##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K


|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31, 2004                                                 
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934

Commission file No.


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(Address of Principal Executive Offices) |  | 01801(zip code)                         

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 Registered
|                                         |  |                                          
|Common Shares, $0.01 par value per share |  | New York Stock Exchange                  

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


None





þ o


o


o þ






DOCUMENTS INCORPORATED BY REFERENCE












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TABLE OF CONTENTS


|                                                   |  |                                                                                                          |    |      |        |  |  | 
|-------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------- | -- | ---- | ------ |  |  | 
|                                                   |  |                                                                                                          |    | Page |       
|Description                                        |  |                                                                                                          |    |      | Number | 
|                                                   |  |                                                                                                          |    |      |        | 
|PART I                                            
|Item 1.                                            |  | Business                                                                                                 |    |      | 2      | 
|Item 2.                                            |  | Properties                                                                                               |    |      | 7      | 
|Item 3.                                            |  | Legal Proceedings                                                                                        |    |      | 7      | 
|Item 4.                                            |  | Submission of Matters to a Vote of Security
    Holders                                                  |    |      | 10     | 
|PART II                                           
|Item 5.                                            |  | Market for Registrants Common Equity
    and Related Stockholder Matters                                |    |      | 10     | 
|Item 6.                                            |  | Selected Financial Data                                                                                  |    |      | 11     | 
|Item 7.                                            |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                |    |      | 13     | 
|Item 7a.                                           |  | Quantitative and Qualitative Disclosures
    about Market Risk                                           |    |      | 32     | 
|Item 8.                                            |  | Financial Statements and Supplementary
    Data, Including Selected Quarterly Financial Data (Unaudited) |    |      | 32     | 
|Item 9.                                            |  | Changes In and Disagreements with
    Accountants on Accounting and Financial Disclosure                 |    |      | 32     | 
|Item 9a.                                           |  | Controls and Procedures                                                                                  |    |      | 32     | 
|Item 9b.                                           |  | Other Information                                                                                        |    |      | 32     | 
|PART III                                          
|Item 10.                                           |  | Directors and Executive Officers of the
    Registrant                                                   |    |      | 32     | 
|Item 11.                                           |  | Executive Compensation                                                                                   |    |      | 32     | 
|Item 12.                                           |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters       |    |      | 33     | 
|Item 13.                                           |  | Certain Relationships and Related
    Transactions                                                       |    |      | 33     | 
|Item 14.                                           |  | Principal Accounting Fees and Services                                                                   |    |      | 33     | 
|PART IV                                           
|Item 15.                                           |  | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K                                     |    |      | 33     | 
|SIGNATURES                                         |  |                                                                                                          | 38 |     
|EX-21.1 Subsidiaries of the Registrant            
|EX-23.1 Consent of Vitale, Caturano & Company, LTD
|EX-23.2 Consent of Deloitte & Touche LLP          
|EX-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.       



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PART I







|        |         
|------- | --------
|Item 1. | Business



| |        
| | -------
| | General











| |                                          
| | -----------------------------------------
| | Leasing, Servicing and Financing Programs



2



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| |                          
| | -------------------------
| | Terms of Equipment Leases











| |                                           
| | ------------------------------------------
| | Residual Interests in Underlying Equipment





| |                  
| | -----------------
| | Service Contracts



3



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| |        
| | -------
| | Dealers







| |                  
| | -----------------
| | Use of Technology



tm tm R






| |             
| | ------------
| | Underwriting



4



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tm








| |                                
| | -------------------------------
| | Bulk and Portfolio Acquisitions





| |                          
| | -------------------------
| | Servicing and Collections





5



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| |            
| | -----------
| | Competition





| |          
| | ---------
| | Employees





| |                   
| | ------------------
| | Executive Officers

|                           |  |                                                                                 
|-------------------------- |  | --------------------------------------------------------------------------------
|Name and Age of            |  |                                                                                 
|Executive Officers         |  | Title                                                                           
|                           |  |                                                                                 
|Richard F. Latour, 51      |  | Director, President, Chief Executive Officer, Treasurer,
    Secretary and Clerk
|James R. Jackson, Jr., 43  |  | Vice President and Chief Financial Officer                                      
|Carol A. Salvo, 38         |  | Vice President, Legal                                                           
|Steven J. LaCreta, 45      |  | Vice President, Lessee Relations                                                
|Stephen J. Constantino, 39 |  | Vice President, Human Resources                                                 



| |                                  
| | ---------------------------------
| | Backgrounds of Executive Officers







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| |                            
| | ---------------------------
| | Availability of Information








|        |           
|------- | ----------
|Item 2. | Properties








|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings





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|        |                                                    
|------- | ---------------------------------------------------
|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





|            |  |         |      |  |         |  |      |         |  |  |         |  |  |         |      |  |         |  |      |         |  |  |         |  |  |  |      |  |  |  |      | 
|----------- |  | ------- | ---- |  | ------- |  | ---- | ------- |  |  | ------- |  |  | ------- | ---- |  | ------- |  | ---- | ------- |  |  | ------- |  |  |  | ---- |  |  |  | ---- | 
|            |  | 2003    |      |  | 2004    | 
|            |  |         |      |  |         | 
|            |  | First   |      |  | Second  |  |      | Third   |  |  | Fourth  |  |  | First   |      |  | Second  |  |      | Third   |  |  | Fourth  | 
|            |  | Quarter |      |  | Quarter |  |      | Quarter |  |  | Quarter |  |  | Quarter |      |  | Quarter |  |      | Quarter |  |  | Quarter | 
|            |  |         |      |  |         |  |      |         |  |  |         |  |  |         |      |  |         |  |      |         |  |  |         | 
|Stock Price |  |         |      |  |         |  |      |         |  |  |         |  |  |         |      |  |         |  |      |         |  |  |         |  |  |  |      |  |  |  |      | 
|High        |  |         | 1.49 |  |         |  | 1.84 |         |  |  | 3.49    |  |  |         | 3.44 |  |         |  | 3.45 |         |  |  | 3.39    |  |  |  | 4.08 |  |  |  | 5.00 | 
|Low         |  |         | 0.56 |  |         |  | 0.37 |         |  |  | 1.75    |  |  |         | 2.64 |  |         |  | 2.58 |         |  |  | 2.55    |  |  |  | 3.14 |  |  |  | 3.40 | 









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|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data



|                                                          |                                      |                                               |        |         |      |   |        |         |  |   |         |         |     |      |         |         |   |   |         |        |  
|--------------------------------------------------------- | ------------------------------------ | --------------------------------------------- | ------ | ------- | ---- | - | ------ | ------- |  | - | ------- | ------- | --- | ---- | ------- | ------- | - | - | ------- | ------ | -
|                                                          |                                      | Years Ended December 31,                      |       
|                                                          |                                      |                                               |       
|                                                          |                                      | 2000                                          |        |         | 2001 |   |        | 2002    |  |   | 2003    |         |     | 2004 |        
|                                                          |                                      |                                               |        |         |      |   |        |         |  |   |         |         |     |      |        
|                                                          |                                      | (Dollars in thousands, except per share data) |       
|Income Statement Data:                                    |                                      |                                               |        |         |      |   |        |         |  |   |         |         |     |      |         |         |   |   |         |       
|Revenues                                                  |                                      |                                               |        |         |      |   |        |         |  |   |         |         |     |      |         |         |   |   |         |       
|                                                          | Income on financing leases and loans |                                               | $      | 69,847  |      |   | $      | 70,932  |  |   | $       | 53,012  |     |      | $       | 30,904  |   |   | $       | 11,970 |  
|                                                          | Rental income                        |                                               |        | 27,638  |      |   |        | 37,664  |  |   |         | 37,154  |     |      |         | 34,302  |   |   |         | 31,009 |  
|                                                          | Income on service contracts          |                                               |        | 8,687   |      |   |        | 8,665   |  |   |         | 9,734   |     |      |         | 8,593   |   |   |         | 5,897  |  
|                                                          | Other income(1)                      |                                               |        | 33,305  |      |   |        | 36,830  |  |   |         | 26,922  |     |      |         | 17,775  |   |   |         | 11,491 |  
|                                                          |                                      |                                               |        |         |      |   |        |         |  |   |         |         |     |      |        
|                                                          | Total revenues                       |                                               |        | 139,477 |      |   |        | 154,091 |  |   |         | 126,822 |     |      |         | 91,574  |   |   |         | 60,367 |  
|                                                          |                                      |                                               |        |         |      |   |        |         |  |   |         |         |     |      |        
|Expenses:                                                 |                                      |                                               |        |         |      |   |        |         |  |   |         |         |     |      |         |         |   |   |         |       
|                                                          | Selling, general and administrative  |                                               |        | 38,371  |      |   |        | 44,899  |  |   |         | 45,535  |     |      |         | 33,856  |   |   |         | 26,821 |  
|                                                          | Provision for credit losses          |                                               |        | 38,912  |      |   |        | 54,092  |  |   |         | 88,948  | (2) |      |         | 59,758  |   |   |         | 47,918 |  
|                                                          | Depreciation and amortization        |                                               |        | 10,227  |      |   |        | 14,378  |  |   |         | 18,385  |     |      |         | 16,592  |   |   |         | 14,010 |  
|                                                          | Interest                             |                                               |        | 15,858  |      |   |        | 14,301  |  |   |         | 10,787  |     |      |         | 7,515   |   |   |         | 2,283  |  
|                                                          |                                      |                                               |        |         |      |   |        |         |  |   |         |         |     |      |        
|                                                          | Total expenses                       |                                               |        | 103,368 |      |   |        | 127,670 |  |   |         | 163,655 |     |      |         | 117,721 |   |   |         | 91,032 |  
|                                                          |                                      |                                               |        |         |      |   |        |         |  |   |         |         |     |      |        
|Income (loss) before provision (benefit) for income taxes |                                      |                                               | 36,109 |         |      |   | 26,421 |         |  |   | (36,833 | )       |     |      | (26,147 | )       |   |   | (30,665 | )     
|                                                          |                                      |                                               |        |         |      |   |        |         |  |   |         |         |     |      |        
|Provision (benefit) for income taxes                      |                                      |                                               | 15,249 |         |      |   | 10,104 |         |  |   | (14,735 | )       |     |      | (10,460 | )       |   |   | (20,449 | )(3)  
|                                                          |                                      |                                               |        |         |      |   |        |         |  |   |         |         |     |      |        
|Net income (loss)                                         |                                      | $                                             | 20,860 |         |      | $ | 16,317 |         |  | $ | (22,098 | )       |     | $    | (15,687 | )       |   | $ | (10,216 | )     
|                                                          |                                      |                                               |        |         |      |   |        |         |  |   |         |         |     |      |        
|Net income (loss) per common share                        |                                      |                                               |        |         |      |   |        |         |  |   |         |         |     |      |         |         |   |   |         |       
|                                                          | Basic(4)                             |                                               | $      | 1.64    |      |   | $      | 1.28    |  |   | $       | (1.72   | )   |      | $       | (1.20   | ) |   | $       | (0.77  | )
|                                                          | Diluted(5)                           |                                               |        | 1.63    |      |   |        | 1.26    |  |   |         | (1.72   | )   |      |         | (1.20   | ) |   |         | (0.77  | )
|Dividends per common share                                |                                      |                                               | 0.18   |         |      |   | 0.20   |         |  |   | 0.15    |         |     |      | 0.00    |         |   |   | 0.00    |       

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|                                        |                            |                        |          |         |      |   |          |         |  |   |         |         |  |      |         |         |  |   |         |        | 
|--------------------------------------- | -------------------------- | ---------------------- | -------- | ------- | ---- | - | -------- | ------- |  | - | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------ | 
|                                        |                            | December 31,           |         
|                                        |                            |                        |         
|                                        |                            | 2000                   |          |         | 2001 |   |          | 2002    |  |   | 2003    |         |  | 2004 |        
|                                        |                            |                        |          |         |      |   |          |         |  |   |         |         |  |      |        
|                                        |                            | (Dollars in thousands) |         
|Balance Sheet Data:                     |                            |                        |          |         |      |   |          |         |  |   |         |         |  |      |         |         |  |   |         |       
|Gross investment in leases and loans(6) |                            | $                      | 452,885  |         |      | $ | 438,723  |         |  | $ | 367,173 |         |  | $    | 194,898 |         |  | $ | 69,181  |       
|Unearned income                         |                            |                        | (132,687 | )       |      |   | (104,538 | )       |  |   | (67,574 | )       |  |      | (23,729 | )       |  |   | (6,313  | )     
|Allowance for credit losses             |                            |                        | (40,924  | )       |      |   | (45,026  | )       |  |   | (69,294 | )       |  |      | (43,011 | )       |  |   | (14,963 | )     
|Investment in service contracts, net    |                            |                        | 12,553   |         |      |   | 14,126   |         |  |   | 14,463  |         |  |      | 8,844   |         |  |   | 4,777   |       
|Investment in rental contracts, net     |                            |                        | 6,537    |         |      |   | 10,348   |         |  |   | 5,633   |         |  |      | 3,758   |         |  |   | 1,785   |       
|                                        | Total assets               |                        |          | 342,602 |      |   |          | 361,728 |  |   |         | 295,085 |  |      |         | 156,414 |  |   |         | 71,270 | 
|Notes payable                           |                            |                        | 201,991  |         |      |   | 203,053  |         |  |   | 168,927 |         |  |      | 58,843  |         |  |   | 34      |       
|Subordinated notes payable              |                            |                        | 4,785    |         |      |   | 3,262    |         |  |   | 3,262   |         |  |      | 3,262   |         |  |   | 4,589   |       
|                                        | Total liabilities          |                        |          | 246,579 |      |   |          | 251,172 |  |   |         | 208,482 |  |      |         | 85,148  |  |   |         | 9,177  | 
|                                        | Total stockholders equity |                        |          | 96,023  |      |   |          | 110,556 |  |   |         | 86,603  |  |      |         | 71,266  |  |   |         | 62,093 | 

