##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2007
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 333-116595
 LEASE EQUITY APPRECIATION FUND II, L.P.
  Delaware
    
    20-1056194(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 
 
 þ o
  o o þ
 o þ




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##### 



LEASE EQUITY APPRECIATION FUND II, L.P.
  
 INDEX TO QUARTERLY REPORT
 ON FORM 10-Q
 PAGEPART I FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets  March 31, 2007 (unaudited) and December 31, 2006
    
    
    3Consolidated Statements of Operations Three Months Ended March 31, 2007 and 2006
(unaudited)
    
    
    4Consolidated Statement of Partners Capital and Comprehensive Income
For the Three Months Ended March 31, 2007 (unaudited)
    
    
    5Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2007 and 2006 (unaudited)
    
    
    6Notes to Consolidated Financial Statements  March 31, 2007 (unaudited)
    
    
    7-14ITEM 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    15-19ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    20ITEM 4. Controls and Procedures
    
    
    20PART II OTHER INFORMATIONITEM 6. Exhibits
    
    
    20SIGNATURES
    
    
    21Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive OfficerRule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial OfficerCertification of Chief Executive Officer pursuant to Section 1350Certification of Chief Financial Officer pursuant to Section 1350
  2




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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 LEASE EQUITY APPRECIATION FUND II, L.P.
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands)
 March 31,
    
    
    December 31,2007
    
    
    2006(unaudited)
    
    
    (audited)ASSETSCash
    
    $
    1,722
    
    
    $
    14,210Restricted cash
    
    
    15,345
    
    
    
    2,574Accounts receivable
    
    
    374
    
    
    
    475Due from lockbox
    
    
    637
    
    
    
    4,565Investment in direct financing leases and notes, net
    
    
    311,587
    
    
    
    306,431Investment in operating leases (net of accumulated depreciation of $4,611 and
$3,577)
    
    
    14,508
    
    
    
    14,439Fair value of interest rate swap
    
    
    879
    
    
    
    1,803Other assets
    
    
    1,484
    
    
    
    1,845$
    346,536
    
    
    $
    346,342LIABILITIES AND PARTNERS CAPITALLiabilities:Debt
    
    $
    293,399
    
    
    $
    291,118Accounts payable and accrued expenses
    
    
    1,053
    
    
    
    1,081Due to related parties, net
    
    
    794
    
    
    
    644Security deposits
    
    
    3,722
    
    
    
    3,020Total liabilities
    
    
    298,968
    
    
    
    295,863Partners Capital
    
    
    47,568
    
    
    
    50,479$
    346,536
    
    
    $
    346,342
  3




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LEASE EQUITY APPRECIATION FUND II, L.P.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except unit data)
 (unaudited)
 Three Months EndedMarch 31,2007
    
    
    2006Income:Interest on equipment financings
    
    $
    5,786
    
    
    $
    953Rental income
    
    
    1,451
    
    
    
    570Gain on sale of equipment and lease dispositions, net
    
    
    57
    
    
    
    30Other
    
    
    505
    
    
    
    867,799
    
    
    
    1,639Expenses:Interest expense
    
    
    4,231
    
    
    
    696Depreciation on operating leases
    
    
    1,223
    
    
    
    485Provision for credit losses
    
    
    1,115
    
    
    
    17Management fee to related party
    
    
    942
    
    
    
    143Administrative expense reimbursed to related party
    
    
    402
    
    
    
    131General and administrative expenses
    
    
    677
    
    
    
    798,590
    
    
    
    1,551Net (loss) income
    
    $
    (791
    )
    
    $
    88Weighted average number of limited partner units outstanding during the
period
    
    
    600,000
    
    
    
    153,818Net (loss) income attributed to limited partners per unit
    
    $
    (1.30
    )
    
    $
    0.56
  4




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LEASE EQUITY APPRECIATION FUND II, L.P.
 
