##### Table of Contents





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

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2007oro

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

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

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

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

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

The Nasdaq Stock Market LLC   Securities registered pursuant to Section 12(g) of the
    Act:
  None
    o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  12b-2
  Large accelerated
    filer o

Accelerated
    filer o

Non-accelerated
    filer o

Smaller reporting
    company þ(Do not check if a smaller reporting company)   Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE




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##### 





Table of
    Contents
  
  PageDescription



NumberPART IItem 1.


Business


2Item 1A.


Risk Factors


7Item 2.


Properties


12Item 3.


Legal Proceedings


12Item 4.


Submission of Matters to a Vote of Security
    Holders


12PART IIItem 5.


Market for Registrants Common Equity and
    Related Stockholder Matters


12Item 6.


Selected Financial Data


15Item 7.


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


17Item 7A.


Quantitative and Qualitative Disclosures about
    Market Risk


29Item 8.


Financial Statements and Supplementary Data


29Item 9.


Changes In and Disagreements with Accountants on
    Accounting and Financial Disclosure


29Item 9A.


Controls and Procedures


29Item 9B.


Other Information


30PART IIIItem 10.


Directors, Executive Officers and Corporate
    Governance


31Item 11.


Executive Compensation


31Item 12.


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


31Item 13.


Certain Relationships and Related Transactions,
    and Director Independence


31Item 14.


Principal Accountant Fees and Services


31PART IVItem 15.


Exhibits and Financial Statement Schedules


32SIGNATURES


35EX-21.1 Subsidiaries of RegistrantEX-23.1 Consent of Vitale, Caturano & Company, LtdEX-31.1 Section 302 Certification of CEOEX-31.2 Section 302 Certification of CFOEX-31.2 Section 906 Certification of CEOEX-32.2 Section 906 Certification of CFO   1




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##### Table of Contents



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




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##### Table of Contents



Terms
    of Equipment Leases
          Residual
    Interests in Underlying Equipment
    Service
    Contracts
   3




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##### Table of Contents



Dealers
      Use
    of Technology
    e-mail,
    Underwriting
     4




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Bulk
    and Portfolio Acquisitions
    Servicing
    and Collections
      Competition
    Employees
   5




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##### Table of Contents



Executive
    Officers
  Name and Age of Executive Officers

TitleRichard F. Latour, 54

Director, President, Chief Executive Officer,Treasurer, Secretary and ClerkJames R. Jackson, Jr., 46

Vice President and Chief Financial OfficerSteven J. LaCreta, 48

Vice President, Lessee Relations and LegalStephen J. Constantino, 42

Vice President, Human ResourcesThomas Herlihy, 49

Vice President, Sales and Marketing, ofTimePayment Corp.   Backgrounds
    of Executive Officers
            Availability
    of Information
  http://www.microfinancial.com Form 10-K, Form 10-Q, Form 8-K Form 10-K. http://www.sec.gov
 6




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Item 1A.
    Risk
    Factors    We depend
    on external financing to fund leases and contracts, and adequate
    financing may not be available to us in amounts, together with
    our cash flow, sufficient to originate new leases.
          The delay
    in originations caused by our former credit facilitys
    failure to renew in 2002 has decreased the size of our portfolio
    and may continue to adversely affect our financial
    performance.
      We are
    vulnerable to changes in the demand for the types of equipment
    we lease or price reductions in such equipment.
   7




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




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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 or contracts less
    profitable.
    An
    economic downturn may cause an increase in defaults under our
    leases and lower demand for the commercial equipment we
    lease.
     9




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Our
    allowance for credit losses may prove to be inadequate to cover
    future credit losses.
    We may
    not be able to realize our entire investment in the residual
    interests in the equipment covered by our leases.
    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.
    Government
    regulation could restrict our business.
     10




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We may
    face risks in acquiring other portfolios and companies,
    including risks relating to how we finance any such acquisition
    or how we are able to assimilate any portfolios or operations we
    acquire.
      If we
    were to lose key personnel, our operating results may suffer or
    it may cause a default under our debt facilities.
    Certain
    provisions of our articles and bylaws may have the effect of
    discouraging a change in control or acquisition of the
    company.
   11




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Our stock
    price may be volatile, which could limit our access to the
    equity markets and could cause you to incur losses on your
    investment.
    There is
    no assurance that we will continue to pay dividends on our
    common stock in the future.
    Item 2.
    Properties    Item 3.
    Legal
    Proceedings    Item 4.
    Submission
    Of Matters to a Vote Of Security Holders   PART II  Item 5.
    Market
    For Registrants Common Equity and Related Stockholder
    Matters  Market Information
   12