|                           |                                                                                 |                                                 |   |          |      |  |   |          |      |  |      |          |    |      |   |         |    |  |   |         |   
|-------------------------- | ------------------------------------------------------------------------------- | ----------------------------------------------- | - | -------- | ---- |  | - | -------- | ---- |  | ---- | -------- | -- | ---- | - | ------- | -- |  | - | ------- | --
|                           |                                                                                 | December 31,                                    |  
|                           |                                                                                 |                                                 |  
|                           |                                                                                 | 2000                                            |   |          | 2001 |  |   | 2002     |      |  | 2003 |          |    | 2004 |  
|                           |                                                                                 |                                                 |   |          |      |  |   |          |      |  |      |          |    |      |  
|                           |                                                                                 | (Dollars in thousands, except statistical data) |  
|Other Data:                |                                                                                 |                                                 |   |          |      |  |   |          |      |  |      |          |    |      |   |         |    |  |   |        
|Operating Data:            |                                                                                 |                                                 |   |          |      |  |   |          |      |  |      |          |    |      |   |         |    |  |   |        
|                           | Value of leases and loans originated(7)                                         |                                                 | $ | 236,763  |      |  | $ | 155,308  |      |  | $    | 111,829  |    |      | $ | 3,429   |    |  | $ | 920     |   
|                           | Value of service contracts acquired(8)                                          |                                                 |   | 4,138    |      |  |   | 6,658    |      |  |      | 6,773    |    |      |   |        |    |  |   |        |   
|                           | Value of rental contracts originated                                            |                                                 |   | 5,686    |      |  |   | 12,379   |      |  |      | 677      |    |      |   | 157     |    |  |   | 77      |   
|                           | Dealer fundings(9)                                                              |                                                 |   | 145,400  |      |  |   | 111,100  |      |  |      | 74,000   |    |      |   | 1,600   |    |  |   | 668     |   
|                           | Average yield on leases and loans(10)                                           |                                                 |   | 38.0     | %    |  |   | 38.1     | %    |  |      | 36.9     | %  |      |   | 32.5    | %  |  |   | 30.1    | % 
|Cash Flows From (used in): |                                                                                 |                                                 |   |          |      |  |   |          |      |  |      |          |    |      |   |         |    |  |   |        
|                           | Operating activities                                                            |                                                 | $ | 116,360  |      |  | $ | 122,280  |      |  | $    | 120,628  |    |      | $ | 98,052  |    |  | $ | 58,793  |   
|                           | Investing activities                                                            |                                                 |   | (157,947 | )    |  |   | (116,860 | )    |  |      | (80,141  | )  |      |   | (2,839  | )  |  |   | (912    | ) 
|                           | Financing activities                                                            |                                                 |   | 43,081   |      |  |   | (10,104  | )    |  |      | (35,139  | )  |      |   | (94,174 | )  |  |   | (54,705 | ) 
|                           |                                                                                 |                                                 |   |          |      |  |   |          |      |  |      |          |    |      |  
|                           | Total                                                                           |                                                 |   | 1,494    |      |  |   | (4,684   | )    |  |      | 5,348    |    |      |   | 1,039   |    |  |   | 3,176   |   
|Selected Ratios:           |                                                                                 |                                                 |   |          |      |  |   |          |      |  |      |          |    |      |   |         |    |  |   |        
|                           | Return on average assets                                                        |                                                 |   | 6.86     | %    |  |   | 4.63     | %    |  |      | (6.73    | )% |      |   | (6.95   | )% |  |   | (8.98   | )%
|                           | Return on average stockholders equity                                          |                                                 |   | 23.86    |      |  |   | 15.80    |      |  |      | (22.42   | )  |      |   | (19.87  | )  |  |   | (15.32  | ) 
|                           | Operating margin(11)                                                            |                                                 |   | 53.79    |      |  |   | 52.25    |      |  |      | 41.09    |    |      |   | 36.70   |    |  |   | 28.58   |   
|Credit Quality Statistics: |                                                                                 |                                                 |   |          |      |  |   |          |      |  |      |          |    |      |   |         |    |  |   |        
|                           | Net charge-offs                                                                 |                                                 | $ | 37,888   | (12) |  | $ | 51,408   | (12) |  | $    | 65,081(3 | )  |      | $ | 86,041  |    |  | $ | 75,967  |   
|                           | Net charge-offs as a percentage of average gross investment(13)                 |                                                 |   | 9.00     | %    |  |   | 11.20    | %    |  |      | 15.60    | %  |      |   | 29.40   | %  |  |   | 54.71   | % 
|                           | Provision for credit losses as a percentage of average gross
    investment(14) |                                                 |   | 9.24     |      |  |   | 11.78    |      |  |      | 21.32    |    |      |   | 20.42   |    |  |   | 34.51   |   
|                           | Allowance for credit losses as a percentage of gross
    investment(15)         |                                                 |   | 8.79     |      |  |   | 9.94     |      |  |      | 18.16    |    |      |   | 21.11   |    |  |   | 20.23   |   






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes loss and damage waiver fees, service fees, interest
    income, and equipment sales revenue.                                                                                                                                                                                                                                                                                                                                                    
|   
|(2) | The provision for 2002 includes an additional provision of
    $35.0 million to reserve against certain dealer receivables
    as well as delinquent portfolio assets. In the past, dealer
    receivables had been offset, in some instances, against the
    funding of new contracts. While the Company had suspended the
    funding of new deals, management felt that the collection of
    these receivables would be more difficult. Although the

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|    |                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | Company continued to pursue collections on these accounts,
    management believed that the cost associated with the legal
    enforcement would outweigh the benefits realized.                                                                                                          
|   
|(3) | During 2004 the Company recorded an income tax benefit of
    $7.9 million that resulted from a reduction in the
    Companys estimate of certain tax liabilities that had been
    included in accrued income taxes on the Companys balance
    sheet.                                 
|   
|(4) | Net income per common share (basic) is calculated based on
    weighted-average common shares outstanding of 12,728,441,
    12,789,605, 12,821,946, 13,043,744 and 13,182,833 for the years
    ended December 31, 2000, 2001, 2002, 2003 and 2004
    respectively.                     
|   
|(5) | Net income per common share (diluted) is calculated based
    on weighted-average common shares outstanding on a diluted basis
    of 12,807,814, 12,945,243, 12,821,946, 13,043,744 and 13,182,833
    for the years ended December 31, 2000, 2001, 2002, 2003 and
    2004 respectively.
|   
|(6) | Consists of receivables due in installments, estimated residual
    value, and loans receivable.                                                                                                                                                                                          
|   
|(7) | Represents the amount paid to Dealers upon funding of leases and
    loans, plus the associated unearned income.                                                                                                                                                                          
|   
|(8) | Represents the amount paid to Dealers upon the acquisition of
    service contracts, including both non-cancelable service
    contracts and month-to-month service contracts.                                                                                                            
|   
|(9) | Represents the amount paid to Dealers upon funding of leases,
    contracts and loans.                                                                                                                                                                                                    



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Represents the aggregate of the implied interest rate on each
    lease and loan originated during the period weighted by the
    amount funded at origination for each such lease and loan.                                                                                                                                                                                                                                                                                                                                                                                                
|    
|(11) | Represents income before provision (benefit) for income taxes
    and provision for credit losses as a percentage of total
    revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    
|(12) | In 1999 the Company included a special provision of
    $12.7 million in net charge-offs for a loan made to one
    company, collateralized by approximately 3,500 microticket
    consumer contracts, and guaranteed by, among other security, an
    insurance performance bond. MicroFinancial has obtained
    judgments against the company and the insurance company in the
    amounts of $23.0 million and $14.0 million,
    respectively. Charge-offs against the special reserve were $6.4
    and $7.1 million for the years ended December 31, 2000
    and 2001, respectively.
|    
|(13) | Represents net charge-offs as a percentage of average gross
    investment in leases and loans and investment in service
    contracts.                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    
|(14) | Represents provision for credit losses as a percentage of
    average gross investment in leases and loans and investment in
    service contracts.                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    
|(15) | Represents allowance for credit losses as a percentage of gross
    investment in leases and loans and investment in service
    contracts.                                                                                                                                                                                                                                                                                                                                                                                                                                                 






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations





| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 in
    order to continue originating new contracts;                        

13



---



##### Table of Contents





| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | 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 our leases and loans;         
|
| |  | acquiring other portfolios or companies;                                                                                        
|
| |  | dependence on key personnel;                                                                                                    
|
| |  | adverse results in litigation and regulatory matters, or
    promulgation of new or enhanced legislation or
    regulations; and
|
| |  | general economic and business conditions.                                                                                       





| |         
| | --------
| | Overview







14



---



##### Table of Contents











| |                             
| | ----------------------------
| | Critical Accounting Policies





| |                    
| | -------------------
| | Revenue Recognition



15



---



##### Table of Contents









| |                            
| | ---------------------------
| | Allowance for Credit Losses









| |             
| | ------------
| | Income taxes



16



---



##### Table of Contents





| |                      
| | ---------------------
| | Results of Operations



| |        
| | -------
| | Revenue

|                                     |  |                |         |  |        |  |       |      |  |   |        |  |  |      |       |    |  |   |        | 
|------------------------------------ |  | -------------- | ------- |  | ------ |  | ----- | ---- |  | - | ------ |  |  | ---- | ----- | -- |  | - | ------ | 
|                                     |  | 2002           |         |  | Change |  |       | 2003 |  |   | Change |  |  | 2004 |      
|                                     |  |                |         |  |        |  |       |      |  |   |        |  |  |      |      
|                                     |  | (In thousands) |        
|Income on financing leases and loans |  | $              | 53,012  |  |        |  | (41.7 | )%   |  | $ | 30,904 |  |  |      | (61.3 | )% |  | $ | 11,970 | 
|Rental income                        |  |                | 37,154  |  |        |  | (7.7  | )%   |  |   | 34,302 |  |  |      | (9.6  | )% |  |   | 31,009 | 
|Income on service contracts          |  |                | 9,734   |  |        |  | (11.7 | )%   |  |   | 8,593  |  |  |      | (31.4 | )% |  |   | 5,897  | 
|Service fees and other               |  |                | 26,922  |  |        |  | (34.0 | )%   |  |   | 17,775 |  |  |      | (35.4 | )% |  |   | 11,491 | 
|                                     |  |                |         |  |        |  |       |      |  |   |        |  |  |      |      
|Total revenues                       |  |                | 126,822 |  |        |  | (27.8 | )%   |  |   | 91,574 |  |  |      | (34.1 | )% |  |   | 60,367 | 
|                                     |  |                |         |  |        |  |       |      |  |   |        |  |  |      |      









| |                                    
| | -----------------------------------
| | Selling, General and Administrative

|                                    |  |                |        |   |        |  |       |      |  |   |        |   |  |      |       |    |  |   |        |  
|----------------------------------- |  | -------------- | ------ | - | ------ |  | ----- | ---- |  | - | ------ | - |  | ---- | ----- | -- |  | - | ------ | -
|                                    |  | 2002           |        |   | Change |  |       | 2003 |  |   | Change |   |  | 2004 |      
|                                    |  |                |        |   |        |  |       |      |  |   |        |   |  |      |      
|                                    |  | (In thousands) |       
|Selling, general and administrative |  | $              | 45,535 |   |        |  | (25.6 | )%   |  | $ | 33,856 |   |  |      | (20.8 | )% |  | $ | 26,821 |  
|As a percent of revenue             |  |                | 35.9   | % |        |  |       |      |  |   | 37.0   | % |  |      |       |    |  |   | 44.4   | %



17



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##### Table of Contents









| |                            
| | ---------------------------
| | Provision for Credit Losses

|                            |  |                |        |   |        |  |       |      |  |   |        |   |  |      |       |    |  |   |        |  
|--------------------------- |  | -------------- | ------ | - | ------ |  | ----- | ---- |  | - | ------ | - |  | ---- | ----- | -- |  | - | ------ | -
|                            |  | 2002           |        |   | Change |  |       | 2003 |  |   | Change |   |  | 2004 |      
|                            |  |                |        |   |        |  |       |      |  |   |        |   |  |      |      
|                            |  | (In thousands) |       
|Provision for credit losses |  | $              | 88,948 |   |        |  | (32.8 | )%   |  | $ | 59,758 |   |  |      | (19.8 | )% |  | $ | 47,918 |  
|As a percent of revenue     |  |                | 70.1   | % |        |  |       |      |  |   | 65.3   | % |  |      |       |    |  |   | 79.4   | %







| |                              
| | -----------------------------
| | Depreciation and Amortization

|                                          |  |                |        |   |        |  |       |      |  |   |        |   |  |      |       |    |  |   |        |  
|----------------------------------------- |  | -------------- | ------ | - | ------ |  | ----- | ---- |  | - | ------ | - |  | ---- | ----- | -- |  | - | ------ | -
|                                          |  | 2002           |        |   | Change |  |       | 2003 |  |   | Change |   |  | 2004 |      
|                                          |  |                |        |   |        |  |       |      |  |   |        |   |  |      |      
|                                          |  | (In thousands) |       
|Depreciation  fixed assets               |  | $              | 2,261  |   |        |  | (36.1 | )%   |  | $ | 1,445  |   |  |      | (44.6 | )% |  | $ | 801    |  
|Depreciation and amortization  rentals   |  |                | 9,351  |   |        |  | 1.9   | %    |  |   | 9,528  |   |  |      | (4.1  | )% |  |   | 9,142  |  
|Depreciation and amortization  contracts |  |                | 6,773  |   |        |  | (17.0 | )%   |  |   | 5,619  |   |  |      | (27.6 | )% |  |   | 4,067  |  
|                                          |  |                |        |   |        |  |       |      |  |   |        |   |  |      |      
|Total depreciation and amortization       |  |                | 18,385 |   |        |  | (9.8  | )%   |  |   | 16,592 |   |  |      | (15.6 | )% |  |   | 14,010 |  
|                                          |  |                |        |   |        |  |       |      |  |   |        |   |  |      |      
|As a percent of revenue                   |  |                | 14.5   | % |        |  |       |      |  |   | 18.1   | % |  |      |       |    |  |   | 23.2   | %