 CONSOLIDATED STATEMENT OF PARTNERS CAPITAL
 AND COMPREHENSIVE LOSS
 FOR THE THREE MONTHS ENDED MARCH 31, 2007
 (in thousands, except unit data)
 (unaudited)
 AccumulatedGeneral
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    Partners
    
    
    ComprehensivePartner
    
    
    Limited Partners
    
    
    Comprehensive
    
    
    Capital
    
    
    LossAmount
    
    
    Units
    
    
    Amount
    
    
    Income (loss)
    
    
    Total
    
    
    TotalBalance, December 31, 2006
    
    $
    (32
    )
    
    
    600,000
    
    
    $
    48,708
    
    
    $
    1,803
    
    
    $
    50,479Cash distributions paid
    
    
    (12
    )
    
    
    
    
    
    
    (1,184
    )
    
    
    
    
    
    
    (1,196
    )Net loss
    
    
    (8
    )
    
    
    
    
    
    
    (783
    )
    
    
    
    
    
    
    (791
    )
    
    $
    (791
    )Unrealized loss on hedging
derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (924
    )
    
    
    (924
    )
    
    
    (924
    )Balance, March 31, 2007
    
    $
    (52
    )
    
    
    600,000
    
    
    $
    46,741
    
    
    $
    879
    
    
    $
    47,568
    
    
    $
    (1,715
    )
  5




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LEASE EQUITY APPRECIATION FUND II, L.P.
 
 CONSOLIDATED STATEMENT OF CASH FLOWS
 (in thousands)
 (unaudited)
 Three Months EndedMarch 31,2007
    
    
    2006Cash flows from operating activities:Net (loss) income
    
    $
    (791
    )
    
    $
    88Adjustments to reconcile net (loss) income to net cash provided by
operating activities:Gain on sale of equipment and lease dispositions net
    
    
    (57
    )
    
    
    (30
    )Depreciation
    
    
    1,223
    
    
    
    485Provision for credit losses
    
    
    1,115
    
    
    
    17Amortization of deferred financing costs
    
    
    24
    
    
    
    11Changes in operating assets and liabilities:Accounts receivable
    
    
    101
    
    
    
    (51
    )Due from lockbox
    
    
    3,929
    
    
    
    292Other assets
    
    
    377
    
    
    
    34Accounts payable and accrued expenses
    
    
    (28
    )
    
    
    295Due to related parties, net
    
    
    150
    
    
    
    99Net cash provided by operating activities
    
    
    6,043
    
    
    
    1,240Cash flows from investing activities:Investment in direct financing leases and notes
    
    
    (33,909
    )
    
    
    (32,990
    )Investment in equipment under operating leases, net
    
    
    (1,285
    )
    
    
    (3,326
    )Proceeds from direct financing leases, net of earned income
    
    
    27,689
    
    
    
    2,871Security deposits, net
    
    
    702
    
    
    
    273Net cash used in investing activities
    
    
    (6,803
    )
    
    
    (33,172
    )Cash flows from financing activities:Proceeds from debt
    
    
    31,736
    
    
    
    30,655Repayment of debt
    
    
    (29,455
    )
    
    
    (3,123
    )Increase in restricted cash
    
    
    (12,771
    )
    
    
    (303
    )Increase in deferred financing costs
    
    
    (42
    )
    
    
    (5
    )General Partner capital contribution
    
    
    
    
    
    
    1Limited Partners capital contribution
    
    
    
    
    
    
    8,454Cash distributed to partners
    
    
    (1,196
    )
    
    
    (251
    )Payment of offering costs incurred for the sale of limited partnership units
    
    
    
    
    
    
    (1,119
    )Net cash (used in) provided by financing activities
    
    
    (11,728
    )
    
    
    34,309(Decrease) increase in cash
    
    
    (12,488
    )
    
    
    2,377Cash, beginning of period
    
    
    14,210
    
    
    
    1,034Cash, end of period
    
    $
    1,722
    
    
    $
    3,411
  6




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LEASE EQUITY APPRECIATION FUND II, L.P.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2007
 (unaudited)
 NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS
      NOTE 2
 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation
  Classification
  7




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LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(unaudited)
 NOTE 2
 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Continued)
 Use of Estimates
      Concentration of Credit Risk
  Revenue Recognition
  8




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LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(unaudited)
 NOTE 2
 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Continued)
 Direct Financing Lease.
 Operating Leases.
 Notes Receivable.
  Income Taxes
  Supplemental Disclosure of Cash Flow Information
  2007
    