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##### Table of Contents



2006


2007First


Second


Third


Fourth


First


Second


Third


FourthQuarter


Quarter


Quarter


Quarter


Quarter


Quarter


Quarter


QuarterStock PriceHigh

$
3.95


$
3.89


$
3.49


$
3.89


$
6.34


$
6.52


$
6.45


$
6.50Low

$
3.26


$
3.20


$
3.01


$
3.12


$
3.62


$
4.08


$
5.14


$
4.85   Holders
    Dividends
              Total Number of


Average Price PaidPeriod

Shares Purchased


per ShareOctober 1, 2007  October 31, 2007


75,000


$
5.30  13




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Performance Graph
    Comparison
    of 5 Year Cumulative Total Return
    Assumes Initial Investment of $100
    December 2007
  
   14




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##### Table of Contents



Item 6.
    Selected
    Financial Data    Year Ended December 31,2003


2004


2005


2006


2007(Amounts in thousands, except share and per share data)Income Statement Data:Revenues:Income on financing leases

$
30,904


$
11,970


$
4,140


$
3,917


$
12,302Rental income


34,302



31,009



25,359



20,897



13,612Income on service contracts


8,593



5,897



3,467



1,870



1,271Other income(1)


17,775



11,491



6,318



5,758



4,486Total revenues


91,574



60,367



39,284



32,442



31,671Expenses:Selling, general and administrative


33,856



26,821



20,884



14,499



12,824Provision for credit losses


59,758



47,918



10,468



6,985



7,855Depreciation and amortization


16,592



14,010



9,497



5,326



1,344Interest


7,515



2,283



1,148



162



143Total expenses


117,721



91,032



41,997



26,972



22,166Income (loss) before provision (benefit) for income taxes


(26,147
)


(30,665
)


(2,713
)


5,470



9,505Provision (benefit) for income taxes


(10,460
)


(20,449
)(2)


(1,053
)


1,555



3,303Net income (loss)

$
(15,687
)

$
(10,216
)

$
(1,660
)

$
3,915


$
6,202Net income (loss) per common share:Basic

$
(1.20
)

$
(0.77
)

$
(0.12
)

$
0.28


$
0.45Diluted


(1.20
)


(0.77
)


(0.12
)


0.28



0.44Weighted-average shares:Basic


13,043,774



13,182,833



13,567,640



13,791,403



13,922,974Diluted


13,043,774



13,182,833



13,567,640



13,958,759



14,149,634Dividends declared per common share

$



$



$
0.50


$
0.20


$
0.20   15




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December 31,2003


2004


2005


2006


2007(Dollars in thousands)Balance Sheet Data:Cash and cash equivalents

$
6,533


$
9,709


$
32,926


$
28,737


$
7,080Restricted cash


2,376















561Gross investment in leases(3)


194,898



69,181



33,004



44,314



102,128Unearned income


(23,729
)


(6,313
)


(3,658
)


(13,682
)


(35,369
)Allowance for credit losses


(43,011
)


(14,963
)


(8,714
)


(5,223
)


(5,722
)Investment in service contracts, net


8,844



4,777



1,626



613



203Investment in rental contracts, net


3,758



1,785



3,025



313



106Total assets


156,414



71,270



65,188



59,721



70,982Notes payable


58,843



34



161



5



6,531Subordinated notes payable


3,262



4,589



2,602







Total liabilities


85,148



9,177



10,501



3,585



10,154Total stockholders equity


71,266



62,093



54,687



56,136



60,828   December 31,2003


2004


2005


2006


2007(Dollars in thousands, except statistical data)Other Data:Operating Data:Value of leases originated(4)

$
3,429


$
920


$
7,296


$
33,343


$
83,698Value of rental contracts originated


157



77



1,731







Dealer funding(5)


1,600



668



6,364



21,498



54,035Average yield on leases(6)


32.5
%


30.1
%


30.6
%


30.0
%


29.0
%Cash Flows From (Used In):Operating activities

$
98,052


$
58,694


$
35,228


$
26,870


$
30,440Investing activities


(2,839
)


(813
)


(6,978
)


(22,114
)


(55,203
)Financing activities


(94,174
)


(54,705
)


(5,033
)


(8,945
)


3,106Net change in cash and cash equivalents

$
1,039


$
3,176


$
23,217


$
(4,189
)

$
(21,657
)Selected Ratios:Return on average assets


(6.95
)%


(8.98
)%


(2.43
)%


6.27
%


9.49
%Return on average stockholders equity


(19.87
)


(15.32
)


(2.84
)


7.07



10.60Operating margin(7)


36.70



28.58



19.74



38.39



54.81Credit Quality Statistics:Net charge-offs

$
86,041


$
75,967


$
16,717


$
10,476


$
7,356Net charge-offs as a percentage of average gross investment(8)


29.40
%


54.71
%


30.79
%


26.34
%


9.99
%Provision for credit losses as a percentage of average gross
    investment(8)