18



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##### Table of Contents









| |                 
| | ----------------
| | Interest Expense

|                        |  |                |        |   |        |  |       |      |  |   |        |   |  |      |       |    |  |   |       |  
|----------------------- |  | -------------- | ------ | - | ------ |  | ----- | ---- |  | - | ------ | - |  | ---- | ----- | -- |  | - | ----- | -
|                        |  | 2002           |        |   | Change |  |       | 2003 |  |   | Change |   |  | 2004 |      
|                        |  |                |        |   |        |  |       |      |  |   |        |   |  |      |      
|                        |  | (In thousands) |       
|Interest                |  | $              | 10,787 |   |        |  | (30.3 | )%   |  | $ | 7,515  |   |  |      | (69.6 | )% |  | $ | 2,283 |  
|As a percent of revenue |  |                | 8.5    | % |        |  |       |      |  |   | 8.2    | % |  |      |       |    |  |   | 3.8   | %







| |                         
| | ------------------------
| | Benefit for Income Taxes

|                         |  |                |         |   |        |  |       |      |  |   |         |   |  |      |      |   |  |   |         |  
|------------------------ |  | -------------- | ------- | - | ------ |  | ----- | ---- |  | - | ------- | - |  | ---- | ---- | - |  | - | ------- | -
|                         |  | 2002           |         |   | Change |  |       | 2003 |  |   | Change  |   |  | 2004 |     
|                         |  |                |         |   |        |  |       |      |  |   |         |   |  |      |     
|                         |  | (In thousands) |        
|Benefit for income taxes |  | $              | (14,735 | ) |        |  | (29.0 | )%   |  | $ | (10,460 | ) |  |      | 95.5 | % |  | $ | (20,449 | )
|As a percent of revenue  |  |                | 11.6    | % |        |  |       |      |  |   | 11.4    | % |  |      |      |   |  |   | 33.9    | %







| |                     
| | --------------------
| | Other Operating Data



19



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##### Table of Contents









| |                        
| | -----------------------
| | Selected Quarterly Data



|          |                                             |                |   |        |         |  |   |         |        |  |         |        |        |         |   |        |         |  |   |         |        |  |         |        |        |  |   |        |        |  |   |        |        | 
|--------- | ------------------------------------------- | -------------- | - | ------ | ------- |  | - | ------- | ------ |  | ------- | ------ | ------ | ------- | - | ------ | ------- |  | - | ------- | ------ |  | ------- | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|          |                                             | 2003           |   |        | 2004    | 
|          |                                             |                |   |        |         | 
|          |                                             | First          |   |        | Second  |  |   | Third   |        |  | Fourth  |        |        | First   |   |        | Second  |  |   | Third   |        |  | Fourth  |       
|          |                                             | Quarter        |   |        | Quarter |  |   | Quarter |        |  | Quarter |        |        | Quarter |   |        | Quarter |  |   | Quarter |        |  | Quarter |       
|          |                                             |                |   |        |         |  |   |         |        |  |         |        |        |         |   |        |         |  |   |         |        |  |         |       
|Revenues: |                                             |                |   |        |         |  |   |         |        |  |         |        |        |         |   |        |         |  |   |         |        |  |         |        |        |  |   |        |        |  |   |       
|          | Income on leases and loans                  |                | $ | 9,821  |         |  | $ | 8,378   |        |  | $       | 7,173  |        |         | $ | 5,532  |         |  | $ | 4,167   |        |  | $       | 3,235  |        |  | $ | 2,560  |        |  | $ | 2,008  |       
|          | Income on service contracts rental and fees |                |   | 15,750 |         |  |   | 15,586  |        |  |         | 14,884 |        |         |   | 14,450 |         |  |   | 13,841  |        |  |         | 12,547 |        |  |   | 11,665 |        |  |   | 10,344 |       
|          |                                             |                |   |        |         |  |   |         |        |  |         |        |        |         |   |        |         |  |   |         |        |  |         |       
|          |                                             | Total revenues |   |        | 25,571  |  |   |         | 23,964 |  |         |        | 22,057 |         |   |        | 19,982  |  |   |         | 18,008 |  |         |        | 15,782 |  |   |        | 14,225 |  |   |        | 12,352 | 
|          |                                             |                |   |        |         |  |   |         |        |  |         |        |        |         |   |        |         |  |   |         |        |  |         |       
|Expenses: |                                             |                |   |        |         |  |   |         |        |  |         |        |        |         |   |        |         |  |   |         |        |  |         |        |        |  |   |        |        |  |   |       
|          | Selling general and administrative          |                |   | 9,131  |         |  |   | 8,709   |        |  |         | 7,837  |        |         |   | 8,178  |         |  |   | 7,280   |        |  |         | 6,845  |        |  |   | 7,235  |        |  |   | 5,461  |       
|          | Provision for credit losses                 |                |   | 10,799 |         |  |   | 15,249  |        |  |         | 13,852 |        |         |   | 19,858 |         |  |   | 13,408  |        |  |         | 14,181 |        |  |   | 10,295 |        |  |   | 10,034 |       
|          | Depreciation and amortization               |                |   | 4,270  |         |  |   | 4,087   |        |  |         | 4,106  |        |         |   | 4,129  |         |  |   | 4,294   |        |  |         | 3,936  |        |  |   | 3,161  |        |  |   | 2,619  |       
|          | Interest                                    |                |   | 2,629  |         |  |   | 2,145   |        |  |         | 1,589  |        |         |   | 1,152  |         |  |   | 846     |        |  |         | 611    |        |  |   | 559    |        |  |   | 267    |       
|          |                                             |                |   |        |         |  |   |         |        |  |         |        |        |         |   |        |         |  |   |         |        |  |         |       
|          |                                             | Total expenses |   |        | 26,829  |  |   |         | 30,190 |  |         |        | 27,384 |         |   |        | 33,317  |  |   |         | 25,828 |  |         |        | 25,573 |  |   |        | 21,250 |  |   |        | 18,381 | 
|          |                                             |                |   |        |         |  |   |         |        |  |         |        |        |         |   |        |         |  |   |         |        |  |         |       

20



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|                                              |  |         |        |   |         |   |        |         |  |   |         |   |  |         |         |   |         |   |        |         |  |   |         |   |  |   |        |   |  |   |         |  
|--------------------------------------------- |  | ------- | ------ | - | ------- | - | ------ | ------- |  | - | ------- | - |  | ------- | ------- | - | ------- | - | ------ | ------- |  | - | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                              |  | 2003    |        |   | 2004    |  
|                                              |  |         |        |   |         |  
|                                              |  | First   |        |   | Second  |   |        | Third   |  |   | Fourth  |   |  | First   |         |   | Second  |   |        | Third   |  |   | Fourth  |  
|                                              |  | Quarter |        |   | Quarter |   |        | Quarter |  |   | Quarter |   |  | Quarter |         |   | Quarter |   |        | Quarter |  |   | Quarter |  
|                                              |  |         |        |   |         |   |        |         |  |   |         |   |  |         |         |   |         |   |        |         |  |   |         |  
|Income (loss) before benefit for income taxes |  |         | (1,258 | ) |         |   | (6,226 | )       |  |   | (5,327  | ) |  |         | (13,336 | ) |         |   | (7,820 | )       |  |   | (9,791  | ) |  |   | (7,025 | ) |  |   | (6,029  | )
|                                              |  |         |        |   |         |   |        |         |  |   |         |   |  |         |         |   |         |   |        |         |  |   |         |  
|Benefit for income taxes(1)                   |  |         | (503   | ) |         |   | (2,490 | )       |  |   | (2,131  | ) |  |         | (5,336  | ) |         |   | (3,128 | )       |  |   | (3,917  | ) |  |   | (2,810 | ) |  |   | (10,594 | )
|                                              |  |         |        |   |         |   |        |         |  |   |         |   |  |         |         |   |         |   |        |         |  |   |         |  
|Net Income (loss)                             |  | $       | (755   | ) |         | $ | (3,736 | )       |  | $ | (3,196  | ) |  | $       | (8,000  | ) |         | $ | (4,692 | )       |  | $ | (5,874  | ) |  | $ | (4,215 | ) |  | $ | 4,565   |  
|                                              |  |         |        |   |         |   |        |         |  |   |         |   |  |         |         |   |         |   |        |         |  |   |         |  
|Net Income (loss) per common share  basic    |  |         | (0.06  | ) |         |   | (0.29  | )       |  |   | (0.24   | ) |  |         | (0.61   | ) |         |   | (0.36  | )       |  |   | (0.45   | ) |  |   | (0.32  | ) |  |   | 0.35    |  
|Net Income (loss) per common share  diluted  |  |         | (0.06  | ) |         |   | (0.29  | )       |  |   | (0.24   | ) |  |         | (0.61   | ) |         |   | (0.36  | )       |  |   | (0.45   | ) |  |   | (0.32  | ) |  |   | 0.33    |  
|Dividends per common share                    |  |         |       |   |         |   |       |         |  |   |        |   |  |         |        |   |         |   |       |         |  |   |        |   |  |   |       |   |  |   |        |  






|    |                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In the fourth quarter of 2004, the benefit for income taxes
    includes a benefit of $7.9 million that resulted from a
    reduction in the Companys estimate of certain tax
    liabilities that had been included in income taxes payable on
    the Companys balance sheet.



| |                          
| | -------------------------
| | Exposure to Credit Losses



|                          |                |                       |         |         |  |  |      |      |   |   |         |        |  |  |      |      |   |   |         |        |  |  |     |      |  
|------------------------- | -------------- | --------------------- | ------- | ------- |  |  | ---- | ---- | - | - | ------- | ------ |  |  | ---- | ---- | - | - | ------- | ------ |  |  | --- | ---- | -
|                          |                | 2002                  |         |         |  |  |      |      |   |   |        
|                          |                |                       |         |         |  |  |      |      |   |   |        
|                          |                |                       |         | 2003    |  |  |      |      |  
|                          |                |                       |         |         |  |  |      |      |  
|                          |                | As of December 31,    |        
|                          |                |                       |        
|                          |                |                       |         | 2004    | 
|                          |                |                       |         |         | 
|                          |                | )                     |        
|                          |                | (Dollars in thousands |        
|Cumulative amounts billed |                | $                     | 600,637 |         |  |  |      |      |   | $ | 478,791 |        |  |  |      |      |   | $ | 303,695 |        |  |  |     |     
|31-60 days past due       |                | $                     | 5,772   |         |  |  | 1.0  | %    |   | $ | 5,446   |        |  |  | 1.1  | %    |   | $ | 1,858   |        |  |  | 0.6 | %   
|61-90 days past due       |                |                       | 6,019   |         |  |  | 1.0  | %    |   |   | 3,995   |        |  |  | 0.8  | %    |   |   | 1,818   |        |  |  | 0.6 | %   
|Over 90 days past due     |                |                       | 137,607 |         |  |  | 22.9 | %    |   |   | 85,883  |        |  |  | 17.9 | %    |   |   | 29,673  |        |  |  | 9.8 | %   
|                          |                |                       |         |         |  |  |      |      |   |   |         |        |  |  |      |      |   |  
|                          | Total past due |                       | $       | 149,398 |  |  |      | 24.9 | % |   | $       | 95,324 |  |  |      | 19.8 | % |   | $       | 33,349 |  |  |     | 11.0 | %
|                          |                |                       |         |         |  |  |      |      |   |   |         |        |  |  |      |      |   |  

21



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|                                      |  |                   |        |  |  |  |       |  
|------------------------------------- |  | ----------------- | ------ |  |  |  | ----- | -
|                                      |  | December 31, 2004 |       
|                                      |  |                   |       
|                                      |  | (Dollars in       |       
|                                      |  | thousands)        |       
|Current                               |  | $                 | 19,945 |  |  |  | 33.4  | %
|31-60 days past due                   |  |                   | 1,079  |  |  |  | 1.8   | %
|61-90 days past due                   |  |                   | 987    |  |  |  | 1.7   | %
|Over 90 days past due                 |  |                   | 37,668 |  |  |  | 63.1  | %
|                                      |  |                   |        |  |  | 
|Gross receivables due in installments |  | $                 | 59,679 |  |  |  | 100.0 | %
|                                      |  |                   |        |  |  | 



| |                                
| | -------------------------------
| | Liquidity and Capital Resources



| |        
| | -------
| | General













| |           
| | ----------
| | Borrowings



22



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##### Table of Contents





|                                   |  |                        |        |  |                         |         |            |             |  |   |               |        |  |          |             |  |        |   |        |  |  |   |        | 
|---------------------------------- |  | ---------------------- | ------ |  | ----------------------- | ------- | ---------- | ----------- |  | - | ------------- | ------ |  | -------- | ----------- |  | ------ | - | ------ |  |  | - | ------ | 
|                                   |  | As of                  |        |  |                        
|                                   |  | December 31, 2003      |        |  | As of December 31, 2004 |        
|                                   |  |                        |        |  |                         |        
|                                   |  |                        |        |  |                         | Maximum |           
|                                   |  | Amounts                |        |  |                         |         | Amounts    |             |  |   |               | Unused |  |          | Facility    | 
|                                   |  | Outstanding            |        |  | Interest Rate           |         |            | Outstanding |  |   | Interest Rate |        |  | Capacity |             |  | Amount |  
|                                   |  |                        |        |  |                         |         |            |             |  |   |               |        |  |          |             |  |        |  
|                                   |  | (Dollars in thousands) |       
|Revolving credit facility  old(1) |  | $                      | 55,346 |  |                         |         | 6.00%      |             |  | $ |              |        |  |          | 7.25%       |  |        | $ |       |  |  | $ |       | 
|Revolving credit facility  new(2) |  |                        |       |  |                         |         |            |             |  |   | 34            |        |  |          | 6.75%       |  |        |   | 29,966 |  |  |   | 30,000 | 
|MFI I term note securitization(3)  |  |                        | 3,247  |  |                         |         | 5.58%      |             |  |   |              |        |  |          | 5.58%       |  |        |   |       |  |  |   |       | 
|Term notes(4)                      |  |                        | 250    |  |                         |         | 7.50%      |             |  |   |              |        |  |          | 7.50%       |  |        |   |       |  |  |   |       | 
|Subordinated notes(5)              |  |                        | 3,262  |  |                         |         | 7.0%-12.5% |             |  |   | 5,152         |        |  |          | 7.75%-13.0% |  |        |   |       |  |  |   |       | 
|                                   |  |                        |        |  |                         |         |            |             |  |   |               |        |  |          |             |  |        |  
|                                   |  | $                      | 62,105 |  |                         |         |            |             |  | $ | 5,186         |        |  |          |             |  |        | $ | 29,966 |  |  | $ | 30,000 | 
|                                   |  |                        |        |  |                         |         |            |             |  |   |               |        |  |          |             |  |        |  






|    |                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | After September 30, 2002, this facility failed to renew and
    the Company no longer had the ability to draw down additional
    amounts.                     
|   
|(2) | The unused capacity is subject to lease eligibility and the
    borrowing base formula                                                                         
|   
|(3) | The MFI I term note securitization is a one-time funding that
    pays down over time, without any ability for the Company to draw
    down additional amounts.
|   
|(4) | The term notes were a one-time funding, without any ability for
    the Company to draw down additional amounts.                                               
|   
|(5) | Subordinated notes are generally one-time fundings, without any
    ability for the Company to draw down additional amounts.                                   