    
    2006Cash paid for:Interest
    
    $
    4,188
    
    
    $
    633
 9




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LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
MARCH 31, 2007
(unaudited)
 NOTE 2
 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Continued)
 Recently Issued Accounting Pronouncements
  ,
 Transfers of Financial Assets
  Fair Value of Financial Instruments
   NOTE 3  RESTRICTED CASH
  10




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LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
MARCH 31, 2007
(unaudited)
 NOTE 4
 DUE FROM LOCKBOX
  NOTE 5 - INVESTMENT IN LEASES AND NOTES
  March 31,
    
    
    December 31,2007
    
    
    2006Direct financing leases
    
    $
    265,181
    
    
    $
    264,711Notes receivable
    
    
    47,824
    
    
    
    42,841$
    313,005
    
    
    $
    307,552Allowance for possible losses
    
    
    (1,418
    )
    
    
    (1,121
    )$
    311,587
    
    
    $
    306,431
  March 31,
    
    
    December 31,2007
    
    
    2006Total future minimum lease payments
    
    $
    293,868
    
    
    $
    292,944Unearned rental income
    
    
    (35,494
    )
    
    
    (34,893
    )Residuals, net of unearned residual income
    
    
    6,807
    
    
    
    6,660$
    265,181
    
    
    $
    264,711
  Three Months EndedMarch 31,2007
    
    
    2006Allowance for possible losses, beginning of period
    
    $
    1,121
    
    
    $
    130Provision for credit losses
    
    
    1,115
    
    
    
    17Net write offs
    
    
    (818
    )
    
    
    (7
    )Allowance for possible losses, end of period
    
    $
    1,418
    
    
    $
    140
 NOTE 6
 OTHER ASSETS
  11




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LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
March 31, 2007
(unaudited)
 NOTE 7 - DEBT
  March 31, 2007
    
    
    December 31, 2006WestLB AG, New York
Branch revolving line of
credit, with an aggregate
borrowing limit of $150
million collateralized by
specific leases and notes
receivables and related
equipment, with a 1%
credit reserve of the
outstanding line of
credit. Interest on this
facility is calculated at
LIBOR plus .95% per
annum. To mitigate
fluctuations in interest
rates the Fund has
entered into interest
rate swap agreements.
The interest rate swap
agreements terminate on
various dates ranging
from December 2010 to
March 2014. As of March
31, 2007, the interest
rate swap agreements fix
the interest rate on the
outstanding balance at
6.09% on a weighted
average basis. Interest
and principal are due
monthly. The line of
credit is renewable for
one year periods in 2007
and 2008. The terms of
the Funds credit
facility with WestLB
includes financial
covenants related to the
Funds net worth and
leverage used. As of
March 31, 2007, the Fund
is in compliance with all
such covenants
    
    $
    110,975
    
    
    $
    99,731Merrill Lynch Commercial
Finance Corporation
revolving line of credit,
with an aggregate
borrowing limit of $200
million collateralized by
specific leases and notes
receivables and related
equipment. Interest on
this facility is
calculated at LIBOR plus
..95% per annum. To
mitigate fluctuations in
interest rates the Fund
has entered into an
interest rate swap
agreement. As of March
31, 2007, the interest
rate swap agreement fixes
the interest rate on the
outstanding balance at
5.48% and terminates in
January 2014. Interest
and principal are due
monthly. The line of
credit expires in June
2007. The terms of the
Funds credit facility
with Merrill Lynch
includes financial
covenants related to the
Funds leverage used. As
of March 31, 2007, the
Fund is in compliance
with all such covenants
    
    
    182,424
    
    
    
    191,387Total outstanding debt
    
    $
    293,399
    
    
    $
    291,118
  2008
    
    $
    216,3462009
    
    
    28,3942010
    
    
    21,4052011
    
    
    14,2832012
    
    
    7,432Thereafter
    
    
    5,539$
    293,399
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LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
MARCH 31, 2007
(unaudited)
 NOTE 8 - DERIVATIVE INSTRUMENTS
      NOTE 9
 TRANSACTIONS WITH AFFILIATES
    13




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LEASE EQUITY APPRECIATION FUND II, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
MARCH 31, 2007
(unaudited)
 NOTE 9
 TRANSACTIONS WITH AFFILIATES  (Continued)
    Three Months EndedMarch 31,2007
    