20.42



34.51



19.28



17.56



10.67Allowance for credit losses as a percentage of gross
    investment(9)


21.11



20.23



25.16



11.63



5.59     (1)
    
    Includes loss and damage waiver fees, service fees, interest
    income, and miscellaneous revenue.(2)
    
    Includes an income tax benefit of $7.9 million that
    resulted from a reduction in our estimate of certain tax
    liabilities. 16




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(3)
    
    Consists of receivables due in installments and estimated
    residual value.(4)
    
    Represents the amount paid to dealers upon funding of leases
    plus the associated unearned income.(5)
    
    Represents the net amount paid to dealers upon funding of leases
    and contracts.(6)
    
    Represents the aggregate of the implied interest rate on each
    lease originated during the period weighted by the amount funded.(7)
    
    Represents income before provision (benefit) for income taxes
    and provision for credit losses as a percentage of total
    revenues.(8)
    
    Represents a percentage of average gross investment in leases
    and net investment in service contracts.(9)
    
    Represents allowance for credit losses as a percentage of gross
    investment in leases and net investment in service contracts.  Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations, Including Selected Quarterly Financial Data
    (Unaudited)    
    our dependence on point of sale authorization systems,
    expansion into new markets and the development of a sizeable
    dealer base;
    our significant capital requirements;
    our ability or inability to obtain the financing we need, or to
    use internally generated funds, in order to continue originating
    contracts;
    the risks of defaults on our leases;
    our provision for credit losses;
    our residual interests in underlying equipment;
    possible adverse consequences associated with our collection
    policy;
    the effect of higher interest rates on our portfolio;
    increasing competition;
    increased governmental regulation of the rates and methods we
    use in financing and collecting on our leases and contracts;
    acquiring other portfolios or companies;
    dependence on key personnel;
    adverse results in litigation and regulatory matters, or
    promulgation of new or enhanced legislation or
    regulations; and
    general economic and business conditions.   17




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Overview
    22-month
         18




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Critical
    Accounting Policies
    Revenue
    Recognition
      Allowance
    for Credit Losses
   19




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##### Table of Contents



Income
    Taxes
    Share-Based
    Compensation
   20




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##### Table of Contents



Results
    of Operations
  Revenues
  2005


Change


2006


Change


2007(In thousands)Income on financing leases

$
4,140



(5.4
)%

$
3,917



214.1
%

$
12,302Rental income


25,359



(17.6
)


20,897



(34.9
)


13,612Income on service contracts


3,467



(46.1
)


1,870



(32.0
)


1,271Loss and damage waiver fees


2,863



(33.8
)


1,895



7.3



2,033Service fees and other


2,953



(17.1
)


2,448



(35.6
)


1,576Interest income


502



181.9



1,415



(38.0
)


877Total revenues

$
39,284



(17.4
)%

$
32,442



(2.4
)%

$
31,671         Selling,
    General and Administrative
  2005

Change

2006

Change

2007(Dollars in thousands)Selling, general and administrative

$
20,884



(30.6
)%

$
14,499



(11.6
)%

$
12,824As a percent of revenue


53.2
%






44.7
%






40.5
%    21




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##### Table of Contents



Provision
    for Credit Losses
  2005

Change

2006

Change

2007(Dollars in thousands)Provision for credit losses

$
10,468



(33.3
)%

$
6,985



12.5
%

$
7,855As a percent of revenue


26.6
%






21.5
%






24.8
%       Depreciation
    and Amortization
  2005


Change


2006


Change


2007(Dollars in thousands)Depreciation  fixed assets

$
410



(50.7
)%

$
202



38.6
%

$
280Depreciation  rental equipment


5,936



(30.8
)


4,108



(83.1
)


695Amortization  service contracts


3,151



(67.8
)


1,016



(63.7
)


369Total depreciation and amortization

$
9,497



(43.9
)%

$
5,326



(74.8
)%

$
1,344As a percent of revenue


24.2
%






16.4
%






4.2
%      22




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##### Table of Contents



Interest
    Expense
  2005


Change


2006


Change


2007(Dollars in thousands)Interest

$
1,148



(85.9
)%

$
162



(11.7
)%

$
143As a percent of revenue


2.9
%






0.5
%






0.5
%       Provision
    (Benefit) for Income Taxes
  2005


Change


2006


Change


2007(In thousands)Provision (benefit) for income taxes

$
(1,053
)


247.6
%

$
1,555



112.4
%

$
3,303As a percent of revenue


2.7
%






4.8
%






10.4
%      23




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Other
    Operating Data
     24




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Selected
    Quarterly Data
  Form 10-K.
  2006