23



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| |                    
| | -------------------
| | Financial Covenants





| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | Consolidated tangible capital funds not less than
    $42.5 million         
|
| |  | Allowance for credit losses of at least 9.0% of gross lease
    installments
|
| |  | Maximum leverage ratio of not more than 3:1                                 





| |                                                   
| | --------------------------------------------------
| | Contractual Obligations and Commercial Commitments





|                                  |  |             |    |  |           |   |       |           |  |   |         |  |  |       |    |  |  |   |       | 
|--------------------------------- |  | ----------- | -- |  | --------- | - | ----- | --------- |  | - | ------- |  |  | ----- | -- |  |  | - | ----- | 
|                                  |  | Revolving   |    |  |           |   |       |           |  |   |        
|                                  |  | Credit      |    |  | Long-Term |   |       | Operating |  |   | Capital |  |  |      
|For the Period Ended December 31, |  | Facility(1) |    |  | Debt      |   |       | Leases    |  |   | Leases  |  |  | Total |   
|                                  |  |             |    |  |           |   |       |           |  |   |         |  |  |       |   
|2005                              |  | $           | 34 |  |           | $ | 2,052 |           |  | $ | 585     |  |  | $     | 41 |  |  | $ | 2,712 | 
|2006                              |  |             |   |  |           |   | 3,100 |           |  |   |        |  |  |       |   |  |  |   | 3,100 | 
|2007                              |  |             |   |  |           |   |      |           |  |   |        |  |  |       |   |  |  |   |      | 
|2008                              |  |             |   |  |           |   |      |           |  |   |        |  |  |       |   |  |  |   |      | 
|2009                              |  |             |   |  |           |   |      |           |  |   |        |  |  |       |   |  |  |   |      | 
|Thereafter                        |  |             |   |  |           |   |      |           |  |   |        |  |  |       |   |  |  |   |      | 
|                                  |  |             |    |  |           |   |       |           |  |   |         |  |  |       |   
|                                  |  | $           | 34 |  |           | $ | 5,152 |           |  | $ | 585     |  |  | $     | 41 |  |  | $ | 5,812 | 
|                                  |  |             |    |  |           |   |       |           |  |   |         |  |  |       |   






|    |                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Companys obligation to repay the revolving credit
    facility in the current year is subject to lease collateral
    availability and the borrowing base formula. The credit facility
    expires on September 29, 2007.



| |            
| | -----------
| | Commitments



24



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##### Table of Contents







| |                                      
| | -------------------------------------
| | Market Risk and Financial Instruments











| |                                          
| | -----------------------------------------
| | Recently Issued Accounting Pronouncements





| |             
| | ------------
| | Risk Factors





| |                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on external financing to fund new leases and
    contracts, and adequate financing may not be available to us in
    amounts, together with our cash flow, sufficient both to
    originate new leases and to service our debt.





25



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##### Table of Contents













| |                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The delay in new 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.





26



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##### Table of Contents





| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | We are vulnerable to changes in the demand for the types of
    systems we lease or price reductions in such systems.







| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Even if we had adequate financing, our expansion strategy may
    be affected by our limited sources for new originations and our
    inexperience with lending for 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.



27



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##### Table of Contents









| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | We may face adverse consequences of litigation, including
    consequences of using litigation as part of our collection
    policy.







| |                                                                                      
| | -------------------------------------------------------------------------------------
| | Increased interest rates may make our leases, contracts or
    loans less profitable.



28



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##### Table of Contents







| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | An economic downturn may cause an increase in defaults under
    our leases and less demand for the commercial equipment we
    lease.







| |                                                 
| | ------------------------------------------------
| | We may not be able to maintain our NYSE listing.





| |                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



29



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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.





30



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##### Table of Contents





| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | If we were to lose key personnel, our operating results may
    suffer or it may cause a default under our debt facilities.





| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



31



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##### Table of Contents










|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk








|        |                                                                                                         
|------- | --------------------------------------------------------------------------------------------------------
|Item 8. | Financial Statements and Supplementary Data, Including
    Selected Quarterly Financial Data (Unaudited)








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures



| |                                   
| | ----------------------------------
| | Disclosure controls and procedures





| |                  
| | -----------------
| | Internal controls








|         |                  
|-------- | -----------------
|Item 9B. | Other Information






PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant








|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation



32



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##### Table of Contents








|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters








|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services






PART IV







|         |                                                                        
|-------- | -----------------------------------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules, and Reports on
    Form 8-K



|        |                                                                                                                                                                                                
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) (1) | Financial Statements MicroFinancial Incorporateds
    Financial Statements, together with the related Independent
    Auditors Report, appear at pages F-1 through F-27 of this
    Form 10-K





|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                            
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .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          |  | Bylaws. 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.                                                                                                                             
|       
|        | 10 | .1          |  | Fourth Amended and Restated Revolving Credit Agreement, dated
    August 22, 2000, among Leasecomm Corporation, the lenders
    parties thereto, and Fleet National Bank as agent. Incorporated
    by reference to Exhibit 10.6 in the Registrants
    Quarterly Report on Form 10-Q filed with the Securities and
    Exchange Commission on November 14, 2000.                         
|       
|        | 10 | .2          |  | Forbearance Agreement dated January 3, 2003 among Leasecomm
    Corporation, Fleet National Bank, as agent, and the other
    Lenders named therein. Incorporated by reference to
    Exhibit 10.11 in the Registrants Quarterly Report on
    Form 10-Q filed with the Securities and Exchange Commission on
    May 15, 2003.                                                           
|       
|        | 10 | .3          |  | Forbearance Agreement dated January 24, 2003 among
    Leasecomm Corporation, Fleet National Bank, as agent, and the
    other Lenders named therein. Incorporated by reference to
    Exhibit 10.12 in the Registrants Quarterly Report on
    Form 10-Q filed with the Securities and Exchange Commission on
    May 15, 2003.                                                          
|       
|        | 10 | .4          |  | First Amendment to Fourth Amended and Restated Revolving Credit
    Agreement dated September 21, 2001 among Leasecomm
    Corporation, Fleet National Bank, as agent, and the other
    Lenders named therein. Incorporated by reference to
    Exhibit 10.10 in the Registrants Quarterly Report on
    Form 10-Q filed with the Securities and Exchange Commission on
    May 15, 2003.

33



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##### Table of Contents



|        |    |      |             |                                                                                                                                                                                                                                                                                                                                                                                                     
|------- | -- | ---- | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |            
|Number  |    |      | Description
|        |    |      |            
|       
|        | 10 | .5   |             | Second Amendment to Fourth Amended and Restated Revolving Credit
    Agreement dated April 14, 2003 among Leasecomm Corporation,
    Fleet National Bank, as agent, and the other Lenders named
    therein. 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 May 15, 2003.                 
|       
|        | 10 | .6   |             | Third Amendment to Fourth Amended and Restated Revolving Credit
    Agreement dated June 30, 2003 among Leasecomm Corporation,
    Fleet National Bank, as agent, and the other Lenders named
    therein. 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 14, 2003.                
|       
|        | 10 | .7   |             | Fourth Amendment to Fourth Amended and Restated Revolving Credit
    Agreement dated November 7, 2003 among Leasecomm
    Corporation, Fleet National Bank, as agent, and the other
    Lenders named therein. Incorporated by reference to
    Exhibit 10.7 in the Registrants Annual Report on
    Form 10-K filed with the Securities and Exchange Commission
    on March 30, 2004.            
|       
|        | 10 | .8   |             | 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 | .9   |             | 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 | .10  |             | 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 | .11  |             | 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 | .12  |             | Letter Agreement dated April 14, 2003 among Fleet National
    Bank, as Agent, the Company, and the holders of the
    Companys 7.5% Term Notes. Incorporated by reference to
    Exhibit 10.14 in the Registrants Quarterly Report on
    Form 10-Q filed with the Securities and Exchange Commission on
    May 15, 2003.                                                                       
|       
|        | 10 | .13  |             | Letter Agreement dated April 14, 2003 among Fleet National
    Bank, as Agent, the Company, and the holders of the
    Companys Subordinated Capital Notes. Incorporated by
    reference to Exhibit 10.15 in the Registrants
    Quarterly Report on Form 10-Q filed with the Securities and
    Exchange Commission on May 15, 2003.                                                            
|       
|        | 10 | .14  |             | 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 | .15  |             | 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 | .16  |             | 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 | .17* |             | 1987 Stock Option Plan. 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.                                                                                                                      
|       
|        | 10 | .18* |             | Forms of Grant under 1987 Stock Option Plan 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.                                                                                                  

34



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|        |    |      |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------- | -- | ---- | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |            
|Number  |    |      | Description
|        |    |      |            
|       
|        | 10 | .19* |             | 1998 Equity Incentive Plan Incorporated by reference to the
    Exhibit with the same exhibit number 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 | .20* |             | Employment Agreement between the Company and Peter R. Bleyleben.
    Incorporated by reference to Exhibit 10.13 in the
    Registrants Annual Report on Form 10-K filed with the
    Securities and Exchange Commission on April 15, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                  
|       
|        | 10 | .21* |             | Employment Agreement between the Company and Richard F. Latour.
    Incorporated by reference to Exhibit 10.14 in the
    Registrants Annual Report on Form 10-K filed with the
    Securities and Exchange Commission on April 15, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                   
|       
|        | 10 | .23* |             | Employment Agreement between the Company and Carol Salvo.
    Incorporated by reference to Exhibit 10.41 in the
    Registrants Annual Report on Form 10-K filed with the
    Securities and Exchange Commission on April 15, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                         
|       
|        | 10 | .24* |             | Employment Agreement between the Company and James R.
    Jackson, Jr.. Incorporated by reference to
    Exhibit 10.42 in the Registrants Annual Report on
    Form 10-K filed with the Securities and Exchange Commission on
    April 15, 2003.                                                                                                                                                                                                                                                                                                                                                                                                           
|       
|        | 10 | .25* |             | Employment Agreement between the Company and Stephen
    Constantino. Incorporated by reference to Exhibit 10.43 in
    the Registrants Annual Report on Form 10-K filed with the
    Securities and Exchange Commission on April 15, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                 
|       
|        | 10 | .26* |             | Employment Agreement between the Company and Steven LaCreta.
    Incorporated by reference to Exhibit 10.44 in the
    Registrants Annual Report on Form 10-K filed with the
    Securities and Exchange Commission on April 15, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                      
|       
|        | 10 | .27* |             | Forms of Restricted Stock Agreement grant under 1998 Stock
    Option 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 | .28  |             | Amended and Restated Standard Terms and Condition of Indenture
    dated as of September 2001 governing the MFI Finance
    Corp. I, 5.5800% Lease-Backed Notes, Series 2000-3 (the
    2001-3 Notes). Incorporated by reference to
    Exhibit 10.15 in the Registrants Quarterly Report on
    Form 10-Q filed with the Securities and Exchange Commission on
    November 14, 2001.                                                                                                                                                                                                                                                                    
|       
|        | 10 | .29  |             | Supplement to Indenture dated September 2001 governing the
    2001-3 Notes. Incorporated by reference to Exhibit 10.16 in
    the Registrants Quarterly Report on Form 10-Q filed with
    the Securities and Exchange Commission on November 14, 2001.                                                                                                                                                                                                                                                                                                                                                                                                    
|       
|        | 10 | .30  |             | Specimen 2001-3 Note. Incorporated by reference to
    Exhibit 10.17 in the Registrants Quarterly Report on
    Form 10-Q filed with the Securities and Exchange Commission on
    November 14, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       
|        | 10 | .31  |             | Standard Terms and Conditions of Servicing governing the 2001-3
    Notes. Incorporated by reference to Exhibit 10.18 in the
    Registrants Quarterly Report on Form 10-Q filed with the
    Securities and Exchange Commission on November 14, 2001                                                                                                                                                                                                                                                                                                                                                                                                       
|       
|        | 10 | .32  |             | Direction and Permanent Waiver of Trigger Events and Servicer
    Events of Default dated April 15, 2003 among Ambac
    Assurance Corporation, Wells Fargo Bank Minnesota, National
    Association (Wells Fargo), as indenture trustee, MFI
    Finance Corp. I and Leasecomm Corporation waiving certain
    covenants under the Amended and Restated Indenture dated as of
    September 1, 2001 and related documents thereto, all with
    respect to MFI Finance Corp. I. Incorporated by reference to
    Exhibit 10.6 in the Registrants Quarterly Report on
    Form 10-Q filed with the Securities and Exchange Commission on
    May 15, 2003.
|       
|        | 10 | .33  |             | First Amendment to Amended and Restated Indenture dated
    April 15, 2003 among the Company, MFI Finance Corp I,
    Wells Fargo, as back-up servicer and Wells Fargo, as indenture
    trustee. Incorporated by reference to Exhibit 10.8 in the
    Registrants Quarterly Report on Form 10-Q filed with the
    Securities and Exchange Commission on May 15, 2003.                                                                                                                                                                                                                                                                                     
|       
|        | 10 | .34  |             | Second Amendment to Servicing Agreement dated October 14,
    2002 among the Company, MFI Finance Corp I, Wells Fargo, as
    back-up servicer and Wells Fargo, as indenture trustee.
    Incorporated by reference to Exhibit 10.13 in the
    Registrants Quarterly Report on Form 10-Q filed with the
    Securities and Exchange Commission on May 15, 2003.                                                                                                                                                                                                                                                                                            