    2006Acquisition fees
    
    $
    554
    
    
    $
    726Asset management fees
    
    $
    942
    
    
    $
    143Reimbursed administrative expenses
    
    $
    402
    
    
    $
    131
  NOTE 10 - ALLOCATION OF PARTNERSHIP INCOME, LOSS AND CASH DISTRIBUTIONS
   NOTE
11  COMPREHENSIVE LOSS
  NOTE
12  NET (LOSS) INCOME PER LIMITED PARTNERSHIP UNIT
  14




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ITEM
2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS                (unaudited)
 When used in this Form 10-Q , the words believes anticipates, expects and similar
expressions are intended to identify forward-looking statements. Such statements are subject to
certain risks and uncertainties more particularly described in Item 1A, under the caption Risks
Inherent in Our Business, in our annual report on Form 10-K for fiscal 2006. These risks and
uncertainties could cause actual results to differ materially. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the date hereof. We
undertake no obligation to publicly release the results of any revisions to forward-looking
statements which we may make to reflect events or circumstances after the date of this Form 10-Q or
to reflect the occurrence of unanticipated events.
 OVERVIEW
   
    
    500 or fewer employees;
    
    $1.0 billion or less in total assets; or
    
    $100.0 million or less in total annual sales.
   15




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Our Lease Portfolio
  Direct Financing Leases and Notes
 March 31, 2007
    
    
    December 31, 2006Net
    
    
    
    
    
    
    NetType of Equipment
    
    Investment
    
    
    Percentage
    
    
    Investment
    
    
    PercentageMedical Equipment
    
    $
    75,724
    
    
    
    24.2
    %
    
    $
    69,631
    
    
    
    22.6
    %Computers
    
    
    66,155
    
    
    
    21.1
    
    
    
    70,412
    
    
    
    22.9Industrial Equipment
    
    
    63,415
    
    
    
    20.3
    
    
    
    60,046
    
    
    
    19.5Office Equipment
    
    
    20,129
    
    
    
    6.4
    
    
    
    20,814
    
    
    
    6.8Garment Care
    
    
    19,055
    
    
    
    6.1
    
    
    
    19,463
    
    
    
    6.3Restaurant Equipment
    
    
    17,481
    
    
    
    5.6
    
    
    
    16,761
    
    
    
    5.5Software
    
    
    14,261
    
    
    
    4.6
    
    
    
    14,334
    
    
    
    4.7Communications
    
    
    12,823
    
    
    
    4.1
    
    
    
    11,614
    
    
    
    3.8Building systems
    
    
    9,773
    
    
    
    3.1
    
    
    
    9,930
    
    
    
    3.2Other
    
    
    14,189
    
    
    
    4.5
    
    
    
    14,547
    
    
    
    4.7$
    313,005
    
    
    
    100.0
    %
    
    $
    307,552
    
    
    
    100.0
    %
 Operating Leases
 March 31, 2007
    
    
    December 31, 2006Net
    
    
    
    
    
    
    NetType of Equipment
    
    Investment
    
    
    Percentage
    
    
    Investment
    
    
    PercentageComputers
    
    $
    3,988
    
    
    
    27.5
    %
    
    $
    4,254
    
    
    
    29.4
    %Industrial Equipment
    
    
    3,949
    
    
    
    27.2
    
    
    
    3,667
    
    
    
    25.4Communications
    
    
    2,721
    
    
    
    18.8
    
    
    
    2,780
    
    
    
    19.3Office Equipment
    
    
    2,450
    
    
    
    16.9
    
    
    
    2,247
    
    
    
    15.6Medical Equipment
    
    
    502
    
    
    
    3.5
    
    
    
    858
    
    
    
    5.9Building systems
    
    
    324
    
    
    
    2.2
    
    
    
    154
    
    
    
    1.1Restaurant Equipment
    
    
    216
    
    
    
    1.5
    
    
    
    237
    
    
    
    1.6Garment Care
    
    
    63
    
    
    
    0.4
    
    
    
    69
    
    
    
    0.5Software
    
    
    21
    
    
    
    0.1
    
    
    
    25
    
    
    
    0.2Other
    
    
    274
    
    
    
    1.9
    
    
    
    148
    
    
    
    1.0$
    14,508
    
    
    