2007First


Second


Third


Fourth


First


Second


Third


FourthQuarter


Quarter


Quarter


Quarter


Quarter


Quarter


Quarter


QuarterRevenues:Income on leases

$
672


$
724


$
1.007


$
1,514


$
2,033


$
2,653


$
3,406


$
4,210Rental income


5,721



5,594



5,121



4,461



3,924



3,514



3,268



2,906Income on service contracts


555



488



435



392



361



329



303



278Loss and damage waiver fees


551



493



431



420



444



473



524



592Service fees and other


1,103
(1)


535



437



373



386



330



415



445Interest income


315



323



411



366



323



247



182



125Total revenues


8,917



8,157



7,842



7,526



7,471



7,546



8,098



8,556Expenses:Selling, general and administrative


4,207



3,926



3,312



3,054



3,568



3,158



3,134



2,964Provision for credit losses


1,610



1,627



1,887



1,861



1,523



1,677



1,919



2,736Depreciation and amortization


1,765



1,674



1,195



692



463



347



288



246Interest


81



31



23



27



13



13



13



104Total expenses


7,663



7,258



6,417



5,634



5,567



5,195



5,354



6,050Income before provision for income taxes


1,254



899



1,425



1,892



1,904



2,351



2,744



2,506Provision for income taxes


490



361



573



131
(2)


687



902



941



773Net income

$
764


$
538


$
852


$
1,761


$
1,217


$
1,449


$
1,803


$
1,733Net income per common share  basic

$
0.06


$
0.04


$
0.06


$
0.13


$
0.09


$
0.10


$
0.13


$
0.12Net income per common share  diluted


0.05



0.04



0.06



0.13



0.09



0.10



0.13



0.12Dividends declared per common share


0.05



0.05



0.05



0.05



0.05



0.05



0.05



0.05     (1)
    
    Includes a $212,000 gain on the sale of rental contracts(2)
    
    Includes a net benefit of $385,000 resulting from the settlement
    of the IRS audit.  Exposure
    to Credit Losses
   25




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December 31, 2005


December 31, 2006


December 31, 2007(Dollars in thousands)Current

$
8,486



29.1
%

$
29,027



71.8
%

$
75,528



81.8
%31-60 days
    past due


637



2.2



1,607



4.0



4,565



5.061-90 days
    past due


601



2.1



825



2.0



3,016



3.2Over 90 days past due


19,415



66.6



8,996



22.2



9,205



10.0Receivables due in installments

$
29,139



100.0
%

$
40,455



100.0
%

$
92,314



100.0
%   Liquidity
    and Capital Resources
  General
            Borrowings
    December 31, 2006


December 31, 2007Maximum











MaximumAmounts


Interest


Unused


Facility


Amounts


Interest


Unused


FacilityOutstanding


Rate


Capacity


Amount


Outstanding


Rate


Capacity


Amount(Dollars in 000)Revolving credit facility(1)

$
5



9.75
%

$
29,995


$
30,000


$
6,531



7.25
%

$
23,469


$
30,000$
5






$
29,995


$
30,000


$
6,531






$
23,469


$
30,000     (1)
    
    The unused capacity is subject to limitations based on lease
    eligibility and the borrowing base formula 26




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90-day
      Financial
    Covenants
    Contractual
    Obligations and Lease Commitments
  Contractual
    Obligations
    Lease
    Commitments
   27




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Market
    Risk and Financial Instruments
            Recently
    Issued Accounting Pronouncements
    contract-by-contract
   28




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##### Table of Contents



Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk    Item 8.
    Financial
    Statements and Supplementary Data  Form 10-K.
  Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Disclosure
    controls and procedures
  Rule 13a-15
  Managements
    Report on Internal Control over Financial Reporting
  Rule 13a-15(f)
   29




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Change in
    Internal Control over Financial Reporting
    Item 9B.
    Other
    Information   30




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##### Table of Contents



PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance    Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    Item 13.
    Certain
    Relationships and Related Transactions and Director
    Independence    Item 14.
    Principal
    Accountant Fees and Services   31




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##### Table of Contents



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

Description3
.1

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

Restated Bylaws, as amended.  Incorporated by reference to
    Exhibit 3.2 in the Registrants Annual Report on Form 10-K
    filed with the Securities and Exchange Commission on March 28,
    2007.10
.1

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

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

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

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

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

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

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

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

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

Forms of Restricted Stock Agreement grant under 1998 Equity
    Incentive Plan.  Incorporated by reference to Exhibit 10.27 in
    the Registrants Annual Report on Form 10-K filed with the
    Securities and Exchange Commission on March 30, 2004. 32




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##### Table of Contents



ExhibitNumber

Description10
.6.3*

Form of incentive stock option agreement under 1998 Equity
    Incentive Plan.  Incorporated by reference to Exhibit 10.6.3 in
    the Registrants Annual Report on Form 10-K filed with the
    Securities and Exchange Commission on March 28, 2007.10
.6.4*