35



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|        |    |     |             |                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------- | -- | --- | ----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |            
|Number  |    |     | Description
|        |    |     |            
|       
|        | 10 | .35 |             | Third Amendment to Servicing Agreement dated April 15, 2003
    among the Company, MFI Finance Corp I, Wells Fargo, as
    back-up servicer and Wells Fargo, as indenture trustee.
    Incorporated by reference to Exhibit 10.9 in the
    Registrants Quarterly Report on Form 10-Q filed with the
    Securities and Exchange Commission on May 15, 2003.                                                                      
|       
|        | 10 | .36 |             | Note Purchase Agreement dated as of June 10, 2004, by and
    between TimePayment Corp. LLC and Ampac Capital Solutions, LLC
    (incorporated by reference to Exhibit 10.6 of the
    Registrants Form 8-K filed on June 15, 2004)                                                                                                                                                                                               
|       
|        | 10 | .37 |             | Subordinated Promissory Note dated June 10, 2004, to Ampac
    Capital Solutions, LLC by TimePayment Corp. LLC (incorporated by
    reference to Exhibit 10.7 of the Registrants Form 8-K
    filed on June 15, 2004)                                                                                                                                                                                                             
|       
|        | 10 | .38 |             | Subordinated Conditional Guaranty dated June 10, 2004, by
    MicroFinancial Incorporated in favor of Ampac Capital Solutions,
    LLC (incorporated by reference to Exhibit 10.8 of the
    Registrants Form 8-K filed on June 15, 2004)                                                                                                                                                                                         
|       
|        | 10 | .39 |             | 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 | .40 |             | Warrant Certificate to purchase up to 191,685 shares of
    Common Stock, dated June 10, 2004 issued to Ampac Capital
    Solutions, LLC by MicroFinancial Incorporated (incorporated by
    reference to Exhibit 10.10 of the Registrants Form
    8-K filed on June 15, 2004)                                                                                                                                                   
|       
|        | 10 | .41 |             | Warrant Certificate to purchase up to 110,657 shares of
    Common Stock, dated June 10, 2004 issued to Ampac Capital
    Solutions, LLC by MicroFinancial Incorporated (incorporated by
    reference to Exhibit 10.11 of the Registrants Form
    8-K filed on June 15, 2004)                                                                                                                                                   
|       
|        | 10 | .42 |             | 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 | .43 |             | 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 | .44 |             | $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 | .45 |             | 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 | .46 |             | 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 | .47 |             | 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 | .48 |             | 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 | .49 |             | 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)                                                                                                                          

36



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##### Table of Contents



|        |    |     |             |                                                                                                                                                                                                                                                                                                                      
|------- | -- | --- | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |            
|Number  |    |     | Description
|        |    |     |            
|       
|        | 10 | .50 |             | 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 | .51 |             | 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 | .52 |             | 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)                                 
|       
|        | 10 | .53 |             | 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 | .54 |             | 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 Registrant                                                                                                                                                                                                                                                                                           
|       
|        | 23 | .1 |             | Consent of Vitale Caturano & Company Ltd.                                                                                                                                                                                                                                                                            
|       
|        | 23 | .2 |             | Consent of Deloitte & Touche LLP                                                                                                                                                                                                                                                                                     
|       
|        | 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 2002                                                                                                                                                            
|       
|        | 32 | .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.





37



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##### Table of Contents






SIGNATURES






| |                            
| | ---------------------------
| | MicroFinancial Incorporated



| |     |                      
| | --- | ---------------------
| | By: | /s/ Richard F. Latour

| |                                      
| | -------------------------------------
| |                                      
| | Richard F. Latour                    
| | President and Chief Executive Officer



| |     |                         
| | --- | ------------------------
| | By: | /s/ James R. Jackson Jr.

| |                                           
| | ------------------------------------------
| |                                           
| | 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 30, 2005
|                                                    
|/s/ Richard F. LatourRichard
    F. Latour           |  | President, Chief Executive Officer, Treasurer, Clerk,
    Secretary
    and Director |  | March 30, 2005
|                                                    
|/s/ James R. Jackson
    Jr.James
    R. Jackson Jr. |  | Vice President and
    Chief Financial Officer                                       |  | March 30, 2005
|                                                    
|/s/ Brian E. BoyleBrian
    E. Boyle                 |  | Director                                                                             |  | March 30, 2005
|                                                    
|/s/ Torrence C. HarderTorrence
    C. Harder         |  | Director                                                                             |  | March 30, 2005
|                                                    
|/s/ Fritz Von MeringFritz
    Von Mering             |  | Director                                                                             |  | March 30, 2005
|                                                    
|/s/ Alan J. ZakonAlan
    J. Zakon                   |  | Director                                                                             |  | March 30, 2005

38



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##### Table of Contents



MICROFINANCIAL INCORPORATED


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


|                                                                                                              |  |  |     | 
|------------------------------------------------------------------------------------------------------------- |  |  | --- | 
|Reports of Independent Registered Public
    Accounting Firms                                                 |  |  | F-2 | 
|Financial Statements:                                                                                         |  |  |     | 
|Consolidated Balance Sheets as of
    December 31, 2003 and 2004                                              |  |  | F-4 | 
|Consolidated Statements of Operations for
    the Years Ended December 31, 2002, 2003, and 2004               |  |  | F-5 | 
|Consolidated Statements of
    Stockholders Equity for the Years Ended December 31,
    2002, 2003, and 2004 |  |  | F-6 | 
|Consolidated Statements of Cash Flows for
    the Years Ended December 31, 2002, 2003, and 2004               |  |  | F-7 | 
|Notes to Consolidated Financial
    Statements                                                                |  |  | F-8 | 

F-1



---



##### Table of Contents






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM










Deloitte &
Touche LLP






F-2



---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM










Vitale,
Caturano & Company, Ltd.






F-3



---



##### Table of Contents



MICROFINANCIAL INCORPORATED





CONSOLIDATED BALANCE SHEETS


|                                     |                                                                                                                            |                                     |                                            |         |         |         |        |        |         |        | 
|------------------------------------ | -------------------------------------------------------------------------------------------------------------------------- | ----------------------------------- | ------------------------------------------ | ------- | ------- | ------- | ------ | ------ | ------- | ------ | 
|                                     |                                                                                                                            | December 31,                        |                                           
|                                     |                                                                                                                            |                                     |                                           
|                                     |                                                                                                                            | 2003                                |                                            |         | 2004    |        
|                                     |                                                                                                                            |                                     |                                            |         |         |        
|                                     |                                                                                                                            | (In thousands, except               |                                           
|                                     |                                                                                                                            | share data)                         |                                           
|ASSETS                              
|Cash and cash equivalents            |                                                                                                                            | $                                   | 6,533                                      |         |         | $       | 9,709  |       
|Net investment in leases and loans:  |                                                                                                                            |                                     |                                            |         |         |         |        |       
|                                     | Receivables due in installments                                                                                            |                                     |                                            | 175,788 |         |         |        | 59,679 |        
|                                     | Estimated residual value                                                                                                   |                                     |                                            | 19,110  |         |         |        | 9,502  |        
|                                     | Initial direct costs                                                                                                       |                                     |                                            | 1,804   |         |         |        | 453    |        
|                                     | Less:                                                                                                                      |                                     |                                            |         |         |         |        |        |        
|                                     |                                                                                                                            | Advance lease payments and deposits |                                            |         | (37     | )       |        |        | (25     | )     
|                                     |                                                                                                                            | Unearned income                     |                                            |         | (23,729 | )       |        |        | (6,313  | )     
|                                     |                                                                                                                            | Allowance for credit losses         |                                            |         | (43,011 | )       |        |        | (14,963 | )     
|                                     |                                                                                                                            |                                     |                                            |         |         |        
|Net investment in leases and loans   |                                                                                                                            | $                                   | 129,925                                    |         |         | $       | 48,333 |       
|Investment in service contracts, net |                                                                                                                            |                                     | 8,844                                      |         |         |         | 4,777  |       
|Investment in rental contracts, net  |                                                                                                                            |                                     | 3,758                                      |         |         |         | 1,785  |       
|Restricted cash                      |                                                                                                                            |                                     | 2,376                                      |         |         |         |       |       
|Property and equipment, net          |                                                                                                                            |                                     | 2,086                                      |         |         |         | 754    |       
|Other assets                         |                                                                                                                            |                                     | 2,892                                      |         |         |         | 2,412  |       
|Deferred income taxes, net           |                                                                                                                            |                                     |                                           |         |         |         | 3,500  |       
|                                     |                                                                                                                            |                                     |                                            |         |         |        
|                                     |                                                                                                                            |                                     | Total assets                               |         | $       | 156,414 |        |        | $       | 71,270 | 
|                                     |                                                                                                                            |                                     |                                            |         |         |        
|                                    
|LIABILITIES AND STOCKHOLDERS EQUITY
|Notes payable                        |                                                                                                                            | $                                   | 58,843                                     |         |         | $       | 34     |       
|Subordinated notes payable           |                                                                                                                            |                                     | 3,262                                      |         |         |         | 4,589  |       
|Capitalized lease obligations        |                                                                                                                            |                                     | 209                                        |         |         |         | 41     |       
|Accounts payable                     |                                                                                                                            |                                     | 3,186                                      |         |         |         | 2,474  |       
|Other liabilities                    |                                                                                                                            |                                     | 4,104                                      |         |         |         | 2,039  |       
|Income taxes payable                 |                                                                                                                            |                                     | 7,789                                      |         |         |         |       |       
|Deferred income taxes                |                                                                                                                            |                                     | 7,755                                      |         |         |         |       |       
|                                     |                                                                                                                            |                                     |                                            |         |         |        
|                                     |                                                                                                                            |                                     | Total liabilities                          |         |         | 85,148  |        |        |         | 9,177  | 
|                                     |                                                                                                                            |                                     |                                            |         |         |        
|Stockholders equity:                |                                                                                                                            |                                     |                                            |         |         |         |        |       
|                                     | Preferred stock, $.01 par value; 5,000,000 shares
    authorized; no shares issued at December 31, 2003 and 2004           |                                     |                                            |        |         |         |        |       |        
|                                     | Common stock, $.01 par value; 25,000,000 shares
    authorized; 13,410,646 shares issued at December 31,
    2003 and 2004 |                                     |                                            | 134     |         |         |        | 134    |        
|                                     | Additional paid-in capital                                                                                                 |                                     |                                            | 44,245  |         |         |        | 45,244 |        
|                                     | Retained earnings                                                                                                          |                                     |                                            | 29,402  |         |         |        | 19,186 |        
|                                     | Treasury stock, at cost (234,230 and 225,480 shares at
    December 31, 2003 and December 31, 2004, respectively)          |                                     |                                            | (2,515  | )       |         |        | (2,420 | )      
|                                     | Deferred compensation                                                                                                      |                                     |                                            |        |         |         |        | (51    | )      
|                                     |                                                                                                                            |                                     |                                            |         |         |        
|                                     |                                                                                                                            |                                     | Total stockholders equity                 |         |         | 71,266  |        |        |         | 62,093 | 
|                                     |                                                                                                                            |                                     |                                            |         |         |        
|                                     |                                                                                                                            |                                     | Total liabilities and stockholders equity |         | $       | 156,414 |        |        | $       | 71,270 | 
|                                     |                                                                                                                            |                                     |                                            |         |         |        



F-4



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##### Table of Contents



MICROFINANCIAL INCORPORATED





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                              |                                      |                                       |         |        |         |   |         |        |         |   |         |        |        | 
|--------------------------------------------- | ------------------------------------ | ------------------------------------- | ------- | ------ | ------- | - | ------- | ------ | ------- | - | ------- | ------ | ------ | 
|                                              |                                      | For the Years Ended December 31,      |        
|                                              |                                      |                                       |        
|                                              |                                      | 2002                                  |         |        | 2003    |   |         | 2004   |        
|                                              |                                      |                                       |         |        |         |   |         |        |        
|                                              |                                      | (In thousands, except per-share data) |        
|Revenues:                                     |                                      |                                       |         |        |         |   |         |        |         |   |         |       
|                                              | Income on financing leases and loans |                                       | $       | 53,012 |         |   | $       | 30,904 |         |   | $       | 11,970 |       
|                                              | Rental income                        |                                       |         | 37,154 |         |   |         | 34,302 |         |   |         | 31,009 |       
|                                              | Income on service contracts          |                                       |         | 9,734  |         |   |         | 8,593  |         |   |         | 5,897  |       
|                                              | Loss and damage waiver fees          |                                       |         | 6,257  |         |   |         | 5,525  |         |   |         | 4,016  |       
|                                              | Service fees and other               |                                       |         | 20,665 |         |   |         | 12,250 |         |   |         | 7,475  |       
|                                              |                                      |                                       |         |        |         |   |         |        |        
|                                              |                                      | Total revenues                        |         |        | 126,822 |   |         |        | 91,574  |   |         |        | 60,367 | 
|                                              |                                      |                                       |         |        |         |   |         |        |        
|Expenses:                                     |                                      |                                       |         |        |         |   |         |        |         |   |         |       
|                                              | Selling, general and administrative  |                                       |         | 45,535 |         |   |         | 33,856 |         |   |         | 26,821 |       
|                                              | Provision for credit losses          |                                       |         | 88,948 |         |   |         | 59,758 |         |   |         | 47,918 |       
|                                              | Depreciation and amortization        |                                       |         | 18,385 |         |   |         | 16,592 |         |   |         | 14,010 |       
|                                              | Interest                             |                                       |         | 10,787 |         |   |         | 7,515  |         |   |         | 2,283  |       
|                                              |                                      |                                       |         |        |         |   |         |        |        
|                                              |                                      | Total expenses                        |         |        | 163,655 |   |         |        | 117,721 |   |         |        | 91,032 | 
|                                              |                                      |                                       |         |        |         |   |         |        |        
|Loss before benefit for income taxes          |                                      |                                       | (36,833 | )      |         |   | (26,147 | )      |         |   | (30,665 | )     
|Benefit for income taxes                      |                                      |                                       | (14,735 | )      |         |   | (10,460 | )      |         |   | (20,449 | )     
|                                              |                                      |                                       |         |        |         |   |         |        |        
|Net loss                                      |                                      | $                                     | (22,098 | )      |         | $ | (15,687 | )      |         | $ | (10,216 | )     
|                                              |                                      |                                       |         |        |         |   |         |        |        
|Net loss per common share  basic and diluted |                                      | $                                     | (1.72   | )      |         | $ | (1.20   | )      |         | $ | (0.77   | )     
|                                              |                                      |                                       |         |        |         |   |         |        |        
|Dividends per common share                    |                                      | $                                     | 0.150   |        |         | $ | 0.000   |        |         | $ | 0.000   |       
|                                              |                                      |                                       |         |        |         |   |         |        |        



