



14,499Provision for credit losses


47,918



10,468



6,985Depreciation and amortization


14,010



9,497



5,326Interest


2,283



1,148



162Total expenses


91,032



41,997



26,972Income (loss) before provision
    (benefit) for income taxes


(30,665
)


(2,713
)


5,470Provision (benefit) for income
    taxes


(20,449
)


(1,053
)


1,555Net income (loss)

$
(10,216
)

$
(1,660
)

$
3,915Net income (loss) per common
    share  basic

$
(0.77
)

$
(0.12
)

$
0.28Net income (loss) per common
    share  diluted

$
(0.77
)

$
(0.12
)

$
0.28Weighted average shares
    outstanding  basic


13,182,833



13,567,640



13,791,403Weighted average shares
    outstanding  diluted


13,182,833



13,567,640



13,958,759Dividends declared per common share

$



$
0.50


$
0.20    F-4




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##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  CONSOLIDATED STATEMENTS OF STOCKHOLDERS
    EQUITY
 Years Ended December 31, 2004, 2005 and 2006
  Additional














TotalCommon Stock


Paid-In


Retained


Treasury Stock


Deferred


StockholdersShares


Amount


Capital


Earnings


Shares


Amount


Compensation


Equity(In thousands, except share data)Balance at December 31, 2003


13,410,646


$
134


$
44,245


$
29,402



234,230


$
(2,515
)

$



$
71,266Restricted stock granted










79















(79
)


Amortization of unearned
    compensation


2,500























28



28Treasury stock issued










(68
)






(6,250
)


68







Reclassification of treasury stock


(227,980
)


(2
)


(2,445
)






(227,980
)


2,447







Warrants issued










1,015



















1,015Net loss














(10,216
)














(10,216
)Balance at December 31, 2004


13,185,166



132



42,826



19,186











(51
)


62,093Affect of adoption of
    SFAS No. 123(R)










(51
)














51



Option exercises


432,500



4



(4
)


















Warrant exercises


322,938



3



776



















779Restricted stock granted


13,912







63



















63Stock-based compensation










842



















842Amortization of unearned
    compensation


5,000







15



















15Purchase and retirement of stock


(245,617
)


(2
)


(646
)


















(648
)Common stock dividends
    ($0.50 per share)














(6,815
)














(6,815
)Tax benefit on stock options










18



















18Net loss














(1,660
)














(1,660
)Balance at December 31, 2005


13,713,899



137



43,839



10,711















54,687Warrant exercises


13,983



























Stock issued for accrued
    compensation


56,141



1



199



















200Restricted stock granted


16,169







51



















51Stock-based compensation










10



















10Amortization of unearned
    compensation


11,250







37



















37Common stock dividends
    ($0.20 per share)














(2,764
)














(2,764
)Net income














3,915















3,915Balance at December 31, 2006


13,811,442


$
138


$
44,136


$
11,862






$



$



$
56,136    F-5




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##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  Year Ended December 31,2004


2005


2006(In thousands)Cash flows from operating
    activities:Cash received from customers

$
85,000


$
55,231


$
39,790Cash paid to suppliers and employees


(26,373
)


(20,066
)


(13,762
)Cash (paid) received for income
    taxes


2,404



102



(453
)Interest paid


(2,364
)


(542
)


(120
)Interest received


27



503



1,415Net cash provided by operating
    activities


58,694



35,228



26,870Cash flows from investing
    activities:Investment in lease contracts


(714
)


(6,364
)


(21,498
)Investment in direct costs






(59
)


(345
)Investment in property and equipment


(99
)


(555
)


(271
)Net cash used in investing
    activities


(813
)


(6,978
)


(22,114
)Cash flows from financing
    activities:Proceeds from secured debt


11,419



262



179Repayment of secured debt


(69,978
)


(135
)


(335
)Repayment of short-term demand
    notes payable


(250
)






Proceeds from issuance of
    subordinated debt


2,000







Repayment of subordinated debt


(110
)


(1,771
)


(2,602
)Decrease in restricted cash


2,376







Repayment of capital leases


(162
)


(41
)


Purchase and retirement of stock






(648
)


Payment of dividends






(2,700
)


(6,187
)Net cash used in financing
    activities


(54,705
)


(5,033
)


(8,945
)Net change in cash and cash
    equivalents


3,176



23,217



(4,189
)Cash and cash equivalents, beginning


6,533



9,709



32,926Cash and cash equivalents, ending

$
9,709


$
32,926


$
28,737Reconciliation of net income (loss)
    to net cash provided by operating activitites:Net income (loss)