Form of non-qualified stock option agreement under 1998 Equity
    Incentive Plan.  Incorporated by reference to Exhibit 10.6.4 in
    the Registrants Annual Report on Form 10-K filed with the
    Securities and Exchange Commission on March 28, 2007.10
.7*

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

Amended and Restated Employment Agreement between the Company
    and Richard F. Latour dated March 15, 2004.  Incorporated by
    reference to Exhibit 10.8 in the Registrants Annual Report
    on Form 10-K filed with the Securities and Exchange Commission
    on March 28, 2007.10
.9*

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

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

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

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
.13.1

Credit Agreement dated August 2, 2007 (incorporated by reference
    to Exhibit 10.1 of the Registrants Form 8-K filed on
    August 8, 2007)10
.13.2

Unlimited Guaranty of Registrant dated August 2, 2007
    (incorporated by reference to Exhibit 10.2 of the
    Registrants Form 8-K filed on August 8, 2007)10
.13.3

Unlimited Guaranty of Leasecomm dated August 2, 2007
    (incorporated by reference to Exhibit 10.3 of the
    Registrants Form 8-K filed on August 8, 2007)10
.13.4

Security Agreement between Borrower and Agent dated August 2,
    2007 (incorporated by reference to Exhibit 10.4 of the
    Registrants Form 8-K filed on August 8, 2007)10
.13.5

Security Agreement between Registrant and Agent dated August 2,
    2007 (incorporated by reference to Exhibit 10.5 of the
    Registrants Form 8-K filed on August 8, 2007)10
.13.6

Security Agreement between Leasecomm and Agent dated August 2,
    2007 (incorporated by reference to Exhibit 10.6 of the
    Registrants Form 8-K filed on August 8, 2007)10
.13.7

Trademark Security Agreement and License dated August 2, 2007 by
    Borrower (incorporated by reference to Exhibit 10.7 of the
    Registrants Form 8-K filed on August 8, 2007)10
.13.8

Trademark Security Agreement and License dated August 2, 2007 by
    Registrant (incorporated by reference to Exhibit 10.8 of the
    Registrants Form 8-K filed on August 8, 2007)10
.13.9

Trademark Security Agreement and License dated August 2, 2007 by
    Leasecomm (incorporated by reference to Exhibit 10.9 of the
    Registrants Form 8-K filed on August 8, 2007)10
.13.10

Pledge Agreement of Registrant dated August 2, 2007
    (incorporated by reference to Exhibit 10.10 of the
    Registrants Form 8-K filed on August 8, 2007)10
.13.11

Sovereign Note dated August 2, 2007 (incorporated by reference
    to Exhibit 10.11 of the Registrants Form 8-K filed on
    August 8, 2007)10
.13.12

TD Banknorth Note dated August 2, 2007 (incorporated by
    reference to Exhibit 10.12 of the Registrants Form 8-K
    filed on August 8, 2007)21
.1

Subsidiaries of Registrant23
.1

Consent of Vitale, Caturano & Company, Ltd. 33




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##### Table of Contents



ExhibitNumber

Description31
.1

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

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

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

Certification of Chief Financial Officer pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to Section 906
    of the Sarbanes-Oxley Act of 2002     
    
    Filed herewith.*
    
    Management contract or compensatory plan or arrangement required
    to be filed as an exhibit pursuant to Item 15(b) of this
    Report.     34




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##### Table of Contents



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

Title

Date/s/  Peter
    R. BleylebenPeter
    R. Bleyleben

Chairman of the Board of Directors

March 25, 2008/s/  Richard
    F. LatourRichard
    F. Latour

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

March 25, 2008/s/  James
    R. Jackson Jr.James
    R. Jackson Jr.

Vice President and Chief Financial Officer

March 25, 2008/s/  Brian
    E. BoyleBrian
    E. Boyle

Director

March 25, 2008/s/  John
    W. EveretsJohn
    W. Everets

Director

March 25, 2008/s/  Torrence
    C. HarderTorrence
    C. Harder

Director

March 25, 2008/s/  Fritz
    Von MeringFritz
    Von Mering

Director

March 25, 2008/s/  Alan
    J. ZakonAlan
    J. Zakon

Director

March 25, 2008  35




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##### Table of Contents



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


F-2Financial Statements:Consolidated Balance Sheets as of
    December 31, 2006 and 2007


F-3Consolidated Statements of Operations for the
    Years Ended December 31, 2005, 2006 and 2007


F-4Consolidated Statements of Stockholders
    Equity for the Years Ended December 31, 2005, 2006 and
    2007


F-5Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2005, 2006 and 2007


F-6Notes to Consolidated Financial Statements


F-7   F-1




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##### Table of Contents



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




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##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  CONSOLIDATED
    BALANCE SHEETS
  December 31,2006