F-5



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##### Table of Contents



MICROFINANCIAL INCORPORATED





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


For the Years Ended December 31, 2002, 2003 and 2004


|                                             |  |                                   |            |  |            |   |     |          |  |                |          |   |            |        |         |   |          |       |          |               |  |   |              |   |  |        |     |   |  |   |      |   |  |   |         |  
|-------------------------------------------- |  | --------------------------------- | ---------- |  | ---------- | - | --- | -------- |  | -------------- | -------- | - | ---------- | ------ | ------- | - | -------- | ----- | -------- | ------------- |  | - | ------------ | - |  | ------ | --- | - |  | - | ---- | - |  | - | ------- | -
|                                             |  |                                   |            |  |            |   |     |          |  | Notes          |          |   |            |        |        
|                                             |  | Common Stock                      |            |  | Additional |   |     |          |  | Treasury Stock |          |   | Receivable |        |         |   |          | Total |         
|                                             |  |                                   |            |  | Paid-in    |   |     | Retained |  |                |          |   |            | From   |         |   | Unearned |       |          | Stockholders | 
|                                             |  | Shares                            |            |  | Amount     |   |     | Capital  |  |                | Earnings |   |            | Shares |         |   | Amount   |       |          | Officers      |  |   | Compensation |   |  | Equity |    
|                                             |  |                                   |            |  |            |   |     |          |  |                |          |   |            |        |         |   |          |       |          |               |  |   |              |   |  |        |    
|                                             |  | (In thousands, except share data) |           
|Balance at December 31, 2001                 |  |                                   | 13,410,646 |  |            | $ | 134 |          |  | $              | 47,723   |   |            | $      | 69,110  |   |          |       | 588,700  |               |  | $ | (6,343       | ) |  | $      | (68 | ) |  | $ | 0    |   |  | $ | 110,556 |  
|Common stock dividends                       |  |                                   |            |  |            |   |     |          |  |                |          |   |            |        | (1,923  | ) |          |       |          |               |  |   |              |   |  |        |     |   |  |   |      |   |  |   | (1,923  | )
|Notes receivable from officers and employees |  |                                   |            |  |            |   |     |          |  |                |          |   |            |        |         |   |          |       |          |               |  |   |              |   |  |        | 68  |   |  |   |      |   |  |   | 68      |  
|Net loss                                     |  |                                   |            |  |            |   |     |          |  |                |          |   |            |        | (22,098 | ) |          |       |          |               |  |   |              |   |  |        |     |   |  |   |      |   |  |   | (22,098 | )
|                                             |  |                                   |            |  |            |   |     |          |  |                |          |   |            |        |         |   |          |       |          |               |  |   |              |   |  |        |    
|Balance at December 31, 2002                 |  |                                   | 13,410,646 |  |            | $ | 134 |          |  | $              | 47,723   |   |            | $      | 45,089  |   |          |       | 588,700  |               |  | $ | (6,343       | ) |  | $      | 0   |   |  | $ | 0    |   |  | $ | 86,603  |  
|Restricted stock granted                     |  |                                   |            |  |            |   |     |          |  |                | 284      |   |            |        |         |   |          |       |          |               |  |   |              |   |  |        |     |   |  |   | (284 | ) |  |   |        |  
|Restricted stock forfeited                   |  |                                   |            |  |            |   |     |          |  |                | (11      | ) |            |        |         |   |          |       |          |               |  |   |              |   |  |        |     |   |  |   | 11   |   |  |   |        |  
|Amortization of unearned compensation        |  |                                   |            |  |            |   |     |          |  |                |          |   |            |        |         |   |          |       |          |               |  |   |              |   |  |        |     |   |  |   | 273  |   |  |   | 273     |  
|Treasury stock issued                        |  |                                   |            |  |            |   |     |          |  |                | (3,828   | ) |            |        |         |   |          |       | (354,470 | )             |  |   | 3,828        |   |  |        |     |   |  |   |      |   |  |   |        |  
|Warrants issued                              |  |                                   |            |  |            |   |     |          |  |                | 77       |   |            |        |         |   |          |       |          |               |  |   |              |   |  |        |     |   |  |   |      |   |  |   | 77      |  
|Net loss                                     |  |                                   |            |  |            |   |     |          |  |                |          |   |            |        | (15,687 | ) |          |       |          |               |  |   |              |   |  |        |     |   |  |   |      |   |  |   | (15,687 | )
|                                             |  |                                   |            |  |            |   |     |          |  |                |          |   |            |        |         |   |          |       |          |               |  |   |              |   |  |        |    
|Balance at December 31, 2003                 |  |                                   | 13,410,646 |  |            | $ | 134 |          |  | $              | 44,245   |   |            | $      | 29,402  |   |          |       | 234,230  |               |  | $ | (2,515       | ) |  | $      | 0   |   |  | $ | 0    |   |  | $ | 71,266  |  
|Restricted stock granted                     |  |                                   |            |  |            |   |     |          |  |                | 79       |   |            |        |         |   |          |       |          |               |  |   |              |   |  |        |     |   |  |   | (79  | ) |  |   |        |  
|Amortization of unearned compensation        |  |                                   |            |  |            |   |     |          |  |                |          |   |            |        |         |   |          |       |          |               |  |   |              |   |  |        |     |   |  |   | 28   |   |  |   | 28      |  
|Treasury stock issued                        |  |                                   |            |  |            |   |     |          |  |                | (95      | ) |            |        |         |   |          |       | (8,750   | )             |  |   | 95           |   |  |        |     |   |  |   |      |   |  |   |        |  
|Warrants issued                              |  |                                   |            |  |            |   |     |          |  |                | 1,015    |   |            |        |         |   |          |       |          |               |  |   |              |   |  |        |     |   |  |   |      |   |  |   | 1,015   |  
|Net loss                                     |  |                                   |            |  |            |   |     |          |  |                |          |   |            |        | (10,216 | ) |          |       |          |               |  |   |              |   |  |        |     |   |  |   |      |   |  |   | (10,216 | )
|                                             |  |                                   |            |  |            |   |     |          |  |                |          |   |            |        |         |   |          |       |          |               |  |   |              |   |  |        |    
|Balance at December 31, 2004                 |  |                                   | 13,410,646 |  |            | $ | 134 |          |  | $              | 45,244   |   |            | $      | 19,186  |   |          |       | 225,480  |               |  | $ | (2,420       | ) |  | $      | 0   |   |  | $ | (51  | ) |  | $ | 62,093  |  
|                                             |  |                                   |            |  |            |   |     |          |  |                |          |   |            |        |         |   |          |       |          |               |  |   |              |   |  |        |    



F-6



---



##### Table of Contents



MICROFINANCIAL INCORPORATED





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                                 |                                                                                              |                                                              |                                              |          |         |        |       |          |         |         |       |         |         |         |  
|-------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | -------------------------------------------- | -------- | ------- | ------ | ----- | -------- | ------- | ------- | ----- | ------- | ------- | ------- | -
|                                                                                 |                                                                                              | For the Years Ended December 31,                             |                                             
|                                                                                 |                                                                                              |                                                              |                                             
|                                                                                 |                                                                                              | 2002                                                         |                                              |          | 2003    |        |       | 2004     |        
|                                                                                 |                                                                                              |                                                              |                                              |          |         |        |       |          |        
|                                                                                 |                                                                                              | (In thousands)                                               |                                             
|Cash flows from operating activities:                                            |                                                                                              |                                                              |                                              |          |         |        |       |          |         |         |       |        
|                                                                                 | Cash received from customers                                                                 |                                                              | $                                            | 175,859  |         |        | $     | 136,834  |         |         | $     | 85,000  |        
|                                                                                 | Cash paid to suppliers and employees                                                         |                                                              |                                              | (41,573  | )       |        |       | (39,359  | )       |         |       | (26,274 | )      
|                                                                                 | Cash (paid) received for income taxes                                                        |                                                              |                                              | (3,829   | )       |        |       | 9,451    |         |         |       | 2,404   |        
|                                                                                 | Interest paid                                                                                |                                                              |                                              | (10,222  | )       |        |       | (8,987   | )       |         |       | (2,364  | )      
|                                                                                 | Interest received                                                                            |                                                              |                                              | 393      |         |        |       | 113      |         |         |       | 27      |        
|                                                                                 |                                                                                              |                                                              |                                              |          |         |        |       |          |        
|                                                                                 |                                                                                              | Net cash provided by operating activities                    |                                              |          | 120,628 |        |       |          | 98,052  |         |       |         | 58,793  |        
|                                                                                 |                                                                                              |                                                              |                                              |          |         |        |       |          |        
|Cash flows from investing activities:                                            |                                                                                              |                                                              |                                              |          |         |        |       |          |         |         |       |        
|                                                                                 | Investment in lease contracts                                                                |                                                              |                                              | (66,042  | )       |        |       | (2,260   | )       |         |       | (714    | )      
|                                                                                 | Investment in inventory                                                                      |                                                              |                                              | (2,989   | )       |        |       | (225     | )       |         |       | (99     | )      
|                                                                                 | Investment in direct costs                                                                   |                                                              |                                              | (4,150   | )       |        |       | (137     | )       |         |       |        |        
|                                                                                 | Investment in service contracts                                                              |                                                              |                                              | (6,773   | )       |        |       |         |         |         |       |        |        
|                                                                                 | Investment in fixed assets                                                                   |                                                              |                                              | (255     | )       |        |       | (221     | )       |         |       | (99     | )      
|                                                                                 | Repayment of notes from officers                                                             |                                                              |                                              | 68       |         |        |       |         |         |         |       |        |        
|                                                                                 | Repayment of notes receivable                                                                |                                                              |                                              |         |         |        |       | 4        |         |         |       |        |        
|                                                                                 |                                                                                              |                                                              |                                              |          |         |        |       |          |        
|                                                                                 |                                                                                              | Net cash used in investing activities                        |                                              |          | (80,141 | )      |       |          | (2,839  | )       |       |         | (912    | )      
|                                                                                 |                                                                                              |                                                              |                                              |          |         |        |       |          |        
|Cash flows from financing activities:                                            |                                                                                              |                                                              |                                              |          |         |        |       |          |         |         |       |        
|                                                                                 | Proceeds from secured debt                                                                   |                                                              |                                              | 33,521   |         |        |       |         |         |         |       | 11,419  |        
|                                                                                 | Repayment of secured debt                                                                    |                                                              |                                              | (66,672  | )       |        |       | (110,054 | )       |         |       | (69,978 | )      
|                                                                                 | Proceeds from refinancing of secured debt                                                    |                                                              |                                              | 490,000  |         |        |       |         |         |         |       |        |        
|                                                                                 | Prepayment of secured debt                                                                   |                                                              |                                              | (490,100 | )       |        |       |         |         |         |       |        |        
|                                                                                 | Proceeds from short-term demand notes payable                                                |                                                              |                                              | 305      |         |        |       |         |         |         |       |        |        
|                                                                                 | Repayment of short-term demand notes payable                                                 |                                                              |                                              | (1,181   | )       |        |       | (30      | )       |         |       | (250    | )      
|                                                                                 | Proceeds from issuance of subordinated debt                                                  |                                                              |                                              |         |         |        |       |         |         |         |       | 2,000   |        
|                                                                                 | Repayment of subordinated debt                                                               |                                                              |                                              |         |         |        |       |         |         |         |       | (110    | )      
|                                                                                 | (Increase) decrease in restricted cash                                                       |                                                              |                                              | 1,983    |         |        |       | 16,140   |         |         |       | 2,376   |        
|                                                                                 | Repayment of capital leases                                                                  |                                                              |                                              | (430     | )       |        |       | (230     | )       |         |       | (162    | )      
|                                                                                 | Payment of dividends                                                                         |                                                              |                                              | (2,565   | )       |        |       |         |         |         |       |        |        
|                                                                                 |                                                                                              |                                                              |                                              |          |         |        |       |          |        
|                                                                                 |                                                                                              | Net cash provided by (used in) financing activities          |                                              |          | (35,139 | )      |       |          | (94,174 | )       |       |         | (54,705 | )      
|                                                                                 |                                                                                              |                                                              |                                              |          |         |        |       |          |        
|Net increase in cash and cash equivalents                                        |                                                                                              |                                                              | 5,348                                        |          |         |        | 1,039 |          |         |         | 3,176 |        
|Cash and cash equivalents, beginning of period                                   |                                                                                              |                                                              | 146                                          |          |         |        | 5,494 |          |         |         | 6,533 |        
|                                                                                 |                                                                                              |                                                              |                                              |          |         |        |       |          |        
|Cash and cash equivalents, end of period                                         |                                                                                              | $                                                            | 5,494                                        |          |         | $      | 6,533 |          |         | $       | 9,709 |        
|                                                                                 |                                                                                              |                                                              |                                              |          |         |        |       |          |        
|Reconciliation of net income to net cash provided by operating
    activitities: |                                                                                              |                                                              |                                              |          |         |        |       |          |         |         |       |        
|                                                                                 | Net income (loss)                                                                            |                                                              | $                                            | (22,098  | )       |        | $     | (15,687  | )       |         | $     | (10,216 | )      
|                                                                                 | Adjustments to reconcile net income (loss) to net cash provided
    by operating activities: |                                                              |                                              |          |         |        |       |          |         |         |       |         |        
|                                                                                 |                                                                                              | Amortization of unearned income, net of initial direct costs |                                              |          | (53,012 | )      |       |          | (30,904 | )       |       |         | (11,970 | )      
|                                                                                 |                                                                                              | Depreciation and amortization                                |                                              |          | 18,385  |        |       |          | 16,592  |         |       |         | 14,010  |        
|                                                                                 |                                                                                              | Provision for credit losses                                  |                                              |          | 88,948  |        |       |          | 59,758  |         |       |         | 47,918  |        
|                                                                                 |                                                                                              | Recovery of equipment cost and residual value                |                                              |          | 102,058 |        |       |          | 72,202  |         |       |         | 39,621  |        
|                                                                                 |                                                                                              | Amortization of unearned compensation                        |                                              |          |        |        |       |          | 273     |         |       |         | 28      |        
|                                                                                 |                                                                                              | Non-cash interest expense                                    |                                              |          |        |        |       |          |        |         |       |         | 194     |        
|                                                                                 |                                                                                              | Changes in assets and liabilities:                           |                                              |          |         |        |       |          |         |         |       |         |         |        
|                                                                                 |                                                                                              |                                                              | Increase (decrease) in income taxes payable  |          |         | (2,811 | )     |          |         | 6,389   |       |         |         | (7,789  | )
|                                                                                 |                                                                                              |                                                              | Increase in income taxes receivable          |          |         | (8,652 | )     |          |         | 8,652   |       |         |         |        |  
|                                                                                 |                                                                                              |                                                              | Increase (decrease) in deferred income taxes |          |         | (6,666 | )     |          |         | (16,050 | )     |         |         | (11,255 | )
|                                                                                 |                                                                                              |                                                              | Decrease (increase) in other assets          |          |         | 3,124  |       |          |         | (1,207  | )     |         |         | 736     |  
|                                                                                 |                                                                                              |                                                              | Increase (decrease) in accounts payable      |          |         | 1,323  |       |          |         | (653    | )     |         |         | (712    | )
|                                                                                 |                                                                                              |                                                              | Increase (decrease) in accrued liabilities   |          |         | 29     |       |          |         | (1,313  | )     |         |         | (1,772  | )
|                                                                                 |                                                                                              |                                                              |                                              |          |         |        |       |          |        
|                                                                                 |                                                                                              | Net cash provided by operating activities                    |                                              | $        | 120,628 |        |       | $        | 98,052  |         |       | $       | 58,793  |        
|                                                                                 |                                                                                              |                                                              |                                              |          |         |        |       |          |        
|Supplemental disclosure of noncash activities:                                   |                                                                                              |                                                              |                                              |          |         |        |       |          |         |         |       |        
|                                                                                 | Property acquired under capital leases                                                       |                                                              | $                                            | 68       |         |        | $     | 0        |         |         | $     | 0       |        
|                                                                                 | Fair market value of restricted stock issued                                                 |                                                              | $                                            | 0        |         |        | $     | 273      |         |         | $     | 79      |        
|                                                                                 | Fair market value of warrants issued                                                         |                                                              | $                                            | 0        |         |        | $     | 77       |         |         | $     | 1,015   |        