    100.0
    %
    
    $
    14,439
    
    
    
    100.0
    %
 16




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Direct Financing Leases and Notes
 March 31, 2007
    
    
    December 31, 2006Net
    
    
    
    
    
    
    NetType of Business
    
    Investment
    
    
    Percentage
    
    
    Investment
    
    
    PercentageServices
    
    $
    168,366
    
    
    
    53.8
    %
    
    $
    167,651
    
    
    
    54.5
    %Retail Trade
    
    
    38,952
    
    
    
    12.4
    
    
    
    41,493
    
    
    
    13.5Manufacturing
    
    
    33,081
    
    
    
    10.6
    
    
    
    31,312
    
    
    
    10.2Agriculture/Forestry/Fishing
    
    
    15,290
    
    
    
    4.9
    
    
    
    12,958
    
    
    
    4.2Transportation/Communication/Energy
    
    
    13,119
    
    
    
    4.2
    
    
    
    11,386
    
    
    
    3.7Construction
    
    
    12,025
    
    
    
    3.9
    
    
    
    11,169
    
    
    
    3.6Wholesale Trade
    
    
    10,272
    
    
    
    3.3
    
    
    
    10,232
    
    
    
    3.3Finance/Insurance/Real Estate
    
    
    9,193
    
    
    
    2.9
    
    
    
    9,533
    
    
    
    3.1Public Administration
    
    
    1,095
    
    
    
    0.3
    
    
    
    1,248
    
    
    
    0.4Other
    
    
    11,612
    
    
    
    3.7
    
    
    
    10,570
    
    
    
    3.5$
    313,005
    
    
    
    100.0
    %
    
    $
    307,552
    
    
    
    100.0
    %
 Operating Leases
 March 31, 2007
    
    
    December 31, 2006Net
    
    
    
    
    
    
    NetType of Business
    
    Investment
    
    
    Percentage
    
    
    Investment
    
    
    PercentageServices
    
    $
    6,321
    
    
    
    43.6
    %
    
    $
    6,371
    
    
    
    44.1
    %Construction
    
    
    3,988
    
    
    
    27.5
    
    
    
    3,940
    
    
    
    27.3Manufacturing
    
    
    1,621
    
    
    
    11.2
    
    
    
    1,613
    
    
    
    11.2Finance/Insurance/Real Estate
    
    
    569
    
    
    
    3.9
    
    
    
    481
    
    
    
    3.3Public Administration
    
    
    551
    
    
    
    3.8
    
    
    
    621
    
    
    
    4.3Wholesale Trade
    
    
    464
    
    
    
    3.2
    
    
    
    494
    
    
    
    3.4Retail Trade
    
    
    435
    
    
    
    3.0
    
    
    
    327
    
    
    
    2.3Transportation/Communication/Energy
    
    
    382
    
    
    
    2.6
    
    
    
    414
    
    
    
    2.9Agriculture/Forestry/Fishing
    
    
    114
    
    
    
    0.8
    
    
    
    113
    
    
    
    0.8Other
    
    
    63
    
    
    
    0.4
    
    
    
    65
    
    
    
    0.4$
    14,508
    
    
    
    100.0
    %
    
    $
    14,439
    
    
    
    100.0
    %
  17




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Results of Operations
 Three Months Ended March 31, 2007 Compared to the Three Months Ended March 31, 2006
  
    
    Interest income on equipment financings increased to $5.8 million for the three
months ended March 31, 2007 as compared to $953,000 for the three months ended March
31, 2006 an increase of $4.8 million (507%). Our average net investment in financing
assets increased to $323.5 million for the three months ended March 31, 2007 as
compared to $58.6 million for the three months ended March 31, 2006, an increase of
$264.9 million (452%). This growth was driven by our General Partners increased sales
to us, increasing the amount of our WestLB debt facility from $75.0 million to $150.0
million in June 2006, marketing efforts supported by lines of financing, in addition to
the purchase of a lease portfolio from Merrill Lynch.
    
    Rental income increased to $1.5 million for the three months ended March 31, 2007 as
compared to $570,000 for the three months ended March 31, 2006, an increase of $881,000
(155%). This increase is directly related to our increase in operating leases.
    