2007(In thousands,except shareand per share data)ASSETSCash and cash equivalents

$
28,737


$
7,080Restricted cash






561Net investment in leases:Receivables due in installments


40,455



92,314Estimated residual value


3,859



9,814Initial direct costs


302



729Less:Advance lease payments and deposits


(50
)


(219
)Unearned income


(13,682
)


(35,369
)Allowance for credit losses


(5,223
)


(5,722
)Net investment in leases


25,661



61,547Investment in service contracts, net


613



203Investment in rental contracts, net


313



106Property and equipment, net


655



782Other assets


652



703Deferred income taxes, net


3,090



Total assets

$
59,721


$
70,982LIABILITIES AND STOCKHOLDERS EQUITYNotes payable

$
5


$
6,531Accounts payable


1,038



1,350Dividends payable


691



698Other liabilities


1,110



801Income taxes payable


741



228Deferred income taxes






546Total liabilities


3,585



10,154Commitments and contingenciesStockholders equity:Preferred stock, $.01 par value; 5,000,000 shares
    authorized; no shares issued at December 31, 2006 and 2007






Common stock, $.01 par value; 25,000,000 shares
    authorized; 13,811,442 and 13,960,778 shares issued and
    outstanding at December 31, 2006 and 2007, respectively


138



140Additional paid-in capital


44,136



45,412Retained earnings


11,862



15,276Total stockholders equity


56,136



60,828Total liabilities and stockholders equity

$
59,721


$
70,982    F-3




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##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  CONSOLIDATED
    STATEMENTS OF OPERATIONS
  Year Ended December 31,2005


2006


2007(In thousands, except share and per share data)Revenues:Income on financing leases

$
4,140


$
3,917


$
12,302Rental income


25,359



20,897



13,612Income on service contracts


3,467



1,870



1,271Loss and damage waiver fees


2,863



1,895



2,033Service fees and other


2,952



2,448



1,576Interest income


503



1,415



877Total revenues


39,284



32,442



31,671Expenses:Selling, general and administrative


20,884



14,499



12,824Provision for credit losses


10,468



6,985



7,855Depreciation and amortization


9,497



5,326



1,344Interest


1,148



162



143Total expenses


41,997



26,972



22,166Income (loss) before provision (benefit) for income taxes


(2,713
)


5,470



9,505Provision (benefit) for income taxes


(1,053
)


1,555



3,303Net income (loss)

$
(1,660
)

$
3,915


$
6,202Net income (loss) per common share  basic

$
(0.12
)

$
0.28


$
0.45Net income (loss) per common share  diluted

$
(0.12
)

$
0.28


$
0.44Weighted average shares outstanding  basic


13,567,640



13,791,403



13,922,974Weighted average shares outstanding  diluted


13,567,640



13,958,759



14,149,634Dividends declared per common share

$
0.50


$
0.20


$
0.20    F-4




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##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  CONSOLIDATED
    STATEMENTS OF STOCKHOLDERS EQUITY
 Years
    Ended December 31, 2005, 2006 and 2007
  Additional








TotalCommon Stock


Paid-In


Retained


Deferred


StockholdersShares


Amount


Capital


Earnings


Compensation


Equity(In thousands, except share data)Balance at December 31, 2004


13,185,166


$
132


$
42,826


$
19,186


$
(51
)

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










(51
)






51



Option exercises


432,500



4



(4
)










Warrant exercises


322,938



3



776











779Restricted stock granted


13,912







63











63Stock-based compensation










842











842Amortization of unearned compensation


5,000







15











15Purchase and retirement of stock


(245,617
)


(2
)


(646
)










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














(6,815
)






(6,815
)Tax benefit on stock options










18











18Net loss














(1,660
)






(1,660
)Balance at December 31, 2005


13,713,899



137



43,839



10,711







54,687Warrant exercises


13,983



















Stock issued for accrued compensation


56,141



1



199











200Restricted stock granted


16,169







51











51Stock-based compensation










10











10Amortization of unearned compensation


11,250







37











37Common stock dividends ($0.20 per share)














(2,764
)






(2,764
)Net income














3,915







3,915Balance at December 31, 2006


13,811,442



138



44,136



11,862







56,136Warrant exercises


125,000



1



319











320Purchase and retirement of shares


(75,000
)


(1
)


(398
)










(399
)Stock issued for accrued compensation


77,654



2



307











309Restricted stock granted


11,682







72











72Stock-based compensation










12











12Conversion of share-based liability awards to equity awards










932











932Amortization of unearned compensation


10,000







32











32Common stock dividends ($0.20 per share)














(2,788
)






(2,788
)Net income














6,202







6,202Balance at December 31, 2007


13,960,778


$
140


$
45,412


$
15,276


$



$
60,828    F-5




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##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  Year Ended December 31,2005


2006


2007(In thousands)Cash flows from operating activities:Cash received from customers