F-7



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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









F-8



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##### Table of Contents



MICROFINANCIAL INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                                           
|-- | ------------------------------------------
|B. | Summary of Significant Accounting Policies



| |                      
| | ---------------------
| | Basis of Presentation





| |                 
| | ----------------
| | Use of Estimates





| |                          
| | -------------------------
| | Cash and Cash Equivalents





| |                
| | ---------------
| | Restricted Cash





| |                               
| | ------------------------------
| | Leases and Revenue Recognition







| |                            
| | ---------------------------
| | Allowance for Credit Losses



F-9



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##### Table of Contents



MICROFINANCIAL INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                                
| | -------------------------------
| | Investment in Service Contracts





|                                               |  |              |        |   |      |   |        |  
|---------------------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | -
|                                               |  | December 31, |       
|                                               |  |              |       
|                                               |  | 2003         |        |   | 2004 |  
|                                               |  |              |        |   |      |  
|Gross investment in service contracts          |  | $            | 14,673 |   |      | $ | 9,968  |  
|Less accumulated depreciation and amortization |  |              | (5,829 | ) |      |   | (5,191 | )
|                                               |  |              |        |   |      |  
|Investment in service contracts, net           |  | $            | 8,844  |   |      | $ | 4,777  |  
|                                               |  |              |        |   |      |  





| |                               
| | ------------------------------
| | Investment in Rental Contracts





|                                               |  |              |         |   |      |   |        |  
|---------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------ | -
|                                               |  | December 31, |        
|                                               |  |              |        
|                                               |  | 2003         |         |   | 2004 |  
|                                               |  |              |         |   |      |  
|Gross investment in rental contracts           |  | $            | 14,578  |   |      | $ | 11,061 |  
|Less accumulated depreciation and amortization |  |              | (10,820 | ) |      |   | (9,276 | )
|                                               |  |              |         |   |      |  
|Investment in rental contracts, net            |  | $            | 3,758   |   |      | $ | 1,785  |  
|                                               |  |              |         |   |      |  





| |                       
| | ----------------------
| | Property and Equipment



F-10



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##### Table of Contents



MICROFINANCIAL INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                                    
| | -----------------------------------
| | Fair Value of Financial Instruments





| |                 
| | ----------------
| | Debt Issue Costs





| |             
| | ------------
| | Income Taxes





| |                              
| | -----------------------------
| | New Accounting Pronouncements



Share-Based Payment Accounting
for Stock-Based Compensation Accounting for Stock Issued to
Employees.




F-11



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##### Table of Contents



MICROFINANCIAL INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | All new awards issued after the effective date;                                                     
|
| |  | All modifications, repurchased or cancellations of existing
    awards after the effective date; and
|
| |  | Unvested awards at the effective date.                                                              

Stock-based Employee Compensation.


Inventory Costs  An
amendment of ARB No. 43, Chapter 4


Exchanges of Nonmonetary Assets  An
Amendment of APB Opinion No. 29 Accounting for Nonmonetary Transactions




| |                                        
| | ---------------------------------------
| | Reclassification of Prior Year Balances





| |                                   
| | ----------------------------------
| | Net Income (Loss) Per Common Share



F-12



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##### Table of Contents



MICROFINANCIAL INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                                |                                                                                                 |                                  |            |            |      |   |            |            |  |   |            |            | 
|------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | -------------------------------- | ---------- | ---------- | ---- | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|                                                                                |                                                                                                 | For the Years Ended December 31, |           
|                                                                                |                                                                                                 |                                  |           
|                                                                                |                                                                                                 | 2002                             |            |            | 2003 |   |            | 2004       | 
|                                                                                |                                                                                                 |                                  |            |            |      |   |            |            | 
|Net loss                                                                        |                                                                                                 | $                                | (22,098    | )          |      | $ | (15,687    | )          |  | $ | (10,216    | )         
|Shares used in computation:                                                     |                                                                                                 |                                  |            |            |      |   |            |            |  |   |            |           
|                                                                                | Weighted-average common shares outstanding used in computation
    of net loss per common share |                                  |            | 12,821,946 |      |   |            | 13,043,744 |  |   |            | 13,182,833 | 
|                                                                                | Dilutive effect of common stock options                                                         |                                  |            |           |      |   |            |           |  |   |            |           | 
|                                                                                |                                                                                                 |                                  |            |            |      |   |            |            | 
|Shares used in computation of net loss per common
    share  assuming dilution |                                                                                                 |                                  | 12,821,946 |            |      |   | 13,043,744 |            |  |   | 13,182,833 |           
|                                                                                |                                                                                                 |                                  |            |            |      |   |            |            | 
|Net loss per common share  basic and diluted                                   |                                                                                                 | $                                | (1.72      | )          |      | $ | (1.20      | )          |  | $ | (0.77      | )         
|                                                                                |                                                                                                 |                                  |            |            |      |   |            |            | 



| |                                  
| | ---------------------------------
| | Stock-based Employee Compensation

Accounting for Stock-Based Compensation. Accounting for Stock Issued to Employees, Accounting for
Stock-Based Compensation,


|                                                                                                                                                    |  |                                 |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                                                    |  | For the Year Ended December 31, |        
|                                                                                                                                                    |  |                                 |        
|                                                                                                                                                    |  | 2002                            |         |   | 2003 |   |         | 2004 | 
|                                                                                                                                                    |  |                                 |         |   |      |   |         |      | 
|Net loss, as reported                                                                                                                               |  | $                               | (22,098 | ) |      | $ | (15,687 | )    |  | $ | (10,216 | )
|Add: Stock based employee compensation expense Included in
    reported net loss                                                                    |  |                                 |        |   |      |   | 273     |      |  |   | 28      |  
|Deduct: Total stock-based employee compensation expense
    determined under fair value based method for all awards, net of
    related tax effects |  |                                 | (1,475  | ) |      |   | (1,065  | )    |  |   | (877    | )
|                                                                                                                                                    |  |                                 |         |   |      |   |         |      | 
|Pro forma net income (loss)                                                                                                                         |  | $                               | (23,573 | ) |      | $ | (16,479 | )    |  | $ | (11,065 | )
|                                                                                                                                                    |  |                                 |         |   |      |   |         |      | 
|Net Income (loss) per share:                                                                                                                        |  |                                 |         |   |      |   |         |      |  |   |         |  
|As reported  Basic and Diluted                                                                                                                     |  | $                               | (1.72   | ) |      | $ | (1.20   | )    |  | $ | (0.77   | )
|                                                                                                                                                    |  |                                 |         |   |      |   |         |      | 
|Pro forma  Basic and Diluted                                                                                                                       |  | $                               | (1.84   | ) |      | $ | (1.26   | )    |  | $ | (0.84   | )
|                                                                                                                                                    |  |                                 |         |   |      |   |         |      | 

F-13



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##### Table of Contents



MICROFINANCIAL INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                        |  |      |         |   |      |  |         |  
|----------------------- |  | ---- | ------- | - | ---- |  | ------- | -
|                        |  | 2002 |         |   | 2003 | 
|                        |  |      |         |   |      | 
|Risk-free interest rate |  |      | 3.63    | % |      |  | 3.34    | %
|Expected dividend yield |  |      | 0.80    | % |      |  | 0.00    | %
|Expected life           |  |      | 7 years |   |      |  | 7 years |  
|Volatility              |  |      | 68.00   | % |      |  | 76.00   | %





|   |                         
|-- | ------------------------
|C. | Net Investment in Leases



|                   |  |   |        | 
|------------------ |  | - | ------ | 
|For the Year Ended |  |  
|December 31,       |  |  
|                   |  |  
|2005               |  | $ | 54,262 | 
|2006               |  |   | 4,735  | 
|2007               |  |   | 552    | 
|2008               |  |   | 118    | 
|2009               |  |   | 12     | 
|Thereafter         |  |   |       | 
|                   |  |   |       
|Total              |  | $ | 59,679 | 
|                   |  |   |       







F-14



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##### Table of Contents



MICROFINANCIAL INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                            |                                    |  |        |  |  |   |        |        | 
|----------------------------------------------------------- | ---------------------------------- |  | ------ |  |  | - | ------ | ------ | 
|Balance of allowance for credit losses at December 31, 2001 |                                    |  |        |  |  | $ | 45,026 |       
|                                                            |                                    |  |        |  |  |  
|Balance of other asset reserve at December 31, 2001         |                                    |  |        |  |  | $ | 401    |       
|                                                            |                                    |  |        |  |  |  
|Provision for leases and loans credit losses                |                                    |  | 88,948 |  |  |   |        |       
|                                                            | Total provisions for credit losses |  |        |  |  |   |        | 88,948 | 
|Charge-offs (including $401 in other asset charge-offs)     |                                    |  | 76,844 |  |  |   |        |       
|Recoveries                                                  |                                    |  | 11,763 |  |  |   |        |       
|                                                            |                                    |  |        |  |  |  
|                                                            | Charge-offs, net of recoveries     |  |        |  |  |   |        | 65,081 | 
|                                                            |                                    |  |        |  |  |  
|Balance of allowance for credit losses at December 31, 2002 |                                    |  |        |  |  | $ | 69,294 |       
|                                                            |                                    |  |        |  |  |  
|Provision for leases and loans credit losses                |                                    |  | 59,758 |  |  |   |        |       
|                                                            | Total provisions for credit losses |  |        |  |  |   |        | 59,758 | 
|Charge-offs                                                 |                                    |  | 93,153 |  |  |   |        |       
|Recoveries                                                  |                                    |  | 7,112  |  |  |   |        |       
|                                                            |                                    |  |        |  |  |  
|                                                            | Charge-offs, net of recoveries     |  |        |  |  |   |        | 86,041 | 
|                                                            |                                    |  |        |  |  |  
|Balance of allowance for credit losses at December 31, 2003 |                                    |  |        |  |  | $ | 43,011 |       
|                                                            |                                    |  |        |  |  |  
|Provision for leases and loans credit losses                |                                    |  | 47,918 |  |  |   |        |       
|                                                            | Total provisions for credit losses |  |        |  |  |   |        | 47,918 | 
|Charge-offs                                                 |                                    |  | 81,763 |  |  |   |        |       
|Recoveries                                                  |                                    |  | 5,797  |  |  |   |        |       
|                                                            |                                    |  |        |  |  |  
|                                                            | Charge-offs, net of recoveries     |  |        |  |  |   |        | 75,966 | 
|                                                            |                                    |  |        |  |  |  
|Balance of allowance for credit losses at December 31, 2004 |                                    |  |        |  |  | $ | 14,963 |       
|                                                            |                                    |  |        |  |  |  



|                                                         |  |   |         |  
|-------------------------------------------------------- |  | - | ------- | -
|Balance of Estimated Residual Value at December 31, 2001 |  | $ | 37,114  |  
|New Originations                                         |  |   | 10,254  |  
|Lease Terminations                                       |  |   | (16,614 | )
|                                                         |  |   |        
|Balance of Estimated Residual Value at December 31, 2002 |  | $ | 30,754  |  
|New Originations                                         |  |   | 186     |  
|Lease Terminations                                       |  |   | (11,830 | )
|                                                         |  |   |        
|Balance of Estimated Residual Value at December 31, 2003 |  | $ | 19,110  |  
|New Originations                                         |  |   | 92      |  
|Lease Terminations                                       |  |   | (9,700  | )
|                                                         |  |   |        
|Balance of Estimated Residual Value at December 31, 2004 |  | $ | 9,502   |  
|                                                         |  |   |        