    Gain on sale of equipment increased to $57,000 for the three months ended March 31,
2007 as compared to a gain of $30,000 for the three months ended March 31, 2006, an
increase of $27,000 (90%). Gains and losses on sales of equipment may vary
significantly from period to period.
    
    Other income increased to $505,000 for the three months ended March 31, 2007 as
compared to $86,000 for the three months ended March 31, 2006, an increase of $419,000
(487%). Other income consists primarily of late fee income. Late fee income has
increased due to the increase of the equipment financing portfolio coupled with an
increase in payment collection efforts.
  
    
    Interest expense increased to $4.2 million for the three months ended March 31, 2007
as compared to $696,000 for the three months ended March 31, 2006, an increase of $3.5
million (508%) due to our increase in average debt outstanding. Our average debt
increased to $293.1 million for the three months ended March 31, 2007 as compared to
$53.0 million for the three months ended March 31, 2006, an increase of $240.1 million
(453%).
    
    Depreciation on operating leases increased to $1.2 million for the three months
ended March 31, 2007 as compared to $485,000 for the three months ended March 31, 2006,
an increase of $738,000 (152%). This increase is directly related to our increase in
operating leases.
    
    Our provision for credit losses increased to $1.1 million for the three months ended
March 31, 2007 as compared to $17,000 for the three months ended March 31, 2006, an
increase of $1.1 million (6,459%). As our portfolio increases and ages, we expect that
our provision for credit losses will increase. This increase was within our
expectation. We provide for bad debts when losses are likely to occur based
on a migration analysis of past due payments and economic conditions.
    
    Management fees increased to $942,000 for the three months ended March 31, 2007 as
compared to $143,000 for the three months ended March 31, 2006, an increase of $799,000
(559%). This increase is directly attributable to the increase in our portfolio of
equipment financing assets, since management fees are paid based on lease payments
received.
    
    Administrative expenses reimbursed to related party increased to $402,000 for the
three months ended March 31, 2007 as compared to $131,000 for the three months ended
March 31, 2006, an increase of $271,000 (207%). This increase is due to the increase
in our portfolio of equipment financing assets.
    
    General and administrative expenses increased to $677,000 for the three months ended
March 31, 2007 as compared to $79,000 for the three months ended March 31, 2006, an
increase of $598,000 (757%). This increase is principally related to increased legal
costs associated with collection efforts.
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Liquidity and Capital Resources
   March 31,2007
    
    
    2006Net cash provided by operating activities
    
    $
    6,043
    
    
    $
    1,240Net cash used in investing activities
    
    
    (6,803
    )
    
    
    (33,172
    )Net cash (used in) provided by financing activities
    
    
    (11,728
    )
    
    
    34,309(Decrease) increase in cash
    
    $
    (12,488
    )
    
    $
    2,377
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4. CONTROLS AND PROCEDURES
    
 PART II  OTHER INFORMATION
 
 ITEM 6. EXHIBITS
 Exhibit No.
    
    Description3.1
    
    Amended and Restated Agreement of Limited Partnership (1)3.2
    
    Certificate of Limited Partnership (2)4.1
    
    Forms of letters sent to limited partners confirming their investment (2)31.1
    
    Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Executive Officer.31.2
    
    Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer.32.1
    
    Certification of Chief Executive Officer pursuant to Section 1350 of Chapter 63 of
Title 18 of the United States Code.32.2
    
    Certification of Chief Financial Officer pursuant to Section 1350 of Chapter 63 of
Title 18 of the United States Code.
 
 (1)
    
    Filed previously as Appendix A to our Post-Effective Amendment No. 3 to our
Registration Statement on Form S-1, filed on January 24, 2004.(2)
    
    Filed previously as an Exhibit to Amendment No. 1 to our
Registration Statement on Form S-1 filed on June 7, 2002. 20




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##### Table of Contents



SIGNATURES
  LEASE EQUITY APPRECIATION FUND II, L.P.A Delaware Limited PartnershipBy: LEAF Financial Corporation, its General PartnerMay 15, 2007
    
    /s/ Crit DeMentCRIT DEMENTChairman and Chief Executive Officer of the General PartnerMay 15, 2007
    
    /s/ Robert K. MoskovitzROBERT K. MOSKOVITZChief Financial Officer, Treasurer of the General Partner
 21