$
55,231


$
39,790


$
42,553Cash paid to suppliers and employees


(20,066
)


(13,762
)


(12,653
)Cash (paid) received for income taxes


102



(453
)


(230
)Interest paid


(542
)


(120
)


(107
)Interest received


503



1,415



877Net cash provided by operating activities


35,228



26,870



30,440Cash flows from investing activities:Investment in lease contracts


(6,364
)


(21,498
)


(54,035
)Investment in direct costs


(59
)


(345
)


(761
)Investment in property and equipment


(555
)


(271
)


(407
)Net cash used in investing activities


(6,978
)


(22,114
)


(55,203
)Cash flows from financing activities:Proceeds from secured debt


262



179



11,685Repayment of secured debt


(135
)


(335
)


(5,159
)Increase in restricted cash










(561
)Repayment of subordinated debt


(1,771
)


(2,602
)


Repayment of capital leases


(41
)






Proceeds from exercise of common stock warrants










41Purchase and retirement of common stock warrants










(120
)Purchase and retirement of stock


(648
)






Payment of dividends


(2,700
)


(6,187
)


(2,780
)Net cash provided by (used in) financing activities


(5,033
)


(8,945
)


3,106Net change in cash and cash equivalents


23,217



(4,189
)


(21,657
)Cash and cash equivalents, beginning


9,709



32,926



28,737Cash and cash equivalents, ending

$
32,926


$
28,737


$
7,080Reconciliation of net income (loss) to net cash provided by
    operating activitites:Net income (loss)

$
(1,660
)

$
3,915


$
6,202Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:Amortization of unearned income, net of initial direct costs


(4,140
)


(3,917
)


(12,302
)Depreciation and amortization


9,497



5,326



1,344Provision for credit losses


10,468



6,985



7,855Recovery of equipment cost and residual value


20,755



12,309



22,909Stock-based compensation expense


1,088



255



517Amortization of unearned compensation


15



37



32Non-cash interest expense


606



46



37Decrease (increase) in deferred income taxes


(1,382
)


1,792



3,636Changes in assets and liabilities:Increase (decrease) in income taxes payable


431



310



(513
)Decrease (increase) in other assets


1,053



678



(87
)Increase (decrease) in accounts payable


(1,375
)


(61
)


691Increase (decrease) in other liabilities


(128
)


(805
)


119Net cash provided by operating activities

$
35,228


$
26,870


$
30,440Supplemental disclosure of non-cash activities:Fair value of stock issued for compensation

$
63


$
251


$
381Warrants exercised by cancellation of debt


779







Conversion of share-based liability awards to equity awards










932    F-6




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##### Table of Contents



MICROFINANCIAL
    INCORPORATED



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS

(Tables
    in thousands, except share and per share data)  A.
    Nature of
    Business    90-day
      B.
    Summary
    of Significant Accounting Policies  Basis of
    Presentation
    Use of
    Estimates
   F-7




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##### Table of Contents



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




---



##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Investment
    in Service Contracts
      December 31,2006


2007Investment in service contracts

$
3,418


$
2,482Less accumulated amortization


(2,805
)


(2,279
)Investment in service contracts, net

$
613


$
203     Investment
    in Rental Contracts
      December 31,2006


2007Investment in rental contracts

$
7,387


$
5,198Less accumulated depreciation


(7,074
)


(5,092
)Investment in rental contracts, net

$
313


$
106      F-9




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##### Table of Contents



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




---



##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Year Ended December 31,2005


2006


2007Net income (loss)

$
(1,660
)

$
3,915


$
6,202Weighted-average shares outstanding used in computation of net
    income (loss) per share  basic


13,567,640



13,791,403



13,922,974Dilutive effect of options, warrants and restricted stock






167,356



226,660Shares used in computation of net income (loss)
    per common share  assuming dilution


13,567,640



13,958,759



14,149,634Net income (loss) per common share  basic

$
(0.12
)

$
.28


$
.45Net income (loss) per common share  diluted

$
(0.12
)

$
.28


$
.44   Stock-Based
    Employee Compensation
  Share-Based
    Payment
  
    All new awards issued after the effective date;
    All modifications, repurchases or cancellations of existing
    awards after the effective date; and
    Unvested awards at the effective date.    Recent
    Accounting Pronouncements
    contract-by-contract
 F-11




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##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        C.
    Net
    Investment in Leases    Year Ending December 31,2008

$
35,5412009


26,7062010


18,1062011


9,2412012


2,720Total

$
92,314       Year Ended December 31,2005


2006


2007Allowance for credit losses, beginning

$
14,963


$
8,714


$
5,223Provision for credit losses


10,468



6,985



7,855Charge-offs


(22,806
)


(16,069
)


(12,119
)Recoveries


6,089



5,593



4,763Allowance for credit losses, ending

$
8,714


$
5,223


$
5,722  F-12




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##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31,2005