$
(10,216
)

$
(1,660
)

$
3,915Adjustments to reconcile net income
    (loss) to net cash provided by operating activities:Amortization of unearned income,
    net of initial direct costs


(11,970
)


(4,140
)


(3,917
)Depreciation and amortization


14,010



9,497



5,326Provision for credit losses


47,918



10,468



6,985Recovery of equipment cost and
    residual value


39,522



20,755



12,309Stock-based compensation expense






1,088



255Amortization of unearned
    compensation


28



15



37Non-cash interest expense


194



606



46Changes in assets and liabilities:Increase (decrease) in income taxes
    payable


(7,789
)


431



310Decrease (increase) in deferred
    income taxes


(11,255
)


(1,382
)


1,792Decrease in other assets


736



1,053



678Decrease in accounts payable


(712
)


(1,375
)


(61
)Decrease in other liabilities


(1,772
)


(128
)


(805
)Net cash provided by operating
    activities

$
58,694


$
35,228


$
26,870Supplemental disclosure of non-cash
    activities:Fair market value of stock issued
    for compensation

$
79


$
63


$
251Fair market value of warrants issued


1,015







Warrants exercised by cancellation
    of debt






779



Reclassification of treasury stock
    to additional paid-in capital


2,447







    F-6




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##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS
 (Tables in thousands, except share and per share data)
  A.
    Nature of
    Business    90-day
    B.
    Summary
    of Significant Accounting Policies  Basis of
    Presentation
    Use of
    Estimates
    Cash and
    Cash Equivalents
   F-7




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##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Restricted
    Cash
    Leases
    and Revenue Recognition
      Allowance
    for Credit Losses
     F-8




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##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Investment
    in Service Contracts
      December 31,2005


2006Gross investment in service
    contracts

$
5,302


$
3,418Less accumulated amortization


(3,676
)


(2,805
)Investment in service contracts,
    net

$
1,626


$
613     Investment
    in Rental Contracts
  point-of-sale
    December 31,2005


2006Gross investment in rental
    contracts

$
11,258


$
7,387Less accumulated depreciation


(8,233
)


(7,074
)Investment in rental contracts, net

$
3,025


$
313        F-9




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##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Property
    and Equipment
    Fair
    Value of Financial Instruments
    Debt
    Issue Costs
    Income
    Taxes
    Reclassification
    of Prior Year Balances
    Net
    Income (Loss) Per Common Share
    F-10




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##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Year Ended December 31,2004


2005


2006Net income (loss)

$
(10,216
)

$
(1,660
)

$
3,915Weighted-average shares
    outstanding used in computation of net income (loss) per
    share  basic


13,182,833



13,567,640



13,791,403Dilutive effect of options,
    warrants and restricted stock










167,356Shares used in computation of net
    income (loss) per common share  assuming dilution


13,182,833



13,567,640



13,958,759Net income (loss) per common
    share  basic

$
(0.77
)

$
(0.12
)

$
0.28Net income (loss) per common
    share  diluted

$
(0.77
)

$
(0.12
)

$
0.28   Stock-Based
    Employee Compensation
  Accounting for Stock-Based
    Compensation. Accounting for Stock
    Issued to Employees
  Share-Based Payment.
  
    All new awards issued after the effective date;
    All modifications, repurchases or cancellations of existing
    awards after the effective date; and
    Unvested awards at the effective date. F-11




---



##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     2004Net loss, as reported

$
(10,216
)Add: Stock-based employee
    compensation expense included in reported net loss


28Deduct: Total stock-based employee
    compensation expense determined under fair value based method
    for all awards, net of related tax effects


(877
)Pro forma net loss

$
(11,065
)Net loss per share:As reported  basic and
    diluted

$
(0.77
)Pro forma  basic and
    diluted

$
(0.84
)   Recent
    Accounting Pronouncements
  Accounting for Servicing of Financial Assets  An
    Amendment of FASB Statement No. 140. available-for-sale
  Accounting for Uncertainty in
    Income Taxes  An Interpretation of FASB Statement
    No. 109. Accounting for Income Taxes.
   F-12




---



##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   C.
    Net
    Investment in Leases    Year Ending December 31,2007