F-15



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##### Table of Contents



MICROFINANCIAL INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |                       
|-- | ----------------------
|D. | Property and Equipment



|                                               |  |              |       |  |      |   |       | 
|---------------------------------------------- |  | ------------ | ----- |  | ---- | - | ----- | 
|                                               |  | December 31, |      
|                                               |  |              |      
|                                               |  | 2003         |       |  | 2004 |  
|                                               |  |              |       |  |      |  
|Inventory                                      |  | $            | 904   |  |      | $ | 261   | 
|Computer Equipment                             |  |              | 6,124 |  |      |   | 5,521 | 
|Office Equipment                               |  |              | 1,155 |  |      |   | 1,115 | 
|Leasehold improvements                         |  |              | 112   |  |      |   | 112   | 
|                                               |  |              |       |  |      |  
|                                               |  |              | 8,295 |  |      |   | 7,009 | 
|Less accumulated depreciation and amortization |  |              | 6,209 |  |      |   | 6,255 | 
|                                               |  |              |       |  |      |  
|Total                                          |  | $            | 2,086 |  |      | $ | 754   | 
|                                               |  |              |       |  |      |  







|   |                                    
|-- | -----------------------------------
|E. | Notes Payable and Subordinated Debt



| |              
| | -------------
| | Notes Payable



|                               |  |                        |              |                           |      |   |              |      |  |   |       | 
|------------------------------ |  | ---------------------- | ------------ | ------------------------- | ---- | - | ------------ | ---- |  | - | ----- | 
|                               |  |                        |              | Amounts Outstanding as of |     
|                               |  |                        |              |                           |     
|                               |  |                        |              | December 31,              |      |   | December 31, |     
|                               |  | Interest Rate          |              |                           | 2003 |   |              | 2004 | 
|                               |  |                        |              |                           |      |   |              |      | 
|                               |  | (Dollars in thousands) |             
|Credit facility  old          |  |                        | prime + 2.0% |                           |      | $ | 55,346       |      |  | $ |      | 
|Credit facility  CIT          |  |                        | prime + 1.5% |                           |      |   |             |      |  |   | 34    | 
|MFI I term note securitization |  |                        | 5.58%        |                           |      |   | 3,247        |      |  |   |      | 
|Term notes                     |  |                        | 7.50%        |                           |      |   | 250          |      |  |   |      | 
|Subordinated notes             |  |                        | 7.0%-13.0%   |                           |      |   | 3,262        |      |  |   | 5,152 | 
|                               |  |                        |              |                           |      |   |              |      | 
|                               |  |                        |              |                           |      | $ | 62,105       |      |  | $ | 5,186 | 
|                               |  |                        |              |                           |      |   |              |      | 



F-16



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##### Table of Contents



MICROFINANCIAL INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)
















F-17



---



##### Table of Contents



MICROFINANCIAL INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)














| |                           
| | --------------------------
| | Subordinated Notes Payable







F-18



---



##### Table of Contents



MICROFINANCIAL INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                   
| | ------------------
| | Repayment Schedule



|                                  |  |             |    |  |           |   |       |       |  |   |       |  
|--------------------------------- |  | ----------- | -- |  | --------- | - | ----- | ----- |  | - | ----- | -
|                                  |  | Revolving   |    |  |           |   |      
|                                  |  | Credit      |    |  | Long-Term |   |       |      
|For the Period Ended December 31, |  | Facility(1) |    |  | Debt      |   |       | Total | 
|                                  |  |             |    |  |           |   |       |       | 
|2005                              |  | $           | 34 |  |           | $ | 2,052 |       |  | $ | 2,086 |  
|2006                              |  |             |   |  |           |   | 3,100 |       |  |   | 3,100 |  
|2007                              |  |             |   |  |           |   |      |       |  |   |      |  
|2008                              |  |             |   |  |           |   |      |       |  |   |      |  
|2009                              |  |             |   |  |           |   |      |       |  |   |      |  
|Thereafter                        |  |             |   |  |           |   |      |       |  |   |      |  
|                                  |  |             |    |  |           |   |       |       | 
|                                  |  |             | 34 |  |           |   | 5,152 |       |  | $ | 5,186 |  
|Less Discount                     |  |             |    |  |           |   | (563  | )     |  |   | (563  | )
|                                  |  |             |    |  |           |   |       |       | 
|                                  |  | $           | 34 |  |           | $ | 4,589 |       |  | $ | 4,623 |  
|                                  |  |             |    |  |           |   |       |       | 






|    |                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Companys obligation to repay the revolving credit
    facility in the current year is subject to lease collateral
    availability and the borrowing base formula. The credit facility
    expires on September 29, 2007.





|   |                
|-- | ---------------
|F. | Preferred Stock





|   |                     
|-- | --------------------
|G. | Stockholders Equity



| |             
| | ------------
| | Common Stock





| |               
| | --------------
| | Treasury Stock



F-19



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##### Table of Contents



MICROFINANCIAL INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                   
| | ----------------------------------
| | Stock Options and Restricted Stock









|                                                       |  |        |            |   |                 |           |                   |                |  |   |        | 
|------------------------------------------------------ |  | ------ | ---------- | - | --------------- | --------- | ----------------- | -------------- |  | - | ------ | 
|                                                       |  |        |            |   |                 | Weighted- |                  
|                                                       |  |        |            |   |                 | Average   |                  
|                                                       |  | Shares |            |   | Price Per Share |           |                   | Exercise Price | 
|                                                       |  |        |            |   |                 |           |                   |                | 
|Outstanding at December 31, 2001                       |  |        | 2,036,000  |   |                 |           | $9.48 to $13.544  |                |  | $ | 11.337 | 
|Canceled                                               |  |        | (391,000   | ) |                 |           | $6.70 to $13.544  |                |  | $ | 11.184 | 
|Granted                                                |  |        | 1,350,000  |   |                 |           | $1.585 to $6.70   |                |  | $ | 3.555  | 
|                                                       |  |        |            |   |                 |           |                   |                | 
|Outstanding at December 31, 2002                       |  |        | 2,995,000  |   |                 |           | $1.585 to $13.544 |                |  | $ | 7.849  | 
|                                                       |  |        |            |   |                 |           |                   |                | 
|Converted to Restricted Stock                          |  |        | (1,325,000 | ) |                 |           | $1.585 to $13.10  |                |  | $ | 7.727  | 
|Canceled                                               |  |        | (195,000   | ) |                 |           | $1.585 to $12.313 |                |  | $ | 7.618  | 
|Granted                                                |  |        | 200,000    |   |                 |           | $0.86             |                |  | $ | 0.860  | 
|                                                       |  |        |            |   |                 |           |                   |                | 
|Outstanding at December 31, 2003 and December 31, 2004 |  |        | 1,675,000  |   |                 |           | $0.86 to $13.544  |                |  | $ | 7.139  | 
|                                                       |  |        |            |   |                 |           |                   |                | 

F-20



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##### Table of Contents



MICROFINANCIAL INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                 |  |             |           |              |             |  |           |                |  |   |         |  |  |  |           | 
|---------------- |  | ----------- | --------- | ------------ | ----------- |  | --------- | -------------- |  | - | ------- |  |  |  | --------- | 
|                 |  | Outstanding |           |              | Exercisable | 
|                 |  |             |           |              |             | 
|                 |  |             |           | Weighted-    |             |  | Weighted- |                |  |  
|                 |  |             |           | Average Life |             |  | Average   |                |  |  
|Exercise Price   |  | Shares      |           |              | (Years)     |  |           | Exercise Price |  |   | Shares  | 
|                 |  |             |           |              |             |  |           |                |  |   |         | 
|$12.3125         |  |             | 359,391   |              |             |  | 4.16      |                |  | $ | 12.3125 |  |  |  | 359,391   | 
|$13.5440         |  |             | 40,609    |              |             |  | 4.16      |                |  | $ | 13.5440 |  |  |  | 40,609    | 
|$9.7813          |  |             | 350,000   |              |             |  | 5.15      |                |  | $ | 9.7813  |  |  |  | 280,000   | 
|$13.1000         |  |             | 90,000    |              |             |  | 6.14      |                |  | $ | 13.1000 |  |  |  | 54,000    | 
|$6.7000          |  |             | 235,000   |              |             |  | 7.16      |                |  | $ | 6.7000  |  |  |  | 94,000    | 
|$1.5850          |  |             | 400,000   |              |             |  | 7.91      |                |  | $ | 1.5850  |  |  |  | 240,000   | 
|$0.8600          |  |             | 200,000   |              |             |  | 8.08      |                |  | $ | 0.8600  |  |  |  | 110,000   | 
|                 |  |             |           |              |             |  |           |                |  |   |         | 
|$0.86 to $13.544 |  |             | 1,675,000 |              |             |  | 6.26      |                |  | $ | 8.0865  |  |  |  | 1,178,000 | 
|                 |  |             |           |              |             |  |           |                |  |   |         | 



|   |             
|-- | ------------
|H. | Income Taxes



|          |         |                                  |        |        |         |   |         |         |         |   |         |         |         |  
|--------- | ------- | -------------------------------- | ------ | ------ | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|          |         | For the Years Ended December 31, |       
|          |         |                                  |       
|          |         | 2002                             |        |        | 2003    |   |         | 2004    |        
|          |         |                                  |        |        |         |   |         |         |        
|Current:  |         |                                  |        |        |         |   |         |         |         |   |         |        
|          | Federal |                                  | $      | (7,198 | )       |   | $       | 4,683   |         |   | $       | (8,045  | )      
|          | State   |                                  |        | (872   | )       |   |         | 907     |         |   |         | (1,149  | )      
|          |         |                                  |        |        |         |   |         |         |        
|          |         |                                  | (8,070 | )      |         |   | 5,590   |         |         |   | (9,194  | )      
|          |         |                                  |        |        |         |   |         |         |        
|Deferred: |         |                                  |        |        |         |   |         |         |         |   |         |        
|          | Federal |                                  |        | (4,685 | )       |   |         | (13,510 | )       |   |         | (12,098 | )      
|          | State   |                                  |        | (1,980 | )       |   |         | (2,540  | )       |   |         | 843     |        
|          |         |                                  |        |        |         |   |         |         |        
|          |         |                                  | (6,665 | )      |         |   | (16,050 | )       |         |   | (11,255 | )      
|          |         |                                  |        |        |         |   |         |         |        
|          |         | Total                            |        | $      | (14,735 | ) |         | $       | (10,460 | ) |         | $       | (20,449 | )
|          |         |                                  |        |        |         |   |         |         |        

F-21



---



##### Table of Contents



MICROFINANCIAL INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                     |                                    |      |         |         |      |   |        |         |  
|------------------------------------ | ---------------------------------- | ---- | ------- | ------- | ---- | - | ------ | ------- | -
|                                     |                                    | 2003 |         |         | 2004 |  
|                                     |                                    |      |         |         |      |  
|Deferred tax assets:                 |                                    |      |         |         |      |   |        |        
|Allowance for credit losses          |                                    | $    | 9,367   |         |      | $ | 5,338  |        
|Depreciation and amortization        |                                    |      | 10,723  |         |      |   | 3,567  |        
|Alternative minimum tax credit       |                                    |      |        |         |      |   | 1,384  |        
|Federal NOL Carryforward             |                                    |      |        |         |      |   | 4,903  |        
|State NOL and other state attributes |                                    |      | 1,922   |         |      |   | 2,588  |        
|State Valuation Allowance            |                                    |      |        |         |      |   | (2,339 | )      
|                                     |                                    |      |         |         |      |  
|                                     | Total deferred tax assets          |      | $       | 22,012  |      |   | $      | 15,442  |  
|                                     |                                    |      |         |         |      |  
|Deferred tax liabilities:            |                                    |      |         |         |      |   |        |        
|Lease receivable and unearned income |                                    | $    | (21,402 | )       |      | $ | (7,960 | )      
|Residual value                       |                                    |      | (7,644  | )       |      |   | (3,801 | )      
|Initial direct cost                  |                                    |      | (722    | )       |      |   | (181   | )      
|                                     |                                    |      |         |         |      |  
|                                     | Total deferred tax liabilities     |      | $       | (29,768 | )    |   | $      | (11,942 | )
|                                     |                                    |      |         |         |      |  
|                                     | Net deferred tax (liability) asset |      | $       | (7,755  | )    |   | $      | 3,500   |  
|                                     |                                    |      |         |         |      |  





|                                           |  |                                  |        |    |      |  |        |      |  |  |        |   
|------------------------------------------ |  | -------------------------------- | ------ | -- | ---- |  | ------ | ---- |  |  | ------ | --
|                                           |  | For the Years Ended December 31, |       
|                                           |  |                                  |       
|                                           |  | 2002                             |        |    | 2003 |  |        | 2004 | 
|                                           |  |                                  |        |    |      |  |        |      | 
|Federal statutory rate                     |  |                                  | (35.00 | )% |      |  | (35.00 | )%   |  |  | (35.00 | )%
|State income taxes, net of federal benefit |  |                                  | (5.38  | )% |      |  | (4.91  | )%   |  |  | (5.60  | )%
|State valuation allowance                  |  |                                  |       | %  |      |  |       | %    |  |  | 7.63   | % 
|Nondeductible expenses and other           |  |                                  | 0.38   | %  |      |  | (0.09  | )%   |  |  | (33.71 | )%
|                                           |  |                                  |        |    |      |  |        |      | 
|Effective income tax rate                  |  |                                  | (40.00 | )% |      |  | (40.00 | )%   |  |  | (66.68 | )%
|                                           |  |                                  |        |    |      |  |        |      | 



F-22



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##### Table of Contents



MICROFINANCIAL INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                              
|-- | -----------------------------
|I. | Commitments and Contingencies



| |                             
| | ----------------------------
| | Operating and Capital Leases





|                                 |  |   |     | 
|-------------------------------- |  | - | --- | 
|For the Years Ended December 31, |  |  
|                                 |  |  
|2005                             |  | $ | 585 | 
|2006                             |  |   |    | 
|2007                             |  |   |    | 
|2008                             |  |   |    | 
|2009                             |  |   |    | 
|Total                            |  | $ | 585 | 
|                                 |  |   |    





|                                   |  |   |    |  
|---------------------------------- |  | - | -- | -
|For the Years Ended December 31,   |  |  
|                                   |  |  
|2005                               |  | $ | 42 |  
|2006                               |  |   |   |  
|2007                               |  |   |   |  
|2008                               |  |   |   |  
|2009                               |  |   |   |  
|                                   |  |   |   
|Total minimum lease payments       |  |   | 42 |  
|Less amounts representing interest |  |   | (1 | )
|                                   |  |   |   
|Total                              |  | $ | 41 |  
|                                   |  |   |   



| |              
| | -------------
| | Legal Matters





F-23



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##### Table of Contents



MICROFINANCIAL INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








F-24



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##### Table of Contents



MICROFINANCIAL INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












F-25



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##### Table of Contents



MICROFINANCIAL INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






In re: State of
Washington v. Priority One Security, Inc. and William
Roberts




| |            
| | -----------
| | Indemnities









|   |                       
|-- | ----------------------
|J. | Employee Benefit Plan:



F-26



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##### Table of Contents



MICROFINANCIAL INCORPORATED


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|   |                               
|-- | ------------------------------
|K. | Concentrations of Credit Risk:











|   |                            
|-- | ---------------------------
|L. | Related-Party Transactions:





F-27