2006


2007Estimated residual value, beginning

$
9,502


$
3,865


$
3,859Lease originations


710



2,954



7,145Terminations


(6,347
)


(2,960
)


(1,190
)Estimated residual value, ending

$
3,865


$
3,859


$
9,814     D.
    Property
    and Equipment    December 31,2006


2007Computer equipment

$
4,184


$
4,551Office equipment


691



732Leasehold improvements


263



263Total


5,138



5,546Less accumulated depreciation and amortization


(4,483
)


(4,764
)Net

$
655


$
782     E.
    Notes
    Payable and Subordinated Debt    December 31,2006


2007Credit facility  CIT

$
5


$
Credit facility  Sovereign






6,531   Notes
    Payable
   F-13




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##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    90-day 90-day
      Subordinated
    Notes Payable
          F.
    Stockholders
    Equity  Warrants
   F-14




---



##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Stock
    Options and Restricted Stock
     F-15




---



##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Number


Amortizedof


CompensationShares


ExpenseNon-vested at December 31, 2004


16,250Granted


Vested


(5,000
)

$
15,000Non-vested at December 31, 2005


11,250Granted


25,000Vested


(11,250
)

$
37,000Non-vested at December 31, 2006


25,000Granted


Vested


(10,000
)

$
32,000Non-vested at December 31, 2007


15,000              F-16




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##### Table of Contents



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


Price Per Share

Exercise PriceOutstanding at December 31, 2004


1,675,000


$0.86 to $13.544

$
7.139Exercised in 2005


(432,500
)

$0.86 to $1.585

$
1.250Outstanding at December 31, 2005 and 2006


1,242,500


$1.585 to $13.544

$
9.189Granted in 2007


40,188


$5.77

$
5.77Outstanding at December 31, 2007


1,282,688       Outstanding


ExercisableWeighted-





Weighted-Average


Intrinsic


Average





IntrinsicExercise Price

Shares


Life (Years)


Value


Exercise Price


Shares


Value$12.31


359,391



1.16


$



$
12.31



359,391


$
13.54


40,609



1.16







13.54



40,609



9.78


350,000



2.15







9.78



350,000



13.10


90,000



3.14







13.10



90,000



6.70


235,000



4.16







6.70



235,000



1.59


167,500



4.91



781,000



1.59



167,500



781,0005.77


40,188



9.17



19,000



5.77







1,282,688



2.86


$
800,000



9.19



1,242,500


$
781,000      F-17




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##### Table of Contents



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


93,289Stock options


1,282,688Restricted stock grants


15,000Reserved for future grants


1,537,118Total


2,928,095  F-18




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##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  G.
    Income
    Taxes    Year Ended December 31,2005


2006


2007Current:Federal

$
168


$
(416
)

$
67State


161



179



188329



(237
)


255Deferred:Federal


(978
)


2,039



3,269State


(404
)


(247
)


(221
)(1,382
)


1,792



3,048Total

$
(1,053
)

$
1,555


$
3,303     2006


2007Deferred tax assets:Allowance for credit losses

$
1,747


$
2,289Accrued expenses


315



Depreciation and amortization


7,760



18,194Federal alternative minimum tax credit


1,345



599Federal NOL carryforward


1,020



State NOL and other state attributes


3,451



3,396State valuation allowance


(2,915
)


(2,442
)Total deferred tax assets


12,723



22,036Deferred tax liabilities:Lease receivable and unearned income


(7,969
)


(17,968
)Residual value


(1,543
)


(3,926
)Initial direct costs


(121
)


(291
)Reserve for Contingencies






(397
)Total deferred tax liabilities


(9,633
)


(22,582
)Net deferred tax asset (liability)

$
3,090


$
(546
)    F-19




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##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31,2005


2006


2007Federal statutory rate


(35.00
)%


35.00
%


35.00
%State income taxes, net of federal benefit


(4.13
)


6.36



7.10State valuation allowance


(6.90
)


(7.49
)


(6.35
)IRS audit settlement






(7.03
)


Reversal of state income tax reserve










(2.02
)Nondeductible expenses and other


7.22



1.58



1.02Effective income tax rate


(38.81
)%


28.42
%


34.75
%       Uncertain
    Tax Positions
    Balance at January 1, 2007

$
920,000Additions for tax positions related to current year


25,000Reductions for tax positions as a result of:Settlements


(25,000
)Lapse of statue of limitations


(300,000
)Balance at December 31, 2007

$
620,000    F-20




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##### Table of Contents



MICROFINANCIAL
    INCORPORATED
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  H.
    Commitments
    and Contingencies  Operating
    Leases
    Legal
    Matters
    Lease
    Commitments
    I.
    Employee
    Benefit Plan    J.
    Concentration
    of Credit Risk         F-21