$
19,0342008


10,0132009


6,7842010


3,4202011


1,204Total

$
40,455       Year Ended December 31,2004


2005


2006Allowance for credit losses,
    beginning

$
43,011


$
14,963


$
8,714Provision for credit losses


47,918



10,468



6,985Charge-offs


(81,763
)


(22,806
)


(16,069
)Recoveries


5,797



6,089



5,593Allowance for credit losses, ending

$
14,963


$
8,714


$
5,223     Year Ended December 31,2004


2005


2006Estimated residual value, beginning

$
19,110


$
9,502


$
3,865Lease originations


92



710



2,954Terminations


(9,700
)


(6,347
)


(2,960
)Estimated residual value, ending

$
9,502


$
3,865


$
3,859    F-13




---



##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   D.
    Property
    and Equipment    December 31,2005


2006Computer equipment

$
5,190


$
4,184Office equipment


1,184



691Leasehold improvements


349



263Total


6,723



5,138Less accumulated depreciation and
    amortization


(6,136
)


(4,483
)Net

$
587


$
655     E.
    Notes Payable
    and Subordinated Debt    December 31,2005


2006Credit facility  CIT

$
161


$
5Subordinated notes


2,602



Total

$
2,763


$
5   Notes Payable
  90-day 90-day
     F-14




---



##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
              Subordinated
    Notes Payable
     F-15




---



##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Fair
    Value of Notes Payable and Subordinated Debt
    F.
    Stockholders
    Equity  Treasury
    Stock
    Stock
    Options and Restricted Stock
     F-16




---



##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
         Weighted-AverageShares


Price Per Share


Exercise PriceOutstanding at December 31,
    2003 and 2004


1,675,000


$
0.86 to $13.544


$
7.139Exercised in 2005


(432,500
)

$
0.86 to $ 1.585


$
1.250Outstanding at December 31,
    2005 and 2006


1,242,500


$
1.585 to $13.544


$
9.189         Outstanding


ExercisableWeighted-





Weighted-Average


Intrinsic


Average





IntrinsicExercise Price

Shares


Life (Years)


Value


Exercise Price


Shares


Value$12.31


359,391



2.16


$



$
12.31



359,391


$
13.54


40,609



2.16







13.54



40,609



9.78


350,000



3.15







9.78



350,000



13.10


90,000



4.14







13.10



90,000



6.70


235,000



5.16







6.70



188,000



1.59


167,500



5.91



386,000



1.59



167,500



386,0001,242,500



4.26


$
386,000


$
9.29



1,195,500


$
386,000    F-17




---



##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
              Common
    Stock Reserved
    Warrants


318,289Stock options


1,242,500Restricted stock grants


25,000Reserved for future grants


1,666,642Total


3,252,431  F-18




---



##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  G.
    Income
    Taxes    Year Ended December 31,2004


2005


2006Current:Federal

$
(8,045
)

$
168


$
(416
)State


(1,149
)


161



179(9,194
)


329



(237
)Deferred:Federal


(12,098
)


(978
)


2,039State


843



(404
)


(247
)(11,255
)


(1,382
)


1,792Total

$
(20,449
)

$
(1,053
)

$
1,555     2005


2006Deferred tax assets:Allowance for credit losses

$
2,781


$
1,747Accrued expenses


101



315Depreciation and amortization


2,100



7,760Federal alternative minimum tax
    credit


1,551



1,345Federal NOL carryforward


2,453



1,020State NOL and other state
    attributes


3,764



3,451State valuation allowance


(3,576
)


(2,915
)Total deferred tax assets


9,174



12,723Deferred tax liabilities:Lease receivable and unearned
    income


(2,991
)


(7,969
)Residual value


(1,262
)


(1,543
)Initial direct costs


(39
)


(121
)Total deferred tax liabilities


(4,292
)


(9,633
)Net deferred tax asset

$
4,882


$
3,090    F-19




---



##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31,2004


2005


2006Federal statutory rate


(35.00
)%


(35.00
)%


35.00
%State income taxes, net of federal
    benefit


(5.60
)


(4.13
)


6.36State valuation allowance


7.63



(6.90
)


(7.49
)IRS audit settlement










(7.03
)Nondeductible expenses and other


(33.71
)


7.22



1.58Effective income tax rate


(66.68
)%


(38.81
)%


28.42
%       H.
    Commitments
    and Contingencies  Operating
    Leases
    Legal
    Matters
     F-20




---



##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Lease
    Commitments
    I.
    Employee
    Benefit Plan    J.
    Concentration
    of Credit Risk        point-of-sale
 F-21